By Paul Scheuren
When I have a plumbing problem, I know that I will save time, money, and headaches if I just call a professional. Even as a pretty handy guy and armed with a page full of how-to videos on YouTube, I know that the results will be better if I hire someone who has done this before. You see, I could gain the experience and be prepared for this problem next time but why risk it? Why turn my kitchen sink into the learning lab?
This concept is often the core of many public-private partnership (P3) arrangements – why should a municipality get into the business of operating a conference center or collecting tolls? Aren’t there professionals who specialize in this? Indeed, there are and this is why public-private partnerships have the potential to result in a win-win; state or local government fill a need for new infrastructure or services and the developer can lend its specialized knowledge and experience. Similar to the plumber who doesn’t fix my kitchen sink for free, the private developer may require some public support in order to close the gap in the capital stack to see the project come to fruition. A deal impact analysis can help the two sides negotiate fair terms and then build support among stakeholders.
A P3 Deal Impact Analysis
Public-private partnerships usually include many detailed contracts but it is important to step back from the arrangement and estimate the benefits and costs, in dollar terms, for both sides with a P3 deal impact analysis. Consider a mixed-use development that will revitalize a downtown area and include a new conference center hotel, apartments, retail, and office space. The private developer will make a significant capital investment with an upfront cost. The benefits to the private developer will be generated by his ability to apply his specialized experience and knowledge and generate a rate of return on this investment by operating and leasing the new development.
A deal like this is attractive to the public sector for reasons including:
- the temporary construction spending that will give a boost to local contractors,
- a rejuvenated downtown with sidewalk and parking improvements to replace a blighted area,
- new businesses and employment opportunities,
- new visitors and associated spending,
- new property,
- new tax revenue, and
- potential revitalization of the wider downtown area.
However, the public sector may see increased costs for new city services like public safety, education, and infrastructure.
Based on the specifics of the agreement, the city or other local jurisdictions may consider making a portion of the new tax revenue available to the developer to help make this plan a reality. Commonly used economic development incentives for P3 deals such as tax increment financing and tax sharing, will feedback into these costs and benefits for the private and public entities. A detailed economic and fiscal impact analysis can help all sides be clear about the potential benefits to be gained and costs to be incurred so that a fair deal can be struck. What’s more, the deal impact analysis can then be used by all sides to gain buy-in from other government officials and citizens. As with most things in economic development, transparency will be your friend.
There are no cookie-cutter P3 deals and understanding the economics of a P3 agreement takes careful effort. Now more than ever is it important to understand the timing, who gets what, and ultimately how this really benefits the residents. A P3 deal impact analysis can help get your deal across the finish line.