P3 is shorthand for public private partnership. The term "P3 project" is used to describe a legally binding contractual agreement between a public sector body, such as a government agency, and a private sector body, such as a business. The public sector body typically oversees the P3 project throughout its life cycle, while the private sector body is responsible for commercial activities, including construction, finance and everyday operations.
Transfer of Risk
Government agencies may choose many types of private sector bodies, including construction, engineering and financial organizations, as partners for P3 projects. However, an important characteristic of any successful P3 project is the transfer of risk from the public to the private sector. Government agencies may be familiar with setting policies, but less accustomed to managing the risks associated with commercial projects, so they pass those risks on to the private sector for the benefit of both parties.
Risks and Rewards
If a private company accepts responsibility for building -- and perhaps operating and maintaining -- a highway, it exposes itself to risks associated with construction delays, increased labor costs, rising interest rates, extreme weather conditions and natural disasters. However, the company also accepts these risks, willingly, because the rewards of a P3 project -- a stable, long-term investment opportunity and prospect of revenue, from fees for services -- outweigh the risks.
Choosing a P3 Partner
In the United States, the National Council for Public-Private Partnerships has identified six components that it considers critical to the long-term success of any P3 project. One of the most critical components -- and one of the biggest challenges facing government agencies -- is choosing an appropriate partner, or partners. The chosen partner, or partners, must be able to provide skills and experience in specific components of the project, which are otherwise unavailable to a public agency.
P3 projects allow both the public and private sectors to do what they do best. This, in turn, increases the cost-effectiveness of projects, improves budget certainty -- at least as far as the government is concerned -- and makes better use of resources. The private sector is renowned for its experience, flexibility and innovation -- as well as its desire to exploit commercial opportunities and maximize return on investment -- so a P3 project typically results in higher levels of service for the public sector, at a cost that is not only lower, but also more predictable.