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Partnership

Description

Advantages

Disadvantages

Temporary Privatization

Ownership of an existing public facility is transferred to a private partner, which

Reduced operational costs; increased efficiency; risk rests with private sector.

Difficulty in replacing private partner in the event of bankruptcy or performance default.

expands or improves the facility. The facility is owned and operated by the partner for the length of the contract.

Lease- develop- operate or Buy-develop- operate

The partner leases or buys a facility from the local government, expands or modernizes it, and then operates the facility under a contract. The partner is expected to invest in facility expansion and is given a specified amount of time to recover its investment and realize a return.

Cash infusion for local government; time reduction in project implementation; fast-track construction; no public- sector capital needed for upgrade.

Difficulty valuing assets for lease or sale; reduced control.

Build- transfer- operate

The local government contracts with a private partner to finance and build a facility. Once completed, the partner transfers ownership to the local government. The local government then leases the facility back to the partner under a long-term lease, during which the partner has the opportunity to recover its investment and realize a return.

Maximizes private-sector financial resources; ensures most efficient and effective facility based on life-cycle costs; all “start- up” problems are addressed by the private partner; community is provided with a facility without large up-front capital outlay or incurring large long-term debt.

Loss of public control over construction and initial operation; difficulty in replacing private partner in the event of bankruptcy or performance default; facility may transfer back to public sector at a time in which operating costs are increasing.

Build-own- operate- transfer

A private partner obtains an exclusive franchise to finance, build, operate, maintain, manage, and collect user fees for a fixed period to amortize investment. At the end of the franchise, title reverts to public authority.

Maximizes private-sector financial resources; ensures most efficient and effective facility based on life-cycle costs; all “start- up” problems are addressed by the private partner.

Less public control than build-transfer-operate; difficulty in replacing private partner in the event of bankruptcy or performance default; facility may transfer back to public sector at a time in which operating costs are increasing.

Build-own- operate

Local government either transfers ownership and responsibility for an existing facility or contracts with a private partner to build, own, and operate a new facility in perpetuity.

Private sector operates in the most efficient manner, in both the short run and the long run; long term entitlement is incentive for firm to invest significant capital.

No competition, making regulations for operation and pricing necessary.

Operation and Maintenance

Local government contracts with private partner to operate and maintain a publicly owned facility.

Improved service and efficiency; cost savings; flexibility in securing contracts.

Costs to resume public operation if contractor defaults; reduced owner control and ability to adapt to changing public demands.

Source: “To Partner or Not to Partner—That Is the First Question,” EDCO Newsletter, October 27, 1999.

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Table A.1: Alternative Project Delivery Options

INFRASTRUCTURE OUTSOURCING

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