The federal government faces formidable fiscal challenges, caused by a fundamental imbalance between revenue and spending. Over the long term, the continuous growth in debt will severely limit the federal government's flexibility to address future challenges, ultimately jeopardizing its ability to deliver essential programs and services. State and local governments are facing similar fiscal pressures.

Against this backdrop, governments have adopted and continue to explore creative cost-cutting and financing initiatives. At the state and local levels in particular, there has been renewed interest in public-private partnerships (PPPs). PPPs are contractual arrangements between a public agency and a private-sector entity where the skills and assets of each are shared in delivering a service or facility for the public good.

PPPs generally call for the private sector to deliver two or more of the required project functions, such as financing, construction, operations, and maintenance. By bundling these functions, the provider can derive efficiencies across the entire scope of work—from design, to materials, to long-term maintenance strategies—resulting in cost savings, higher quality, faster project completion, and greater innovation. Generally, as more functions are bundled, more project risk and responsibility are transferred to the private sector, harnessing and leveraging its expertise and capacity.

PPPs are not a magic bullet to solve the nation's long-term fiscal challenges; nevertheless, when properly conceptualized, structured, and implemented, PPPs can help finance and deliver large-scale projects that might otherwise not be feasible for governments to fund and execute. One need only look at the growing funding required to address decaying infrastructure. According to the American Society of Civil Engineers, cumulative infrastructure investment needs will total $2.7 trillion by 2020, rising to $10 trillion by 2040. Anticipated available funding will cover only 60 percent of these needs through 2020, dropping to 53 percent by 2040. PPPs can help bridge this gap.

However, in order to gain the full benefit of PPPs, there will need to be policy changes. At the federal level, existing laws and budget scoring rules hinder their greater use. Additionally, since PPPs fundamentally change the nature of how agencies perform their missions, they often meet with significant organizational resistance.

Yet, in instances where the Congress has legislated PPP authority, there have been successes that otherwise might not have been possible. One outstanding example is the Department of Defense's Military Housing Privatization Initiative (MHPI), authorized in 1996. MHPI is a PPP in which the private-sector operates, maintains, improves, and assumes responsibility for military family housing. The local agreements typically entail the lease of land to a developer for a term of 50 years; the military service generally conveys existing homes that are located on the leased land to the developer for the duration of the lease. Once the renovated or newly-constructed housing project is completed, the service then leases the properties from the developer, either directly or through individual service members' base housing allowance. In either case, the continuous income stream from these lease payments supports access to private capital, allowing the developer to expand, maintain, and recapitalize the initial investment.

Some states have already expanded the use of PPPs, largely to help finance highways and bridges, relying on subsequent tolling to provide needed revenue. However, 17 states still do not have the legislative authority to use PPPs to deliver transportation projects. Beyond transportation, PPP use has been even more limited; yet, they are applicable to sectors ranging from social services and energy to utilities, technology, and defense.

Ultimately, greater use of PPPs will require transformative change. This is never easy and will require a sustained leadership commitment from policymakers. However, the current fiscal situation will require government at all levels to put all options on the table. Once they do, the full potential of PPPs can be realized.

William Lucyshyn is the interim director and senior research scholar at the Center for Public Policy and Private Enterprise in the School of Public Policy at the University of Maryland.

Jeffrey Steinhoff is KPMG's managing director of the Government Institute, and the former assistant comptroller general of the United States.

Mike Vitale  is a director at KPMG.

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