Public-private partnerships: A game-changer for states and cities

City and state budgets are facing tremendous pressure as reductions in federal funding, unfunded pension liabilities, and inflation limit government’s ability to invest in critical needs for the future. The result is a growing backlog of projects for highways, bridges, public transit, water pipes, sewage treatment, and other essential infrastructure. Such backlogs are costly, since postponing repairs and maintenance can lead to much bigger expenditures down the road. Making matters worse, traditional contract structures often leave taxpayers holding the bag when project costs rise—leading to dissatisfaction and reduced economic benefit.  

That’s why state and local governments are increasingly turning to public-private partnerships (P3s) to address these challenges. And rightly so, as P3s offer some clear advantages over typical service contracts. Specifically, they: 

• Transfer risk to the private-sector partner, incentivizing timely, effective delivery 
• Are structured so that payments are linked to measurable outcomes and performance 
• Can bundle financing with project execution 

These features mean that the provider doesn’t stand to make more money if the project is delayed, as can happen with traditional procurement models. On the contrary, payment is dependent on factors such as on-time delivery, meeting performance thresholds, and regulatory compliance. P3s also enable states and cities to bundle separate stages of the project into a single design-build agreement—giving governments more influence over the project’s scope, schedule, and pricing as well as a better understanding of cost tradeoffs and timelines.  

What's more, the U.S. has seen a massive increase in private-infrastructure capital. Market research firm Preqin estimates that more than $500 billion in North American private infrastructure funds were under management in 2024. These investors seek long-term, stable cash flows with creditworthy counterparties—exactly the conditions that P3s can deliver.  

But capturing all that upside is far from guaranteed. P3s aren’t appropriate for every type of project, and rules governing them differ from state to state. Contracts that fail to clearly delineate responsibilities, define scope, and articulate measures of success can doom a project.  

By understanding these pros and cons and how they apply to local conditions, state and local leaders can navigate pitfalls and get the most value out of these partnerships. 

A varied legislative landscape 

State laws set the boundaries for which contract structures, procurement processes, and asset types are permissible. As one of the leading states to support P3s, Virginia allows a broad scope of eligible projects, including education facilities, utility and telecom infrastructure, broadband deployments, and more.  

Other states are more selective. Georgia excludes electric generation, communications services, and water reservoir projects. Missouri allows P3s for pipelines, ferry and port facilities, wastewater systems, public buildings, airports, railroads, parking facilities, and mass transit—but the public must vote to authorize partnerships for highways and bridges. Massachusetts, which recently enacted new rules to accelerate P3 development, is currently setting up a public-private partnership for interstate highway rest stops. 

State laws also govern how deals can come together. Virginia, Florida, and Maryland allow private entities to initiate proposals and, in some cases, proceed without a competitive bidding process. By contrast, Indiana retains sole authority to issue an RFP before entering any public-private agreement. Georgia and Louisiana both prohibit unsolicited P3 proposals for transportation department projects at the state level but allow them at the county and municipal level.  

State and local agencies seeking to leverage P3s for immediate infrastructure needs must gain a detailed understanding of the current legislative landscape in their state. At the same time, state officials and legislators should conduct a thorough assessment of how other states—many of which have revised their laws in the past decade as projects have grown more complex—are governing the use of P3s in order to best determine how to legislate for maximum benefit in their own state. 

Incentivizing the best outcomes 

The primary benefit of successful P3s is government’s ability to allocate and transfer risk to a private partner. That risk most often comes in the form of cost overruns and delays. This in turn can spur second-order risks such as the erosion of public trust that happens when, say, commuters spend more time stuck in traffic or students get relegated to sub-standard temporary classrooms.  

When a private partner bears key risks that should be controllable, incentives are aligned, and outcomes can improve dramatically compared to traditional contract structures. In Florida, for example, widening 10.5 miles of I-595 under a P3 structure saved an estimated 15 years and nearly $400 million compared to a traditional-contract scenario, according to the U.S. Department of Transportation. 

Another benefit of P3s: They can ensure that the public only pays for what it gets. When the city of Regina, Saskatchewan, decided to upgrade its 1950s-era wastewater-treatment plant to meet more stringent effluent requirements, it opted for a “design-build-finance-operate-maintain” (DBFOM) partnership that linked capital payments to performance. Under the agreed P3 structure—which the city estimates has reduced project costs by more than 20% compared to a traditional “design-bid-build” approach—the local government can withhold payments if the upgrades fail to meet regulatory requirements.  

A third advantage of P3s is the potential to combine financing with the project design and build and, depending on needs, with ongoing operations and maintenance. But there are caveats. In the U.S., where states and municipalities can readily issue low-cost debt to finance projects, P3s that are used primarily as a financing vehicle have tended to be less successful. Using P3s as a source of financing is often a better option outside the U.S., where governments have less ability to issue low-cost debt. 

A linchpin of success: Change management 

For states and cities long accustomed to conventional procurement models, tapping into the potential of P3s requires a mindset shift. Risk transfer, outcome-based payments, and delivery-integrated financing reflect a performance-based approach that’s more aligned with the world of business than that of traditional public-sector design-bid-build agreements.  

With P3s still a relative rarity in state and local government, public-sector leaders need clarity on desired outcomes and measures of success to ensure that they can structure P3s effectively. Without deliberate investment in education across state and local agencies, even well-intentioned P3 initiatives can falter. Building fluency in concepts like risk transfer, lifecycle costing, and outcome-based contracting—to say nothing of navigating the shift from managing discrete vendors to overseeing long-term partnerships—is essential to drive this mindset shift. 

All this represents a significant change-management challenge, particularly for sectors that are best suited to P3s, such as transportation, water, education, and social infrastructure. Agencies overseeing these sectors must not only update procurement processes and governance models but also overcome entrenched cultural norms that favor traditional delivery methods.  

In practice, this requires sustained, structured education efforts—not one-off trainings—to build institutional capacity. Comprehensive programs that combine workshops, applied case studies, and peer learning can help close the P3 education gap, equipping public-sector leaders with the tools and shared language needed to evaluate, procure, and manage such partnerships effectively. 

Ultimately, this fundamental shift from procurement to partnership can yield immense benefits for state and local governments facing massive infrastructure needs—not just in saved time and money but in restored public trust.