The COVID-19 crisis has threatened more than the health of the American public. It is also threatened the budgets and financial viability of many of the nation’s municipalities, public utilities and state governments. These financial setbacks may impact public entities longer than the immediate health impacts of the virus itself.
This comes at a time when America’s infrastructure is crumbling faster than it is being replaced. In the state of New York alone, the American Society of Civil Engineers estimates that $9.3 billion is required to replace or repair deficient highway bridges. And now, local public agencies may not have the fiscal resources to fix it.
P3 Project Opportunities
A growing alternative approach to local funding are public-private partnerships (P3s). In general, they establish a single-purpose, private entity responsible for the conception, design, construction, financing and long-term operation and maintenance of the project (up to 30 or even 50 years).
The Government Accountability Office (GAO) defines a public-private partnership as “a contractual agreement formed between public and private sector partners, which allows more private sector participation than is traditional. These agreements usually involve a government agency contracting with a private company to design, renovate, construct, operate, maintain, and/or manage a facility or system.”
The P3 Process
A P3 project generally goes as follows: Concessionaire identifies a local need and submits a successful proposal. It enters into a P3 agreement with the public entity. The concessionaire arranges the project financing, manages the entitlement phase and subcontracts the design and construction to a qualified design-builder (generally two separate organizations).
The concessionaire also hires an operations and maintenance contractor to provide the public those services over the term of the P3, which could be 20, 30 or 50 years. The public owner provides the land and oversight of the project to ensure compliance with state and local enabling laws. The concessionaire is paid a monthly, quarterly or annual availability payment for the public’s use of the facility. Upon the conclusion of the P3 term, it can be extended or revert back to the public entity.
Along with legislative changes in local and state procurement law, the P3 project offers private citizens, community groups and entrepreneurs the opportunity to create and finance exceptional projects in partnership with a local government or public agency.
Successful P3 Projects
There are hundreds of successful P3 projects that have been recently built in the United States and Canada (where nearly all hospitals use the P3 investment model). There are billions of dollars more of these projects being built or in planning stages in the U.S.
P3 projects have a long history of success in America—spanning 230 years. The Erie Canal, the Transcontinental Railroads, the early bridges in San Francisco, California, and Boston, Massachusetts, and hundreds of early bridge and roadway projects were built with the land being granted or leased to a private entity who designed, built and financed a project, then collected the revenue for a period of 30 to 50 years.
In fact, one of the first U.S. Supreme Court public works cases was an 1837 dispute between the City of Boston and two private bridge building companies entitled, The Proprietors of Charles River Bridge v. The Proprietors of Warren Bridge. The U.S. Supreme Court held that the City of Boston’s issuing of a concession for a second bridge across the Charles River did not violate the contract rights of the first builder.
But construction business owners can learn some valuable lessons from this P3 history. It is important to read the fine print. The Charles Bridge ventures should have gotten exclusive rights of access and service, and excluded direct competitors from building a competing bridge just a little bit downstream.
Contractor Risk Factors
While contractors engaging in P3 projects have an enviable track record, there have been some epic failures. There are several key lessons that can be applied to virtually every type of project, whether vertical (buildings), horizontal (roadways, bridges and pipelines) or social (health care, education and public safety).
Most of all, the concessionaire team must appreciate and plan for the inevitable types of risks that may be posed by these innovative projects. The following are a few of the significant P3 risks to contractors:
- Revenue risk from the completed facility
- Zoning, environmental permits and right of way
- Scope creep (public agencies may consider a P3 a blank check for improvements)
- Design delays (beware of the large public agency)
- Prevailing wages (generally these are considered public works)
- Project labor requirements (project labor agreements)
- Completion delays (availability payments do not start until substantial completion)
- Payment remedies (many are not available in the P3 environment)
- Long-term labor and material cost escalation
- Continuing agency support (over the 30-year period)
- Insolvency of the public entity (U.S. Bankruptcy Code, Chapter 9)
- Dispute resolution process (court, arbitration or project neutral)
A project neutral can be an incredibly positive professional to bring a project to a successful completion without litigation or other disputes.
The Magic of Unsolicited Proposals
Another overlooked aspects of P3s is the ability of construction business owners to create and submit unsolicited proposals to local public entities. While this may trigger a review period, notice to the public, and an opportunity for others to submit competing proposals.
A P3 is an amazing opportunity for pitching an urgently needed facility, such as a rural hospital, daycare center, water treatment facility, bridge or waterworks, that the local government cannot afford to capitalize or operate. But they often have the land and a public that needs the services being offered by the P3 group.
The P3 pricing method provides a unique opportunity for public agencies to evaluate projects. Competitively sought projects are typically awarded based upon life-cycle costing. As such, the long-term energy costs, maintenance, operational expenses and financing methods are taken into account. This is in stark contrast to the typical process of developing a design then awarding the construction contract to the lowest cost construction bidder—a system that ignores everything except the initial cost of construction. As such, many civic leaders consider P3s the future of public infrastructure. We can’t fix our society’s growing challenges without robust private investment.