P3s present a variety of benefits and challenges for local governments who choose to undertake them
By Greg Hummel and James Drescoll
Public-Private Partnerships(P3’S) are often cited as a tool to renew America’s infrastructure and, if properly structured, could be useful at local levels of government. The need for new infrastructure finance, and delivery mechanisms, is clear. Much of today’s infrastructure is nearing the end of its useful life, and local governments need a comprehensive and unified plan for repair or replacement. When weighing the various options to make these needed replacements and repairs, municipalities could consider a public-private partnership (P3). P3 broadly refers to a variety of transactions in which a public or quasi-public entity shifts some degree of control and responsibility for development and operation of a facility or a piece of infrastructure to a private entity.
Some benefits of such P3s include the fact that properly structured P3 projects are often likely to be completed on time and within budget. Construction cost savings and reduced life cycle costs often accrue in P3 projects because of analysis of the costs of construction and operation over the life of the infrastructure rather than on the basis of annual budgets and appropriations. As a result, costs are spread over many years. The foregoing benefits allow the public entity to focus on outcomes rather than means.
P3s can be important vehicles to transform and revitalize a municipality’s aging infrastructure, but can also be challenging and complex to implement.
The use of P3s in a municipal context presents many challenges. Many states lack enabling legislation. P3 projects benefit from strong framework laws and P3 offices experienced in the procurement and administration of P3 projects, like those at the state level in Virginia and Florida. Promising municipal examples include Chicago’s infrastructure and Colorado’s efforts around the Eagle Project linking its Union Station to Denver International Airport. These projects were of sufficient scale to permit the establishment of teams to prepare plans that made the case for a P3 approach. They also put in place the enabling framework, attracted competitive proposals, judged them on a series of measures like value for money invested, and administered them with a public team of principals and advisors and private sector participants.
Before a P3 is used for a project at the local level, it is important to ask if the resources of expertise, experience, time, and money available in the beginning so the right projects are chosen. Apart from this question, local use of the P3 tool often encounters a number of other challenges like conventional procurement laws and practices based on final plans and detailed specifications. The requirement to take the lowest responsible bidder is the norm. Peculiarities of different classes of infrastructure also provide challenges.
Sewer and water are typically delivered at a fair price by municipal authorities. P3s here do not generally deliver clear benefits unless they take the form of energy supply contracts that focus on efficiency and using savings to deliver improvements. Further, social infrastructure, like schools and hospitals, are typically owned and maintained by special agencies that often don’t have the authority to undertake P3 projects.
Successful P3 projects include comprehensive framework laws that drive a transparent selection process; a P3 office that is knowledgeable, experienced, and empowered; a detailed business plan on both the public and private sides for identification and delivery of the right P3 projects; and a revenue stream that can be reliably projected as a part of the plan of finance.
Local units of government, in the absence of these criteria, can approach projects using creativity, tax increment financing, special service areas, and home rule powers. These tools can engage the private sector in a request for qualifications and proposals centered on a particular infrastructure need. Moreover, agreements can be used which bind both the public and private parties to terms that will help ensure the successful procurement and implementation of the project undertaken.
Development Agreements provide the means to use tax increment financing, special district financing, and other municipal powers and should include the following reviews and approvals:
- Planned Development Special Use permit review and approval
- Site Plan and Elevations review and approval
- Redevelopment Plan and Budget for the entire term of the tax increment development district review and approval
- Community Development Area Rate and Methodology of special taxation review and approval
- Gap analysis and value for money analyses review and approval
- True-up provisions regarding profit projected versus profit achieved based on actual costs and actual earnings and as a consequence of true up results, profit sharing or clawback mechanisms can be used.
P3s can work at the local level. The key is choosing the right project and the right partners. Time-tested tools like tax increment and special district financings coupled with comprehensive development agreements provide the means.
Greg Hummel is a Partner at Bryan Cave Leighton Paisner. He may be reached at www.bryancave.com
James Drescoll is an Associate at Bryan Cave Leighton Paisner. He may be reached at www.bryancave.com