Public Private Partnerships: A Promise Still Unfolding

With time and after education of the public sector, P3s are poised to continue to grow in popularity as more states turn to them to help fix the infrastructure deficit

By Tariq Taherbhai and Peter Fogel

The public-private partnership (P3) structure has been a common form of infrastructure procurement in Canada and the United Kingdom for a number of years, but was relatively rare for governments in the United States until fairly recently. Initially, P3s in the U.S. were primarily revenue-risk toll roads. California and Virginia each procured road P3s in the mid-1990s and it took until the early 2000s for other states like Texas to begin to enter the P3 market. Texas’ P3 project SH 130, for example, reached financial close in March of 2008. These road deals were structured such that public funds were not at risk on the projects. This left the private partners responsible for the design, construction, debt issuance, operations, and maintenance of the roads in return for the exclusive right to collect toll revenues.

While revenue-risk projects continue to be an option for states and municipalities, recently the P3 model has been shifting away from revenue-risk projects that can appear to public officials as “free money” and more towards projects that provide the public with consistent, quality infrastructure through contracts that compensate the private sector through availability payments. This shift in project structure expands the asset types that could be candidates for public-private partnerships to include infrastructure that would not necessarily generate user fees sufficient to cover debt service obligations. Examples of these include recently closed projects like the Long Beach Civic Center, Pennsylvania Rapid Bridge Replacement Project, and the Kentucky Wired P3 Project. Other states and municipal-level governments have also begun considering P3s using the availability payment mechanism to procure projects like the Fargo-Moorhead Flood Diversion Project, Miami-Dade’s County Civil and Probate Courthouse, and the Los Angeles International Airport’s development of its Automated People Mover and Consolidated Rental Car Center.

Like traditionally procured infrastructure, the P3 structure does not provide the public with free infrastructure in exchange for nothing. In the end, the public will pay for the infrastructure in some manner, either in the form of user fees or through taxes that will fund availability payments. A P3 is therefore fundamentally a tool for the public sector to manage particular risks that are associated with developing key infrastructures that are necessary for enhancing quality of life and fostering economic growth. In these projects, the public receives an asset on a fixed-price, date-certain basis with essentially a long-term warranty and is able to shift some key risks to the private sector such as cost overruns, asset rehabilitation, and lifecycle risk.

The long-term nature of the partnerships between the public and private sectors in P3s holds the private partners accountable for continuing to provide quality infrastructure throughout the term of the agreement. These agreements have pre-determined maintenance requirements that the private partners must achieve to ensure that they receive the maximum amount of availability payments. Structuring a project in this manner acts as a commitment device for future public officials to ensure that their infrastructure is well-maintained and does not suffer from excessive deferred maintenance as can often happen. Additionally, the debt associated with these projects is issued in the name of the private partner, and the availability payments made by the public sector are contractual obligations.

P3s are not without challenges, however, as indicated by some high profile project cancellations in the last couple of years. Constituents can be very sensitive to what incorrectly appears to be privatizing public infrastructure. Therefore, one of the key challenges when pursuing a P3 is in the communication with the public about why a P3 is the chosen method of procurement. P3s can also appear to be more costly than traditional procurement due to the fact that a P3 prices the full life-cycle costs of design, construction, financing, operations, and maintenance of the asset. Alternatively, the budget of a traditionally procured project is composed almost exclusively of the design and construction costs of the asset while largely neglecting the public sector’s borrowing costs, and the asset’s operations and maintenance costs. This perceived appearance of increased costs associated with P3s can lead to significant political challenges that can prevent these projects from moving forward.

The state of P3 use in the U.S. is complex, but full of promise. With time, and after additional education of the public sector, we expect P3s to continue to grow in popularity as more states turn to them to help fix the infrastructure deficit.

Tariq Taherbhai is COO of Aon’s Global Construction & Infrastructure practice. He may be reached at tariq.taherbhai@aon.com. Peter Fogel is a Risk Analyst for Aon Infrastructure Solutions. He may be reached at peter.fogel@aon.com.

 

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