Faced with the challenge of rebuilding the nation’s infrastructure in a challenging fiscal environment, governments and policy makers at every level have been exploring innovative ways to fund, finance, and deliver public infrastructure projects.
One approach getting a lot of attention is the Public Private Partnership, commonly referred to as a P3. Widely used throughout the world on a range of enormous infrastructure projects, in the U.S. to date, P3s have been most commonly used on highway projects. Bidders are typically consortiums made up of major construction and financial firms. The projects are generally quite large and therefore incredibly complex, often with the design, financing, construction, operations and maintenance of a project rolled into one transaction.
The first modern-day P3 project was a 47-mile highway around Denver, CO, named E-470. According to AIG, the project, which broke ground in 1989, did not have federal or state funding and was built in four years with private funds. It was the first highway of it's size to use electronic tolling, and E-470 would help encourage growth along the outskirts of the sprawling Denver metropolis.
Public Private Partnerships are usually a variation of the same basic structure. They are typically long-term agreements between a public entity and a private entity for the designing, building, financing, maintenance, and, when appropriate, operation of a public infrastructure asset with the public sector maintaining ownership of the asset. Besides highways, P3s have been used to build, replace or repair mass transportation systems, bridges, state buildings, and municipal water infrastructure. In a typical P3 road project, the private company pays for construction and maintenance of the roadway, and in exchange collects toll revenue. Conceptually, the major advantage of a P3 project is that each party shares in the potential risks and rewards in the delivery of the service and/or facility, meaning that everyone has skin in the game.
The foremost advantage for the taxpayer is that a P3 partnership is structured so that the public sector body seeking to make a capital investment does not incur any borrowing. It also provides the public entity with the ability to harness the expertise and efficiencies of the private sector — technologies, materials and management techniques — that would normally exceed the capabilities of an individual governmental agency or department, without incurring substantial borrowing.
The financial picture is further enhanced in that the public entity does not begin making performance criteria-based payments until the asset is delivered.
By specifying what it wants rather than how it wants it, the public partner maximizes opportunities for the private sector to bring innovation to the table, an ingredient often lacking in large public works projects.
P3s can deliver cost and time efficiencies to both parties. Driven by the need to deliver profit to investors and shareholders, the private sector is less tolerant of cost overruns and project delays than the public sector, leading to faster project completion and reduced delays. Indeed, on the basis of evidence from a small number of studies, it appears that P3 partnerships have built highways slightly less expensively and slightly more quickly, compared with the traditional public-sector approach.
By assuming responsibility for a long-term period of the asset’s life, the private entity becomes fully accountable for the delivered asset and is therefore incentivized to employ infrastructure solutions such as Value Engineering and life-cycle cost analysis to build quality and longevity into projects that will promote savings over a project’s lifetime.
Public/private sector collaboration can lead to a number of innovations that the public sector may have never considered, such as new materials, faster project delivery, increased use of technology, operational efficiencies, and enhanced building techniques.
With shared rewards there are also shared risks. On the public side there are regulatory and legislative risks, planning and design, and construction risks, the potential for delays, insurance and workforce risks, and ultimate responsibility and costs associated with operating and maintaining the asset passed on to the concessionaire. The private sector has direct exposure to financial risk, such as unexpected interest rate fluctuations in the capital markets that may undermine the debt structure of the project, and demand risk if an asset such as a toll road fails to make money.
Nevertheless, the need for enormous infrastructure work cannot be ignored. State governments around the country are crafting legislation to pave the way for P3 projects and infrastructure banks. Twenty-three states have executed P3s since 1989; thirty-one currently have legislation allowing P3s for road and bridge projects, and 21 for transit projects.
Public Private Partnerships are incredibly complex and require careful consideration. But the need to repair and build America’s failing infrastructure can’t be ignored. The real opportunity for public benefit with P3 projects lies in the innovation, risk sharing, and value to the taxpayer that these agreements are capable of providing.