In today’s construction sector, with less federal, state and local money available for public works and road/infrastructure, public-private partnerships – also known as PPPs, or P3s – have a growing profile in the United States.
What exactly is a P3?
A public-private partnership is, most simply, a contractual agreement between a governmental entity and one or more private entities to fund, build and operate a service that has been traditionally provided by the government. P3 contracts are created to operate and maintain an existing public asset, or design, finance, construct, operate and maintain a new public asset, such as toll roads/bridges, parking garages, rest areas, etc.
P3s are relatively new to the United States, although the Brooklyn Bridge was probably America’s first P3 project in the late 19th century. P3s are not simply the outsourcing or privatizing of previously public sector services. Government remains an active participant and would be expected to provide the service in the event of default.
P3s have been more common financing and delivery methods in other countries. In the United Kingdom, most public/private partnerships were negotiated successfully, as one-off deals. The model grew to include public projects beyond the UK, reaching Australia, Canada and Europe.
In the United States, 24 states and the District of Columbia have used P3s to finance and build nearly 100 transportation projects totaling over $50 billion.
Why are P3s suddenly so high profile?
The P3 option and profile is growing because of federal, state and local budget constraints and the growing need for infrastructure improvements and capacity.
The federal gas tax (18.4 cents/gallon) has not risen since 1993, and neither have state gas taxes in many states. The total of the two is about 50 cents/gallon in many states, and few lawmakers want to raise gas taxes. When gas was $1/gallon in the 1990s, roughly half went to fund road projects. Today’s higher construction costs and infrastructure needs can’t be covered by revenues based on 1993 dollars.
One state looking at major P3 projects is Ohio, with three large projects under consideration: Cleveland’s I-90 Bridge, Portsmouth’s Bypass and Cincinnati’s Brent Spence Bridge.
A panel discussion on P3 financing led by CPAmerica CPA firm VonLehman & Co., Inc., took place at the Ohio Contractor Association’s winter conference, following a speech by Ohio Gov. John Kasich on the need to find financing solutions for the infrastructure needs. The panel discussed the primary challenges facing P3s, which include finding:
Banks willing to finance the private portion
- Terms range from three to 30 years, or longer.
- Large amounts, hundreds of millions, are involved.
- Sureties willing to bond a P3 project because the magnitude of the debt and related P3 asset on the contractor’s books disrupt the surety’s bonding formula
- Contractors who will shoulder inherent P3 risk and are financially savvy enough to enter a P3 arrangement without significant effort
What are the roles of key players?
Typical P3 contracts are between a public entity with a specified need and private partners with specific resources to offer. While each project specification and P3 contract is unique, some basic elements and potential benefits of the P3 model include:
1. For the public entity
- Use the private sector’s expertise and resources to address public needs.
- Help address the nation’s infrastructure gap.
- Reduce risk of cost overruns.
- Monetize public assets by leasing the rights to operate them for profit to the P3 entity.
- Provide new projects to the public more quickly, sometimes cutting years out of the delivery process if just public funds were used.
2. For private partners
- Raise necessary funding for the project from investment funds, private equity firms.
- Usually design-build construction projects, with huge up-front design costs (and stipend, but the public entity owns the design).
- Realize a reasonable return on investment, but assume project risk – potential P3 project users may choose to go around new toll roads and bridges, rendering revenue stream projections obsolete and project payback funding inadequate.
3. For both public entities and private partners
- At end of any P3 agreement, the asset reverts back to the public, since the public entity retains full ownership.