Contractors that bid on large government projects have no doubt heard the term “public-private partnership.” They might have even participated in one. But many are likely to have little or even no experience with this method of procurement or may have some misconceptions about what they are and how they work.
Simply put, a public-private partnership, or P3, is an arrangement through which a public entity transfers most or some of the risk of a major project to the private sector. Broadly speaking, any joint effort between the private and public sectors to build, renovate, or maintain publicly-owned assets could fit the definition.
Some states have yet to authorize their use for specific projects. Some, however, have embraced them with gusto, even encouraging the private sector to submit unsolicited proposals for P3s, presumably hoping to tap into private-sector innovation and construction expertise. By the Federal Highway Administration’s count, as of August 2018, 24 states and Washington, DC, allowed unsolicited proposals for certain types of work, even when P3 statutes themselves were limited in scope.
“A lot of times, the private developers are just better,” said William Eliopoulos, partner at Rutan & Tucker in Palo Alto, California. “This is their business. This is what they do.”
However, nothing sells like success. According to Keith Poliakoff, partner in the Fort Lauderdale, Florida, office of Saul Ewing Arnstein & Lehr, the more projects make it out of the procurement process and get underway with construction, the more public entities will be receptive to reviewing unsolicited proposals and P3s in general.
Of course, even though a potential private partner might be first to offer up a great idea—one perfect for a P3—that doesn’t necessarily mean they will win the project. In the spring of 2017, engineering and construction firm Burns & McDonnell proposed that Kansas City, Missouri, take the P3 route in building a much-needed new terminal at Kansas City International Airport. However, by Feb. 2018, the Kansas City Council had entered into a $1 billion memorandum of understanding with a competitor, edging out the local Burns & McDonnell team after a heated bidding process.
“One reason why contractors and developers love P3s is that they can be very creative in their offerings. Similarly, a government can be more creative in its selection”
There is no typical P3, an industry truism memorialized by the saying, “Once you’ve done one P3, you’ve done one P3.” There are some commonly used models, though. One might have a private team assuming design-build duties only, while the owner provides financing. Another arrangement might involve a huge consortium that takes over design, finance and construction, as well as operations and maintenance duties—thus, the public entity gives up all control, save its position as owner.
“P3s run the gambit of offers,” said Poliakoff. “One reason why contractors and developers love P3s is that they can be very creative in their offerings. Similarly, a government can be more creative in its selection.”
When it comes down to numbers, though, P3s make up a very small percentage of public project deals in the U.S., according to Jimmy Christianson, vice president of government relations for the Associated General Contractors of America. As he claims, they rank somewhere in the neighborhood of the low single digits. However, he added, there continues to be a “robust interest” in P3s—in many markets, it's very difficult for some entities to raise enough revenue for their ever-expanding laundry lists of infrastructure and other public works projects.
Basically, when a private consortium shoulders the burden of financing a public project, it frees up the governing entity’s capital for other infrastructure initiatives or important expenses that they couldn’t pay for otherwise.
While there are many ways a P3 can be set up, Eliopoulos said, they can be divided into two basic types: revenue P3s and availability P3s. Revenue-generating projects include toll roads, tunnels and bridges, rail systems, student housing, and airport projects. As a participant in these undertakings, the private partner will be reimbursed, partly or in whole, through the collection of tolls, fees or passenger fares.
When private partners enter into this type of arrangement, the key is to make sure anticipated revenue projections are correct. A few consortia have overestimated how much money a toll road, for example, will generate and have actually gone under when revenue failed to meet their expectations.
Availability P3s are used for projects like schools and civic centers. Typically, the private partner to an availability P3 is paid as the project is delivered, with most of the money held back until the new structure is complete, or available for use, Eliopoulos said. P3 partners that finance these projects upfront then have an added incentive to get the job done right and on schedule.
These two types of P3s can be fashioned into custom arrangements, but therein lies their strength. “[They are] flexible models of procurement,” Eliopoulos said, “that can be adapted for each project.”
When it came time for the City of Long Beach, California, to replace its outdated and maintenance-heavy civic center, officials chose the availability P3—with a twist. While the city was under pressure to make seismic upgrades, it also had to deal with the building’s antiquated inner workings.
According to Eliopoulos, it is not unusual for old buildings, such as Long Beach, to have “their HVAC and energy systems so outdated.” Nevertheless, with the same budget the city allocated just for deferred maintenance, it was able to strike a deal for a new energy-efficient building—including operations and maintenance. To make the numbers work, the city threw in a small piece of land near the civic center as part of its payment to the private group building the new complex.
Other California cities, Eliopoulos said, like Napa and Los Angeles are now replacing their own civic centers, looking to save money through similar efficiencies on the structures that host emergency services, planning and city administration departments. The Long Beach project, which Eliopoulos helped put together, is on time and on budget so far.
The advantages to owners are clear—less design and construction risk, an often-expedited schedule, managers that are familiar with the latest construction techniques and someone to take over the responsibility of coming up with the capital outlay.
But what is in it for contractors? Of course, there are advantages as well.
The attraction, in general, Christianson said, is that contractors get a seat at the negotiating table and are in a position to assist in drawing up the deals; they can also work alongside other contractors that will help share the risk.
P3s are also about contractor opportunities. They can give construction companies the chance to be a part of projects that might be otherwise unattainable, Poliakoff said. This is especially true when there are diversity or small business requirements, or the group needs to partner with a contractor familiar with the local market.
On privately financed projects, Christianson said, there’s also the possibility of expedited payment for government work that otherwise might not happen as quickly.
The expertise of the private sector might also mean delivering a project faster than when using a more traditional method. This benefits both the contractor and the public, who has likely been waiting to use the new building, road or other assets. Contractors, Christianson said, want to do the best job they can do as quickly as possible so that they can get on to the next one.
“It's all about time,” he said. “They might not be making more money overall (on the job), but they're doing it in a shorter period of time and have the capacity to do more.”