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By Duane Craig
August 9, 2017
The talk of public private partnerships (P3s) for addressing the country’s infrastructure woes over the next few years is highly optimistic. In fact, most informed sources don’t expect wide scale roll out of P3s at any time. Even where they are aggressively used, they seldom reach more than 5% of a country’s public construction spend.
Nevertheless, 5% of a trillion dollar infrastructure plan is a lot of construction to put in place. No matter what size your contracting business, or what sector you operate in, the rise of P3s offers opportunities.
Here’s more about P3 opportunities and challenges for your construction business.
A P3 is a way to structure a public project so that the public side doesn’t have to bear all the costs and risks up front. Think about water and sewer projects, or public transportation projects like terminals, tracks, and trains. All of these have an aspect that makes them attractive for P3s––they charge user fees.
A developer, or group of private entities, partner with a government entity to build and operate a public asset. The public entity transfers risks of designing, building, financing, operating, and maintaining to the private entity as needed. The private entity is paid back over time in user fees, or payments pegged to the availability of the asset.
In Redwood City, California, the Crossings/90 project brought public and private together to revitalize the downtown area. A Chicago suburb did a major redevelopment of its town center. Park Ridge Illinois reinforced its downtown and commuter rail stations, while adding retail, residential, commercial development, and parking. In Miami, a 6.5 million square foot mixed-use development is underway, thanks to cooperation between the public and private sectors. California has 91 new express lanes, the East Coast has I-495, Florida has I-595, and Pennsylvania has numerous renovated bridges.
For contractors, P3s open up a whole new realm of business. They can be a source of new business when brought into a project by a developer or concessionaire. If contractors enter a P3 alone as concessionaires or developers, they get even bigger roles in the design, construction, and operation of the public assets. Contractors also get long term revenue from operating and maintaining the asset. The other attractive aspect for contractors is the opportunity to share some risk with the public entity. This can open up new project types for contractors who want to diversify their businesses.
P3s are also a leverage tool for developers and contractors. They might have a project in mind, but there are legacy environmental issues. Or, maybe there’s a building that’s abutting the project that they can’t get under control. Perhaps there are variances needed, or they’ll have to upgrade existing public infrastructure. In these cases, a P3 can advance the interest of developers and contractors, while also serving the public interest.
But of course, there are cautions for contractors and others on the private side of the equation. Chief among them is enthusiasm causing higher than realistic revenue estimates. If the estimated revenue doesn’t materialize, the contractor ends up waiting longer to recoup investment money.
A recent example is the Capital Beltway High Occupancy Toll Lane project in Virginia. After completion in 2012, the traffic in the HOT lanes was lower than estimated, leaving the private investor facing a shortfall of hundreds of millions of dollars.
Private partners also get paid out through availability fees. The Port of Miami Tunnel completed in 2014 was done that way. In that case, Florida is paying out milestone payments to the private partner over several decades. Of course, that will depend on the state’s economic fortunes over the years. And, this type of arrangement can entice the public entity to work around its debt limits because the availability payments are not put on the ledger. If public budget issues arise later, the private partner might see payments reduced, or even missed.
Contractors also carry greater risks related to site characteristics, environmental aspects, schedule changes, unforeseen costs, liabilities from others not operating as partners, and long term liabilities related to the finished asset.
Obviously, the private investors putting up the money for P3 projects want a certain guarantee that revenue from the project will eventually repay them. So P3s often include non-compete clauses that limit or ban development in the surrounding area. For the contractors who are not in the P3, these clauses can stifle nearby opportunities for them.
But P3s are evolving. Imagine a situation where even more collaboration comes together to serve even more interests. This new entity is called a P5 and it signals perhaps the next evolution of the P3. P3s are good for public projects, but what about reinvigorating entire neighborhoods, or expanding the scope of public infrastructure projects to include green spaces and deeper aesthetics? That’s where a P5 comes in. In this partnership you combine the nonprofit sector, the philanthropic sector, the local people, the public sector, and the private sector.
While it might sound like a recipe for total chaos, there are strategies and techniques already proven to make P5s superior to P3s. While it remains to be seen how much of America’s infrastructure woes can be calmed by public private partnerships, they’re not going away, and their increased use under the right circumstances offers construction companies pathways to new business.
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