Public-Private Partnerships Are on the Rise
Interest in using public-private partnerships (P3s) to fix the country’s failing infrastructure has steadily been growing. According to the American Society of Civil Engineers (ASCE) have estimated that an investment of $3.6 trillion is needed by 2020 to fix America’s infrastructure. The American Road & Transportation Builders Association (ARTBA) recently released their 2017 Bridge Report showing that nearly 56,000 of the bridges in the U.S. are structurally deficient. That’s 9.1% of all bridges nationwide.
State and local governments aren’t investing in infrastructure spending like they were just a few years ago, instead focusing on paying down debt incurred prior the Great Recession. Add to that the fact that up until 2015, Congress hadn’t passed a long-term transportation bill in a decade. Instead, they resorted to a number of short-term patches that caused most states to delay starting work on larger road and highway projects in the event funding to complete them might disappear if another extension wasn’t authorized before the project was completed.
That long-term transportation bill, the Fixing America’s Surface Transportation (FAST) Act, in addition to providing $305 billion in funding for surface transportation projects through FY 2020, also laid the groundwork to help promote the use of P3s.
Under the FAST Act, the Surface Transportation Block Grant Program, formerly the Surface Transportation Program, allows states to use federal funds to set up and operate offices to oversee P3 projects eligible for Federal highway and transit funding. In some instances, the funds can also be used to pay a stipend to unsuccessful bidders on P3 projects.
In construction, a P3 is a project delivery method that involves a contractual agreement between a public agency and private sector entities. A P3 can be as basic as a Design-Build project where the private partner is responsible for design and construction of a project and the public entity provides the funding as well as operation and maintenance once construction is complete. On the far end of the spectrum is the Design-Build-Finance-Operate-Maintain (DBFOM) where the private partner is responsible for all aspects of project delivery while the public entity maintains ownership of the project.
There’s a common misconception that P3s can only be used on revenue generating projects like toll roads. While this has primarily been the case in the past, using P3s on non-revenue generating projects are coming into their own. Instead of paying back the private entity user fees or toll revenues, the state or local government would make availability payments which are similar to the way municipal bonds get paid back.
The availability payments are typically paid out over the course of several years, assuming that the delivered project is “available” to the public. For a highway project, this may mean that the private entity is required maintain the roadway, clearing debris, sealing cracks or filling potholes, and keep it in good working order for the next 25 to 30 years. For vertical construction like a school or courthouse, it may mean overseeing maintenance and operation of the facility for the length of the contract.
There are 37 states now that have legislation enabling the use of P3s to privately finance, construct and maintain infrastructure and public works projects. Virginia and Florida are two examples of states that have embraced and been rewarded with the success of their P3 programs. Florida closed on the first P3 to use availability payments in order to construct express lanes on I-595 back in 2009.
One of the drawbacks of P3s for public entities is that they aren’t well suited for smaller value projects. The cost to privately finance a project is higher than using public funding so there has to be decent enough profit potential for a private entity to take on the risk. There’s typically not enough profit to be made on smaller projects.
The Pennsylvania Department of Transportation (PennDOT) came up with a creative solution to this problem by bundling 558 bridge replacement projects into one large P3 with a performance-based payment schedule once there has been substantial completion of the bridges.
As we already mentioned, P3s aren’t just for toll roads and other revenue generating projects. In addition to transportation infrastructure, P3s are gaining in popularity for social infrastructure as well, such as for schools, universities, hospitals, housing and prisons.
Some examples of recently closed, awarded and completed P3s include:
Construction at the University of California, Merced is underway on a massive $1.3 billion P3 that will deliver student housing, classroom buildings, a dining facility, laboratories and more over the next few years. Progress payments will be made to the developer, Plenary Properties Merced, during construction. Once the project is completed in 2020, availability payments will be made over the next 35 years for the remaining capital costs owed to the developer and for them to operate and maintain the building systems during that time.
The New Long Beach Civic Center Project, another Plenary project, which closed last year will deliver a new city hall, library, Port Authority office, city park and residential and retail development. The project is a $520 million will be built using the DBFOM model.
The PortMiami Tunnel project reached financial close with the Florida DOT and the Miami Access Tunnel Concessionaire, LLC back in 2009. Construction started in 2010 and was opened to traffic on August 3, 2014. Availability payments will be made to Miami Access Tunnel until the end of the contract in October 2044 and are contingent upon lane availability and other requirements.
Several factors have led to an increased interest in the use of P3s as an effective alternative to the basic design-bid-build method of contracting. The recession left many public agencies with increased debt that made it harder to sell bonds to fund infrastructure projects. Lawmakers were hesitant to raise taxes to pay for such projects due to fears of angering the public during tough financial times.
Public entities are also realizing the benefits of P3s as more projects are being closed and completed. The private financing frees up money to be spent on other projects that wouldn’t necessarily fit a P3 model. Depending on the type of P3 model used, the risks of financing, designing, constructing and maintaining a project can be shifted from the public entity to the private partner.
P3s are not a universal answer to all our infrastructure woes in America. When both the public and private partners work together, P3s can be an integral part of restoring the nation’s infrastructure. Many hurdles from planning and financing to getting public approval and clearing political roadblocks before ground can be broken on a P3 project. When executed poorly, they can go horribly wrong. When everyone involved works together, they can be a boon to both parties and help deliver projects that will benefit the communities they serve.