This past September, the American Bar Association’s Forum on the Construction Industry held its annual Fall Meeting in Washington D.C. The program covered a wide range of issues concerning the present and future of “public-private partnerships” (P3) for the construction of public works projects.
P3 encompasses various delivery methods for infrastructure projects, all of which involve collaboration between public and private sectors. The Department of Transportation defines P3 as “contractual agreements formed between a public agency and a private sector entity that allow for greater private sector participation in the delivery and financing of transportation projects.” Generally, P3 projects involve contracts between government entities and private companies to build, maintain, or renovate facilities or systems.
The overarching theme of the two-day program was the existing ripeness for P3s due to an unmet, and growing, need for repair and expansion of public infrastructure. In fact, the American Society of Civil Engineers (ASCE) estimates that by 2020, there will be a $1.2 trillion funding gap to bring infrastructure to a satisfactory condition. However, the P3 market has been inconsistent and faces obstacles – for example, greater assumption of risk for contractors and the fact that the model does not translate well into smaller projects. On the upside, however, a few states (including Virginia) have become models for the success of P3s, and the P3 model lends itself well to green projects.
Almost half the states (including the District of Columbia) have used P3 for transportation projects. But, over the past five years, P3 has only made up approximately 2% of the market share for capital highway investments. And, sixty-five percent of all P3 transportation projects are concentrated in eight states, including Virginia. In fact, Virginia is one of seven states with a P3-dedicated office, and among the only three states to have what is considered a “sophisticated P3 unit.” Thirty-three states (including Maryland and Virginia) have statutes in place authorizing procurement of P3 projects. Federal legislation provides funding for P3s -- the Transportation Infrastructure Finance and Innovation Act (TIFIA) provides federal credit assistance in the form of direct loans, guarantees, and standby loans of credit. And further legislation based on TIFIA is likely -- some proposed laws are the Water Infrastructure Finance & Innovation Act and the Building Infrastructure Finance and Innovation Act. Other methods of finance include state infrastructure banks, private activity bonds and municipal bonds, and government grants and revenues.
While some small projects also stand to benefit from the P3 model, the financial structure of the typical P3 does not translate into a feasible small project. For example, in a large-scale project, the initial public sector contributions are usually around 25-40% of the capital costs, and the remaining amount is funded by a mixture of debt and equity. There are also due diligence costs and expenditures for design. These costs do not translate into viability for smaller scale assets, which the speakers defined as single asset projects with capital costs of less than $100 million. The speakers proposed the following solutions: first, increase public sector contribution so that third party financing becomes unnecessary; and second, “bundle” facilities by identifying more than one or expanding the scope for projects that might be satisfied under a single project agreement.
In contrast to the difficulties that small projects face, the speakers stated that P3 project delivery systems are a “perfect” delivery model for green projects. At core, P3 projects foster more collaboration than the traditional linear contract model, and the speakers pointed out how important cooperation is for successful and compliant green projects. One of the main challenges with green building is that the standards are constantly changing. In addition, design professionals face elevated standards of care and warranties, while contractors face increased liability for performance specifications while working with new and/or untested technologies, products, and materials. To successfully meld P3 with green building, contractors will have to ensure collaboration between public and funding sectors, and to convince the parties involved that they cannot aim for the minimum standards. To that end, contractors need to find experienced subcontractors who are willing to collaborate, and they will have to manage uninsurable risks, while monitoring the ever-changing sustainable building requirements and the legislative and political environments.
