Getting public-private partnerships right in the US
With a US $3.8 trillion infrastructure deficit and constrained funding options[1], public-private partnerships are an excellent model for financing and delivering critical public infrastructure projects. P3 specialist Yaye-Mah Boye Sar offers guidance on how to get the best from this funding option.
Public-private partnerships (P3s) help stretch available public funding by joining with private development and investment to design, build and operate public infrastructure. While upfront procurement costs can be higher than in a traditional funding model, P3s enable projects to be delivered faster, on time and on budget, and with more efficient lifecycle considerations. The inherent features of P3s – innovation, transparency, balanced risk transfer, performance-based approach, and lifecycle and operate and maintain (O&M) considerations to name a few – lead to project outcomes that are oftentimes superior for infrastructure owners and the public.
P3s are however unique, complex and challenging, and they don’t easily apply to all project sizes and types. Public clients considering P3s must go in with eyes wide open and complete their homework before engaging in such a procurement. Here are six considerations for using P3s the right way :(The below presumes that the state, city, county entity has P3 legislation and clear regulations to enter into a P3.)
1. Select the right project
While very effective, P3s are not suitable for all projects. Infrastructure owners should conduct the necessary due diligence in terms of project selection. This can be done through a project screening and prioritization process whereby candidate projects are evaluated across various criteria. Suitable projects would at a minimum meet some of the criteria below:
• Criticality: Meets a public need and brings significant economic benefits
• Political support AND public support: Has rock-solid political support from a project champion such as a governor, mayor, or county executive. Support of the populace is equally important
• Preparation level: Preliminary studies / environmental process underway / value-for-money analysis
• Financial feasibility: Is the project financially feasible? What is its revenue generating potential if any? Are there revenue or funding sources dedicated?
• Size and complexity: Is the project of sufficient size and complexity (smaller projects can be bundled)?
2. Dedicate resources for the process: hire experienced advisors and increase staff P3 capacity
Allocate resources for project preparation and P3 technical, procurement, legal, financial advisors. Advisors will help you
• Prepare a business case / project definition
• Determine whether P3 is best method (various screening tools / value for money analysis)
• Assess regulatory and legal framework and what is required to go forward with a P3
• Identify the right form of contract (risk transfer)
• Prepare tender documents and help evaluate bids
• Boost client’s office’s P3 capacity/expertise
It is equally important to have government staff who are skilled, dynamic, entrepreneurial team members within the procuring agency. P3s are non-traditional and will require technical, operational, legal, financial background / experience.
3. Determine usage / availability of federal credit assistance
• Federal programs such as Transportation Infrastructure Finance and Innovation Act (TIFIA) or Private Activity Bonds (PABS) help reduce financing costs associated with a P3. As the Department of Transportation’s Build America Bureau explains, TIFIA “provides credit assistance in the form of direct loans, loan guarantees, and standby lines of credit to eligible projects” at much more favorable and flexible terms than in the capital markets. PABS provide private developers and operators access to tax-exempt interest rates -and thus lower the cost of capital significantly.
4. Listen to the industry
• Conduct market sounding, industry forum, meet with prospective bidders – investors, developers, engineering and construction firms, O&M and facility maintenance providers
• Get feedback on risk transfer, what will be bankable?
5. Be open to industry innovations and to unsolicited proposals
• P3s bring more benefits when owners or government agencies structure requirements based on outcomes and allow the private sector to innovate. It is important to craft project requirements in terms of desired outputs vs prescriptive specifications.
• Be open to unsolicited proposals – unsolicited proposals are when the private sectors initiate a potential solution to address a key client need. A number of successful projects originated from unsolicited proposals.
6. Communicate, communicate, communicate to the public
• The importance of political and public support cannot be overstated. Communication is key to secure and maintain this support not only during procurement but also during construction and operations.
• Communicate regularly and frequently with the public. Be super transparent about benefits of the project and the benefits of using the P3 delivery method
• Manage political stakeholders throughout the full life of the project
• Help dispel myths around P3s
Notwithstanding the upfront work that is required, a key benefit of P3s is that upon financial close, all commitments, obligations and contracts are locked in for 15-20-30+ years. Projects are shovel-ready and advance quickly – often times completing ahead of budget and schedule. Long-term performance is ensured and incentivized through rigorous asset performance .
P3s are widely used successfully around the world, but on a limited basis in the US. With a $3.8T need for infrastructure, US governmental entities are wise to consider P3s as an option to stretch public funding, accelerate delivery, and transfer risks, while protecting taxpayers.
[1] G20 Global Infrastructure Hub; https://outlook.gihub.org/