Widening the scope of public-private partnerships could help America bridge its infrastructure gap

As the cost of bridging America’s well-documented trillion-dollar infrastructure funding gap continues to increase, our industry has high hopes for the new administration to increase the federal infrastructure budget. AECOM’s Stephen del Percio says this combined with President Joe Biden’s commitment to seeking bipartisan support means that any bill passed should try to leverage private capital.

To keep the U.S.’s $20 trillion economy going, it needs roads, bridges, schools, hospitals and other vital infrastructure. Current systems are creaking, however, and according to the American Society of Civil Engineers (ASCE), fixes would require an investment of $5.6 trillion. The private sector could play a bigger role in financing these projects but for this to happen, public-private partnerships need to evolve.

One way to drive this evolution is to incentivize the broader use of unsolicited public-private partnerships through federal legislation as a way for state and local governments to procure new projects. Unsolicited public-private partnerships allow the private sector to propose new, creative ways to deliver projects with a public purpose — from schools, hospitals and government buildings to roads, bridges and water treatment facilities. Unlike projects originating with a public-sector agency that typically include defined scopes, unsolicited public-private partnerships give private sector teams broad discretion to create new projects from scratch using their own innovative solutions. And unlike in competitive bidding — where the private sector cannot actively enlist public support for its proposal over any others — teams submitting unsolicited public-private partnerships can reach out to key stakeholders in order to build support and consensus for their proposed projects.

Unsolicited public-private partnerships offer real promise and potential. However, there are also some roadblocks to address first if the federal government is serious about unleashing the power of the private sector to help transform America’s crumbling infrastructure.

Here are four prominent roadblocks and ideas on how to fix them.

Roadblock 1: A disorganized, patchwork regulatory regime that exists at the state and local levels

Little uniformity exists today in enabling legislation for unsolicited public-private partnerships, making it difficult for stakeholders — including investors and project delivery teams — to scale their approaches, creating erratic deal flow and driving up transaction costs. Indeed, as of 2018, only 24 states (and the District of Columbia) had enabling legislation allowing the private sector to submit unsolicited public-private partnerships proposals in the first place. Another challenge is that the mechanics and the breadth of these statutes vary. Some only apply to certain market sectors like transit or social infrastructure, while others require a certain minimum threshold of capital spend in order to qualify for an agency’s consideration.

One way to fix this scattershot approach is for the federal government to actively advocate for and push down more uniform regulations into state and local legislation. It could place conditions on the distribution of future grants or as part of established, successful loan programs like the Transportation Infrastructure Finance and Innovation Act (TIFIA) and the Water Infrastructure Finance and Innovation Act (WIFIA). It could also work with the industry to help craft model unsolicited public-private partnership legislation in jurisdictions without a statute on the books yet or amend statutes under which unsolicited public-private partnerships have been difficult to administer or execute.

Roadblock 2: Infrastructure procurement in general is broken

It’s time for the architecture, engineering and construction industry to take a stand and reject bespoke contracts. Large, transformative infrastructure projects have traditionally been a poor fit for design-build procurement under public-private partnership models — whether unsolicited or not. Because certain risks typically retained by public-sector owners (like right-of-way acquisition, permitting, differing site conditions, third-party approvals, etc.) are instead transferred wholesale to the private sector in public-private partnerships, this creates the chilling effect of shrinking bidding pools and making procurement needlessly expensive.

The federal government could instead promote the use of standardized, consensus-based procurement documents from industry organizations (DBIA, EJCDC, etc.). These forms try to share risk equitably between owners, contractors and designers. They would immediately drop transaction costs and promote increased participation across the industry.

The federal government could even go as far as trying to ban lump-sum bidding on projects that receive a certain amount of federal funding and require that those projects be procured on a cost-reimbursable basis with fixed fees for overhead and profit, much like in other sectors of federal procurement. Private financiers would balk at that approach. But in the long run, everyone would benefit from increased certainty around project delivery, an appropriate allocation of risk with fewer claims and litigation, and better PR for public-private partnerships and design-build procurement, generally.

Roadblock 3: Unsolicited public-private partnerships aren’t free (but maybe they should be)

Some legislation that enables unsolicited public-private partnerships requires bidders to pay a substantial fee with their submission, ostensibly to compensate the agency for its time and effort in reviewing the unsolicited proposal. This fee, which is on top of the costs for developing the actual proposal, can become a significant obstacle or even a deterrent in getting private sector participants engaged in the process. The federal government could help here by offsetting some of these costs through grants to subsidize proposal evaluation, including hiring staff or even seconding experienced contracting officers who would assist local agencies in procuring or administering complex or federally strategic projects.

Roadblock 4: Challenges against confidential information and industrial and intellectual property

Many states that authorize unsolicited public-private partnerships will still require a subsequent competitive public solicitation prior to formal acceptance. For example, California does not permit a public agency to even consider a proposal without first seeking competitive proposals from other firms. This is typically referred to in the infrastructure and project finance industries as a “Swiss Challenge.” These challenges add an additional layer of uncertainty — and therefore risk and cost — to teams developing unsolicited proposals.

Those challenges are compounded because when teams submit proposals for unsolicited public-private partnerships — even in a Swiss Challenge jurisdiction — they may be required to disclose certain confidential and proprietary information. Some states offer zero protections for intellectual and industrial property while others provide statutory cover (yet another example of the patchwork regulatory environment). In those cases, an unsolicited proposal team may find that its new competitors are free to use its concepts, designs and business models, despite developing the original proposal content at a  significant expense. Even the public agency may be able to reserve its right to use designs from rejected unsolicited public-private partnership proposals. This stifles the creativity and innovation, which are hallmarks of the private sector. Protecting industrial and intellectual property should therefore be a primary pillar of any model legislation.

Bonus Roadblock: Build America Bonds and expanded tax-exempt financing could make a comeback

With Democrats also controlling Congress, a Biden administration-backed infrastructure or coronavirus stimulus bill could create new sources of tax-exempt financing for projects, as well as renew Obama-era Build America Bonds. (This program expired in 2010 and authorized taxable municipal bonds to include federal tax credits and subsidies for participating state and local governments.) Additional sources of infrastructure funding should of course, be cheered. But they could create an environment where investor appetite for unsolicited public-private partnerships is curbed thanks to other attractive alternatives. Regardless, emphasizing the potential for this type of partnership to innovate will be critical in successfully securing private capital for creative, worthy projects.

Unsolicited private-public partnerships are key to delivering more innovative projects

The private sector must be properly incentivized and protected when proposing new infrastructure projects to produce fresh ideas worthy of attracting investors. Private capital will not be a magic bullet but if enabling legislation is authorized uniformly with correctly aligned incentives, unsolicited public-private partnerships could go a long way toward helping America build the 21st century infrastructure that it desperately needs. Improved legislation, coupled with fiscal and administrative support from Washington, could get the ball rolling. And, in the age of coronavirus, with state and local budgets struggling, private capital may be one of the last bridges available for restoring, rebuilding, and revitalizing America’s infrastructure.