Why some P3s go bad — and how to avoid a project failure
Public-private partnerships (P3s) have been getting a lot of positive press recently. They're increasingly being used to take on large highway projects like Arizona's $2 billion Loop 202 South Mountain Freeway project, which, according to Arizona Department of Transportation officials, will be delivered three years ahead of schedule, largely due to the P3 design team.
New York is also building the new $4 billion LaGuardia International Airport Central Terminal B under the management of P3 group LaGuardia Gateway Partners, which includes Skanska USA, Vantage Airport Group, Meridiam Infrastructure, HOK and Walsh Group.
P3s are gaining in popularity because, when executed right, they can be a win-win for both sides. The private side can be rewarded with long-term revenue from tolls or user fees via decades-long maintenance and operation contracts and simply benefit from being part of a consortium working on a massive project that would have been difficult to handle solo.
The public agency benefits by being able to shift risk to the private sector, leverage limited cash across many capital programs and take advantage of the cutting-edge technology and capacity for innovation that private companies have developed.
Unfortunately, a few not-so-stellar P3 stories have emerged.
Indiana, for example, allows a wide variety of P3s, and many consider its history with the delivery structure to be a successful one. However, earlier this month, Indiana Finance Authority officials announced that they were moving to take over an Interstate 69 highway project that is currently operating under a P3. The IFA alleges that I-69 Development Partners has fallen behind schedule, been late on payments to subcontractors and that there is only $72 million left to complete $236 million of work.
The Indiana situation begs the question — what conditions contribute to an unsuccessful P3, and how can they be avoided?
Differences among states
This discussion is especially relevant considering the fact that President Donald Trump's infrastructure proposal will likely include P3s as one of the ways he plans to turn $200 billion of federal spending into $1 trillion of investment.
The push for P3s is also reflected in state laws. According to the National Council for Public-Private Partnerships, 37 states and Washington, DC, had enacted some sort of legislation, as of January 2017, allowing P3s to be used on transportation projects, social infrastructure or both.
So why do some states still limit their use or resist P3s altogether?
"The main hesitation is that they don't have experience implementing the P3 method of procurement," said William Eliopoulos, partner at Rutan & Tucker. "As public sector agencies … develop more experience and expertise with this new method, they will develop standardized legal procurement processes and forms and use it more."
Jeff Shoaf, senior executive director of government affairs at the Associated General Contractors of America, noted that there have only been 28 highway P3 concessions — those providing a payoff of road tolls, availability payments or long-term leases — implemented in the U.S. since 1992, signaling the early stage of the delivery method int he U.S.
When challenges arise — and how to handle them
"In my experience, [trouble starts] when the private group and the public group don't have the same goals," said Liz Holland, CEO of real estate management and acquisition firm Abbell Associates. She said both sides should make use of lead time by getting on the same page prior to the start of a project.
Another challenge, Eliopoulos said, is getting the public entity to realize that P3s are a cost-effective option even though financing might cost a few basis points more than the tax-exempt bond financing to which municipalities and other public agencies have access.
"Private financing is more flexible than bond financing, so draws are made when the money is needed later in the project rather than in one lump sum early on," he said.
"In my experience, [trouble starts] when the private group and the public group don't have the same goals."
CEO of real estate management and acquisition firm Abbell Associates
P3s also offer advantages such as life-cycle facility performance guarantees, Eliopoulos said, that aren't available using traditional procurement methods.
Adding to the complexity, even when states do allow P3s, is the fact that those laws don't always allow for public agencies to take advantage of the benefits they provide and can even create obstacles, according to Keith Poliakoff, partner in the Fort Lauderdale, FL, office of Arnstein & Lehr.
In Florida, for example, even if a state agency has negotiated with a well-qualified consortium for a P3 deal and come to an agreement on a price, state law requires that they put it out to bid. The information given to bidders, Poliakoff said, includes the price and project details hammered out during the previous negotiations with the consortium, so other companies are sure to lowball that number and try to make their proposals more attractive.
"As a result," Poliakoff said, "you get a vendor that may be selected because it's the low bidder, but they [might not] have the ability to perform."
And therein lies another problem. Poliakoff said public agencies are most likely to run into trouble during the execution phase of P3s if they don't fully vet the contractors or other parties to the P3. "A vendor might not have the financial wherewithal or expertise to perform as they indicated in the bid," he said.
The solution to this, he said, is for the agency to do a full review, with audited financial statements, of the vendor proposing to execute the project. In addition, he said a well-crafted set of documents should include a way for the public entity to exit the project if necessary. The extra time it takes the P3 to work out these details, he said, is nothing compared to the time it would take the public agency to fight it out in court if the project runs into serious trouble down the road.
This potential for a derailed P3 is one of the reasons, Poliakoff said, that public agencies tend to favor the industry's heavy hitters — like Fluor, Skanska and Granite Construction, to name a few. These companies, he said, have successful P3 track records, so the agencies know what to expect when they partner with them.
Why P3s aren't a 'policy experiment'
Some might see the potential swarm of projects that could be part of the Trump infrastructure plan as a source of a steep learning curve for companies and public entities that want to get their feet wet with P3s, but Stewart Steeves, chief executive officer of LaGuardia Gateway Partners, doesn’t see it that way.
"Public-private partnerships are not a policy experiment," he said. "They have long been a popular and successful model for large-scale infrastructure projects around the world and have already started to gain traction in the United States."
"People on the public side and concessionaires are getting more comfortable with the approach and speaking each other's languages."
Senior executive director of government affairs at the Associated General Contractors of America
Steeves said those in the P3 arena will be able to draw on the experiences of other companies and projects like Central Terminal B. "We believe that projects like LaGuardia Central Terminal B will prove to the public that this structure of funding can deliver one of the biggest and most visible infrastructure projects in the country successfully," he said.
Eliopoulos said Trump's plan to expand the use of private activity bonds for P3s could help lower their cost, which would further promote the use of P3s.
In the grand scheme of things, Holland said, P3s can be a successful tool to help both the private and public components achieve a successful outcome.
This is especially true, Shoaf said, because public and private agencies have started networking, sharing information and educating each other. "People on the public side and concessionaires are getting more comfortable with the approach and speaking each other's languages," he said.
"The vast majority of [P3s] work," Holland said., "as long as everyone's pulling in the same direction. If there are hiccups, you figure it out along the way."
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