The United States is increasingly turning to public-private partnerships (P3s) to tackle infrastructure projects. However, despite studies that point to a more successful schedule and budget outcome when using a P3 versus traditional contract delivery methods, governments are still hesitant to hand over major projects to the private sector. That's primarily due to uncertainty and misperceptions about the process, according to a recent McKinsey report.
Some contractors also might be unsure about what to expect from the P3 process. However, there are ways for them to estimate whether a project carries with it the likelihood of success under the emerging financing and operations format.
Pick the right model
When a private consortium is going to assume the revenue risk for a project, a financing structure in which the P3 concessionaire owns the revenue is the most beneficial, says Skanska USA Civil president and CEO Richard Cavallaro. That could mean a toll road or some other asset with a dedicated funding source.
Skanska is part of LaGuardia Gateway Partners (LGP), the private group selected to design, build, finance, operate and maintain the new Terminal B at LaGuardia Airport, in New York. On that project, LGP is being repaid through passenger fees, Cavallaro said.
"When you don't have a dedicated funding source … you’re looking at availability payments," Cavallaro said. Availability payments are set, annual remittances from the public entity to the private consortium and are not dependent on revenue.
Either way, the government agency gets to shift the risk to the private sector and the project timeline will mostly likely be reduced. "Projects can have delays and cost overruns," he said. "They get to shed that risk early on in the process."
Lee Weintraub, shareholder at Fort Lauderdale, FL, law firm Becker & Poliakoff and chair of the firm's P3 group, has another take on projects in which the private side of a P3 takes on the revenue risk. Depending on the due diligence done beforehand, a project like a tolled highway could turn into a rocky road, he said.
In June, a Texas toll road P3 came out of Chapter 11 bankruptcy reorganization with new owners and management after the first concessionaire struggled financially when toll revenue did not meet original estimates.
Projects like that one, which are dependent on an asset's revenue stream, can face higher borrowing costs because some investors are hesitant about the potential for a return. "They're going to charge a premium," Weintraub said.
For Keith Poliakoff, partner at Arnstein & Lehr in Fort Lauderdale, FL, an ideal P3 comes wrapped as a previously unknown opportunity that a private developer proposes to a public agency. A private group should not be afraid to present public agencies with ideas about developing unused property or rehabbing aging assets.
"The beauty and the success in P3s is allowing private companies to see things that a government entity might not see and to be able to propose it without being ignored," he said.
Of course, that comes with risk. Kansas City, MO, engineering firm Burns & McDonnell proposed a $1 billion, privately financed terminal for the Kansas City International Airport. When international firm AECOM heard about the deal, it also made a proposal, and the Kansas City Council decided to open up the project to other bids. It is now weighing four proposals, including those from Burns & McDonnell and AECOM.
Build a solid team
There are often more than one or two upper-echelon contractors, developers and engineering companies as part of the private consortium attached to a P3. Rather than an inevitable battle of egos, as some might suspect, each company typically heads up the aspect of the project that matches its strengths, Cavallaro said.
For example, there might be a strong financial partner, a company that wields local political influence or one that has a particular expertise. On the LaGuardia project, he said, P3 partner Chicago-based Walsh Construction came to the consortium with a great deal of airport infrastructure experience, so they're heading up the runway portion.
The quality of all the consortium members is critical, Cavallaro said, "because the best team wins."
Advocate for transparency in bidding
AECOM made news earlier this month when it expressed concern about how the Kansas City Council was handling the bid process for the terminal project. According to The Kansas City Star, AECOM accused the terminal selection committee of "moving the goalposts" by publicly asking them questions about their bid's financial elements, supposedly giving the other teams the opportunity to modify their proposals in response to the board members' areas of concern.
Cavallaro did not comment on the AECOM situation but said that Skanska will not participate if there is any doubt about the integrity of the bid process. "These jobs are so expensive to bid, and we can't feel like the process is rigged," he said. "There can't be a local favorite who's going to win. If it doesn't feel transparent, we won't bid."
Solicit public approval
Even when a public entity is on board with a P3, whether the project actually happens comes down to taxpayer support, either formally at the ballot box or informally at public meetings, Poliakoff said.
Once the public realizes how quickly the project can be delivered via a P3, they often support the project, Cavallaro said. Additionally, a willing public partner can sometimes be the key to the project happening at all. "If municipalities had the money, they wouldn't be looking to a P3," he said. "They're looking to a P3 because they don't have the money."
Last November's elections saw the public vote overwhelmingly in favor of bond measures dedicated to infrastructure funding, indicating that they are very motivated to see movement on infrastructure repairs and upgrades. "P3s are a way to help solve some of that," he said.
Public outreach and a good public relations strategy are also important when trying to get taxpayers on board, Weintraub said.
Find a champion
A major component of a successful P3 is a champion for the project, Weintraub said. That is, someone with the political clout and the necessary respect within the community — such as a member of the city council or the school board — to see the project through the procurement stage and into action.
"There needs to be someone who is going to put it on his or her shoulders and see it through all the political components," he said. The more local, the better.
"All P3s look dead at some point," he said. "If you don’t have [that champion], the whole thing will collapse like a house of cards at the first opposite wind."