Why P3s can be a project delivery method worth the risk
When executed properly, public-private partnerships can be a win-win for those on both sides of the aisle.
Design-bid-build may still be the No. 1 project delivery method for U.S. construction, but other processes are rising that could challenge DBB’s stake in how some projects are carried out.
One such arrangement, public-private partnerships (P3), is gaining steam with talks from Washington, D.C., about employing the method for President Donald Trump’s $1.3 trillion infrastructure spend. While more states and local entities are successfully turning to P3s to tackle major infrastructure overhauls and new projects, the method still runs up against a perception problem. Some elected officials are hesitant to employ P3s because they don’t want to let a private firm finance, construct and manage public assets.
Despite success stories like Indiana’s Ohio River Bridge P3, which came in under budget and is generating revenue that is exceeding projections, a national spotlight on failed P3s, including a bankrupt Texas toll road built and operated under a P3, has left many state and local agencies wary of entering into such an arrangement.
Whether P3s will move more toward the mainstream will largely depend on state and local governments’ willingness to adopt new revenue streams, like tolling, despite uncertainties and the potential for public opposition.
When executed properly, the method can be a win-win for those on both sides. The private entity can see long-term revenue from such projects while the public agency is able to shift any potential risk to the private sector and leverage limited funding across a number of capital programs.
But how those arrangements are determined comes down on a case-by-case basis.
“I think one thing a lot of people think is that there’s a formula for P3s, but we look at them as all being unique in their approach,” according to Stephanie McFarland, a senior issue-management consultant who has worked with the Indiana state government. “[The state] looks at P3s more as a process you manage than a template or formula.”
For construction companies, engaging in a P3 can mean a guarantee for long-term revenue, whether that money comes from tolls or user fees that accrue from maintenance and operation contracts that span decades.
And the vast majority of P3s tend to work, Liz Holland, CEO of real estate management and acquisition firm Abbell Associates, told Construction Dive in June — but only if everyone is on the same page.
P3s run the biggest risk of derailment when the private and public entities don’t share a common goal. For a P3 to succeed, partners should lay out those goals long before a project has broken ground.
Considering the risks
But before partners can manage that process, both public and private entities have to formulate a list of all known project risks, according to Lee Weintraub, shareholder at Fort Lauderdale, Florida, law firm Becker & Poliakoff and chair of the firm's P3 group. Those risks include the risks in construction and design, cost overruns, delays, unforeseen conditions, land entitlements and land use, among other things.
Partners will also go over the risks that are inherent to the facility’s operation and to what extent usership — or lack thereof — and corresponding revenues align with their expectations.
After those risks have been identified, the next step is to delegate responsibility for handling such situations, should problems arise. Almost always, the construction and design risks will go to the private side and the political risks will go to the public, although the private side may help try to quash some opposition, Weintraub said.
While these negotiations attempt to account for any uncertainty, unforeseen risks are sometimes inevitable. When those risks arise, who will take care of any associated costs depends on who holds the broader share of responsibility.
“You have to see who has the obligation of that type of situation under the agreement,” Weintraub said. “If there is a tax change, for instance, whoever is operating the facility and managing the finances is the one who would take the brunt. If the contract doesn’t specifically define that risk, you just go broader.”
But dealing with as many risks up front as possible can limit the possibility of major cost overruns and legal fees.
When project stakeholders on the $1 billion Port of Miami Tunnel ran into issues with a tunnel boring machine (TBM) — a technology that, at that point, had never been used in the U.S. — both sides disputed who would take responsibility for the unexpected costs.
The project, however, was spared long delays and massive cost overruns thanks to an existing contingency reserve fund, according to Samara Barend, AECOM’s North America strategic development director for public-private partnerships.
“They had litigated the issue and specified it in the project agreement how it would be dealt with in terms of risk sharing. It wasn’t as much a killer as it could have been if it was a traditionally delivered project.”
According to Barend, P3s make sense for risky projects in uncharted territory — and the method can even lend itself to innovation. Because they bring all sides of a project team together in a unified format, P3s settings can be the perfect catalyst for devising more efficient methods of delivering a project.
“In this case, Florida was unwilling to take the risk of new technology for building its first major tunnel,” she said. “The P3 framework attracted proposals from teams that allowed the state to transfer this risk in a reasonable way and gave [it] certainty that the project could be delivered on time and on budget.”
Improving project schedules
Studies continue to point to P3s’ ability to improve project schedules and budgets when compared to traditional contract delivery methods. A study by Allen Consulting Group found that P3 projects in Australia were completed on average 3.4% ahead of schedule, while traditional public projects were 23.5% late on completion.
The public sector is beginning to open up more to those possibilities. “I’ve seen the market change dramatically from only a couple of states having P3 authority to now over 40 states having the ability to do P3s,” Barend said.
Specific state legislation and having fully operational projects can help explain that shift, according to Barend. And that momentum will likely continue with the success of P3s currently in the pipeline. “People are much more optimistic given that we have a lot more deal flow now than we had before,” she said.
And while some projects of national significance, such as a $9 billion expansion of three major highways that connect the Maryland to Washington, DC, and Virginia, are moving forward because of the delivery method, P3s can only be viable if there is political support for the project.
“Given the amount of focus on these projects and the attention that is brought when a city or state advances one, you need a lot of political support and a governor or mayor who’s willing to put their job on the line to be aligned with the project,” Barend said. “You need agency heads who will champion the concept — if the idea is being driven by the agency staff but it doesn’t have the support of a public official who is willing to get behind it, I don’t think it has any opportunity.”
Public agencies also have to do their due diligence in determining if they can commit to a P3, which can oftentimes be unaffordable. And, if they can, they need to answer one question before moving forward with a proposal — are they willing to take on the risk?
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