The ABCs of the P3 Model

America’s infrastructure deficit problem needs fixing. Municipal bonds are an antiquated method for raising capital that only solves a part of the problem. What about P3s?

by Joel Kranc - Contributing Writer / August 7, 2014

Earlier this summer, President Obama spoke enthusiastically about the creation of the Build America Transportation Investment Center. The idea behind it would gives state and local governments needed assistance in generating private-sector investments for infrastructure projects. The Center would be housed at the Department of Transportation and would offer advice to officials on public-private partnerships (P3s).

P3s, a procurement model that pegs public-sector initiatives and infrastructure needs, with private sector capital and future management, is not a new concept around the world. Many countries, such as the U.K., Australia and Canada have been using P3s to help close their infrastructure gaps, while at the same allowing risks and costs to be shared through the partnerships rather then placing it squarely at the government’s door. The U.S. however, has been slower to adopt P3s so far, and in many cases still relies heavily on the municipal bond market for infrastructure capital.

But should municipalities in the U.S. be looking more closely at P3s as a solution to a decaying infrastructure that has not kept up with population trends and has not been overhauled in decades (and in some cases longer)? The American Society of Civil Engineers, in its Failure to Act: The Impact of Current Infrastructure Investment on America’s Economic Future study, says it would take $1.7 trillion to correct the current infrastructure deficit and an extra $160 billion per year to meet infrastructure needs through 2020.

The nuts and bolts

How do P3s work exactly? At their very core, P3s are a long-term performance-based approach to procuring public infrastructure. In most cases, the private sector assumes the lion’s share of risks including the financing and construction of the project as well as ensuring effective performance of the infrastructure – from design and planning, to long-term maintenance.

This means that (1) assets are not paid for until they are completed, (2) most of the costs are paid over the life of the asset if it is maintained properly and functions according to pre-agreed designations, and (3) the costs are known upfront and span the life-cycle of the project, meaning that taxpayers (in theory) are not on the financial hook for cost overruns, problems or any performance issues over the life of the asset.

“One of the major advantages of this,” according to Todd Herberghs, Executive Director for the National Council for Public Private Partnerships, “is being able to get the expertise of the private sector. Organizations that specialize in water and waster water or transportation development,” for example. “Many times, they’ll have expertise and skill sets that the public sector does not have,” he explained.

Besides expertise, there is the aspect of bundling projects so that the design and build aspects of a project are bundled under one vendor and/or approved at one time.

“Design-build has been rising in the American market as a business practice,” noted Jonathan Gifford, Professor, Director, Center for Transportation Public-Private Partnership Policy at George Mason University. “It has its benefits in terms of ‘on time and on budget’ delivery of assets. The newer P3 model brings O&M (Operations and Maintenance) into the mix and I think that has two important implications,” he explained. “One is you now have integration of design-build, operations and maintenance, in a single package so the O&M that contributes to the life-cycle cost of an asset are now incorporated into a single initial transaction. The second thing is having a contractual obligation to O&M with a particular standard of performance.”

John McBride is CEO of PPP Canada, a Canadian federal agency that provides expertise and advice in assessing and executing P3 opportunities at the federal level. He said an enormous benefit of the P3 model is that with private capital comes discipline and oversight not feasible at the public-sector level.

Can it work for U.S. cities?

It’s easy to look at some of the benefits of P3s and ask if the U.S. has such an enormous infrastructure deficit, why is the P3 model not being adopted more often? However, according to the PwC report entitled U.S. Infrastructure Deals 2013: More interest, but fewer deals, “Investors are most bullish about greenfield P3s where they see less political risk. When private investors take control of existing roads and other public assets, it’s often a tougher sell to the public.”

Why?

McBride said there is a distinct difference in the ways Americans view P3s. “The modern P3s in Canada are really a response to trying to get better execution,” he explained. “Most of the American audiences still see P3s, I think, as a way of solving their funding problems not a way of solving their execution problems.”

Gifford agrees and said part of the reason P3s are not as widely used in the U.S. is that costs appear to be visible and upfront. “P3s are typically applied to large, more complex projects. And if you increase the initial cost of those, the dollar amounts are considerable. It’s a new way of doing business and the cost of due diligence, when you don’t have normalized business transactions, are difficult on both the private and public side.”

Another issue for the U.S. is that there is no cohesive overarching legislation that applies to everyone. Said Herberghs: “The legal framework is fractured so there is little federal guidance, if any. That’s really the big threshold question that Canada does not face because they have a very robust legal framework that enables P3s at all levels.”

In fact, noted Mark Romoff, President and CEO of the Canadian Council for Public Private Partnerships (CCPPP), Canada is unique in that provinces have the mandate for all infrastructure procurement (including P3). “The fact that you have a single body overseeing the whole portfolio allows them to bring more consistency to the approach, standardization of documentation and features like that which make our portfolio of P3 projects very attractive to both Canadian and international bidders.”

He added that investors and the public in Canada have seen, that with more than 20 years’ experience, most P3s are completed on time and on budget.

Currently there are more than 200 P3 projects across Canada valued at more than C$63 billion. And in a recent survey by the CCPPP, roughly 62 percent of Canadians support the use of the P3 model for building infrastructure.

Gaining ground

Despite fractured legal frameworks, skepticism towards upfront costs and private intervention, and a lack of political will at the local level, some ground is being gained on the P3 model. Earlier this summer, U.S. Department of Transportation Secretary Anthony Foxx spoke to the U.S. P3 Infrastructure Finance Forum in New York. In his speech he mentioned the GROW AMERICA Act – a transportation proposal that would “inject, not only maintenance of effort capital in the U.S. infrastructure system, but also, dramatically growing it to the tune of $90 million over four years.”

Also, noted Gifford, some lead states such as Florida, Colorado, Texas and Virginia, have adopted and are advancing P3s. “What seems to be a best practice both in the U.S. and abroad is having a programmatic office for P3s as opposed to a project-by-project learning curve.”

Overall, the movement towards P3 is slower in the U.S. then in many other parts of the world. Partly due to cheap debt, fear of the unknown and a lack of cohesive structure (and political will), the model remains difficult to establish. As the infrastructure deficit grows at its current pace, local governments will have no choice but to look outside of their comfort zones for build and design models that work. P3s might be that option.

Joel Kranc is Director of KRANC COMMUNICATIONS in Toronto, focusing on business communications, content delivery and marketing strategies. joel@kranccomm.com