Illustrating Public-Private Partnership Applications in Construction
Defining public-private partnership (P3) has become something of an art, given the diversity of modern views on the subject. P3s are essentially complex government contracts where a federal, state or local entity hires a private party to deliver an integrated solution for the design and construction, long-term operation and/or maintenance (and often financing) of a new or existing infrastructure asset.
P3s can be structured using several models, such as Build-Operate-Maintain, Design-Build-Operate or Design-Build-Finance-Operate-Maintain. The P3 model implemented depends on factors such as the existing legal framework (for instance, some U.S. states only allow P3s for transportation projects), financial considerations, public funds availability or simply political choice.
P3s are not appropriate—or effective—for every project. Short-term contractual needs, such as pure construction, would not merit using a P3, nor would contracts for external services (for instance, toll collections on roads operated by an authority). P3s are also not a means of tapping the private sector to finance public works where the government lacks budgetary authority. Instead, the project must have a revenue source to enable the private investor to service debt and obtain an equity return.
To succeed, a P3 must attract qualified proponents, provide a transparent procurement process, select a preferred bidder and achieve commercial and financial closing in a reasonable timeframe, and have performed as intended during the term. Let’s review the key elements.
Proposers must have the technical expertise and track record to deliver the project, and the financial savvy to provide a funding solution that is economically efficient and resilient. The authority must:
- ensure that the P3 model is legally permissible;
- commission the necessary studies to ensure project viability;
- obtain preliminary permits and rights of way (or a path forward); and
- determine the availability of and arrange for any public funds to be employed.
The procurement documents need to contain clear instructions to proposers and contemplate avenues—including one-on-one meetings—for the proposers to put forward their ideas and concerns about the project. Then, the authority needs to process the input and give feedback quickly. For instance, a client proposed an innovative and efficient financing solution that was not contemplated in the bid documents, and that would have required a change in the process for all participants if accepted. Though the authority’s response did not favor the client’s request, its quick reply helped the clients avoid needlessly wasting time and resources.
In this regard, communications rules should require the authority and bidders to appoint a single point of communications. The bidder’s team leader will deliver the team’s message (whether official comments and proposals, or day-to-day communications), and the authority’s team leader needs to have the mandate for open communication with the bid-side team leaders. Open communications are also important in the bidding team. The team’s financial advisor can play an important role here, serving as the interlocutor to make sure that all stakeholders—including the lender side and their advisors—stay up-to-date on all phases of the process. The financial advisor or project counsel needs to prepare and maintain timelines and checklists to help the team stay on top of the process, prevent anything from “falling through the cracks” and consider potential roadblocks and try to avoid them.
Moreover, the one-on-one meeting process should involve each team’s principal contractors to demonstrate cooperation, collegiality and mutual trust. The active participation of the design-build and operations team can pay other big dividends in enabling the team to address issues on the fly with the authority and showcase their problem-solving ability. Perhaps most importantly, if the design-build and operations team is part of the process, the sponsors have a greater chance of avoiding issues that might impact cost or, worse, derail a bid. Needless to say, the design-builder and operator must agree terms with the bidder’s equity team that are generally back-to-back with those of the project agreement and agree to condition (with exceptions) its claims for changes or relief to those provided to the project company under the P3 agreement.
The authority’s scoring process should be designed to help produce the desired outcome for the specified project. Is a bid cap or “upset limit” desired or necessary for political or economic reasons? Is project design the most important factor? Is life-cycle the biggest concern? The authority needs to take all this into consideration when determining the relative weighting of the financial proposal versus the technical proposal in order to drive the procurement toward what is, in the eyes of the authority, the best value for money proposition.
Finally, a successful P3 is not simply a partnership that leads to commercial operation, but one that continues throughout the project’s life cycle to ensure the project functions as agreed: The long-term concession arrangement needs to have a strong foundation, as well as elasticity and resiliency. A good P3 contract will also try to build in solutions for potential crises, including, in the case of early termination, developing reasonable compensation parameters and clear payment terms.
P3s are not the solution for all projects, but for those projects that are well structured and procured, a P3 contract will provide an integrated long-term solution with a balanced allocation of risks and rewards.