Public-private partnerships are becoming an important way to deliver large infrastructure projects in the United States. Most of these projects require surety bonds due to their size, complexity and scope of work.
The U.S. construction market continues to provide an excellent source of opportunities for domestic and international companies. According to the American Society of Civil Engineers, the United States will need to invest $4.59 trillion by 2025 to improve the nation’s overall grade of D+ for infrastructure. As such, the repair and rebuilding of highways, bridges, airports, rail systems and tunnels are the present focus for state and government agencies.
While the U.S. Department of Transportation defines P3s as “contractual agreements formed between a public agency and a private sector entity that allow for greater private sector participation in the delivery and financing of transportation projects,” the reality is P3s differ significantly from sector to sector and from project to project.
Many states are still debating whether P3s are the right delivery method for large, complex projects, though 33 states have passed legislation allowing the use of them for public projects.
Still, some states lack the technical capacity and expertise to consider such deals.
Balancing Risk
A P3 project can be delivered in different ways, including design-build (DB), design-build-finance (DBF), design-build-finance-maintain (DBFM) and design-build-finance-maintain-operate (DBFMO). Each has one common element: P3 projects pose greater risks for private contractors.
Contractors, which ultimately will handle the design and construction, may assume additional risk exposures in P3 projects depending on the delivery method of the P3 and whether it is DB, DBF, DBFM or DBFOM. By transferring more risk to the contractor, it may possibly reduce public entities’ own financial exposure. The bottom line is that the private sector and public entities need to find a balance of risk and responsibilities.
P3s require the involvement of large companies that have the expertise, capabilities, capital base and surety bonding support to undertake these projects. Many large P3 projects have been completed with the involvement of foreign contractors through their U.S. subsidiaries. These foreign companies have a large presence in the United States, as well as the resources, experience, capabilities and equity to participate in these P3 projects. P3s are common in other parts of the world, particularly in Europe, Asia, Latin America and Canada.
Engaging the surety early in the process is very important for a successful financial close and bonding support.
Gaining Support and Financing
It is crucial to understand what is expected from the partnership. Preparing bids for P3 projects can take years and millions of dollars in investments. Detailed contract agreements are necessary, and early involvement of the surety is key.
Support from public officials is also paramount when it comes to P3 projects. Public officials need to be fully on board with the project because ultimately they must protect the best interest of the taxpayers. The public could very well influence public officials to terminate negotiations with the private sector.
Educating the public, as well as legislatures and state agencies, about the benefits of P3s is essential for a successful financial close of a P3 project. Most large-scale transportation P3 projects are eligible to participate in the Transportation Infrastructure and Innovation Act program (TIFIA loans) and Private Activity Bonds (PABs).
Recent U.S. P3 transportation projects were funded through a combination of public and private funds (e.g., through TIFIA loans, PABS and private equity from investment partners).
Overall, approximately $11 billion in PABs and approximately $27 billion in TIFIA loans have been issued to date. In the end, the availability of funds through TIFIA, PABs and private funds will ultimately benefit taxpayers and resolve significant state budget restrictions for new infrastructure investments.
There is no one size fits all for the delivery of a P3 project, but states certainly can learn from each other through the process and past P3 jobs.
Ultimately, a successful P3 requires efforts from public officials, the public and private sectors, and state and federal government agencies.
