Ten Things To Know About P3s

In her role as Director of Victor’s Risk Management Services, Yvonne Castillo will be expanding the company’s resources in terms of project delivery for public works. She’s identified the 10 things on which architects should focus when trying to enter the public-private partnership or P3 project delivery market.

With governments across the nation struggling to make ends meet, i.e., increased infrastructure demand with decreased funding, many are turning to new ways to fund the upfront costs associated with the design and construction of horizontal and vertical infrastructure. One of those new ways involves private financing of public infrastructure.

(1) Nomenclature

When you hear “P3” or “PPP” or “public-private partnerships,” substitute “design-build-finance-operate-maintain project delivery.” It’s been used for decades in other parts of the world to deliver public infrastructure (horizontal and vertical) and now governmental entities (federal, state, and local) in the United States have developed a strong interest in institutionalizing this as a new project delivery method to deliver public infrastructure.

(2) New laws

To gain traction in the U.S. and minimize the political risks for investors, comprehensive enabling legislation has either passed or is being considered across the country. As an architect, you have a vested interest in influencing how these laws are written and how your services will be procured. You can view a comprehensive webinar on the legislative landscape. Contact your state professional association to explore ways for you (and your profession) to get involved.

(3) New stand-alone P3 agencies are being created

To assist states in identifying, vetting, and developing a pipeline of P3 projects and to support agencies that have an interest in exploring the use of P3, states are following cues from other countries’ experiences by creating stand-alone agencies with P3 expertise who can effectively analyze value for money and a comparison to other project delivery methods.

(4) Market drivers

The market drivers for P3 in the U.S. are (1) severe deferred maintenance and (2) severe budgetary constraints. Depending on the type of infrastructure (i.e. roads, bridges, ports, water treatment facilities, dams, airports, schools, etc.), the last major investments occurred 50 years ago.

(5) Greenfield/Brownfield pipeline

The pipeline of greenfield projects in the U.S. is robust, having more than tripled in 2016 so far, as compared to 2015, with a capital expenditure value of almost $8 billion…and we’re only halfway through the year. Brownfield projects have been a tougher nut to crack in this space, but in the U.S., due to the vast under-investment over the past several decades in existing infrastructure, there should likely be a similarly robust pipeline of projects.

(6) Recent projects

In the last 18 months, 11 deals have closed with a value of $10.4 billion total, with an average per capital expenditure of $945 million. Next Wave: Depending on your state, there are a number of P3 projects being planned in California, Virginia, North Dakota, Pennsylvania, Arizona, Michigan, Iowa, Texas, and Florida – 23 known so far. See InfraDeals, Breaking the Barriers to US Infrastructure Potential (2016).

(7) Procurement

The P3 procurement process is lengthy, averaging just over two years per project, and involving multi-million dollar front-end investment by teams in hopes of winning the project. See InfraDeals, Breaking the Barriers to US Infrastructure Potential (2016).

(8) Funding/financing

This isn’t a funding tool; it’s all about financing, and there’s plenty of private capital ready to be tapped to help finance the upfront planning, design, and construction. Institutional investors (such as pension funds) have a keen interest in investing in public infrastructure because of low yields in other markets and the fact that public asset classes perform consistently well and are well-suited for long-term returns. Municipal bonds remain another source of funding and are often instrumental in attracting private investor interests to make the P3 contracts an attractive return on investment.

(9) Life-cycle considerations

Government capital construction budgets have not historically accounted for operations and maintenance issues. P3, because it is based on long-term financing, allows (and encourages) governments to think about what it costs to own a building or other asset throughout its life-cycle. It’s important to note that P3 involves ownership remaining with the public entity, while M&O responsibilities are transferred over a long-term period.

(10) Bundling is gaining traction

This project delivery method generally makes sense for investors when the projects are large and complex due to the high-transactional costs, but lately there’s been a trend toward bundling smaller assets (schools, bridges, municipal buildings), which means small and medium-sized design firms may see an uptick in activity.

Private financing of public infrastructure is a solution, among others, that can help governments not only in moving forward with new construction, but also, and most importantly, in renewing infrastructure and integrating modern design and technology. It’s not a panacea, however; the vast majority of projects aren’t necessarily large enough to be bankable prospects. The key takeaway and benefit is that if certain large-scale projects can access private financing, capital construction budgets will be freed-up to move forward with traditional funding, and that’s a good thing for everyone.

If you’re reading this and wondering how your firm might start exploring P3 work, the ways are not unlike exploring any other public works—your firm should read industry publications, including P3 publications, (e.g. P3 Bulletin, InfraAmericas), review local planning board and city council meeting minutes to flag P3 planning, review state public agency websites for upcoming solicitations, and prioritize relationship-building with large A/E (E/A) firms who are currently doing this kind of work.

Victor and CNA work with the AIA Trust to offer AIA members quality risk management coverage through the AIA Trust Professional Liability Insurance Program and Business Owners Program to address the challenges that architects face today and in the future.