When is a Public-Private Partnership Appropriate?
One of the fundamental decisions to be made regarding P3s is whether or not a project is well-suited for P3 procurement. The process of making this determination typically starts with the public sector agency responsible for an infrastructure asset.
Legislatures may or may not play a role in this process, and states have chosen to handle legislative participation in a variety of ways. While a handful of enabling statutes place limitations on the type, size and price of P3 projects, the majority of states have broad enabling legislation with few project specific limitations. The majority of enabling statutes provide for some form of legislative review or involvement, but very few states require legislative approval for specific projects; leaving the procurement decision up to the appropriate state agency.
Transportation P3 Toolkit
- NCSL’s report, Public-Private Partnerships for Transportation: A Toolkit for Legislators, provides expert guidance, dependable counsel and a compilation of best practices to assist state legislatures as they consider whether and how to pursue transportation P3s in their states.
- Similar to the P3 market in America, NCSL’s P3 research began with a focus on the transportation section. As the P3 market expands, so does the need for continuing the policy discussion.
- Building off the foundational research in the P3 Toolkit, this web brief provides additional analysis and guidance for P3s outside of the transportation sector.
A variety of circumstances can make a project a potential good fit for P3 procurement. Key aspects of a project that will help determine the suitability for a P3 include opportunities for available revenue streams, risk transfer, scalability, proper statutory authority, public vs. private cost of financing and the long-term performance strategy for asset owners.
For many years the P3 market in the United States focused heavily on large-scale transportation projects, especially projects with an associated revenue stream. Many of the early U.S. P3s involved adding toll lanes as new capacity to existing roadways. A dedicated revenue stream in the form of tolls may be attractive to the private sector in order to pay back their investment and provide a financial rate of return for their acceptance of project risk. Revenue streams also can be used to subsidize long-term operations and maintenance payments to the private sector in the case of design-build-operate-maintain (DBOM) or design-build-finance-operate-maintain (DBFOM) models.
More recently, states have begun to move towards an availability payment structure for transportation projects, rather than relying on future revenue streams associated with the project.
Essentially, in exchange for design, construction, long-term maintenance and/or operations of an infrastructure project, the state will pay the private partner an “availability payment,” backed by future public funding, dependent on the private sector meeting predefined benchmarks of performance. Florida’s I-4 Ultimate P3 and Pennsylvania’s Rapid Bridge Replacement P3 are both examples of an availability payment approach, both of which are lauded among the P3 community.
The availability payment model may help expand the feasibility of P3s in non-transportation infrastructure projects. Many infrastructure projects are associated with a revenue stream, including energy production projects, micro-grids, water systems or buildings with commercial rental space. However, for any number of reasons the public sector may decide against dedicating those future revenues to repay the private-sector financing of a P3.
Some jurisdictions have found that “user risk”, or the uncertainty of a future user-based revenue stream, can be expensive to transfer to the private entity. It generally will require a greater rate of return than a more certain revenue stream such as availability payments which is associated with an “appropriations risk.”
A key selling point for P3s is the ability for the public to transfer risk to the private sector and the subsequent enhancement of the public interest. While this can provide great benefit to the public sector, any time the private sector accepts additional risk they will require additional financial incentives to do so.
Certain types of risk are better managed by the private sector while others are more appropriate for the public sector to retain. Common risk transfers to the private sector include operations risk, maintenance risk, construction risk, finance risks and more. Conversely, risks commonly retained by the public sector include ridership (when appropriate) or user risk, force majeure and revenue risk.
As previously discussed, the determination of risk transfer surrounding revenue risk or user risk can be alleviated with the introduction of availability payments. In the absence of a user-based revenue stream, when the revenue stream is not appropriate to be accessed by the private sector, or when the risk of future use is too prohibitive for the private sector to accept, the public sector partner can build a P3 agreement around payments from future public sector funding.
P3s are complex legal agreements that often involve sophisticated financial analysis and legal consultation. The barriers to entry for P3 agreements may preclude small municipalities or public agencies with small-scale projects from utilizing P3s.
An idea that has garnered increased attention recently is bundling together multiple similar small-scale projects. Pennsylvania recently entered into an agreement to replace and maintain more than 500 small to medium-sized bridges. Each bridge being too small a project on its own, bundling the projects has created an opportunity to leverage the private sector and transfer maintenance risk into a long-term contract.
Many possibilities abound for states to facilitate the bundling of small-scale municipal or county projects into larger regional P3s, particularly in the water/wastewater sector. In 2015, the EPA successfully worked with the state of Maryland and localities to pursue what is called community based public-private partnerships (CBP3s).
Other determinations to be made concerning whether to employ a P3 for a certain project include the financing costs, especially the cost of public vs. private financing, and the long-term goals of performance management for infrastructure assets. One factor that is currently up for debate is the relatively cheap price of private financing compared to historical trends due to current low federal interest rates.
Finding of Public Interest
In 2015, the Virginia Legislature enacted legislation to tweak the state’s long-standing and well-respected P3 laws. VA HB 1886 requires the public agency to produce a finding of public interest, and the Virginia Transportation Public-Private Partnership Committee (created by the bill) is required to ensure a P3 project meets the finding of public interest throughout the P3 process.