P3’s have become a buzzword in the construction industry recently, associated with President Trump’s promised $1 trillion infrastructure bill. The concept of a Public Private Partnership (P3 for short) arose early in the 1990’s in the UK as one-off deals with the goal to retard the level of public debt. Since then, P3’s have caught on internationally in several countries including Canada.
The US has been slow to embrace P3 usage as an major delivery system, partly because P3 projects have had mixed results. For example, the 2016 Texas SH130 Toll Road debacle is still fresh. The private company (SH 130 Concession Company) invested $1.3 billion and agreed to build and operate this highway for 50 years, collecting tolls as repayment. Unfortunately, the toll income on this 85 mph highway was not enough. Conversely, The $2.66 billion LBJ Express Highway, also in Texas, finished three months early in 2015 as P3 participants cooperated to get the job done.
A P3 is a contractual arrangement between a federal, state, or local entity and a private sector entity. Both the public and private entities share in the funding of the project. P3’s come with their own lingo—a “brownfield” is an existing facility, a “greenfield” is a new facility, O&M is a long term Operation and Maintenance contract. Typically the public entity (e.g. state DOT) retains ownership of the bridge, road, or other asset while the private entity provides the up front funding for the construction. It is important that the funds provided by the private entity are dedicated to that infrastructure project, and not used by the public entity for other purposes. The financier depends on a revenue stream for repayment of their funds, such as tolls, fees, taxation, etc.
The private entity can be a partnership, JV, or single business. This entity is usually responsible for the design, development, and construction of the project, coordinating the contractor for the work. The contractor’s role in a P3 could be as limited as a subcontractor for a trade, or as broad as assuming the design portion of the project. It is important for the contractor to be a part of the process from the very beginning so it is clear who they are working for, how, and when they will be paid. Contractors must be aware of risk transfer: in a P3 the public entity is outsourcing their risk to the GC for permits, site and soil conditions, design, conflicts and delays.
In the US, states are responsible for passing their own legislation regarding usage of P3’s as well as surety bond requirements. Three of the six New England states passed this legislation: Maine requires 100% performance & payment bonds or a letter of credit for DOT projects, Massachusetts requires a 100% payment bond, and Connecticut does not have any requirement for surety bonds. New Hampshire, Vermont, and Rhode Island have not addressed P3 legislation yet. Some sureties have special P3 bond forms and will require evaluation of the P3 agreement, with close scrutiny of long term maintenance provisions.
As this model of infrastructure development evolves, we will need to watch its progress and see if and how it affects our territory. Most projects in New England seem too small for a P3, however this could change depending on experience and availability of public funding.
Any questions? Contact Bob Shaw, Heidi Rodzen, or Melanie Bonnevie at (207)753-7300.