“Public-private partnerships” (P3s) is one of the hottest buzz terms in public construction in the United States these days. A relatively new concept in America but old and well established in many other parts of the world P3s are starting to transform the face of public construction throughout the country. But just what are P3s and more importantly how can they change the business plan of an engineering firm seeking to capitalize on the opportunities they present?
In their purest form, P3s are exactly what they sound like: partnerships between private industry and the public sector to deliver projects for public use, whereby public and private participants share in the cost, risk, and benefits of the projects. In a typical P3, the private sector designs, builds, and finances the project then operates and maintains it over a multi-decade period. Though the private sector usually bears most of the design and construction costs, it gets paid during the prolonged period of operations and maintenance, which is where it can earn a healthy return, as long as the project remains available for public use.
P3s are seen throughout the country in a multitude of forms, some of them neatly fitting the model and others being more abstract forms of partnerships, humorously referred to as “P3-ish.” Regardless of their structure, P3 projects involve a partnership of some form between public- and private-sector participants in which they share the risks and rewards.
Furthermore, unlike the traditional design-bid-build process, where price and qualifications are the primary drivers in the selection of the private-sector participant, P3 procurement is often driven by factors such as ingenuity in design and financial returns to both the private and public sectors. A common saying is: “If you have seen one P3, you have seen one P3,” meaning there is opportunity for the design team participant to entice public sector buy-in through innovative design, and the design team can also impact the financial returns of their private-sector participants through efficient designs, lowering operations and maintenance costs to the operators of the facilities. In this way, the design participant becomes integral to the project’s success.
P3s have been a preferred public project delivery method in Europe, Canada, and Australia for decades. The delay in P3 popularity in the U.S. stems from ours being a wealthy country that has been able to afford public projects without requesting private-sector investment. But, there is nothing like a good recession to lead to great ideas. P3s have emerged in America as a result of a number of factors, including the Great Recession of 2008 and the loss of corresponding tax revenue, the loss of public education capital outlay funds for the public education system, the need for new or upgraded facilities with no available capital, a reduction in internal public resources to manage facilities, and the increased risk of real estate investments.
The P3 model is a go-to solution for these issues because it allows the private sector to help defray some of the costs and risks in the delivery of public projects, thereby helping the public sector develop the projects it needs before the capital reserves returned. Many states have passed formal P3 statutes, and P3 activity has built momentum steadily over the last several years. Now is the time for engineers to catch the wave and familiarize themselves with the opportunities P3s present.
P3s offer a unique opportunity for engineering firms to take a lead role in the delivery of public projects. Competition in P3s drives innovation. In a design-bid-build model, contractors find weaknesses in the plans on which bids are based so they can drive their bid price down, knowing future change orders will make up for the low margins. That dynamic is irrelevant in P3s, where the private-sector concessionaire does the design, construction, and financing themselves. Hence, there are rarely change orders and, if there are, the private sector absorbs the cost.
In P3s, ingenuity becomes the driving factor. Because of the transfer of risk from the public sector to the private sector, the rules of competition change. For instance, an engineering firm that can find ways to run utility lines in easements, instead of under roads, to minimize future maintenance costs can increase the private sector’s return on investment. Therefore, an engineering firm has a big role to play in finding ways to reduce the costs of construction, operations, and maintenance in a manner that could increase efficient operations for the public sector and financial returns for the private sector. To the extent the public sector may share in some of those returns, depending on the project’s financial model, such a design would make the private team’s proposal more attractive during the competitive bidding process.
In design-build projects, the contractor usually controls the process from the private sector’s perspective and the engineer usually works for the contractor on a service-fee basis. In P3s, however, the engineer takes control. In a traditional project, a contractor saves costs by cutting corners on the materials and systems specified in the design. Though such value engineering may increase construction profits, it often also increases future maintenance costs. That is not much of a concern to a design-build contractor, who completes and leaves the project long before the owner begins operating and maintaining the project.
In a P3 project, where the private sector must also operate and maintain the project, the engineer becomes a valuable commodity, challenging him- or herself to design efficient and innovative systems that can reduce operations and maintenance costs, thereby increasing the returns to the private-sector team that operates the facility once construction is complete.
Though engineers are sometimes compensated a standard design fee for their services, on large P3 projects, the engineer may choose instead to be compensated by a share of the private team’s profit, often determined by a percentage of savings achieved through innovative design. In this way, an engineer can increase its financial rewards on P3 projects by agreeing to a compensation model tied to a share of profits realized through, among other things, maintenance cost savings achieved through innovative and efficient design, a very different concept than value engineering or design-build.
Another interesting dynamic is that the private concessionaire team, usually consisting of a developer and one or more contractors, financial investors, design professionals, and operations firms, is often led by the developer, as opposed to the contractor. On traditional projects, there is often an inherent tension between a contractor and an engineer. When the developer leads the team instead of the contractor and all participants have skin in the game as teammates of the overall concessionaire team, the tension between the construction and design components is reduced or eliminated. The project can then be collaboratively structured so that most of the profit would be realized during the operations and maintenance period. Though engineers can be compensated for their initial designs on a service-fee basis, they can become among the most important participants in the private concession team through their ability to increase profits by reducing maintenance expenses.
P3s offer the promise of healthy profits and the opportunity to participate in unique, portfolio-building designs around which your company’s reputation can be built. Many engineers would tell you that, for those reasons, participation in a private-sector team is the ultimate goal for an engineer engaged in P3s. But, if you are not a well-established large engineering firm walking in the circles of the big developers and contractors who build P3s, how can you get started? The answer is by beginning your P3 adventure working first for the public sector.
For a public entity to have a successful P3 program as part of its capital improvement plan, it is important that it have initial success on its first few projects. Failures will discourage private-sector participants from investing in expensive bids to work on the entity’s P3 projects. The best private P3 teams gravitate toward public entities with either a successful P3 track record or who appear to have systems in place to ensure predictability and efficiency in the procurement and administration of P3 projects. Engineers play an important role in helping the public entity achieve success in that regard.
Opportunities abound for engineers to work with public entities on P3 projects, beginning with master plan studies. Engineers, in collaboration with financial consultants, can be retained by the public entity to determine which projects on the public entity’s capital improvement plan are most ideal for P3s and which instead should be procured through more traditional delivery methods. Once those projects are identified, the engineer can be pivotal to preparation of procurement documents and evaluation of bids received in response.
Most P3 bidders not only provide a bid fully responsive to the solicitation document, but also include alternatives for the public sector to consider. These alternatives can change the nature of the project, the financial model, and the engineering parameters in ways that could maximize efficiency, create more novel public uses, and drastically affect financial returns to both the public and private sectors. Engineers evaluating responsive bids can also advise their public-sector clients on these proposed alternatives. P3 procurement is a fluid and often unpredictable process in which engineers can provide stability through their consultation services.
It is sometimes less competitive to get public engineering consultant work because most of the established engineers would be chasing the job as part of private teams and would therefore be conflicted from also pursuing it as a public-sector consultant. Public consultation is less risky than private-sector employment and, therefore, pays a correspondingly smaller profit, but it is a great way to cut your teeth and start building your reputation, which can later be parlayed into private-sector participation. Because of the lower competition and lower pay, it is sometimes easier to get started with public-sector employment.
If engineers new to P3s begin with public-sector consultation employment, their later marketability to the private sector increases accordingly. A public-sector consultation position helps the engineer learn the P3 process better and, more importantly, helps them understand how the public sector approaches the process. Engineers who fully understand what goes through the minds of public decision makers can translate that later to productive private-sector use as a future member of a private concession team.
Pedro “Pete” Hernandez, vice president and Metro-Dade executive for AECOM, said, “In a P3 world, engineers can bring innovation, new opportunities, and better performance at a lower cost. On the other side of the equation, the firm that wants to get started in P3s can work with the client, get experience in the technical and administrative side, and learn how the process works from the client perspective. That is critical and will help serve them well from the private-side perspective in the future.”
As Hernandez said, learn how the public-sector client views things and reacts to issues. It also does not hurt to develop political connections that can be leveraged in the future when you join a private concession team.
Another benefit of beginning your P3 experience by representing the public sector is that you will better understand its facilities needs and be able to suggest ideas for new jobs not planned for imminent procurement. You can move those projects up on the capital improvement plan by identifying ways in which private innovation and funding can make the jobs more appropriate for procurement than the public entity may have believed.
As Michael Shehadeh, client and relationship manager at CH2M HILL, said, “The public sector should not be too restrictive in identifying projects. The best part of the P3 process is innovation. Bring in specialty designers to assist with the development of innovation and get a handle on the extent of risk.”
Simply put, P3s are the latest in the progression of public delivery methods: from design-bid-build, to design-build, and now to P3s. They are the wave of the future and will be as commonplace one day as design-build is now. Now is the time to familiarize yourself with the process the same way engineers did when design-build was novel. And get innovative. After all, that is what it is all about!
Lee A. Weintraub, a shareholder at Becker & Poliakoff, is board certified in construction law by the Florida Bar and serves as vice chair of the firm’s Construction Law Practice Group. He can be reached at email@example.com.