Described by some as “classic sausage making,” the model for infrastructure delivery known as the public-private partnership, or P3, is poised to emerge as a credible option to help cure the colossal ills of the nation’s network of roads, bridges, airports, and tunnels.
But even as mega P3 projects are either finished — the North Tarrant Express in Texas — under construction — the light rail Purple Line in Maryland — or in the works — the Gordie Howe Bridge from Detroit to Windsor — the nation’s embrace of P3 is far from wholehearted. And with no federal standard, long-established ways of doing business, and a hodgepodge of state legislation, there’s no hint P3s will take their place at the center of public works, as they have in Canada, Australia, and the United Kingdom.
As state and local governments, as well as infrastructure companies and equity investors, wait to see what will happen, if anything, with the $1 trillion infrastructure bill touted by President Donald Trump — and as Trump has made conflicting statements about the effectiveness of P3s — there’s certainly no shortage of interest in what’s possible, and what’s not, under the P3 model.
Todd Herberghs, executive director of The National Council for Public-Private Partnerships, an advocacy founded in 1985, said he’s been busy fielding questions, but in an interview with Civil + Structural Engineer magazine, said critical mass has yet to be achieved.
“P3s are in the news and there is a lot of interest,” Herberghs said. “Our phones are ringing, but there’s a big difference between interest and actually going down the road.”
P3s are a way to access new financing sources while also transferring risk from the public to the private sector. Under the standard model, the public sponsor controls each phase — design, construction, finance, operation, and maintenance — of the project’s life cycle. Under P3, a single private entity, which could be a consortium of several companies, assumes responsibility for multiple phases, accepting long-term risks in return for prospective rewards. Transportation P3s feature user fees or tolls or, in other instances, government resources committed via long-term contract, known as availability payments, according to the U.S. Department of Transportation.
Herberghs’ organization has an impressive list of members that includes, among others, Arcadis U.S., Bostonia Partners, CH2M, and the Port Authority of New York and New Jersey. A clear indication that the big outfits are on board, Herberghs said the difficulties exist at the state and local level, the level where the overwhelming majority of infrastructure is owned.
A big part of the complicated P3 model is risk and reward, and investors only want to take on projects that promise a great return. That can spook state and local leaders and the constituents they represent. It doesn’t help when major P3 programs like I-69 in Indiana fail and are bailed out by the state. That being the case, P3 needs advocates in statehouses and city halls, or P3 can arrive as a dead letter.
“A lot of times if there is no champion pushing for it, it might not go anywhere,” Herberghs said. “It’s a new way of doing things and you have to explain it.”
There are, however, issues at the federal level, where much of the “seed money” for P3 projects comes from in the form of low-interest debt. Early in his presidency, Trump had said he wanted to fund $1 trillion in upgrades. In May, a framework was issued in which the federal government would pledge $200 billion over 10 years as incentives for another $800 billion in spending by state and local governments and the private sector. In effect, the ideal environment for P3s.
But in September, Trump, speaking to lawmakers, apparently reversed course, putting the infrastructure framework into question. A glimmer of hope for P3 advocates, meanwhile, came in August when U.S. Transportation Secretary Elaine Chao, a Trump appointee, appeared at the groundbreaking for the 16-mile light rail Purple Line in suburban D.C. The federal government pledged $900 million to the project, which has as private equity partners the super firms of Flour, Meridiam, and Star America.
Still, the national infrastructure program appears to be stuck in neutral, with lawmakers focused on health care and tax reform, not roads and bridges. Add to that the series of brushfire controversies involving Trump, partisan gridlock on Capitol Hill, and a simmering investigation into Russian meddling in the 2016 election, and the forecast looks cloudy for P3s.
“I fear infrastructure is taking a back seat,” Herberghs said. “We’re reading the tea leaves.”
If infrastructure is taking a back seat, it’s at least still in the car. And there are plenty of influential people who want to see P3s considered whenever projects are proposed. One such person is Geoffrey Yarema, founder of Nossaman’s Infrastructure Practice Group. An acknowledged thought leader for innovative procurement, contracting, and financing structures for large transportation projects, he is known for his work with state departments of transportation, as well as regional and local agencies. Yarema has often provided expert testimony before Congress.
In addition to his work across the United States, Yarema counts 16 years representing the Texas Department of Transportation through more than $59 billion in transportation improvements. Perhaps it’s no surprise that Texas is one of the nation’s leaders in P3s, with many projects operational or under construction, and with an advanced, centralized state bureaucracy.
Yarema, an attorney, spoke with Civil + Structural Engineer and shared his thoughts on P3 and its role in the ongoing struggle to repair and expand the nation’s infrastructure.
An important talking point for Yarema centers on the business model. Delivery of most publicly owned infrastructure in the United States, Yarema said, is based on a system that hasn’t changed in decades — pay for infrastructure with bonds and/or taxes with the owner breaking a project up into many scopes and awarding contracts to the lowest bidder.
The result, for larger and more complicated projects, is owner retention of interface and other significant risks that can be the foundation for significant claims and change orders. With the overwhelming majority of infrastructure in the United States delivered under the standard model, the conventional thinking is, “If it ain’t broke, don’t fix it.”
But with P3, there are many tools in the toolbox, and for owners there are opportunities to deliver increasingly complex projects by transferring to contractors project risks they can control better at commercially reasonable prices, all while creating a defined schedule for long-term asset management and life cycle costs — an expense that often exceeds a project’s initial capital outlay.
With state and local governments across the country looking at pressing needs throughout the gamut of infrastructure — road, rail, water, and air — now is the time to consider additional delivery models.
“Agencies should look at methods they may not have used before,” Yarema said. “Let’s not default to standard methods without analytically comparing them to modern business practices. Analytics now even drive how baseball players are positioned on defense. Why shouldn’t they drive how state and local governments deliver their most important capital investments?”
For Yarema, the use of alternative delivery should at least be on the table every time an owner plans to spend significant taxpayer dollars on a complex public works project with the potential for private-sector innovation. Based on the outcome an owner wants, maybe a P3 is the right tool, maybe it isn’t. But at least put P3 in the conversation, Yarema said.
While P3 has been around in the United States for about 30 years, the industry itself has yet to mature here. But at least one prominent infrastructure firm is expecting that to change.
In October, Louis Berger, a global professional services corporation, announced the appointment of Leif Dormsjo as senior vice president for infrastructure asset management. The former District of Columbia Department of Transportation director, Dormsjo brings to the firm nearly 20 years of experience in the transportation industry. Before joining Louis Berger, the Harvard-educated Dormsjo was associated with such marquee projects as the D.C. Streetcar project and the Purple Line in Maryland.
In an interview with Civil + Structural Engineer, he discussed Louis Berger’s growing role in the P3 industry, and the P3 industry in general.
Louis Berger has been involved with P3s for a while, primarily as an advisor on the front end, providing analytics, design-build, revenue analysis, and traffic forecasts. While the firm will continue to provide those services, Dormsjo’s hire signals an expansion into the P3 universe. The firm will now undertake direct operation of assets and will expand from highways and toll roads into transit, aviation, and maritime.
“We want to deepen our involvement on the operations side of the business,” Dormsjo said.
A major P3 the firm is now involved in is the once-troubled SH 130 in central Texas, a 41-mile highway linking Georgetown and San Antonio. The toll road went bankrupt when revenue did not meet projections, and emerged from Chapter 11 with new ownership, Strategic Value Partners. The firm hired Louis Berger to operate and maintain the roadway.
While SH 130 had its problems, it is still representative of what Louis Berger and Dormsjo see on the long-term horizon — a healthy secondary market in maturing infrastructure assets. As the original investors in P3s — infrastructure and construction companies — cycle out of the assets, new kinds of owners — pension funds and insurance companies — cycle in.
“We find that market intriguing,” Dormsjo said. “We see that transition into long-term life cycle management as an opportunity to be helpful.”
Here’s how it works.
A P3 is built, and the original investors manage the asset through the high-risk period, say for the first seven to 10 years when the reward is also high. When, in Dorsmjo’s words, the asset is “de-risked,” the original owners sell to a different breed of buyer, those looking for a more stable asset.
“The profile, from a risk perspective, changes,” Dormsjo said. “It’s the maturation of the asset.”
As a preview of what Dormsjo expects to happen in the United States, one must look no further than Canada, a country with perhaps the most well-defined P3 industry in the world. SNC-Lavalin, the largest engineering firm in Canada, announced this summer that it had agreed to sell five assets for about $208 million to BBGI, a Luxembourg-based investment company.
Even as the secondary market in domestic P3s begins to take shape, the foundation of the P3 industry in the United States will remain on uneven ground for a long time to come. With no federal standard, each state that has P3 legislation has its own law. As a result, companies looking to do business in P3s must navigate a labyrinth of obstacles, including legal, political, and labor, from state to state.
“The market is very fractured,” Dormsjo said “You have many pipelines. It injects a whole bunch of risk in going after projects.”
A good example of how state and local politics can affect P3s happened in Colorado in 2014 when Gov. John Hickenlooper had to pass an executive order adopting more P3 transparency measures — but only after vetoing a previous proposal that would have been so restrictive, it would have imposed “unworkable substantive limitations on future P3 transactions.” The legislative uproar was sparked by the state’s first P3, U.S. 36 in metro Denver.
A big litmus test for P3 is likely to take shape this year, and beyond, in Nashville, one of the most explosive markets in the country. Nashville Mayor Megan Barry has proposed a $5.2 billion transit and infrastructure plan. Facing a huge upturn in population and subsequent congestion, Nashville is looking for as much as 26 miles of light rail, a tunnel under downtown for the transit lines, and rapid bus routes.
Voters are supposed to head to the polls in May to either approve or reject increases in the city’s sales tax, hotel-motel tax, car rental tax, and the business and excise tax, revenue sources that would fund the historic program. Last year, Tennessee lawmakers passed P3 legislation, albeit with restrictions. Under Tennessee law, P3s cannot be used for highways, bridges, and tunnels, but transit programs, like the one being proposed in Nashville, are authorized.
Sean Braisted, a spokesman for Mayor Barry’s office, had this to say about possible delivery methods, when and if the project moves forward: “Metro has developed our program at this stage without a definitive determination as to the ultimate delivery model. Metro will examine traditional design-bid-build and we will also entertain alternate delivery models to include the possibility of a P3 if it would result in faster or less expensive delivery, while managing the long-term risk of the city and keeping the best interests of our workers and residents in mind.”
Before Nashville arrives at the question of whether to use P3, however, it must first push past the age-old obstacle that has dogged public works for years — the unpopularity of new and increased taxes.
Zachary Jones, an infrastructure attorney with Nashville-based Stites & Harbison PLLC, said the political hurdle will be difficult to surmount. As proposed, the increased taxes would be implemented in Nashville and Davidson County, but not in the surrounding area. For many constituents, that might be too much to swallow — paying for something that lots of other people get to use.
“This is the potential problem on the horizon,” Jones said. “That’s what will be politically difficult.”
There is already opposition to Mayor Barry’s proposal. And then there’s the additional issue of what projects would be good for P3 and which ones wouldn’t — when and if the taxes are passed. Tennessee is brand new to P3 and has a law that, in Jones’ opinion, is “not the model of clarity.”
Though Jones was speaking of Tennessee, he could have been talking about multiple other states across the country when, referring to the P3 bureaucracy in Nashville, he said, “There’s no real infrastructure to get from Point A to Point B.”
Design-Bid-Build (DBB) — Design and construction of the facility are procured in two separate contracts.
Design-Build (DB) — Combination of two, usually separate services, into a single contract.
Design-Build-Finance (DBF) — One contract is awarded for design, construction, and full or partial financing of the facility.
Design-Build-Operate-Maintain (DBOF) — An integrated partnership that combines design and construction responsibilities of DB procurement with operations and maintenance.
Design-Build-Finance-Operate-Maintain (DBFOM) — Responsibilities for designing, building, financing, and operating are bundled together and transferred to private-sector partners, with concessions often extending for 30 to 50 years.
P3 financing mechanisms
Private Activity Bonds — Tax exempt construction debt issued by state and local governments.
Transportation Infrastructure Finance and Innovation Act — Provides low-interest debt for regional and national projects.
Agencies that have pursued a pipeline of P3 projects have found that implementation through a centralized P3 unit is helpful. Centralizing implementation of P3 project delivery within a statewide team with technical, financial, and legal expertise has been beneficial to the delivery of P3 projects.
Enable P3 authority
Legislation should largely place the control of policy development and contract negotiations in the hands of the designated P3 authority, whether within or outside the state’s department of transportation.
Upfront legislative involvement
In general, if legislative approval is desired for P3 projects, it is more effective to require them as early in the development process as possible and ideally before the private sector becomes heavily engaged.
Leading policy makers or elected officials who understand the benefits and costs of the project and can fully articulate them to the public. Political champions act as a rallying force, reaching out to influential parties and to the public to drum up support for a project.
Allowing for robust public deliberation and participation through early agency approvals (separate from legislative approvals) and stakeholder input is a successful practice that not only reduces changes at a late stage but also increases transparency.
Allowing unsolicited proposals for new projects can trigger significant private-sector input. However, managing and responding to unsolicited proposals can lead to pitfalls, including proposal quality, constrained resources for adequate review, a lack of competition, and a lack of transparency, which could lead to allegations of abuse. Inserting an unsolicited proposal into a state’s project pipeline could lead to the perception that unsolicited proposals receive undue priority over established public projects.
As expensive projects with concepts and arrangements that differ from traditional project delivery, P3 projects can be controversial and garner negative public attention. For successful P3 implementation, public outreach is important, facilitating open communication and minimizing misconceptions among all parties.
Creating quality competition during the procurement phase is vital. Public agencies benefit the most when multiple bidders submit quality proposals generating robust competition between the most capable private firms. This increases the likelihood that the winning bid will be the best choice for delivering a project that achieves public goals.
The bidders’ willingness to invest in high-quality bids depends on the expected return. As such, a public agency that reimburses unsuccessful bidders reduces bidding costs and thereby encourages high-quality proposals. Paying a stipend to reimburse at least a portion of the cost of unsuccessful, yet compliant, bids is therefore an effective way of fostering robust competition.
Public agencies are heavily involved in monitoring the performance of contractors under conventional delivery methods, including DB. In a P3, although some of the monitoring roles will be carried out by the public agency, the private concessionaire will primarily monitor its own performance and report periodically to the public agency. Nonetheless, the public agency can ensure that the private partner is performing as promised by independently verifying the reports. Therefore, establishing a system for monitoring P3 performance that includes a role for both the public agency and the private partner is a factor of success for P3s.
Members of The National Council for Public-Private Partnerships
(legal, contracting, public, private) include the following:
Arcadis U.S. Inc.
Ballard Spahr LLP
Bostonia Partners LLC
City and County of Denver
George Mason University
Herzog Contracting Corp.
Port Authority of New York and New Jersey
Thirty-four states; Washington, D.C.; and Puerto Rico have P3 legislation.
Sources: Successful Practices for P3s, U.S. Department of Transportation; The National Council for Public-Private Partnerships (https://www.ncppp.org); National Conference of State Legislatures
Richard Massey is director of newsletters and special publications at Zweig Group and editor of The Zweig Letter. He can be reached at firstname.lastname@example.org.