What Are Public-Private Partnerships?

by: Smith and Howard

April 8, 2017

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The United States is facing consequences from decades of deferred maintenance and underinvestment in infrastructure. At the same time, available public fund levels for such projects are low and resistance to increased taxation is high.

One approach government agencies are exploring to help meet the needs for new infrastructure projects is developing public-private partnerships (P3s). These arrangements could provide profitable opportunities for contractors in the near future, so it’s important to know how they work.

The concept, defined

Under the P3 model, a public entity (federal, state or local) engages a private partner, which in turn hires, supervises and pays the contractor. The private partner may participate in the design, financing, operation and maintenance of the project, as well as in the construction. The specific role of the private partner varies considerably from one project to another. Ideally, everyone’s role is clearly spelled out in the contract.

The types of projects that have been handled as P3s include water and sewer systems, parking facilities, toll bridges, roads, highways and prisons. In some cases, the P3 is formed to develop a new infrastructure project; in others, an existing asset is transferred to a private partner that assumes responsibility for needed upgrades, repairs and ongoing maintenance work.

Pros and cons

The chief advantage proponents see in P3s is that both the public and private entities involved do what they do best. The public entity is better able to serve its constituency by targeting and completing the necessary projects. The private partner is motivated to work effectively and efficiently, because its contractually specified compensation depends on good performance.

In addition, by working together, P3 partners often are able to develop better infrastructure solutions than either could have come up with on their own. Projects may be built faster when time-to-completion is included as a measure of performance and, thus, profit. Risks are appraised fully before a project moves forward, with the private partner often serving as a check against unrealistic government promises or expectations. Taking advantage of the private partner’s experience in containing costs can mean more efficient use of government funds and resources, too.

P3s also present some potential disadvantages — especially where the size, nature or complexity of the project limits the number of potential private partners. When only a few private entities have the necessary scope and skills to handle the job, there may not be enough competition to ensure cost-effective partnering.

Furthermore, if the expertise in the partnership is weighted heavily on the private side, it puts the government at an inherent disadvantage. Under those circumstances, it can be difficult for the public partner to accurately assess the proposed costs.

The contractor’s perspective

As mentioned, P3s represent potentially profitable opportunities for contractors with the requisite experience and resources to perform the work. If you want to consider going after one of these projects, it’s important to be aware of the ways they differ from traditional public works construction.

At the state and local level, laws governing P3s vary widely from state to state and municipality to municipality. They don’t always offer contractors the same protections typically provided in publicly funded projects.

For example, some state P3 laws don’t address bonding requirements at all, while others allow alternative forms of security, such as guarantees from a parent company or equity partner. (For more information, see “P3s and bonding.”) Sometimes the security required makes it difficult or even impossible for a subcontractor or supplier to pursue payment claims, which can increase your risk of nonpayment on a P3 project.

Even more onerous, state and local governments own the land on which most P3s are built. Thus, subcontractors can’t rely on mechanics’ liens for compensation if the general contractor defaults.

Your best interests

Analysts expect P3s to become more prevalent for infrastructure projects in years to come. So you may want to keep an eye out for such work and be prepared to pursue it, assuming the project suits your construction company’s strengths.

If you do get the chance to participate in a P3, consult your CPA, attorney and surety rep before starting work. You’ve got to ensure that the contract into which you’re entering will reasonably serve your best interests.

P3s and bonding

Although laws governing public-private partnerships (P3s) are far from uniform from state to state, they are evolving. More and more states are enacting legislation to allow such partnerships while assuring the public owners, investors and taxpayers that the private partner is capable of completing the project successfully and of paying the subcontractors, suppliers and workers on the job.

Most of the newer laws enacted or currently under consideration require private contractors bidding on P3 projects to post contract bonds guaranteeing that the work will be completed to high standards and on time. Commonly used types include bid bonds, payment bonds and performance bonds. They’re designed to protect the public owner from fraud or default by the private partner, and from nonpayment of suppliers, subcontractors and workers.

The surety company underwriting the bond is, in effect, prequalifying the contractor bidding on the project. The surety would issue such bonds only if it considered the contractor capable of completing the work. In the event that a bonded contractor cannot meet its contractual obligations, the surety can follow a few courses of action to see the work through to completion. The bonded party will then be liable to repay the surety for all incurred expenses, a heavy burden that can easily drive the contractor out of business.

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