P3s offer financing options for cash-strapped governments
Public-private partnerships are gaining popularity across the country as governments with tighter budgets — see: Alaska — look for ways to fund critical public infrastructure.
The potential benefits of the partnerships, best known as P3s, and the often-overlooked pitfalls were discussed Oct. 5 at the International Economic Development Council convention held in Anchorage.
Generally, there are two categories of P3s, the international and American project models, each with its own merits.
John Finke, a program manager for the National Development Council said the first and biggest difference between the project structures is how they are financed.
The American model takes advantage of financing that is uniquely American: tax-exempt financing, typically through bonds. Tax-free debt can be sought through nonprofit public benefit corporations or by partnering with a more traditional 501(c)3 nonprofit.
International model P3s, most common in Europe, Canada and Australia, bring private equity and private debt to public facilities, infrastructure and buildings, Finke said. It uses a long-term public concession for operations in buildings — up to 40 years in some cases.
“It’s essentially control privately, ownership publicly,” Finke said of the standard concession agreement part of an international P3.
American P3s typically use short-term building management contracts for operations and maintenance, along with a long-term lease from the nonprofit entity to the government for use of the building.
Taxable financing is more expensive; “equity is the most costly source of money,” Finke noted, but it could open a project up to more partners.
International P3s typically have higher debt-to-equity ratios and multiple lenders, compared to tax-exempt American model projects with a single lender.
Finke has participated in 30 public-private partnerships across the U.S., including the $28 million expansion of the Wood Center dining hall on the University of Alaska Fairbanks Campus.
The 46,000 square-foot addition to the Wood Center was done with no state funding. UAF will take back ownership of the facility when the debt, financed by the National Development Council, is paid off.
The benefits of using the P3 process start with the simple principles behind the public and private sectors, according to Finke.
“The whole gain in public-private partnerships tends to be getting out of the public works process,” he said. “The private sector is motivated by profit.”
The public process has its place, but it does not have a motive for efficiency. However, private delivery of a project with performance incentives usually leads to lower cost, he said.
Most public buildings, and infrastructure for that matter, are built using design-bid-build, or DBB, procurement. A P3 allows for nontraditional procurement methods that could save time and money.
The goal of the American model is to take the delivery process out of the public sector, Finke said. He described each project as having three buckets: finance, construction and operations.
“In those three areas the public’s goal ought to be to figure out how to pick the pieces out of the bucket that deliver the least costly project,” he said. “You cannot do that in a public works arena.”
Finke and Arizona Department of Transportation Director of P3 Initiatives Gail Lewis both encouraged bringing a project team together earlier than would be normal in the public process.
Finke said it provides an opportunity to “value engineer” a project as well as determine a feasible cost, which provides a baseline for bidding the project on a level playing field. That all helps the selection committee better understand the project and pick the best partner, he said.
The quality cost estimate can also be used as a cap or limit for the project, above which the developer incurs any cost overruns.
Finke also encouraged the private partner bid out as many aspects of the project as reasonable to drive down cost as well.
When evaluating a highway project’s potential for being a P3, Lewis said she gets the engineering, finance, environmental and right-of-way teams together in one room.
“At the end of the day you end up with a 70-80 percent confidence level that you can get a project done for somewhere in this cost range, somewhere in this time frame and that gives you the basis for your own knowledge of this project,” Lewis said.
From there a project’s cost value is rendered, and determining whether or not partnering with the private sector can improve that value can follow.
About half of the time it’s found that the public sector process is the way to go, she said, but that determination couldn’t be made without a meeting of the minds.
Lewis also warned against claims — popular with politicians — that P3s don’t cost anything extra.
“If there’s going to be private money involved you have to build the return, the amount of private capital that’s going to be returned and the interest that’s going to be repaid, into the model. And it’s often that you find the numbers just don’t work,” she said. “The next time someone tells you (that) you don’t have to raise the gas tax to pay for a project, just use a P3, it’s just not true.”
Elwood Brehmer can be reached at [email protected].