The big message from the Public-Private Partnership Conference & Expo held in late February in Dallas? That these partnerships – known in the industry as P3 projects – are on the rise in the United States. And this includes in the Midwest, where several states have relied on P3 projects to deliver new highways, public transit systems and municipal buildings.
The rise of P3 programs, contractual agreements between public agencies – either on the federal, state or local level – and private-sector construction companies or contractors? It’s good news for states and local municipalities. These private-public partnerships offer local and state governments the ability to boost their infrastructure at more affordable costs.
Charles Renner, chair of the P3 group in the Kansas City, Missouri office of law firm Husch Blackwell, is a long-time support of this trend. He told Midwest Real Estate News that P3 projects are finally gaining momentum in the United States after having been an effective model of delivering infrastructure projects throughout countries such as Europe and Australia.
“After the recession, public-private partnerships showed themselves to be a feasible approach in getting projects done and underway,” Renner said. “The projects that are getting done through the P3 approach are still few and far between. But they are becoming gradually more common.”
Why is this happening? Public-private partnerships are a boon to governmental bodies that are strapped for cash. Say a state needs a new toll road that travels through one of its regions. If that state faces heavy debt, it can work with a private company that would agree to handle the construction if it later receives a portion of the tolls paid on that road once the project is done.
P3 projects, then, give government agencies the chance to complete infrastructure projects without having to stretch their already strained budgets further. They will, of course, have to pay up once the projects are done. But this can often be an easier economic hit for government agencies to accept than is the toll of providing all the construction costs upfront.
Husch Blackwell polled conference registrants about P3 projects. According to the poll results, 91 percent of public-side respondents and 94 percent of private-side respondents said that they plan to have multiple P3 projects in progress during the next three years.
Those numbers are up. In 2017, 85 percent of public-side respondents and 93 percent of private-side ones said they had P3 projects planned.
The survey found, too, that 80 percent of private-side and more than 50 percent of public-side respondents are currently involved in a P3 project. Those responding to the survey said that project efficiencies are the top reason why they are pursuing P3 projects. They also pointed to the ease of financing these projects and the lesser amounts of risk as the two top reasons why P3 projects are so desirable.
Renner said that while P3 projects are still far from the norm when it comes to commercial construction across the country, it’s clear that both public entities and private companies are becoming more comfortable with this model.
“The shift is happening quicker than we maybe expected,” Renner said.
In the United States, participants in P3 projects prefer what is known as the availability payment model. In this type of P3 project, public-side participants make a fixed payment each year to pay for the projects they take on. This makes it easier for governments to afford the infrastructure and other projects they need, while also guaranteeing a steady flow of income to the private companies doing the work.
Renner said that this model of payment is becoming ever more popular in the P3 world. The other option is the revenue model, where governments pay private companies based on the revenue that a project earns. A good example is when a P3 project results in a new toll road. The government paying for the toll road will make payments based on the toll revenue that the road generates.
This model can work well, too, but it appears that private companies prefer the structure of annual payments that are guaranteed.
“As we look back on the P3 projects that have closed, it’s pretty clear that there have been a high number of availability payments as opposed to revenue payment projects,” Renner said. “That affirms my expectations that this is going to be the preferred model. This model is already taking hold.”
Another trend in this space? A large portion of P3 projects still involve higher-education projects, Renner said. He said that about half of the overall P3 inventory in the United States during the last few years is made up of higher-education properties.
This, though, should change in the coming years, Renner said.
“The P3 approach really helps focus on building projects for the future,” Renner said. “It can be challenging for municipalities to garner all the energy and resources to address current needs and to also build for the future. It helps to leverage the energy from the private sector to tackle projects that will deal with the next generation’s needs. This approach is a way for communities to not just address deferred-maintenance issues, but as a driver to build for the future and compete for jobs and growth. It’s a unique tool that is good at taking future projects and making them feasible.”