There are varying definitions of a public-private partnership (P3) in the North American water sector, and each definition can impact the design-build contractor and their commercial relationships.
My P3 water sector experience gained in the UK, Australia, Canada, and the U.S. is centered on the procurement model of design, build, finance, operation, and maintenance (DBFOM). In this model, a government entity (for example, a water district or authority) will create and define the scope of the project, and then issue a single contract (a project agreement) to engage a special purpose vehicle (also known as Project Company) who is responsible for the overall design, construction, financing, and usually long-term (greater than 20 years) operation and maintenance of the project.
A key component within the P3 model is defining the funding mechanism for the project. In a P3 model, the project’s financing can be sourced 100% from the private sector or a combination of both public and private sector funding. However, it is important to note that the funding source for the project’s financing does not impact how the project’s design-build obligations are met.
The reason for this is that in the P3 model, the Project Company typically subcontracts two packages of work: design-build and O&M. These subcontractors strive to mirror the design-build and O&M technical, legal, and commercial obligations detailed in the project agreement.
In all of the successful DBFOM water sector projects I have been associated with, the design-build entity has been some form of general contractor, who in turn has subcontracted some or all of the design obligations to an engineering design consultant. The management of the project, as opposed to costing and process performance risk, is key to a successful DBFOM proposal.
Within the industry, there are general contractors, such as Acciona Agua, who have the capacity to assume the performance obligations of a DBFOM design-build contract, which entails accepting the liabilities of asset performance prior to handover of the project to the O&M contractor so the engineering design consultant does not have to take on performance risk. However, the general contractor still has to assist in the creation of a design that complies with the obligations of the project agreement. Compliance is often assessed via a technical submission, which clients receive, for example, four to six weeks prior to the financial proposal. This scenario lends itself to the creation of an integrated design team that can be comprised of participants from the general contractor (from both design and construction disciplines), the engineering design consultant, and preferably the O&M contractor. An integrated design team is fundamental to achieving the lowest whole of life cost outcome that complies with the requirements of the P3 project agreement.
In this model, the design-build entity can be a single contractor or some form of joint venture (JV), the nature of which is determined by the capability of the JV participants. These participants usually involve general contractors with complimentary skill sets and experience who are joint and severally liable for the delivery of the project. It is entirely feasible that an engineering design consultant could participate in such a design-build JV if they have the capacity and are able to accept the commercial terms and conditions associated with a project agreement’s design-build requirements. A split or separate scope type JV in which the design obligations are separated from the design-build obligations is possible. However, such arrangements are usually viewed as suboptimal from an investor perspective when compared to the fully integrated design-build scenario.
Project Company investors, who are both equity and debt funders, prefer the integrated joint and several JV type arrangements as commercial interfaces are reduced, and risk allocation is simplified. But more importantly from a Project Company’s perspective, the opportunity for design, construction, and O&M risks residing in the Project Company are minimized, if not reduced to zero.
The ultimate risk capture scenario for a DBFOM project is when one entity can participate in each element of the procurement process, i.e., for the design, construction, equity participation, and long-term operation and maintenance of the asset.
The presence of the integrated design team within the integrated design-build JV is often the winning solution to achieve technical, legal, and commercial alignment when all participants are focused on the lowest whole of life cost, the metric by which all DBFOM procurements are evaluated.
Brian Nicholas has been involved in P3 water sector procurements for almost 30 years, encompassing deals in the UK, Australia, Canada, and the U.S. He is the Business Development Director, North America, for Acciona Agua.