A public-private partnership (P3) with project financing is formed when a public-sector entity, such as a municipal water utility or state department of transportation, enters into an agreement with a private-sector entity for the design, construction, finance, long-term operation and maintenance of a project. A P3 project allows for greater private-sector participation in the delivery, financing, and operations of public water infrastructure projects.
When applied to suitable water projects, they can be powerful tools in achieving public policy goals, cost, and schedule objectives; thus relieving public agencies of a financing burden; providing a more expedient implementation process; fostering efficient risk management; and creating even greater opportunities for innovation.
If you as a public-sector entity are considering using a public-private partnership delivery method for a water or transportation infrastructure project, following the key factors below will help ensure success and a win-win for both the public and private sector.
Competition Is a Good Thing
Robust competition with a level playing field for all proposers establishes an objective benchmark for measuring the value that the private-sector brings to the project. The optimal number of highly qualified bidders to engage in a procurement is three to four, with the hope that at least two will submit a proposal.
To further ensure that the internal procurement process is bringing good value to the organization, the public-sector entity should develop their own benchmark(s) on the expected value of the procurement, based on a review of recent comparable procurements in the market.
The public-sector entity should then finalize its benchmark(s) before receiving bids, and compare them to the submitted bids to determine if the proposal that appears to bring the best value is also meeting the defined expectations.
Due Diligence Pays Off
The public-sector entity should perform a thorough analysis of anticipated project costs, risks, and revenues to help them gain the private sector’s interest in project pursuit. The required due diligence by the public-sector entity includes the status and timing of environmental approvals, utility identification, extensive soil condition data collection, and detailed hazardous materials investigations.
The results of these efforts should be factored into the overall risk-adjusted project costs and calculated through a structured process whereby the public-sector procurement team evaluates the risks, likelihood of risk occurrence, and potential effects on cost and schedule.
Get It in Writing
The procurement documents and the terms and conditions for P3 agreements need to clearly and effectively protect both parties’ interests. Procurement documents should describe what the public-sector entity wants and expects, and how the proposers will be evaluated.
As a project transitions to implementation following the commercial close, the individuals who initially procured the project will likely change, and if these key points are not defined in writing, others involved could have different interpretations of agreement provisions.
Stakeholders’ Support Is a Must
All parties with an interest in the project — including the public, users, elected and appointed government officials, utility management, and operations and maintenance staff — need to support the value proposition underpinning a decision to proceed with P3 procurement.
This assumes, of course, that a value proposition in favor of public-private partnership procurement exists and has been carefully developed. With respect to public-sector municipal water utility projects, several factors can make the P3 value proposition challenging.
These topics include the wide availability of low-cost public financing with tax-exempt bonds and State Revolving Loan programs; local preference for municipal operation and maintenance; and small projects that can make it difficult to justify a complex and costly P3 process.
Don’t Forget the Power of the Design-Builder
Lastly, it is important to remember that when P3 procurement is designated for water or wastewater projects, use of a design-build delivery method is an essential element. In fact, the use of private financing in a P3 arrangement is very much dependent on the design, construction, and financial capabilities of the design-builder.
With this important role of assuring project completion with a fixed-price and guaranteed schedule, however, the design-builder involved in private financing will also likely need the financial strength and creditworthiness to provide additional performance security (such as a letter of credit) and accept higher delay liquidated damages as compared to a traditional design-build contract with a public-sector entity.
Though every project is different, the benefits of public-private partnerships for carefully selected projects can be bountiful. Applying these five key factors when considering a P3 project, and taking advantage of the benefits they provide when navigating the procurement process and project implementation, are the steps to ensuring a successful venture.
John Muñoz and Pat Gallagher, both of CDM Smith, are vice presidents with more than 25 years of experience with P3 procurements for transportation and water projects.