Perhaps you’ve heard that expression – “Perception is Reality” – meaning you may perceive things to be true regardless of the facts! The following are some common perceptions about Public-Private Partnerships (P3s), coupled with counterpoints. You decide!
1 | “P3s are a form of privatization!”
Privatization – by definition – involves the transfer of ownership of public assets and/or services to the private sector. Privately owned and operated waste management companies are a fine example. Public-Private Partnerships (P3s) – on the other hand – typically involve the development of public assets that are publicly-owned, publicly-controlled, and publicly-accountable. A public entity may solicit and enter into a binding agreement with a private sector entity to design, construct, finance, maintain or operate a publically-owned asset. Once the term of contract ends, those duties that were performed by the private sector can either revert back to the public sector or be renewed to the same private sector entity or re-assigned to a new private sector entity. Regardless, the underlying ownership always remains with the public sector.
2 | “P3s cost more than traditional procurements”
True – A P3 transaction can cost more than the traditional bid-build procurement. Furthermore, the private sector’s borrowing costs are usually higher than those available to the public sector. However, a well-structured P3 will often result in providing better value for the public dollar through better accountability, transferring risk away from the public sector and providing performance driven incentives.
The ideal P3 model is one that provides for accountability – a metric that often difficult to measure – and can often elude the public sector when the fox is watching the chicken coop. One such example of instilling accountability is setting aside funds for routine capital expenditures (repairs and maintenance), which is the single most important factor in keeping overall cost down.1 How often have your heard a public outcry for more funding to repair roads, fix leaky roofs on schools and the list goes on and on. The ideal P3 model takes into consideration the entire life of a public asset – looking at its life-cycle costs early on – which normally shapes many decisions leading to superior design, better construction, lower operating cost and minimal maintenance cost.
The ideal P3 model is one that transfers risk to the entity that’s best suited to control/manage such risks. Generally speaking and because of competition and repetition, the private sector is better suited and more experienced at managing risks. Often times, the private sector is accustomed to handling certain routine risks and more adaptable to handling extraordinary risks. Case in point: the Florida Department of Transportation (“FDOT”) has a great deal of the experience building roads and bridges, but what about a tunnel – something they’ve never done before – from the main land to Port Miami?
The ideal P3 model is one that provides for inceptives that drive performance. For example, can you imagine a world where all of our public streets and parks were as clean and kept up as the those public areas found within Walt Disney World in Orlando, Florida? A well-structured P3 will have certain, clearly defined performance metrics that can be measured. Rewards can be earned by exceeding those metrics – sharing some portion of increase in measurable value. Think carrot versus stick!
3 | “The Value-for-Money (“VFM”) analysis inflates the cost of risks to favor P3s”
The VFM analysis assesses which procurement model is best suited for a given project. P3 agencies use the best available information to calculate risk premiums, by participating in workshops with experts to identify risks and to develop economic models and simulations that consider possible outcomes of those risks. These risks are rarely quantified for traditional government procurements, so P3s add an additional important level of analysis to ensure value for money. Detailed financial information is available about P3 contracts because they are often financed through publicly rated bonds and information is also available in credit rating reports and government capital plans.
4 | “P3s create big private-sector profits using public money”
The private sector designs and builds both types of projects – traditional and P3. Profit is earned (not guaranteed) in both models, but P3s can be structured and enjoy the unique distinction to tie the profitability (and loss) to the availability of the asset. Canada and many European countries have mature and competitive P3 markets, that result in the public sector getting the highest value for money. Accordingly, most of these government have made P3 projects the norm – as opposed to the exception – for their public infrastructure needs.
5 | “The public sector can borrow at lower interest rates than the private sector”
True – the private sector’s borrowing costs are higher than those available to the public sector. BUT, the delta that favors the public sector in terms of borrowing costs is offset by delivering better value for the public dollar. Accordingly:
- P3 projects are typically seen as strong, stable investments by lenders and investors. Lenders and investors, who partner with contractors to finance a P3 project, continually monitor the project milestones and provide additional oversight to keep the project on schedule and built to a high standard;
- A well-structure P3 agreement normally requires the private sector to have “skin in the game” (i.e. significant investments and/or responsibilities) that create the necessary incentives to provide on-time, on-budget, and high-quality infrastructure; and
- Project risks are typically transferred away from the public sector to the private sector, the party that’s best suited to manage them.
6 | “Small and local contractors get left out of P3s”
Given the size and complexity of most P3 projects, not every company has the qualifications, experience and financial capabilities to take the lead role. However, large companies play a dominant role in the P3 sector, just as they do in traditional projects. These large companies have large balance sheets which allows them the leverage retained earnings as equity to invest in P3 projects.
- Regardless of who leads the consortium, P3 projects employ many firms of all sizes and locations, particularly at the subcontracting level.
- Local firms tend to win more contracts than foreign or out-of-town firms because they can compete at a lower cost not having to account for temporary housing, relocation, travel and subsistence expenses for its workforce.
- Many jurisdictions have developed policies that require “local participation” in large infrastructure projects, further incentivizing the participation of smaller and local contractors.
- Between 2003 and 2012, a study conducted by InterVISTAS found that Canada’s P3s created nearly 300,000 direct jobs, and generated $9 billion in direct income/wages and benefits over a ten year period.
7 | “P3s export profits out of the local community to foreign companies”
True – in comparison to the United States, there are many foreign countries – from Canada and most of Western Europe – that have fairly mature P3 markets which have led to large experience firms. Hence, firms like Bouygues (France) designed and built the Port Miami tunnel using a D-B-F-O-M model. Dragados (Spain) won the P3 contract to replace 595 – the new and expanded artery the connects the western suburbs of Broward County to the Florid Turnpike, Interstate 95 and its center of commence, airport and seaport – again using a D-B-F-O-M model. Skanska (Sweden) won the I-4 expansion between Orlando and Tampa. Balfour Beatty (England) won the contract to develop new student housing at Florida Atlantic University and list goes on. So that’s the bad news. Here’s the good news.
Many local jobs were created by these projects – that may not otherwise may not have happened. Plus, the surrounding areas thrived after these projects were completed. Case in point: With the new tunnel online, downtown Miami removed some 8,000+ daily tractor-trailer trips from its surface streets – a game changer with long-term benefits which are now emerging. Both the tunnel and 595 created 500± new permanent jobs for the next 30+ years to operate and maintain these assets. In the final analysis, import this expertise enabled these projects to happen and the long-term financial benefits outweigh whatever profit was exported.
8 | “Unions do not support P3s”
Union labor builds both types of projects – traditional and P3. So whether the project is a traditional procurement or P3 procurement – it really has neutral effort on labor unions. With that said, labor unions has succeeded in getting government to protect their interest through legislation, such as Davis Bacon Act (for Federally funded projects) and prevailing wages (local ordinances paste by large municipalities and counties). For example, when the owner of the Florida Panthers NHL Hockey Club (a private entity) developed the Broward County Arena (a publically owned and financed asset) the prevailing wages local ordinance set wage rates, which mostly aligned with prevailing labor union rates. Since Florida is a Right-to-Work State, both merit and union employees competed for contracts.
Collective agreements are usually maintained for public sector employees in P3s and provide equivalent wages and benefits. For example, public employees have been transferred to the private sector company – who was retained to operate the new wastewater treatment plant – upn the condition their collective bargaining agreements remaining intact. Accordingly, new P3s create new union jobs.
9 | “P3s take longer than traditional procurement”
Canada, for example, enjoys a generation of the P3 procurements and has become a world-leader in using public-private partnerships for its public assets. Their procurement process has become very well refined and is viewed globally as one of the shortest and most efficient.3
Although the initial procurement can take longer than traditional projects, this is due time required fully vet the project to determine if P3 is the appropriate model, plus engage stakeholders and to ensure performance is optimized over the life of the contract. The on-time construction record of P3s compared to traditional procurement more than makes up for the longer procurement time.
Under some P3 models, the private sector does not receive payment from the public sector until construction of an entire project is complete or it completes agreed to construction milestones. This arrangement further crystallizes the private sector focus to ensure delivery, since the private sector is at risk for any additional financing costs caused by extended timetables. So there are significant incentives, unlike traditional procurement, to deliver P3s without delay.
1 Public-Private Partnerships: A tool in a tool box. Report of the Standing Committee on Government Operations and Estimates, by Pat Martin, March 2013.