The pipeline for public-private partnerships (P3) in the US has historically lagged behind those of other nations. Though the P3 model has over the last few years received increased attention at the federal, state and local levels, some barriers to procurement remain. Stanford University’s Global Projects Center is working alongside Living Cities and Citi Foundation to develop guidelines that will help US procurement bodies better understand and implement P3 procurements.
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- Decisionmakers require clear information regarding procurement structures and implementation.
- Selection of the procurement structure depends on whether the asset can generate revenues, or if there is an opportunity to reduce the capital expenditure (CapEx) by leveraging the operational expenditure (OpEx).
- Organizations such as Washington, DC’s Office of Public-Private Partnerships (OP3) can ensure that there is a process in place to support P3 procurements and attract private investment
States and municipalities seeking ways to fund infrastructure development have been considering public-private partnerships (P3) for years. Though the benefits of risk transfer are acknowledged by many in the public and private sectors, the number of projects to have made it over the line in the US are minimal compared to Australia, Europe, and our northern neighbor Canada.
There are, however, some signs of progress. Julie Kim, director of the P3 FLIPS program at Stanford University’s Global Projects Center, and its Managing Director Michael Bennon have been working to develop P3 procurement guidelines using Washington, DC’s Office of Public-Private Partnerships (OP3) as a model. The pair spoke to Icons of Infrastructure about how local governments can structure P3 deals, and what procurement bodies can learn from OP3.
IOI: The study is intended to serve as a means for developing guidelines for the structure and possible implementation of public-private partnerships in the US. Can you tell me a little more about it?
JK: There is a basic focus, as it should be, on P3 institutional capacity building at municipal level as elaborated by Mike but the study was much more than that. In additional to the P3 capacity building needs, we also covered both “processes” from planning to procurement that need to be established, as well as the appropriate P3 procurement structure or “forms.” Those forms can be either P3 concessions, various other non-P3 lease arrangements, or franchise agreements such as build-operate-transfer (BOT), that depend on the specific asset under consideration.
The selection of procurement structure depends on whether the asset can generate revenues, or whether there is an opportunity to reduce the capital expenditure (CapEx) by leveraging the operational expenditure (OpEx).
The assets that we covered include: public buildings; schools; health care facilities; FTTH/broadband networks; waste-to-energy conversion; justice/correctional facilities; and streetlight modernization. These are local assets managed both at the city and county levels.
IOI: You noted in the study that there is a general a degree of unfamiliarity with P3s among a number of municipal offices, despite the success of high-profile projects such as the Long Beach Civic Center. Can you explain why this is?
JK: The three terms — P3 concession, franchise agreement, lease arrangement — are used interchangeably in the industry without clear definitions. One of the purposes of the study was to provide clear nomenclature based on how these terms originated initially.
In general, P3 concessions are used for publicly owned assets that may or may not generate revenues. Franchise agreements are used for revenue-generating assets such as energy utilities, where special operations and management expertise often reside in the private sector. The asset could be owned by the private sector and the public sector’s role is primarily to regulate the pricing (for example, through an entity such as public utility commissions). Lease arrangements, which are for buildings or vertical facilities, are designed to leverage lease payments in order to finance large one-time capital investment needs. In that way, local governments can avoid issuing long-term debt and hitting debt capacity restrictions.
It’s important to note that just because a project is generating revenue doesn’t mean it’s a P3. The procurement process involves a screening process to determine whether private delivery of a public asset is viable. A value-for-money (VfM) assessment is at the core of the process but, ultimately, structuring decisions have to be made on the basis of whether the project is supposed to generate revenue or not. You have to look at a different set of P3 options in either case.
Relying on a risk assessment alone isn’t credible and the exercise is often more art than science. For example, with the [failed] Indiana Consolidated Justice Facility project, the key issue was that the VfM didn’t give public officials credible information on the proposed P3’s benefits and risks. The credibility of those benefits and risks are often questioned, and political opposition can often override anything else.
IOI: You make a point in the report about different municipalities’ need for specific infrastructure projects relative to their respective appetites for private sector involvement. In your opinion, why is there a dearth of educational deals such as SaskBuilds’ school development P3, or health care projects in the US despite evidence of their success in other municipalities particularly Canadian ones?
JK: The lack of P3 deals in schools and health care facilities in the U.S. are related more to the messiness of institutional structure and underlying politics rather than the P3’s viability. Compared to Canada, Australia and the UK, schools and health care facilities in the US are more fragmented.
There are about 14,000 school districts in the US. Those schools are funded by primarily by property taxes, and the local municipalities have control over how those funds are used. School boards and communities in the US generally don’t want to leave educational decisions with the private sector. There are also many who think everything related to schools should be in the public domain.
Additionally, the institutional structures and processes differ from state to state. We are starting to see more P3s at the university level.
If you look at Canada, the process is much more streamlined and there is a greater acceptance of the P3 model’s value. In the US you have 50 states and each one has a different way of doing things.
We need policies and guidelines that each state can follow in order to push for more P3s in the US.
IOI: The focus of the study is the ‘project structuring’ decision process. Can you tell me what bodies such as Washington, DC’s Office of Public Private Partnerships are getting right with regard to P3 procurements?
MB: The first thing they’re doing right lies in the creation of the office itself. Municipal P3s touch a lot of different departments and parts of the government. The office has the institutional capability to coordinate between departments and participate as a lead agency. That’s lacking in a lot of municipalities, and part of the reason is because most of the P3s procured in the US have been in transportation departments.
Having the institutional capability at the office level is also one of the ways OP3 has been able to get its program off the ground. It’s still in its infancy, but they’ve already got several projects in procurement, and things are going well.
IOI: Presumably, such institutional knowledge would mean that projects could potentially be replicated elsewhere?
MB: Infrastructure is, in general, an idiosyncratic industry. It’s difficult to translate the needs and benefits of a project to a different region. But in the US, the number of P3 procurements has more to do with the politics around infrastructure and how we typically approve projects. I’d imagine that those issues are the same everywhere.
IOI: One of the most sensitive issues around P3 procurements has to do with making projects attractive to the private sector. How can this be done during the structuring decision process?
MB: A project has to be bankable in order to be financed. One of the biggest problems in the US is project uncertainty, and that is something OP3 is helping to resolve. We’ve had a lot of cancelled projects in the US, so each subsequent one is more risky to commit to early on.
You have at least three bidders, so they’re investing from the outset. If you layer in the potential for cancellation, it can be a huge barrier to demand from the private sector. OP3 and other offices can mitigate this by ensuring there’s a process and institution in place. More certainty that a project will happen will increase the attractiveness of the procurement for the private sector.
P3s can also create opportunities to better fund projects through value capture. For example a public land procurement helped the city of Long Beach make the Long Beach Civic Center a bankable project.
IOI: You mention that building consensus among multiple stakeholders is, one of, if not the most important condition for successful P3 procurement. Is this done through a P3 champion or champions?
MB: I don’t like the whole “political champion” idea. You hear it all the time, but it’s like saying “to get rich, you need to find gold.” Of course you need a political champion, but the question is how you get that.
I think that P3 offices can successfully build consensus around projects.
The study makes recommendations around project boards, and you have an example in in the city of Victoria, Australia: It’s like a state P3 office that serves an advisory function. When the municipality chooses to pursue a project, the P3 office is on the board along with local representation.
We thought they could be helpful in the US because municipal P3s involve multiple agencies. That’s where delays, transaction costs, and miscommunication can happen.
The project board that we were recommending is composed of the different parts of the government involved in the procurement process. That board could formalize and better facilitate communication for projects between departments.
Ideally, the board would govern the management of the project as long as the agencies or other parties on the board agree with the governance structure. You can imagine the decision boils down to who’s on the board, and what expertise they have. Some members may not have any expertise, but the office is on the board to help provide that.
Essentially, OP3 is creating a situation that recreates representative democracy. If you were just looking at it from the outset, the board shouldn’t have a lot of veto authority. But you also have a more coordinated approach to citizen engagement which has been shown to be very productive on a case-by-case basis.