September 07, 2017

Are P3s Truly a Better Project Delivery Method to Fix our Ailing Infrastructure?

Daniel A. Dorfman and Tamara J. Lindsay

It has been said that the greatest public works project in our Country’s history was the development and construction of our federal highway system (called the Interstate System), which was signed into law by President Dwight D. Eisenhower in 1956There has been no other federal public infrastructure works project as large, complex and successful.  More importantly, most if not all observers have pointed out over the past several years that  that our national infrastructure system is failing (well not quite failing, the American Society of Civil Engineers graded the transportation system as a D+).  In other words, our greatest public works project has not been well-taken care of, neither have our bridges, seaports, or rail systems (to name a few).  Critically, this is not a political issue. Both sides of the aisle agree that our transportation infrastructure needs to be repaired and upgraded.  The only issue now is when and how.

While we do not yet have the “when,” we may have the “how.”  President Trump campaigned on a promise to re-build our transportation infrastructure through a $1 trillion, 10-year expenditure extensively funded by private investors.  For such a massive private capital investment, the Trump Administration will need to obtain enabling legislation from Congress authorizing (what is assumed to be) billions of dollars in tax credits for the construction of new infrastructure in exchange for the private equity investment.  This partnership, commonly known as private-public partnership (P3), is how President Trump proposes to solve the country’s ailing transportation infrastructure problem.

What is lacking (at this time) from Trump’s $1 trillion P3 transportation infrastructure plan are the details. We do not yet know what types of transportation infrastructure will qualify for P3 spending and tax benefits, what federal agencies will be in charge of overseeing this work, or what public contracting laws will apply.  These are the basic and rudimentary details that will hopefully be provided by the Trump Administration when the plan is rolled out, which is expected to happen this Fall.

What we do know is that the plan is aimed at private investors, and will be organized as a P3. As such, and as construction lawyers, one of the most interesting questions is whether P3s are a better project delivery method than publically-financed projects (PFP) for the construction and operation of our national transportation infrastructure.  This article analyzes that question.

To start, it is important to understand the different project delivery methods that are typically utilized for P3 infrastructure projects as compared to PFP for infrastructure.  PFPs for transportation infrastructure generally follow the traditional design/bid/build delivery method.  The public entity fully designs the transportation project, using outside private design firms, and then competitively bids the build portion of the project to private construction firms.  The entire infrastructure project is generally financed by the public entity (through the procurement of tax-exempt bonds), and the public entity at all times owns, operates and manages the infrastructure through the life of the built project.  In comparison, P3s for public infrastructure projects generally follow a design/build delivery method.  Although the public entity always owns the infrastructure project, the private entity (usually known as a concessionaire) finances the project and incurs the costs associated with its design, construction, maintenance and operation.  In exchange for these upfront and ongoing costs, the concessionaire generally receives tax credits, revenue collection, or both from the built-infrastructure.  It is widely assumed that the Trump Administration’s plan will include both incentives.

Proponents of P3s for infrastructure projects argue that the design/build delivery system enables projects to be built faster, on-time, and without the red tape of bureaucracy and legislatures holding back financing.  Because the same entity is doing both the design and construction of the project, promoters of P3s also argue that these infrastructure projects rarely exceed budget, as it is the contractors, design professionals, and equity investors of the consortium who would bear the risk of budget overrun.  Still more, advocates contend that P3s incentivize collaboration between the design and construction sides, with a goal of decreasing overall costs (lowering budgets) and increasing construction innovation.

Opponents of the P3s, however, argue that the design/build delivery method for public infrastructure projects takes too much control away from the public entities empowered to and responsible for overseeing and managing these projects.  And, worse, objectors argue because these infrastructure projects are substantially financed by private capital, the incentive to deliver a quality product may be outweighed by interests in maximizing rate of return.

The different delivery methods utilized in a P3 infrastructure project compared to a PFP also involves different risks that are assumed by the parties actually designing and constructing the project.  In the typical P3 infrastructure model, risks that would otherwise (and naturally) be borne by the public entity (under the PFP model) are transferred to the P3 – such risks as differing site conditions, unavoidable delays, or budgets on overall project costs.  P3s then tend to shift these risks further down to the contractors and designer, who generally would never take on those liabilities.  But because of the collaborative integrated approach to P3s for the transportation infrastructure projects, P3s tend to mitigate these risks by having their project participants clearly define their scopes and responsibilities, and of course, make sure proper insurance is available to cover unexpected events.  Likewise, P3 supporters argue that because of this transfer of risk to the P3, the concessionaire is further incentivized to take extra care to properly construct the project.

The other major difference between these two models is how maintenance and operation is performed and controlled upon construction completion.  In a PFP, the designer and contractor may have certain warranty obligations upon completion, but the ultimate maintenance and operation of the infrastructure projects is left to the public entity.  In contrast, for P3s, the concessionaire typically operates and maintains the infrastructure for an extended period of time after project completion, in exchange for some economic advantage, such as a percentage of revenue collected.  As explained by Christopher Roth, a Managing Director at Jones Lang LaSalle, which specializes in advising the public sector on P3 projects, the P3 model typically requires the concessionaire to build towards contractually-agreed post construction performance incentives in exchange for economic benefit (known as Key Performance Indicators or KPI).  Stated otherwise, the concessionaire would be at economic risk if it fails to meet the KPI and therefore economically incentivized to build a higher quality product, with less maintenance and operational costs.

As detailed above, certainly there are disputes as to the merits of infrastructure projects under a P3 delivery method as compared to a PFP.  That said, it is without question that America’s infrastructure is in dire need of repair.  If the future – as the Trump Administration hopes – lies in P3s for funding, the concessionaires and all relevant stakeholders must be ready and able to address the myriad of complicated legal issues that will arise from the intersection of a public works project being subcontracted out to a private equity investor, and be able to properly address the risks that come with such endeavors for the future re-building of our transportation infrastructure.

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Daniel A. Dorfman

Harris Winick Harris LLP, Chicago, IL, Division 13 (Government Construction)

Tamara J. Lindsay

MWH Constructors, Broomfield, CO, Young Lawyers Division