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Stronger State Bonding Requirements Needed on P3s

Public-private partnerships (P3s) are an increasingly attractive method for financing infrastructure projects, in part because they avoid strain on public sector budgets and shift some of the risk to the private sector.

Laws in 33 states allow such partnerships to be formed for transportation projects, according to the National Conference of State Legislatures. However, those laws don’t always address the need for bonding.

The National Association of Surety Bond Producers (NASBP) is urging greater adoption of bonding requirements and consistency in state P3 laws. Bonding requirements make sure projects use a contractor that has been vetted during the surety prequalification process, with the goal of guarding taxpayers from the costs of a default and guaranteeing that subcontractors are paid.

“One of the primary goals of NASBP is to make sure that taxpayers, subcontractors and suppliers are protected,” says Howard Cowan, president of Cowan-Hill Bond Agency in Lubbock, Texas.

P3 work initially focused on projects including highways, bridges and wastewater treatment plants, but has expanded into other types of construction projects.

“It’s not uncommon for these projects to run a billion dollars or more,” Cowan says. “That’s where the financing element from the private sector comes in. Projects can involve long-term commitments where a private entity operates a facility, such as a toll road or revenue-producing building, for decades after construction is finished.”

Because of the variation in state P3 laws, NASBP is seeking the inclusion of bonding provisions in model P3 contracts that will be provided by the Federal Highway Administration. The disparities in P3 bonding requirements led NASBP, the American Subcontractors Association, and the Surety & Fidelity Association of America to develop the chart “Public-Private Partnership Laws in the States, Including Surety Bond Requirements,” which breaks out P3 laws by state and examines their bonding provisions.

NASBP members “need to have a solid grasp of how these things can work for all the participants,” Cowan says. “We owe it to our clients and to public agencies to explain the value of the surety’s prequalification process in this dynamic construction delivery method.”

Thirteen states have P3-related laws that may allow bonding worth less than 100 percent of a contract’s construction portion. Some of these laws defer to state agencies in establishing the amount of bonding for a project. P3 laws that don’t require bonding have been enacted in 21 states.

NASBP sent letters and comments to a range of public officials and government entities to advocate for P3 bonding requirements. The association encouraged them to add provisions for bonding worth 100 percent of construction costs for the Illiana Expressway project in Illinois and Indiana, as well as P3s in Maryland.

The association also has called for the National Conference of State Legislatures to provide information about the need for bonding requirements on P3 projects in its legislator toolkit.

“The public needs to be assured that when these projects get underway” to solve an infrastructure issue, “that at the end of the day the project is completed and then the people who helped to make the project happen [such as subcontractors and suppliers] have recourse to make sure that they are paid for their services,” Cowan says.

To obtain a copy of the chart “Public-Private Partnership Laws in the States, Including Surety Bond Requirements” and the Executive Summary of the chart, contact Shannon Crawford, NASBP Manager of State Relations, at scrawford@nasbp.org or (202) 464.1170.

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