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Bonding Is an Essential Element in P3s

It has been more than a decade since the U.S. first considered legislation permitting public works projects to be delivered through public-private partnerships (P3s). Thirty-two states currently have laws enabling the use of P3s.

The first generation of P3 legislation generally was limited to state department of transportation projects. In some cases, the P3 legislation was limited to one specific project or authorized a limited number of P3s as a pilot project. Sometimes the original legislation contained size requirements for P3s, usually requiring that they be used for projects exceeding a certain size. The next generation of P3 legislation now under consideration is no longer limited to state projects or just transportation projects. Local government entities also are being authorized to use the P3 method, and many of these latest bills apply broadly to public works projects.

It is critical that the protections of payment and performance bonds be in place for any public construction involved in a P3 as the surety’s underwriting of the bonds is crucial to the success of public construction projects. By issuing a bond, the surety gives the public owner, investors, taxpayers and subcontractors and suppliers the assurance from an independent third party, backed by the surety’s own assets, that, in the surety’s opinion, the contractor in a P3 is capable of completing the construction contract and paying the subcontractors, suppliers, and workers on the job.

The existing P3 enabling statutes vary among the states, and it sometimes can be difficult to obtain a clear picture of the requirements for P3s, as some states have multiple statutes authorizing different types of P3 projects. For example, Florida and Indiana currently have multiple different enabling statutes enacted at different times. Other state P3 laws are barebones enabling statues. Some of the existing P3 authority was enacted in the 1990s in a robust economy when funding for public infrastructure was far less problematic than it is today. Legislation enacted in this era was aimed primarily at privatizing public functions. Under the P3s contemplated at the time, the public owner funded the construction of a new facility or road and then entered into a contract with a private partner to operate and maintain the facility. Thus, there are numerous P3 statutes in place that are either silent on bonding or contain alternatives to bonding because it was assumed that the public works part of the P3 would be completed under traditional delivery methods before the private partner came on board. Some of the more recent P3 enactments, however, require a surety bond on P3 projects: District of Columbia, Florida, Maine, Maryland, North Carolina, and Ohio.

Some of the existing P3 authority never has been exercised in the states but could be revived in the near future. State and local budgets were hit hard in the Great Recession, and they are recovering and growing slowly. Private investment is increasingly attractive as a way to meet infrastructure needs. More than a decade later, some of these existing P3 laws may be used to conduct today’s version of the P3 in which the private partner provides the upfront funding for the public works project and gets repaid with public revenues in the future, sometimes up to 30 years. Much of this existing P3 legislation needs to be reconsidered and updated to require bonding.

The recent uptick in legislation authorizing the use of P3s is continuing in the 2015 state sessions. More than a dozen states already have introduced legislation for the year. Of the 2015 pending legislation, five bills represent new P3 authority in a state; three represent expansion of existing P3 authority. Among the legislation is a bill in Indiana that is intended to clarify or specifically incorporate bonding requirements for P3 projects in Indiana’s existing P3 laws. Amendments are being actively sought in Virginia also to clarify the existing bonding provisions.

Legislation passed the Senate and now is in the Assembly in New Jersey that would authorize the state, local governments, school districts, and state colleges and universities to enter into P3 agreements for public building and infrastructure projects. Bonds are required in this legislation, but the bill needs to be clarified so that the bonds are required from the contractor, not the concessionaire.

There also are a number of P3 bills that have been introduced but are not yet moving this early in the sessions. P3 legislation has returned in Arkansas, Georgia and New Mexico for public infrastructure and public facility projects. The bonding provisions in these three states reflect the work accomplished in prior sessions to require bonding for the design and construction portion of a P3. Pending P3 legislation in Florida would expand the existing P3 law to allow special districts, Florida College System institutions and state universities to enter into P3s for construction projects. The bill would authorize municipalities, political subdivisions, school districts and school boards to award design-build contracts through P3s. Missouri would authorize P3s for all non-transportation buildings, facilities, and infrastructure improvements; amendments will be introduced shortly to clarify the bonding provisions.

Connecticut legislation would extend the expiring authorization for P3 projects for public facilities and transportation projects and eliminate the current cap on the number of P3 projects that can be undertaken. In Minnesota, a transportation appropriations bill would authorize a new P3 pilot program for transportation projects. The P3 agreement would have to include financial protections against default without specifically requiring bonding. New Hampshire has a bill pending that would require a study of P3 intermodal transportation projects. In New York, legislation authorizing P3s for power grid projects has been introduced, but it is silent on bonding. Virginia legislation would expand the current authority for P3s to solar energy generation system installation projects. Legislation in Washington would exempt P3s from the state bond threshold, as the P3 law does not require bonding but permits other forms of security in lieu of bonds. Legislation in Washington also would create passenger-only ferry service districts that would be authorized to use P3s for their projects. The authority to conduct P3s in California also will expire this year, and it is expected that legislation will be introduced to extend that authorization.

Government entities in the United States have understood the importance of surety bonds and have required bonds for over a century to provide performance security and payment assurance on the nation’s public construction projects. Although new procurement methods like P3s have evolved to meet current needs to get necessary infrastructure projects completed, the construction risk remains the same, making surety bonds just as relevant and important on P3s.

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