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The Best Risk Management Tool for P3s Is Good Help

The public-private partnership (P3) has graduated from a foreign concept to a necessary tool for the U.S. construction market. According to PriceWaterhouseCoopers, at least 25 states have P3-authorizing legislation in place.

And, with more than $2.2 trillion in infrastructure needs alone, states and their cities are quickly turning to the P3 option in order to benefit from private sector innovation and investment. By a 15-to-1 ratio, P3s are less likely to generate cost overruns as compared to traditional public works projects. With large investors, such as pension funds, dedicating 1 percent to 10 percent of their portfolios to the P3 industry, it is no wonder that more than 90 percent of state and local officials have an interest in joining the P3 market.

According to Public Management Review, approximately 60 percent of P3 cost savings are derived from the transfer of risk, so it is imperative that a construction participant be well advised before securing its place in the P3 industry. Risk calculations, risk transfers, retained risks and the inevitable uncertainty of public policy factors all have a presence in the implementation of P3 projects. Yet, the most significant single risk consideration facing construction partners is the decision of whether to seek experienced P3 guidance from what the industry calls external advisors.

Global P3 best practice models require the engagement of cost consultants, design consultants, technical consultants, financial advisors and legal advisors. For an individual construction participant, the inclusion of experienced financial and legal assistance can provide solid footing on an uncertain but rewarding path. The reliability of untested statutory authority, the financial capacity of a single purpose P3 consortium, political dynamics and twice removed contractual obligations can all quickly blitz a traditional construction team. There are three core reasons that financial and legal advisors are certain to add value to a construction company’s P3 undertaking.

It’s not brain surgery, but call a specialist

P3 is a proven way to introduce private sector innovation into the public works process. Yet, in order to connect the natural process of governmental bureaucracy to the private markets, numerous sets of technical documentation and approvals will take place prior to the P3 being finalized, funded and accepted by the public partner.

The time investment and potential to be attached to undesired risk exposure for a construction party is severe. Often times such exposure can come by way of agreements between a special purpose entity and the public participant where the contractor is not a party. The consortium’s development and construction agreement with the public partner may have cost caps, construction party termination rights and design and cost approval authorizations, all of which can greatly affect the contractor. Without an external advisor versed in the P3 process, a construction company can find itself facing uncertainties that it didn’t even know existed. Much like choosing a neurologist over a family physician for an issue specific to the brain, starting anew in the world of P3 merits making use of industry-specific expertise to avoid the risks unknown to a traditional team.

Lewis & Clark had Sacagawea

A construction company that is qualified to be selected for a P3 project is sure to know the construction business. And, as much as any construction project has predictable resource-demanding components, P3s give rise to unique complexities beyond the typical project. By engaging a P3 external advisor, one gains a necessary guide to assist in working through the process. From the public sector perspective, there are four categories of implementation relative to a P3:

  1. the statutory and policy framework;
  2. identification and evaluation of a potential P3 project;
  3. the procurement process; and
  4. monitoring and oversight aspects.

A strong construction participant may be highly likely to translate its prior experience to a number of the steps involved in a P3. However, familiarity with the P3 legislation necessary to support a reliable P3 undertaking, the ability to gauge policy factors that affect project risk, a macro-understanding of the inevitable value for money analysis and experience as how best to address public sector monitoring of the P3 construction phase are all reasons to have quality external advisors to guide the process. Additionally, the public sector participant’s commitment to complete the P3 procurement is a fluid aspect of any P3, which experienced external advisors are adept at identifying before the die is cast in the wrong direction. In a broad sense, Lewis and Clark had the expertise necessary to explore the West. But, without the guidance of Sacagawea, their history may have had a few more bumps in it, similar to a construction company new to the territory of P3.

Connect to the industry and avoid lost opportunities

The P3 world truly is an industry sector that will drive numerous public priorities and, even where P3s are not the chosen path for a development, the evaluation of that option can be a prologue to which service providers are the recipients of an ever-growing number of construction opportunities. Some municipal projects have been examined as P3 undertakings and, while the P3 components were ultimately not used, the consortium group ended up with the resulting work on a more traditional public build project.

The inclusion of an external advisor with P3 experience will assist in avoiding the risk of identifying future opportunitis. As an example, in Kansas City, Mo., there is an extraordinarily high concentration of state and local P3 service providers (engineering, architecture and infrastructure construction firms). Contrary to the Canadian P3 procurement model, the U.S. market is not yet so mature as to have high volume P3 procurement run through a true RFP model. Rather, a version of the unsolicited project model is used, where an industry provider identifies a P3 opportunity and assembles a consortium to stimulate procurement. By including a P3 external advisor in the legal or financial analyst component, a construction company will avoid the high barrier to entry felt by newer service providers left to mine the latecoming RFP solicitations. Put simpler, the cluster theory of economics is present in the P3 industry as well. And, if an external advisor is within one’s cluster, one can avoid the risk of never seeing the opportunities for which they search.

The awareness and diagnosis of risks, the knowledge of the many unique process steps and the connection to an industry cluster growing in market share and investment, are all key reasons that the absence of experienced external advisors can be the leading risk factor for construction companies entering the P3 industry. And, while it is clear that the P3 risks are numerous, in the words of Will Rogers, “you’ve got to go out on a limb sometimes because that’s where the fruit is.” Quality financial and legal advisors can help construction companies brave enough to venture out on the limb, while making sure the limbs sought are the ones bearing the best fruit.

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