Privatizations of municipal assets or public facilities in the United States are occurring on a much more frequent basis.
Many municipal or public entities are privatizing assets, such as water systems, sewer systems, parking systems, toll bridges, prisons, roads and highways, through the outright sale of such assets to a private party or through the lease of such assets to a private party. The lease of such assets may be in the form of a lease or a concession agreement to a private entity.
Generally, a “privatization” occurs when a private purchaser or concessionaire pays or causes an upfront payment to be made to the public entity, in order for the right of the purchaser or concessionaire to purchase the asset outright or to operate and manage the asset for a certain time period. These transactions are known as public-private partnerships (P3s) and have become a tool public entities use for a variety of reasons, including:
- avoidance of regulatory mandates or changes requiring the public entity to potentially borrow and expend large amounts of capital to repair, replace or upgrade an asset so that it meets regulatory standards;
- debt reduction or the improvement of the public entity’s financial condition through a one-time infusion of capital;
- transfer of the operational and maintenance risks associated with operating the asset being privatized to the private sector; or
- reduction of the services provided by the public entity, which has the effect of reducing the number of public employees and the associated administrative requirements attendant thereto.
The undertaking of a P3 by a public entity can be a time-consuming and complex process, requiring the public entity to, among other things, seek extensive public input regarding the potential privatization and to undertake a bidding process through which the public entity can solicit, obtain, review and analyze proposals from potential purchasers or concessionaires.
It is common for potential purchasers or concessionaires to put together a “team” in order to provide an educated, thoughtful response to the public entity’s RFP. The team approach provides the purchaser or concessionaire with the ability to have the analysis, advice and input of investment bankers or financial advisors, construction professionals, attorneys, potential managers of the asset subject to the P3 and others, in order to prepare a comprehensive response to the RFP. It is common for the proposals received by the public entity to have significant variations from each potential purchaser or concessionaire.
The public entity’s team of professionals will process the information received in the responses in order for the public entity to be able to determine which response, if any, makes the most sense. It is common for the public entity to create a short list of potential purchasers or concessionaires and to conduct interviews prior to making a decision.
One of the major participants in any P3 are construction professionals. Expert advice and evaluations are needed by both the public sector entity seeking to privatize the asset and the potential private purchaser or concessionaire of the asset.
Prior to making a decision to privatize an asset, the public entity needs to assess the current condition of the asset to be privatized and determine the costs of any current or future upgrades required to upgrade or maintain the asset. Likewise, prior to participating in a privatization, the purchaser or concessionaire must undertake a similar inspection of the facilities so it can make a similar determination regarding both short-term improvements or upgrades that need to be made to the asset, as well as improvements or upgrades that may need to be made by the purchaser or concessionaire to the asset during the term of the concession.
It is essential that the construction professionals understand the asset, the revenues it produces, any restrictions being made to the ability of the purchaser or concessionaire to increase rates or tolls, if any, imposed by the public entity as a part of the privatization, how the privatization will be funded in order that the revenues produced by the asset will be sufficient to pay any capital improvements to the asset, ongoing maintenance and operation of the asset, and to repay any debt incurred by the concessionaire if the concessionaire is planning to finance the “upfront” payment to the public entity.
There have been circumstances in which the public feedback or a failure to obtain necessary approvals has caused the public entity to decide not to move forward with the privatization. There also have been circumstances in which the proposed privatization has resulted in the public asset being acquired by another public entity rather than a private entity, known as a public-to-public, or P2, transaction.
Remember, each P3 has its own set of facts and circumstances that will need to be addressed in each specific instance.