Public Private Partnerships Provide an Opportunity to Leverage Private Sector Expertise and Financing for Public Benefit

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To anyone who has suffered through traffic on the Interstate Bridge, the Sunset Highway, or any number of other transportation “thoroughfares,” the impacts of our growing population are painfully obvious.  Perhaps more ominous, but less obvious, are the problems associated with our aging water and sewer systems.  Left unchecked, these problems threaten to undermine our region’s continued economic growth. 

These problems are not unique to the Portland metro area, or even the State of Oregon or the Pacific Northwest.  Almost every region of the United States faces a mounting infrastructure backlog.  These threats are amplified by the potential impacts of climate change.  The catastrophic impacts associated with Hurricane Sandy underscore the importance of upgrading aging infrastructure to endure the risks of increasingly volatile natural events.    

Despite the almost universal desire to solve these problems, comprehensive efforts to address our infrastructure backlog have been effectively paralyzed by the price tag associated with “fixing” these issues.  According to current estimates, it will require almost $4 trillion in investment to address the current infrastructure needs in our country.  Even the most optimistic among us recognizes the difficulty in securing $1 trillion, let alone $4 trillion, in new public funding.

Creative solutions will likely be required to bridge the gap between the cost of addressing our growing infrastructure needs and the amount of available public funding.  One increasingly popular possibility involves supplementing public funds with private financing through agreements that allow for greater private sector participation in the delivery and financing of public infrastructure projects.  Such arrangements, often known as “Public-Private Partnerships” or “P3s,” have a long, but arguably mixed, history of success.  Perhaps the best known example of a P3 is the Golden Gate Bridge, which used toll revenues to repay the public bonds used to fund construction of the iconic span.  Proponents of P3s point to empirical studies, which demonstrate that, on average, P3 projects are more likely to be delivered on time and on budget than traditional procurement projects. 

Although a surge in public funding in the post-WWII era supplanted P3s, P3s are riding a modern resurgence.  Over 30 states, including Oregon and Washington, have passed legislation enabling P3s, and some commentators have suggested that the market for P3s in the United States is ripe for growth.  The majority of P3s have been used to develop transportation infrastructure, but other kinds of P3s are becoming more common.  P3s have been used to fund construction of a state-wide broadband network, civic and wastewater projects, and government buildings.  Some governments have even begun “bundling” smaller projects into a larger P3 package to attract more interest. 

Despite these successes, the opportunity provided by P3s is not without challenges.  This “new” model requires government entities and their potential private partners to rethink their tried and true approach to the more familiar design-bid-build model.  The partners in a potential P3 should carefully consider whether the proposed P3 is likely to survive the political gauntlet before investing time and money into the P3 process.  This involves considering whether the project is appropriate for a P3.  The proponents of a project should determine whether the higher preparation and procurement costs associated with P3s are offset by the financial benefits of constructing and maintaining the project as a P3.  They should also consider whether the project “pencils out”:  will the anticipated revenue generated by the project justify private investment, or will it require unpopular rate or fee increases to make the private investor whole?  Indeed, the most common complaint of political opponents of P3s is the belief that they privatize public assets, to the detriment of the public. 

P3s have the potential to help bridge the gap between the cost of addressing our growing infrastructure needs and the amount of available public funding.  The promise of P3s is not without risk, to both public entities and their potential private partners. 

P3s often involve complex legal issues relating to the structure of the P3, the financing agreements for the P3, and the allocation of risk among the public and private partners.  Once the parties have determined that a P3 is an appropriate mechanism for financing, procuring, constructing, maintaining, and operating a project, care must be given to the legal framework of the P3 agreement.  The parties to a potential P3 must take care to carefully document their partnership.  To address the legal issues inherent in the formation of a P3, both public entities and their potential private partners should engage the services of qualified professionals with the expertise necessary to facilitate and structure the P3.

Originally published as "OP-ED: Leveraging private expertise and financing for public benefit" by the Daily Journal of Commerce on June 15, 2017.

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