A decade after the term “public-private partnerships” became a hot topic of discussion, P3s are still relatively uncommon and difficult to bring to fruition. Yet they still appear to provide a fertile opportunity for some contractors willing to puzzle through their complexities.
Although some forms of private investment in public assets have existed for decades, interest in P3s mushroomed after the city of Chicago entered into a 99-year lease of the Chicago Skyway to private operators for $1.83 billion in early 2005. The next year, Indiana leased the Indiana Toll Road for 75 years in exchange for an up-front $3.8 billion payment that the state dedicated to other highway projects. That deal helped motorists get an improved toll road and provided work for highway contractors on the turnpike and all over the state. But it proved to be a bad bet by the investors—they filed for bankruptcy on September 22.
Most P3s since 2006 have involved construction of new infrastructure or buildings rather than leasing existing assets. The agreements for these projects have typically taken a long time to hammer out, but once in place, the lessees or concessionaires have an incentive to award and complete construction as quickly as possible, so as to start earning a return on their investment.
The recession and financial crisis of 2007-2009 derailed some P3s and lowered the revenue stream for many projects, including the Indiana Toll Road, which experienced a drastic reduction in lucrative truck traffic as well as an unprecedented decline in passenger vehicle travel. Other highway P3s that made revenue projections before the recession have also incurred unexpectedly low revenue or traffic counts.
However, the recession also created new opportunities as cash-starved state and local governments turned to the private sector to finance, build and operate other types of assets. For instance, public universities that lost substantial funding from legislatures have increasingly turned to private investors for athletic facilities, student activity centers, parking structures and dormitories or near-campus student housing. These projects are typically smaller, less complex and easier to structure financially than new or expanded toll roads. As a result, a larger variety of contractors have benefited.
Other types of P3s include hospital buildings and parking structures, water treatment systems and desalinization plants. However, some municipalities have tried to buy back their privatized water systems, as the Wall Street Journal reported on September 15, citing examples from Ojai, Calif., Missoula, Mont., and Fort Wayne, Ind.
Revenues have begun rising for many state and local governments. But there has been little increase in public investment in construction. State and local construction spending was unchanged in the first seven months of 2014 compared with the same span in 2013, the Census Bureau reported on September 2. Even though the seasonally adjusted July total was the highest in more than two years, it was 13% below the record set in 2009.
Thus, it appears likely that contractors will encounter more potential partnership opportunities as local and state officials look for nontraditional funding sources for needed infrastructure and public buildings. But those “opportunities” are also fraught with pitfalls such as bankruptcy or a change of heart by officials (or their replacement by other officials with differing agendas). Meanwhile, the rules surrounding P3s remain perplexing in many jurisdictions.