Tips to Successfully Navigate PPPs for Construction Firms
Public-Private Partnerships have been a popular method of construction in Europe for decades. It was developed in the UK in the 1990s because they believed that private sector construction companies could provide better services for public needs. Ideally, this opens up bidding and allows for the government to use federal funds more prudently to address issues and update construction where needed.
Public-Private Partnerships, also called P3s and PPPs, have shown a significant benefit in the US to address failing infrastructure issues. For instance, civil construction projects have always used private contractors and engineers in the US. Using a Public-Private Partnership, these civil construction projects can be managed by private firms that are authorized by the federal or local agencies contracting the project.
P3 is a project delivery method that offers a new way to finance and manage significant capital projects for better organization and budget control. Currently, this type of partnership is used in numerous projects across the country. While Public-Private Partnerships in the UK and Europe have differed slightly from those in the US, similar benefits have been gained.
Below, we’ll dive in deep to explore what P3 looks like, discuss benefits and possible drawbacks as well as cover information on how to effectively navigate this method for your projects.
What Are Public-Private Partnerships? A Definition
According to the US Department of Transportation (DOT), P3s are defined as, “contractual agreements formed between a public agency and a private sector entity that allow for greater private sector participation in the delivery and financing of transportation projects.”
There are a lot of different types of Public-Private Partnerships. In the most generic sense, a P3 is when the public and private sectors collaborate for the best benefit for all parties.
P3s can be structured in numerous ways. They might consist of financing, managing and maintenance. The delivery method gives a good range of options which is beneficial for the governing entity because it can allow for less taxpayer expense without compromising the quality of the construction. A firm, for example, may provide their own investment of funds for the project. In other cases, the funds may be provided largely by the governing body with the private firm providing design or construction or maintenance.
Unlike models where the government entity simply contracts and pays for the construction, P3s are often defined by the fact that all parties share in both the risk and the profits from a project. The asset is complete for the general public who benefits from the completion and maintenance of the asset.
The reason why infrastructure is one area where the US has seen major success from this model is that it allows for faster repair and on budget completion of needed upgrades, including roads and buildings of public use.
Top Benefits of P3 Partnerships
For government entities, the benefits of Public-Private Partnerships can be outstanding. Primarily, this is because they are offsetting a portion or sharing the risk.
Factors such as cost and schedule are a huge concern in any construction project because both aspects directly impact the citizens who the public entity serves. However, there are different ways to structure your P3. Depending on the scenario, a cost-benefit analysis can be performed to determine the best structure for optimal success and profitability. According to a report from Star America Infrastructure Fund, “Historically, P3 projects have been delivered on time and on budget more often than traditional procurement projects, despite the fact that the P3 projects were typically larger and more complex.”
That being said, there will be variables in the types of benefits each party sees depending on which model is used and the type of project. But in general, here are some common benefits when choosing a Public-Private Partnership:
- Increased Productivity/More Efficient Time Schedules. With P3 partnerships, each role is addressed by entities that are best suited for individual responsibilities. Using the right model, this can streamline productivity and help keep projects within schedule. Sometimes early completion bonuses increase incentives to maintain efficiency, as well.
- Lower Costs. The private sector can keep costs lower due to the better availability of experience and quality assurance. The private sector is also more flexible in regulations regarding the number of employees and the level of salaries, benefits, etc. Another cost benefit for Public-Private Partnerships is that the private sector assumes the maintenance costs.
- Spreads Costs Over Time. P3 models allow for the costs of a project to be paid over time, which means that projects can be completed in a more timely manner without waiting for budgetary constraints.
- Less Risk for Citizens and the Public Sector. The public sector needs to consider budgetary constraints and the cost as it’s passed to citizens. With the P3 model, the risk is divided by both the private and public entities and, in some cases, the private sector fully assumes the risk. For the public entity, this can mean great savings and lower taxes to pass on to constituents.
A Few Potential Drawbacks of P3 Partnerships
You might look at the cost benefits and risk mitigation and wonder why all partnerships are not P3 where public entities are concerned. For the US, this is a newer model but one that is gaining traction because there can be so many benefits when the model is ideally suited for the project. Nevertheless, it’s also a complex process. In 2018, the UK House of Commons ceased the use of PPP because there wasn’t enough evidence showing that it gave value to taxpayers.
While the process can be complicated, it is worth noting that infrastructure improvements have used this type of partnership to great success in maintaining schedules and completing projects within a more rigid budget because the private sector can accommodate processes more efficiently than its public sector counterparts. It is ideal to understand the drawbacks before you begin.
Obstacles that become more challenging with a Public-Private Partnership:
- Increased Project Complexity. Because there are more stakeholders involved in any construction process through P3, the process becomes more complicated, and it’s absolutely integral to maintain excellent communication with all parties.
- Uncertain Profitability. Construction often includes a very tight profit margin, in general. With a P3 model, profits can vary widely because there are different specifications for each project which might include competition in bidding, the complexity of the project itself and the scope of work.
- Can Increase Government Costs. The private sector takes responsibility for the majority of the risk and, in some cases, this can increase the government costs over the short or long term.
Navigating Public-Private Partnerships Effectively
We know that P3 Partnerships are trending in the US and that they’ve been proven to offer benefits to contractors and public entities alike. The big question is, how do you avoid the common pitfalls and navigate this type of partnership effectively?
The most effective way to use a P3 model to great success is by embracing tools that allow for the best possible collaboration between all of the entities working through the project. Communication is vital in every aspect of a P3 project, from the cost-benefit analysis through the completion or ongoing maintenance of the asset. Ideally, all of the contractors and shareholders from each of the partnering entities should be able to communicate seamlessly to keep everyone updated on the project in real time throughout the process.
Best practices with regard to collaboration will mean increased efficiency and higher profitability. Regardless of the types of tools you choose, planning the protocols for how communication is conducted in advance can help to keep the project running smoothly throughout.
If you’re looking to learn more about navigating PPP successfully, the US DOT has a guide, “Successful Practices for P3s,” here.
Examples of Great P3 Partnerships
Currently, many states are taking advantage of the ability to use Public-Private Partnership models for a number of important aspects of civil life. According to Star America Infrastructure Fund, “The United States is poised to become the largest public-private partnership (P3) market in the world for infrastructure projects. The opportunity to rebuild crumbling American infrastructure and create first class assets is now.”
Overall, P3 could be the solution that allows the state to better meet budgetary constraints while still meeting the needs of the public. Here are a few examples of the model that have been working well throughout the country:
Golden Gate Bridge
While the Golden Gate Bridge was delivered with a more old school version of P3 than we know today, the Golden Gate Bridge Highway and Transportation District (GGBHTD) received a $35 million commercial loan from a national bank based in California and involvement from four private investment firms.
E-470 in Denver
E-470 broke ground in 1989 and formed the standard for modern P3 project in the US. Eight counties and cities built the 47-mile highway outside of Denver. However, since the project did not have federal or state funding, it was built with private funds.
I-95 HOT/HOV Lanes in Virginia
The Public-Private Partnership was a highway transportation project between the Virginia Department of Transportation (VDOT) and 95 Express Lanes LLC (95 Express), in addition to a private consortium owned by the Australian toll road operator Transurban Group and Fluor Enterprises. The project was delivered on time and budget.
Paving the Way for P3 Success
There are many ways that P3 agreements can be used to make improvements to the state or area. Some examples might include toll roads, government buildings and buildings for public use, such as schools. In recent years, with budgetary issues hitting many states especially hard, Public-Private Partnerships have offered an excellent advantage to allow for further progress without raising taxes to an exorbitant level or putting off needed infrastructure improvements.