ABCs of P3s: Understanding the Basics of This Project Model

By Ed Green
P3 Kentucky Editor

P3 Kentucky is a couple of months old now, but we’ve never really broken down or explained public-private partnerships – at least the way we view them. Because Kentucky P3 legislation is just about a year old, the concept is new to many. Looking at sources both nationally and internationally, you’ll see varying definitions for P3. It can be confusing and complicate discussions about potential partnerships.

Broad and precise

As we’ve said before, P3s are not new. Some form of P3 has been around our state and country for as long as most can remember.

The Business Dictionary says a public-private partnership is the: Involvement of private enterprise (in the form of management expertise and/or monetary contributions) in the government projects aimed at public benefit.

The National Council for Public Private Partnerships defines P3 this way: A public-private partnership (P3) is a contractual arrangement between a public agency (federal, state or local) and a private-sector entity. Through this agreement, the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility.

The World Bank says this about P3: A long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance.

As far as we are concerned, P3 can be used to describe any arrangement that gives private-sector firms or nonprofits additional responsibilities and risks than traditional projects, particularly in financing or operations of a public asset. In some cases, public-private partnerships involve both sides collaborating by contributing to different elements of a project, such as neighborhood development. It’s important to note that P3 isn’t the same as privatization, which might involve selling a public asset.

Kentucky’s law

In Kentucky, new legislation was passed last year to establish a process for state agencies and local and county governments to procure some services using the P3 model. The law opened the door for increased use of P3s is state and local governments and required that state projects, or local projects valued at 30 percent or more of its general fund, must follow the P3 process.

This process can begin with an RFP solicitation – as is the case in the Capital Plaza and Madison County projects – or as an unsolicited proposal.

In either case, the new P3 process requires an agency to determine if using the P3 delivery model for construction or financing is “the most advantageous method of awarding and administering a capital project or other contract.” This step requires a qualitative and quantitative analysis to determine the benefits, costs and risks associated with using the P3 model.

Types of P3

P3 models

Image source: National Conference of State Legislatures

As the different definitions of P3 suggest, there are a variety of P3 types – determined primarily by the level of involvement by private partners. The U.S. General Accounting Office outlines the range of P3 types succinctly. Some basic models include the following.

  • Operations, Maintenance & Management: A public partner contracts with a private firm to operate, maintain, and manage a facility or system providing a service. The asset remains government-owned, but the private party may invest its own capital in the facility or system. Some local governments use this contractual partnership to provide services like wastewater treatment.
  • Design-Build: Under this model, the private partner provides both the design and construction of a project to the public agency. This delivery model can speed projects and save money. It also can reduce conflict on a project by having one entity responsible for delivering the project, which will be managed by a public agency. This model is becoming increasingly common in the construction industry.
  • Design-Build-Operate-Maintain: Like the design-build, one entity delivers the project. Under this longer-term arrangement, the entity also agrees to operate and continue to invest in the asset over a number of years to meet pre-defined standards. The project typically is financed and continues to be owned by the public partner, with operating responsibility shifted to a private partner.
  • Design-Build-Finance-Operate-Maintain: This is the model many are referring to when talking about private-sector investment in infrastructure. Like the earlier models, much of the risk and responsibility for building and maintaining is given to the private partner, which also secures at least a portion of the financing for a project. Determining the revenue source to fund the improvements is an important component to this type of project, but the private partner will require a return on its upfront investment over time. Revenue sources could include user fees, lease payments, availability payments from general government funds or new funds or cost savings generated by the project.
  • Sale/Leaseback: Under this arrangement, the public partner transfers ownership to a private partner but guarantees to use the asset for a period of time. The private partner is now responsible for ongoing investments in the asset, but the government still may operate and use it.

Risks and rewards

Like every contract, P3 deals come with risks and rewards for public agencies. These must be weighed before moving forward with contracts. The Federal Highway Administration, which has been a strong advocate for considering P3s as part of innovative financing for public infrastructure offers this guidance.

Potential advantages:

  • May accelerate project delivery.
  • May enable longer term view of asset management.
  • May provide access to additional capital.
  • May reduce public cost and/or debt requirements.

Potential disadvantages:

  • Requires considerable administrative cost and time to develop, analyze, procure, and monitor.
  • Although P3s can offer access to capital, they do not provide new revenue; in fact, P3s need a revenue stream to work.
  • May not be the most cost-effective or appropriate procurement model for projects if the public sector can deliver better value without it.

P3 Kentucky was created to educate and connect, so if you have a question about where to go next, feel free to reach out: (502) 544-2917 or ed@c2strategic.com.

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