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FMI Quarterly/September 2013/September 1, 2013

Unlocking the P3 Potential in the U.S. Construction Market

getty_key_imageAs engineering and construction firms continue to shake off the effects of the recession and reorganize plans for future growth, public-private partnerships (P3s) are one area that some organizations are exploring with much diligence and perseverance. Regularly discussed by both public officials and industry practitioners alike, P3s have been slow to gain traction in the U.S., but still present a growth opportunity for firms that put the time and effort into such projects.

2013q3_P3_potential_ex1-811x1024By definition, a P3 is a government service or private business venture that is funded and operated through a partnership of government and one or more private-sector companies. Such partnerships play out particularly well on large infrastructure projects, where financing, ideas, risks and other input can be shared among the various parties — all of which have significant stakes at play. Although P3 infrastructure projects have had a fitful history in the U.S., other countries, including Canada, Australia and the United Kingdom, have fine-tuned such arrangements over the last few decades. Between 1985 and 2011, for example, 1,969 P3 projects were funded worldwide, but the U.S. accounted for only 377, according to the Public Works Financing’s International Major Projects database. In contrast, 699 such projects were funded in Europe and 406 in Asia and Australia. In the U.S., P3s primarily are used in the transportation sector (see Exhibit 1). Many industry analysts expect this trend to intensify, as P3s have proven to be a viable means to repair and upgrade infrastructure, particularly in a strained economy where public resources are limited and private capital is in need of strong, risk-adjusted investment opportunities.

WANTED: INNOVATIVE DELIVERY METHODS

P3s are slowly gaining traction in the U.S. for the viable opportunity that they present to design and construction companies that are willing to put the time and effort into working closely with local, state and federal organizations.

A growing number of owners are looking for new and innovative delivery methods that incorporate state-of-the-art technologies and offer a broad variety of project components. Such alternative formats include Design-Build, Design-Build-Finance, Build-Finance, CM-at-Risk and varying Integrated Project Delivery (IPD) arrangements. Each iteration offers greater collaboration between stakeholders in a departure from the linear hard-bid contract, traditionally driven by the owner spec.

Across the country, alternative delivery methods comprise around 50% of nonresidential contracts. Viewed in the context of these options, P3s represent not a new model, so much as a place on the continuum between wholly owner-driven projects and purely collaborative, shared-risk models of project execution. Some of the variations at the highly collaborative end of this continuum will bring in additional deliverables, such as operations and maintenance, as stakeholders find more ways to derive value from a project.

The continued evolution of joint public-private endeavors has been fueled by the payoffs that come from sharing resources and risk: greater efficiency, better access to capital and higher quality and more cost-effective results than traditional funding methods. Public agencies are able to contract the ongoing monitoring and oversight of an operation; meanwhile, high-performance private firms bring their expertise to large-scale, long-term projects.

OVERCOMING P3S’ KEY CHALLENGES

One of the fundamental issues slowing a broad P3 acceptance in the U.S. is the lack of understanding of what public-private partnerships really are. James Geer, manager of P3s at Kiewit, sums it up: “I think there is still a tremendous lack of understanding of what P3s are all about, what value they bring, and, ultimately, where their place is in the market.”

“From the owner’s perspective, you have 50 states and each has a different way of looking at things, combined with varying degrees of enabling legislation,” Geer continues. “When you have that much diversity and decentralization of the decision-making process at the project delivery level, the education process takes time.”

Despite the industry’s slow-to-change mindset and the high level of uncertainty over what P3s are all about, knowledge and agility among contractors, construction managers and other stakeholders are building, with interest in P3s piquing at local, regional and national levels. The impetus for firm leaders to move beyond the traditional business model has received a bump from the difficult market environment.

Given today’s economic constraints and the huge need for infrastructure development and replacement in the U.S., P3s are well-positioned to become more widely accepted — for both economic infrastructure (e.g., roads, bridges, railways, water/wastewater treatment plants, etc.) and social infrastructure projects (e.g., hospitals, courthouses, schools, etc.).

However, until more successful P3 examples emerge, traction may remain low for such arrangements. At the 2012 U.S. P3 Infrastructure Forum, for example, proponents of such partnerships argued that the more successful P3 projects that are completed in the future, the more confidence and trust the general public, industry stakeholders and government officials will have in these complex finance and delivery models. After all, success breeds success.

Despite such optimism, advocates admit that many obstacles must be cleared before a broad-sweeping P3 revolution can take place in the United States. As one executive from a large construction company put it, “There have been a number of P3 failures. Projects have been canceled, owners couldn’t get the approval or the financing lined up for one reason or another — it’s just not a real crisp process and that has caused a lot of heartburn for players that invest millions of dollars into the pursuit of these projects.”

Remember that beyond the complementary benefits of public and private entities attracting a counterpart to contribute their strengths to a project, there is a real synergy that can be tapped through collaboration that renders the final product greater than its individual parts. Solid partnerships offer a deep understanding of the needs of each stakeholder and provide a means to facilitating the work beyond what is seen on a typical arm’s-length commercial relationship.


SIX STRATEGIC P3 ASSETS FOR DESIGN AND CONSTRUCTION FIRMS

Through in-depth interviews with more than a dozen P3 industry leaders as well as FMI experts, the following tactical strengths were identified as the six key strategic assets for design and construction companies interested in P3s:

1. Build your expertise through strategic joint ventures. Pick your partners carefully. Most interviewees described P3s as a completely “different animal.” What you learned in previous construction jobs does not necessarily apply to P3s.

2. Plan comprehensively for project complexities. Be smart about your business decisions. P3s are typically complex and large-scale projects. It is therefore important to know what to expect of the partnership beforehand and to outline expectations and responsibilities at the outset in an extensive, detailed contract.

3. Understand the cost and risk barriers to entry. Due to the magnitude of P3 projects, contractors are often required to provide proof of strong balance sheets and solid bonding capacity. Furthermore, P3s bring with them greater risk in terms of a longer life cycle, larger scale of liability and heightened vulnerability to changes in external dynamics as the project progresses.

4. Be strategic about the projects (and owners) you go after. Preparing bids for P3 projects can take years and millions of dollars of investment. Therefore, it is paramount to have a deep understanding of the owner’s ecosystem. What are the budgeting process, timetable and constraints? What does the decision-making process look like? How is the public agency run? What is the viability of the project, which is often dependent on the public and political context?

5. Get in the door early. Start building relationships with public officials and finance representatives now. P3s require commitment and support from senior public officials, who must be actively involved in supporting the concept of P3s and taking a leadership role in the development of each given partnership if they are to succeed.

6. Collaborate and innovate. P3 projects are highly complex and collaborative in nature and therefore cannot be run in a silo-type manner. New emerging technologies, as well as owner demands, are pushing design professionals and contractors to work as a cohesive team from the outset, communicating and approaching projects more holistically.


Sabine Hoover is a senior research consultant with FMI Corporation. She may be reached at 303.398.7238 or via email at shoover@fminet.com.

 

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