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Blog/April 11, 2016

Six Things You Need to Know About Public-Private Partnerships

six-things-you-need-to-know-about-public-private-partnershipsThrough in-depth interviews with more than a dozen public-private partnership (P3) industry leaders, as well as FMI experts, we uncovered several tactical strengths that help contractors get started with P3s, from both a business and operational standpoint. Here are six things you need to know about 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. Therefore, it is important to start cautiously, educate yourself as you move along, and work with experienced project partners – ideally, trusted partners with whom you’ve had successful prior experience. When selecting the right partners, the lowest bid is not always the best choice when you are hoping to form a long-term relationship in which both your futures are invested.
  2. Plan comprehensively for project complexities. Be smart about your business decisions.P3s are typically very complex, large-scale projects. It is therefore more important than ever to know what to expect of the partnership beforehand and to outline expectations and responsibilities at the outset in an extensive, detailed contract. On top of that, a conflict-resolution contingency should be on hand to deal with inevitable disputes, whether large or small. Always keep an open mind and be ready to resolve issues every step of the way.
  3. Understand the cost and risk barriers to entry. You need deep pockets and a thick skin.Due to the magnitude of P3 projects, contractors are often required to provide proof of strong balance sheets and solid bonding capacity. More often than not, the concessionaire will require a large (i.e. financial) parent company to back the performance of the design-build, and request very large Letters of Credit (LOCs) as additional performance guarantees of the design- build in order to meet the lender’s requirements for backing the deal with debt. While the amount of equity a firm is fronting is one obvious consideration, the issue with greater potential impact on a firm’s balance sheet is the financing risk it is taking on. 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, for example, changes in public administration.
  4. Be very 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 is their budgeting process, timetable and constraints? What does their decision-making process look like? How is the public agency run?), and the viability of the project, which is often dependent on the public and political context. As part of this reconnaissance phase, it is also important to identify public agencies that understand what types of public policy goals they are trying to achieve and promote. If a proposed project has lots of public support, has already overcome some key hurdles (such as environmental impact assessments), and is part of a more comprehensive agency program, then chances for a successful P3 deal increase dramatically.
  5. Get in the door early.Start building relationships with public officials and finance representatives now. P3s require commitment and support from very 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. Start conversations with public officials and finance representatives long before projects have been announced. Understanding both their project needs, as well as the P3 process, is key to building trust with a given stakeholder – crucial if they are to personally invest themselves in a P3. Long-term relationships with key influencers will help you shape and develop P3 projects from the onset.
  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. As part of this effort, build strategic alliances with reliable partners, and develop a deep network of companies that are team players, open-minded and innovative. Experience in design-build-type delivery methods as well as a background in finance, operations and maintenance are a huge plus and can help your company differentiate itself even further.

    Looking ahead, industry practitioners agree that as more deals are closed in the next few years and more success stories are experienced at all levels – by communities, policymakers, and industry practitioners – P3s will thrive. As additional P3 projects come online and demonstrate the value proposition of such an arrangement, states and localities will get a better sense of the benefits P3s offer and can therefore benchmark their efforts against these types of projects more easily.

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