The Reality of Public-Private Partnerships (P3's)

March 12, 2019

notebook with public private partnership on a desk with coffee cup, keyboard, and glasses

image credit: Adha Ghazali/shutterstock.com

State and Federal deficits are ballooning at an alarming rate, and maintaining the Infrastructure hasn’t yet become a priority. Politicians are struggling to find the balance between the need to fix our infrastructure and how to fund the costs.

In recent years, a solution to this struggle is Public-Private Partnership (P3’s). This is a partnership where the Public Entity outsources the responsibility of building and/or maintaining an Infrastructure asset to a Private For-Profit Company.

 

By allowing the Public Sector (State and Federal Governments) to foster Private Investments in our Infrastructure, a more efficient delivery system is created that takes some of the stress out of the funding needs for major infrastructure projects. Simply put, a Public Entity works side-by-side with the Private For-Profit Company to enter into a long-term contract (20+, 30+ years, etc.). This contract includes the Design, Build, Finance, and Maintenance on an Infrastructure asset (i.e. a Toll Bridge).

The private company, motivated by profit, forms a Special Purpose Entity (SPE) to manage the work. The SPE or Concessionaire is responsible to build and maintain the asset, which is designed in conjunction with strict guidelines specified in their contract with the Public Entity.

 

There are two phases of this contract:

  1. The Construction of the asset
  2. The Maintenance of the asset

The funding for both phases are arranged simultaneously, and a profit forecast is created. Since the SPE expects to be repaid for their investment, there are two ways they can recoup their money:

1. Toll Concessions: The Public Entity cedes the right to collect money from the daily usage of the asset.

2. Availability Payments: The SPE receives periodic payments from the Public Entity based on a prearranged payment schedule in the contract.

Even though the SPE is investing in the infrastructure project, this is not “free” to the Public Entity. They will still bear costs through availability payments and/or giving up revenue. Luckily, these costs can be spread out over the term of the contract, rather than up front. Once the contract has been completed, the ownership/control of that asset passes back to the Public Entity. 

 

Controlling costs is a major factor in managing a profitable P3. Still have questions? At TSIB, we have been involved with many P3’s and can assist your Risk Management team on creating insurance programs to protect your people, your asset, and your profit. Call us today at 201-267-7500 to learn more!

Understanding Contractual Risk Transfer

Topics: Public-Private Partnership

Written by The TSIB Team