Public-private partnerships (P3s) help fund transportation and infrastructure projects, but there are benefits and pitfalls to consider.
Generally, P3s are not well-suited for smaller projects worth less than $25 million, said Chris Roux, partner and co-chair of Alston & Bird’s Construction and Government Contracts Groups.
Projects usually cost more because the price of private financing is typically higher and the private entity must earn a sufficient return on its investment to justify taking the significant long-term risks, Roux explained.
Project managers have to reasonably estimate timing for siting, permitting, procurement and construction.
“This can be a very difficult task because if a critical risk is not identified or if the risk is underestimated it can lead to the failure of the project, which in turn results in the government taking back that failed project at a substantial cost,” Roux said.
“Because parties are required to wade through these complicated issues, the front-end transaction costs associated with setting up the P3 project are typically much higher than if the government procured the project in a typical manner,” he added.
Labor organizations looking to protect construction or union jobs could pressure politicians to ensure projects don’t displace public-sector workers.
“It is critical that P3 projects have strong government support in selling P3 procurement to their constituents but also constructively working with the private entity over the life of the project,” Roux said.
Public agencies must follow state procurement laws in order to use a P3 model.
To date, 33 states, the District of Columbia and Puerto Rico have passed laws allowing public entities to use some form of P3 procurement as an alternative to the long-standing standard of legally requiring public agencies to competitively bid construction work and award the project to the “lowest responsible bidder,” Roux explained.
“P3s are not required to be competitively bid and typically are awarded on the basis of ‘best value’ to the public entity, as opposed to being awarded on the basis of the lowest cost,” Roux said.