Public-Private Partnerships: The Good, The Bad, The Opportunity, The Risk

Public-Private Partnerships: The Good, The Bad, The Opportunity, The Risk

Public-private partnerships (P3s) have been around for quite some time and are gaining momentum. They are an increasingly important instrument for supplying public services on capital project assets including institutional facilities (i.e. state universities), more complex assets (i.e. prisons and utilities) and infrastructure assets (i.e. bridges and roads).

A majority of states now permit some form of P3 arrangements, but not all states are as progressed in P3 legislation as others. Participating states generally impose laws and rules to ensure accountability and to protect the public from poorly designed financial agreements. Depending on the state, there are many models of P3s that exist, creating opportunities for real estate developers, contractors and insurance firms alike.

A public-private partnership is a long-term contract between a private party and a governmental entity providing a public asset or service, where the private party bears significant risk and management responsibility and the return on investment is linked to performance. Some highly recognizable examples of P3s include the High Occupancy toll lanes in Virginia around the D.C. area, the Tappan Zee Bridge and student housing projects at Rutgers, The College of New Jersey and Montclair State University, to name just a few that are completed or in-progress as of the date of this article.

A benefit to the public stemming from these partnerships is that the delivery of the service can be provided in a more efficient manner through harnessing the private sector’s expertise in combining the design and operation of an asset, as opposed to the common state and local procurement methods. Additionally, the beneficial supplement of private funding and expertise to the very limited public sector’s capabilities to meet the growing demand for infrastructure development is not only improving the infrastructure, but creating long-term construction jobs and long-term employment opportunities. However, these partnerships do come with substantial risk factors, and they require a number of conditions that need to be in place in order for the P3s to be successful. For example, the development, bidding and ongoing costs in P3 projects are likely to be greater than the traditional government procurement process. Furthermore, there is a cost attached to the debt financing, albeit the private sector can access financing easier. Most importantly, the legal and regulatory framework is crucial to achieving a sustainable project.

As of the date of this article, there are various state financing and incentive programs available to projects planned in areas targeted for growth similar to financing and incentive programs enacted in New Jersey under the Economic Stimulus Act of 2009. New Jersey programs like the Economic Redevelopment and Growth Program provide tax credits and incentive grant reimbursements to developers and businesses to address revenue gaps in development projects in both the commercial and residential arenas. These programs help mitigate financing risk factors and also expand returns on investment for many real estate developers in New Jersey.

Insurance providers are also becoming an important contributor to the sustainability of P3 projects. Understanding risk management is the insurer’s main and unique expertise that helps strengthen government and community capacity. Further, insurers have, at times, been a source of capital to fund infrastructure projects. The synergies realized amongst the collaborating real estate developers, contractors and insurance providers certainly could be responsible for each participant’s economic growth and other efficiency advantages and yield greater benefits to many of the environmental and economic challenges facing the public sector

While P3s are an increasingly popular tool for procuring and managing public projects, they are complex instruments in terms of risk sharing, costing, contract negotiations, affordability and budget and accounting treatment. “The Goals Guy®”, Gary Ryan Blair, sums it up in this quote, stating “Creative risk-taking is essential to success in any goal where the stakes are high. Thoughtless risks are destructive, of course, but perhaps even more wasteful is thoughtless caution which prompts inaction and promotes failure to seize opportunity.” By objectively considering the new opportunities stemming from public-private partnerships, creative and well planned risk-taking could yield additional opportunities for your company.

To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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