As states and the federal government seek funding for needed infrastructure projects and repairs, they are increasingly considering public-private partnerships (P3s). Unlike traditional methods of procurement, under a P3, the public entity signs a contract with a private partner, which in turn chooses and pays the construction contractor. The public entity commits public funds to repay the private partner, plus a profit, over a period of time, ranging from 30 to 99 years.
Even though procurement methods have evolved—including the use of P3s—construction remains a risky business, making the protections that surety bonds provide for taxpayers’ investments and the payment guarantees for subcontractors and suppliers just as relevant and important in P3s.
There is no federal P3 law, and the surety industry does not expect to see such legislation any time soon. Rather, states are looking to Congress for funding for their P3 and other infrastructure projects. One way this is being done is through federal infrastructure banks that provide financing, rather than direct funding, for state P3s and other projects. Such banks can make loans and loan guarantees and provide lines of credit for public works project with rates, terms and lengths of time not widely available in the commercial market.
WIFIA Bonding Requirements
Along with several construction industry stakeholders, the surety industry is advocating for bonding requirements in the Water Resources Development Act (WRDA) reauthorization legislation pending in Congress. The WRDA includes a provision known as the Water Infrastructure Financing and Innovation Act (WIFIA) for financing state and local water infrastructure projects. The surety industry is seeking to include a specific provision in WIFIA that would apply bond requirements as a condition of WIFIA financing for a public construction project under a P3 agreement.
There is precedent for what the surety industry seeks in Congress. In the 2008 National Defense Authorization Act for Fiscal Year 2009, now codified at 10 U.S.C. § 2885, Congress mandated surety bonding for military housing privatization projects after construction performed under the 1996 Military Housing Privatization Initiative experienced some significant quality issues, such as unreliable contractors and others that were unwilling to make repairs. This prompted discussions in Congress regarding accountability on military housing privatization projects, including better diligence in vetting project bidders, resulting in bonding requirements.
While WIFIA is in its infancy, it was modeled after the Transportation Infrastructure Finance and Innovation Act (TIFIA) created in 1998. According to the U.S. Department of Federal Transit Administration
, the TIFIA credit program is designed to fill market gaps and leverage substantial private co-investment by providing supplemental and subordinate capital. Each dollar of federal funds can provide up to $10 in TIFIA credit assistance and support up to $30 in transportation infrastructure investment.
Up until 2012, TIFIA had $122 million in funding annually. Because of its success, TIFIA’s funding was increased under MAP-21 to $750 million for FY2013 and $1 billion in FY2014. The FAST Act in 2015 reduced TIFIA’s funding to lesser amounts for the next five years, but still at significantly higher levels than ever before. WIFIA could follow TIFIA’s path, and significant federal dollars could be at risk in financing infrastructure.
Managing Public Funds
The development of P3s is the driving force behind this effort. The federal Miller Act and state Little Miller Acts require bonding of public works projects, but traditional procurements have not involved a private partner providing the financing and managing the construction. State P3 laws also vary regarding security requirements. To manage risks properly, construction under a WIFIA-financed P3 ought to be bonded just like any other federal public works project.
Public money pays for the P3 project in the long run, and such public funds are at risk in a P3, just as they would be when using any other method of delivery. Arguably, the risk to the public entity is increased in a P3 because the public entity is responsible to the taxpayers to deliver a public service or facility, but the public entity does not choose or control the construction contractor and could suffer financial losses if the private partner defaults. Surety and construction associations have been educating Congress on the critical need to protect taxpayer dollars used to finance P3 water infrastructure projects.
Many states have considered P3 legislation in the last five years. According to the National Conference of State Legislatures
, 33 states have adopted statutory authority for P3s (as of January 2016). The vast majority of states allow P3s only for transportation projects, but more recent legislation broadly applies to transportation, public buildings and facilities.
Most recent enactments of P3 laws also require bonding. Four states joined the P3 ranks in 2016—Kentucky, Louisiana, New Hampshire and Tennessee—and all require bonding of the construction portion of the P3. In the past five years, the District of Columbia, Georgia, Maryland and West Virginia have enacted new P3 laws that require bonding. In that same time period, California, Ohio and North Carolina amended existing P3 laws to require bonding.
Variations in P3 Laws
State legislatures still need to address variations in their P3 laws. Some states may expand their law beyond transportation projects to all vertical construction. Other states may amend the multiple P3 laws enacted over time to make them all consistent. Several of the existing laws are just a general grant of authority to use P3s. It remains to be seen whether state agencies with these barebones laws, which date back a decade or more, will use them to enter into complex P3 agreements with private partners without a further defined law from the current legislature, particularly if public revenues must be committed for a long time into the future.
The surety industry urges that this process also should include bonding requirements. In particular, state P3 laws that allow bonds and other forms of security need to be clarified to state the design and construction portion of the P3 needs to be bonded, rather than all phases of a P3.
P3s still are a relatively new method to deliver a public works project in the United States. States with the most experience with P3s are Florida, Indiana, Pennsylvania, Virginia and Texas. Ideally more states will follow their lead, and those with newly enacted P3 laws will attract investors. If just New York, New Jersey and Connecticut added laws, the U.S. P3 market could expand considerably.
Bonding is sound public policy contained in the federal Miller Act and state Little Miller Acts. These public policies have assured the successful completion of construction projects and protected businesses for decades. Those public policies hold true regardless of which entity is providing the revenue stream for these projects.
Lenore Marema is vice president of government affairs for The Surety & Fidelity Association of America and Lawrence LeClair is director of government relations. For more information, email firstname.lastname@example.org or email@example.com.