The P3 Market: America vs. the Rest of the World

The United States is lagging behind other nations in the adoption of public-private partnerships (P3s) for infrastructure. Unlike the United States, countries such as the United Kingdom, Australia and Canada have developed a number of practices that add certainty to the pursuit of P3s, including dedicated procurement offices, standardized contracting, and the application of P3s across infrastructure asset classes.

A number of provinces in Canada have offices dedicated to the procurement of P3s, including Infrastructure Ontario, Partnerships BC and SaskBuilds in Saskatchewan. These dedicated offices have relatively standardized contracts and provisions that help create certainty for bidding teams. The existence of dedicated P3 offices has been less common in the United States. Some states, including Virginia, Colorado and Pennsylvania, have dedicated offices within their departments of transportation that assess the appropriateness of pursuing P3s. Only a few states or municipalities have dedicated offices that assess P3s in other infrastructure asset classes, yet more American governments, such as the city and county of Denver, are contemplating establishing dedicated P3 units.

Perhaps due to the lack of dedicated offices, the United States does not have standardized contracts for P3s. The United Kingdom has the Standardization of the Private Finance Initiative Contract, which lays out general terms and conditions of P3s across the country. In Canada, the provincial procurement authorities also have their own standardized contracts. In contrast, U.S. contract terms can vary from project to project—adding uncertainty and increasing transaction costs through the procurement process.

Other countries that have been active users of P3s have predominantly used P3s to procure social infrastructure assets such as hospitals and schools, while the United States has focused on transportation P3s. Recently, some U.S. governments have procured social infrastructure assets through P3s, including courthouses and university development projects. Conversely, Canada has seen an increase in its investment in transportation infrastructure P3s, including light rail systems, bridges and highways.

One key reason for the differences in the asset choice of American P3s compared to other countries is the existence of the U.S. municipal bond market. Municipal bonds allow state and local governments in the United States to issue tax-exempt debt to finance their capital projects. P3s are ineligible to receive similar tax-preferred treatment. To bring the cost of capital more in line with tax-exempt debt, the U.S. Department of Transportation manages two programs to help spur private investment in the transportation sector. The TIFIA program offers low-cost, subordinated debt for innovatively financed projects, while the Private Activity Bond program allows the issuance of up to $15 billion worth of tax-exempt debt in support of highway and freight P3s.

The lack of similar tax-preferred programs for social infrastructure assets such as schools, hospitals and other government buildings has impeded the expansion to more social infrastructure P3 projects, but has not entirely stifled the market. In an attempt to put P3s on more equal footing with traditionally procured social infrastructure projects, Sen. Dean Heller (R-Nev.), along with seven other cosponsors, has introduced the Public Buildings Renewal Act, with a companion House bill with 24 cosponsors. The proposed bill would allocate $5 billion in private activity bonds to be used for public building projects.

Public support is another area of disconnect between the United States and Canada. In Canada, the Canadian Council on Public-Private Partnerships has conducted polling regarding public opinion on P3s and has found that 67 percent of Canadians support private sector delivery of public infrastructure services. Public opinion in the United States does not seem to be at a comparable level, though similar polling has not been conducted there. Many P3s that go through procurement can run into political challenges either from government officials or from voters who do not yet fully understood the P3 mechanism.

These differences have made the U.S. market unique when it comes to the P3 process. The historical focus on transportation P3s means that projects have tended to be relatively large opportunities that elicit responses by large global contractors and equity funds. However, due to the lack of consistency in contracting and procurement methodology, risks remain inherent in the pursuit of these projects that can result in some bidding teams pulling out of the process early. As some states and localities move toward a more consistent process and expand eligible project types, more firms may feel comfortable and able to participate in the U.S. P3 market.

 
Peter Fogel is a policy analyst at Aon Infrastructure Solutions. For more information, visit aon.com/risk-services/construction services/infrastructure-solutions.jsp.