It’s no secret the public sector has money problems. Some governments are on the verge of bankruptcy, and it’s expected to take another four or five years for most state and municipal budgets to return to 2007 levels. Pile on extensive infrastructure problems and governments are pretty much left with three options: continue postponing capital improvement projects, raise taxes or explore the possibility of a public-private partnership (P3).
“Yes, the process of P3s is more complicated, but they can allow you to get something built,” says Rick Norment, executive director of the National Council for Public-Private Partnerships
, Arlington, Va. “For too long, maintenance has been deferred on schools, roads and other public facilities. When you do that for 20 years, you have a serious problem.” Market Growth
Localities seem to be getting the message, causing what Norment calls a “legislative stampede” in the past few years. Twenty-one states had P3 statutes on the books at the end of 2009; that number is now up to 32.
Virginia is a leader in P3 activity. The commonwealth passed the Public-Private Transportation Act nearly 20 years ago and followed it up with the Public-Private Education Act, which allows school systems to partner with private real estate development companies to finance state-of-the-art facilities by using publicly owned underutilized assets for commercial activities (e.g., building an apartment complex on city or county land). Virginia has built about 250 schools in the last decade using this model, and in 2002 the legislature amended the law to include infrastructure projects such as water facilities, prisons and hospitals.
Texas legislators cloned about 80 percent of Virginia’s language in its P3 transportation law, and passed another statute last fall clearing a P3 procurement process for social infrastructure projects. California and Florida also are active in the P3 market, and Indiana and Illinois are showing signs of expansion.
“No state has done zero P3s,” Norment says. “Some have statutes in place, which makes it easier. But others, like Michigan, have no statute on the books and P3s are still being done by taking pieces out of existing procurement code and putting them together to make it work.”
Though much of the industry’s focus to date has been on large-scale, high-dollar P3s in the transportation sector, Norment reports the most sustained growth is expected for projects in the $40 million to $100 million range. In addition to infrastructure, effective construction markets for the P3 procurement process include military housing, courthouses and higher education. Water reclamation is another hot market, as municipalities struggle to deal with drought, population growth and noncompliant wastewater facilities.
Even something as simple as a parking lot could be a good candidate for a P3. “They aren’t expensive to build and are easy to operate and maintain, but many cities don’t have the cash or expertise to implement new technologies,” Norment says. For example, the private sector can offer solutions such as variable pricing based on time of day or customer notification (via text) of a pending meter expiration—all of which can generate revenue for the locality. Solutions-Oriented Proposals
Even with all these potential market opportunities, it’s important to view P3s as a viable option, not a cure-all for government budget crises.
“P3s aren’t the right solution for every single problem. On a monthly basis, we talk to someone about a P3 and then decide another procurement model would be better based on the project details,” says Jeff Boehm, vice president of Howard Shockey & Sons, Inc.
, Winchester, Va. “We weigh whether there’s a solid public need for a project, and there has to be political will on the public side to sell P3 as the best model.”
Howard Shockey & Sons, a 116-year-old general contractor with about 150 employees, has completed 10 P3 projects since learning about the procurement method at a seminar held by Associated Builders and Contractors’ Virginia Chapter
in 2002. With a solid foundation in design-build and joint ventures, and a division devoted to real estate development, “the thought of being able to partner with an owner was right up our alley,” Boehm says.
After the seminar, Howard Shockey & Sons started talking to its municipal and criminal justice clients to see what work they needed done. Now, the firm regularly pursues, submits proposals for and builds two to three P3 jobs at a time—most of which cost between $10 million and $80 milllion.
The company currently is involved in a P3 with the city of Harrisonburg, Va., to design and build a $14 million transportation maintenance facility that will service school and municipal bus fleets. With financing already lined up, the city opted to solicit proposals under the P3 procurement method. Howard Shockey & Sons teamed up with RNL Design, which specializes in transportation facilities, to provide design-build services for the 14-month job. The project is slated to break ground in August.
Howard Shockey & Sons also puts together unsolicited proposals, which are allowed under Virginia’s P3 statute. In this case, a contractor or developer identifies a need within a city or county and submits a conceptual proposal explaining how a P3 could solve the problem. Confidence in the public need for the project is crucial, as extensive upfront preconstruction services, including schedule analysis, pricing and schematic designs, are included in the proposal at the contractor’s and designer’s risk.
“We don’t just throw out proposals haphazardly,” Boehm says. “We really qualify our public partners so we know they’re serious.”
Proposals also can carry a pretty hefty non-refundable deposit (up to $50,000) that the public entity uses to compare bids. “Contractors that want to get into this arena need to understand there are some significant upfront costs, but those costs allow public entities to review a variety of creative proposals and pick the best solution,” Boehm says. “A public entity can say no to a proposal at any stage. That’s part of the risk, but also part of the glory in terms of getting the best solution.”
Contractors must expand their financial expertise to succeed in the P3 market. Boehm estimates 90 percent of the public owners Howard Shockey & Sons deals with on prospective P3 jobs want to hear about funding options. “Cities and counties have great needs, but little money,” he says. “Construction costs are comparatively low and interest rates are low, so the private sector can bring a lot of financing power that the public side can’t take advantage of.”
Colin Myer, managing director of project finance for FMI
, Raleigh, N.C., recommends contractors become familiar with potential lenders and various financial marketplaces, but they don’t need to fully immerse themselves in that world to the point of becoming a financier. He cites the two principle sources of financing as insurance companies, which are best positioned to fund long-term P3 projects, and the Federal Highway Administration’s Transportation Infrastructure Finance and Innovation Act program
, which provides loans, loan guarantees and standby lines of credit for surface transportation projects of national and regional significance. It’s also valuable to know the major players in real estate investment trusts, pension funds and infrastructure funds.
“Contractors don’t have to be intimately familiar with these areas, but they do need to find a partner with the skill set to look at different markets and financing techniques and offer a range of alternatives,” Myer says.
—FMI, “Public-Private Partnerships: What You Need to Know”
- Build expertise through strategic joint ventures. Choose partners carefully.
- Plan comprehensively for project complexities. Make smart business decisions.
- Understand the cost and risk barriers to entry. Deep pockets and a thick skin are required.
- Be strategic about which projects and owners to pursue.
- Get in the door early. Start building relationships with public officials and finance representatives now.
- Collaborate and innovate.
Choosing partners wisely is the most critical step a contractor can take toward being successful in the P3 market. Teams usually consist of a general contractor, designer, engineer, operations/maintenance firm, someone who can source financing, and a legal representative or accountant who can structure the joint venture agreements.
“Look to partner with firms that have experience in the P3 world,” Myer says. “All P3s start with a request for qualifications. The question isn’t about your bid or your price, it’s about who’s on the team. As such, all members need to have substantial résumés.”
Adds Norment: “These are complex contractual relationships. Your local lawyer probably doesn’t have the experience a P3 requires. Find a firm or consultant that has actually done this before.” For AEC teams that have no collective experience in the P3 market, Norment recommends hiring an advisor who can offer expertise and guide the P3 process (but not be a formal member of the joint venture).
Internally, contractors must have a portfolio rich in successful design-build projects, as well as personnel focused on business development outreach to government agencies, public works officials, existing clients and other industry members with P3 experience.
“Listen to what’s going on in the community. Can you perceive a need? If so, it might deserve an unsolicited proposal,” Norment says. “You don’t always have to wait for an RFP to be issued. Get ahead of the curve.”
It’s also crucial to promote a collaborative workplace culture that emphasizes customer service, as P3s are structured to elicit a less adverserial environment than hard bid jobs. Not only must contractors learn how to act as a partner with owners, but supervisors must be trained to communicate more effectively with subcontractors in the field.
“Being involved in P3s is more fun because everybody has the same goal and works together to achieve that goal,” Boehm says. “That’s why P3s are gaining such popularity; we’re seeing good experiences with public owners.”
Team Members: The city of Dallas, acting as project owner, partnered with developer Matthews Southwest and Omni Hotels & Resorts to develop a convention center hotel that would help revitalize the economic and cultural landscape of downtown Dallas. 5G Studio Collaborative was the design architect and BOKA Powell was the architect of record. On the contracting side, Balfour Beatty formed a joint venture with H.J. Russell & Company and Pegasus Texas Construction. All three firms previously worked together on the Dallas/Fort Worth International Airport.
Financial Arrangement: Dallas taxpayers voted to approve the project, which was financed with $477 million in city-backed bonds. If the hotel fails to bring in enough revenue, taxpayers will have to foot the bill. However, Omni reports it is on target to meet its first-year debt obligation.
Project Specs: The $546 million luxury hotel broke ground in September 2009 and opened in November 2011, finishing nearly a month ahead of schedule. The 23-story hotel covers 1.14 million square feet, featuring 1,000 rooms and more than 80,000 square feet of meeting space and ballooms, plus a spa, fitness center, pool and restaurants. It is connected to the Dallas Convention Center via a skybridge.
Green Goals: The city mandated LEED Silver certification, but the project team went above and beyond to achieve LEED Gold certification. Sustainable elements include water-efficient plumbing, reflective roofing materials, a 25,000-gallon cistern and a rain garden that aids runoff. Guest rooms are equipped to automatically activate lighting and HVAC systems when a room key is inserted; lights shut off and a preset temperature is activated when guests leave their rooms.