Markets

P3 Infrastructure Projects: What the Private Sector Needs to Know

State and local governments, many already facing financial constraints prior to the impact of the COVID-19 pandemic, shoulder the greater share of the infrastructure burden, and this is not likely to change.
By Charles Renner
November 6, 2020
Topics
Markets

The American Society of Civil Engineers estimates that the United States needs to spend $4.5 trillion by 2025 to fix the country’s infrastructure. To understand the scope of this challenge, that figure is roughly one-quarter of the country’s annual gross domestic product and would easily dwarf annual spending in key areas such as health care.

State and local governments, many already facing financial constraints prior to the impact of the COVID-19 pandemic, shoulder the greater share of the infrastructure burden, and this is not likely to change. (See “Paths to Funding” on p. 22.)

However, infrastructure spending provides benefits to the private economy that can far exceed the initial investment, even though these benefits can be difficult to measure and quantify.

“The rate of return to infrastructure investment is large; the median and average estimates of a review of dozens of studies on infrastructure indicate that each $100 spent on infrastructure boosts private sector output by $13 (median) and $17 (average) in the long run,” says a 2017 Economic Policy Institute meta-study.

Federal, state and local governments will increasingly seek to use such projects to provide stimulus to struggling economies post-pandemic and, to make these projects a reality, private participation through public-private partnerships (P3s) could begin to address the backlog of projects and aid in economic recovery.

The Benefits of P3s

The use of P3s as a model for delivery of infrastructure projects has expanded beyond surface transportation projects—which traditionally dominated P3s—to vertical projects, such as government facilities, student housing and stadiums, among other types.

Such growth can be expected to continue, despite (and in some ways due to) the impact of COVID-19. An increased number of P3 infrastructure projects can be expected for the following reasons:

  • Need. Major infrastructure investment was necessary before the impact of COVID-19 and remains so.
  • Economic Benefits. Not only are infrastructure projects necessary, but the benefits of such projects include stimulus of local economies.
  • Financial Constraints. Particularly given the state of municipal finance due to the COVID-19 epidemic, U.S. states and cities will need to be creative in marshalling the requisite resources, and the private sector has an important role to play in restoring infrastructure assets.

With no shortage of P3 RFPs in the second and third quarter of 2020, public entities seemingly will continue to turn to alternative delivery models in the current market.

The University of Idaho and the University of Maryland, for example, have issued RFPs for redevelopment of campus energy utilities. Cities in Illinois, Oklahoma and New Mexico, to name a few, have issued RFPs for mixed-use projects.

Given the expected continued increase in use of P3s as a delivery model in the wake of COVID-19, more construction companies may wish to take advantage of new opportunities.

How to Find Your Role in P3s

The first thing to remember regarding P3s is that the concept is broad and variable. P3s are best viewed as a spectrum of alternative project delivery models falling between the traditional design-bid-build approach and outright privatization. The roles available for private-sector participants, therefore, varies according to what elements of P3 are incorporated into a final agreement.

On a basic level, private sector participants fill four main roles: the developer, the financier, the operator and the contractor. Depending on a company’s core competencies, that company may fill only one, multiple or all four private sector roles.

If a company can perform multiple roles, this flexibility will make it an attractive partner to the public sector. Consider core competencies and whether the contractor can develop further capabilities to provide flexibility for public partners.

For instance, in 2017, Garney Construction, based in Kansas City, Missouri, stepped out of its usual shoes to fill the financier role with the Vista Ridge Water Supply Project, a water pipeline project (the largest P3 water project in North America) in San Antonio, Texas, after the initial equity participant experienced financial distress. In completing the project as an owner, Garney bet on itself—it assumed substantial financial risks in winning the $927 million project, but its successful management of the project allowed the project to proceed and get closer to yielding returns on the investment.

Likewise, Clark Construction, one of the largest commercial and civil contractors in the country, along with affiliate Edgemoor Infrastructure and Real Estate, was able to fill multiple roles in the $350 million development of the University of Kansas’ Central District Project. Edgemoor served as the master developer of a 55-acre tract, but also provided financing, design-build and operations for the assets, which included a 285,000-square-foot integrated academic science facility, a 26,500-square-foot student union, 1,250 beds of student housing in three buildings, a dining center and approximately 2,000 parking spaces.

For smaller firms, creating strong teaming relationships with larger companies that can fulfill multiple roles and provide the flexibility the public sector requires will put them in position to capitalize on the continued growth in the use of P3s in all segments of infrastructure development.

by Charles Renner

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