Public-Private Partnership statute offers benefits to municipalities and communities
| 8:44 a.m. August 31, 2023
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In Florida and other growing communities, the demand for public infrastructure and facilities continues to surge. Yet—for many critical construction projects—limited funding and resources are keeping plans on the shelf.
Fortunately, if you represent a municipality or other local government, the State of Florida provides an innovative method to address the needs of your community: the Public-Private Partnership (P3) statute.
What is a P3 project?
A P3 can generally be described as a contractual agreement between a public agency and a private entity that is used to deliver a facility or a service essential to the public. The P3 approach has historically been used for larger, “mega” projects. However, lawmakers in Florida and other states have recently amended legislation to apply to smaller, “social infrastructure” projects, like city halls, parks and recreation facilities, libraries, airports, police and fire stations, medical facilities, schools, and parking and electrical vehicle charging facilities.
In the P3 framework, public and private sector entities share the functions of design, build, finance, operate, maintain and transfer—and along with them—the risks and rewards. The partnership leverages the skills and assets of each party to improve project outcomes for everyone.
For example, a public agency could hire a private entity to design, build, and perhaps finance (fully or partially) their capital project. This entity could also operate and/or maintain the facility for a designated period, then transfer it to the public agency under a pre-negotiated arrangement. The exact structure and distribution of responsibilities differs for each P3 project, depending on the project’s goals. The common denominator for these projects is that they all offer a direct benefit to the public.
Advantages of a P3
Under procurement laws like Florida’s P3 statute, Meyer Najem has developed public projects with dozens of communities around the country. This experience has highlighted several key advantages to public entities and their projects, whether large or small.
Construction projects inherently involve some degree of financial risk, whether from volatile materials pricing, schedule delays, or unforeseen conditions on the job site. Differing site conditions, issues with drawings, or other challenges can result in change orders that affect the project fees. For most public projects delivered under a design-bid-build model, or traditional procurement, the taxpayer foots the bill.
For public entities, perhaps the most compelling advantage of a P3 is the transfer of financial risk from the public to the private sector. The private partner is typically more capable of managing the risk—and motivated to do so. As an example, Meyer Najem has delivered 60+ P3 projects, and—outside of increased scope requested by our public partners—hasn’t had a single change order issued.
Streamlined, Collaborative Delivery
In a P3, the typical project delivery functions are procured from a single entity. In the traditional design-bid-build model, separate procurements are administered for each service. Administering multiple, separate contracts not only puts a strain on limited public resources, it can also hinder collaboration and alignment.
While each firm on the design and construction team offers its own specific skills and expertise, each has its own objectives, as well. The P3 framework aligns the objectives and breaks down silos, keeping the best interest of the public at the forefront. Each firm is collectively incentivized to deliver a high-quality project that achieves mutually beneficial outcomes. In addition, the P3 model promotes early collaboration between design and construction disciplines, one of the keys to a successful building project.
The P3 model removes some of the wild cards that can impact a project’s schedule and budget.
Under a traditional, design-bid-build model, a public agency hires a team to design the project and generate an initial budget. The agency makes its financing arrangements made based on this budget, then puts the project out to public bid. If the resulting bids exceed the budget, delays can ensue as the project is redesigned or financing is reconfigured.
With a P3, the agreement establishes the schedule and budget, and work proceeds according to those targets. The private partner follows the upfront standards and objectives provided by the public partner but takes full responsibility for both design and construction. The public gets what they want, when they want it.
Private sector financing for a P3 can be provided through multiple structures, normally in some form of project-specific equity and debt. One such structure is the build-operate-transfer (BOT) model. In this approach, the private partner takes ownership of the project for a fixed period. The private partner’s team designs, builds, and operates the facility, transferring it to the public entity at a later date. The financing for this model has low issuance costs, no debt service reserve, and no prepayment penalty. And when you factor in the cost savings from transferring selected risks to the private partner, the overall life cycle costs of the project will typically be lower under a P3 approach.
Projects completed under a Public-Private Partnership framework offer public entities an innovative way to deliver critical “social infrastructure” projects. With efficient risk transfer, a streamlined project delivery process, assurance of schedule, and innovative financing approaches, the delivery method offers a practical solution when public financing isn’t an option. By assembling an experienced team of professionals to carry out the work, public entities can have confidence that the outcome will be delivered on time and on budget, exceeding expectations.