Consulting P3’s to Raise Funds for Infrastructure Projects
In the United States, the number of P3s (Public-Private Partnerships) is expected to grow substantially in the coming years as governments increasingly turn to them as a means of funding public infrastructure works.
There are many benefits of using P3s for not only financing, but also the delivery of a project, and that’s why it’s expected that the market will continue to shift in this direction.
“The World Economic Forum ranks US infrastructure behind that of most other comparable advanced nations such as Singapore, Germany, and the United Kingdom. And it will get worse: from 2013 to 2020, cumulative US infrastructure needs are estimated to be nearly $3.5 trillion. Fiscal constraints limit how much governments can do on their own, and much has been written about how public-private partnerships (P3s) can be a viable option for filling this financing gap. But most overlook P3s’ ability to address many of the nonfinancing pain points in infrastructure development and delivery.”
With a strategic, well-thought-out approach utilizing P3s, governments can potentially mitigate the schedule delays and overruns that currently plague infrastructure project delivery. Allocating shared risk, clearly delineating governance, applying all the industry’s best practices, integrating resources, and establishing a life cycle-long perspective for accountability and costs can lead to improved project delivery for all public infrastructure projects.
In general, institutions face many recurring challenges when it comes to capital project portfolios, and many are unrelated to financing. However, P3s can potentially address these problems, which include:
- Unclear responsibilities. When there is a lack of clarity about project governance and decision making, it often hinders and delays the effective delivery of the project. P3s can address this challenge as they require the owner of the project to document and negotiate its performance standards, responsibilities, risk-allocation mechanisms, rewards, and penalties in a commercially realistic and transparent way.
- Poor alignment with strategy. Implementation can be delayed during a project and support can wane when a project is not backed and supported with a strategic and robust commitment. With P3s, however, each investor is throughly screened and vetted from a broad portfolio of potential investors. They have a high degree of public visibility as well, which results in a higher project commitment that is aligned with the sponsor’s strategy.
- Insufficient optimization. When it comes to project features, sponsors often fast constraints when it comes to the methodologies, standards, and exposure that already exist. These limits of traditional approaches constrain them from practicing the last best practices, which lessens the effectiveness of the project’s delivery. However, with P3s, they are encouraged to innovate by solving problems in new ways throughout the bidding, design, construction, and long-term operation of the project.
- Lack of the right mindset. The traditional project delivery process usually leads to poor alignment between a project owner and the project contractor. With P3s, concessionaires choose to adopt the perspective of the sponsors, owners, or both. The reason is that they have performance incentives and they also have an obligation to transfer assets in a good state in the end.
- Lack of discipline. Many large infrastructure projects suffer when it comes to competing time frames, objectives, and resource commitments. P3s, however, allow a project to achieve clarity in the delivery and operational accountability. They do so by defining and aligning contractual obligations while also integrating the functions, design, procurement, and supply chain management aspects of the project.
- Poor project controls. Having many different participants and systems can lead to competing versions of progress that differ from the actual truth. This leads to wasted effort spent reconciliation and a strained partnership between the project’s participants. P3 concessionaires, however, usually deploy a project-wide system and considerable resources in order to identify and mitigate deviations from the plan. This results in better contingency planning and a much faster response to any changes that are made.
- Low initial cost mind-set. The traditional approach to projects usually awards contractors who offer the lowest construction bid, but this fails to consider the project’s full cost-of-life-cycle operation and the maintenance costs of the future. However, by definition, P3s focus on the long-term and total cost of owning the project, including the operation and mechanism costs, at the time the contract is awarded. This incentivizes the concessionaire to optimize the initial capita expenditure and ongoing operating expenditures in order to maximize the actual value.
- Poor resource optimization. Many times, project owners suffer from having an inadequate supply of internal resources. Without these resources to help them ensure the progress and daily decision making regarding the project are completed in a timely manner, projects suffer delays and added costs. On the other hand, P3s help address this big challenge by transferring the delivery responsibilities to a highly capable team with many resources and then incentivizing them to perform based on the contract’s terms.
With all of this in mind, it really seems like a no-brainer to choose P3 funding for your next infrastructure project. However, actually receiving P3 funding can be a bit of a challenge in itself.
If you are seeking P3 funding for a public infrastructure project, the first thing you should do is figure out the details of the project and the overall cost target you are looking for. In other words, consider the up-front and on-going costs (and budgets) and also think about your time frame of completion and other constraints.
A Public-Private Partnership will ultimately involve funding coming from multiple sources, which may include Equity Contributions, Debt Contributions, Bank Guarantees, Bond/Capital Markets Financing, and/or an Intercreditor Agreement. With your project laid out, it is safe to begin approaching the financing process and comparing quotes so that you can seek out the best solution for your project.