The P3 Opportunity/Challenge
In the face of continued declining budgets at the federal, state, and local levels, combined with the increasing need to update and improve our aging and insufficient infrastructure, the growth of public-private partnerships (“P3s”) in the United States has significantly increased. While traditional public-private agreements are often created for roads and highways, similar arrangements have begun appearing in the vertical commercial real estate development field. This market entrance may provide new opportunities for NAIOP and its members, though not without challenges.
A P3 is essentially a contract between a private consortium/concessionaire and a public entity to design, build, finance, operate and maintain (or some combination thereof) a public or public-purpose facility over an agreed time frame, in exchange for a reliable long-term revenue stream to provide a return on the private sector’s investment and operation. It combines elements of risk-transfer, a life-cycle delivery system and private capital to provide alternatives to the public sector’s shrinking budgets.
The traditional exposure of P3s in the U.S. market has been with major “horizontal” infrastructure projects involving roads, bridges, ports and the like. An example would be a P3 contract to build or improve and operate/maintain a highway and, many times, to install and maintain a user fee system to assist with the annual revenues required to pay the private consortium. “Toll roads” have been the more familiar term for this example.
Infrastructure, in the broader sense, goes beyond just roads and highways. It include water treatment facilities, courthouses, civic centers, health care and hospital facilities, schools, and student and affordable housing, among others. All are facilities that support a governmental purpose, and require vertical construction knowledge and an expertise within a P3 framework.
At all levels of government, P3s are being debated and considered as a viable option. Still, challenges remain, and there needs to be more political will to pursue the P3 alternative delivery system to overcome the fear of this yet unknown “privatization” tool. Overcoming perceptions that the public-private arrangement is back-door “sell-off’ of public facilities to private industry, or whether such tools will result in windfall profits to the private sector at the expense of the public taxpayer is sometimes difficult, but all too often necessary. Issues of transparency and subject-matter knowledge have proved obstacles that inhibit the growth of P3 or P3-like development programs at a time when both our public horizontal and vertical infrastructure is in historic need of updating, replacement and expansion.
Most of these problems can be solved with a combination of transparency, education, and involvement of our elected leaders. There is a current move to form “Centers of Excellence” to provide just such subject-matter knowledge to government officials on these matters. These centers provide officials an understanding of P3 programs and show how they result in a true win-win-win for the public-at-large, elected officials and the private sector. Further education is still needed to explain the entire process of a P3 transaction. Beyond this, however, a concerted advocacy effort can help to advance this needed tool to support new solutions for our country’s aging and inadequate infrastructure needs. Supporting this concept will provide greater opportunities for our NAIOP members to become involved in a field where their expertise is sorely needed.
Jim Mulligan is a Partner with Husch Blackwell LLP’s Real Estate, Development and Construction team, and is a member of NAIOP’s Corporate Board of Directors and of NAIOP Colorado’s Board of Directors.
