ULI Los Angeles News

Public private partnerships — coming to a civic building near you

By Allan Mackenzie and Frank Zerunyan

A variety of public private partnerships (PPPs) have been created in the United States for transportation and utility infrastructure projects, but PPPs for social infrastructure — civic buildings, schools, libraries, police departments, courthouses and hospitals — have been slow to materialize, especially at the state and local level. That is due in large part to Government agencies’  unfamiliarity with the delivery method, their focus on front end versus lifecycle costs, lender intransigence, and their long-standing use of tax-exempt financing mechanisms. However, all of that is rapidly changing as the need to replace aging infrastructure continues to drive the use of alternative delivery methods.

Recognizing the huge market for PPPs for social infrastructure, several trends are under way. Credit Tenant Lease lenders and small infrastructure funds are slowly moving into the public market, offering taxable financing rates that are increasingly competitive to tax-exempt rates, enabling government agencies to avoid bonded indebtedness and benefit from the greater flexibility offered by a private loan. A recent quote by a reputable infrastructure fund for an AA-rated municipality was within 10 basis points of tax-exempt rates, yet it provided greater flexibility, lower front-end costs and greater ease of issuance.

Also, major infrastructure capital groups, such as Macquarie Capital Group, are examining methods of streamlining the PPP process for smaller municipal projects to attract more overseas lenders; without such action, the front end processing and documentation costs associated with a PPP project would render many smaller projects both infeasible and unattractive to the major overseas lenders most familiar with funding such projects.

At the same time as a greater number of financing options are becoming available, more government agencies are considering lifecycle costs as a critical factor in selecting a delivery model. PPPs tend to cost less over the project’s lifecycle because long term performance is stressed over front end cost unlike in conventional design/bid/build delivery, and the private sector bears much of the operating and capital replacement risk.. In fact, a study (Arthur Andersen, Enterprise LSE (2000), Value for Money Drivers in the Private Finance Initiative, report from Arthur Andersen and Enterprise LSE Commissioned by the Treasury Taskforce, Office of Government Commerce, London) showed lifecycle savings of 17 percent over conventional projects.

Budget and schedule adherence is another benefit: a UK National Audit Study report showed that 73 percent of conventional projects were delivered over budget and 70 percent were late, whereas 22 percent of PPP projects were over budget and 24 percent were late.

Finally, states, such as California, are legislating to open the field to integrated project delivery models, and public agencies, increasingly aware of the emerging trend and market sector, are more open to solicit design, build, finance, operate and maintain bids for social infrastructure. One of the benefits of the structure is having a single point of accountability for the design, construction, financing, operation and maintenance of a facility, in that the private sector project sponsor bears responsibility for all these elements and includes in its initial bid the lifecycle costs of the project; conventional delivery methods have one or more designers, a builder, a financier and a number of operational contractors, none of whom bear any responsibility for the other’s work effort since each contracts separately with the public sector client,  Also, the private sector can assist the public sector under exclusivity agreements until a clear project is defined, entitled, committed and funded, at which time the public sector’s front-end costs can be reimbursed.
With huge infrastructure deficits, both public and private sectors need to look for cost-effective and timely methods of designing and building social infrastructure. PPPs can be one such method as long as an open and true partnership is developed between the sectors.

Allan Mackenzie and Frank Zerunyan are partners in P3 Solutions Group, LLC, a Los Angeles-based integrated P3 delivery organization emphasizing the development and financing of social infrastructure. Zerunyan also is an adjunct associate professor at the University of Southern California, School of Policy Planning and Development.

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