Public-Private Partnerships for Financing Public Improvements — The Potential Good, Bad and Ugly

Image by digitalart via FreeDigitalPhotos.net

I commend to your reading the current issue of NC Construction News, which includes this feature article on public-private partnerships (“PPPs” or “P3s”).  As those who regularly follow this blog know, I’ve dedicated a fair amount of cyber-ink recently to the utilization of P3s in the construction of public facilities (particularly highways); after reading the linked article, my thinking on the subject has coalesced around this admittedly simplistic notion: P3s have enormous potential for good, for bad and for ugly, and it likely will be up to the General Assembly to determine which of those adjectives ultimately will apply to this unique project financing and delivery system.

The Good.  Over the next 20-25 years, North Carolina’s infrastructure needs are almost certain to vastly exceed available public dollars to pay for them.  By way of example, the 2009 Report Card issued by the American Society of Civil Engineers (“ASCE”) estimates a shortfall of about $30 billion in road construction needs alone (quick sidenote: the ASCE has released updated 2012 “report cards” for certain states, and I’ll be keeping my eyes open for North Carolina’s latest grades).  Bringing private money to bear in the financing of public facility improvements means that critical infrastructure needs get met sooner, more available construction work, fewer unemployed construction workers, more yellow steel in the field, a more robust state economy and a higher quality of living for North Carolina’s citizens.  As an engine that can drive substantially increased construction and economic activity in North Carolina, P3s simply cannot be ignored by the leaders we send to Raleigh every two years.

The Bad.  If not appropriately authorized or regulated, however, P3s have the potential to deprive in-state contractors of a meaningful opportunity to bid on major public capital improvements.  As Dave Simpson, NC Building Division Director for Carolinas AGC, notes in the story linked above, the unsolicited bid provisions of Virginia’s P3 statute do not provide competing contractors with an adequate amount of time to prepare and submit rival proposals for particular improvements.  While addressing present and future infrastructure needs as quickly as possible is undoubtedly a critical policy goal, our state leaders should not seek to meet that objective while sacrificing the transparency, price competitiveness and level playing field provided by the sealed bidding process.

The Ugly.  It is often said that cash flow is the lifeblood of the construction industry.  Payment assurance statutes — i.e., mechanics’ liens on private projects and payment bonds on public projects — create leverage to keep the cash flowing and protect downstream contractors and suppliers when a project participant gets in a financial bind.  But since P3s are neither fully public nor fully private enterprises, it’s conceivable that neither existing lien nor bond statutes would apply to P3 projects.  The American Subcontractors Association has identified this blindspot in a letter published in ENR last month.  As the General Assembly grapples with appropriate P3 authorizing legislation, it would do well to follow the lead of the Texas and Maine legislatures, which require payment bonds on P3 projects.  Otherwise, the default of a key player on a P3 project could have disastrous cost and scheduling implications for those left behind to clean up the mess.

P3s are not only making waves here in North Carolina.  The Washington Post’s “Wonk Blog” had a great post about public-private partnerships this past Sunday, and I highly recommend it for more background reading on the subject.

Further, I’m interested in hearing your perspectives on the potential benefits and/or pitfalls of P3s.  Feel free to send along a comment to keep the conversation going.