There is no doubt public infrastructure projects have gotten a reputation for being expensive and time consuming. The president’s recently proposed 2018 budget identified Private Public Partnerships (P3 or PPP) as one means to stretch federal dollars used for infrastructure projects.
Infrastructure decline and the need to rehabilitate it along with the need to, in some cases, expand current infrastructure has created a tension between the needs and available funding.
Carrie Cox, Marquette 1998, is assistant general counsel with the Wisconsin Department of Transportation, Madison, where she concentrates her practice on transportation issues including, construction, contracting, eminent domain, utilities, and regulatory compliance.
P3 is a means to mitigate some of that tension, by invoking unique project delivery and/or infusion of private funds into public infrastructure. But P3 isn’t a panacea, and there are issues to be aware of when considering participation in a P3 project.
In the first instance, P3 involves private companies working with the government on a (typically) large project that will serve both the public and the private entity. A first challenge is to marry the often diverse objectives of both. Add to that the myriad other potential issues, and the decision to engage in P3 work will require thought and consideration.
One such challenge is having the authority to engage in P3. Much of the P3 activity and the enabling legislation to date centers on highway infrastructure. Because of this, additional or modified statutory authority will be required for nontransportation projects in some states.1
The National Conference of State Legislatures has compiled a chart of enabling legislation for P3s.2 P3 procurement methods have been legislatively authorized in 33 states and Puerto Rico (as of May 2015 reporting by the Conference).
In Wisconsin, the legislature has authorized the Department of Transportation to enter into build-operate-lease or transfer agreements,3 as well as authority for design-build on several specific bridges.4 Note that it is not unusual for a state to authorize P3 only for specific projects.5 Design-build in general and public-private financing (such as commissionaire agreements) have not been authorized as of this time.
Contracting itself is certainly a primary challenge to P3 projects. Public infrastructure is typically heavily controlled by the public entity commissioning the work. This approach can stifle alternative procurement methodologies.
Alternative contracting such as design-build or contract manager/construction manager (which is really a subset of design-build) call out for coordination and collaboration between the public and private partner, a side-to-side versus top down relationship if you will. Some of the contract provisions that facilitate this approach include addressing quality and value (versus strictly cost), use of the construction review process to expedite schedule, and incentives for meeting milestones (versus penalties for failing to meet deadlines). None of those are typical in design-bid-build arrangements.
In addition, the relationships between the parties are distinct. In design-build, the designer and constructor are essentially partners so that relationship needs to be fleshed out via legal entity formation or sub-contracting agreements. In any case, the owner will have only one contract and including the “third” entity in the equation will be essential to garner expected benefits.
Contract Change Orders
Contract change orders can present some challenges as well. The basis for construction change orders differ from management of design issues in construction under design-build. Typical construction-type change orders aren’t likely to be affected (such as differing site conditions or changes to scope). However, when the constructor and designer are one in the same, the availability of change order for design issues won’t be available and could have cost implications to the contractor. If not anticipated and accounted for the costs could prove difficult to manage.
Insurance is another area of consideration. Designers and constructors are insured differently. Exclusions for the counterpart service in typical policies needs to be addressed as well as the impact of anti-indemnity laws.6 If the entities are one and the same, a determination of how to insure will be important.
Finally, projects with federal funds7 attached may require adherence to federal laws, implicating cost and timing of the work.
Becoming More Common
There is no doubt that P3 will continue to be a part of public infrastructure work and that this work will become more and more common. More recently, projects such as water infrastructure and facilities, energy systems, public buildings (for example, the Long Beach Civic Center), and even broadband networks have emerged as candidates for P3 projects.
The opportunities could be many only limited by one’s imagination. The key to success in the P3 arena is identifying and managing the unique challenges of this work.
1 For example, in Indiana separate statutory sections authorize general facility P3s and those relating to highway facilities. Ind. Code Ann. §§ 5-23-1-1 to 5-23-7-2 and §§ 15-1-1 to 8-15-3-35 respectively.
2 Public-Private Partnerships for Transportation: A Toolkit for Legislators.
3 Wis. Stat. § 84.01(30). Note that under Wis. Stats. § 13.48(19), the Department of Administration has the authority to use alternative contracting methods, which is a form of P3.
4 84.115 (authorizing design and construction of a bridge using design-build in Door County) 84.11(5n).
5 Alaska Stat. §§ 19.75.111 to 990, Fla. Stat. Ann. § 343.875.
6 Wis. Stat. § 895.447.
7 Financing at the federal level may include typical highway funds or other federal financing programs for P3 projects such as Private Activity Bonds, and Transportation Finance and Innovation loans and grants.