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January 22, 2019

Few of us would be surprised to know that the American Society of Civil Engineers (ASCE) recently gave our nation’s aviation infrastructure a near failing grade. Newspaper articles have compared La Guardia Airport, for example, to a third world country. According to the ASCE, however, aviation is just one of the 16 classes of U.S. infrastructure that needs attention. Cumulatively, they earned a D+, which is defined as “poor and at risk (for failure).” ASCE estimates that raising the grade to a B, which is defined as “good, adequate for now,” will require an investment of more than $2 trillion before 2025.

© 2019 ASCE's 2017 Infrastructure Report Card

Source: © 2019 ASCE's 2017 Infrastructure Report Card. Note: Arrows represent changes from the 2014 Report Card.

At the same time, federal spending for infrastructure has remained stagnant. Local and state governments have struggled to close the gap and our nation’s structural foundation is costing us billions in traffic delays, congestion, wasted time and fuel.

Public-Private Partnerships (P3’s)

It’s clear that we can no longer wait for elected officials to prioritize funding, so the Public-Private Partnership, or P3, has emerged as a way to bring private money and expertise to bear in the public sector.

In the case of La Guardia Airport, the Port Authority of New York and New Jersey executed one of the largest P3’s in U.S. history to develop, finance, operate and maintain the Central Terminal Building, frontage roads and other improvements. Additionally, the State of Pennsylvania’s Rapid Bridge Replacement Program and Michigan’s recently announced I-75 modernization program is another example of the public sector harnessing private sector financing and innovation to develop new infrastructure.

P3 Benefits

While government plays an important role in infrastructure delivery, competing priorities for financial resources can limit the development and maintenance of our infrastructure. That’s where P3’s can add the most value – by leveraging their resources and expertise to deliver high-quality, sustainable, cost-effective solutions that benefit the public. Further benefits include:

  • Increased Cash Flow – Private financing can reduce demands on the government’s bonding capacity and free up funding for other important public services and projects.
  • Transferred Risk – Construction, revenue and operations and maintenance risks are assumed by the P3 operator.
  • Expedited Project Delivery – Payment contingencies for on-time and on-budget delivery and the long-term performance of the asset are inducements for performance.
  • Incentivized Operations and Maintenance Performance – In a P3, the ongoing operations and maintenance is the responsibility of the P3 operator and subject to meeting certain agreed upon standards. Failure to meet the standards can result in financial penalties.

P3’s will never be enough to supplant government funding, nor are they appropriate for all projects. As it’s often said, P3’s are not “free money.” They are complex, highly negotiated agreements that can often span 30 years or more; however, they are proving to be a viable means of delivering infrastructure and can play an important role in getting our infrastructure grades up.

If considering a P3 arrangement, be sure to begin planning early, have a defined communication, stakeholder and procurement strategy, as well as financially model the expected outcome to both parties.