How to use this white paper:
This white paper can be considered independently or as part of HNTB's public-private partnership white paper series, written to reflect the milestones in the life cycle of a P3. These papers are not intended to be exhaustive works but rather to trigger ideas and questions of how the topic might be applied to your agency's program. To learn more about P3s, contact Scott Smith, director strategic initiatives, at ssmith@hntb.com, or Tim Heilmeier, program director Georgia Department of Transportation Public-Private Program, at theilmeier@hntb.com.

 

A P3 is an all-in-one contract

 

Public-private partnership contracts are vastly different from traditional design and construction contracts in that they incorporate all facets and phases in a facility's life cycle. A P3 groups those considerations into three main categories or components: legal/policy, financial and technical. Below is a brief description of each component, the associated risks and what an owner can expect from the respective adviser.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

^{HPPM = High-performance program management}

 

The legal/policy component
The ultimate goal of the legal/policy component is to define the long-term working relationship between the owner agency and the private partner, which can span 30, 40, 50 — even 99 years. In addition, the legal/policy component has another major purpose. It attempts to answer the question: What if one party doesn’t live up to its end of the deal? Here, the owner agency and private partner must anticipate the worstcase scenarios in each phase of the project's life cycle, and more importantly, the fair and appropriate mitigation of said risks. This exhaustive, yet mandatory troubleshooting exercise accomplishes three objectives:

 

• Safeguards the public's interest.
• Provides a baseline project risk profile and positions the deal as attractive to the private sector.
• Provides a sound foundation for both parties to succeed.

 

Major risks that fall under the legal/policy category include:

 

• Relinquishing control of tolls. In many P3 deals, the owner agency transfers to the private entity the right to toll a facility. In doing so, the owner agency relinquishes the right to determine when or by how much the toll is raised. The concern being the private entity can, and likely will, raise the rate as much as it can to make a profit and will drive away customers. This highlights the inherent tension between a revenue maximization model and a usage maximization model.

 

• Default. The worst-case scenario here would be if toll revenues fell below projections, causing the facility to go bankrupt and forcing the private partner to default on its obligations.

 

• Change. It is certain to happen over the course of the P3's lifetime. Political interests and elected officials will change. Leadership within the agency itself may change. Or, requirements that govern the owner agency could change. For example, a state may update its design and construction standards. How would such a revision impact the existing P3 agreement, and who is responsible for paying the additional or upfront costs the change in standards may cause? Further, when is the appropriate time for the private sector to implement those changes?

 

• Non-compliance. The risk being that one party fails to meet its contract requirements and how to address the noncompliance(s) without having to terminate the entire agreement.

 

Because P3s are highly complex transactions, it is in the owner agency’s and the public’s best interest to have expert representation in each of those categories to match the sophistication of the private sector's counsel. Ultimately, the owner agency is signing a large, complex contract that obligates the state to the partnership for years. As such, these contracts are best constructed by attorneys who synthesize input from the financial and technical advising teams, as well as the owner.

 

Owner agencies retain legal advisers to provide a range of services, including:

 

• Giving strategic counsel on navigating the legal framework or boundaries of a P3.
• Negotiating the final business terms with the private partner's legal counsel.
• Offering its perspective on commercial precedent.
• Reviewing enabling legislation, statutes and the constitution to determine what the owner can and cannot do.
• Drafting procurement documents.
• Capturing an acceptable risk profile in the procurement and concession documents.
• Providing counsel about insurance aspects, surety elements and other key factors.

 

The financial component
One reason a transportation agency considers a P3 in the first place is because a gap exists in its ability to fund a program or fund it according to a certain timeline. Thus, the financial component’s job is to:

 

• Determine the value of the transaction.
• Describe how the owner and public agencies will pay for the project and, subsequently, how much money the owner agency would need to contribute.
• Verify or refute on a value-for-money basis that a P3 delivery model optimizes the value to the public sector.

 

The main objective of the financial component is to understand the project's key valuation drivers — e.g., tolling policy (both pricing and operational) or availability payment (securing a revenue source and limiting government appropriation risk) — and then to establish policies and tools to capture the best and most value. Major financial risks include:

 

• Lack of demand. A proposed facility may have underlying traffic volume issues.

 

• Default. Each transaction will be structured based on a certain amount of debt and equity as the private partner tries to achieve the highest leverage possible on assets. The more debt in a transaction increases the risk of potential default if project revenues underperform.

 

• Future refinancing. The risk being whether the market will allow refinancing at the appointed time and at what cost.

 

For guidance in this area, an owner agency will retain a financial adviser. Financial advisers structure procurement documents to maximize the transaction's value. Specific financial services include:

 

• Leading the comparator/value for money analysis.
• Constructing ghost bid models to anticipate a project’s financability, the final bid amount and the amount of public subsidy needed.
• Helping to identify and apply for federal programs, such as private activity bonds or TIFIA loans.
• Monitoring the capital markets and banks to understand the cost of money based on any given instrument at any given time.
• Anticipating changes in the financial or insurance markets that could affect the dollars and cents of the deal.
• Stress testing and fine-tuning the travel and revenue study.
• Leading the financial negotiations with the private sector.

 

The technical component
The technical component outlines the duties of the contractor, covering all aspects of design, environment, construction, operations and maintenance. P3s typically are mega infrastructure improvement projects that are fraught with risks associated with construction, utilities, environmental issues, and the nature of the job itself. In keeping with the practice of hiring expert guidance, an owner agency will retain a technical adviser to help it navigate all technical aspects of the P3.

 

The technical adviser is a jack-of-all-trades role. It must understand the program in its broadest sense, at its deepest, most detailed level, as well as how the project needs to be delivered from multiple perspectives, such as safety and operations and maintenance.

 

Technical advisers provide such services as:

 

• Coordinating and managing budgets and schedules.
• Advancing technical due diligence.
• Estimating costs.
• Forecasting operations and maintenance expenses.
• Conducting traffic and revenue studies.
• Providing raw data to the financial adviser.
• Collaborating with the financial adviser to perform risk assessments and price risk.
• Generating technical documentation associated with the agreement and procurement.
• Assisting in developing the criteria necessary to evaluate the private partner's performance.

 

In addition, an iterative process occurs between the technical adviser, program manager (if different from the technical adviser), the traffic and revenue consultant and the financial adviser to understand the project's scope and balance the sources and uses of funds to identify and right-size the project.

 

Once the contract documents are written and advertised, the technical and financial advisers help select the private sector partner. From there, the owner enters the design and construction phases. At this stage, the legal and financial adviser roles diminish while the technical adviser stays on to oversee design, construction and, consequently, how the contract plays out.

 

Achieving continuity
While crucial to the partnership's success, the advising teams are, at the end of the day, only advisers, not decision-makers. That puts a heavy burden on the owner, who often is new to the P3 arena, but must know enough about P3s to ask the right questions and ultimately make a tremendous number of legal, financial and technical decisions. The task becomes even more complex when the owner realizes those decisions cannot be made in silos. If the ultimate goal of the P3 is traffic management, the project will take a different shape than if the goal were revenue maximization. The ramifications of just this one decision will influence the way the concession is legally structured, how it is financed, as well as the operational standards. Thus, the owner must understand and anticipate the potential domino effect of every decision it makes.

 

Some transportation agencies may be well-equipped to negotiate a sophisticated P3 transaction on their own. Other down-sized organizations that do not possess the often-required understanding of tolling, the internal resources, the subject matter experts or the program management software systems will require outside assistance. Without it, the organization will be unable to provide the proper organizational response, coordinate the three components and identify the right-sized project. Having this central figure in place is a signal to the private sector that the owner agency is credible and serious about achieving a successful partnership. For the purposes of this paper, we will refer to that central figure as the program manager.

 

The program manager provides cradle-to-grave continuity in forming the partnership and implementing it. In orchestrating and "living" previous P3 deals, an experienced program manager will possess a compendium of best practices and a comprehensive understanding of all the facets at play — political, business, legal, financial, technical and commercial. Having both telephoto- and zoom-lens perspectives of a P3, the program manager can help the owner agency see the whole picture and how decisions in one area will influence another area.

 

Functions of a program manager include:

 

• Analyzing project implementation and phasing.
• Developing revenue and cost estimates.
• Modeling preliminary financial feasibility.
• Performing traditional engineering services with a programmatic perspective.
• Identifying the technical risks, as well as high-level political and public stakeholder acceptance risks that can kill a program if not addressed early.
• Helping the owner administer the overall contracts through design, construction and beyond.
• Liasing with other advisers to balance sources and uses of funds to right-size projects.
• Assisting the owner in identifying candidate projects.
• Leveraging relationships with political, community and business leaders to open doors and keep them open.
• Facilitating communication between the public and private partners, so when issues arise, the two parties are accustomed to interacting and have a good rapport.

 

With help from a trio of advisers, an owner agency can create a legally sufficient document, crunch all the necessary financial numbers and achieve a technically sound project, but for the P3 to be successful, the owner must have a central figure in place to create continuity among the three components.

 

Additional resources
For more information about P3s or how to mitigate the risks presented in this paper, consult the following:

 

Scott Smith, HNTB Corporation
Director Strategic Initiatives
(816) 527-2425; ssmith@hntb.com

 

Tim Heilmeier, HNTB Corporation
Program Director Georgia Department of Transportation Public-Private Partnership Program
(404) 946-5710; theilmeier@hntb.com

 

Paul Huston, HNTB Corporation
Program Director Texas Department of Transportation
Interstate 35 Corridor Program
(512) 750-0310 or phuston@hntb.com

 

For a map of P3 activity in the United States, visit:
http://www.hntb.com/sites/default/files/P3_2011.pdf

 

Design-Build Institute of America
http://dbia.org

 

The Federal Highway Administration’s website on public-private partnerships
http://www.fhwa.dot.gov/ipd/p3/index.htm

 

InfraAmericas
http://www.infra-americas.com

 

Institute for Public-Private Partnerships
http://www.ip3.org/about-ip3.html

 

The National Council for Public-Private Partnerships
http://ncppp.org

 

For other HNTB-issued papers and viewpoints on P3s, visit HNTB.com.

 

HNTB Corporation is an employee-owned infrastructure firm serving public and private owners and contractors. With nearly a century of service, HNTB understands the life cycle of infrastructure and solves clients' most complex technical, financial and operational challenges. Professionals nationwide deliver a full range of infrastructure-related services, including award-winning planning, design, program delivery and construction management. For more information, visit www.hntb.com.

 

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