Business Opportunities Grow Through Public Private Partnerships

Business opportunities are growing for private companies to partner with public entities to fill a void caused by the continuing downward pressure on government budgets combined with mounting needs for improvements to roads, sewers, schools and other public assets.  Public-Private Partnerships (otherwise also known as PPP, P3s, or Performance-Based Infrastructures) are mutually advantageous arrangements allowing public needs to be met with private funding and management.  According to Wayne O’Neill in a recent interview, “Public private finance is coming to this country.  It is already worldwide.  Financing projects that way through pension funds and long term financial interests and not around a transaction but around a covenant will be another major option in how major projects and scopes of work move forward.” 

In Public Private Partnerships, the private sector accepts responsibility to design, build finance, maintain and in some cases operate infrastructure (greenfield or rehabilitation and expansion).  Facilities are then managed over a long term concession period of 25-35 years with pre-defined hand back conditions.  A single entity then contracts with a sponsor entity who in turn contracts with consortium partners.  In Performance based contracting arrangements, payment from a sponsor only begins upon completion of construction and on-going payments are subject to deduction for failures in service delivery.   Another notable characteristic of P3s is that the price is firm for the term of the concession.

Wayne O’Neill, CEO of Wayne O’Neill and Associates, and Larry Beasley, COO of Wayne O’Neill and Associates, recently attended the P3C Conference.   While interviewing Wayne O’Neill, he shared his perspectives:

The most provacative presentation at the conference was led by Mike Marasco, Director at The Canadian Council for Public Private Partnerships and senior executive with the Plenary Group where he plays the dual role of CEO of Plenary Health and CEO Plenary Investments.  In his presentation entitled, “Structuring Performance Guaranteed Facilities / Infrastructure in the US,”  Marasco stated that in the U.S., many people still think P3 is a normal development or another financing opportunity.  However, Marasco clarified, “Performance Guaranteed Facilities (PGF) is not about the financing because In most cases, there is no “off-book” treatment for public sponsors.  Government and non-profits borrow at a lower cost.  It’s not about sales and leaseback or asset sales (“privatization”).  It’s not about a Real Estate transaction requiring private sector ownership of the asset.  It’s about Performance Based RISK Transfer where the facility performance over a 25-35 year time period is guaranteed.  The partner is repaid through incentive-based availability of the asset and can be a direct payment from the owner or through user fees (tolls) or a combination of both.”

Most speakers at the conference are still hanging onto the looser interpretation of mingling private and public funds as to what P3 really means.  In reality, Wayne believes that P3 on the world stage means Performance Risk Transfer.

Government entities present at the conference are still promoting their sites, promoting their interest in private capitalization, and not really seeing the public private finance structure as a transformative tool to place-making.  (Placemaking means that it is not just about the building, it’s creating a destination.)  For example, you may have a retail area, how do you mix it in with hotels and education to draw people into the area to interact  In other words, …How do you pull people into an area and give them multiple reasons to interact with each other?)

In the US, we like the concept of projects as opposed to the concept of assets.  We like the concept of financing or real estate transfer as opposed to the concept of an agreement to make a facility wrap itself around the core purpose of the facility.  If you are a university, you are in the education business, not in the facilities business.   If you are a hospital, you are in the business of healing people, you are not in the facilities business.  All P3s do is transfer the risk from designing, building, financing, operating and maintaining that facility which is a different concept than just designing the building and selling  the business.  We are used to transaction driven thinking.  Public Private Finance is longer term, 25-35 year thinking, and is asset driven by for example, the life of the building or road.

Asset management thinking focuses on a broader perspective by examining what it takes to operate a facility over a 40 year period of time.  We tend to focus on just a piece of the pie– design and construction — and what is best and the cheapest way to get that done.  P3 focuses on the whole cost of a facility over a longer term–including operation and maintenance, refurbishment (what does it take to keep a facility functioning around the core of its intent), planning and transition –along with design and construction.

This longer term, non-transactional thinking is emotional for US markets because we don’t tend to think this way.  Case in point would be billions of dollars needed for deferred maintenance with no built in plan to pay for it.   Asset management thinking is scary for politicians too, as was evidenced by a presentation by George Burgess, former Miami-Dade County Manager and current Chief Operating Officer at Becker & Poliakoff.  Prior to co-chairing the firm’s Public Private Partnerships Practice (PPP) team, Burgess served as Miami-Dade’s County Manager and was one of South Florida’s most experienced public administrators who served one of the longest tenures in County history.  In that capacity, he managed the day-to-day operations of one of the largest and most sophisticated metropolitan regional governments in the United States, with nearly 30,000 employees and a budget of over $7 billion and oversaw one of the country’s most diverse local and metropolitan government service product lines in America.

Under Burgess’ leadership the County experienced an unprecedented level of public infrastructure improvements.  Burgess was the driving force behind numerous signature projects including the launch of the new state-of-the-art retractable roof baseball stadium for the Florida Marlins in Little Havana, the Port of Miami tunnel, and completion of the internationally acclaimed Adrienne Arsht Center for the Performing Arts. He also conceived, developed and led the campaign to secure voter approval for of the $2.9 billion Building Better Communities General Obligation Bond Program, which has and will continue to fund literally hundreds of vital public infrastructure projects. Mr. Burgess also guided the development of the South and North Terminals at Miami International Airport, as well as the elevated people mover system and Metrorail extension connecting the airport to downtown Miami.   Prior to his appointment as County Manager, Mr. Burgess held senior roles with both the County and Miami-Dade Public Schools, the fourth largest school district in the United States.

P3s gained momentum in Texas during the last legislative session with the passing of Senate Bill 1048 – the Public Private Facilities Infrastructure bill. That bill provided improved opportunities for the use of Public-Private Partnerships at the state, county, city and school district levels. The law is focused not on the big transportation mega-projects, but smaller projects such as education and infrastructure and allows for unsolicited projects, as well as solicited projects.   So a private partner would do well to develop a strategy for pursuing P3s. Then, make contact with the entity that has a need.

Mary Scott Nabers, a former Texas railroad commissioner who runs Strategic Partnerships, a government affairs, business development, and procurement consulting firm, calls it a “go to market strategy.” Figure out what you have to offer, and then learn what public entity needs it. “Draw up a tactical plan for both sides,” she said. “It’s a strategy just like you do your business strategy, or your marketing.”

P3s are diverse and cover a wide variety of projects. Some infrastructure and facilities projects currently in the works plus “softer” P3 projects include:

• $1.75 million to replace the vehicle maintenance facility for the Capital Area Rural Transportation System (CARTS)
• $9.3 million to renovate, remodel and selectively demolish part of the Psychology Building at Texas State University
• In San Antonio, the Alamo Area Council of Governments will consider proposals to design and build a website for the Alamo Area Development Corporation.
• InGenesis, a San Antonio-based medical staffing firm, won a $249 million federal contract to provide 569 medical, program management and administrative staff at 21 Immigration and Customs Enforcement facilities.
• The Texas Lottery is a P3. A private company owns the lottery and gives the state the money back.

In addition, P3s are found in every state, so opportunities abound.

Any public-private partnership must consider value for money, or the costs of a facility for the total life cycle of that facility– the entire capital cost, the operations cost, the utility cost, and the periodic refurbishment cost.

Since politics is involved in a P3, the best thing a private entity can have is a political champion for the project.  “Look at what John Sharp (Chancellor of the Texas A&M System) is doing at A&M,” said Nabers in a recent Texas CEO magazine. “He’s championing all of the outsourcing and privatization in P3s and he’s doing it for financial reasons. He’s bringing the parties together by giving benefit to both sides.”

7 Components to Every Successful P3

1.  Trust & Professional Respect– essential components to success

2.  Excellent Communication – Nabers said, “Public officials need to be more open about the procurement process.  They need to be saying, ‘We’re not going to tell you how to do it, but understand what the end result needs to be and come talk to us,’”

3.  Commitment to Total Success & Total Oversight by the public sector entity all the way through the process.

4.  Stakeholder Buy-In from the beginning – In the public sector, there are many stakeholders and everyone of them needs to have buy in to make it successful.

5.  Political Acceptance and Political Support – “The politicians will kill it if it starts to go bad,” Nabers said. “If you get them involved early, they will stay involved and help make it a success.”

6.  Specific Contract & Thorough Financial Analysis   According to Nabers, “P3s live or die on one thing – either they can make the financial case or they can’t.”  Nabers urges public sector friends to use someone who understands how to bring these two cultures together and make it work.

7.  The Executive Summary – key to proposals. “What you always want to do on your proposals is put your value proposition and your one overlying message in the executive summary,” said Nabers.  Members of the evaluating committee might each concentrate on different aspects of the proposal, but they will all see the executive summary.

As the need to strengthen and stimulate local economic activity grows, more and more public officials,  municipal leaders and public sector agencies are seeking private sector businesses to develop, capitalize and operate  public private partnerships to build roads, repair bridges, manage new projects, construct and repair facilities and purchase new technology.

If we educate ourselves and listen, P3 possibilities will bloom and blossom.