By Todd Bryant
When a federal or state government is seeking to offset some of the cost for a public works project, they can choose to engage in a public private partnership, or P3, project. According to the US Department of Transportation’s Federal Highway Administration, P3s “are public-private agreements in which the private sector takes on some of the risks and rewards of financing, constructing (or leasing), and operating and maintaining a facility in exchange for the right to future revenues or payments for a specified terms.”
For the government, the appeal is to harness the expertise and efficiency of the private sector to a project. For the private sector, the incentive to invest their own assets is to receive a share of the profits.
How do P3’s differ from other public works projects?
In a traditional public works project, a government agency has designed a project. The specific parameters have been set, and bids from private firms are solicited. Once the lowest responsible bidder has been chosen, they undertake the project. Once it’s been constructed, the public agency is responsible for the maintenance of the project.
A P3 project differs in that the private party enters the project earlier, and is capable of greater decision-making power. The bidding process works in a similar way as with conventional public works projects. However, rather than coming on at the construction stage, the private entity can participate in earlier stages like design and financing or later stages like operation and maintenance of the now-completed project.
Ultimately, these are the 5 points at which a private entity can engage in a P3 project: design, financing, construction, operation and maintenance.
Who are the participants?
P3 projects are often referred to as concessions, because the government agency concedes additional aspects of the project to the private sector. Consequently, the private actor is often referred to as the private concessionaire.
The public partner is often a traditional public agency: federal or state governments, state governors, local governments or the US Department of Transportation.
Private concessionaires are often equity investors, bondholders, commercial lenders, or concessions companies. Concessions companies are often established as Special Purpose Vehicles (SPVs), which speak to the size and complexity of projects.
What’s so special about SPVs?
One of the most compelling reasons for making a public-works project a P3 project is the size and cost of a project. Often, there isn’t enough money in a government budget to pay for the entire project. This is the sort of situation that usually creates a P3 concession.
According to the Comptroller of the State of New York, “an SPV — sometimes known as a consortium, a sole purpose entity or a project company — might be created by a construction company working with a private bank, an engineering firm and a number of smaller firms, to design, build, finance, operate and maintain new infrastructure. Each participating company contributes expertise and resources to the project while the SPV structure limits the exposure of the parent companies to potential losses.”
Protect Your Investments
For a P3 project, which typically involves large sums of money, contract bonds are a must. Contract bonds, often incorrectly called construction bonds, cover a variety of categories of three-party agreement. For a private entity seeking to engage in a P3 project, bid and performance bonds will be first on the list. These surety bonds guarantee that a contractor can fulfill the terms of their contract and are the first step to becoming a concessionaire.
Todd Bryant is the President and Founder of Bryant Surety Bonds. He is a surety bonds expert with years of experience in helping contractors get bonded and start their business.