The Pacific Northwest Economic Region (PNWER) hosted a webinar on traditional funding mechanisms for large-scale infrastructure and transportation projects on May 10. Partnering with private funding sources has been successful in Canada and some U.S. states, but a lack of regulation and guidelines has left U.S. entities unsure about how to use this method.
The moderators and PNWER Transportation Co-Chairs Bruce Agnew and State Sen. Chuck Winder of Idaho explained that PNWER’s Innovative Finance Taskforce focuses on encouraging states and provinces and regional jurisdictions to find innovative strategies to fund projects.
Jonathan Trutt, Executive Director, West Coast Infrastructure (WCX), discussed Innovations in Infrastructure Finance as Performance-Based Infrastructure (PBI).
He said that PBI is applicable across all sectors, and consolidates responsibility for the key aspect of a project’s full lifecycle into a single, performance-based contract with a private partner. This includes the design, construction, and long-term maintenance.
The goal is to inform decision making, and PBI’s were created to replace Public-Private Partnerships (P3’s). With PBI’s the private sector is included in the financing and operations, the assets are publically owned, and cost overrun and performance risks are shifted substantively from the public to the private sector. The emphasis of this delivery method is on the full life cycle costs.
By focusing on outcomes and infrastructure as a service, project managers specify the outcomes, but not the methods and means of achieving them. This creates a competitive process for organizations to obtain the desired outcome, and more if possible. This approach also incorporates the institutional knowledge of all parties involved.
Another key concept with PBI’s is risk. The PBI approach generates a conversation about risk, and which entity is best suited to deal with the risk.
Trutt added that, for the right projects, PBI’s are better value for the public. For instance, under traditional methods, if there are unexpected costs, the first response is to defer the maintenance, which only shortens an asset’s life cycle. But, with a PBI, the design-build component sets the construction price and gives the responsibility for the performance costs to the private sector.
With a turn-back component, the asset has to be in a certain state, or there will be financial penalties. This way the private sector has incentives to properly maintain a project.
Private financing should be considered for the following reasons:
- Debt constraints – if a city is in a lot of debt, which impairs its ability to invest, or a city does not have access to credit.
- Tax-exempt private financing.
- Mixed private financing with extremely low-cost public financing sources.
- Security for long-term performance and faithful execution of turn-back provisions.
PBI and private financing deal, specifically, with debt and equity. Debt can be tax exempt for water and transportation projects and also have bankruptcy protection. Equity has no bankruptcy protections and is more expensive than debt.
Agnew added that using PBI instead of P3’s is better for state legislatures because, with P3’s, misperceptions often occur about infrastructure ownership. But, with PBI, the ownership is still clearly with the public. It also works with the recently passed Fixing America’s Surface Transportation Act.
Steve Fleck, Executive Vice President, Stantec stated that P3’s challenges if something is being done in the best way that it should be done. A P3’s are long-term performance-based contracts between the public sector and business to deliver goods or services. They are a combination of design, build, operate, finance, maintenance, and operations within one contract.
P3’s should be used because they combine public and private strengths, driving innovation and pushing on the accepted norms of cost financing. When you have private finance at the table, you have the oversight of private equity managers to drive the project to the performance level that was bid. Meaning, if they want to get return on their equity, they need the project to meet the performance outcome that was set.
Fleck then discussed concession agreements (CA’s), which recognize that the agreement is based entirely on the contract. The private party has no ownership, the asset the concession owns is the contract.
Concession agreements (CA) – recognize that the agreement is entirely based on contract. There is no ownership, the asset the concession owns is the contract.
Given this, overall P3’s are long-term relationships with partners and owners based on large complex projects that foster innovation and drive efficiency. Non-contract solutions between the two parties need to be based off negotiations that occur around the table because there is never going to be a perfect contract.
Fleck added that one key aspect the parties need to be comfortable with is operating at a velocity that most are not used to.
The public partner’s main role is the comprehensive bid package, which should make a point to how prescriptive the process is going to be.
One key point is to recognize Canada’s success with P3’s, and how this can be used as a model to overcoming some of the barriers posed by restrictive state laws.