For many U.S. construction businesses, the term “P3” may conjure images of “the big catch”—much discussed but rarely seen, at least not at your fishing hole. While the public-private partnership model has long been used in international markets (by way of example, for nearly thirty years, the EU has averaged nearly seventy P3 project completions annually), its adoption in the United States has been more restrained. The pace of adoption in the United States is, however, accelerating to the point that all U.S. construction companies ought to understand the basics and how a P3 differs from traditional government contracting.
Whereas the traditional governmental contracting model entails the governmental body contracting for and financing the design and construction of a project until completion, in its simplest incarnation, a P3 structure is comprised of a public player with a public need partnering with a private player or consortium of players to deliver a project with the private player arranging the financing, building the project and then maintaining the asset for some period of time into the future. Needless to say, P3 is a project delivery model that is as complex as it is sensible in accommodating many mutual but multifaceted interests.
P3s have been used in the United States for developing a wide variety of public projects including hospitals, healthcare facilities, highways, schools and other government buildings, sporting venues and airports, as well as other hard and soft infrastructure works. Of these projects, while sports venues have oftentimes been the most visible and controversial partnerships, highway projects have been the largest.
The historical impetus for P3 structures arose out of limitations on public financing sources and perceived advantages in pursuing development through access to the best of both public and private capital markets. Tasking a private partner with the financing of a public works project limits public debt while shifting financial risk to the private partner. Over time and with experience, U.S. private partners now manage that financial risk early and often in P3 projects. Indeed, the allocation of financial risk is the epicenter in the negotiating, structuring and managing most such P3 projects.
With that back drop, the scope of a P3 project requires that the private partners be able to coordinate joint venture, lobbying, finance, construction and operational capabilities into their teams. Depending on the size and nature of the project, these capabilities may be locally available or invite national and international players into the process. Even in those instances in which large national and international players assume leadership of private consortiums, experience with recent projects in Florida, Virginia and Colorado have led to a trend whereby the large project leader relies heavily on local partners and consultants to navigate local politics, legal issues and the construction community.
An example of what may become a P3 is the South Mountain Freeway project in Phoenix, Arizona. As of today, 33 U.S. states have enacted specific statutes meant to enable, if not encourage, the use of P3 structures for expanding the nation’s transportation infrastructure. Although Arizona adopted such legislation in 2009, to date this development model has been used only once by the Arizona Department of Transportation (ADOT)—and then for a facility in Flagstaff. The South Mountain Freeway project has become the subject of P3 speculation in light of an unsolicited 2013 proposal from a private consortium. Following up on that proposal, ADOT issued a Request for Information in February 2014. Interested players ought to take notice—some observers believe this request to be a precursor to an RFQ in coming months.
The South Mountain Freeway project is a 22-mile, eight-lane highway project expected to cost nearly $2 billion. Multiple efforts have been made to put the project into motion over the past 20 years but financing, as well as political, tribal and environmental concerns have complicated the endeavor. While a project of this magnitude is sure to invite interest from the usual suspects of mega-project development, the host of longstanding local impediments to this project’s development suggests that success for any private consortium will require a strong and influential boots-already-on-the-ground presence.
For this particular project, the executive summary of the 2013 unsolicited proposal itself indicates that the consortium intends to provide “significant subcontracting and job opportunities for local contractors to ensure the greatest benefit to the local economy and taxpayers.”
P3 projects in general, and the South Mountain Freeway project in particular, will also require a significant local legal presence. Regardless of whether the team leadership is local or national, given that the P3’s structure is driven by allocation of financial risk, all of the partners must understand that financial structure and the implications of local issues thereon. That being the case, local counsel can aid the process by bringing a strong financial and construction practice to bear in guiding the P3’s local legal team with respect to the variety of legal issues which will necessarily arise in a real estate project of this nature including:
- real estate and land use law;
- construction contracting and disputes;
- eminent domain proceedings;
- obtaining rights of way and easements;
- environmental concerns;
- design and pre-construction agreements;
- prime construction contracts and general conditions;
- subcontract agreements;
- labor matters;
- contracting with local governmental authorities; and
- in this particular case, significant tribal implications.
Our review of successful P3 projects suggests that legal support is critical early on, primarily because of the compounded risk to numerous parties sharing the financial risk and vesting more significant manpower and overall effort to achieve success on a major project. In many cases, a P3 becomes a company’s principal undertaking over a period of many years. Waiting to assemble a local legal team for a P3 could bring about delays in a demanding schedule and cause unwanted stigma under the ever-watchful public eye. Companies may also find fewer local attorneys ready and able to provide the expertise needed for P3 support, which requires a matching skill set and a team of attorneys, paralegals and agents experienced in preparing, handling and recording key legal documents.
A local P3 legal team can help guide the process by focusing on the fine print to help companies meet vital deadlines. Thus, it never hurts to identify and weigh your options early on and consult your local counsel on P3 projects before it’s too late.