Country / Language

The Rise of Public-Private Partnerships: Are You Ready?


4/25/14

The public-private partnership (P3) model represents a momentous shift in how public projects are coming online. With crumbling infrastructure and severe financial constraints, a growing number of states are passing legislation that sets the stage for P3s to build everything from roads and bridges to schools and hospitals.

In February, CohnReznick sponsored the 2014 Public-Private Partnership Conference in Dallas, an event attended by more than 750 economic development and industry professionals. Jack Callahan, Partner and CohnReznick’s Construction Industry Practice Leader, moderated a panel on the challenges contractors face when they undertake these P3 projects, specifically with regard to accountability and transparency.

“This is a whole new world,” Callahan says. Unlike in the traditional procurement model, in a P3 model, the government agency typically shifts a majority of responsibilities, including financing, to a private entity.

As discussed during the conference, the following highlights the significant opportunities the P3 model presents to the construction industry, government agencies, and financial institutions, as well as the risks inherent in such a partnership.

Opportunities and Risks for Developers and Contractors

As the traditional pipeline of public projects has dried up, contractors that have historically focused on public sector work are looking for the next opportunity. To date, most of the P3 projects that have been carried out in the United States have undertaken large civil infrastructure projects, such as the Goethals Bridge, which connects New York and New Jersey.

Understandably, large national and international construction firms have dominated these large projects. Mid-sized and local contractors might ask themselves, “Is there a place for us at this table?” The answer is “yes”— if you know where to look and how to manage the expanded scope of responsibilities and risks.

In addition to civil infrastructure projects, there is a significant need for new or renovated “social” infrastructure, such as student housing, conference centers, courthouses, stadiums, and a variety of other asset classes, many of which can utilize tax credits as expanded upon below. A growing number of P3s are targeting these social infrastructure projects, which typically fall well within the skills sets of local contractors.
 
P3s can represent a way to recapture that niche. However, a P3 is a completely different ball game for contractors, one in which their responsibilities go far beyond bidding and building. Before jumping into such a partnership, contractors should make sure they understand all of their risks. Key questions to consider include:

  • Do you know how to perform economic modeling and to procure the long-term financing necessary to complete a design-build-finance-operate-maintain model (or another type of model)?
  • Do you have the financial backing to cover the higher up-front costs required by such a model?
  • Does your company have a transparent culture that will withstand public scrutiny?
  • Do all of the partners in the special entity embrace the same level of transparency?
  • Does the P3 entity have policies and procedures in place to comply with standards of transparency, both those required by the contract today and those that may be introduced in the future?
     

P3s can either provide a profitable avenue for growth, or they can deteriorate quickly due to misaligned expectations. Take the time now to thoroughly plot the risks, exposures, and opportunities inherent in these deals.

Opportunities and Risks for Government Agencies

Ideally, a P3 model enables a federal, state, or local agency to execute a project efficiently while transferring risks onto the private sector, all without having to raise taxes. However, it is never possible to transfer 100% of the risks.

Public owners should undertake a thorough cost-benefit analysis to understand the long-term economic impact this project will have on the agency. Some key questions public owners should ask before heading into a P3 include:

  • What are the commitments and contingencies from each party?
  • What will be the agency’s financial commitment if the project does not perform as expected?
  • How does that potential long-term cost compare to what it would cost the agency to operate and maintain the facility itself?
  • Are there appropriate provisions in place to ensure the facility will be in good operating condition at the end of contract term?
  • Does the P3 entity practice a culture of transparency, and do the policies and procedures in place comply with those standards?
     

A P3 can be an effective way to deliver valuable civil and social infrastructure to an agency’s constituents. However, without proper attention to detail, the project can end up being a financial drain and a black mark on any public figure associated with it.

Opportunities and Risks for Financing Partners

For lenders, investors, and other entities with capital to deploy, P3s represent an opportunity to realize a strong return on investment. However, P3s are also longer-term investments than most, with a typical project spanning 20, 30, or even 40 years. Investors and lenders need to evaluate their P3 partners as thoroughly as they would an equity partner. Some specific questions financiers should ask themselves and their design-build partners include:

  • How long has your organization been in business?
  • Is the entity sufficiently capitalized? Does it have the financial stability to carry the project through the entire lifecycle of the contract?
  • What is the company’s succession plan? Have current owners groomed the next generation of leaders?
  • If the contract or government agency does not require a bond, do contract provisions allow regular access to contractor’s financial reports?
  • What are the risks if construction goes over budget, or if the launch is delayed?
  • What is your exposure if the project experiences fraud or misconduct?
     

Tax credits are one form of creative financing that gave been used for many years in the economic and community development context for what is referred to as “social infrastructure.” They connect to the world of P3 on numerous levels. "Tax credits can be seen as a classic expression of a public-private partnership in the way that risk and opportunity transfer occurs," says Ira Weinstein, Co-Managing Principal of CohnReznick’s Baltimore office. Weinstein, a member of the Firm’s Construction Industry Practice, spoke at the P3 Conference on how to get the most out of tax credits such as the Low Income Housing Credit, the Rehabilitation Credit, and the New Markets Tax Credit. While tax credits are a form of financing and not a particular asset class, the financing and the asset classes financed are at the intersection of a public-private partnership.

For years, investors have been using these tax credits to defray costs of affordable housing, rehabilitation of historic properties, and investment in blighted areas. Tax credits shift the risks and responsibilities of a project to the private sector. The P3 model, as it has evolved, achieves the same goal through a different mechanism. “Tax credits set a precedent for the long-term success of public-private partnerships,” Weinstein says. Private sector investors can also benefit from tax losses generated by qualified nonrecourse financing, significantly increasing after-tax return on investment.

Ultimately, an investor or lender needs to be confident that the partnership will stand the test of time. The most important litmus test is to ensure that the reputation and corporate culture of these entities is in line with your own.

What Does CohnReznick Think?
If they succeed, P3s represent a remarkable opportunity to bring valuable public projects to market, more efficiently and more effectively than the traditional public bid model. Success, however, depends on the motivations of the P3 partners.

Beyond the contract that binds the partners of the P3 to one another, partners must also accept a social contract: to provide safe, attractive, affordable structures that will serve the community for years to come. If they succeed in fulfilling that contract, then P3s have the potential to fuel the construction industry and the economy for the next several decades. If they fail, then the fallout will reverberate throughout the construction industry and the economy.

Contact

For more information, please contact Jack Callahan, Partner and Construction Industry Practice Leader, at 732-380-8685, or Ira Weinstein, Co-Managing Principal - Baltimore, at 410-783-8328.

To learn more about CohnReznick’s Construction Industry Practice, visit our website.


This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Search Our People

Search Our People

Look ahead. Gain insight. Imagine more. Is your business ready to break through?

View our new TV commercial..

Industry Outlooks

Industry Outlooks

Gain insight into what is ahead for the Commercial Real Estate, Technology and Middle Market Private Equity industries.

READ MORE

Learn about our upcoming events.

READ MORE

Working With Us

Working With Us

What makes CohnReznick different from others in our profession? And what should our clients come to expect when working with us? The answer is The CohnReznick Advantage. Contact us to learn how we can out the CohnReznick Advantage to work for your business.


People

The value of an organization is determined by the skills and qualities of its leaders. With more than 280 partners serving clients nationwide, CohnReznick is renowned for the diverse experiences, knowledge and backgrounds of its leadership.

Learn More

Services

We align our services in three segments: Accounting and Assurance, Tax, and Advisory. This approach allows us to provide holistic solutions to complex business problems and to seize upon opportunities requiring an integrated approach.

Learn More

Industries

Accounting and tax issues different significantly based on an organization's industry. We provide clients with expertise in nearly two dozen industries – we know the opportunities, the obstacles, the competitive landscape.

Learn more

Insights

CohnReznick professionals are thought leaders in their industries. Clients benefit from relevant and timely economic, legislative and industry insights that can keep them a step ahead of competition.

Learn More

Global Reach

Our involvement in the Nexia International network of firms enables us assist our clients wherever they do business-providing local expertise and connections wherever they needed. Nexia is comprised of 20,000 professionals operating in over 100 countries.

Learn More