Public-Private Partnerships & Development Finance

Overview

Public-Private Partnership (P3) as a financing tool is a complex yet useful agreement between a public agency and a private-sector entity. A public agency, for example municipalities, states, or authorities, is able to transfer some of the inherent risk of project development by collaborating with private developers, construction and engineering firms, or infrastructure investors who have the private resources and expertise which the agency lacks. There are two common types of P3 involving asset monetization; the first occurs when a public asset is transferred to a private entity for a one-time fee or future revenue; and the other is infrastructure investment constructed by a public entity then given to the private business for operation.

Within the United States, governments face budgetary limits in the context of infrastructure in need of improvement. In 2017, the American Society of Civil Engineers graded the state of US infrastructure as a D+, and estimated around $4.5 trillion was necessary by 2025 to improve national transportation and additional infrastructure projects across many sectors.

By leveraging private expertise, this tool is primed for assisting in infrastructure improvements through assisting government agencies otherwise not able or wary of taking on this challenge alone. As of 2018, P3 enabling legislation exists in over 39 states including Puerto Rico. Most relate to transportation, and are under the authority of a state's transportation department.

Typical projects for P3 include:

Transportation Projects (e.g. toll roads, bridges, and parking)
Water and Sewer Infrastructure projects
Energy Related Projects
Social Infrastructure (e.g. schools or university projects, and municipal buildings)

Process

Research and assessment are appropriate initial steps in the P3 process. A public entity must determine whether the project is best delivered in collaboration with a private partner, or by traditional public methods. If collaboration is deemed appropriate, a net benefit analysis can be done to determine the best use of any public funds to be used in the project. Other analyses such as supply and demand analysis, cost analysis, and environmental assessments follow to set parameters and anticipated outcomes.

Second, project and advisory teams initiate and guide the preparation stage of the P3 process involving drafting a P3 agreement.

Procurement, or a bidding process to select an appropriate private partner follows. Legal agreements and final financial structuring lead the team toward execution of the project.

Project implementation usually requires management from the public side while the private entity does the actual construction. As previously mentioned, the final occupancy and use of the infrastructure, if not a public good, can be retained by the private entity.

Characteristics

Both private and public entities share the potential risks and rewards of the project.
Public leverage of private sector skills and resources.
Public entity retains some control over the project though either ownership or provisions.

Case Studies

CampusParc

In 2012 Ohio State University entered into a $483M deal with private Australian investment company QIC Global Infrastructure in a public-private partnership resulting in the creation of CampusParc. CampusParc manages one of the largest university parking systems in the United States, leased to QIC for a total of 50 years. Ohio State continues to the influence the system in several ways including the number of parking spaces and what kind of spaces are available.

CampusParc works alongside QIC, one of the largest parking-management firms in the country in LAZ Parking, and OSU, and has invested millions of their own dollars on infrastructure improvements on campus. The initial payment of nearly $500M, expected to provide a return of over $3B in investment earnings, is being used to fund student scholarships, increase staff grants, and support Campus Area Bus Service among other benefits. CampusParc sees benefit from the ongoing cash flow from parking permits and citations. Ohio State was the first major public university to engage in such a partnership.

Little Caesars Arena

Little Caesars Arena, home of the Detroit Red Wings and the Detroit Pistons, in Downton Detroit, is the final product of a P3 with the City of Detroit, Wayne County, State of Michigan and Olympia Development of Michigan. Olympia Entertainment, a partner with Olympia Development, leases the land while the Arena is owned by the Detroit Downtown Development Authority. All profits from arena events are subject to revenue sharing with the city, averaging $7M per year for Detroit.

In planning the project, further modifications to the P3 structure were made by the Detroit Downtown Development Authority and Palace Sports & Entertainment, LLC to refinance the project to allow for the development of new facilities for the Pistons. The arena is just a small portion of a larger “Detroit District” project being undertaken by this same partnership to revitalize this section of downtown Detroit.

P3 Legislation

As the United States continues to grow, building and maintaining the nation’s infrastructure is becoming more of a critical and overwhelming task. Almost all US states have some form of legislation pertaining to public-private partnership finance, oftentimes in the form of promoting infrastructural development.

New Jersey recently enacted bipartisan legislation which seeks to promote economic development within the state through P3 agreements for building and highway infrastructure projects. Bill S-865 allows all government bodies to enter into a P3 with a private entity who would assume the financial and administrative duties for the project.

As a part of this bill, projects require that workers involved are subject to the New Jersey Prevailing Wage Act. The bill also allows for a small number of transportation projects that require private investment and public support.