By Brian G. Lustbader
Our nation’s rapidly deteriorating infrastructure has spurred many states, municipalities and other public agencies to investigate new and innovative solutions to intractable procurement and construction issues. One such innovation that many jurisdictions are exploring is collaboration between public entities and private organizations, usually called public-private partnerships or P3s.
Schiff Hardin’s construction law group collaborates with the firm’s project finance, insurance, banking, franchising, and real estate groups in evaluating and advising our clients concerning this “new-old” approach to creating infrastructure and re-development.
The P3 concept offers many potential advantages. It promises greater access to financing sources. It affords the public sector an opportunity to minimize long-term debt, while allowing private sector experts to “think outside the box” otherwise created by public sector bidding constraints. Concession agreements establishing long term operational interests encourage developers to build projects of more lasting durability and relevance, based on their own self-interest.
P3s typically involve Design/Build projects, where a contractor/construction manager combines with a design team to design and perform all project work on a turnkey basis. Design/Build agreements are often viewed as a fail-safe mechanism to insure that projects are built on time and within budget. Frequently, however, that expectation is not met. As a result, even if the project is a “success” from the standpoint of one or more of its participants (such as the public agency involved), it is often the subject of continuing disputes and dissension among other project participants: the designer, the builder, the concessionaire, the investor. In some instances Design/Build projects are not successful for any of its participants. As is the case for other project-delivery systems, without coordinated and proper protections throughout the contract documents Design/Build can become a problem rather than the panacea it sometimes purports to be.
There is no “one-size-fits-all” P3. Indeed, there are as many variables and permutations to consider as there are potential projects. The overall concept is that project risks and rewards can be shared between public and private participants. Specific types of risks to be addressed include: (a) legislation; (b) government default; (c) project financing; (d) planning and design; (e) permits, approval, and actual construction; (f) operations and maintenance; (g) generating revenue from demand for use of the asset post-completion (e.g., highway tolls); (h) liability for “failure”; and (i) meaningful dispute resolution processes. Schiff Hardin’s practice groups collaborate regularly on managing such risks for our clients regardless of the nature of the project or the means of delivery, but we acknowledge – as must any law firm – that the P3 context adds interesting analytics and challenges to the mix.
P3 project delivery systems run the gamut from Design/Bid/Build, to Design/Build, to Design/Build/Finance, to Design/Build/Finance/Operate/Maintain. Within these general categories, there are strategic roles and risks that must be logically allocated among the public agencies and the private participant(s), including: (1) identifying the need; (2) proposing the solution; (3) financing the project; (4) designing the project; (5) constructing the project; (6) operating/maintaining the ultimate asset; and, finally, (7) post-agreement reversion of ownership of the asset — usually to the public. Public agencies are presumably accustomed to addressing items (1) and (7), but the entities involved in every aspect of the project can be either public or private (or some combination thereof), and the Design/Build agreement should carefully assign and account for the responsibilities of each participant. That isn’t so easy, especially given the fact that politics and public opinion sometimes interfere with a completely logical allocation of risk and reward when public agencies are involved.
Typically a form of Design/Build agreement is entered into with a private entity, thereby extricating the public agency from nitty-gritty details of design and construction while ostensibly allowing the public agency to cap the project at a fixed price. Indeed, public agencies often advertise that their Design/Build agreements are capped or fixed at a designated price, and that that fixed price assures that the project will come in at or under budget. As P3s are mostly touted for use on massive projects, usually valued in the hundreds of millions or billions of dollars, avoiding change orders can mean huge savings. But unless the agreement has been artfully crafted and the project carefully monitored, change orders can sometimes allow the project cost to exceed the ostensible cap. And the numbers can be staggering. For that reason, sophisticated contract drafting, closely coordinated with the financing and concessionary aspects of the project, and close monitoring with hands-on project controls, are needed to assure that any proposed changes or potential disputes are kept to an absolute minimum. Without such safeguards, costs may far exceed the amounts budgeted for the project, thereby dissipating the financial gains that were originally expected. At Schiff Hardin, we provide sophisticated, artful drafting of agreements and project controls during performance in order to maximize the chance that a P3 project will succeed.
In short, while the P3 mechanism can be a valuable project delivery option (and sometimes the only option), care must be taken in all aspects of planning, contract drafting, implementation and oversight to assure that the goals of the client are met.