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Public-Private Partnerships: Navigating the Ins and Outs of P3s

October 3, 2017

Overview

Earlier this year, the Public-Private Partnership (P3) Committee of the Washington Capital Projects Advisory Review Board (CPARB) submitted draft legislation that would make significant changes to Washington’s current statutory structure for public-private partnerships. A P3 is a contractual relationship between a public agency and a private sector entity. While their use in Washington has historically been limited and fraught with complications, they are successfully used in many other places to complete wide-scale education, transportation, and civic works projects.

Common P3 Mechanisms

Many types of P3s reflect a broad range of approaches to the balance of power between the public and private parties engaged in a project.

Design-Build (DB). Design-build is the most commonly used P3 delivery mechanism. In a DB, the private partner provides both the design and construction of a project for the public owner. The public owner retains control of the assets and is responsible for operation and maintenance, but the private entity takes on much of the risk associated with the construction process.

Design-Build-Operate-Maintain (DBOM). DBOM is a project delivery method in which the public owner enters into a single contract for the design and construction, and the maintenance and/or operation, of a public-private facility for a set period of time. Financing is secured by the public sector, and the public owner retains ownership and significant oversight of the operations through terms defined in the contract.

Design-Build-Finance-Operate-Maintain (DBFOM). In a DBFOM, the public owner enters into a single contract for design, construction, finance, maintenance, and operation of a public-private facility over a contractually defined term. No public funds are appropriated to pay for any part of the services that the private partner provides. Instead, the private entity uses a variety of debt leveraging mechanisms, grant funding, or equity investments to finance the project.

Benefits and Drawbacks of the Public-Private Partnership

Proponents of P3s argue that creating systems to incentivize and leverage private spending on public-benefit projects alleviates cost pressures and premiums associated with public projects—like prevailing wage, environmental and labor regulation, and stringent public bid requirements. Opponents argue that allowing private entities to avoid those requirements provides a form of corporate welfare at the expense of the taxpayers. The proposed legislation attempts to find a balance between cost, speed, and risk-shifting mechanisms while still supporting Washington’s commitments to prevailing wage, labor standards, and public bidding.

Washington’s Proposed Legislation

The draft bill, written by a committee of diverse stakeholders, including representatives of public owners, contractors, trades/labor, academia, and others, is intended to overcome hurdles and make P3 projects more available to public entities on a variety of potential projects, while maintaining open and fair competition and emphasis on Washington’s high labor standards, upholding mandatory procurement and contract considerations, and promoting participation by minority-owned and disadvantaged business interests. The draft bill includes the following key provisions:

  1. Value‐based procurement. To procure a P3 project, the public owner must use either a single-step Request for Proposal or a two-step Request for Qualification/Request for Proposal process.
  2. Express “opt‐in” requirement. Public owners are not prohibited from using other project methods; the P3 statute only applies if the owner expressly chooses to implement a project using these standards.
  3. Contract requirements.Requirements include basic project parameters and technical requirements, maximum term, property interest/ownership, compensation, termination, reporting requirements, payment bonds, usage rights, prevailing wage, disadvantaged business plan, and labor requirements.
  4. Public ownership.The property will remain public and control reverts to the public owner upon expiration or termination of the contract.
  5. Flexible funding and financing. Public owners may combine private, state, federal, or other funding/financing sources.
  6. Requirements for subcontractors, labor, and disadvantaged businesses. Every P3 contract must provide for, and the public owner must ensure that adequate protections are made for, subcontractors, prevailing wage, and participation of small, disadvantaged, and/or minority-owned businesses.
  7. Project review. Each proposed project must be reviewed by a specialized subcommittee of the Project Review Committee to evaluate the proposed public use. The subcommittee will issue a recommendation to CPARB, which will ultimately approve or deny the application.

On the Horizon

The draft legislation that the P3 Committee proposed was approved to move forward for legislative review. Financial impacts, risk of default by public partners, and guarantees that new projects would abide by Washington’s strong protections for payment of contractors, prevailing wage, and minority business participation are all issues that will continue to be refined and advanced over the coming year. For now, everyone involved in the construction industry—owners, developers, designers, architects, and contractors—should pay attention to the conversation that has the potential to substantially change Washington’s landscape for public works projects.

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