Infrastructure Week 2018: Public Private Partnerships in the Spotlight
In addition to the prospects for a federal infrastructure package in 2018, one of the other major topics at various events during Infrastructure Week 2018 (May 14-21) in Washington, D.C. was public-private partnerships. The National Association of Counties and the Metropolitan Policy Program at Brookings hosted an event May 17 on “modernizing infrastructure policies to advance” P3s. Two veterans of P3 deals, John Porcari of WSP and Judah Gluckman of the D.C. Office of Public-Private Partnerships, were among the panelists. Here’s a report on some of what was said.
“The public sector can’t do it alone,” John Porcari told attendees at the National Association of Counties/National League of Cities Leadership Center.
Porcari would know. A veteran of both the Maryland Department of Transportation and the U.S. Department of Transportation, Porcari is now the President of Advisory Services at engineering professional services firm WSP.
“Public-private partnerships are an important part of the toolkit,” Porcari said. “They are a very precise tool that applies only in limited circumstances but can be very effective.”
But Porcari said it’s important not to think immediately of P3s in a project financing context.
“Where a public-private partnership comes in, it is really not in the provision of private equity or funding because that’s typically more expensive than the public funding,” he said. “It’s getting to the infrastructure itself and what you want from a lifecycle point of view. Who’s going to make sure it’s maintained for that 30 or 40 years? Who’s going to have the performance standards so it’s serving the public that entire time?”
He believes P3s can be much more helpful in the context of fixing and maintaining the nation’s crumbling infrastructure.
“We all have worked with elected officials where it’s relatively easy to get the funding to cut a ribbon on something new,” he said. “The important part of the infrastructure discussion is the day-to-day. It’s maintaining what we have and the vast majority of the infrastructure we have out there is old, is in need of renewal and outside of the context of a lifecycle approach where you’re really thinking about maintaining it for that entire lifecycle, it’s very difficult to get funding for it so as we have this discussion, I’d urge you to think about public-private partnerships in that context.”
Maryland in years past has deployed P3s on projects like a container terminal at the Port of Baltimore, Porcari noted.
“We could have put about $450 million of state money into expanding the container terminal,” Porcari said. “Instead, we signed a public-private partnership that rebuilt the existing one, maintained the existing one and the new berth for the lifecycle of it and highly incentivized the private sector and the state for more volume.”
Other Maryland P3 projects have included highway rest areas on I-95 and the Purple Line, a 16-mile light rail line now under construction in the D.C. suburbs.
“The primary benefit to the state is that you have a private sector partner that throughout the multi-decade contract is highly incentivized to be on time, to meet other performance metrics to maintain the facility and is required to turn it over to the state at the end (of the contract agreement) in good shape,” Porcari said. “And when you do that, you can build in some of your other societal goals as well. So for example, a community benefits agreement in the case of the Purple Line, that gets to local employment, impact and opportunities for local businesses, environmental remediation, all the kinds of things that communities care about you work out up front in a community benefits agreement.”
Establishing a P3 Office and Developing a Process
For states and communities wishing to pursue P3s one thing they can do to facilitate things is create an office focused on that.
“These are extremely complex legal, financial, structural procurements and projects,” said Judah Gluckman, Deputy Director and Counsel for the D.C. Office of Public-Private Partnerships, which was the first city/county level P3 office in the country. “And to do them properly when you’re dealing with folks from around the country, around the world in some cases, very savvy investors—the J.P. Morgans, the Goldman Sachs of the world—you need someone on your side who is just as savvy and can structure these deals in such a way that the District or any jurisdiction gets what it is they need.”
But Gluckman said what his office does is about much more than the procurement process and making sure a contract has all the T’s crossed.
“What’s almost more important is that you do the analysis to say ‘what are the assets that we have? What do we need and what are the outcomes we’re trying to achieve and how do we do that effectively, whether it’s through a P3 or any kind of private contract or working inside the government?’” Gluckman said. “That sort of asset management, that lifecycle analysis is almost more important than the procurements we may or may not set up when that makes sense.”
Gluckman said the District of Columbia was fortunate that at the same time the P3 office was being created, the District’s chief financial officer was creating an asset management system.
“Ninety-six-point-five percent of our assets are now in this online system, where we can track every single detail from every building, every pipe, every road, down to door handles in some cases or individual cars; it’s all tracked,” Gluckman said. “The age, the condition, when it recently got maintenance or servicing or those sorts of things. You can’t make smart decisions about how to invest in your assets if you don’t know what assets you have. It’s kind of a no-brainer that we all too often overlook.”
But asset management programs and the complexities of P3s can produce staffing challenges, Porcari said.
“Even the largest public agencies and entities out there don’t have the capacity and capabilities they used to in the past,” he said. “You find very large public agencies that are one deep in some of the specialized expertise that you need.”
Porcari said his company, WSP, is often tasked with setting up an asset management program for an agency and helping them go through the institutional change so it becomes embedded in the culture of the agency.
Gluckman agreed that staffing capacity is a concern.
“I think capacity in the government is one of the biggest challenges,” he said. “That’s something that we’ve asked for pretty regularly. Forget about funding projects; fund staff. Build capacity. That’s something the federal government could do at relatively low dollar amounts and it would have a huge impact and so far I think we haven’t seen a lot of movement there.”
Gluckman said one big reason why the D.C. P3s office exists is to help build the talent pool across District government agencies.
“These contracts, these P3s that we do are extremely complicated and challenging the traditional orthodoxy of a government procurement or the way government does things is really difficult if you don’t have smart, hard-working, creative people in the government,” he said.
Porcari recalled the process of setting up a P3 office in Maryland.
“We spent a year-and-a-half working with the legislature to walk them through what it is and is not,” he said. “We did (P3-) enabling legislation that provided a framework and defined the opportunities and places where elected officials would make decisions.”
Having those designated points where lawmakers can weigh in is an important part of lowering the risk involved in a public-private partnership, Porcari said. If they’re allowed to pull the plug on a project at any time during the process—for example, if a different party suddenly finds itself in power at the statehouse—that can increase the risk for the private sector.
“Pricing political risk in the context of P3s is the single biggest reason that they’re not more successful in the U.S.,” he said.
While no two states are alike in terms of their statutes governing public-private partnerships, Porcari said, the most successful ones share common characteristics.
“To the extent that you invest upfront time in defining a process, in being very public about where the public input is, that’s time very well spent because you are much more likely to have a good outcome,” he said. “There are a couple of municipal examples where they literally got to within a couple of weeks of closing the deal and then walked away from it. So the private sector firm—the winning bidder—spent millions of dollars, will never do it again, would probably be very reluctant to look at another municipality or county again. It’s the consistency and predictability of it that is really important and you can build that in through the enabling legislation.”
Porcari conceded however there is a significant need for more efforts to inform public officials when it comes to P3s.
“If (elected officials) are in a two-year or four-year cycle, they need to understand both from an asset management perspective and even from new projects that the reality is they’re starting projects that others are going to finish and they’re finishing projects others have started,” he said. “And if you can’t overlay that elected official cycle on this whole discussion, then I think you’re deluding yourself and you’re not going to get anywhere.”
Porcari said another important part of the process in Maryland was doing something called a value-for-money analysis.
“Which is a fancy way of saying you’re actually making the case for why, from a benefit-cost point of view, this public-private partnership makes sense,” he said. “If you don’t do that upfront work, if you don’t do those necessary steps, you’re probably not going to be successful and I’d argue you probably shouldn’t be because if you can’t make the public case for it, if it’s not totally transparent, you shouldn’t be doing it. I think one thing we found—and I saw the same thing at the national level—is the upfront time invested in a more transparent, rigorous, and yes onerous process is time very well spent because when you get to the latter parts, some of the obvious questions about ‘why didn’t you do this a different way?’ or ‘why didn’t you just issue public debt for it?’ then you can answer those questions.”
Gluckman said the legislative process in the District was critical for another reason: countering some of the common misconceptions about public-private partnerships.
“There was often this perception that it’s asset recycling, it’s maximizing revenue, it’s charging really high fees, it’s outsourcing jobs, it’s selling off land or assets,” he said. “And so what we had to do is say ‘no, this is a District-style P3. It represents District values.’ And that got support from all of our elected officials to say ‘oh, okay, it’s more about asset management and it’s not about selling off assets. It’s not about free money.’”
But Gluckman said that in addition to making sure all the policymakers are on the same page on P3s within a single jurisdiction, it may also be important to seek some standardization of P3 statutes and approaches across the country, particularly if the goal is to expand the P3 market in the United States.
“They’re never going to be identical,” he said. “There are unique challenges in each place. But the more standardized that it is, the more normalized these kinds of projects are, the easier (it) is all going to be. It brings down the transaction costs. It enhances competition. It enhances predictability and lowers risk. All those things that are necessary to make those harder projects a little bit easier. They’re never easy but it can make them financially or legally or politically feasible.”
Register Now for US P3 Infrastructure Forum 2018
If you’d like an even deeper dive into the issues surrounding public-private partnerships, be sure to join us next month at the US P3 Infrastructure Forum 2018 hosted by Inframation. CSG is pleased to be a supporting organization and media partner this year on the conference, which takes place June 13-14 at The Hilton Midtown in New York City. The full agenda for the 14th annual event is now available and you can request your copy here. The Infrastructure Forum brings together state and federal public officials and regional transportation authorities, along with infrastructure developers, investors and financiers to talk about what’s happening with public-private partnerships around the country and the issues that are shaping the industry’s future. Among the panelists at this year’s event will be Maryland Secretary of Transportation Pete Rahn. You can find out more about how to register for the conference on the event website. You can read bios of some of the great featured speakers here. For an idea of what to expect, you can read my coverage of the 2016 forum here.