Legislative Update: Alternative Funding: P3s

As local and state governments struggle to replace, repair and expand their aging infrastructures, they are often turning to Public-Private Partnerships (P3s) to meet the challenge. On May 13, Governor Baducci signed HB 1167 into law, making Maine the latest state to authorize P3s. Maine joins seven other states that have passed P3 legislation in the last 14 months.

The most common type of P3 is the design-build-operate model. However, several other models are becoming more common, including design-build-finance, design-build-own-operate and design-build-operate-maintain models. P3s are being used not only for new infrastructure but also for the operation, redevelopment and financing of existing systems.

When most people think of P3s, they think of transportation, particularly toll roads. While the P3s continue to be an important tool to finance, construct and maintain roadways and bridges, P3s are growing dramatically in other sectors as well.

California, Florida and Illinois are looking at P3s to help them move forward with high speed rail. New Jersey passed legislation last year authorizing P3s for state colleges and several states and local governments are turning to P3s to help them build and operate prisons, water systems and healthcare clinics.

P3s are often referred to as “innovative financing,” but the innovation just begins there. In addition to helping public owners leverage both public and private funding, P3 projects almost invariably implement project delivery systems that integrate design and construction.

The Port of Miami Tunnel Project is a good example of this combination; the $900 million project to connect the Port of Miami with I-395 is particularly challenging. The geotechnical conditions under Biscayne Bay are unpredictable and the risk of hurricanes is ever present. The boring equipment needed to complete the project is itself a big challenge. From a risk-management perspective, the tunnel project represents a “perfect storm.” Add these challenges to the bonding requirements and it’s clear that only innovative financing, design and construction could allow this project to move forward.

In the water/wastewater sector, local governments increasingly are looking to contract the entire operations of their systems. Cities like Atlanta, Milwaukee and Indianapolis have turned to long- term P3 agreements for their water systems. New treatment and biosolids facilities using the design-build-operate model have moved forward in Seattle, Atlanta, Phoenix and other municipalities. Many cities today have very old water and wastewater infrastructures and lack the funding to improve them. So far, P3s are proving a significant force in maintaining basic services without putting cities at financial risk. As design-build and P3 authority continues to expand at the local level, this trend is likely to grow dramatically in the future.

Not all state and local governments turn to P3s out of necessity; many use them to supplement existing funding, provide greater innovation, higher quality and speedier implementation. In fact, many states have simultaneously increased infrastructure funding and expanded P3 authority. For example, Minnesota recently raised its gas tax by 10 cents and also converted its HOV lanes to HOT lanes. The additional funds supplement the transportation system but, more importantly, traffic flow has improved.

As the demands on our nation’s aging infrastructure grow, public officials will continue to look for more and better alternatives to traditional means of funding, designing, maintaining and building transportation and utility systems. Public-private partnerships and integrated project delivery methods — like design-build — will continue to play important roles in meeting today and tomorrow’s challenges.