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Risk Vs. Rewards in P3s for Design-Build Contractors

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Public-private partnerships (P3s) have burst onto the scene in the U.S. as a solution to help meet the overwhelming need for public infrastructure and the underwhelming public resources to pay for it.

P3s, of course, are hardly new. Private funding sources have been used for decades to develop major infrastructure and social assets in Europe, Asia and Latin America. In the last decade, P3s have become common in Canada, and they were utilized in the U.S. in the 1970s to develop post offices.

In many cases, these privately financed assets are well timed, developed and operated. They can also provide a good opportunity for contractors who have the financial wherewithal to take on large design-build contracts and for specialty firms that perform as subcontractors. While P3s present opportunities, they also create risks in financing large-scale projects.

P3 projects represent real work, real revenue and real profit potential in a U.S. construction market that is down 20% to 30% from its peak in 2006, according to construction consultant FMI. The entrepreneurial drive inherent in P3s is created by private-sector demands for a timely financial return on investments.

Risk is priced and apportioned by those parties best able to understand and mitigate it within the P3 structure. However, all parties involved in a P3 project have a common goal: to build an infrastructure asset and have it begin to generate revenue as quickly and efficiently as possible.

Efficiency is the key. Given the long-term operate-and-maintain component typically included in P3s, everyone involved in project development must focus on its full life cycle. The asset must be buildable but also productive and cost efficient to operate and maintain.

Financing also must be efficient. Some financing sources are prepared to take on greater risk in exchange for the higher returns associated with the design-construct phase. Other financing sources prefer the stability of low risk and lower but generally more predictable returns during the operations and maintenance cycle.

For a select group of contractors, P3s may also create sound investment opportunities. It's not uncommon for the design-builder to invest in the project's equity. But this investment may not be suitable for all contractors because:

• The investments are not very liquid and require the backing of a large balance sheet.

• Even contractors with the financial resources should limit their investments so that the adverse impact of one job does not damage their entire enterprise.

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