The Golden Gate Bridge, the Transcontinental Railroad, and the Lancaster Turnpike; America’s economy was built on the back of private infrastructure investment. In the late 1900s, however, as both the government and America’s economy grew, federal programs like the Eisenhower Interstate Highway System became the norm. Then, as more state governments became responsible for financing the expansion and maintenance of infrastructure while dealing with both a critical economic downturn and a lack of political and public support, private investments once again gained popularity, bringing new opportunities as well as new challenges.
Although they were once considered the gold standard in project delivery methods, P3 (also known as PPPs), are now taking a public buffeting as an increased number are going over budget. According to AACE, out of 20 projects surveyed, 70% were nearly complete or operational. The remaining 30%, however, were in default or bankruptcy.
As Oliver North once said, “I came here to tell you the truth, the good, the bad, and the ugly.” So, let’s do just that.
P3s have become the “go-to” solution for large infrastructure projects, generally running above $500 million, such as prisons, highways, power plants, bridges, waste treatments, schools, and hospitals. Deferring large capital expenditures, lowering whole life cost through bundled contracts, and gaining the advantages of private sector innovation and expertise for public projects. P3s drive quality, performance, accountability, and finance, while creating synergies that help remove friction throughout project delivery.
P3s can also be used to monetize or expand existing infrastructure projects and assets and relieve some much-needed capital. Due to the nature of the projects, contracts are often long term, ranging between 15 and 30 years and spur economic movement.
In theory, that’s a whole lot of good.
The Long Beach Courthouse
In August 2013, the first performance-based social infrastructure P3 project in the US, Governor George Deukmejian Courthouse, was completed ahead of schedule, under budget and received a total of thirteen awards. Long Beach Judicial Partners was awarded the contract in June of 2010 and began construction in January of 2011. The courthouse consisted of 31 courtrooms, holding cells, a detention center, office space, and sally port. The 529,000 square foot facility accommodates up to 4500 daily visitors and 800 workers. I went to high school and college in Long Beach so needless to say I watched this one closely.
Due to the size and complexity, P3s are inherently higher risk. Numerous studies of P3 failures show one of the main culprits is inadequate assessment and allocation of risk through all stages of the value chain and throughout the project life cycle.
Author Young Hoon Kwak and his co-authors in a 2009 article determined that the success or failure of a PPP project is dependent on four groups of factors:
- The competence of the government
- The selection of an appropriate concessionaire
- Appropriate risk allocation between the public and private sectors
- A sound financial package
Indiana’s I-69 Section 5 project was to reconstruct 21 miles of State Route 37 to meet full interstate highway standards. The IFA (Indiana Finance Authority) was conceived by the Indiana General Assembly to facilitate P3s, amongst other things. IDP (I-9 Development Partners), a company specifically created for the purpose of bidding on the I-69 section 5 contract, was chosen by the IFA to finance, design, build, operate and maintain the project for 35 years.
However, in 2017, the project shifted to INDOT (Indiana Department of Transportation) in order to avoid default after IDP failed to meet contract requirements. Originally estimated at a total construction cost of $369 million, costs ballooned to $556.2 million, coming in at 51% over budget, and more than two years behind schedule. That’s a big miss.
As we all continue to fight for a few dollars more, mitigating risk through an effective and proactive risk management plan is vital to successful execution. P3s are neither good, bad, nor ugly. Unlike the old spaghetti westerns, this is not a face-off, we all win or lose together.