- Public private partnerships shift some risk and responsibility to where they are appropriate.
- Established model from Canada and Europe.
- With more than $2 trillion in infrastructure needs in the U.S., PPPs increasingly are being embraced for everything from hospitals to transit projects.
While Canada’s use of public private partnerships, as well as PPPs in the United Kingdom, were discussed at ULI’s Fall Meeting in Denver, much of the focus was on U.S. projects.
With the U.S. grappling with how to address more than $2 trillion in infrastructure needs, PPPs increasingly are the answer, said Jeffrey Fullerton, director at Edgemoor Infrastructure & Real Estate, who moderated the ULI panel on Thursday, Oct. 18.
“I’m very excited about the public-private model,” Fullerton said. “It is a tool to get some infrastructure build in a sustainable way.”
As a case study of what a P3 can accomplish, Fullerton used a $343 million courthouse in Long Beach, Calif., a design-build project that is under construction and will be completed in about a year.
Fullerton and several other members on the panel are part of the private-public partnership involved with the development, called the Gov. George Deukmejian Courthouse.
Fullerton began the program with a video report of the decrepit, 50-year-old courthouse that was literally falling apart, even as people worked there. One employee said that she cleaned seven rats out of traps set throughout the building on one day.
With the blessing of then-Gov. Arnold Schwarzenegger, the General Assembly approved a PPP for the new 543,000-square-foot (50,000 square meters) development that required razing the existing building.
“We learned about different kinds of tools and decided to use a different financing model,” by choosing a public private partnership, said Clifford Ham, the Principal Architect for the California Administrative Office of the Courts.
One advantage of the PPP is that expansion of the complex is built into the financing, said Ham. “With traditional bond financing, it is for a specific size and not one square foot more,” he said.
Ham said that while a public private partnership model is “not rocket science,” when he first tried to explain it to state legislators, his presentations were viewed as “some place between heresy and craziness,” as he said politicians “prefer to kick it down the road,” rather than lock in costs for more than three decades.
But that is an advantage of the PPP, because the state knows its annual costs over the next 35 years, after which time the building will be turned over to the state.
Typically, when constructing a new building, money needs to be found to operate it and governments may not have the funding to keep the building in tip-top shape, leading to costly deferred maintenance problems, he and other panel members said.
“One big selling point is that if we do not have the use of space for a particular time of the day, we don’t pay for it,” Ham said.
Indeed, Sean Maher, the business development director for building at Johnson Controls, which will operate the courthouse, said the company could be on the hook for up to $250,000 per day, plus the cost of solving the problems, if for some reason the building was out of service because of a mistake by Johnson Controls.
“Essentially, we have penalties,” Maher said. “It shifts the risk to the private sector. It is really critical for us to maintain it in a way to avoid penalties. No. 1, the idea is to mitigate problems. No. 2, we will have contingency plans in place that will be available to try to avoid penalties.”
P3s are commonplace in places such as Canada and the United Kingdom.
Tim Philpotts, a senior vice president of Ernst & Young, who is based in Vancouver, Canada, said that PPPs have been popular in the UK for more than 20 years and for the most part have been embraced whether Labour or Conservative parties are in charge. Only more recently, given economic woes that have been sweeping Europe, have some criticisms of PPPs started to surface, he said.
In Canada, P3s have been growing rapidly over the past decade, he said. “Canada took the model in the UK and improved it,” Philpotts said.
Still, there are a number of misconceptions about P3s, he said. “It is not about the financing; it is not about the sale and lease-back or asset sales; it is not about privatization,” he said. “It is about performance-based infrastructure and facilities, specifically, risk transfer,” Philpotts said. “It is having a solution that works for the public and private sectors. You can’t transfer risk that aren’t appropriate for the private sector.”
That means that the private sector is not responsible for problems that may arise that are the responsibilities of its government partner, and vice versa, he said.
Lynn Graydon, vice president of infrastructure finance for Toronto-based John Laing, noted her company has been involved in more than six dozen PPPs in countries that include the United Kingdom, Australia, Netherlands, Canada and the U.S.
Public-private ventures have included health care facilities, schools, defense installations, waste management, rails, bridges, and roads.
In the Denver area, John Laing is a 45 percent equity partner in a portion of Colorado’s $6.5 billion FasTracks light-rail and rapid transit bus development.
It is a partner with the Regional Transportation District in Denver for the $400 million Denver Eagle PPP project, which will include a new light rail to western suburbs of Denver and a light rail line from the Denver Union Station in downtown to the Denver International Airport.
She noted that the RTD acquired the land for the light rail, so that is not something John Laing has to worry about. “It is all about transferring the risk to the right party,” she said.
One nice thing about PP3s, such as the one in Denver, is that there is true collaboration, she said.
“It is just a joy and pleasure to work with a very knowledgeable client-team,” Graydon said. “All parties buy in. That makes a big difference.”
In the case of the Gov. George Deukemjian Court House, the PPP also led to innovative construction techniques. For example, the entire five-story building, which will span two city blocks, is being clad in a deeply-articulated curtain wall that was built and tested in a factory, then shipped to the site. Getting the watertight wall up allows construction to continue inside of the building, no matter the weather conditions, Ham said.
Plus, it is a handsome wall, according to Ham. “It won our hearts in an architectural sense,” Ham said. “It is also the best piece of cladding curtain wall you will ever find.”