Image courtesy of itchaznong via Adobe Stock
Two heads are better than one. And three heads are better than two.
Occasionally, local municipalities need assistance developing, designing, financing, and executing a project, so they rely upon outside entities to streamline and efficiently turn a project into a reality.
Commonly referred to as P3 or PPP, a public-private partnership has been an increasingly popular solution to these project problems. A public-private partnership is a collaborative working relationship between partners—often a local government or municipality and a private enterprise that may also include a third-party intermediary—with a shared objective.
“Our mission is to lessen the burden on the government entity to get their facilities built,” said Steve Collins, president of CFP3, a non-profit organization that works with cities to develop P3 partnerships that help them increase their capacity to develop community assets. “When a city is having a tough time trying to get something done and financed, and they can’t get enough votes for a referendum or they have all sorts of time spent going through public hearings and procurement protocols, we step in because we can speak on their behalf and can get around all that.
“We go ahead and issue tax-exempt bonds so we can get debt issued, which is sort of similar in terms of the rates they can get through a general obligation bonding process, but we don’t have to go through all the political steps.”
Hardly a guaranteed recipe for success or a silver bullet, P3 offers large and small municipalities a helping hand to avoid time-consuming governmental procedures and red tape and secure necessary funding and resources to improve their communities efficiently.
Seeing these benefits, more municipalities are turning to P3 for their projects, whether they’re building or renovating university student housing, governmental buildings, infrastructure, transportation, hospitality, or sports and recreation facilities.
More than $36 billion in transportation P3 projects have been undertaken since 2010, with a cost savings of more than 20 percent on most projects, while more than 30 states have opened up P3s to their municipalities since 2015.
Often, nonprofit organizations like CFP3 and Provident Resources Group, which similarly support cities, act as intermediaries and conduits between the public and private sectors on these projects, lessening the burden and risk on both sides of the equation. Unsurprisingly, there isn’t a one-size-fits-all template for each project given variances in cost, location, responsibility, etc.
Working in conjunction with municipalities, CFP3 and Provident can establish nonprofit 501(c)(3) organizations for new facility projects equipped with a board of directors that meets regularly. They’ll lease the facility to the municipality, which becomes the owner after a certain number of years once the debt is paid. Incoming revenue from the facility is utilized for day-to-day management, operations, and compliance, which is either managed by CFP3 or Provident or via a third party they contract via design, build, finance, operate, and maintain (also known as a DBFOM) project delivery method or by the public entities themselves (aka DBF project delivery method).
“The core thing to remember is every project is different but at its foundation is the same,” said Provident president Chris Hicks. “The consistent piece is that Provident, as a nonprofit organization, creates a special-purpose entity that serves as the contracting party with everyone else. We’re the hub of the wheel, so to speak. We’ll have the ground lease with the municipality, a development agreement with the developer, an operating agreement with the manager, and loan or trust documents with the trustee bank and financial partners.
“We just become that central core of the web. That piece of it is always the same. Where those contracts go and with whom and what the terms of those contracts are, that all varies by project.”
For example, Provident is helping facilitate a new Mississippi River bridge with the city and state in Baton Rouge, Louisiana. If tolls weren’t being levied to help pay for the project, the city and state would be left with the burden of financing the bridge with tax-raised dollars.
The impact of P3 can also be seen in Massachusetts, where the state limits the percentage that debt service bonds can make up the overall budget (no more than 8 percent) of its university system. With that in mind, the University of Massachusetts is leveraging a P3 for new student housing, which can eventually pay itself off thanks to students paying room and board.
While a P3 is beneficial for improving logistics and speed of delivery on a project, especially when funding and resources are scarce, it will cost more given the public municipality’s need for outside private assistance. But for many municipalities, the difference in cost is worth it, especially given the uncertainties with the economy lately thanks to the COVID-19 pandemic, supply chain issues, and inflation.
“The least expensive, most cost-effective thing that can be done is for these municipalities to do this themselves,” Hicks said. “If they’re a single-A rated, double-A or triple-A municipality, it’s going to cost them less money in interest rates and the actual cost of the debt to do it themselves. On paper, that will look better, but that brings with it political will, approvals at the state legislature, local municipal bond issuing authorities, and things like that which are much harder to get over that hurdle.”
Added Collins: “It’s the speed of delivery that sometimes makes a big difference on the cost of financing.”
With many benefits as well as potential negatives, the key is finding the right balance between the public and private parties both seeking the most efficient and cost-effective method for delivery to upgrade and improve a community, because after all, the most important thing is doing what’s best for your local community and residents.