May 15, 2018
Pursuit of P3s Can Be Risky
by Peter Fogel
To help prospective bidders on public-private partnership (P3) projects manage and assess risks, it is important to look at two key factors.
Political risk is a key concern for participants in the public-private partnership (P3) market in the U.S. and Canada. Large infrastructure projects generally, and P3s in particular, can serve as lightning rods in debates surrounding investment decisions using public funds. Due in part to the potentially higher up-front price of delivering an infrastructure asset through a P3 or the perceived loss of public control of an infrastructure asset, P3s can generate significant opposition – ultimately ending with the cancellation of a project for political reasons and no contract to award. Though the risk of project cancellation is considered a business risk and is not insurable, this does not mean it is something risk advisers should ignore.
To help prospective bidders on these projects manage and assess risks, it is important to look at the readiness and friendliness of a company. Readiness is a measure of the legal and regulatory climate of a given state or province as it relates to P3 procurement, while friendliness is a measure of the public sector’s willingness and drive to successfully procure a P3. Within the readiness score are sub-factors, such as whether the state or province has legislation authorizing the use of P3s, whether P3s can be used for both civil and social infrastructure projects and whether the state or province has an office dedicated to assessing and procuring P3 projects. Within the friendliness score are sub-factors such as whether the state or province is in an election year, whether the state or province has experience procuring P3s and whether there is organized opposition to P3s.
Aon’s latest Public-Private Partnership Pursuit Risk and Opportunity Index (P3-Pro), takes a deeper look at these two scores, and the results provided valuable key learnings. States and provinces that have relatively long track records of successful P3 procurements and institutions established to bring certainty to the procurement process topped the list. In the U.S., the top states for certainty as it relates to successful P3 procurement were Colorado and Virginia. Both these states have experience procuring P3s and each had two major projects successfully reach financial close in 2017. Both of these states also have offices dedicated to the assessment of whether the P3 model is in the public’s best interest. These offices lend a given procurement an increased sense of legitimacy and show that the public sector has thought about the project and is not simply looking at a P3 as a source of free money.
Overall, last year saw a general decline in certainty across the U.S. Much of this was due to coming gubernatorial elections in 36 states. The potential change in executive can foster uncertainty for a project, particularly if the project becomes a campaign issue, as happened in the British Columbia elections in 2017. Additionally, last year saw the expiration of authorizing legislation in states that have had significant experience with P3s, particularly Texas. Texas has completed multiple highway P3s over the past decade, but due in part to public opposition to continued development of toll highways, the legislature allowed the legislation authorizing Regional Mobility Authorities to pursue P3s to lapse.
When looking at which states currently have large projects in procurement, there are some continuing projects in states that scored in the middle of the pack on the index. For example, Alabama is in the process of procuring the $2 billion I-10 Mobile River Bridge and Bayway project but falls into the “less certain” category, in part due to its inexperience in procuring a P3 project. While Michigan is in the process of procuring the $650 million I-75 Modernization project, the state also falls into the “less certain” category due to its lack of explicit P3 authorizing legislation.
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Canada has historically been less dramatic than the U.S. when it comes to P3s. However, 2017 was a little different. A new government took power in the summer and subsequently canceled the George Massey Tunnel Replacement project. Aside from the turbulence in British Columbia, many provinces in Canada scored fairly high in the index. Ontario, which for the last three years of P3-Pro’s publication secured the top scoring jurisdiction in North America. In terms of certainty of reaching financial close once a project begins procurement, Ontario has been the P3 leader in North America for some time. The province has successfully reached financial close on dozens of projects and has a robust pipeline of more than 20 projects.
The pursuit of a P3 can be a risky decision. Once the pursuit begins, there is no guarantee that the project will actually be awarded. Though there has been some progress in recent years to add certainty to the P3 process, with more states passing enabling legislation and getting experience in this delivery model, political considerations remain a key concern.