The Public Private Partnership Model written by Bryan Lofton & Katie Maynard Koran, DPR Construction

In ancient times, construction projects were carried out by a master builder, a single entity or individual that embodied all knowledge and skill in design, engineering, and construction. Since that time society has isolated these responsibilities and doing so lost efficiencies often creating adversarial relationships between these roles on projects. Recently, we have begun to see these roles converge once again in an increasingly popular project delivery method. 

What is a P3? When Is It Used?

A Public Private Partnership, or P3, is formed when a public entity, such as a school or transportation department, enters into an agreement with a private entity, such as a developer, to share skills, assets, risks, and rewards in the delivery of a facility. A P3 arises when a public entity wants private funding to build and maintain some building or infrastructure feature. On the development or private equity side, future revenue streams in the form of tolls or rent motivate pursuit of P3 opportunities. For many years, the P3 concept has been common to transportation infrastructure projects but recently its popularity has grown among social infrastructure projects as well, including student housing projects, hotels, and even museums. In fact, the American Institute of Architects is currently introducing P3 legislation for state consideration that focuses specifically on social infrastructure projects.

How Does It Work?

From a contractual standpoint, consider the Public Private Partnership like a design/build agreement on steroids. Unlike the Construction Manager at Risk and Design/Build, a developer or sponsor will carry a single agreement with the public entity then directly hire the A/E firm and builder. To further mitigate the construction risk, many P3 agreements allow for some major trade contractors to be equal partners with the construction manager and design firms. With so many new vested parties in the endeavor, it is common for the project to form an executive steering committee made up of all stake holders to discuss issues and make decisions for the project. 

Advantages

• A group of equal stake holders, each offering unique expertise and ability to affect the project, can make better, faster decisions. 
• This high level of collaboration shortens project schedules and reduces capital costs. 
• Facility operation costs are usually included as part of the P3 agreement which means public entities can better control the risks of future operation. 

Challenges

• Having multiple partners on a project that share risk / reward requires careful attention when preparing P3 agreement - legal expertise from a firm that specializes in such agreements is crucial. 
• The public entity may find itself paired with a new private partner if the original partner sells their end of the agreement which can lead to conflict in how the new partner operates the facility or provides services. 
• A public entity can become stuck with an underperforming asset if their private partner becomes insolvent. It is important to remember that a P3 agreement transfers risk but it won’t eliminate it. 
• An additional layer of ownership is introduced with the addition of a development partner. To lessen this issue, contractors are more frequently becoming equity partners in the arrangement along with the construction work. As the market evolves, smaller construction companies, who are unable to bring money to the table, may become marginalized. 

Why Have We Seen an Increase in P3 Models?

P3 arrangements are growing in popularity, especially for building projects, for to two primary reasons: 
1. Expanding demand
2. Limited availability of resources
There is a growing need to build more public infrastructure projects. Federal, state, county, municipal, and higher education institutions continue to expand public services; this requires additional facilities to accommodate the growing population. The resources available to fund the installation and operation of these facilities are often lacking or could be put to better use funding other projects and services. For example, a college may choose to build a new academic building using their own funds and use a P3 arrangement to fund student housing projects which are more predictable and appealing to private investors.

While the P3 delivery model resolves some issues inherent to conventional project delivery modes, it also creates a number of new challenges. Certainly the P3 scenario is not the remedy for all public projects. Yet, the key drivers of this delivery model, limited public funding and growing public need, are unlikely to change in the future so we are sure to see more P3 opportunities.