There is no doubt that the idea of developing a project via a public-private partnership (or P3) remains the “belle of the ball” in many circles, with businesses and public entities trying to identify opportunities to work together on projects.
As popular as it is, the P3 concept is not new. It has been successfully used to fund a variety of project types around the world, including utility projects, schools, transportation projects, etc.
So, what is the draw of a P3 in contrast to other project delivery methods?
For starters, it permits the public entity to leverage its existing revenue sources. Further, many public entities are land-rich and cash-poor. For example, the U.S. Army controls roughly 12.7 million acres of land, making it one of America’s largest landholders.
Army holdings include more than 207,000 buildings, tens of thousands of roadway miles, and more than a million square yards of pavement. While the Army does not independently have the money to develop and/or maintain all of its holdings, the use of a P3 model provides an opportunity to collaborate with the private sector to develop new projects and renovate existing infrastructure.
Finally, all of the parties involved in a P3 benefit, as it permits a project that might not otherwise receive traditional financing to move forward, often at a faster rate.
From the comments above, in which everyone seems to win, it is hard to believe that every project is not developed via a P3. However, as are most things in life, utilizing a P3 to develop a project has a number of potential challenges. Here are just a few:
>> The advantage of flexibility is often tempered by lack of a clear understanding of how a P3 works. When confronted with nearly endless possibilities for how to structure a P3, would-be partners can find it difficult to determine how to proceed.
>> A P3 model poses different risks versus more conventional models. For example, under Arizona law, there is no right to impose a mechanics’ lien on a P3 project and no designated bond requirements. That raises the risk for general contractors, subcontractors, design professionals and suppliers seeking to protect their payment rights. Attempts to remedy this by amending the law have yet to be successful.
>> The risk window between the partners is much longer than with a traditional delivery method. For example, a developer decides to enter into a relationship with a tribal government to develop a resort property under a traditional delivery method utilizing conventional funding.
A tension on the part of the developer in engaging in this sort of relationship is whether the tribe will, in the event of a dispute, utilize its sovereign immunity argument. This is a real issue that both native communities and developers face in working together. And that risk window is maybe 18 months.
Now, imagine, the same project utilizing a P3 where the relationship between the public entity and the private entity is closer to a 50-year window. A lot of things can go wrong in a relationship over a half century. Accordingly, partners need to be confident in each other before moving forward under a P3 model.
Notwithstanding these challenges, it would be difficult to drive around the valley without seeing a P3 project, such as the Phoenix Biomedical Campus, CityScape, the Mesa Center for Higher Education, and the Peoria Sports Complex. Clearly, the use of a P3 model is, and will continue to be, a very important tool in Arizona’s development.
The above is intended to be the beginning of the exploration of this topic. Future articles will delve deeper into the P3 model and its use.
Matthew Meaker is a construction and real estate attorney with Sacks Tierney PA. He has been named to both the 2012 and 2013 Arizona Business Magazine’s Top Lawyer’s List for Construction Litigation and was just recently named as an Up and Comer in AZRE’s People to Know in Commercial Real Estate. To learn more about Meaker and the Construction Group Practice at Sacks Tierney PA, visit the website at sackstierney.com/services/construction.htm. He can be reached at Matthew.Meaker@Sackstierney.com.