By Sarah Trefethen
As state and local governments across the country face aging infrastructure and uncertain political climates, they are turning to the private sector to take on more of the responsibility for the construction of bridges and roads.
Public-private partnership, or P3, is a model for financing public works projects popular in Canada and Europe. Recently, a number of states have experimented with the model, and the Port Authority of New York and New Jersey is dipping its toes in the private investment waters, with a planned PPP funding structure for the repair of the Goethals Bridge.
The PPP phenomena is driven by “access to capital, and the need for capital and the desire of states not to take on more debt,” according to Seth Hausman, head of operations, construction for Zurich Insurance in North America, who addressed an audience of insurance brokers at a Zurich event last week.
PPP is a way to fund projects that might not otherwise get done, Hausman said, and thus open up new opportunities for builders. He warned, however, that contractors need to know what they’re getting into before bidding on a PPP project. Unlike a traditional design-build assignment, the private partner in a PPP becomes builder and investor.
“This is a financial method for organizing a project that is different from building a building,” he said.
Contractors who have successfully bid on PPP projects in other states often create a new branch of their companies to act as concessionaire and handle the financing side of the deal, he said.
The specific structure of the deals varies. It may be a pure asset transfer, in which the private partner takes on full responsibility for operating and collecting tolls. In other cases, the public agency continues to operate the road or bridge in question but the private partner’s chances of getting paid remain tied to the successful operation of the asset.
“Every single one is unique,” Haussman said of the deals. But all share the common feature that the private partner keeps some of the risk associated with the project on its balance sheet for the life of the asset.
From the perspective of an insurance company, that is the most important thing for one of their clients to understand before bidding on a PPP.
“Contractors are used to buying insurance and being done with it when they hand the keys over,” Haussman said.
Patrick Foye, executive director of the Port Authority, has said that the Goethals Bridge, which connects Elizabeth, N.J. to Staten Island, will continue to be operated by the Port Authority after the PPP project is complete.
European and Canadian companies, such as the Spanish firm Dragados, which recently entered the New York market, have more experience working with PPP than their American counterparts. But local companies may find it in their best interest to get up to speed. “The risks and the reward go together,” Haussman said.
