Public-private partnerships (P3) are a relatively new phenomenon in the United States, where the public sector partners with private enterprise in order either build or renovate a public project or raise needed public funds. The beauty of partnering with private real estate developers for governments is that while the P3 shifts the day-to-day operational burdens of the project from the public agency to a private entity with the technical and operational expertise to run it most efficiently, the public entity is able to retain a share of the long-term revenue streams from the project.
There are many iterations of P3 structures, which vary widely depending on the type of infrastructure involved, the fund sources and the negotiated deal terms. The US public sector has utilized the private contract fee service and design build arrangement for decades. Such P3 variations fall on one side of the P3 spectrum, where the public entity owner retains all or most asset and performance risk. On the other end of the P3 spectrum is the total concession P3 arrangement, where the private party builds the project and assumes the financial and operational performance obligations in exchange for a share of the cash flow resulting from the project. It is this type of P3 arrangement that the US has just begun to dabble in.
One case model of a successful major total concession P3 project is the current modernization of Los Angeles International Airport (LAX), the sixth-busiest airport in the world. LAX is undergoing a desperately needed major overhaul into a leading world-class airport. This multibillion-dollar airport modernization project has only been made possible through a public-private partnership between Los Angeles World Airports (LAWA) and shopping center developer Westfield Group. While portions of the renovation project fall outside the total concession P3 project, by integrating and piggy-backing those portions of construction with Westfield’s construction, LAWA is benefiting from the natural economies of scale and efficiencies. The result is a win-win structure, with the general public ultimately receiving better public improvements more quickly and cheaply than could otherwise be achieved.
While building airports has traditionally been viewed as a governmental function, as the country is beginning to embrace creative financing options for needed infrastructure projects in a period when government is struggling to balance budgets, the P3 model has proven an ideal option to undertake complex projects of grandiose scale. The advantages in enlisting the capabilities of private real estate development companies for these major total concession P3 projects are many, including technical and operational expertise, a dedicated project team that is not distracted by other public duties or responsibilities, efficiencies that comes with multiple project experience and relationships and the inherent incentives for the private developer to bring the project to service without unnecessary delay. At the same time, the public sector can reallocate its internal resources and personnel to fulfilling its underlying public objective.
However, pulling off a successful total concession P3 project is not an easy feat. After the public sector entity elects to proceed with a total concession P3, the project is launched through a formal public bidding process. Given total concession P3 projects are still relatively new to the US and that they typically involve large public assets, there is often a fair amount of political sensitivity surrounding them. And because they are usually large, visible and potentially very profitable opportunities, transparency is necessary to attract a range of high quality bidders. The critical factors for the public agency are to have a dedicated project team, early community outreach that engages and secures stakeholders’ buy-in and experienced outside advisers who can assist the public agency navigate through the in P3 process.
For the private developer to succeed in the total concession P3 sector, it must not only possess highly credible technical expertise, financial backing and creative ideas to enhance the project, it must also assemble a team that understands the unique nature of these deals, which includes political considerations beyond the bottom line, and that has an appetite for risk beyond the typical pro forma. Westfield is among an elite group of US companies who have and are achieving success in the total concession P3 space.
By Anita Sabine, partner Manatt, Phelps & Phillips, LLP and member of the Real Estate & Land Use Practice Group