Construction projects can be costly, especially for large-scale public projects to create and expand infrastructure. Because of this, public entities have expanded their use of non-traditional financing or funding methods. One of these alternative funding methods that is rapidly growing in popularity is the public-private partnership, or P3 project. P3 projects enable the public sector to utilize private funding and overcome some of the many funding issues large public projects face on a regular basis.
What is a P3 Project, and Why Are They Popular?
A P3 project is one in which public and private entities invest together, and through which both may have some “ownership rights” or other property rights in the project. There is no specific structure for P3s that is routinely used, and generally no mandated form of agreement between the parties. Because of this, the financial risks of the project are transferred between or allocated among the parties on the project pursuant to that individual project’s specific agreement. Since some property/ownership rights and risks can be set forth by contract in P3 projects, the underlying structure of that contract can have a significant impact.
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The increased popularity and prevalence of P3 projects can be tied to many different reasons, but a significant one is the ability for an otherwise financially-strapped public body to privately finance a “public” improvement and allocate some of the financial risk on it by offering a subsequent reward or benefit to private companies. This structure allows the public entity to incur reduced delivery costs when compared to the traditional “design-bid-build” method that has been historically employed. Despite the name “public private partnership”, P3 projects are routinely not a traditional partnership, as commonly understood, but a complex contractual agreement between two otherwise uninvolved parties. While the number of states with specific P3 project legislation is relatively small, it’s growing along with the popularity of P3 projects themselves. Recently, P3 legislation came into effect in two more places: Georgia and Washington D.C.
The D.C. P3 Legislation
The D.C. P3 Act establishes the Office of Public-Private Partnerships (P3 Office) to regulate and oversee P3 projects. That office is to be the main point of contact for parties that are involved in P3 projects, or parties who want to become involved. The main function of the office will be smoothing over the legal issues faced with many of these P3 projects due to the complexity of the relationships between public and private entities, and will be looked to to provide expertise in a financial, legal, and technical capacity. The office is also entitled to contract with consultants and others to further provide this expertise to projects and construction entities. Perhaps the most important function of the P3 Office is creating rules, regulations, and procedures to implement the P3 Act.
As noted above, the definition of P3 projects is generally not concrete – and the specific projects for which a P3-type financing structure can be utilized is not clearly defined. D.C.’s P3 Act attempts to provide some insight and clear up some confusion by setting out a definition, as follows:
[A P3 project is] a long-term, performance-based agreement between a public entity and a private entity or entities where appropriate risks and benefits can be allocated in a cost-effective manner between the public and private entities in which (A) a private entity performs functions normally undertaken by the government, but the public entity remains ultimately accountable for the qualified project and its public function, and (B) the District of Columbia may retain ownership or control in the project asset and the private entity may be given additional decision-making rights in determining how the asset is financed, developed, constructed, operated and maintained over its life-cycle.
The Act goes further into defining specific projects that may qualify as P3 projects under the Act: educational facilities, transportation, cultural or recreational facilities, etc. The project must be deemed beneficial to the public interest to qualify. The P3 Office will have oversight on all proposals and contracts associated with P3 projects in the District of Columbia.
Georgia’s P3 Legislation
P3 Acts create opportunities for governments to engage in new projects that would previously have been cost prohibitive. The Partnership for Public Facilities and Infrastructure Act, Georgia’s P3 Act, is a bit less complex than the legislation D.C. passed. This Act simply amends an already existing part of the Georgia Code to allow private companies to propose projects to local and state government. These proposed projects are required to serve a public purpose or public need in order to qualify. The rules for each P3 project depend on what government entity the project is with (i.e. local or state).
For local partnerships, a P3 Committee will be set up between August 2015 and July 2016 to decide the guidelines for these projects. For the state level, the guidelines will be decided by two different entities: the Georgia State Financing and Investment Commission (GSFIC) will set-up guidelines for projects with the State Properties Commission and the Board of Regents will set up guidelines for projects with itself. These division of rules and guidelines creates for better public oversight of each partnership. The Act does not completely allow these government entities to stipulate the rules. The Act itself lays out some steps projects that are approves must follow.
Does This Really Clear Anything Up?
The benefits of P3 projects are evident by how many states (and Washington D.C.) have enacted legislation pertaining to these partnerships, but does the recent legislation clear things up for parties who are doing the work on the P3 project, or just the parties who are the p3 “partners”? P3 projects present difficulties for parties furnishing labor and/or materials to the project and who are looking to protect their rights and secure their invoices. Why is this? The complexity and nature of the relationships between private and public entities is something that traditional construction law is not currently set-up to handle in certain capacities. Determining the true underlying or fundamental nature of the P3 project for the purposes of security, can be a challenge – and must be accomplished on a case-by-case basis through examination of the contract. A project participant cannot always be sure whether a bond claim or a mechanics lien is the appropriate remedy, and when that is unknown, it is difficult to comply with the appropriate requirements. Because the law has not fully adapted to the new methods of construction relationships and partnerships, many issues related to financial risk for project participants will be difficult to determine.