|
This extreme form of contracting-out by the government is based on the realization that private sector innovation, technological skill, financial capability, and management expertise can generate quality public infrastructure and services in an economically efficient manner.
In recent years, governments at all levels have attempted to limit costs without reducing services. To meet demands that exceed their fiscal limitations, various initiatives have been created to rethink the role of government. This is especially true in creating and managing buildings and properties.
In the U.S., publicly-funded construction projects are often guided by an extensive series of costly regulations and mandates. Such mandates are in addition to the normal safety and quality requirements embodied in applicable codes and standards. For instance, on federally-funded projects, public clients and the contractors they select must adhere to contractual provisions on payment of prevailing wages, environmental reviews, minority contracting, small business set-asides, origin of materials, and other constraints that add substantially to the cost of construction.
A public-private partnership can shorten the time between pre-planning and the completion of the project by securing private financing and allowing the final outcome to be achieved with a minimum of regulation. The relationship established to fill a public need through a private partnership can be structured in a variety of ways from simple design-build to the private firm undertaking a project’s financing, creation, operation, maintenance, management, and ownership.
Unbundling the Risk
The development of public-private partnerships is a key issue causing much concern among contractors, financial entities, and facility managers. Part of this concern is the unbundling of project risk in a way that creates challenges in understanding risks and creating systems to manage and insure these risks.
For instance, unbundling the risk on a capital improvement project usually results in the private sector assuming those risks that are of a commercial nature and can be identified, appraised, and managed, leaving the residual risks to the government. Because each project arrangement is different, the risk profiles and resultant risk allocations differ. One fundamental issue that remains constant is the value in the transfer of risk.
Absorbing Business Risk
Every design and construction endeavor has both project risk and professional or design risk. When a public-private partnership is formed, the project risk usually becomes more extensive but more manageable. The professional risk—including basic design liability—often becomes greater and spread among the entities forming the private part of the arrangement.
Construction professionals involved in the planning, implementation, and day-to-day management of public-private projects need to assess their current risk management methods to address increased risk. Expanded roles may introduce new risks such as meeting fixed schedules and cost commitments, absorbing development and management costs, and facing reduced cash flow because the fee structures are often set up as deferred payments made during operation of the facilities.
While public-private projects are an important source of construction and investment income for many of the largest contractors, they can also be risky; tight schedules, complex design and construction, or innovative financing can create significant business risks. Financial pressure can often arise as there is often a time-lag between negotiation and receipt of fees.
Blurring Private Entity Exposures
The use of alternative project delivery and financing methods for public infrastructure projects blurs the common division of risks and rewards. Through negotiation, project risks should be allocated to the party best equipped to manage those risks. Contracts often include incentives that reward private partners for mitigating financial risk factors. Contracts should also assign governmental immunity to the partnership.
Under the public-private delivery model, the traditional relationship between project designer and project contractor changes significantly. The design effort in a public-private partnership is usually fully integrated into the project delivery team and managed by the contractor or developer.
Although all the parties need to share a new perspective, the design elements in particular need to be carefully managed. Designers need to be more creative in their responses to the contractors’ needs for constructability and schedule and may find it difficult to maintain the integrity and public accountability that is associated with being licensed professionals.
Continuing Exposure of Professionals
Public-private partnerships increase business opportunities in return for assuming new or expanded responsibilities and risks. In a more entrepreneurial capacity as a developer and operator, the private entity may assume risks that the public entity never had. Third-party liability—in many cases the same risks that don’t exist for a public agency—becomes important as a risk for private entities.
While government agencies have limited tort exposure (usually in the form of a cap), private entities usually do not. A contractor or designer with continuing management or maintenance responsibilities may find that its exposure is not capped in amount or time. Formal contractual agreements must clearly describe the public services to be provided and the standards to be met while providing the appropriate flexibility, incentive, and protection of profit-seeking private investors to provide improved public services and facilities.
Reaping the Benefits
Construction-related professionals are rightfully at the center of public-private partnerships. The skills of design and construction teams can provide the creative and management resources for large and complex programs, access to advanced technologies, and improvement of asset management and life-cycle cost practices. The public can benefit because new infrastructure can be financed with private market debt or equity that is to be repaid from project-derived, direct-user charges or government payments.
|
