How States and Municipalities Can Harness the Power of Public-Private Partnership Agreements to Buil How States and Municipalities Can Harness the Power of Public-Private Partnership Agreements to Buil

How States and Municipalities Can Harness the Power of Public-Private Partnership Agreements to Build Smarter Cities

This article is part of Ice Miller’s Smarter Cities Guide, designed for municipal leaders, city administrators, urban planners, and economic developers. In this guide, your team will find opportunities to explore best practices and utilize checklists to develop the infrastructure, to understand the technology, and to implement the financial and legislative solutions needed to build a smarter city. Click here to learn more.


ISSUE OVERVIEW

As public infrastructure in the United States is aging, the cost of infrastructure construction and improvements is increasing. Recently, public spending on just transportation and water infrastructure totaled $416 billion. The lion’s share of that figure—$320 billion—was borne by state and local governments.[1] In the face of such costs, coupled with the need to leverage smart connections for reliable delivery of amenities and utilities to citizens, states and municipalities are reaching for innovative ideas to relieve the financial burden of improving or building public infrastructure.

One such alternative is a public-private partnership ("P3"). Many states have laid the legislative groundwork to allow for public entities to use P3s for transportation projects. In order to facilitate connected infrastructure development such as public utility upgrades and facilities expansion and renovation, states and municipalities are currently considering non-transportation P3 legislation.

A P3 is essentially a long-term contract between a public entity and a private partner. In exchange for compensation, the private partner invests its own funds and delivers a public structure or service. Payments to the private partner can either be made periodically out of existing funds, called availability payments, or through the utilization of concession arrangements.

P3 agreements can take many forms, depending on the project, and each agreement is unique. Generally, two of the most common forms of agreements are the (1) Design-Build-Finance-Operate-Maintain (or some combination of the same) agreement, in which the private partner finances the public facility, and collects payments from the public entity over the life of the agreement; and the (2) Long-Term Lease, in which the public entity enters into a long-term lease with a private partner, and the private partner makes an upfront cash payment to the public entity in exchange for a continuing revenue stream (such as a parking lot or rental of a public building).


P3 OPPORTUNITIES

Entering into a P3 Agreement is a great way for a municipality to leverage the private sector’s expertise and resources while enjoying cost savings and improved performance. Private sector expertise is critically important to infrastructure or transportation projects that are designed to leverage smart connections. For example, a municipality can take advantage of private sector advances in data collection and analysis to contract with partners to build smart metering systems for improved water delivery to citizens.

In addition, the public entity is able to transfer the risk to the private partner. The private partner will typically bear the operations and maintenance risk, while the public entity bears the revenue and force majeure risk. Of course, risk transfer between the two partners can and should be addressed in the P3 Agreement.

Opportunities for municipalities to utilize a P3 include waterworks facilities and other utilities, the monetization of aging public buildings with environmental remediation exposure (brownfield), and financing assistance with new-build infrastructure (greenfield). A partnership with a private party also allows the municipality access to cutting-edge technology and enhanced operations that may not otherwise be available due to budget constraints. This could include a P3 for a fiber-optic internet infrastructure, which would not only benefit the public by securing dependable fiber connections throughout communities, but also provide significant municipal uses, including emerging Smart City and Internet of Things applications.


P3 CHALLENGES AND IMPEDIMENTS

P3 arrangements also carry a unique set of challenges that all parties should consider, such as the lack of enabling legislation, which creates uncertainty as to the rights and responsibilities of both the public and private partners. In addition, P3 arrangements result in the loss of public control and oversight and the possible loss of future public revenues, which are of concern to the public entity.


STRATEGIC STEPS FOR MUNICIPALITIES

In analyzing a potential P3 arrangement, municipalities should consider the following:

Step #1
Are there assets that generate a stream of income?

Step #2
What is the cost of operating and maintaining public assets?

Step #3
Are public funds available to finance the project?

Step #4
Can the income stream be monetized sufficiently to justify the loss of control over the asset?

For governmental entities, P3 arrangements also necessarily involve a loss of public control and oversight, and a possible loss of future public revenues. Of course, these concerns can and should be addressed in the P3 agreement. If there are political or project-neutral concerns—such as general financing approval or determination of supervisory agency—which are not resolved under current law, they should be addressed by P3 enabling legislation.

For more information on the IoT, contact a member of our Internet of Things Industry Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
 


[1] Congressional Budget Office, Public Spending on Transportation and Water Infrastructure, 1956 to 2014, Mar. 2, 2015, https://www.cbo.gov/publication/49910

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