On the surface, the Administration’s recent P3 Summit was an exercise in wild agreement from all sides of the infrastructure sector.
“We know P3 can work.” “P3 isn’t the answer to our infrastructure crisis, but it is an important tool.” “Federal investment in P3 projects must be expanded.” “States must be encouraged to use P3 financing, even if they never have done so before.”
Beneath those fairly non-controversial comments, though, Summit participants were sending a more nuanced message, one that indicates that the P3 movement still has a ways to go.
Speaker after speaker indicated that the current P3 market was stuck in neutral because of disputes over how to effectively allocate risk between the public and private sectors. Jane Garvey, the former FAA Administrator and now with Merdiam, summed it up well. She said that early on, government saw P3 deals as a way to transfer risk from the taxpayer to a private party. Now, P3 partners are negotiating ways to manage risk in any particular deal.
How is that done? Most private equity representatives readily admitted that they were not in the best position to guarantee approval of necessary federal permits or environmental reviews. Government, they argued, had existing relationships with agency partners and greater familiarity of regulatory constructs. Thus, it made sense (procedurally and economically) to assign management of that task, and the risk associated with delays in accomplishing that task, to the public entity.
For their part, government leaders urged that private companies were much better positioned to manage contract procurement, labor relations, and construction deadlines. Therefore, economic incentives and risk for those items should fall squarely with the equity companies.
As I observed live streaming of the Summit, this pas de deux of risk management seemed more than a bit ironic. Had state DOTs not been engaged in major project construction for generations? Aren’t public water works generally successfully built and operated consistent with complex regulatory schemes? It was almost as if government representatives were more than happy to admit their inability to do effectively what they have supposed to have been doing for years.
Private developers also seemed to feign ignorance over the permitting process, one in which they are engaged as a matter of course. They seemed to argue: “We have the know-how to engineer and build highly complex public infrastructure, but get a Record of Decision from an agency, now that’s like sending a man to Mars.”
From the outside, watching the Summit felt like watching an actual P3 negotiation in progress. One side says that it will gladly accept the additional risk, so long as it receives fair compensation and gets contract terms that minimize exposure to that risk. The other side says that it will gladly offer incentives for the acceptance of that risk, but it must respect the taxpayer’s tolerance to in essence pay for an expensive insurance policy in addition to tolls or other fees for use of the infrastructure.
Is it risk transfer or risk management? Neither. It’s money. If the deal is right, risk can always be managed.