Colorado used it to fund a $1.3 billion expansion of Interstate 70 in Denver. Texas used it for the $2.9 billion Grand Parkway in Houston. And Ohio State University used it to improve energy management and sustainability.
All these projects and initiatives were made possible by public-private partnerships. Popularly known as P3s, these partnerships are contractual agreements, usually long term, between a public agency and a private entity that allow public entities to pursue large projects they otherwise could not fund on their own. When they work, P3 deals provide an infusion of cash or other financial benefits to the public agency, and the private entity enjoys a potential profit opportunity.
For instance, a public hospital, in the business of health care, might enter into an agreement with a private parking lot operator to monetize its parking structures. In such a case, the hospital would get an upfront payment, a share of the profits or some combination of financial benefits. The parking operator would assume responsibility for operating and maintaining the parking structures while retaining some portion of the profits. Both parties would be able to focus on their core competencies.
In 2017, Ohio State entered into a 50-year partnership with ENGIE Services to take over management of the systems that heat, cool and power the Columbus campus. The deal included an upfront payment to the university of slightly more than $1 billion, most of which was placed in an endowment fund.
Though P3s have been widely used in Europe since the 1990s, particularly for large highway projects, they are a relatively new phenomenon in the United States. In the past decade, many states, including Arkansas, have passed P3 legislation. Act 813, known as the Partnership for Public Facilities and Infrastructure Act (PPFIA), was passed here in 2017. The rules of the bill went through a lengthy promulgation period and were approved by Gov. Asa Hutchinson in early 2020.
Alex Johnston, spokesperson for the Arkansas Department of Transformation and Shared Services, calls the legislation “another tool in the toolbox for public entities to address the public need for timely acquisition design, construction, implementation, installation, improvement, renovation, expansion, maintenance and operation of the structure or facility for its public purpose.”
Why is the P3 legislation important for the state? State Rep. Les Eaves (R-Searcy) said Arkansas, like any other state, has significant infrastructure needs. This is where P3 comes in.
“It has more needs than it will ever be able to afford,” he said. “This impacts public safety and has important economic ramifications. Public-private partnerships and the P3 legislation are somewhat complicated but offer a tremendous upside when implemented.”
Eaves noted significant advantages for both parties in a P3 deal. The private entity typically enjoys favorable financial terms and greater control than in a normal public project. Since the projects usually pay out over time, construction companies and their lenders may have opportunities to secure future cash flows beyond the completion of a project, he said.
As for the public institution, Eaves noted that, “A notable advantage is that the public entity does not incur any borrowing.
“Also, performance-criteria-based payments are not made until the asset is delivered. Additionally, the public sector is also able to harness the expertise and efficiencies of the private sector. By utilizing a P3 arrangement, we should see that private entities building public facilities and infrastructure are being completed in a more cost-efficient and timely manner. And P3s can shift some risk to the private entity and provide incentives for these assets to be properly maintained.”
Though no deals have been struck yet, Eaves thinks the P3 legislation may offer more construction-related opportunities for the engineering, architecture and construction industries in Arkansas.
“I hope to see increasing efficiencies in the government’s infrastructure investments,” he said. “This might allow public funds to be redirected to other important areas including essential socioeconomic needs. And there is the idea that if public-private partnerships reduce costs to the state as well as cities and counties, then this could potentially lead to lower taxes.”
Rob Guthrie, vice president of business development in the Little Rock office of New Orleans-based Bernhard Energy, anticipates that many P3 deals will involve some of the state’s public universities. The P3 legislation paves the way for such deals, which otherwise would not be allowed.
“Arkansas, like many other states, has recognized that its public universities are facing a perfect storm of adverse conditions,” Guthrie said.
He noted that with declining state appropriations over the years, most universities in the United States have not gotten back to previous funding levels per student. That was before COVID-19 hit. While operating costs continue to rise, many if not most public universities have frozen tuition and are seeing enrollment declining due to demographic changes. If that’s not bad enough, many universities took on a lot of debt over the past 20 years to attract students and increase enrollment, so debt service obligations are large.
“All that creates a lot of pressure on the last real source of revenue, which is non-operating revenue,” Guthrie said. “All that creates a lot of pressure on the last real source of revenue, which is non-operating revenue: investment income, philanthropy and revenue from non-operating grants.”
Guthrie sees P3s offering public universities great potential for monetizing assets, renewing infrastructure, transferring risk and helping to avoid long-term debt recognition on their balance sheets. Even though universities and other public institutions have access to tax-exempt debt, often at very low rates of interest, P3s can represent a better deal once tax credits and tax incentives are figured in, he said.
It’s too early for any P3 partnerships to have been formed in Arkansas, but Guthrie believes it’s just a matter of time before this happens.
“There’s a lot of encouraging momentum and conversations that are underway,” he said. “I think you’ll see some very transformative partnerships that will close in the next couple of years.”