Thinking About a P3? Better Ask These Questions First
Washington, D.C.'s innovative Office of Public-Private Partnerships offers a good case study in to assess whether a P3 makes sense for a particular city project.
The City Accelerator cohort on Urban Infrastructure Finance focused on innovative tools, models and revenue sources that can help cities across the country address their infrastructure challenges, while promoting equity for diverse communities and incorporating the realities of climate change. In this series, we will explore some of the ways in which cities can allocate infrastructure project risks to the private sector through innovative use of public-private partnerships (P3s). Part 1 focused on the reasons cities might decide to pursue (or not pursue) P3s for a given project. In Part 2, we explored some common (and less common) P3 models. In our final installment, we share the evaluation process being used by one cohort city, Washington D.C., to explore how P3s can help solve its infrastructure needs.
Over the past few decades, Washington, D.C., has experienced the kind of growth that most other cities would envy. More than 1,000 new residents move to the District each month, and tourism is at an all-time high.
Residents old and new, as well as visitors, expect urban infrastructure to keep up with demand. But while D.C. government has invested billions in housing, schools and transportation, the city faces a structural deficit and a debt cap that will likely be exhausted in the next few years. Combined with uncertain revenues from the federal government, D.C. -- like many large cities across the country-- is looking to deliver innovative projects efficiently and effectively, maximizing limited dollars for the benefit of its residents.
D.C.’s Office of Public-Private Partnerships (OP3) was launched in November 2015 to serve as the clearinghouse and procurement adviser for other city agencies seeking to utilize P3 models. As a member of City Accelerator’s cohort focused on creative approaches to infrastructure finance, OP3 is developing a strategy for identifying P3 opportunities, working with other District agencies to prioritize projects, and selecting an appropriate P3 model that maximizes innovation, quality and equity.
OP3 is still fairly new, and its approach to evaluating P3 projects is continuously being refined. The following describes the stages of a typical project evaluation, but these steps are iterative and would be customized or adjusted based on a project’s type, scale and objectives. OP3’s Guidelines, which are publicly available online, go into greater detail on the formal steps and criteria they consider for the high-level screening of projects.
The Initial Screen
OP3’s project-screening process includes a realistic assessment of the project’s goals and objectives. This could begin with an evaluation of the relative importance of the asset. Does the project address a critical infrastructure need for residents? Is this project driven by need for a new asset, or the condition of something that already exists?
If the project seems to align with overall city policy, the next set of questions relates to feasibility. Is there a funding source (either from a new revenue stream, capitalizing underutilized value, efficiency savings or general fund budget) to support the project for its entire lifecycle? Would the project generate revenue of its own? An early stage cost estimate and broad scope of work should be completed for the project. A preliminary value-for-money (VfM) analysis compares estimated costs against the expected economic and social benefits of a project, and provides a basis for prioritizing the project among others under consideration.
Determining whether a project could be a good candidate for a P3 may boil down to an assessment of risk. OP3 reviews the types of risks the District is best positioned to retain versus those that it believes can be more cost-effectively mitigated by transferring to a private partner in a P3 project. But, as discussed in previous installments of this blog series, this transfer typically requires higher upfront costs (resulting in long-term savings if properly allocated to the private partner) and more managerial oversight.
A potential P3 should be of sufficient size, scale and complexity to justify these higher costs; the threshold will vary by location and type of project. A large-scale project typically entails more (and more severe) risk that a city may want to explore transferring to a private partner. Smaller projects may not justify the higher transaction costs of a P3 procurement, but could also be opportunities to pilot innovations with limited exposure to risk. If a standalone project doesn’t seem large enough to justify a P3, consider whether the project could be bundled with other, similar projects in a single procurement (e.g. the renovation of a group of school buildings).
The agency who will ultimately “own” the project should have the capacity and capability to effectively manage the procurement. At the same time, if a city doesn’t have much experience completing or maintaining similar projects in the past, or if previous efforts have gone awry, the project may be a good candidate for a partnership with the private sector.
OP3 also examines whether similar types of P3 projects have been done elsewhere, and what lessons or best practices were learned. The market should be studied to ensure a sufficient level of interest from qualified bidders. Typically, a city’s ability to enter into a P3 is governed by state law.
Equity is another important dimension to infrastructure finance decision-making, whether considering a P3 or any other type of transaction. Increasingly, cities in the US are wrestling with the consequences -- intentional and unintended -- of structural racism and economic inequality. Applying an equity lens to P3 prioritization means understanding whether the project could benefit underserved populations and communities, creating pathways to jobs, income and wealth for city residents and closing gaps among racial and socioeconomic groups. Cities should assess whether significant aspects of the project could be provided by minority- or women-owned firms; in fact this is an articulated requirement of many public sector procurements.
Political feasibility should be evaluated early and often. Unlike a formal cost-benefit assessment, there’s no formal methodology for taking a community’s temperature and judging support for a major infrastructure project. It is essential that cities convene the relevant stakeholders -- residents, labor unions, the business community and others -- and discuss the potential impacts of a project generally, and a potential P3 specifically. Would residents need to pay user fees for something they currently receive without charge? Would privatization mean a reduction in public sector jobs? Would private funding create new opportunities or unlock innovations to benefit city residents? Listen carefully and gauge residents’ support. Ensure that citizens affected by a major project -- those who benefit and those who may be inconvenienced -- feel empowered to contribute their ideas meaningfully and that their concerns are addressed thoroughly. A robust community engagement process requires more time and effort upfront, but typically makes any project -- especially a complex public-private partnership-- more likely to succeed.
Red Light, Green Light
If the project seems feasible, the political and social risks seem minimal, and a P3 structure seems desirable, a VfM assessment can reveal whether the benefits of a P3 would be greater or less than a traditional public sector procurement. Many laws governing P3s require this type of comparison. At this point, it should become clear whether a P3 model is preferable to its public-sector comparator. If so, it can be added to a running “pipeline” of projects that could be feasibly advanced as a P3. Projects should be prioritized within the pipeline based on policy objectives, an analysis of infrastructure needs and a review of market conditions. The pipeline should be reviewed and refreshed regularly, and projects should be advanced to the formal procurement process as timing and other conditions allow.
From here, OP3 can develop an Request for Information (RFI) to solicit information and insight as well as market interest from the private sector regarding a potential P3 project. The information gleaned from the RFI, which is typically used for more complex or novel projects, may be used to build a Request for Qualifications (RFQ), through which potential bidders can establish their qualifications for the project. Responses to an RFQ may be helpful in refining the project scope, financing structures and project agreement requirements. At this point, the city can issue an RFP to pre-qualified bidders, and select the proposal that offers the greatest value and potential for innovation and project success.
Wrapping It Up
Public-private partnerships have increasingly become a part of the local government infrastructure toolkit. They are being used to deliver large-scale capital projects that remake entire neighborhoods, and less-visible, but essential, “smart city” technologies that have the power to transform our relationships with the cities in which we live.
Cities around the country are searching for new ways to use limited resources and address critical infrastructure needs, from transportation and housing to resiliency and emerging technologies. The emerging use of P3s by cities, including D.C.’s OP3, will reveal many best practices, key considerations and adaptable strategies in the coming years that will hopefully help local policymakers better align their capital budgets with their capacities and goals.