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A Public Private Partnership—Why Not?

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David M. Lick
Foster Swift Municipal Law News
April 24, 2018

For over 25 years, local, state, and federal governments have utilized public-private partnerships (P3s) to design, build and finance infrastructure, economic development, and social infrastructure. It is recognized as a seasoned, reliable delivery method.

In Michigan, a number of communities have contracted with a private provider to build, operate and maintain water systems or wastewater systems. Holding the private providers to a high standard has been done through contractual terms and monitoring. When a level of performance has not been met, the contract payment provisions have been derated until the service meets the standards in the contract.

Many communities have utilized public-private partnerships to obtain economic development for commercial and retail space and affordable housing. A P3 arrangement for economic development shifts the risk to the private sector and away from the government entity. The risk, however, is analyzed from a risk/reward basis by the lender, the insurance company, the construction company, the developer, and the operation and maintenance company. Multiple parties with a stake in the outcome reviewing the risk reduces the chance of failure. Growing communities recognize the benefits of social infrastructure of libraries, theatres, vocational education, health care, senior centers, and courthouses. Integrating the government power and financial enhancements with a private developer can achieve project goals at less cost while spreading the risk. As a result, the desire for a better community for all is enhanced through P3 delivery methods.

Many projects, whether infrastructure, development, or social infrastructure are often delayed or prevented by the lack of governmental upfront capital. The private sector can provide the upfront capital and utilize its efficiencies, innovations, and incentives for a return on capital investment which creates an optimum scenario for a successful project.

A private provider usually has a great deal of experience in the project that is to be delivered while the public sector has the power to demand results and enforce contracts. A true partnership is a concept that the assets and abilities of both partners are greater than one partner providing the delivery of infrastructure, economic development, or social infrastructure.

The attributes of “why not utilize a public-private partnership?” can be exemplified in the Marquette County Road Commission project. The Marquette County Road Commission engaged in a public-private partnership to obtain a new maintenance garage and salt shed.

The project began November 2014 and, even without a preliminary design, the project was completed in November 2015. The P3 project model included the design-build method of delivery and financing through an installment purchase agreement with direct bank financing.

The interest rate was less than 2% annual interest. The project was under $10 million which reduced the local bank’s financing cost and ultimately created savings for taxpayers of Marquette County. The upfront cost of a legal opinions and contract drafting saved the Marquette County Road Commission substantial money.

Why not have upfront capital delivered by the private sector? Why not obtain a project in record time with innovative and efficient means of delivery? Why not blend the powers and attributes of a governmental entity with private sector initiatives for the largest delivery per dollar spent? Why not have a project maintained at state-of-the-art levels throughout the life of the project?

And why not protect the taxpayers from loss, but rather shift the loss to the private sector in the event of a default?

Do you have questions regarding whether P3 contracts are right for you? Contact David Lick at 517.371.8294 or at dlick@fosterswift.com.