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A Primer on Public Private Partnerships for Municipalities, Part I 

by Ann D. Fillingham and Aleksandra A. Miziolek

Published: September, 2008

Submission: August, 2009

 



Part I of a III Part Primer: An Introduction


This newsletter is the first of a three part report prepared for our public finance clients with respect to “public private partnerships.” Also known as “PPP” or “P3” projects, there is an increasing amount of press regarding these projects, some of which is contradictory and some of which is just plain confusing. While we obviously can’t answer all questions about all of these projects, the purpose of this three part report is to provide you with some useful information in identifying and analyzing these opportunities.



What Really are “Public Private Partnerships”?



Municipalities have been participating in public-public and public-private partnerships for years. Every time a municipality contracts a service rather than having its own municipal employees provide the service, it is entering into a form of public-private partnership. Similarly, every time municipalities come together and establish joint authorities for the creation of sewer, water or other infrastructure projects, or the provision of uniform services such as police, fire or 911, they are entering into a form of public-public partnership. Every time a municipality agrees to create a TIF, brownfield or DDA project for a developer or group of related projects, or enters into a 425 economic development annexation agreement, it enters into a form of public-private partnership.



So why all the recent buzz about “P3”s if we have been doing this for years?



When investment bankers talk about P3 opportunities, they are generally referring not to traditional public-private partnership arrangements like those outlined above. Similarly, they are not generally talking about pure service contracts. Rather, the P3 projects getting the most press lately are generally of three different types:



            1. New infrastructure opportunities; and


             2. Infrastructure rehabilitation opportunities; and


             3. Monetization opportunities.


 New Infrastructure P3 Opportunities


Michigan municipalities have legal authority to borrow to finance a wide variety of projects, and generally have the ability to do so at advantageous tax-exempt rates. Historically, therefore, it has rarely made sense for municipalities to look to private capital sources (with a higher cost of capital) for traditional governmental projects. Two things are changing, however. First, budgets are getting tighter, and the costs of traditional governmental projects are escalating. Second, the political realities associated with passing new taxes, levying additional mills or increasing rates are getting more complicated. There are therefore some types of projects such as road, bridge, energy, university housing or convention center projects that might simply be foregone in the current economy as too costly, either in hard dollars or political cost. Private companies have recognized this reality, and are offering opportunities that involve private financing, management and/or risk sharing for such new projects. Municipalities are generally familiar with opportunities such as leasing versus buying cars, trucks and equipment. They are now starting to be offered similar opportunities with respect to a wide variety of other infrastructure. Part Two of our Special Report will contain tips on analyzing these proposals. For now, we will simply point out the obvious. Some of these opportunities may have merit. For others, the direct or indirect costs in dollars, ownership or control, may outweigh the benefit to the municipality.


Infrastructure Rehabilitation P3 Opportunities



We are starting to see our municipal clients also being approached with P3 opportunities in connection with major infrastructure rehabilitation or improvement needs. These are similar in many respects to those being pitched for new projects as they involve a municipality making financing, ownership and management decisions with respect to a large capital undertaking. Since they relate, however, to the need to rehabilitate or upgrade existing infrastructure projects, they have aspects that need to be analyzed differently. It is often more complicated, for instance, to make decisions about the ownership and operation of an existing public project such as a parking deck, a golf course or a power plant than about the ownership and operation of a purely theoretical future project.


Monetization Opportunities



Rather than providing an opportunity to consider a new infrastructure project or improvement that would otherwise be unaffordable, some P3 proposals are more related to the monetization of existing revenues or assets in an effort to create funds for related or unrelated projects. These proposals often take the form of long term lease or concession arrangements, typically with a large up front payment. Since they involve different needs and motivations, we counsel our clients to analyze these proposals quite differently. Not all monetization is bad. In fact, many municipalities already make these types of decisions in connection with existing facility related bond issues when refinancing or adding new money, choosing to manage their debt and asset portfolio on an overall basis rather than a building or project specific one, extending maturities within useful life limitations rather than cash funding current needs, and entering into interest rate exchange agreements. That being said, any monetization, whether through a traditional refinancing or a P3 type project, involves giving up a current or future asset in exchange for current revenue or at least the lack of need for current expenditures. As such, the need and benefit of current cash influx should be carefully weighed against the loss of future revenue. These considerations will be addressed in greater detail in Part III of our PPP Primer.


Parts II-III of the Primer


This newsletter is the first installment in our PPP Primer. It is merely intended to provide you with an overview of the topic and a context in which to place future reports. Future installments will deal with the following specific topics, which we hope you will find to be useful:


             Part II: Analyzing a P3 Infrastructure Proposal


             Part III: Considerations Specific to a Monetization Proposal


 


 

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