Legal Briefs

Infrastructure Conundrum

Public-private partnerships are good solutions for renovating infrastructure, but the risks are considerable.

The buzz and speculation about a national commitment to improving America's infrastructure continues. This is not surprising with a commercial real estate developer in the White House and members of both political parties recognizing the need to update our aging roads, bridges, dams, ports, and other projects of a public or quasi-public nature. Both Wall Street financiers and Main Street workers usually embrace these major projects.

Long popular in Europe, the public-private partnership model has started to mature in the U.S. Several states have adopted specific P3 legislation. As a result, the sector is expanding beyond traditional P3 deals into social infrastructure projects for schools, hospitals, courthouses, student housing, and recreational facilities.

While P3s may involve innovation, efficiencies, a faster path to market, and a mix of public and private funding sources, resulting in attractive interest rates and returns, these transactions have risks. Each project presents its own unusual business risks. Other risks also should be considered by those contemplating participation in a P3.

Political Reversals

The greatest risk to most P3 deals is the political risk. The P3 graveyard is overflowing with deals that died because of a shift in the political winds.

Changes in political leadership can kill projects almost overnight. Florida's proposed $2 billion high-speed rail project between Tampa and Orlando is just one example. Political shifts kill deals. Time also kills deals.

Critical Timing

Obviously, it is important to understand the structure of the transaction and establish a meaningful timeline. Be sure to build in the requisite lead time for considerations such as legislative approvals, tax incentives, referendums, bonds, and validations.

Adhere to the rules of engagement. For example, during blackout periods do not get cute or creative for communications.

Strictly adhere to the express terms of the request for quotation or the request for proposal. These requirements are not aspirational in nature.

A corollary is to use persuasion for influencing the decision makers as early as possible in the process. Be sure the convincing occurs well before the blackout period or cone of silence goes into effect. It often is possible to drive the RFQ and RFP in a direction beneficial to the team. 

Lawyers, financial consultants, and risk-management teams must be involved early, especially on significant conceptual points. By way of example, comments should be provided at the outset on performance criteria and standards for payments, off-sets, and hand-back provisions at the end of the concession, use agreement, and other critical aspects of the bid.

Benchmarking Processes

Study other recent and similar deals, even if from other jurisdictions. Many of the key players, including law firms, underwriters, insurance companies, and financial advisers, often move from deal to deal. The club is relatively small.

Becoming familiar with the key issues, such as liquidated  damages and market terms, is a must.  Typically, many of the documents to be reviewed as part of this diligence and benchmarking process are accessible because they are public records.

Reality Check

Clear and well-defined risk allocation and user-friendly documentation are relevant. Many individual participants in the P3 process will not be around at the end of a long-term concession that takes 25 to 35 years, so consider as many risks and variables as possible.

At the end of the day, to avoid a no-bid situation, the deal must be enticing for lending institutions. In addition to being attractive for financing, P3 deals must be palatable to the taxpayers and elected officials. Public-private partnerships undergo more scrutiny than private transactions.

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