Understanding P3s

Abstract

Public–private partnerships, or P3s, are often not well understood—the key word being “well.” My observation is that they are understood to a degree by most of us, and one common perception is that they are complicated. P3s are complicated in a way that is different from other, more traditional, project delivery methods used in the water sector, especially those related to financing. The traditional methods of investing in and financing water infrastructure development certainly are not simple. Nonetheless, we may feel more comfortable using them because they are what we're used to, and we already understand the pros and cons. Still, it took time for us to learn about these methods, which once were new and now are considered traditional. And while the traditional methods seem to meet our needs, one question to ask is whether they are the best choice in all situations. Two years ago, AWWA started collaborating with groups interested in expanding the understanding of how P3s work. We have held a series of Round Table Discussions, where stakeholders such as utilities, bond-rating agencies, and private-sector interests can openly explore the benefits, risks, and opportunities of various project delivery and financing models. These include traditional methods, P3s, and other approaches. For the past five years, AWWA has reported in its State of the Water Industry Report that the number one and number two concerns of the water sector are (1) renewal and replacement of aging water and wastewater infrastructure and (2) financing for capital improvements. Knowing this, AWWA was motivated to support round-table educational discussions, with the vision of helping to put the water sector in the best position to make informed financial choices. As it relates to P3s, the 2019 State of the Water Industry Report tells us that 70% of utility respondents are not considering a P3 alternative and that 21% are already involved, plan to use, or are considering using a P3. Interestingly, 9% of utility respondents indicated that they are currently partnering with other utilities to share resources. AWWA recently partnered with Ernst & Young Infrastructure Advisors LLC to conduct a survey, asking AWWA's membership about P3s. The report, To P3 or not to P3, is available electronically on AWWA's website (https://bit.ly/2GjCGZr). There were 166 responses from North American organizations, of which 77% were utilities. The survey clarified that P3s are not a form of privatization, are not appropriate for every project, and do not represent new sources of revenue. So, where does that leave us? Taking all of these survey results together, it seems reasonable to say that P3s will continue to be a part—perhaps a small but strategic part—of the portfolio of options used by utilities for infrastructure development and financing. Projects that will likely lend themselves best to a P3 will be those that involve development of new assets that have technical requirements with which a utility is not familiar. To be successful, a utility will need to invest time and effort in building internal capacities to properly enter into and manage a P3 agreement. The answer, then, to what the best method is for project delivery and finance? It depends.