Infrastructure Option: Public-Private Partnerships Offer Unique Benefits, Risks

In exchange, there is an agreed-upon period of time during which the private company recoups its costs plus a fair return; for example, the company would keep the tolls collected from a toll road it builds. 

Once the contract is complete and the private company has received its due payment, the project ownership (and maintenance) reverts back to the public-sector entity. 

"It's like if the New Jersey Turnpike did not want to pay for repairs," Coen says. "It would call one or two [private] companies and a finance provider" to get the project done.

PPPs are "absolutely" trending, says William F. Becker, executive vice president for Aon Risk Solutions. Aon even has a unit that specializes in such partnerships: the Public Sector Practice, headed by Becker, identifies possible arrangements between private construction companies and state governments­—specifically with the departments of transportation in Virginia, Florida and Maryland.

"Public-private partnerships are one way to [get the work done], and definitely one of the more creative out-of-the-box ideas," says Becker. "They give Aon an additional creative strategy to present to clients and prospects."

Partnerships of this type need to make sense from both a financial and a political perspective, says Coen, and due diligence by all the parties involved in a PPP is critical. "You want to make sure you can handle [your end of the partnership] and that the other side is robust enough to handle its part."

If the private-entity partner goes bankrupt, for example, the state entity would have to buy the project back—as happened with a major construction project on State Route 91 in California, Coen says. Taxpayers ended up footing the bill and understandably weren't pleased.

Political risk can bring a potential project to a halt before it even starts. Local legislators may want to play politics with a project in order to advance their own agenda or to prevent a political rival from seeing a project through. It's another part of the overall picture that a public-sector risk manager needs to assess before the project is put into motion: Who is going to vote on a project, and how are they likely to receive it?

The Pennsylvania Turnpike Authority, for example, in 2007 was millions short of the costs for maintaining the roadway. So Gov. Ed Rendell proposed leasing the roadway to a private entity, which would be in charge of, among other things, the turnpike's upkeep.

In May 2008, with a bid of $12.8 billion, a team-up of Abertis Infraestructuras SA of Spain and Citigroup Inc. was selected as the concessionaire in a 75-year lease. Toll increases would be contractually capped. Rendell, excited by the deal, called it a "slam-dunk" and urged the state legislature to sign off on it. Instead, they voted against it, and the lease was nixed.

So while it's impossible to know how a legislature will vote on a project, risk managers still have to assess the political mood and consider politics as one of the variables in their risk plans.

PPPs AND THE INSURANCE PICTURE

For most public-sector risk managers, entering into a public-private partnership to improve upon or build new public infrastructure is brand-new territory.

PPPs have a certain amount of risk associated with each of the functions carried out by the various partners: There is design risk, construction risk, finance risk, and operations and maintenance risk.

Liberty Mutual's Coen says the first step for a public risk manager is to figure out what risks the city or state wants to take on and what risks it should pass on to its partners.

He says public-sector risk managers should ask themselves, "Out of those buckets of risk, what can we [take on] internally? Operations and maintenance? Yes. Design? Maybe. Construction? Probably not."

Typically, says Coen, the public entity will pull together all the parties and initiate the discussion of risk transfer. It is then decided which risks are going to be assumed by each party.

It's a complicated process for risk managers, as there's no template for it; there are many variables to consider in each arrangement, including state statutes.

In most cases, the private contractor typically takes on operations and maintenance coverage, as they are the ones actually doing the work (as opposed to other situations in which the public entity is responsible for the project). In a PPP, the public entity does not take possession of the project until the contract period has ended, and so would not take on the operations and maintenance risk until the ownership reverts back from the private financier to the public entity.

Each partner in a PPP also carries its own insurance protection against possible suits by the other partners. For example, at one time, designers could forgo General Liability coverage. But now that they are part of a team, it's a must-have, Coen says.

Multiple insurance angles must be considered by the risk manager. There might be certain issues to the public-sector entity in a PPP from a liability-limit perspective, for instance, as nuances in state laws could decide which entity in that partnership would be responsible if a worker is injured on the job.

In Texas, for example, a private company is not liable for injuries incurred on-site if the worker's injuries occurred "within the context of their work," Coen says. So if a road-construction worker was hit by a car while doing his assigned job—laying down asphalt, pouring cement, painting lines—Texas state law says that the liability lies with the state, not the private contractor, regardless of the arrangement between the public body and its partners.

As always, it's incumbent on the risk manager to know the law—and consider every possible outcome when structuring the arrangement.