Recent legislation in Kentucky and Tennessee:
Kentucky and Tennessee have recently been added to the growing list of states allowing the use of public-private partnerships (P3). The Kentucky Legislation (HB 309) was passed on April 11, 2016, requiring regulations to be published by the end of 2016. The legislation allows the use of P3 for ‘capital projects’ with legislative approval required for P3 projects exceeding $25 million. The Tennessee legislation (SB 2093) was signed into law by the Governor on April 27, 2016. It allows the use of P3 for the development or redevelopment and construction of “transportation facilities.” However, during the legislative process the bill was narrowed significantly, as the final version limits the application of the P3 legislation in Tennessee to “any mass transit system.” The legislation in Tennessee is set to take effect October 1, 2016.
What is P3?
P3 is a model for the design, construction, operation, maintenance and financing of public projects that allows them to be financed like private projects. The P3 model serves as an alternative for government projects which historically have been abandoned or postponed for a variety of reasons, including the lack of funding, political opposition to raising funds through a government/municipal bond issuance, and a state policy of not borrowing funds to finance transportation projects. In addition to an alternative source of funding, P3 provides the government an opportunity to shift what would otherwise be some of the inherent risks associated with project development and construction to the developer (which in turn is responsible for the performance of its contractors and subcontractors) within specified parameters and upon an established schedule. In many instances P3 also allows for oversight and information-sharing protocols, as well as the ability to provide operation and maintenance (O&M) on a going-forward basis to meet specified levels of performance in a manner that allows the corresponding O&M financing to be included in the developer proposal from inception. P3 transactions are typically structured either to provide a series of fixed payments to the developer (availability payments) or to grant the developer rights to retain revenues from revenue-producing assets such as toll roads or bridges, a portion of which may be retained by the relevant governing body.. The P3 model generally provides for a thorough bidding process by the public entity in an effort to identify the most cost-effective and qualified teams to carry out the design, construction, operation and maintenance of the relevant project.
The P3 option is of particular importance for a state’s aging infrastructure and mass-transit concerns which may need improvements now. The P3 model has also been successfully implemented for the development and construction of hospitals, schools, portions of airport facilities, etc.
How will it impact the construction industry?
The P3 model appears to be more than a trend. P3 has been adopted as an option in over half of the states in the U.S. While most of the legislation in this country has evolved over the last decade and domestic experience has been somewhat limited, the P3 model has flourished internationally for more than 30 years. For contractors, P3 projects provide a unique mix between statutory requirements and private influences. Among the key questions for contractors to consider are:
- What is the particular P3 scheme governing the project?
- Is compliance with public bid laws required? If so, by whom?
- What about collusion, improper gifts, kickbacks or the like? Is the development entity covered?
- Are liens allowed or bonds required?
- What is the role and authority of the various individuals and entities involved?
- How is the design team incorporated and, more importantly, guided?
- How is the bidding process to be structured and controlled to ensure clarity, fairness across bidding teams and protection of proprietary information?
- What is the allocation of risk vis-à-vis delay and unforeseen costs between the contractor, developer and the government?
- What limitations or parameters are provided for financing options, including the level of any required equity commitment and the ability to incorporate solutions such as tax-exempt private activity bonds or low-interest TIFIA loans?
- Are there any requirements concerning minority contractors? Local contractors? Employment of in-state residents?
The development of the guiding regulations for P3 in both Tennessee and Kentucky is expected to take place over the next five to eight months. If the construction industry wants any input into how P3 is going to function in these states (and help answer the questions above), now is the time to speak up.
The Bradley Team: In addition to Kevin and Bryan, Tom Trent, Chris Bowles and other members of Bradley’s construction and project finance teams have knowledge and experience with P3 projects both domestically and internationally.