Blogs

By Sarah Carpenter of Smith, Currie & Hancock LLP
Published March 15, 2021


The State of Maryland has several public-private partnerships projects (P3s) planned or already in progress, including the Purple Line light-rail project and the I-495 Capital Beltway/I-270 toll lane project. As Maryland continues to look to P3s as a vehicle to address the State’s infrastructure needs, it is important for contractors and subcontractors to understand the P3 structure and the significant ways in which it differs from more traditional procurement models.

History

Prior to 2013, Maryland’s Public-Private-Partnership law did not provide a detailed framework for the authorization and implementation of P3s. However, in 2013, the Maryland Legislature passed significant revisions to the P3 statute, Md. State Fin. & Proc. Art. §10A-101 et seq., providing much-needed detail regarding the mechanics of P3s and establishing the framework for P3 projects today.

What is a P3?

The Maryland P3 statute defines a “Public-private partnership” as:

a method for delivering public infrastructure assets using a long-term, performance-based agreement…where appropriate risks and benefits can be allocated in a cost-effective manner…in which: (i) a private entity performs functions normally undertaken by the government, but the reporting [government] agency remains ultimately accountable for the public infrastructure asset and its public function; and (ii) the State may retain ownership in the public infrastructure asset and the private entity may be given additional decision-making rights in determining how the asset is financed, developed, constructed, operated, and maintained over its life cycle.

What kind of projects are permitted for P3s?

The Maryland P3 statute enables the use of a P3 for the delivery of a “Public infrastructure asset” – a capital facility or structure, including systems and equipment related to the facility or structure intended for public use. Generally, a P3 may be utilized for transportation infrastructure projects, (such as roads, highways, bridges, seaports, airports, and transit) and “social” public assets (such as school facilities).

What agencies are authorized to enter into P3s?

• The Department of General Services;
• The Maryland Department of Transportation, for public infrastructure assets of any of its modal administrations;
• The Maryland Transportation Authority;
• The University System of Maryland;
• Morgan State University;
• Mary’s College of Maryland; and
• The Baltimore City Community College.

Each of the above entities are referred to by the Maryland P3 statute as “reporting agencies.” Each reporting agency is required to adopt its own regulations and establish processes for the development, solicitation, evaluation, award, and delivery of public-private partnerships. For instance, the Maryland Transportation Authority has adopted its own set of regulations (Md. Code Regs. 11.07.06.01 to 14) governing the pre-solicitation and solicitation process, evaluation, negotiation, award, and delivery of P3 projects.

How are P3s funded?

P3s may be funded by any combination of federal (e.g. Transportation Infrastructure Finance and Innovation Act “TIFIA” loans and private activity bonds “PABs”), State, or local funds, grants, loans, debt, or other public sources of funding or financing along with any private sources of funding or financing.

What is the P3 proposal and review process?

All P3s must be procured competitively. The Maryland P3 statute permits solicited as well as unsolicited proposals. Specific details regarding the review and approval process are governed by the Maryland P3 statute as well as applicable reporting agency regulations but, generally, the process will involve several levels of review and approval, including review and approval by the Board of Public Works and the submittals of requests for qualifications (RFQs), requests for information (RFIs), and requests for proposals (RFPs).

What does a P3 agreement entail?

A copy of any final P3 agreement must be published by the reporting agency. For instance, the P3 agreement for the Purple Line Project was published by the Maryland Department of Transportation and Maryland Transit Administration and can be found here.

The Maryland P3 statute defines the basic requirements of any P3 agreement which, where applicable, must address:

• the assignment or transfer of any interest related to the P3;
• setting and adjusting tolls, fares, fees, and other charges related to the public infrastructure asset;
• revenue-sharing or other sharing in fees or charges;
• minimum quality standards, performance criteria, incentives, and disincentives;
• operations and maintenance standards;
• State inspection rights;
• the terms and conditions under which the reporting agency may provide services for a fee sufficient to cover both direct and indirect costs;
• oversight requirements and remedies and penalties for default;
• the reporting agency’s responsibility for ongoing oversight;
• State audit rights;
• return of the public infrastructure asset to the State; and
• performance security and payment security requirements.

Unless otherwise approved by the Board of Public Works, the term of a P3 may not exceed 50 years.

Are P3s subject to MBE Requirements?

Yes, to the extent practicable, the Maryland P3 statute requires the application of the Maryland Minority Business Enterprise (MBE) Program to P3s and also requires MBE goals and procedures be incorporated into any P3 project.

How are P3s different from traditional Maryland procurements?

Procurements by the State of Maryland are generally governed by General Procurement Law, Md. State Fin. & Proc., D. II, et seq., which addresses key elements of procurements, from methods of source selection to the dispute resolution process for contractor claims. Notably, outside of a few defined exceptions (such as the requirements regarding payment and performance bonds and prevailing wage rates), General Procurement Law is not applicable to P3s. This results in several significant differences between traditional procurement contracts and P3 agreements.

Contractors and subcontractors rely upon many facets of General Procurement Law to protect their interests, such as the Maryland Little Miller Act, the Prompt Payment of Subcontractors Act, and the right to protest and submit claims for decision by a procurement officer and appellate review by the Maryland State Board of Contract Appeals (MSBCA). The Maryland Little Miller Act, Md. State Fin. & Proc. Article §17-101, et seq., is one of the few aforementioned exceptions where General Procurement Law applies to P3s so subcontractors on P3 projects can look to the payment bond for the project in the event of nonpayment.

However, the Prompt Payment of Subcontractors Act for procurement construction contracts, Md. State Fin. & Proc., §15-226, is not applicable to P3s. This means that subcontractors on P3 projects may not be entitled to prompt payment from contractors (of undisputed amounts from a contractor within ten (10) days of the contractor’s receipt of corresponding funds from the State) or the remedies for failure to receive prompt payment. Contractors and subcontractors should review the P3 agreement for a project to determine whether any prompt pay obligations are made contractually applicable to the project and whether the regulations governing prompt payment for private projects, Md. Code. Real. Prop. §9-301 et seq., may apply. It is important for contractors and subcontractors to understand which contractual and/or statutory prompt pay requirements apply to a project because applicable obligations (e.g. payment within seven (7) days or ten (10) days), rights, remedies, and penalties will vary.

Similarly, contractors cannot rely upon the dispute resolution process for protests and contract claims typically applicable to procurement contracts with the State. Generally, for a typical procurement contract, a contractor may submit a protest or claim to a procurement officer for review and final decision and, if the decision is adverse, appeal that decision to the MSBCA for an administrative review followed by a more limited review of any adverse decision of the MSBCA by any applicable Maryland court. However, this dispute resolution process is not applicable to P3s.

It is important for any contractor working on a P3 project to review the P3 agreement and any applicable contract documents to determine its right to pursue and avenue for time and cost relief and to find the answers to critical questions such as: What is the review process for claims? Who is the final decision maker regarding any claim? Is that final decision subject to review and if so, what kind of review? Will any final decision be reviewed by a neutral arbiter or will someone within the reporting agency be given the final say-so on any claim? Is there a right to appeal to a Maryland court and, if so, will the court conduct a de novo review (a review without deference to the agency’s decision) or be subject to a very limited review of the agency decision? In the absence of the established dispute resolution process applicable to traditional procurement contracts, contractors on P3 projects must take care to find and understand the answers to these decisive questions or they may find themselves in a contract where the State is the judge, jury, and executioner of the contractor’s sole means of relief.

Sarah Carpenter is a Partner in the Washington, D.C. office of Smith Currie. She can be reached at skcarpenter@smithcurrie.com or 202.452.2140.