Jump on the P3 Wave: The Value of Bonding in a Rapidly Growing Market

By Martha Perkins posted 09-11-2018 01:37 PM

  

It’s no secret that the U.S. is in desperate need of funding to repair its crumbling roads, bridges, highways, railways, and waterways—and that’s why many Americans waited with bated breath for the White House to release its infrastructure plan in February. When the highly anticipated $1.5T plan was released, however, it set aside only $200B in federal spending for infrastructure repairs, leaving the remaining $1.3T to states, localities, and private investors.

One way some government entities may seek to bridge this gap is through the utilization of public-private partnerships, or P3s, as a procurement mechanism. “The federal dollars that many states and local governments were hoping for seem unlikely to come through, and that might result in even more dependence upon P3s as a way to finance projects,” said Mary Jean Pethick, Vice President, Head of Surety Risk Solutions at Zurich North America. “In the proper circumstances, P3s can be a creative way to solve the problem of getting infrastructure built and developed in a timely manner.”

Michele Pavlik, Vice President and Surety Underwriting Manager at Chubb, noted that P3s have successfully expedited infrastructure projects in other countries. “The P3 model is a mature delivery system in Europe and Canada, and the United States is late to the market,” she said. “The P3 model is providing a new source of financing through the private sector to have public infrastructure needs met today, rather than waiting until sometime in the future when and if funds become available.”

Pethick cautioned that P3s aren’t appropriate for all infrastructure projects and that financing should not be confused with funding.

“If you’re considering working on or bonding a P3, it's important to have a good understanding of the structure as well as why it would make sense for that particular situation—each P3 project is going to be different and it's important to have a clear understanding of the goals, risk allocation, and structure,” Pethick said. “Apply common sense, and know there's no free money—this is a financing mechanism and not a source of funding.”

Pavlik agreed. “P3s are complex from a legal, technical, and financial perspective and should be implemented with care,” she said. “The largest and most sophisticated P3 projects can only be handled at the developer level by relatively few private firms in the U.S., and even the world—they're that challenging.”

Pethick said P3s are typically used on large projects—ranging from approximately $800M to more than a billion. “For example, right now a P3 is underway in Virginia on I-66, and that’s over $2.14B,” she said. “Another one that recently started in Maryland is the Purple Line metro—a $1.6B project.”

Of course, risk is inherent in projects of this size. “Any contractor considering a P3 needs to make sure they have the legal teams, sophistication, and ability to understand, evaluate, and manage these risks,” Pavlik said.

To that end, surety bonds help ensure project completion. “Securing the contractor’s performance of the contraction contract and payment of its subcontractors and suppliers with performance bonds and payments bonds protects the beneficiaries of the bonds, as well as the interests of the taxpayers and investors, which are major benefits of bonding,” Pavlik said. ”Subcontractors and suppliers may not have the ability to file a mechanic’s lien against the project to protect themselves from non-payment by the contractor. As such, if a payment bond is not in place, they may be taking on significant payment risk.”

While the federal government recognizes the importance of bonding through the Miller Act and every state has enacted similar legislation through Little Miller Acts, P3s may not necessarily fall under that purview.

“When those statutes were enacted, legislators were envisioning a direct contract between the government entity and the construction contractor, so when you have P3, there's no longer that direct contract, and so it's not as clear that the bonding requirements apply. However, all of the many public policy arguments for requiring the protections of payment and performance bonds continue to apply. ” Pethick said.

“It's a new product in a way — a new procurement method that current bonding legislation may or may not address,” Pavlik added.

Pethick and Pavlik are presenting NASBP’s special educational workshop, "Jump on the P3 Wave: The Value of Bonding in this Rapidly Growing Market," at each of the upcoming fall 2018 NASBP Regional Meetings, and attendees will be eligible for continuing education (CE) credits. Also, joining them will be Stephen M. Rae, General Counsel at Liberty Mutual Surety at the Region 4, 5, 6 & 7 Meeting in New Orleans, LA and Chris Indelicato, Surety Counsel at Liberty Mutual Surety at the Regions 1, 2 & 3 Meeting in Coeur D'Alene, ID.

“We'll be providing a deep dive in terms of what the structure of a typical P3 looks like, the procurement process in the various agreements, underwriting considerations for surety professionals, and the differences in the states in terms of where they stand on P3-enabling legislation,” Pethick said. “It's going to include both a broad overview of P3s and an in-depth review of some of the more complex aspects, including examples. It should be interesting and informative both to those who have not been involved with P3s as well as those who are familiar with P3s.”

See the NASBP Surety Bond Quarterly article on this topic.

Surety, Be guaranteed to succeed.
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