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Public-private partnerships help fund municipal infrastructure projects

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Change in law is considered a shared risk as, in order for relief to be available to the private contractor, the change in law must be specific to water/wastewater treatment facilities, the design and/or output specifications for the project or the treated water/effluent standards. Latent defects, geotechnical and environmental risks are shared, as the private contractor typically assumes risks which were observable or which were properly inferable from the disclosed data and background information.

risk-allocation-chart
Overview of risks carried by the public sponsor and the private contractor in different public-private partnerships.

Lastly, source water quality and influent quality are considered shared risks. Customarily, there is an agreed range or baseline established for these inputs, outside of which the public sponsor bears responsibility and/or the private contractor is granted relief. In the context of events for which relief is granted to the private contractor, the same can take the form of compensation for additional costs, schedule extension and, during any operations and maintenance phase, reduced payment deductions or excused performance.

In addition to the more specific project risk allocations, the private finance component (usually both debt and equity) is a key lynchpin in the risk transfer equation. Typically, payments by the public sponsor during the construction phase are limited to milestone events or substantial completion. During any operations phase, these are subject to deductions for performance failures, all of which is codified in payment schedules to the project agreement.

This serves to create the necessary economic incentive to ensure performance by the private contractor. Delays result in additional debt service costs, cost overruns result in additional equity/reduced equity returns, and performance payment deductions result in reduced equity returns and place debt service at risk.

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Moreover, with private debt in the structure, there is an additional level of oversight, as lenders and their technical advisors monitor all aspects of construction and operations to ensure repayment of the debt. They have “step-in rights” to cure private contractor defaults as mitigation measures.

Innovation and flexibility

Water and wastewater treatment facilities, with their inherent complexity, are unlike other forms of civil infrastructure. They are, in essence, large “machines” and, as such, operations and maintenance are integrally linked. Are P3s flexible enough to accommodate such complexity? The short answer is “Yes”. Indeed, one of the key pillars of P3s, innovation, is part of that answer, as is the depth of experience which exists within the sector. This is evidenced by the advantages, particularly new and proprietary technology, which the private sector possesses.

In order to derive the benefits and value for money which innovation in a P3 structure can offer, the approach taken by the public sponsor is typically less prescriptive, with a greater emphasis on functionality. This is achieved through a focus on project-specific output specifications to address both construction and operational requirements. This allows the public sponsor to focus on needs and outcomes (i.e., output water quality and operational efficiencies).

It also allows the private contractor flexibility to proffer a design which meets those requirements, all within the overarching framework of risk assumption by the private contractor for design and life cycle etc., and the inherent cost efficiencies which arise from a competitive bid structure.

The result is innovation. Of course, each circumstance will differ and public sponsors may seek to be more prescriptive in some areas and less so in others. P3s can accommodate both approaches.

In addition to these advantages, P3s are not limited solely to the greenfield components of a development. Brownfield elements can also be incorporated into the project profile, subject to risk allocation in the areas of latent defects, geotechnical and environmental matters. This may include demolition and decommissioning of existing treatment facilities, or the incorporation of existing facility elements that still have useful life, such as holding tanks, reservoirs, lagoons and transmission infrastructure.

The private contractor must also coordinate with the public sponsor to develop plans for integrating greenfield development portions with brownfield components at an operational level, to ensure continued treatment and supply. This includes all of the scheduling, plans and sequencing which flows from that level of complexity.

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