The final course of the specialization expands the knowledge of a construction project manager to include an understanding of economics and the mathematics of money, an essential component of every construction project. Topics covered include the time value of money, the definition and calculation of the types of interest rates, and the importance of Cash Flow Diagrams.
Benefits of P3
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From the course by Columbia University
Construction Finance
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From the lesson
Public - Private Partnerships
Karl Reichert introduces public and private partnerships.
Meet the Instructors
Ibrahim Odeh, Ph.D., MBAInstructor, Department of Civil Engineering and Engineering Mechanics, Columbia University
Director of Research and Founder, Global Leaders in Construction Management
What are the benefits of P3s?
As I show here, there are certainly benefits to clients and
what I would call by clients is the agency or authority that we're partnering with.
So you get projects completed, you shed the long term legacy O&M costs,
you receive the asset back at the end of the concession agreement,
and you're guaranteed on time on budget delivery.
To the users, to the public, to the tax payers, to the citizens,
you get new infrastructure which improves your life quality.
And the best example is the manage lanes concept,
where you choose to get out of traffic you pay a little bit more but, you're able
to get to your destination in good time in a safe way perhaps at a constant speed.
Whereas, the alternative is you're sitting an hours of traffic every year and
banging on your steering like most of us.
Infrastructure is built for the life cycle and built to last for the long term
because there's incentivisation with the private partner to do so.
It allows non-PPP projects to move forward.
It's interesting that if a client has a limited budget and
can stretch that budget using a P3, then that frees up available resource to
deliver projects that don't qualify as a P3.
Then of course, P3s require a customer-focus and we don't always see
that when we have publicly owned assets where we're actually concerned
about the consumer, concerned about the customers that are utilitizing the asset.
In a P3, the customer is key because they are the ones paying the bill,
they are the ones using the asset, paying the toll or their tax dollars are going
toward the availability of payment that we need to live up to.
So in a public-private partnership, it's critical that we deliver excellent
superior customer service because it has an effect directly on the bottom line.
Whereas in a governmental agency the accountability level isn't quiet as high.
And there you'll see where poor maintenance occurs, poor customer service.
And I think people get frustrated because they see their tax dollars going toward
projects that they need but the service levels aren't maintained to
the level that you might see in a public-private partnership.
And so this trend, I'm on this P3 trend because I really,
truly believe it is one avenue that we can take as a nation to really address
the staggering infrastructure deficit that we have.
We see procurements coming out in new sectors as I mentioned earlier.
It's a way to drive the agenda and prove life quality,
local hiring, safety, sustainable green aspects,
deals are getting less risky so they're become more competitive.
You have four, five, six, seven consortia attempting to pre-qualify and
then short-listed down to four or five to bid so
you have high-quality teams coming in to compete for the work if you will.
Clients are seeing value in P3s.
There was a while where P3s hadn't matured enough in the United States to really
prove their full worth, and
now you see clients that have procured P3s in the early to mid 2000's.
They're now built up and running these assets and
clients are seeing the true value in what they have achieved in this partnership.
So the model is being proven in the US.
There is a lot of capital available on the sidelines.
There's pension funds, there's infrastructure funds, there's equity
funds, there's insurance funds, loaded and on the sidelines waiting to
invest money in projects of high quality, where they can get a fair rate of return.
And so, if we can unlock the sector in the US and
utilize P3s, that money will flow freely into good projects.
Right now, it's kind of on the sidelines looking for places to invest and
I think why P3 is trending is the available funding and
the need will meet and there will be solutions found thereafter.
I would also say that politicians of every stripe have embraced and
utilized public-private partnerships.
It's not a Republican or a Democrat or a Conservative or a Liberal concept.
It's used across the board, I call it multi-partisan and
I think you have governors of every political persuasion who see the value.
Some need to be convinced and that's a good discussion to have but
many others have seen the value and they're embracing it and
I think that's a positive sign why P3s are trending.
So in summary, you have P3s becoming less political or more accepted.
The value proposition is being proven.
There's no more concern, I would say,
about can this structure work, can this procurement called P3 actually work?
While there have been some setbacks in some projects, and perhaps rightly so,
the majority of the projects that have been bid, awarded, and
delivered or are in delivery have been considered highly successful in the US.
There are other big projects coming to market.
There's a pretty good pipeline in the US despite the fact that
we're getting between only five and seven financial closes per year in the P3 space.
There are many more projects coming to market,
we see a significant robust pipeline and that's very encouraging.
And also, you have the emergence of what I would call hybrid P3 projects
where maybe there's not a long term in equity investment in the project but
there might be a design build finance where
financing is arranged in partnership with the private sector to deliver a big asset.
And then the client has 10, 15, 20 years to repay the financing,
plus a premium to the firms that arrange the financing in the first place.
And you still have the design build components, so
you still have the efficiency aspect but you're able to stretch the payment process
out longer so that you can afford the project in today's dollars.
P3s have been under some attack in the US politically or perhaps from other
stakeholders who don't necessarily buy into the concept, and that's understood.
It's something that's relatively new, it needed to be tested.
Anything that involves infrastructure, we in America hold dearly our infrastructure,
our bridges, and our tunnels, and our highways, and our hospitals,
our iconic buildings.
And the idea that a private entity would get involved and somehow financing,
and building, and owning or operating those assets is a little bit new.
And it takes time to acquire the confidence in the private sector
to live up to its obligations.
So there have been a lot of myths in the market that we've had to overcome,
but I think we've made a lot of headway.
But just to share a few, many governmental agencies say well I'm
going to do a P3 because I need money and unfortunately it's more than that.
It's not a stop gap measure to just get money from a bank if you will,
to fund the project.
There comes a lot more with a P3.
So it's not a quick hit of cash infusion for
a political leader to take advantage of.
It's much more complex than that as I've described earlier.
Some say, well, it's a P3, the local environmental rules and
regulations don't apply that they're just going to bulldozed wherever they want,
wherever they can make the most money and the answer is absolutely not.
All of the projects have to be cleared through a robust process,
obviously the NEPA process and the FONSI process, local rules,
regulations, policies and procedures, zoning, planning.
The projects that are procured as a P3 tend to have a higher level of scrutiny
than traditional projects.
And so that's a myth.
The local rules and regulations, even the local practices tend to apply
because again, we're forming a partnership for the long term.
We want to be a part of that community and
we want to make sure that the community embraces the assets.
So, the last thing that you're going to do is go counter to what the community wants
or expects.
There's been a lot of early union opposition,
labor union opposition to P3s because of the term privatization but
actually that couldn't be further from the truth.
P3s generate union jobs by these assets being advanced through the P3 model,
profits quicker and more efficiently than under the traditional approach.
So the union issue of, well this is going to cost us jobs, it actually doesn't.
It generates tons of construction jobs, a lot of sub-contracting so
again it's not multinational companies coming in and taking up all the jobs.
A large portion of the P3 design, build scope and
the support scope under the O&M are sourced locally and regionally.
As a matter of fact, we're required to do so by our public client,
we're happy for that.
We want to make sure that the community completely benefits from the asset
that's being created.
Interestingly also, one of the largest investors in
P3 projects around the world are actually union pension funds.
So in a way it's using your retirement dollars if you're a union member
to generate projects that are hiring the next generation of union workers.
And in some cases, when there is a brown field component to the P3 along with
a green field, the brown field component includes employees of the state or
the authority that can go now to work for
the private partner when the entire project is packaged as a P3 and
there has been a number of examples where that's happened very, very successfully.
The media is a little unfamiliar with P3s as well, so
there takes a little bit of education, you know, you hear the term Lexus Lanes and
why are they charging tolls at that rate, at market rates.
The media often times thinks of the private investors as foreign
investors who are only here to squeeze profit out of the assets and
the whole idea of doing a public-private partnership isn't
quite on the full radar screen of our media friends and colleagues.
So, a lot of education and effort is required there because again these
are complex endevours, they involve perhaps companies that are unfamiliar,
at least at the top level, a lot of times it's all local companies below.
But it's not, it's a very, it can be a little bit controversial,
a little bit political and
it's an easy headline if you're the media to talk about a P3 in a particular way.
So I think one of the myths is that we have a difficult time
breaking through on the benefits of a P3 or what
a P3 is all about because it is such a new and somewhat complex construct there.
And you have other issues related to the fact that you have,
you would call Wall Street investing in these projects.
So you have debt and equity coming in from the investor community or
the equity community and that always raises suspicions and
perhaps that's deserved in some cases.
But ultimately, I think what you will find in all the P3s that have been done
successfully in the US that that has not been an issue.
That this is considered a major investment in a community where a long
term approach is being taken, where we are absolutely reliant on
the excellent performance of the asset in order to generate our return and
we're not there to take advantage of anyone.
We're not there as a private investor or a developer or
contractor to do anything other than deliver a high quality long term life
cycle approach to an asset that can benefit the full community.
So the idea is that there have been a lot of detractors of the P3 model and
that's acknowledged but I think overall, what I'm trying to argue through
today's presentation is that these myths are largely that.
They're not really based on best practices or
full fact and full view of the overall value proposition of the P3s.
So, the pros outweigh the cons.
The pros are that, the cons are that you have slightly higher financing
cost to the risk transfer, tougher more complex procurement process.
All of a P3 procurement basically happens up front, so
that when financial close is reached, construction and design and
engineering begin and the operations and maintenance is already under process.
And so, once the contacts are all signed and
everything is locked, you move immediately into the delivery phase.
There's no, well we'll get your bid and we'll get the bids of four others,
we'll rip them open and we'll get the low price and then we'll negotiate for
a year and a half.
Before you can proceed, we got to go through a design process and so on.
In a P3, it's fully baked if you will.
The solution is baked, it's selected, it's financed, it's ready to go.
And once the financial close is agreed, work begins.
Sometimes there's even an early works agreement that project can get underway
from a design and construction standpoint even before financial close.
So there are some negatives if you will but I think that they outweigh,
the positives outweigh the negatives.
So you have lower life cycle costs, you have an earlier project realization,
you have on time, on budget guarantee.
Typically, the executions are done,
the project is done in a way that is more efficient and faster than traditionally.
You have a guaranteed service level in every incentive for
the private partner to perform and you can spread the costs over time,
and that's another valuable aspect of the P3s.
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