One old-time financing method could give budget-squeezed governmental agencies needed capital flexibility to immediately pay for infrastructure repairs—but the surety industry, contractors and lenders would have to modify their business models first, says broker executive Geoff Heekin.
Heekin, the Chicago-based managing director of the construction-services group at Aon Risk Solutions, notes the American Civil Engineers Society estimates the cost of needed U.S. infrastructure repairs at $2.2 trillion.
To finance those repairs, the public and private sectors likely must form a partnership—known as the P3 model, Heekin says. Although it has been in use for hundreds of years, the model has become popular in other regions worldwide since the mid-1980s, he adds.
Through such a partnership, the public obtains assets or services under a multi-year concession agreement with private contractors; the agreement defines the interests, rights and obligations of all parties.
“A fundamental premise of P3 is value for money,” where certain risks—including asset performance, environmental and cost certainty—are transferred to the private-sector concessionaire, Heekin explains. The public sector often retains other risks, including taxation, terrorism or permit approval. The goal, he adds, is “to align each risk element with the party best able to manage the risk.”
Small and large contractors can participate in the P3 model, Heekin notes. “In fact, P3 mandates optimal innovation and efficiency from the private sector, which often comes from firms that are not large but have unique technical capabilities.”
One challenge in adopting the model is that “surety-bond underwriters are concerned about the long-term nature of a P3 arrangement, which often obligates the private-sector concessionaire to 20-30 years of performance,” says Heekin.
Surety bonds, he adds, “fail to provide the liquidity element of performance security that P3 lenders seek in order to protect their interests.”
In addition, private lenders want rights and interests that overlap with a surety’s, but “these must be aligned and acknowledged by both with inter-creditor agreements while at the same time affording the protection which the public sector seeks in their fiduciary role as the project sponsor.”
A broker’s or agent’s role would be facilitating “risk identification, alignment and treatment of all risks for each project participant” and communicating those risks clearly “to effect a proper value-for-money outcome,” Heekin adds.
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