Public-Private Partnerships: Finally Connecticut?March 30, 2012
Connecticut’s transportation infrastructure is undeniably in need of repair. According to the American Society of Engineers’ 2009 “Report Card for America’s Infrastructure,” 35% of Connecticut’s bridges are “structurally deficient” or “functionally obsolete” and 47% of Connecticut’s major roads are in poor or mediocre condition. Yet, in difficult economic times with reduced tax revenues, the state government has limited ability to adequately fund needed infrastructure projects. Public-private partnerships (“P3” for short) – in which private entities bear the initial burden of financing projects intended for public use – offer Connecticut a potential tool to remedy this situation.
The financing of large-scale public construction projects through partnership with private entities first emerged in the United States in the 1990’s. P3 projects have met with a measure of success across the country in the past 20 years, and today only a handful of states are without any form of legislation authorizing P3 projects for state infrastructure. Massachusetts has had a broad enabling statute for P3 transportation projects since 2009, and New York Governor Cuomo has an ambitious P3 plan that involves billions of dollars in bridge and highway infrastructure advancement. Connecticut has only just begun to dabble in the P3 realm.
Buried within Connecticut’s consensus jobs legislation (HB 6801: “An Act Promoting Economic Growth and Job Creation in the State”), signed into law on October 27, 2011, is a provision opening the door for Governor Malloy to approve up to five P3 projects over the next three years. Specifically, the change in law authorizes state executive branch agencies and quasi-public agencies to enter into partnerships with private entities to “finance, design, construct, develop, operate or maintain” certain public facilities that generate revenue as a public infrastructure. These facilities include educational, health, early childcare, and housing facilities. They also include transportation systems like ports, transitoriented development, and related infrastructure.
The new law sets forth an evaluation and approval process for each proposed P3 project to determine whether the project is suitable for a P3 agreement. The public agency must determine if a P3 project is feasible, desirable, and convenient to the public and furthers public policy goals. The determination cannot be based solely upon the revenue a proposed project generates. Rather, the agency must specifically consider the project’s operational or technological risk, an analysis of the benefit to the agency’s customers and the public, and a “value for money” review and analysis.
In addition to solving budgetary issues that have stalled infrastructure projects, another advantage of public-private partnerships from the State’s perspective is the shedding of risk for design deficiencies and cost overruns. Under the traditional design-bidbuild construction model, the state’s design is put out for public bid, and the state – as owner of the project – is responsible to the contractor for the costs attributable to deficiencies, errors, and omissions in the design. With P3, the state is not necessarily the “owner” of the design and therefore may not have sole liability for design deficiencies.
Contractors who have only performed design-bidbuild projects must have a complete understanding of the risks involved in public-private partnerships. This should include direct involvement of legal counsel as well as insurance and bonding agents to aid the contractor in assessing whether a P3 project is a sound business decision. The contractor’s legal team should also be diversified to handle not only construction-related issues, but also potential zoning and funding issues. A P3 contractor must also be an active participant in the negotiation of the memorandum of understanding of the consortium members (the developer, design team, and contractor) as well as negotiation of the contract with the public entity. Many of the tasks and associated risks traditionally handled by the public entity – major permitting, design review, geotechnical analysis, financing – shift to the consortium members, including the contractor. Moreover, the public-private partnership enabling legislation bars an agreement granting sovereign immunity to a contractor or private entity. Thus, evaluation of the risk-shifting between the P3 participants should be a central focus for the P3 contractor.
The enabling legislation does not guarantee that any P3 projects will actually be built. Agencies interested in a P3 project must first consult with the Department of Economic and Community Development and the Department of Transportation commissioners, the state treasurer, and the OPM secretary. The project must also gain approval of the Governor, and public hearings must be held. The legislation contains a sunset provision of January 1, 2015. It remains to be seen whether any P3 project can clear those hurdles before the legislative sunset. If so, P3 might help provide an answer to Connecticut’s crumbling infrastructure in times of economic austerity.