Planning large-scale infrastructure projects: Are “panacea P3s” too risky?

Insights

When Trump announced his pre-election campaign infrastructure investment pledge, public-private partnerships (P3s) were positioned as the panacea solution to its delivery.

The US infrastructure plan published last year involved turning $200 billion into $5 trillion. The plan involved an initial federal government ten-year investment, which would then be followed by further investment from state and local governments alongside private industry (P3s).

But while some major contractors embraced P3s, others have started to take a step back, judging the risks as too high.

Here we examine whether P3s are the panacea they were purported to be, and look at some of the benefits and risks of taking on large scale infrastructure projects in general.

P3 projects and their benefits for contractors

Since public private partnerships are designed to manage big projects (normally over a long time period), they are attractive for contract firms that want to invest for the longer term and grow.

Providing they are managed well, the contracts themselves offer cashflow security and stability. By making projects easier to finance, P3s bring big opportunities for our industry, which in turn is good news for employment in the project regions.

Current projects utilising the P3 model include the Corps of Engineers $2.8 billion flood control project for Fargo and Moorhead. The Army Corps then plans to use the P3 model to roll out four further projects as part of the Revolutionize USACE Civil Works Program. Currently undergoing viability assessments, the projects include the $2.8 billion Brazos Island Harbor Channel Improvement at the Port of Brownsville in Texas and the $3.9 billion Coastal Storm Risk Management (CSRM) project from Sabine Pass to Galveston Bay just off the coast of Texas.

Contractor risks in US public private partnerships

The $2.3 billion I-4 Ultimate highway project in Florida is also being run through the P3s model. Led by Skanska, Granite Construction Inc. and Lane Construction Corp, it is the biggest public-private partnership in Florida history and one of the largest ever US roadway projects.

But there have been many practical challenges along the way and the project has been beset by tragedy with a fifth person dying recently while working on the project.

It’s a huge long-term investment for the companies involved, who are responsible for financing and building (within seven years) and then operating the project for 40 years – with Florida state making set payments over that period.

The new US infrastructure plan was based on the assumption that cities and states better understand and should therefore manage their own infrastructure needs and budgets.

The potential downside arises when the additional local investment needed has to be pinched from other local program budgets, making the projects unpopular with the general public. Or, as is often the case with projects lasting many years, the project scope changes and becomes financially unsustainable for the contractor to deliver. 

Following the announcement of $97.8 million losses in Q2 this year, Granite CEO James Roberts told investors in August that the P3 process is no longer viable for his company and it will no longer be taking on these “megaprojects”, despite heavy involvement in infrastructure work previously.

Assessing the long-term financial viability of large scale infrastructure projects at the outset is a huge undertaking. Staffing costs can comprise a large proportion of the budget.

If you would like to discuss planning and resourcing for such projects – either speculative or pre or post contract – contact us online or give us a call in confidence on +44 (0)113 487 9300.

Blog post by Sean Rowlands, Head of Construction & Infrastructure. Email: seanrowlands@tsgrale.com

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