Navigating public-private partnerships: Best practices for municipal issuers

In "normal" times — say, before 2020 — the start of the new administration would present an opening for municipalities and other public sector entities across the country to press forward with "wish list" infrastructure projects. The persistent low interest rate environment, coupled with expected tax increases, have made tax-exempt municipal debt an even more attractive asset class than usual.

Unfortunately, many municipalities are operating with limited debt capacity — a problem that has been building for years and which the COVID-19 pandemic has only intensified. While these public entities may access the municipal debt market to refinance various existing issues in the coming years, issuing new debt remains challenging for them.

All these factors have combined to position an innovative approach — the public-private partnership, or P3 model — as a crucial emerging tool for public entities nationwide.

The P3 approach, at its core, involves private capital investment in public infrastructure via long-term agreements. The structure, which has been used successfully for decades in Europe and Canada, enables public entities to address funding shortages by monetizing existing assets, such as airports, parking facilities, water and wastewater systems and others, or by partnering with private investors to develop new infrastructure (known as “greenfield” projects). 

Proceeds from monetizing infrastructure assets can be used to fund other infrastructure projects (a practice known as “asset recycling”), as well as pension obligations or other municipal funding needs.

Podcast Intelligent Automation: What Atos Brings to the Table

In today’s competitive market and rapidly evolving technology environment, it’s difficult for financial services firms to go it alone. P3 initiatives also allow public entities to benefit from the operational expertise of their private partners, who often bring global best practices to the table and typically contract to run the various facilities and assets funded by their investment for terms of 30 years or longer.

Momentum in the U.S. appears to be building as public sector entities have become more aware of the advantages offered by P3 delivery. According to industry source Inframation, the number of U.S. projects adopting P3 delivery increased from 7% of closed greenfield deals in 2017 to 8.7% in 2019 and 11.5% in the first half of 2020.

While the P3 route can be very appealing, it also introduces unique challenges, many of which may be new to municipalities and other public entities. Here are some of the key best practices to ensure success:

Make sure you have sufficiently strong political support. With the right private market partners in place, P3 initiatives can help public entities to improve their infrastructure, deleverage their balance sheets, enlist the operating expertise of experienced managers and — perhaps most importantly — accomplish all of this without raising or introducing taxes.

Clear the regulatory path well ahead of time. For new construction projects, obtaining the required permits and other regulatory approvals can take years. Potential investors will be wary of projects with uncertain regulatory approval outlooks.

Ensure that your financial advisor has deep expertise in P3 deals. Developing and implementing a successful P3 project is very different from issuing muni bonds. The investor universe is much more limited and specialized, while the diligence and documentation processes are much more complex. 

Additionally, advisors on these initiatives must have the expertise to conduct fair bidding processes to obtain optimal value for public assets and provide insight on potential regulatory hurdles. Further, having a financial advisor on your team who is well known to the P3 investor community will bolster the credibility of the procurement process.

But, as with any public finance measure, ensuring a P3 initiative has the right political champions will drive success or failure. Political leaders who have credibility with the communities involved must be firmly committed to the initiative, fully educated on the key issues, and well-prepared with messaging that conveys the benefits to voters. Lack of such political support can doom any P3 project.

While permits do not necessarily need to be in hand (or other regulatory hurdles fully cleared) prior to the start of a P3 project, public sector entities do need to be able to show significant progress on this front, and should be able to delineate a path to completion that falls within a reasonable timeline.

With these factors in mind, it is incumbent on the public entity to work with advisors that have the specialized knowledge and relationships required to ensure the process is successful.

A compelling solution for balance sheet-constrained public entities

The P3 approach is a very promising opportunity for municipal entities, but as with all complex challenges requiring unique solutions during unusual times, the devil can be in the details.

Public entities can position themselves for success in the P3 market — and resume crucial, long-deferred investments in their infrastructure — by adopting the best practices outlined above to ensure they are aligning political support, regulatory approval, and the right expertise.


Source: Bondbuyer