Imagine you’re a town manager with aging infrastructure and a growing population: How do you build enough schools to meet projected demand? Boost the capacity of your water and wastewater treatment facilities? Revamp bridges that now carry twice as much traffic as planned?
In the past, money for projects like these came from tax levies, bond issues and grants from governments higher in the food chain. Today, there is a fourth alternative, one that I’ve been learning a lot about over the last couple of months — and one that can shake up the infrastructure world.
Public-private partnerships (PPP, P3 or, sometimes, P³) are, as the name implies, business ventures which are funded and operated as a partnership between government and one or more private sector companies. Typically, the private party provides funds and/or expertise and assumes a lot of the financial, technical and operational risks in the project. The private entity may recoup its investment by charging a fee to use the asset (think bridge toll) or by payments over time by the asset owner (think long-term bond issue payments).
We’ve seen this before, as in the 1990s variations on design-build-operate-transfer led to the spreading of risk among the participants in private projects. The owner of a process plant contracted out the design and construction of the plant to one or more EPCs and had the EPCs operate the asset as a way of ensuring that the asset performed as specified (and did so quickly). If the asset was up and running early, the EPC made more profit. If it was late, the EPC might be penalized but also didn’t see the profit from the operating asset – a potentially huge loss. After an agreed-upon time period, the asset’s owner took over operation and, in theory anyway, it was by then an efficient, “broken-in” plant running close to capacity.
Now apply this concept to roads, bridges, dams, aqueducts and other public infrastructure, and a whole realm of possibilities opens up — for governments, engineering contractors and the software companies that make the design tools used in the projects.
The joint venture (JV) that is set up for a P3 project is chartered with developing, maintaining and operating the asset. It usually includes some combination of design and building contractor(s), an operator/maintenance company and one or more lenders. This JV signs the contract with the government agency that is responsible for the asset in the long term. If the project is a school, the school department will engage with the JV for the design of the facility. After construction, it will pay the JV to maintain the site out its budget — in essence, renting the space back from the JV. Per the contract, at some point the school department will take over maintenance. By that time, the investors will have been paid back in a relatively low-risk mechanism, the asset operator has a steady revenue stream and the town gets a school without having to raise the money upfront.
P3s are more common in other parts of the world than they are in the US, but they’ve been around for a long time. The P3 concept has been applied to transportation, water/wastewater, energy, social services and many other projects — and could be coming to your local infrastructure soon.
There’s a key difference in these projects, though, that plays to the strengths of the engineering and design software providers: collaboration and communication. In a more traditional world, the community may look at images of the proposed school and perhaps a model of the building, classrooms, gymnasium and so on — looking for tax dollars at work. These reviewers need to imagine themselves with an operating asset and need high-quality renderings, walkthroughs and flyovers.
In a P3 world, the long-term viability and revenue stream of the asset step to the fore, as investors need to be convinced of a return. Here, we need the same visualizations for the community, but also construction plans and schedules (4D and 5D, as I’ve written about before), maintenance and operational projections and a lot of other information that’s keyed to ensuring that decisions are being made based on the best value for the project over the long term (which may not be lowest price). All of this needs to be fed into lifecycle cost and revenue projections. The IT infrastructure needs are much bigger, as the partners are more tightly connected, especially in the early stages of decision-making. 3D CAD models with underlying database structure (BIM models in some cases), materials and maintenance databases and operational simulations all become important assets.
Solution providers that can link these assets for decision-making and collaboration and that can promote them further into the life of the asset will find themselves as strategic partners in these JVs. Right now, we’re so early in the technology development cycle for these projects that many solution providers find themselves showing clients how to implement BIM, for example, on large projects. There are no standard processes yet, so each project relies on the partners’ past experience and invents anew. But that will change as the technology becomes more capable and usage broadens.
A recent McKinsey study found that the world needs $57 trillion in infrastructure investment between 2013 and 2030, just to keep up with global GDP growth. That $57 trillion is 60% more than what we’ve spent, globally, on infrastructure over the last 18 years. The gap between what we need to spend and what we’ve been spending can’t completely be filled by P3 schemes but the private sector is increasingly interested in these projects, in part because all other investments will fail if goods can’t be brought to market and workers can’t be trained.
P3s are coming. Autodesk’s Terry Bennett told me about the Global Infrastructure Forum, an event at which he recently presented. It sounded a bit like infrastructure project speed dating, as “441 executives from the public and private sectors … participate[d] in a series of rapid project presentations, private meetings & deal sessions, leading keynotes, deep dive workshops and networking events. The 6th Global Forum hosted 61 project presentations, 770 private meetings, 42 countries, and over $270 billion in project value”, according to the Forum organizers. My take: 61 projects each met with 10 prospective investors. That’s a lot of investor interest and money looking for projects.
$270 billion. $57 trillion. These are mind-boggling numbers, so let’s bring it back to earth. Need to build a school or fix a bridge? A P3 can leverage the best of the private sector for public benefit. An unfinished project is 100% cost — there’s no possibility of revenue. As a result, P3 projects tend to be finished quickly, with high quality and a focus on the operating life of the asset. Technology is undeniably crucial in these projects, as communication and collaboration at all stages lead to better conceived projects, faster approvals, more efficient construction, better operations and perhaps a longer asset life — before the process begins again on the next revamp.
[Note: One thing I hadn’t considered when I began researching P3s is that some people consider this privatization. To many, privatization (the transfer of an asset to private ownership) is evil because it conjures images of exorbitant fees, lack of choice and corruption. In a P3, the asset is owned by a public agency — it’s not privatization.]