The rise in public-private partnerships (P3s) in the US infrastructure market means greater opportunities for US engineering and construction (E&C) firms.
Now is the time for US engineering and construction (E&C) firms to get into this competitive game: to prepare for P3 projects, to get an edge on potential local competitors, and to catch up with more experienced international contractors and project managers.
But it’s worth learning the ropes first before trying to take a leading role. Before deciding to try a P3, E&C firms must understand the basics of P3s, determine their risk tolerance, and carefully evaluate the risks and rewards of specific projects.
A P3 is a contractual arrangement between a public agency and a private-sector entity that results in greater private participation in the project. Such agreements usually involve the creation of an entity called a “special purpose vehicle” (SPV) to design, build, maintain, and operate the asset for a contracted period.
The SPV typically has several members, including design, engineering, and construction firms, as well as a bank lender and a company to operate and maintain the asset. These private parties invest in the project, receiving an equity interest, and take on substantial financial and operational risks.
E&C firms that want to establish their credentials with government officials and members of the SPV must demonstrate a thorough understanding of P3s and articulate the role they want – and are qualified – to play.
“E&C firms need to position themselves as ‘the local team of choice,' with project experience in the area and knowledge of the local bureaucracy and labor force.”
No doubt, getting involved with P3s is risky business. It requires a bit of drive and entrepreneurial spirit to be willing to invest money upfront in hopes of reaping a healthy return on the tail end.
Before deciding to try a P3, construction firms must determine their risk tolerance and carefully evaluate the risks and rewards of specific projects. This analysis requires the know-how to develop a financial model to help determine some of the risks. Then, companies must gauge their own risk appetite and chart a plan to manage and minimize any risks.
“If your E&C firm is well-capitalized, well-managed, you can use an M&A strategy to consolidate your position in the market or increase market share.”
E&C firms will need to expand their portfolio of skills to include new risk management strategies, tax and financing expertise, an understanding of equity investment and return, governance and oversight capabilities, and screening techniques for choosing both projects and partners. To get up to speed, firms should study past P3s and consider consulting with expert advisers in the field.