Public-private partnerships (P3s) have been used in our community for decades on an informal basis. They weren’t called P3s but represented a partnership of sorts between the public sector and private sector to bring a community benefit, such as improving roads and parks, while allowing the private sector to construct income-producing adjacent developments. Other informal public-private partnerships include local community projects like our local fresh markets.
Today, however, P3s are bringing new opportunities for all. Public and quasi-public projects that might not have been viable in the past can be structured using today’s P3 model to make them viable and sustainable projects.
The P3s of today incorporate the P3 project practices and structures that have been used for years around the world. P3s first gained popularity in Europe as a solution to the challenges public projects typically experienced — cost overruns, lack of funding from year to year and schedule delays that result from the conventional construction project delivery process.
The private sector construction industry is much better positioned to manage risk, control budget and work creatively to meet a project’s needs. By partnering together in a P3, the public sector eliminates most of its risk by requiring a single private-sector party to manage budget, schedule and quality.
In exchange, the private-sector party is allowed to build a project that will provide long-term financial benefits by both building and managing the project once it is operational and, in some cases, commercializing parts of the project to offer to other public and private parties.
P3 projects also involve creative financing, often through financial “stacking” that includes public funding, private equity and debt.
The Doug Meijer Medical Innovation Building in Grand Rapids is one local example of a P3 project that broke ground on property owned by Michigan State University in fall 2019. It will serve as a hub for cancer research, education, life sciences and other service offerings.
Michigan State University wanted to create opportunities for innovation in the form of state-of-the-art facilities without the customary financial risks associated with designing, constructing, financing, operating and maintaining a large real estate project.
Rockford Construction, Walsh Construction/Walsh Investors, Murphy Development Group and SmithGroup, each experts in their respective industries, created the P3 private sector entity to collectively assume the risks necessary to deliver upon Michigan State University’s goals. In addition, the P3 private sector team is incentivized to attract other strategic public and private sector partners that will participate in the innovative project by becoming tenants in the building.
While these additional public and private partners help to mitigate some of the financial risks that the P3 private sector team took on, the real win is for our community as more public and private sector partners can collaborate more easily to advance medical research, innovation and practice in new and exciting ways without creating undue financial burden for any one public partner.
As a result of the financial uncertainties resulting from COVID-19 and the economic downturn, P3s have gained more attention and have evolved to be an increasingly popular option. The ability to minimize debt and shift project responsibilities and risk from the public sector to private companies is an attractive option for government, colleges, universities, utilities and quasi-governmental operators, all of whom want to bring upgrades and innovation to their communities but cannot currently afford the usual risks associated with doing so.
True partnerships, shared collaboration and greater expertise ensure project success.
As we continue to evolve as an industry, we anticipate that P3s will become more prevalent as the public and private sectors collectively realize their potential and positive impact on communities.
By establishing clear project goals, assembling the right team, and identifying roles and responsibilities that make the most of each partner’s strengths and experience, P3s can result in true win-win collaboration among all parties.