Fighting back

16 February 2016 Political risk has long been a factor of life for US P3s. Aonís Caitlin Ghoshal discusses how firms and public bodies can mitigate against that risk
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Political risk continues to be a key issue facing P3 projects in the US. P3 projects are only possible if a US state or Canadian province has the requisite legislation allowing such projects. However, even if that is in place, private investors and contractors face the risk that their investment in pursuing a public infrastructure project could be affected by changes in the political and regulatory environment.

The P3 market has developed unevenly across the globe. In a mature market, such as the UK, one in four infrastructure projects are procured through public-private partnerships. In 2015, Canada procured 36% of its infrastructure with the P3 model whereas the US procured 1% using P3. In the US, Aon Infrastructure Solutions anticipates 11 projects to close in 2016 with a capital value of $8.7bn. We anticipate that 21 projects will close in Canada in 2016, with a total capital value of $12.bn – the highest value of P3 projects to be completed in Canadian history. While dealflow and project activity vary widely, there continues to be an upward trend for the model’s usage by public sector parties.

Aon has developed a proprietary data-driven tool, P3-POINT, to assist its clients in navigating and assessing the varied P3 landscape. In creating P3-POINT, Aon sent surveys to more than 1,000 P3 industry leaders from major construction firms, legal, technical and risk advisors, and infrastructure investors. The survey, distributed in the fourth quarter of 2015, asked for private sector leaders’ views on the bidding climate for P3s in the US and Canada. The survey results provide insight into the political risks facing P3 projects in the US and Canada. Ninety-four percent of respondents indicated that it was ‘very likely’ or ‘likely’ that they would be pursuing a P3 project in the next 12 months. More than half of those that responded (64%) indicated that pursuing P3 procurements figured prominently in their firms’ growth plans.

The existence of enabling legislation for P3 and the types of projects allowed under such legislation were ranked by survey respondents as the most important factors impacting a state/province’s readiness to procure P3. Respondents also ranked the governments’ experience with P3 and the presence of a political champion as additional crucial components necessary for the successful procurement of a P3 project. One respondent noted that “critical [P3] projects create political will and enable the public to proceed through opposition, regardless of delivery model”. The importance of the project in meeting community needs was often cited as a key contributor to the success of P3 procurement.

Respondents also reflected on the importance of a political champion, or an elected official willing to expend political capital in support of P3 projects. A survey respondent noted: “The project must have a champion and a hook. The champion is the driver to break down the political obstacles that could derail the project. The hook is the need being met by the project itself. A real or perceived need drives P3 projects to completion.” Through these comments, it is clear what private industry leaders regard as some of the critical factors influencing whether or not a P3 project will be successfully procured.

Using the results of the industry survey, we designed P3-POINT, a weighted sum model. Survey results were used to accurately weight each factor used in the model. P3-POINT is a data-driven, decision-making tool that provides an educated view of a state’s or province’s ability to implement a successful P3 procurement.

Using P3-POINT, we came to the conclusion that the US Southeast is one of the more certain geographic areas to successfully procure P3 projects. The Southeast region is promising for P3 procurement because of the presence of enabling legislation, positive political support, and strong procurement tendering practices present in the majority of states comprising the region. A state deemed ‘Not Certain’ by P3-POINT does not mean that the state cannot procure P3. For example, Kentucky – a ‘Not Certain’ state – reached financial close on the Next Generation Kentucky Information Highway P3 Project in September 2015. Rather, P3 procurements in states deemed ‘Not Certain’ or ‘Less Certain’ face a number of obstacles that impact the certainty of that P3 project successfully reaching financial close.

While it is difficult to predict where the political winds may blow – particularly across the US landscape – there are tangible factors that can be assessed to ascertain certainty of project procurement. The US continues to evolve and present new opportunities to P3 bidders. A data-driven analysis of P3 political risk goes beyond anecdotal experience and can help market participants make more educated investment decisions in the P3 marketplace in the US and Canada. 

This page was last updated on:
19 February 2016.

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