As we discussed in our recent article, projects below the $100m mark have traditionally been difficult for many in the market to get their heads around, and as such it is increasingly being seen as a missed market, with some significant opportunities.
However, step away from the typical view of P3 as an availability or concession-based model, that is so often the straitjacket for practitioners, and other options emerge. Availability-based models have stolen much of the limelight, but other approaches already exist.
At the forefront of this endeavor is Public Facilities Group (PFG), a firm that has managed to deliver 24 projects via a partnership model at or below the $100m mark - and is on course to close another in 2023.
“All of these projects are for local municipalities,” explains Matt Calcavecchia, vice president at PFG. “They were delivered ahead of schedule and under budget, with the majority portion of project savings being used to lower the cost of debt service on the project to the benefit of the municipality, or to add additional building components or FF&E [furniture, fixtures & equipment] to the project.”
PFG delivered all these projects using its favored 63-20 Progressive Design-Build (PDB) P3 delivery model. Under this format, bonds to finance the project are issued by a not-for-profit partner on behalf of the relevant public agency. This not-for-profit serves as the “on-behalf of” owner of the project during the term of the debt.
It has sometimes been argued that the 63-20 PDB model does not fall within the P3 boundaries, where availability payments and concessions are typically considered the favored approach of the industry.
However, Calcavecchia is quick to disagree, pointing out that the model provides the same design, build, finance, operate, and maintain list of services that are found in a typical availability payment-based P3 approach.
“It offers risk transfer, private operations and maintenance, and private financing,” he adds. “We collect a fee for what we do: we are not-for-profit but that does not push us into being a public sector organization; we are financing privately, not through a government entity.”
He continues that this approach makes the P3 market in the US “more complex and diverse than is typically seen in the rest of the world”, with the use of tax-exempt funding via nonprofits a clear delineator in the sector that is distinct from many other places where P3 is used.
Calcavecchia explains that PFG is able to match the credit rating that the relevant local authority would have got had it issued the bonds itself - but by doing so through PFG the municipality does not bite into its annual bonding allowance. “That’s especially important in projects under $100m,” says Calcavecchia,“because there is not a lot of wiggle room in a smaller project’s budget, particularly in terms of the cost of financing for a municipality.”
Without the same role of equity that is played in traditional P3 schemes, PFG is able to be more nimble and get smaller schemes delivered by using tax exempt bond finance. As one source pointed out to us in the previous feature, equity is the most expensive element of the capital stack, so removing it altogether gives PFG the ability to deliver projects in a more cost-effective manner.
In the 63-20 PDB model there are no hidden costs or annually increasing returns on capital costs, the company explains. This goes to the heart of PFG’s approach on smaller projects. “We are trying to reduce risk, not just transfer it. Any risk transfer is a cost to the municipality.” Calcavecchia says the same is true for the O&M portion. In the 63-20 PDB model, O&M costs are not determined at the outset for the full length of the contract, but instead PFG will appoint parties on a rolling five-year basis, akin to the way many private development projects are operated.
PFG’s success is evident from the list of deals it has done - perhaps most notably the fact that a number of its clients have done more than one project with it. The University of Washington, for example, has used PFG and the 63-20 PDB model to deliver nine separate projects, while King County has seen five schemes use the approach and PFG is currently working on its third deal with LA County.
What the firm’s work demonstrates is that there are options - and opportunities - for smaller projects to be delivered within the broad scope of the P3 concept of public and private sectors working together for a common aim.