Public-Private Partnership Financing

by Elizabeth Fast

In the finance industry, the new hot topic is public-private partnerships, commonly referred to as “PPP” or “P3.”

 

Both public projects and private projects can benefit from using a PPP to enhance their financing when traditional financing resources are not sufficient to make their project economically feasible.

Loosely defined, the term public-private partnership refers to any collaborative effort between the public sector and the private sector. More specifically, the National Council for Public-Private Partnerships defines a public– private partnership as “a contractual agreement
between a public agency (federal, state, or local) and a private sector entity . . . [through which] the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public.”

From an historic standpoint, PPPs generally have been used to finance the construction of public transportation and water systems, and to finance other public facilities and services like hospitals and schools. As an example, the U.S. Department of Transportation created model PPP legislation to assist the public sector in accessing private sector capital to improve traffic congestion and infrastructure. Missouri has enacted the Missouri Public-Private Partnerships Transportation Act. Although Kansas has not enacted any specific PPP legislation, Kansas has enacted legislation which provides more flexibility to allow private sector participation in its public transportation projects.

PPPs also can be used to enhance the financing for private projects. In this situation, the public and private sectors combine their efforts and expertise to promote a common goal shared by both the public and private sectors. These common goals include, without limitation, job creation, business expansion, infrastructure improvement, energy efficiency, and environmental cleanup. Business improvement districts, transportation development districts, tax increment financing, tax credits, real estate tax abatement, tax exempt bond financing and other governmental incentives are some ways that the public sector (i.e., federal, state or local agency) can work together with the private sector (i.e., the business and its lender) to enhance a private project’s financing.

Whether the PPP is used to finance a public or a private project, PPP financing can be complicated and there are various legal issues associated with PPPs. The public sector agency and the private sector entity must negotiate an
agreement as to how the specifics of the PPP will work, including how the revenues and the responsibilities will be shared. Both the public sector agency and the private sector entity must benefit from the PPP, and care must be taken in structuring the PPP to protect the interests of both the public sector agency and the private sector entity. With respect to the financing of public projects, the project must have the ability to provide a sufficient financial rate of return to attract the private sector entity. With respect to the financing of private projects, the project must satisfy a goal or need of the public sector. Moreover, a detailed plan that has been carefully developed as a joint effort by both the public and private sectors will substantially increase the probability of the PPP’s success.

PPPs are powerful financing tools for both public and private projects, and the use of PPPs will continue to expand, especially in times of economic downturn. By using a PPP, the public sector (i.e., federal, state or local agency) and the private sector (i.e., the business and its lender) can work together to create a financing package to combat unfavorable economic conditions or to enhance a project’s financing when traditional financing resources
are not sufficient.

 

M. Elizabeth Fast is a partner in the Financial Services Group at the law firm of Spencer Fane Britt & Browne LLP.
P     |     800.625.6529 
E     |    efast@spencerfane.com