Public-Private Infrastructure Projects Are on the Rise. Here’s How to Mitigate Risks

Public-private partnerships can bridge sorely needed infrastructure financing gaps—leveraging new AI technologies, a phased approach, and other best practices will help them run smoothly

Public-private partnerships (P3s) have long been used to finance, build, and maintain infrastructure projects—the State of Pennsylvania used one for the Philadelphia and Lancaster Turnpike way back in 1792—but, turnpike aside, the US has historically lagged behind when it comes to leveraging this approach.

Not for long: the popularity of P3s has been growing, especially as the Infrastructure Investment and Jobs Act (IIJA) catalyzes a once-in-a-generation construction boom. “It’s going to change everything,” Toby Rittner, president of the Council of Development Finance Agencies, told Quartz in 2022. “In the next 10 years, the number of projects that are going to be financed using P3 models is going to be amazing.”

The pros are evident. P3s, which put much of the burden on private contractors, can support sorely needed infrastructure financing gaps, speed up projects, and minimize risk. The model has helped reinvigorate Detroit’s business district, renovate St. Louis’ Gateway Arch, and develop broadband projects in underserved areas of Iowa, California, and North Carolina.

But P3s also bring risks—something I’m intimately familiar with, having spent decades in construction and several years as an expert witness for disputes arising from P3s. From ongoing supply chain disruptions and rising labor costs to an ever-changing macroeconomic picture, many issues can jeopardize profitability for private contractors. Fortunately, balancing these risks with the many rewards of P3 projects is possible with the right preparation and, increasingly, new technologies like artificial intelligence (AI) tools.

The Current State of Public-Private Partnerships: New Opportunities, New Risks

The IIJA did more than just inject cash into the infrastructure sector; it also created more expansive rules around the use of private activity bonds, or tax-exempt bonds that support infrastructure partially funded by private investments. This is part of an ongoing effort to mainstream P3s in the US, where more than three-quarters of states (along with Washington, DC and Puerto Rico) now allow P3 projects in some form.

Though use of P3s has grown over the last few years, speed bumps have slowed progress, inflated costs, and endangered the viability of these long-term efforts. Labor shortages, inflationary pressures, mounting requirements of government contracts (e.g., related to team diversity, environmental standards, and “Buy American” provisions), and other factors create significant compliance obstacles. In New Jersey, for instance, Ørsted had successfully bid to construct Ocean Wind 1 and 2, the state’s first offshore wind projects. But the company pulled out of the project late last year, citing the impact of macroeconomic factors like high interest rates, inflation, and supply chain bottlenecks.

Other issues lead to complex disputes. Costs for a new municipal building may balloon because of foundational problems discovered underground during a build. Broadband developers may encounter local permitting problems that cause untold delays. Who pays for the overruns? These are thorny challenges—particularly when it comes to increasingly expensive (and massive) IIJA-funded infrastructure projects with long time horizons and multiple stakeholders.

Private contractors often must shoulder these risks. While a fundamental principle of P3s involves shifting the risk to the party most capable of bearing it, there is no mature process in place to evaluate who should do so. Instead, risk is generally shifted according to established industry norms and decided by the party with the most leverage (in this case, the public entity).

Some contractors taking on P3 projects simply are not the most capable of enduring the risk of cost overruns. As a result, more contractors are taking all actions available to craft contract assumptions, clarifications, and exclusions. In effect, this resembles the traditional design-bid-build claims approach—when contractors experience a cost overrun, they often end up filing claims in an effort to recoup potential losses. The lack of a realistic risk-shifting process only perpetuates this problem.

Six Strategies to Mitigate Public-Private Partnership Risk

For private entities looking to participate in the growing number of P3 projects, these best practices can help minimize expensive headaches.

1. Look for a niche

   Contractors should look for projects that align with their expertise and experience. Familiarity with common issues the project might encounter and how to resolve them—coupled with the efficiency that comes from existing teams and supply chains—can help keep the project progressing smoothly.

2. Go with those you know

   Working with a known partner can reduce uncertainty. An established relationship and mutual trust can help amicably (and quickly) resolve issues that arise over the course of the project, reducing costly delays.

3. Start with more funding than you think you need

   Even after following best practices, a great deal will still be out of the contractor’s control. A pandemic, geopolitical shift, or even a practical challenge with the building site can lead to expensive issues. It’s important to have more financing available beyond the projected costs of a project to see it to completion—and start bringing in profits.

4. Take a phased approach

   Given the size and nature of so much infrastructure investment, P3 projects are often years-long endeavors. Mapping out the entire project at the beginning, when much is still uncertain (such as the nature of the site, the design, or supply costs), creates significant risk. Phased procurement, where each stage proceeds separately, can help shift risks to the public entity should the macroeconomic environment change suddenly or the project encounter problems.

5. Have a “go/no go” decision

   You’ll rarely regret the project you passed on but often regret the one you took, hence the phrase “low bidder’s regret.” The development world is led by optimists with “can do!” attitudes on the front end of deals, promoting the benefits while downplaying potential pitfalls. A somewhat independent decision-making group can take a rigorous risk-based approach to the due diligence needed to pursue large P3 infrastructure projects.

6. Leverage new tech tools

   The technology revolution will have unknown and unpredictable impacts on all aspects of large P3 projects. AI tools will be applied to complex P3 projects in many ways, from identifying and managing risks to providing analysis of provisions during the contract negotiation process.

   While these nascent platforms carry risks of their own (and require human oversight), they can help mitigate risks when used properly. In the best case, new technology will drive down many costs in the supply chain, and contractors may enjoy the savings. However, in the worst case, technology may disrupt the means and methods, supply chains, tools, and equipment into obsolescence or even make the project itself obsolete.

The old saying that “every stroke in golf makes somebody happy” comes to mind as we step bravely into the future of P3 projects. My advice? Proceed deliberately and with due caution.

What’s Next for Public-Private Partnership Infrastructure Projects

As interest rates decrease and the need for new infrastructure accelerates, particularly for projects surrounding sustainability or renewable energy, we should expect to see more P3 projects take shape.

Given the extended duration of these investments, however, time becomes an enemy, with market forces creating unpredictable and high-risk impacts on P3 investments. It’s crucial that stakeholders understand what they’re getting into, the risks involved, and how best to proactively mitigate them.