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Public private partnerships for central utilities

November 21, 2018
Public private partnerships for central utilities

Institutions across the nation are turning to public private partnerships (P3) to extract value from existing capital assets, as well as to expand and modernize key infrastructure and services.

There is no single, universally accepted definition of public private partnerships. P3 often means different things to different people, which can lend itself to confusion. In general, however, public private partnerships refer to forms of cooperation between public institutions and the private sector which aim to ensure the financing, construction, renovation, management, operation and/or maintenance of an infrastructure and/or the provision of a service.

At their core, all public private partnerships involve some form of risk sharing between the public sector and infrastructure asset or related service. The real and effective allocation of private sector in the provision of an risk to the private partner is the key determinant in distinguishing between P3s and more traditional models of public service delivery.

In general terms, public private partnerships fall between the traditional model of service delivery and full private sector ownership of assets and services:

Infrastructure & Service Delivery Spectrum of Options

Within this range, however, there are an infinite number of potential P3 structures which can be leveraged, depending on the institutions objectives and needs. The decision as to the specific P3 design will depend on which risks, rights and responsibilities remain with the institution and which are to be transferred to a private partner.

P3 drivers

Institutions are mainly driven to consider P3s and other alternative finance and delivery options for one of the following reasons:
  1. Access to Additional Financial Resources and Delivery Structures: As institutions seek to modernize and expand their core infrastructure and service offerings, they are often confronted by debt ceilings and fiscal constraints that result in capital improvement deferrals, which in turn increase ongoing and future O&M and capital costs. For this reason, many institutions are increasingly turning to P3 to pursue alternative finance and delivery strategies that allow them to defer costs, use off-balance sheet or limited credit-impact financing, reclassify expenditures (from capital costs to operating costs), and find new financing and revenue sources. By leveraging third party debt and equity, institutions can accelerate infrastructure delivery, while likewise incentivizing capital savings and performance improvements. Indeed, by combining private finance and delivery, on average, infrastructure cost savings range between 10 and 15% in comparison with traditional publicly funded design bid-build structures.
  2. Monetization of Existing Assets: As institutions continue to feel the fiscal strain of building, operating and maintaining major infrastructure assets, many innovative leaders are finding creative ways to unlock the value trapped in their current fixed assets in such a way as to advance the organization’s mission. The key principle behind monetization involves leveraging assets to generate revenue to support the mission of the institution. This can involve long-term concessions or leaseback arrangements for existing assets, commercialization opportunities and, in some instances, the sale/disposition of underutilized assets.
  3. Operational Efficiencies and Life-Cycle Savings: In an effort to improve financial performance and/or capitalize savings, institutions are also turning to incentivized performance contracts for the operation and maintenance of their infrastructure assets. Performance contracts come in many shapes and sizes, ranging from Savings Performance Contracts and Peer Partnering to long-term O&M concessions. Incentivized performance often means that the private partner is paid in full or in part on the basis of the savings it generates, while still being required to meet key performance output standards. Even in relatively well-run organizations, this revamped incentive structure has proven to generate significant performance improvements, with savings typically ranging anywhere between 15 and 25%.
  4. Risk Allocation & Mitigation: Likewise, institutions are increasingly turning to P3 for risk management and mitigation purposes. A wide range of risks can be addressed through P3s, including financing risk, construction and completion risk (i.e., construction costs, delay, performance, etc.), revenue/funding risks, cost risk (for O&M), operating performance risk, demand risk, technology risk and regulatory risk. By allocating certain risks to an experienced and qualified private partner, the institution can hedge itself against any associated negative consequences.

While the benefits of P3s can be substantial, they are complex policy tools that must be carefully implemented to ensure the appropriate balance of financial, policy and program goals. Well-structured P3s result in transactions that improve the financial standing of the organization, without surrendering flexibility, control and the achievement of the institution’s goals. On the other hand, poorly structured or unbalanced P3s can be extremely problematic, particularly when they impose direct or contingent liabilities upon the institution. For this reason, it is strongly urged that public institutions engage proven and experienced experts to assist them in structuring, implementing and governing P3 transactions and projects.

Fueling operational objectives through P3s

Over the past decade, institutions across the nation have leveraged P3s for power plant facilities/operations, as well as to achieve broader energy and environmental goals. While the factors sparking institutions to consider P3s for other asset classes likewise apply in the case of energy and environmental facilities and services, institutions have specifically leveraged P3s to ensure reliable energy supply, address deferred maintenance backlogs, expand/modernize energy systems, optimize energy consumption, improve sustainability efforts, enhance energy performance, generate operational savings and assist with carbon footprint management.

As institutions look to optimize the efficiency of plant and distribution systems, while reducing energy consumption and minimizing their carbon footprint, a broad range of innovative contracting structures have been developed and implemented. For instance, P3 structures have been leveraged to finance and deliver new and expanded facilities, like combined heat and power (CHP), chilled water plants and central energy plants. Leasehold concessions of existing generation and distribution systems are also quite common, with specialized operators assuming responsibility for the assets in exchange for an upfront payment, with the institution offering an off-take agreement over the term of the agreement. This structure has allowed institutions to monetize their utility assets, while simultaneously locking in budget predictability and guaranteed operating standards. Performance contracts have also been used to reduce fuel costs and increase production efficiency at energy plants, as well as to assist institutions with environmental, health, safety and regulatory compliance. All of these structures are aimed at helping institutions increase capital and operating budget certainty, improve life cycle operating savings, transfer risks to third parties and extract maximum value from existing assets.

Sample Utility Service and Associated Projects Suitable for P3 public entity

  • Wastewater management
    • Reuse of wastewater as a heating source/sink
    • Source of renewable energy (methane recovery from wastewater)
  • Energy consumption
    • Demand-side management: energy efficiency, capital upgrades, infrastructure maintenance, new building management systems/”smart” technologies to optimize energy use, etc.
  • Energy supply
    • Supply-side management: alternate energy sources (including onsite generation, e.g., combined heat and power plants), clean energy generation, district energy/micro-grid development, etc.
  • Waste management
    • Reduce solid waste generation non-landfilling of waste, (e.g., composting, use for energy generation, etc.)
    • Electronic waste disposal and recycling
  • Stormwater/floods risk management
    • Addition of “green infrastructure" - capture and possible reuse of stormwater
    • Stormwater drainage system

Partnering for success

Through an infusion of private capital and management, P3s can ease fiscal restraints and boost efficiency in the provision of university infrastructure and services. Despite their potential, however, public private partnerships are highly complex policy instruments.

In other words, while P3s have demonstrated their benefit by bringing about improvements in infrastructure and services through shorter delivery times, better value for money and increased innovation across a range of sectors, this does not mean that implementing a P3 is easy. Indeed, P3s are a highly complex policy tool that requires specialized expertise to structure a well-balanced relationship in which institutions and private developers/ operators work together on a successful and sustainable basis.

JLL is a globally recognized market leader in P3 advisory services. For years, JLL has successfully helped across the country to offload risk, access alternative finance, monetize assets, capitalize efficiency savings and accelerate infrastructure delivery, all while retaining the governance and control needed for effective mission delivery. Our experts offer expertise across multiple asset classes, including central utilities, designing and implementing transactions aimed at meeting the specific needs and objectives of our clients.

Approach to P3 advisory services
  1. Value mission and vision first Transactions do not stand on their own and must always be viewed in terms of how they affect the public institution’s critical missions and public service obligations.
  2. Engage stakeholders Public authorities must respond to multiple constituencies whose interests must be carefully identified and addressed. Transactions must enhance key constituents’ experience.
  3. Well-framed and tailored options No one structure or approach will always be correct. Project sponsors deserve to see a range of ownership and management options. Visibility and transparency in decision making mandate that options be objectively assessed and evaluated, without bias or prejudice with regard to delivery structures.
  4. Protect government control of critical matters Decreased expenses and/or increased revenues can be accomplished without loss of government control of critical decisions.
  5. Focus on service quality and performance Service level agreements associated with any transaction should always increase the quality of the user/public experience.

JLL understands the importance of aligning an institution’s asset portfolio with its mission and goals. Our vast P3 experience allows us to tailor our solutions to meet every organization’s specific needs and objectives, recognizing that its assets and services are critical to achieving your core mission and goals, as well as to contributing more broadly to the economic development of the surrounding community.

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