The Association for the Advancement of American Infrastructure (AIAI) recently released a guide that offers a template to public and private sector P3 participants on risk allocation, a key element of project procurement, delivery and finance. The subject of risk allocation has grown in importance in recent years after some design and construction firms have shied away from bidding on these projects, due to the perception that private partners were shouldering too much risk. Infralogic’s Eugene Gilligan reports on the various risks that the guide addresses, and its possible impact on P3 procurements.

A recently released guide that covers risk allocation in public-private partnership (P3) projects may lead to more projects and provide crucial guidance to public and private participants in P3 agreements.

The document, “The First Principles of Risk Reference Guide,” is “designed to provide a comprehensive, plain English, first principles plan understanding of how key contractual terms and concepts are generally applied in the P3 market,” according to a statement issued by the Association for the Improvement of American Infrastructure (AIAI), which released the guide in April this year.

Thomas Sherman, director of public sector initiatives and programming for AIAI, said that he believes the risk guide will be used not only by new market entrants, but also by owners who have done P3s before.

“Every comprehensive agreement I have written, every risk transfer I have written, is and has been slightly different – across the board – but the principles of risk transfer have always been the same,” said Sherman, former deputy director of Virginia DOT’s P3 office. “This document gives public owners a way to understand and stabilize the swings in the risk pendulum. It gives the owner an opportunity to say ‘Wow, this is where the market is. This is how we can get more than one bid, this is how we avoid a no-bid situation, by not only understanding risk, but having a starting point for that.”

“There are new entrants into the market, new advisory firms, new construction firms, so it’s important that we are all on the same page when it comes to allocating risk,” said Sherman, who has incorporated the document into AIAI’s education program.

A guide that shows a path to proper risk allocation in a P3 project is important to the developer community, said Sia Kusha, senior vice president and group head of business development at Plenary Americas.

“As active investors, developers and operators of public infrastructure, we’re interested in a sustainable, predictable, and market-based pipeline of project opportunities that owners generate,” Kusha said. “If the industry is to successfully deliver projects in order to realize returns on their equity investments, participating consortia need market-based terms and conditions as the basis for project agreements. If the project agreement is not market-based, chances for us to pull together a viable consortium that’s likely to remain in the procurement diminish quite rapidly.”

The P3 industry received some negative reverberations with regards to risk allocation, said Kusha, who engaged in discussions about the document as a member of AIAI’s risk working group committee.

“A few years ago, we observed significant pushback, particularly from the design and construction industry, with respect to allocated risks associated with being held to fixed prices and fixed schedules, based on indicative plans that were a part of procurement documents,” Kusha said.

“Construction partners in some P3 projects endured significant financial losses, according to studies, and the withdrawal of several players from the marketplace, mostly due to the assignment of risks over to the private sector,” Kusha said.

Benefits across the procurement process 

The guide will benefit the entire P3 procurement process, according to Matthew Neuringer, infrastructure and transportation finance partner at Orrick.

“As members of AIAI we were asking ourselves how, not only we could address this, but also how we could address the protracted nature of these procurements, and the delivery of these projects, with issues that don’t need to be focused on and relitigated in every transaction,” Neuringer said. “That would allow the parties to focus on the hard work, the complex technical issues, financial challenges, and the political hurdles these projects face. Part of the thesis underlying this initiative is to create a baseline for first principles of risk allocation which can be used to streamline the process to get from conception of a P3 project to procurement to commencement of construction to successful operations and maintenance much faster.”

Design and construction risk were top of mind in putting together the guide, Neuringer said.

“We start from the beginning of a project, talk about site conditions, third-party risk, utility risk, governmental agency approval and site acquisition,” he said.

Regarding operations and maintenance, performance-based payments are covered, “considering holistically the nexus of the financing and design/construction and operations/maintenance, to try to demystify the ‘why’ of how these structures come together,” he said.

The guide also discusses what happens when a “project goes sideways,” Neuringer said, covering areas such as default, termination, termination compensation, and different approaches to this.

“It’s not something you want to focus on, but it is a feature in every transaction,” he said.

It was important in the development of the document to solicit feedback from technical, legal and financial advisors to both public and private sector clients, he said.

“While we engaged with procuring entities separately, in the working group’s debates, the government clients were not in the room, which led to a greater level of candidness and increased the ability to bridge any gaps that existed between private sector participants and public sector advisors,” he said.

DOTs take note

The risk guide has caught the attention of some major US DOTs, according to Steven DeWitt, senior vice president of business development at ACS Infrastructure Development, who was also part of the risk working group committee.

“DOTs such as Georgia, Tennessee, and North Carolina are all looking at this guide, maybe not as a first step, but as an early step, as they evaluate the risk allocation in a project, to make sure they are within the reasonable bounds of the collective thoughts of industry across the country,” DeWitt said.

The risk guide can play a crucial role in P3 and non-P3 projects, according to one state DOT executive.

“While reviewing the AIAI P3 guide, North Carolina Department of Transportation (NCDDOT) staff was reminded of the crucial need for documenting, managing and allocating risks,” said Christopher Peoples, COO of the NCDOT, in a statement. “This document offers a framework applicable to both P3 projects and all procurement types. It will be a key resource in our library of resources for procurement and contract administration practices.”

To spread the word about the risk guide, AIAI transportation committee chair Bryan Kendro from RS&H is establishing a working group to perform direct outreach, said Lisa Buglione, executive director of AIAI.

The organization is also putting together an executive summary, “so that the public sector can get a feel for what we are doing before taking a deeper dive into the guide itself,” Buglione added.

The guide is hosted on AIAI’s website as a “living document where it can be shared with both private sector folks and owners,” she said, and noted that AIAI will institute a training program to instruct owners on how to use the guide.

“The hope is that owners, in particular, those who are new to the P3 model, can take advantage of the information and arm themselves with the knowledge they need to pursue their projects through alternative delivery methods,” Buglione said.