US state and local governments will continue to embrace public-private partnerships (P3s) as a means of accessing private capital, Moody’s Investors Service says in a new report, “Public-Private Partnerships: Frequently Asked Questions”. Furthermore, the procurement process will likely expand to additional public finance sectors beyond transportation, including housing, higher education, and water and sewer.
A P3 is a contractual relationship between the public sector (or an “offtaker”) and a private sector developer to design, build, finance, operate and maintain government-related infrastructure for a fixed period of time. Typically, governments enter P3s as a means of attracting private investment in public infrastructure, which allows them to finance the projects over multiyear construction periods.
“The US has underinvested in its infrastructure for many years,” says John Medina, Moody’s Vice President – Senior Analyst. “P3s grant governments access to private capital, which allows them to avoid traditional bond debt and transfer certain risks to the private sector.”
The notable increase in new P3 projects in the U.S. and around the world illustrates why Moody’s believes the method will expand to areas beyond transportation.
The report notes most P3s are in the investment-grade category because of the essential nature of the assets and the project's contractual framework that allocates project risk over the life of the project. When they occur, P3 rating downgrades are largely driven by refinancing risk, tax-related risks and weakening counterparty credit quality, with lower than forecasted revenue performance also noted as a credit risk.
The report tackles the differences between availability-payment, demand-risk and hybrid P3s, and the status of P3 development in other countries.