We very much agree with Florida’s state bond director, J. Ben Watkins in this article written by Shelly Sigo and published last week in The Bond Buyer: Watkins Doesn’t See P3 Benefits over Tax Exempts.
Tax-exempt debt is significantly cheaper than equity and taxable debt. It is also true that the traditional DBFOM model that uses costly equity and taxable debt is being promoted by the industries big players as the only option available to public agencies when considering a public-private partnership for the development of their social infrastructure.
There is another option. John Finke has closed more P3 social infrastructure projects (27) than anyone in the country. Each one has used the American Approach which combines tax-exempt financing with private sector expertise. All of these projects has been completed on-time or ahead-of-schedule and on- or under-budget. Here is quote from John’s article in the P3 Bulletin, published last year:
“Like DBFOM, the American Model is a true P3 approach that privately designs, finances, builds, operates and maintains facilities for the public sector, but it differs in two key aspects.
Firstly, it utilizes the American system of tax-exempt financing structured either as 501(c) (3) bonds issued through a conduit issuer or as 63-20 bonds issued directly by a not-for-profit organization.
These tax-exempt bonds can be used to fund 100% of a project’s cost, simplifying the financing structure and eliminating the need for costly equity investment. By virtue of the differing requirements in the exempt and conventional financing markets, the overall project costs derived from the capital stack of an exempt financing can be 100 to 200 basis points lower than that of a taxable structure.”
We also couldn’t agree more with Mr. Watkins on his assessment of the risk transfer, “In the context we’ve seen it used there is no real, meaningful risk transfer”
This is especially true concerning the 40 plus year operations and maintenance agreements in a DBFOM P3. Here is another quote from John Finke’s article in the P3 Bulletin:
“The second key difference is that under the American Approach, the not-for-profit owner contracts facility management services through a series of short-term (three to five-year) management agreements with market-driven compensation. This comes instead of a long-term management agreement requiring complex performance rewards and guarantees. The private management company is not required to assume any operating risk because maintenance and repair costs are funded by the government tenant.”
Here is an audit by King County of a project John Finke originated and served as project lead while working at National Development Council. The audit compares the American Approach to traditional public procurement and delivery:
