Stephen Buonpane, Bruce Jervis and Alex Wells
June 2015
As state and local governments seek to move forward on critical infrastructure projects, they’re increasingly asking the private sector to play a greater role through public-private partnerships. Under these partnerships, known as P3s, public works such as highways, bridges and buildings are financed, designed, built, operated and maintained by private concessionaires. The increased interest in P3s comes about as governments grapple with a lack of available funds, public concerns about rising tax and debt levels and the need to repair or replace critical aging infrastructure.
By providing private capital and private sector management expertise, P3s help to facilitate the construction of public projects and operate them under long-term lease agreements. While Europe, Canada and Australia have made extensive use of P3s, many U.S. contractors may be encountering them for the first time, particularly in states such as Florida, Texas and California.
For contractors, P3s bring a different slate of exposures and complex insurance issues. Contractors may find themselves taking on responsibility for risks that traditionally weren’t part of a public works project and facing a time horizon measured in decades rather than years. Unlike traditional infrastructure projects that are turned over to public entities upon completion, a contractor may assume 25 to 99 years of operational exposures as part of a consortium running a highway, bridge or tunnel. Those exposures include uncertainty over long-term liabilities that may be impacted by changes in legislation in individual states. The complexity and long-term nature of these projects creates unique risk challenges for which the traditional approach of an owner or contractor-controlled insurance program is no longer viable.
Before engaging in public-private partnerships, the concessionaires should understand the expanded risks as well as how the P3 structure impacts the risk transfer available through insurance for the different phases of a long-term project, from design and construction through operation and maintenance. The consortium should make sure that the insurance ramifications are a part of the project discussions from the beginning, as they can have a significant impact on long-term financial success. By working with their brokers early in the process and with an insurer that has demonstrated experience in construction and in P3s, contractors can help to mitigate many of these expanded risks.