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P3: 3 Benefits + 3 Risks

Public-private partnerships carry both benefits and risks.
By: | January 9, 2017 • 5 min read

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The American Society of Civil Engineers issues a report every year tracking the status of the nation’s infrastructure across 15 categories, including airports, pipelines, roads, bridges and solid waste facilities. In 2013, the United States earned a D+, a mark that has been steadily declining since it received a C in the ASCE’s first report card released in 1988.

To combat its ailing infrastructure, federal and state governments will increasingly rely on partnerships with private investors to help get these big-ticket projects off the ground.

The U.S. Department of Transportation defines public-private partnerships, or P3s, as “contractual agreements formed between a public agency and a private sector entity that allow for greater private sector participation in the delivery and financing of transportation projects.”

In its whitepaper “The United States: The World’s Largest Emerging P3 Market,” global insurer AIG outlines the promise offered by these partnerships in fixing the nation’s crumbling infrastructure, but notes that they come with their own set of challenges. Below are three major benefits and three key risks to the P3 model.

As we enter into new political landscape in the U.S. with President-elect Donald Trump, the role of P3 may become increasingly important.

The Benefits

1. Filling Investment Gaps

In a time when public dollars are limited but infrastructure needs are infinite, P3s help to fill in the investment gap to make desperately needed upgrades to American infrastructure.

According to the ASCE, an estimated $1.723 trillion is needed for surface transportation, $100 billion for rail and $134 billion for aviation infrastructure. The expense is far outpacing the level of investment from the public sector.

According to a McGraw Hill Construction Dodge report, public works construction dropped 14 percent from 2011 to 2012, and was projected to drop another 6 percent from 2012 to 2013. If the shortfall in public investment isn’t made up in some way, continually aging infrastructure may lead to disasters that cost lives and compromise economic activity in the towns they service — and state governments will be liable for the damages.

Especially in challenging economic climates, P3s can ease the burden on government budgets and help critical projects come to life.

2. Increasing Efficiency

On top of filling a pressing public need, P3 projects also save time and money. Compared to public projects, they have a better track record when it comes to staying on budget and finishing on time.

According to a study conducted by Infrastructure Partnerships Australia from 2000-2007, 18 percent of traditionally procured projects ran past deadline, while only 10 percent of P3 projects were past due. When traditional projects ran late, they were delivered 26 percent later than originally expected. Overdue P3 projects, on the other hand, were completed only 13 percent later.

Forty-five percent of traditionally procured projects incurred additional expenses, compared to just 14 percent of P3 projects. When traditional projects ran over budget, they incurred 35 percent extra expenses, while over-budget P3s went over by only 12 percent.

3. Spurring Economic Growth

P3s also help to spur economic development. They offer a lucrative business opportunity for investors in a time when returns are typically low. And infrastructure projects – particularly transportation networks – enable economic growth in the communities they connect.

Take for example E-470, the 47-mile highway constructed outside Denver, Colo., to service traffic to and from the soon-to-be-opened Denver International Airport. Eight counties and cities pooled their funds in 1989 to build the road, with no federal funding whatsoever. The highway was completed four years ahead of the airport and was the first large tollway to use electronic tolling.

The road paved the way for economic development in a previously sparsely-populated area. The population along E-470’s corridor was expected to double in the years following the project’s completion. In fact, the population of Denver — and the whole state of Colorado —has risen so much that the toll road is undergoing expansion.

The ASCE’s 2013 Report Card stated, “We know that investing in infrastructure is essential to support healthy, vibrant communities. Infrastructure is also critical for long-term economic growth, increasing GDP, employment, household income and exports. The reverse is also true – without prioritizing our nation’s infrastructure needs, deteriorating conditions can become a drag on the economy.”

The Risks

1. Uneven Liability

The chief complaint of private entities that want to further P3s as viable delivery mechanisms is that the government allots an unrealistic portion of the risk to private partners. To make matters worse, most of that risk is not transferrable though traditional insurance methods.

Nailing down contractual language that is acceptable to both parties and spreads liability fairly is the primary obstacle in P3 deals.

According to AIG’s whitepaper, Administrator Victor Mendez, head of the Federal Highway Administration, has argued for more precise valuation of risk in P3 projects, so that public and private parties can place a dollar value on the amount of risk they are willing to assume and strike a fairer balance.

Insurers, for their part, will have to continually analyze the changing construction landscape and develop new products to meet the needs of the evolving P3 model. AIG, for example, recently developed a product to address contractual liability issues in P3 deals.

2. Long-Term Commitment

P3s require a long term commitment on the part of the private entity — as much as 20 to 30 years. Private investors have to be prepared not just for the construction, but also the ongoing management of the project, whether that means ensuring regular maintenance or operating tolling systems. On top of that, covering and projecting insurance costs for the operational and maintenance risk over that course of time provides another layer of complexity. Properly transitioning insurance coverage between course of construction and operational and maintenance can be challenging for some carriers.

Because it’s difficult to predict how the economic environment will change over the next several decades, private partners take on a big risk in assuming management responsibilities for that length of time. Proper due diligence, conducted by both parties, is necessary to ensure the private investor can go the distance.

3. Project Ownership

The general public has also shown concern that major pieces of infrastructure will be owned by a private company rather than the public, and therefore subject to that company’s financial viability over the long term, or to the needs of their bottom line. In other words, citizens don’t want their vital transportation networks and other facilities to be commoditized.

In reality, private investors merely help to finance and manage the project, while it remains the property of the public. Unless that message is communicated clearly, though, aversion to private sector involvement in public works projects could stall some P3 efforts.

In spite of the headwinds and slowly emerging P3 sector in the U.S., AIG stands ready to partner with stakeholder to manage the inherent risks, deliver solutions and value to our clients.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with AIG. The editorial staff of Risk & Insurance had no role in its preparation.




AIG is a leading international insurance organization serving customers in more than 100 countries.

More from Risk & Insurance

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4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]