Surety Sector P3 Progress Report
How the surety industry sees public-private partnerships
State lawmakers have been adopting P3 laws slowly and steadily for over a decade. From the perspective of The Surety & Fidelity Association of America (SFAA), the critical issue isn’t how many states have such laws, but whether the laws recognize the value of surety bonds and lead to getting needed infrastructure projects done in states that lack the necessary funding. A look at the recent past is helpful in estimating what will happen in coming years.
Most existing state laws currently permit P3s for transportation projects only, although the District of Columbia and a few states have broader authorizations that would permit them for buildings and allow local entities to use P3s as well. Some states have passed very limited P3 laws, such as Alaska, where it applies to one toll bridge.
SFAA has worked closely with the American Insurance Association (AIA) to convince state legislatures to include surety bond requirements in recent P3 laws. Construction under any P3 produces a public facility, such as a road or wastewater facility, and it should be bonded under the state Little Miller Act just like a public works project delivered under any other method.
There is another vitally important point: State P3 laws that specify bonds and permit other forms of security to be accepted need to be clarified so that the performance and payment bonds are required for the design and construction, and accepted for the other phases. Unlike the traditional procurement process in which the public entity lets a contract to a private construction company, and pays for it with public funds, P3 deals are struck with a private partner that may
participate in the design, finance, construction and operations and maintenance. The private partner may not be a contractor, and although it’s difficult, sureties have issued bonds for operations and maintanence on P3 projects.
Nevertheless, the performance and payment bonds required for a P3 should only cover design and construction, which is what sureties are uniquely qualified to assess and back.
Fortunately, the trend in recent P3 legislation is going in the right direction. Only four states joined the P3 ranks in the 2016 legislative session—Kentucky, Louisiana, New Hampshire and Tennessee—and all of them require surety bonds for design and construction. Florida and Missouri expanded existing P3 authority to additional projects. Indiana enacted a bill to study bonding requirements for its three P3 laws.
The Recent Adoptions
In the past five years, the District of Columbia, Georgia, Maryland and West Virginia also have enacted new P3 laws that require bonding. Also, existing P3 laws were amended to include bonding in Ohio, California and North Carolina. Florida has consistently expanded its P3 law to include more sectors and each recent law required bonding. It remains to be seen how states will implement the newest P3 laws and what P3 projects will result.
No realistic look at the state P3 laws is complete without considering the impact of the November elections. Virtually all state legislators are up for re-election and there will be elections for the Governor’s mansion in twelve states. Indiana is a mature market, and North Carolina is a growing market with a gubernatorial election this year; the New Jersey and Virginia governors will change in 2017. New Jersey is the only state in which P3 legislation was vetoed in 2016. Any change in administration may change the climate for P3s one way or the other, depending where the P3 issue stands on the new administration’s agenda.
Only a limited number of states adopt new P3 laws each year and only a few states have made use of their P3 enabling laws. Several others are in the start-up process, and many more are interested, but growth can’t be called exponential. We believe more states will look to enact new P3 authority and modernize existing general grants of authority. Some states may review their multiple, in-place P3 laws to make them consistent.
There is a lot more work to be done to ensure sureties’ role in these projects. Bonding is sound public policy that has assured successful completion of construction projects and protected businesses for decades—and that holds true regardless of who is providing the revenue stream for the projects.