If the large infrastructure future of North America is in P3s, as some suggest, will surety bonds providing performance and payment guarantees be part of that future and will they protect subcontractors?

The final answer isn’t clear yet but banks and concessionaires in privately financed infrastructure have in the past shown a preference for more liquid forms of security for themselves, such as letters of credit provided by the prime design-build joint venture. 

P3 concessionaires and lenders have sometimes been uninterested in traditional bond guarantees that may take weeks or months to fulfill.

And so far the question of how and if P3s will provide security for payments to subcontractors has been a mystery.

Now some answers are available, according to research presented by the National Association of Surety Bond Producers and discussed April 29th at the trade group’s annual conference in San Antonio. The research was carried out jointly by NASBP, the Surety & Fidelity Association of America and the American Subcontractors Association.

Following are some intriguing patterns beginning to emerge in P3 enabling laws adopted by states. All but 15 states have them.

Fourteen states that have P3 enabling statutes require no bonding and make no reference to payment security. Those states are Washington, Oregon, Nevada, Arizona, Texas, Missouri, Indiana, Mississippi, Alabama, West Virginia, Pennsylvania, New Jersey and Connecticut.

Another pattern when lawmakers have adopted P3 statute's is a reference in the text to a state’s Little Miller Act, a law that parallels the federal Miller Act. It requires prime contractors to post bonds guaranteeing the payment of their subcontractors and material suppliers.

That is what has happened in Florida, Virginia, Maryland, Massachusetts and Maine, according to NASBP’s research.

Eleven states require no surety bonds and make no reference to payment security for subcontractors: Alaska, Colorado, North Dakota, Minnesota, Wisconsin, Arkansas, Tennessee, Georgia, South Carolina, Deleware and Ohio.

Another four states name specific P3 projects requiring surety bonds: California, Louisiana, North Carolina and Illinois.

The rationale for enabling legislation that would require surety guarantees is that taxpayers are financing some of the work.

 “Generally, there’s a significant public aspect and the public benefits,” said Mark McCallum, chief executive of the NASBP, in an interview at the NASBP convention.

The heterogeneous nature of P3s, however, where private financing funds a public work, makes surety more complicated. 

“A decade or two ago,” said Howard Cowan, a Lubbock, Texas-based surety broker, the nature of a project “was a black-and-white situation. You either could or couldn’t have bonds.”

 

Surety broker Cowan notes that that the public nature of a project is no longer a black-and-white matter.

There were no hybrids of public and private financing, Cowan added.

Of course, surety brokers have an interest in seeing the guarantees adopted into laws enabling P3s, but subcontractors would also benefit. 

“What happens to payment remedies for downstream parties who won’t have lien rights,” said McCallum. Without bonds, "they won’t have a remedy.”