The Rise of the P3 Delivery Model

Public-Private Partnerships (P3) have financed public projects throughout history, and today P3 is widely used around the globe. Although the use of P3 in the U.S. has advanced at a slower pace than in other countries, the rising cost of maintaining and operating public assets which increasingly includes aging infrastructure has accelerated the growth of this delivery model over the past ten years. In 2013, global insurance leader AIG declared the U.S. “The world’s largest emerging P3 market.”

Balfour Beatty has provided progressive P3 delivery solutions for the past 30 years and is recognized as a global alternative delivery leader. Our US P3 operations began in 2008 and we have developed over 35 P3 projects. Over the past fourteen years, we have helped our clients fund, maintain, construct and operate higher education, transportation infrastructure and healthcare projects.

What Differentiates P3?

The benefits of the P3 delivery model for an owner include: 

  • Lowering total life cycle asset costs. P3 does not represent the lowest capital cost. The value of the P3 model is derived from lowering the total cost over the lifetime of the asset by allocating project risks to the party best able to manage that risk. 
  • Partnering with experts that are structured to effectively manage project risk 
  • Leveraging private financing allows owners to reserve their capital for primary business functions.

P3 delivery in the US can take many forms, including design-build, design-build-finance (DBF) or design-build-finance-maintain (DBFM), and the agreements between P3 partners are as unique as the projects delivered. 

Mark Konchar, senior vice president, managing director - rail for Balfour Beatty US, describes P3 as, “A partnership based on need. If a public entity lacks the funding to deliver or maintain an asset, the P3 delivery model provides partners with expertise that will also accept a certain amount of risk for the opportunity of long-term revenue.”

The Value of Balfour Beatty’s Vertical Integration 

Across the company’s US operations, Balfour Beatty maintains a unique corporate structure that encompasses multiple service lines, including Investments, Campus Solutions, Building Construction, Civil Infrastructure, Rail Infrastructure and Facilities Management. This structure allows our teams to provide clients with multiple vertically integrated services to meet the unique needs of public projects. 

The benefits of vertical integration are both quantitative and qualitative. 

Quantitative: P3 projects are often large and complex with many entities and moving parts. If an owner partners with disparate entities, each entity must measure the project against their risk allocations and then price their portion of the project accordingly. This can add additional costs into a project. 

Qualitative: Even though Balfour Beatty has different service lines, the firm approaches P3 projects as one company leveraging national and international processes and best practices. This single-culture approach streamlines P3 projects and empowers our teams to develop solutions to project challenges faster and more effectively while providing a rewarding project journey for our clients.

“When Balfour Beatty has the opportunity to offer a full, vertically integrated solution, we look at the risk holistically across all the service lines engaged on a project. This allows us to offer more competitive pricing,” says Mark Jennings, executive vice president of P3 investments and project finance for Balfour Beatty Investments. 

Balfour Beatty has successfully deployed vertical integration on P3 projects across the U.S., including the University of North Carolina At Wilmington (UNCW) Student Housing Village. The 1,814-bed residential village project included the vertical integration of both Balfour Beatty Campus Solutions and Balfour Beatty US Buildings service lines collaborating with other project stakeholders to meet the needs of the expanding campus. 

Balfour Beatty Campus Solutions served as the project developer working alongside UNCW staff to help identify the building program and provided financing through 30-year tax exempt bonds. Balfour Beatty Buildings was responsible for constructing the two-phase, four-building residential complex. The residential village was completed in time for the Fall 2020 and Fall 2021 semesters. 

Campus Solutions

One of Balfour Beatty’s largest markets for P3 is higher education. Balfour Beatty Campus Solutions is a leading campus real estate development partner offering end-to-end P3 services as well as other alternative financing and development approaches. Since its establishment in 2011, Campus Solutions has provided services for $1.5 billion in asset value.

The P3 delivery model allows universities to: 

  • Use P3 financing mechanisms for infrastructure improvements while preserving debt capacity for their main mission. 
  • Manage the life cycle of their assets. Deferred maintenance costs millions of dollars. P3 provides ongoing funds to maintain student housing facilities.
  • Monetize their assets. As a result of the pandemic, undergraduate college enrollment has dropped 7.8% since Fall 2019 according to a report by the National Student Clearinghouse Research Center. To offset decreases in income from tuition and fees, some campuses with surplus land are developing other facility types, such as retail and entertainment, which will generate revenue. In addition, universities with older facilities are interested in renovation improvements that will help attract and retain students.
  • Overcome any potential future shortfalls in state funding.

To advise university clients, our Campus Solutions team first identifies the leading factors driving the need for improvements. Bob Shepko, division president of Balfour Beatty Campus Solutions, explains this formula for success:

“It is important that we understand the root challenges of the campus. If a university wants to build a five hundred-bed student housing facility, we want to know if it will house freshmen or seniors. Will it need a learning/living environment with built-in academic and living spaces? Is it a new or replacement facility? Are there economic considerations associated with debt capacity or rating agency concerns? What stakeholder groups will be involved and what are their priorities?” 

Serving in the role of developer, Balfour Beatty collaborates with student life and housing professionals, campus architects, master planners, chief financial officers and other project stakeholders to help shape their desired outcome, develop the plan of finance, secure the financing and obtain stakeholder buy-in to deliver the built environment.

Applying this process helped the Campus Solutions team deliver a successful outcome on the Bowie State University Entrepreneurship Living Learning Community project. The university wanted to develop infrastructure on surplus land that would generate additional revenue. The solution was a 170,000-square-foot mixed-use development that provides retail and office space on the ground floor and an additional 557-bed learning/living environment on the top floor. 

The Outlook for P3

The P3 delivery model continues to grow and gain acceptance as an alternative delivery type. As the model matures, Balfour Beatty is observing a trend of P3 agreements that reduce long-term capital investment while providing for long-term maintenance. 

One of the newest trends across market sectors is progressive P3 procurement. In this model, the P3 team members enter into a pre-development agreement with the client. The team collaborates with the client on project solutions from the earliest point of the project, pricing to close. This early planning model adds value through project efficiency and helps lower the upfront cost of projects.

Balfour Beatty was an early leader in the use of progressive P3 procurement in the U.S. and has successfully deployed the model on university student housing projects over the last decade. We are now expanding the model beyond student housing to other campus project types and local government facility developments.

  • In 2021 Balfour Beatty was shortlisted for the Broward County and Fort Lauderdale Joint Government Center P3 project that will use a progressive procurement method to deliver the best value solution.
  • In California, the rising cost of housing is driving interest in campus housing for faculty and staff as a recruitment incentive. Universities are also now considering the P3 delivery model to develop research space, which is consistently an in-demand project type in the higher education market.
  • Universities are turning to P3 for the repair, replacement or new development of academic teaching hospitals.

A market that could substantially benefit from the P3 delivery model is K-12 education. As public schools age, school districts are facing an increasing challenge to maintain or construct new facilities. Studies have shown that there is a direct correlation between the quality of educational outcomes and the quality of the educational facility (PennSate Center for Evaluation and Education Policy Analysis). 

Currently, K-12 building programs are primarily financed from local property tax. This has created a significant education gap between wealthy and underprivileged areas of the country. P3 could help improve the disparity by utilizing agreements and alternative sources of financing to provide updated and improved educational facilities coupled with long-term maintenance solutions. Balfour Beatty is one of the largest P3 developers for K-12 education projects in the UK, and we are poised to successfully expand these services to K-12 clients in the U.S.

Balfour Beaty is Fully Invested in the P3 Delivery Model

P3 in the US is a young, burgeoning alternative delivery model that can help owners realize their infrastructure goals. With proven success in the U.S. and around the globe, Balfour Beatty has the knowledge, resources and leadership necessary to collaborate with owners, architects/master planners and other project stakeholders to deliver complex P3 projects that support the needs of the communities they serve. The vertical integration of our multiple services lines provides streamlined efficiency, cost management and schedule control resulting in the highest quality P3 project delivery. 

From the beginning of a project concept, Balfour Beatty is a trusted ally and partner, providing the creative operations and financing solutions that drive successful outcomes and value on our clients’ terms.