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Could the Pentagon Take a Cue From Britain on Public-Private Partnerships?
Expanding the use of P3s could ease DOD’s budget pressures.
Public-private partnerships, or P3s, have nearly a quarter-century track record of delivering infrastructure and services for public sector agencies worldwide.
Traditionally, P3 projects have been nondefense-related, such as construction of roads, bridges, schools, hospitals and prisons. But some of the most interesting applications have been in the defense sector, where the United Kingdom in particular has blazed a trail with almost 50 P3 initiatives, raising $15 billion in private sector financing.
P3s have been used to refurbish the Ministry of Defense’s main building in Whitehall, consolidate the MOD’s real estate in London, and rebuild Government Communications Headquarters. P3s have also been used to provide family housing, simulator-based training, search and rescue services, fixed telecommunications, roll-on and roll-off ferries, air-to-air refueling, air transport services and much more. One key application has been in the redevelopment of the British Army’s garrisons, including the $3 billion Allenby Connaught Project. This mission is to provide modern, high-quality, fully serviced, purpose-built living and working accommodations for 18,700 soldiers through new construction or refurbishment of 562 buildings. It includes a range of catering, cleaning, transportation, estate management, and document production and handling services as well as warehousing and waste disposal.
In the United States, P3s have been formally adopted by 33 states and territories, with more than 25 initiatives completed or underway in transportation alone, such as the new Interstate 95 express lanes in Virginia. At the federal level, P3s have primarily been used by the Defense and Veterans Affairs departments, although on a relatively narrow basis.
While current law limits DOD’s use of P3s to family housing, utilities and energy production, the department has had considerable success with them. P3s were used to deliver $20 billion in private investment to renovate and construct approximately 200,000 units of family housing to replace dilapidated units. DOD has also tackled utility privatization, as well as renewable energy projects and energy-saving performance contracts as part of its Net Zero program. These are notable projects but a relative drop in DOD’s budget bucket.
As DOD’s financial pressures continue to mount, the opportunities to use P3s could become more apparent and their acceptance as a viable option could grow. For example, DOD is planning to reduce its force by up to 15 percent by 2020, and at the same time, it is requesting congressional authority for a new round of base realignment and closing (BRAC).
So how would P3s play a role? P3s can be a useful tool by reducing costs, avoiding upfront spending for infrastructure projects by leveraging private sector investment, and utilizing private sector innovation and experience to increase value-for-money. It can also shorten construction timelines. The UK National Audit Office (equivalent to the U.S. Government Accountability Office) found that 70 percent of traditional design, bid, and build construction contracts were delivered late and 73 percent were over budget, which fell to 24 percent and 22 percent for P3s respectively. In addition, significant risk can be transferred to the private sector partner.
P3 programs generally require legislation to give federal agencies the ability to enter into a long-term contractual agreement with private sector partners without having to record the entire estimated cost of the project as an obligation in the current year’s federal budget. One advantage is that DOD has experience with successful P3s and already has legislative authority to use them for privatizing family housing, utilities and energy production facilities. In addition, the U.S. Army Corps of Engineers has authority to run as many as 15 pilot P3 projects for inland navigation infrastructure. Additional legislative authority may be needed if DOD is to expand the use of P3s.
P3s have worked successfully around the world, when properly structured and managed.
Given the extent of DOD’s challenging long-term budget realities, now could be the time to closely examine whether additional P3s can reduce infrastructure investments and operating costs.
Nicholas Greenwood is a managing director in KPMG LLP’s infrastructure practice and an executive fellow of the KPMG Government Institute. This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.
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