OCIP & P3 Integration = Risk Financing & Infrastructure Funding Solution
In “OCIP & P3 Integration: Risk Financing & Project Funding” we provided a cursory overview of an owner controlled insurance program (OCIP) and a public-private partnership (P3). We covered the attributes of both in the OCIP Overview, OCIP Methodology, OCIP Cost Savings, and P3 Overview, P3 Methodology, P3 Cost Savings sections. Now that we have addressed the basic structure, application, and benefits of OCIPs and P3s, we can make the compelling argument that integrating an OCIP as a risk financing approach, with a P3 as an infrastructure funding approach, is a viable option to be seriously considered for large public capital construction, transportation, and infrastructure projects.
The Changing Dynamics of U.S. Infrastructure Construction
A lot has changed in the past decade in the United States construction industry. This includes the introduction of new project delivery mechanisms like design-build in lieu of design-bid-build, the introduction of CAD and BIM technologies, and the use of contractual risk-transfer and risk financing methodologies. However, with all these improvements in project delivery, technologies, and methods, the U.S. is experiencing an infrastructure funding crisis. The deteriorated infrastructure in the U.S. has reached massive proportions according to the American Society of Civil Engineers (ASCE) who has given the U.S infrastructure a grade of D because of all the freeways and roads that are in disrepair, bridge failures, and the road congestion throughout many parts of the U.S. at gridlock levels.
The Lack of Infrastructure Funding Has Reached a Tipping Point
The ASCE estimates the need of approximately $3 trillion+ to build new infrastructure and maintain existing infrastructure based on the U.S. population growth projections and increased economic activity. The ASCE also calculates a funding gap of over $1 trillion for U.S. infrastructure, if infrastructure funding levels are not increased. To alleviate this crisis, the proliferation of public-private partnerships (P3s) on large capital construction infrastructure projects may be the solution to financing this funding gap.
Public Entities Need Private Entities
Many states and municipalities are facing funding shortages. Because of the void in local and federal funding, many transportation, engineering, construction financial professionals, and legislatures, are searching for solutions on who will step-up and provide the necessary funding of the financing gap for the U.S. transportation infrastructure construction and redevelopment? Is it time for the private sector to step in? Supporters of the Trump Administration and the USDOT who are advocating the increased use of P3s strongly feel that P3s are a viable solution to remedy this problem.
P3s have proliferated as an effective project delivery and funding tool on projects in states that want to leverage private funds to finance their transportation and construction investment requirements. Using private capital, and the private sector, for building and maintaining infrastructure in the U.S. is being more and more accepted in certain states where they have drafted and enacted P3 legislation to utilize private capital to fund large capital construction, transportation, and infrastructure projects.
OCIP Is a Good Fit with a P3
In addition to the proliferation of P3s, the use of an owner controlled insurance program (OCIP), aka, wrap-up insurance program, is a very effective risk financing and risk management approach that can potentially be seamlessly integrated with a P3. This is an innovative and viable approach to produce project and operational efficiencies, and cost savings benefits, to project owners on large capital construction projects. Project owners who are involved with transportation infrastructure projects have more challenging risks to manage. They could greatly benefit from the risk transfer and risk financing advantages of a properly structured OCIP to effectively manage their project insurance risks.
OCIP Advantage: Show Me the Money!
OCIPs have been around for more than 50 years. In the past decade, OCIPs have been utilized on all types of projects, from commercial building construction projects to large public works megaprojects. There has been a proliferation of OCIPs used on large public transportation infrastructure construction projects. These types of megaprojects are great candidates for an OCIP because they attract lots of public attention, have substantial impacts on communities and to the environment, and typically have large budgets. And, many of these megaprojects can cost more than $1 billion to build.
However, as noted above, the funding dynamic for public infrastructure has changed. We are in, “show me the money” mode. Fortunately, a properly structured, administrated, and managed OCIP can potential save project owners between 1% to 3% of the construction cost on a capital project.
P3 Can Extend the Design-Build Project Life Cycle
A key focus of P3s is on the contract and procurement process, and the use of project delivery methods such as design-build (DB) and other variations like design-build-finance (DBF), design-build-operate-maintain (DBOM), and design-build-finance-operate-maintain (DBFOM). These forms of project delivery and operational management constructs all have unique idiosyncrasies, which need to be stringently evaluated for their applicability and feasibility on a case by case, or project by project, basis.
Maximizing Risk Financing with OCIP / P3 Integration
Combining P3s with OCIPs is a natural! With an abundance of private capital from investors and a growing interest in the creation of P3s, combined with the control and potential cost benefit project owners can derive from the use of an OCIP, this integrated project funding/risk financing construct will offer many new project opportunities. It is imperative to note that attempting to combine a P3 with a contractor controlled insurance program (CCIP) will not produce the same level of control as with an OCIP.
CCIP Is Not a Good Fit with a P3. Caveat Emptor!
Combining a P3 with a CCIP is problematic for many reasons. The most critical reason is that a CCIP cannot be fully integrated with a P3, but can only be ancillary to the P3. Conversely, an OCIP can be fully integrated with a P3. This could be structured as either one, or two separate OCIPs. One OCIP would cover the capital construction work, and the other OCIP would cover the maintenance work that would be ongoing post construction, which is referred to as a “maintenance wrap-up” or rolling owner controlled insurance program (ROCIP).
P3 is a Good Solution. OCIP Integrated with a P3 is a Great Solution!
When it comes to P3s, from the public entity’s perspective, it’s all about the total cost of ownership and life-cycle cost analyses, and risk financing benefits. From the private entity’s perspective, it’s all about the P3 arrangement between the public entity and the private entity being equitable. Especially, when the risk vs. reward metric is the critical factor in structuring a successful P3. A properly structured P3 can offer significant economic and financial opportunities to a public entity and to private entity investors.
These are interesting and exciting times to be in the construction industry! It’s even more exciting to be at the cutting edge of structuring OCIPs that can be integrated with P3s to rebuild the U.S. deteriorating infrastructure. Knowing what a key role infrastructure plays in our U.S. economic competitiveness and in strengthening economic growth in urban and rural areas, the integration of OCIPs with P3s provides a viable alternative solution to address the challenge of renewing or rehabilitating our U.S. infrastructure, which will also provide a boom to the construction industry.
Hope you enjoyed this post. I will look forward to your comments. I will share more Insights in future posts.
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Until next time…
David Grenier is the Managing Director and Principal Consultant at C-RISK, LLC.
C-Risk is a risk management consulting company that provides strategies and insights on wrap-up insurance programs to project owners in the public and private sector who are involved with large capital construction projects.
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