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May 13, 2013
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Kentucky’s $5 billion public-private partnership play

Innovative, creative public-private partnerships accelerate infrastructure development, streamline strategies and build jobs

By John Farris and Tom Howard

Public-private partnerships or “P3s” are being used in Kentucky and across the United States to meet ever-growing needs in transportation, housing, human services and economic development. This mutually beneficial relationship between the public and private sectors often leads to more affordable and effective project delivery than the traditional model – that simply entails the government hiring a private company to accomplish a specific task. By harnessing creativity and exchanging costs, responsibilities and ownership, P3s open up a range of solutions to many seemingly intractable problems affecting our state.

The benefits of P3s can be seen along many aspects of development:

The new Project East End Bridge walkway, part of the Louisville-Southern Indiana Ohio River Bridges Project, is shown in this artist’s rendering. The $2.6 billion project involves construction of two new crossings, with approaches, to help alleviate the traffic congestion for which the Interstate 65 corridor through Louisville and Southern Indiana is known.

The new Project East End Bridge walkway, part of the Louisville-Southern Indiana Ohio River Bridges Project, is shown in this artist’s rendering. The $2.6 billion project involves construction of two new crossings, with approaches, to help alleviate the traffic congestion for which the Interstate 65 corridor through Louisville and Southern Indiana is known.

♦ Financing: In some P3 arrangements, the private sector provides much-needed funds for the project or serves as a conduit for more creative financing options.

♦ Operations: The private sector often provides expertise in operations and execution. Private contractors typically pay for cost overruns, manage design problems, ensure timely delivery, and assume other risks associated with the project.

♦ Timing: P3s expedite projects by streamlining strategies, approval processes and implementation.

♦  Affordability: By providing avenues to alternative financing and increasing efficiency, P3s often make projects more affordable. This is increasingly important as governments across the country face mounting budgetary constraints.

♦ Growth: Perhaps most importantly, public private partnerships spur employment, economic development and opportunities for our citizens.

To date, Kentucky has embarked on dozens of P3 projects that have generated tens of thousands of jobs and more than $5 billion in construction spending over the last decade.  These successes include many different types of projects and illustrate a broad spectrum of P3 possibilities. The chart on the following page presents some notable examples.

Eastern State Hospital

A rendering of Eastern State Hospital at Coldstream Research Campus in Lexington. It is scheduled to open later this year.

A rendering of Eastern State Hospital at Coldstream Research Campus in Lexington.
It is scheduled to open later this year.

This unique partnership between the University of Kentucky, Lexington Fayette Urban County Government, and the commonwealth allowed the construction of a new state-of-the-art facility that replaced a dilapidated hospital. The hospital is being constructed through a design-build model in order to transfer construction risk. Operations will be outsourced to UK HealthCare, and the financing was provided by LFUCG.

University of Kentucky Student Housing

UK is a pioneer in the movement to upgrade obsolete student housing with a new privatized solution. The developer, EdR Collegiate Housing of Memphis, will design-build, operate, maintain and provide equity funding for on-campus facilities under very specific contract terms that offer better amenities and value to the students.

Louisville-Southern Indiana Ohio River Bridges Project

Kentucky Gov. Steve Beshear and former Indiana Gov. Mitch Daniels developed a unique P3 solution to address both states’ needs and policy objectives. Each state agreed to take the financial and construction responsibility for roughly half the project, thereby speeding delivery and lowering cost. Kentucky is responsible for the Downtown Crossing, and Indiana the East End Crossing. Both states are utilizing different and creative financing strategies.

Kentucky Kingdom

The Kentucky State Fair Board has entered into a 50-year lease with Kentucky Kingdom LLP, which will invest a minimum of $45 million to re-open, operate and maintain the amusement park located at the Kentucky State Fair and Exposition Center near the airport in Louisville. The project was made possible through Kentucky Tourism Development Act Incentives.

Owensboro Downtown Placemaking Initiative

Owensboro is undergoing a $1.5 billion transformation of its downtown, anchored by a new $48 million convention center that is scheduled to open this fall. This has spurred significant private development, including almost $35 million in new investment for two hotels, which qualified for $7.5 million of Kentucky Tourism Development Act Incentives.

Warren County Broadband Expansion

This P3 was instrumental to making Bowling Green the third metro area in Kentucky to have 4G wireless capacity. The county hired consultancy Connected Nation Exchange (CNX) to conduct a thorough analysis of both its existing technological resources and the demand for 4G LTE service in the area. CNX and the county then provided this data to wireless providers, while expediting regulatory and licensing requirements in order to maximize efficiency and attractiveness of a project. The partnership also included facilitating access to various public assets for AT&T to use as wireless technology sites.

Tax Increment Financing projects

Tax Increment Financing (TIF) is a P3 method that has been used to help private developers finance the public infrastructure needs of their projects. This program uses the increase in tax collections that a qualifying project will create as a mechanism to repay the developer for the costs of approved public infrastructure expenditures, such as road or utility upgrades. The state TIF program is being utilized by projects of all sizes in a variety of Kentucky cities, including Louisville, Lexington, Bowling Green, Covington, Georgetown and Oak Grove.

Future P3 Opportunities

Given the recent flurry of activity in Kentucky and neighboring states, it appears that the possibilities for future P3 opportunities are limited only by the imagination.

Some future applications for Kentucky could include:

♦ Multiple transportation projects: The replacement of the I-75 Brent Spence Bridge that crosses the Ohio River near Cincinnati, as well as the proposed I-69 bridge that would cross the Ohio River near Henderson, Ky., can find tremendous value in utilizing P3s. Due to the complex and costly nature of bridge projects – as well as the enormous public benefit they create – bridges serve as a classic example of public infrastructure that can succeed by sharing costs and responsibilities with the private sector. These two bridges are excellent candidates for a design-build approach, but the means of financing will likely be different given the levels of traffic expected to cross each bridge.

♦ Expanded infrastructure and/or housing options: These efforts could be facilitated in the Fort Campbell and Fort Knox areas through the use of Tax Increment Financing districts, such as Oak Grove Village, or the expanded Military Housing Privatization Initiative (MHPI) efforts. Previously, the federal government utilized the P3 approach for 4,455 units at Fort Campbell in December 2003 and 2,527 units at Fort Knox in December 2006.

♦ Broadband Internet access for rural areas of Kentucky: P3 partnerships help reduce regulatory burden, attract investment and streamline access to key infrastructure. Working in tandem, the public and private sectors can substantially upgrade high-speed Internet capacities. This has an immediate effect on economic competitiveness, education, public health, public safety and quality of life.

Public private partnerships are an effective tool for state and local governments to accelerate the delivery of much-needed services and infrastructure to the public, while fostering new jobs and future economic development. Stakeholders across the Commonwealth of Kentucky should embrace the recent success of P3s and look for future P3 partnerships as tangible opportunities to spur innovation, job creation and public infrastructure development.

John Farris is founder/president and Tom Howard is a partner with Commonwealth Economics. Farris is an ex-World Bank economist and Kentucky Secretary of the Finance and Administration Cabinet. Howard formerly oversaw Kentucky’s $12 billion investments and debt portfolio and is an ex-federal Municipal Securities Rulemaking Board member.

 

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Innovative, creative public-private partnerships accelerate infrastructure development, streamline strategies and build jobs

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