Lexington's historic courthouse
With tightening fiscal budgets, retiring workforces and growing infrastructure concerns, communities across the country are looking increasingly for help from the private sector to advance their public infrastructure needs.
The use of public-private partnership models, or P3s, isn’t new to the state or Central Kentucky, but with new P3 legislation enacted last year and growing support from private and public agencies, Kentucky is poised for a potential surge in new P3 initiatives at both the state and local levels.
In May, the Kentucky Chamber of Commerce issued a report on the state of Kentucky’s infrastructure, citing among its many statistics that 1,157 of the state’s 14,265 bridges have been deemed structurally deficient by the Federal Highway Administration, and 3,133 more are considered “functionally obsolete,” with repair costs estimated at roughly $2 billion. The report called for “the aggressive use of the state’s new public private partnership (P3) law to leverage private-sector investments to expand and maintain the infrastructure essential to the economic growth of the Commonwealth.”
“There’s not really going to be a bridge that’s built in this country in the next 10 years that doesn’t use that P3 model,” said John Farris, founder and president of Commonwealth Economics, a Lexington-based economic consulting firm whose clients have included the University of Kentucky and the city of Louisville, along with multiple private interests.
With bridge projects included, Farris said that P3 investments will climb well into the billions of dollars across Kentucky over the next decade. While most people think of P3s as primarily transportation projects, the model is also becoming increasingly popular for innovative social infrastructure initiatives, with potential projects ranging from new soccer stadiums to more efficient water and sewer service, he added. Farris cited an RFP issued earlier this year in Madison County for a new rehabilitation and vocational center aimed at helping to address rampant drug use in the community and overcrowding at the Madison County Detention Center. Ten proposals were submitted and are currently being reviewed for the P3 project, which, as envisioned by Madison County Judge Executive Reagan Taylor, would be the first of its kind in the nation.
Kentucky’s P3 legislation also allows for unsolicited proposals from private entities that would formerly have been precluded from any subsequent bidding process for the project, a move that Farris expects will spark more ideas for enhancing and improving public services across the state.
“We are going to see more and more of these projects,” said Farris, who formerly served as secretary of finance for the state of Kentucky. “It’s a way to take another look at something the private sector may do more cheaply and efficiently than the public sector. … The starting point is to ask, ‘Is this something that the government should be in the business of doing, or is this something that the private sector does better?’”
While concerns have been raised about adequate protections for the interests of taxpayers in P3 deals, Farris said the state’s P3 legislation includes safeguards and third-party analysis requirements to make sure the projects have clear return expectations for all parties.
“You do have to be careful in walking that line,” Farris said. “The best way to do that is in a contractual manner up front. … It’s really important when you engage in P3 projects that the state requires that analysis to be done.”
Kentucky-based banks are looking to play a larger role in future P3 projects across the state as well. Last month, six Kentucky banks joined forces to launch a new investment fund deemed as the first of its kind — the $150 million Commonwealth Infrastructure Fund — targeted at supporting innovative P3 projects throughout the state. The institutions behind the new fund, which is managed by Farris, include Central Bank & Trust Co.; Kentucky Bank; Traditional Bank, Inc.; United Bank and Capital Trust Co.; Commonwealth Bank & Trust Co.; and Stock Yards Bank & Trust Co.
Because P3 projects are often sizable endeavors, community banks bound by legal lending limits can compete more effectively with larger regional banks by pooling their assets, said Dan Mason, chief lending officer at Traditional Bank.
“We community banks work together behind the scenes all the time with larger borrowers, but there’s not been a concerted effort before [to come together] to bring in these large infrastructure projects that I know of,” Mason said. “A lot of that business would go out of state. We would like to keep more of that in our own commonwealth to circulate the money in our state.”
P3 projects aren’t cookie-cutter deals, Mason said, but they can carry significant benefits for all sides, and they can make possible needed infrastructure that the Commonwealth otherwise can’t afford or can’t provide efficiently.
In Lexington, multiple high-profile public-private partnerships have been implemented in recent years, most notably on the University of Kentucky’s campus. In August, UK completed the five-year construction period in its $450 million public-private partnership for new dormitories with Memphis-based Education Realty Trust, adding 6,850 new beds to the campus. The university has also engaged in a 15-year, $245 million partnership with Aramark for dining services at the university, including more than $85 million in capital investments. The next project under P3 consideration at the university is a possible mixed-use retail and parking development on the Jersey Street lot near the north side of campus.
At the same time, the city of Lexington’s $30 million renovation of the historic downtown courthouse, with roughly $8 million funded through state and federal historic preservation tax credits, is currently underway and fully leased, with event space slated to open in late February and additional tenants such as VisitLex and Breeder’s Cup scheduled to move into the renovated space in spring of 2018. The city has also partnered with the private sector to build and renovate 1,255 units of affordable housing since 2014, leveraging the city’s $11.5 million investment with $90 million in private funding, and it is pursuing private funding and support in the development of the proposed Town Branch Park as well.
UK’s P3 partnerships have enabled the university to stay focused on its mission of educating students, while bringing experienced private interests to the table with their own set of core competencies and the ability to complete these projects more quickly and efficiently, said Penny Cox, UK associate vice president for administration.
“We look at these as ongoing partnerships; it’s not just signing a deal and walking away,” said Melody Flowers, UK executive director of strategic analysis and policy. “It’s about delivering the outcome we want and doing it in the most effective and efficient way possible.”
And Flowers doesn’t expect the pace to slow down any time soon.
“We have tremendous momentum here at UK,” Flowers said, noting the university’s total investment of roughly $2.3 billion in capital projects across all funding sources under the leadership of UK President Eli Capilouto. “I think we will continue to be open to the opportunities as they present themselves.”