SAN DIEGO — Public-private partnerships provide a solution for the lack of infrastructure funding in the United States, but they present risk management challenges to all the entities involved, a panel of construction insurance experts said.

The partnerships, known as P3s, bring private funds into the public sector to build infrastructure projects that traditionally were funded solely by public entities, such as highways and bridges. In return, the private entities are granted rights to revenue produced by the projects, such as tolls, for an extended period, which can run into decades.

The structure of the projects creates an urgency to reach the point where they can generate revenue, which can cause risk management concerns, the panelists said Monday during the IRMI Construction Risk Conference in San Diego.

As a result of the infrastructure construction boom in the 1950s, the United States has a vast infrastructure network to maintain, said Stephen M. Rae, general counsel at Liberty Mutual Surety, a unit of Liberty Mutual Holding Co. Inc. in Plymouth Meeting, Pa.

In addition, the United States lags much of today's developed economies in new infrastructure spending, he said.

“We are spending less of our (gross domestic product) on infrastructure than just about any other industrialized country,” Mr. Rae said.

However, P3 projects are becoming more popular in the United States and the projects can go some way to narrow the gap between infrastructure spending needs and funds available to meet those needs, said Rodney Moss, senior vice president and managing director of Aon Risk Solutions in Dallas.

“There's a lot of (P3) activity in the Northwest and the Northeast … New York is really focused on P3 delivery and getting it right from the outset as is Illinois and Missouri; and Florida is stepping into P3 in a big way,” he said.

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One of the benefits of the P3 projects is that the private entities that partner with the public entities have a financial incentive to complete the projects quickly as they need to access the revenue that will be generated by the projects, said Mr. Rae of Liberty Mutual.

“That's the driver here and that really changes a lot of the construction phase dynamics,” he said.

In addition, the projects are assessed by rating agencies and those ratings are influential in determining the success of the P3 projects; and surety coverage is a component that is closely considered by the rating agencies, in addition to issues such as projected revenue, environmental risks and contractor risks, said Mr. Moss of Aon.

Much of the traditional risks that are borne by public entities are shifted to their private-sector partners, the panel members said.

As public entities assess the hazard risks of the project, including those that are shifted to the private entities, they have to consider what changes may occur over the length of the project, which may be more than 30 years, said Ron Rakich, Shingle Springs, Calif.-based director, risk consulting solutions, at consulting firm Bickmore Risk Services.

“It's like a marriage contract with a 35-year 'no divorce' clause,” he said.

“You have to anticipate market shifts. One of the big issues right now is: what happens if (the federal terrorism insurance program) goes away? What happens if the (private entity) takes on the risk of terrorism and there's no longer a federal backstop?” Mr. Rakich asked.

In addition, insurance pricing can change dramatically over that time and the public entity needs to consider that when agreeing to terms with their private entity partners in P3 projects, he said.

For the private entities, they often have to take on risks that would be borne by owners in typical private-sector project, such as site conditions and third-party delays, Mr. Rakich said.

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