How Are Broadband P3s Formed?
Earlier in this series of posts, we covered examples of P3 models for broadband. There are three primary stages of P3 development, no matter which P3 model partners decide to pursue: (1) confirmation of authority and regulatory constraints, (2) project planning, and (3) partnership negotiation.
Stage 1: Confirmation of authority and regulatory constraints
First, the public sector jurisdiction involved in the partnership needs to confirm they have legal authority to enter into a public-private partnership. This should entail a careful review of local and state laws concerning P3s and each activity associated with building a network.
There may be laws restricting municipal communications services, setting limits on financing options, dictating certain contract terms, or even defining the size of communities that can pursue public broadband. The effect of legal restrictions can sometimes make public projects riskier or more expensive, so even if a partnership is technically allowable under the law, the regulatory landscape may significantly impact project viability.
Lastly, if a local government is unsure regarding their authority per state law, they should determine whether their state applies Home Rule (allowed unless there are state restrictions), Dillon’s Rule (a locality only has authority if the state specifically grants it), or a combination. A state might follow one rule or the other depending on the population of the locality, or apply one rule to cities and counties but another to publicly owned utilities.
Stage 2: Project planning
After a municipality confirms their legal authority to form a P3, but before entering into any agreements with potential partners, the municipality should create a robust project plan.
This plan should include an analysis of the most suitable P3 model for their community’s needs, a calculation of costs and financial sustainability under the selected P3 model, and an outline of a financing strategy. The goal is to both provide the municipality with a robust path towards implementation and arm the municipality with the knowledge to ultimately negotiate partnership agreements from an informed position.
During this stage, the municipal institution should work to identify which ISPs may be interested in a partnership, which ISPs they would prefer to collaborate with, and the constraints the ISP partner may need to operate under. The locality can open a dialogue with potential partners and — unless there are legal restrictions — issue a Request for Information (RFI) to solicit clearly documented information from ISPs.
Done right, this groundwork should make the actual partnership formation stage smoother and faster, and should lead to the most favorable partnership terms the municipality could negotiate.
Stage 3: Partnership negotiation
Negotiating the official agreement between the public and private entities is often the most time-consuming stage. The parties must agree on responsibilities (who will build, operate, and market the network), who will bear which risks, and how rewards will be shared.
Negotiations should be grounded in knowledge and leverage: the more an entity brings to the table, the more leverage they have — and the more an entity knows about what their partner’s costs and needs will be, the more they can achieve through negotiation. For maximum leverage, municipalities often negotiate with more than one potential partner simultaneously.
Assign responsibilities
Municipalities can use a Request for Proposal (RFP) to assign responsibilities, which may include identifying infrastructure needs, proposing solutions, designing the project, financing the project, constructing infrastructure, operating and maintaining the network, and owning the network. Various models for the responsibilities assigned to the private ISP partner — with the remainder assigned to the public entity — can be summarized as follows:
- bid/build
- design/build
- design/build/finance
- design/build/finance/operate/maintain
The specific arrangement that the partners choose will depend on their experience, capacity, goals, priorities, and resources.
Negotiate financial terms ensuring risk is shared proportionally with investment and access to upside
The financial terms of a partnership — both costs and access to upside — must be agreed upon based in part on all the factors that go into the partnership: roles, terms, financing, etc. Perhaps most important, however, is ensuring terms are calibrated to the investments that each entity is making, as well as the risks or proportion of risk each entity is taking on. Far too often, we see municipalities being asked to assume more of the risk without equal access to potential upside if the network does well.
Legal review
Beyond checking local and state laws to confirm legal authority to enter into a P3, partnership negotiations should include legal reviews to understand future network needs like financing and goals so that final agreement terms do not accidentally preclude future actions.
In our final post in this series, we’ll share some P3 case studies.
Please let us know if you have any questions about P3s that we have not yet answered.
