38 New Jersey Municipalities I March 2019

Municipalities and P3Diving into the innovative economy

By Charles Sarlo, Esq., Vice Chairman, Board of Directors, New Jersey Economic Development Authority (NJEDA)

The simplest definition of a Public Private Partnership is acontractual arrangement between a public entity and a privateentity that allows for greater private sector participation in thedelivery and financing of capital projects with the objective ofshifting risk to the private sector. The P3 law allows for adesign-build-finance-operate-maintain methodology to delivercapital projects and is an alternative project delivery method,to the traditional procurement pursuant to the Local PublicContracts Law (LPCL), which is recognized as a design-bid-build approach.

Broad applicabilityThe P3’s statutory applicability in New Jersey is broad, as it

allows the P3 project delivery model to be used for any building,local or county road, vertical structure, or facility constructedor acquired by a local government unit (defined to not only bemunicipalities, but also other public entities that are subject tothe LPCL or Local Redevelopment and Housing Law) to oper-ate local government functions, including any infrastructure or facility used or to be used by the public or in support of apublic purpose or activity.

Municipalities have the ability to be innovative and creative in addressing their infrastructure capi-tal needs as a result of the newly enacted Public Private Partnership Law (PPP or P3), whichbecame effective February 10 (L.2018, c.90, s.1; N.J.S.A. 40A:11 -52, et seq.). In order to

ensure that a municipality’s economic decisions are financially prudent, the P3 law has built-in safeguards in the form of competitive solicitation, transparency in the form of public hearings, andchecks and balances in the form of the State Treasurer making specific findings in connection with theapproval of PPP projects.

Public Private PartnershipOfficial Publication of the New Jersey State League of Municipalities

“Logic will get you from A to B. Imagination will take you everywhere.” –Albert Einstein

The views, thoughts and opinions expressed herein are those of Mr. Sarloand are not attributable to the NJEDA.

40 New Jersey Municipalities I March 2019

Public-Private Partnerships

Today, the private sector’s innovativeintellect and financial vigor can craftand implement proposed solutions to amunicipality’s infrastructure needs. Thetheme of private sector innovative intel-lect is front and center in New Jersey’sP3 law, which allows the private sectorto submit an unsolicited proposal in the form of a “project playbook” thatincludes certain statutory requirements. Should the municipality elect to pro-

ceed, it must seek competitive proposalsvia a public procurement process thatmust also meet the minimum statutoryrequirements that that satisfy the samebasic purpose and need of the unsolicitedproposal. In the alternative, the munici-pality can issue a public procurementrequest-for-qualifications. Upon a deter-mination of the qualified respondents,based, in part, on minimum standards tobe promulgated by the State Treasurer,the municipality is required to issue arequest for proposals.Regardless of whether the unsolicited

proposal or the solicited proposal path-way is applied, the municipality wouldrank the proposals received in order ofpreference based, in part, on minimumstandards to be promulgated by theState Treasurer. Thereafter, the munici-pality is required to make specific deter-minations of the top-ranked proposalsand hold a public hearing at which thespecific findings must be made in orderto find that the project is in the bestinterest of the public. Subsequent to the public hearing, the

municipality is required to submit a P3application to the State Treasure forreview and approval. (see box on page 41)The statute requires the submission ofspecific items, including: full descriptionof the proposed P3 agreement, a fulldescription of the project, description ofany agreement for the lease of a rev-enue-producing facility related to theproject, the estimated costs and financialdocumentation for the project showingthe underlying financial models andassumptions that determined the esti-mated costs, timetable for project com-pletion, evidence of the public benefit inadvancing the project as a P3, and themunicipality’s findings during it propos-

al review and the public hearing. For municipal projects, the State Trea-

surer, in consultation with the New JerseyEconomic Development Authority(NJEDA) and the Department of Community Affairs (DCA), is statutorilycharged with approving P3 applications.In order to validate that the proposed P3project is in the best interest of the public,the State Treasurer must make specificfindings for a P3 project approval. (seebox above) If the P3 project is approved, the

municipality can then enter into a P3agreement with the private sector, whichneeds to include certain provisions, suchas a completion date guarantee, liquidateddamages, maximum rate of return toprivate entity, and a provision for thedistribution of excess earnings to thelocal government or the private partyfor debt reduction, a project labor agree-ment, performance and payment bonds,prevailing wage, and the establishmentof a construction account with a third-party financial institution to act as a collateral agent. As with any newly enacted law, one can

certainly anticipate litigation involvingthe P3 law in which a party seeks toclarify the intent of certain provisions,

reconcile inconsistencies or challenge theLaw’s applicability. Understandably, the initial inquiry by a

public official will invariably be “Why?” Why chose to undertake a capital

infrastructure project on a path thatappears to be complex, burdensome, anduntested–while it may also be assumedto be more costly and potentially fraughtwith a litigation challenge–rather thanthe time-tested procurement under theLocal Publics Contract Law. For each initial negative reaction, P3

advocates and P3 case studies can illustrate a positive counter. Generally, ithas been proven that there is a role forthe private sector to foster solutions forpublic sector challenges. A well-designedP3 is intended to be performance-basedand outcome-focused with a risk-sharingapproach where asset performance isoptimized for the long term.

Qualifying considerationsNotwithstanding that some who have

had firsthand experience undertaking acapital project under the LPCL would certainly express concerns that they expe-rienced regarding project cost overruns,claims, and missed project completiondates, it should be recognized that the P3

Required Findings - Best Interest of the Public • PPP will cost less than a pure, public sector option (supported byreal comparisons), or if it costs more, there are factors that warrantthe additional expense.

• There is a public need for the project and the project is consistent with existing long-term plans.

• There are specific significant benefits to the project.

• There are specific significant benefits to using the P3 model instead of other options including No-Build.

• The private development will result in timely and efficient development and operation.

• The risks, liabilities and responsibilities transferred to the privateentity provide sufficient benefits to warrant not using other means ofprocurement.

• The maximum public contribution that the municipality willallow under the P3 arrangement.

March 2019 I New Jersey Municipalities 41

Public-Private Partnerships

law should not be considered a blanketreplacement to capital project procurementunder the LPCL, as not every project isappropriate for a P3 arrangement. National P3 players will advise that a

project cost of $50 million is the mini-mum project threshold for a P3 project.The New Jersey P3 law prohibits thebundling of projects (i.e., two or moreprojects considered as one for a P3arrangement). However, there are manyinfrastructure needs of municipalitiesand other local government units withproject costs less than $50 million. Notwithstanding this industry threshold,

it is fully expected and anticipated thatthe New Jersey local know-how of theprivate sector will adeptly be able pro-pose P3 arrangements to the public sector pursuant to the P3 law, for manyof a municipality’s capital infrastructureprojects regardless of project size. Thepublic sector should embrace the imagi-nation of the private sector as related toits capital infrastructure needs and baseits procurement decisions on sound eco-nomic analysis, which supports benefi-cial fiscal and social impacts as requiredby the P3 law.

The dawn of Public-Private-Partner-ships in New Jersey is now. As may beapplicable, it would certainly be prudentfor public officials, who are chargedwith balancing the needs for publicfunds while developing, upgrading orreplacing public infrastructure, to cer-tainly consider the Public-Private-Part-nership business model as an alternative

procurement process, notwithstandingits embryonic stage. e

Charles H. Sarlo, Esq., is the Vice Chairman of the Board of Directors of the New JerseyEconomic Development Authority ( NJEDA). He has presented at NJLM P3 Panels andWebinars. He is a Partner and Vice Presidentand General Counsel of DMR Architects, P.C.

Express FindingsRequired by Treasurer

• Municipality’s assumptionsregarding project scope, benefits,risks and the cost of public sectoroption, were fully and reasonablydeveloped.

• Project design is feasible, finan-cial plan is sound and long-rangemaintenance plan is adequate toprotect the investment.

• The project is in the best interestof the public based on criteria and findings of municipality prior panel.