Public private partnership

A Venn Diagram of a Public Private Partnership (PPP)

Introduction

Most transit agencies engage in some form of public-private partnerships. An agency that engages with a private-sector firm to design or construct a transit plaza is engaging in a simple public-private partnership that distributes risk and responsibility between itself and private sectors to accomplish a project with a public benefit. Recently, as government has tightened its fiscal belt, transit agencies and other stakeholders have become interested in public-private partnerships as a means of attracting additional funding or accelerating project completion. However, public private-partnerships are often misunderstood. A public-private partnership must confer some benefit (usually a rate of return on capital) to the private sector partner.

Potential Benefits of PPPs

Risk transfer

One argument in favor of a public-private partnership is that the arrangement allows the public sector to offload some risk related to project design, finance, construction, operations, and maintenance. Design-build contracts are popular because the structure allows a single party to manage risks related to designing and constructing an infrastructure project. Risks related to costs of constructing a specific design element or certain design flaws can be reduced. A design-build-operate-maintain contract can allow a single party to manage design and construction elements that may impact operation or maintenance costs, rather than allowing parties to transfer risk and costs to other parties. Public-private partnerships can create incentives for early project delivery or penalize late project delivery and transfer risk that fare revenues or other fees are less than expected due to lower than forecast ridership. Under certain arrangements where no revenue guarantee exists, the entity responsible for operating the transit facility will bear the risk of any shortfall in funds from operations.

Additionality

Public private partnerships can lead to investments in infrastructure that would have otherwise been delayed or not made at all. In these cases, the partnership provides an additional investment that would not be possible if the public sector were to rely solely on its own support. Engaging in a public private partnership that produces additional investment is not a choice between exclusive public support and a partnership with private support, but rather a choice between pursuing the investment under a private-sector partnership and not pursuing the investment at all.

Flexibility

Certain contracting arrangements better accommodate necessary adaptations to deal with unforeseen circumstances. Multi-year projects can face conditions that were not expected during the project planning and onset phases. For example, a multi-year subway construction project using a public-private partnership may be better able to take advantage of new tunnel boring technology than a contract in which the builder is restricted by certain design criteria.

Potential Concerns and Controversies of PPPs

Loss of Public Control

Some critics of PPPs argue that PPPs limit the public control of infrastructure. This is especially true of leases or contracts that may extend several generations. To address this, European Union counties limit PPP contracts to 21-35 years. Noncompete clauses in PPP contacts also lead to loss of public control. In the case of State Route 91 in Orange County, California, the county and state were unable to add capacity to the road because of a noncompete clause in its PPP contract for the route's HOT lanes.

Loss of Future Revenue

Many PPPs, especially brownfield tollroads, have received public criticism for leveraging valuable future toll revenues for a short-term infusion of funds.

Accountability and Transparency

Because private entities engage in a bidding process for PPPs, some information in the project process becomes private and proprietary that would otherwise be public in traditional publicly-built projects. One way to address this is to include confidentiality provisions in state enabling legislation.

Public-private partnership structures

Several permutations are possible to transfer tasks, responsibilities, risks, and ownership from the public to the private sector. These include:

• BOT - Build Operate Transfer
• BOOT - Build Own Operate Transfer
• BOO - Build Own Operate
• BLT - Build Lease Transfer
• DB - Design Build
• DBB - Design Bid Build
• DBFO - Design Build Finance Operate
• DBFMO - Design Build Finance Maintain Operate
• DCMF - Design Construct Manage Finance

Types of PPPs for Transit Agencies

In transportation, a public private partnership "involves one or more aspects of the funding, financing, planning, design, construction, operation and maintenance of a transportation facility" In practice, this can take several forms.

Contracting

Agencies use private sector contractors to provide some or all ancillary and core services. Contracting may range from purchasing (using an external printing company to print schedules), to contracting ancillary services (e.g. using an outside payroll company), to contracting transit operations - their core service. Agencies must evaluate ancillary and core service outsourcing on a case-by-case basis to understand what may gained and what may be lost.

Tolling

Although transit already levies a toll-for-service, many automobile facilities do not. Imposing a toll on a previously free facility used by automobiles can both generate revenues and demand for transit. Tolling is typically not politically popular, though providing something new in return for the toll can reduce opposition. Tolling can be used in a BOT, BOOT, DBFO, or DCMF arrangement to provide payments to a private-sector partner which contributed capital and expertise to develop the transportation facility. Tolling generates new revenues, and new revenues are often required to make a public private partnership feasible.

Financing

Private capital typically requires a higher rate of return than public capital. This is because dividends paid on municipal bonds are usually untaxed, and the private sector requires a profit margin while the public sector does not. Nevertheless, public private partnerships can bring new investment capital to a project that will produce new revenues or will increase the public entity's capacity to service debt or pay fees to the private sector partner. Using private financing can be a way for the public sector to move long-term liabilities off of their balance sheet.

Real Estate

Real estate developers can support transit indirectly through development projects that are supportive of transit. Such transit-oriented development bring not only additional ridership, but also additional political support for the transit system. Under a joint-development scenario, a transit agency works with the private sector to develop a publicly-owned parcel. See more information on joint-development and related strategies at the article on value-capture finance

Public Perception of Public-Private Partnerships

Members of the public will likely perceive that the partnership grant profits to the private sector at the public's expense. A public relations strategy from an early stage should focus on how the partnership enables the project to be built more quickly or more completely under a partnership.

Early brownfield tollroad PPPs have dominated the public perception of PPPs. Two early such partnerships were the Chicago Skyway tollroad in 2005 and the Indiana Toll Road in 2006. Both projects have been met with public skepticism, and this perception is not indicative of most PPPs, which are usually greenfield projects.

Principles for State Legislators Considering PPPs

The National Council of State Legislatures (NCSL) published a "Toolkit for Legislators" regarding Public-Private Partnerships for Transportation in 2010. The NCSL provided nine principles for state legislators who are considering PPPs in financing their transportation projects:

1. Be informed.
2. Separate the debates. Most private citizens still consider PPPs to be exclusively brownfield tollroads. Tolling previously-free roads is a controversial issue in and of itself. To effectively bring PPPs to the public, the debates between tolling and between PPPs must be separate. All PPPs needn't be toll roads (and in fact the vast majority are not), and toll roads needn't all be PPPs.
3. Consider the public interests for all stakeholders. The private sector's profit motive in a PPP must be tied to the public interest.
4. Involve and educate the stakeholders. Although the private sector is largely charged with a PPP project's completion, it is important that the community continue to be engaged in the planning process.
5. Take the long-term perspective. PPPs may be alluring to inject short-term revenue into a budget, but its benefits are only realized in the long-term. Long-term investments should be kept to long-term projects.
6. Let the transportation planning program drive PPP projects. PPPs allow for the monetization of existing assets, but they should not enable projects that are not already part of the Long Range Transportation Plan.
7. Support comprehensive project analyses. Bids should be evaluated in an extensive, public process that includes a traditional publicly-built option.
8. Be clear about financial issues. Contracts should be well-written and protect the public financial interest.
9. Set good ground rules for bidding and negotiation. Bidding processes should be transparent and should be backed by a technical evaluation process.

Additional Reading

American Public Transportation Association Task Force on Public Private Partnerships. "Public-Private Partnerships in Public Transportation: Policies and Principles for the Transit Industry." 2008.

This short resource is one of few transit-specific sources available on public private partnerships. The eight page publication contains common issues to consider as well as principles that should guide transit agencies considering public private partnerships.

E. R. Yescombe. Public Private Partnerships: Principles of Policy and Finance. Elsevier Finance. 2007. (find in a library or purchase)

This postgraduate-level textbook is an in-depth resource for evaluating and entering into public private partnerships. It's a useful resource for someone with prior knowledge of transit capital project management or project finance who is considering various PPP structures and is seeking to evaluate risk transfer and rates of return. Many portions of this book will not be accessible to the general reader.