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Developing P3s in the United States, part I

The basics
Innovative contracting and financing techniques are emerging as ways public entities are stretching their transportation dollars. One alternative delivery method gaining ground across the United States is public-private partnerships. This paper is a primer on P3s, the oldest, new way to deliver transportation infrastructure in the United States. It discusses public-private partnerships, the roles, benefits and various models available to transportation agencies.
How to use this white paper:
This white paper can be considered independently or as part of HNTB's public-private partnership white paper series, written to reflect the milestones in the life cycle of a P3. These papers are not intended to be exhaustive works but rather to trigger ideas and questions of how the topic might be applied to your agency's program. To learn more about P3s, contact Jonathan Startin, vice president, national program delivery, at jstartin@hntb.com, or Tim Heilmeier, vice president, Southeast Division program delivery officer, at theilmeier@hntb.com

 

The oldest, new project delivery mechanism

One way states are expanding their ability to deliver projects is by entering into public-private partnership agreements or P3s. These partnerships are formed through contractual agreements between a public agency and private sector entity that allow for greater private sector participation in any of the following areas:  
  • Project conceptualization and origination
  • Design
  • Financial planning and finance
  • Construction
  • Operations
  • Maintenance
  • Toll collection
  • Program management
Forming such partnerships enable states to fully fund and implement critical mobility-enhancing projects years ahead of schedule. In Florida, design-build-finance projects have entered construction an average of four years sooner than conventionally delivered projects.1

In addition to accelerating delivery, P3s also may save money. One formal study by the IBM Endowment for The Business of Government found P3s produced capital cost savings of 15 percent and were delivered 14 percent faster.2

P3s also:
  • Strategically allocate risk to the private sector.
  • Provide long-term, steady cash flows. 
  • Enjoy growing acceptance among states and the general public. 
  • Have a role in monetization and/or other initiatives that provide benefit or optimization to the owner.
P3s aren’t new, however. The private sector had extensive involvement in transportation infrastructure from the Colonial era through the mid-20th century. After World War II, however, road and transit responsibilities in the United States became more and more concentrated in the hands of state and local government. For example, the federal government funded the construction of the Interstate Highway System mainly with federal gas tax monies, leaving the maintenance and expansion of the 48,000-mile system largely to the states.

Yet, public funds (federal, state, and local) were not keeping pace with the demand to maintain and improve the nation’s extensive network of roads, bridges and transit systems. The federal reauthorization bills of 1991 made it easier to blend federal aid with private financing and authorized more flexible operating arrangements. Every reauthorization bill since then has continued to expand the possibilities for private sector participation. MAP-21, the latest transportation authorization bill, advances P3s in a number of ways, one of which includes expanding TIFIAs to the largest infrastructure loan program in U.S. history.

Investors eye emerging U.S. infrastructure market
Today, the U.S. infrastructure market has emerged as a promising new investment sector. It is garnering significant interest from domestic and international development companies and equity investment funds.
  • Some estimate the U.S. market’s potential size to be bigger than that of Canada, Australia and the United Kingdom combined.3
  • One estimate puts the value of the near-term P3 project pipeline at $40 billion.4
  • A survey of top private investment firms conducted in 2011 indicates global investment funds have more than $250 billion available for U.S. P3 projects – 40 percent more than in 2010 and four times more than 2006.5
  • China Construction America, for example, has said it will invest $2 billion in the U.S. P3 market in the next few years.6
Private capital for transportation infrastructure is starting to come from non-traditional investment institutions, such as public pension funds, university endowments and even charitable foundations. According to The Hill’s Congress Blog, nearly 50 pension funds with $38 billion in capital have expressed an interest in infrastructure investment.
  • California Public Employees’ Retirement System has a plan to invest $800 million in California infrastructure projects in three years.7
  • In 2011, a group of public-sector unions established a five-year goal of investing $10 billion in pension assets in job-creating infrastructure projects.8
  • A consortium of labor union pension funds plans to invest equity in the $6 billion Tappan Zee Bridge replacement project.9

Obstacles to adoption remain
Although private investment is increasingly seen by states as a valuable tool that would give them greater flexibility in addressing immense funding challenges, several hurdles have limited the P3 project pipeline:

  • To be attractive to private sector participants, a project must offer a funding or revenue source.
  • While user fees, such as tolling, are the most common new revenue source, some states lack the statutory authority or political will to toll projects.
  • Most P3 projects still require public subsidies, which some states are unable to provide.
  • Other projects that could qualify as P3s lack environmental clearance.
  • Political leaders are reluctant to relinquish control of infrastructure to private entities, often citing various sovereignty concerns.
  • Many states do not have sufficient, enabling P3 legislation.
  • The financial market’s stability, investors’ risk appetite and risks inherent in traffic and revenue studies have challenged the financing capacity of projects.
  • Within the U.S., there is no common approach to P3 implementation and, as a result, foreign companies find it difficult to get their arms around the market.


P3s can benefit both parties
The number of reasons for public and private entities to consider entering P3s continues to grow. Through a P3, a public entity can:

  • Build desired projects now rather than later.
  • Optimize capital costs and long-term operating and maintenance costs (Shifting operations and maintenance to a private partner forces it to take a long-term view of the asset).
  • Accelerate development and completion compared with conventional project delivery methods.
  • Realize an overall project cost savings while typically receiving a fixed-price, date-certain schedule delivery.
  • Improve quality and system performance, results of leveraging private sector innovative technology and management techniques.
  • Supplement constrained resources with private resources and personnel. 
  • Access new sources of capital.
  • Depend less on capital budgets and general revenue bonds.
  • Strategically assign risk and responsibility to the party best suited to manage it.

Private entities benefit from:

  • Sharing some of the risk, while making a profit appropriate to that risk.
  • Identifying more opportunities to participate.
  • Having the potential for long-term roles in concession-style P3s.
  • Increasing the number of viable projects.
  • More responsibility, which gives them greater control over their destinies.

These activities typically are bundled into contract packages according to the public entity’s objectives surrounding schedule and cost certainty, innovative finance or transfer of management and/or
operational responsibility.

Selecting the right P3 model
Different types of P3s lend themselves to the development of new facilities and others to the operation or expansion of existing assets. According to the Federal Highway Administration’s Office of Innovative Program Delivery, P3 models for delivering new facilities are:

Design-build combines two, usually separate services into a single contract. With design-build procurements, owners execute a single, fixed-fee contract for both architectural/engineering services and construction.

The design-build entity may be a single firm, a consortium, joint venture or other organization assembled for a particular project.

Under this model, the design-builder assumes responsibility for the majority of the design work and all construction activities, together with the risks associated with providing these services for a fixed fee. Public entities normally are responsible for financing, operating and maintaining the project. Design-build contracts foster innovation between the engineering and construction phase which frequently allows for lower cost and accelerated delivery.

A public owner also can self-finance a facility and maintain revenue control but use a design-build and qualified management agreement to transfer the construction and operation and maintenance risks.

Design-build-operate-maintain packages the design and construction responsibilities of design-build procurements with operations and maintenance. These project components are procured from the private sector in a single contract with financing secured by the public sector. Typically, the contractor provides long-term operation and/or maintenance services. The public entity retains the operating revenue risk and any surplus operating revenue. DBOM’s incorporate life-cycle considerations and allow the project value to be optimized over a longer term.

Design-build-finance-operate-maintain allows the public entity to retain full ownership of the project but benefit from increased private participation. The private partner finances the project, has design-build responsibilities and then maintains and operates the infrastructure for a fixed fee.

DBFOM projects either are partly or wholly financed with a combination of debt and private equity. Future project revenues or dedicated tax revenues are leveraged to issue bonds or support other debt that provides funds for capital and project development costs. Concession and availability payment transactions are the two most common forms of DBFOM project delivery and are differentiated by the funding source.

  • In a concession, the private developer collects and retains the project-specific revenues and bears the associated revenue and demand risk. Direct user fees (tolls) are the most common revenue source. 
  • In an availability payment transaction, the public owner makes annual availability payments to a concessionaire from a general source of government revenues, such as a state transportation trust fund, based on the facility meeting the contractual operating and performance standards. Because the private sector’s payments are not tied directly to revenue on the facility, the asset is not required to have user fees associated with it.

P3 models best suited for existing facilities:

A qualified management agreement or O&M contract transfers operating and management responsibilities to the private sector. These comprehensive agreements involve both service and management aspects and can be useful in encouraging enhanced efficiencies and technological sophistication. Contractors can be paid either on a fixed-fee or an incentive basis, where they receive premiums for meeting specified service levels or performance targets. Transferring responsibilities, such as major repairs, to the private sector also may allow the public entity to take advantage of life-cycle cost and asset management practices and receive cost certainty.

A concession or lease agreement involves the lease of existing, public toll facilities to a private sector concessionaire for a prescribed period during which it has the right to collect tolls on the facility. In exchange, the private partner must operate and maintain the facility, make any mandated improvements and potentially pay an upfront concession fee to the public owner.

Concessions on an existing asset typically are executed to “monetize” a facility’s value or restructure an underperforming asset. Monetization can be described as realizing the upfront value for a facility’s future cash flows. Fueled by contractual toll rate allowances, bidders structure debt and private equity to finance an upfront concession payment. Concessions also are used for facilities struggling to meet existing debt payments as a way to retire a facility’s debt and eliminate default or bankruptcy risk. In this instance, the concessionaire will assume or retire the existing debt in lieu of a large upfront concession payment. The Indiana Toll Road and the Chicago Skyway are examples of monetization while the Northwest Parkway in Colorado is an example of a “rescue” concession. The most important factor in the award of long-term lease concessions generally is the amount of the concession fee.

Which is best?
There are methods — such as value for money analysis — that can help the public sector identify the optimal project delivery method. Also known as comparator analyses, these assessments quantify the project’s capital and life-cycle costs in real dollars, pricing the various delivery methods, as well as the inherent differences in the discrete activities and individual risk profiles. While factors aside from the bottom line can drive owners to or away from a P3, the value for money analysis is an excellent way to determine the right direction.

Additional resources
For more information about public-private partnerships, consult the following:  

Jonathan Startin, HNTB Corporation
Vice President, National Program Delivery
(212) 915-9603; jstartin@hntb.com  

Tim Heilmeier, HNTB Corporation
Vice President, Program Delivery Officer for Southeast Division
(404) 946-5710; theilmeier@hntb.com  

For a map of P3 activity in the United States, visit:
http://news.hntb.com/images/9055/ResourceImages/P3_2012.pdf  

Design-Build Institute of America
http://dbia.org/  

The Federal Highway Administration’s website on public-private partnerships
http://www.fhwa.dot.gov/ipd/p3/index.htm  

InfraAmericas

http://www.infra-americas.com  

Institute for Public-Private Partnerships
http://www.ip3.org/about-ip3.html  

The National Council for Public-Private Partnerships
http://ncppp.org  

For other HNTB-issued papers and viewpoints on P3s, visit HNTB.com.

1InfraAmericas’ 2012 U.S. P3 Forum
2“The Case for Public-Private Partnerships in the U.S.,” by William G. Reinhardt, editor, Public Works Financing, November 2011.
3InfraAmericas’ 2012 U.S. P3 Forum
4InfraAmericas’ 2012 U.S. P3 Forum
5Sphere Consulting, a Washington, D.C.
6China Daily, Feb. 14, 2012, http://www.chinadaily.com.cn/usa/epaper/2012-02/14/content_14606475.htm
7InfraAmericas’ 2012 U.S. P3 Forum
8InfraAmericas’ 2012 U.S. P3 Forum
9InfraAmericas’ 2012 U.S. P3 Forum

HNTB Corporation is an employee-owned infrastructure firm serving public and private owners and contractors. With nearly a century of service, HNTB understands the life cycle of infrastructure and solves clients' most complex technical, financial and operational challenges. Professionals nationwide deliver a full range of infrastructure-related services, including award-winning planning, design, program delivery and construction management. For more information, visit www.hntb.com.  

© 2012 HNTB Companies. All rights reserved. Reproduction in whole or in part without written permission is prohibited.

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