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PUBLIC SECTOR DECISION MAKING FOR PUBLICPRIVATE PARTNERSHIPS SUMMARY Public sector agencies around the country are seeking creative solutions to closing an increas- ing gap between transportation infrastructure costs and funding. Publicprivate partnerships (PPPs) have the potential to provide part of this needed investment. In addition, some believe that PPPs can bring cost savings and efficiencies on project delivery and operations; how- ever, there is not a lot of evidence to confirm this belief. A 2007 study commissioned by Infrastructure Partnership Australia evaluated the efficiency of PPPs relative to traditional procurement, and found that such partnerships were more cost-efficient and more often com- pleted within schedule. Private investors have shown a willingness to invest heavily in new and existing transportation infrastructure, given the right incentives, and properly structured contracts can bring about cost savings. Much of the information promoting or criticizing PPPs comes from those who have a direct stake in the outcome of the debate (positive or neg- ative). Public sector decision makers seeking to leverage or supplement traditional sources of funding with private investment and other participation must make informed decisions. Cur- rently, there is a shortage of balanced information available to the public and decision mak- ers in their deliberations on PPPs. The well-publicized long-term leases of the Chicago Skyway and Indiana Toll Road gen- erated a lot of attention by supporters and critics of PPPs. The public sector may benefit from tapping into the private sector to procure much needed transportation improvements through a variety of PPP types, with varying levels of private sector participation, based on risk trans- ferred. However, concerns have been raised as to whether PPPs are in the public interest and what type of information is available to decision makers as they decide whether to pursue a PPP. This synthesis examines the information available in the United States and internationally that is needed to properly evaluate the benefits and risks associated with allowing the private sector to have a greater role in the financing and development of highway infrastructure, and how that information can be used in the decision-making process. The synthesis also included two sur- veys. The survey of state departments of transportation (DOTs) included 65 surveys distributed to the 50 states, the District of Columbia, Puerto Rico, and 13 Canadian provinces. Overall, a total of 49 responses were received for a 78% response rate. At the U.S. state DOT level (includ- ing the District of Columbia and Puerto Rico), 44 responses were received, a response rate of 85%. A second survey of interested parties was taken by 24 individuals who were identified by the authors and the topic panel, and had been publicized at the 2008 Annual Meeting of TRB. The numerous topics of interest related to PPP decision making were divided into three major categories: (1) project selection and delivery, (2) transparency, and (3) terms of PPP agreements. Three major themes emerged: How might governments decide whether or not to pursue a PPP? PPPs encompass a variety of project delivery options, with varying levels of private sector participation, based on risk transferred. A PPP is not a one-size-fits-all solution, and the
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2 decision to use one of the many PPP types or traditional approaches could consider and incorporate: · Valuation of alternative approaches. There is a need for a framework or process to analyze the differences between public versus private delivery that can be well understood by decision makers. The value for money is one of the most well-known techniques to evaluate PPP projects. All valuation techniques have their merits and limitations, and decision makers must be aware of what the benefits and limitation are from using these valuation tools. To accomplish this, there is a need for personnel with skills including value engineering, business modeling, risk transfer assessment, capital budgeting, tradi- tional financial problem-solving methodology, and performance auditing. · Appropriate risk transfer. The transfer and sharing of project risks is considered by many as one of the main benefits of PPPs. In a PPP, risk could be allocated to the party that can best manage such risk and, in some instances, there are risks to be shared by both partners. Contract terms can be used to accomplish the transfer of risks. · Transparency and public participation. PPP agreements are complicated, and there have been criticisms over deals being rushed through without the public or its elected officials understanding the implications. The lack of transparency in the PPP process has been voiced as one of the main concerns, and it is mentioned as an important issue by both supporters and opponents of PPPs. Once a PPP model is identified for a specific project, this could be followed by an exercise in educating and informing both the pub- lic and elected officials. · Unavoidable complexity of the transactions. States are motivated to find creative solutions, and they are interested in obtaining results quickly. However, the PPP process is complex, from the valuation and procurement process through the duration of the partnership. There is no uniform set of rules or standards to follow for all projects; there- fore, there is a high level of expertise required when pursuing a PPP. How might the public interest be protected? A PPP allows a much larger role for the private sector, from bundling design and construction in one contract (design-build), to long-term operations and maintenance of existing or new facilities (concessions). Some PPPs include equity contributions from the private partner and may also transfer toll collection and rate setting responsibilities to the private sector. When transferring these responsibilities it is important to ensure that the private sector has the proper motivations to protect the public interest, while allowing investors to meet a return on the investment that is in line with the risk they take. Most of the concerns about PPPs can be managed through contract terms. Although recent contracts have addressed many of the issues that have caused concerns in the past, unfore- seen situations may arise. That is, when the strength and flexibility of the contract is tested, and clauses that allow for contract termination or buyout are important. A PPP may also be monitored over its sometimes long lifetime to ensure that the private sector meets safety, maintenance, and other standards specified by contract. When valuing the decision to pursue a PPP, the public sector may account for the additional cost of perfor- mance monitoring by qualified, independent public sector/DOT staff. Other key public interest issues include appropriate use of revenues, maintaining envi- ronmental standards, and maintaining fair labor practices. Misperceptions about PPPs can be a distraction from the real issues. Many public concerns are rooted in concerns raised over past transactions, even though more recent approaches have learned from the past and resolved the issues in contracts. Some neg-
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3 ative perceptions about PPPs have lingered over time. Also, inadequate public information and openness in the process may lead to mistrust. Project sponsors might communicate with citizens and decision makers in an effort to build trust and to educate the public about some of the misperceptions related to PPPs and how they have been addressed, such as: · Non-compete clauses are always part of PPPs with a long-term lease component. In reality, after the experience with strict non-compete clauses in the 91 Express Lanes PPP in California, most PPP deals have included "limited-compete" clauses. · A PPP is a synonym for tolls and with that toll increases are inevitable, resulting in windfall profits. Limiting schedules for toll levels can be and have been written into PPP agreements. In addition, there are several types of PPPs that do not require the implementation of tolls (e.g., design-build, maintenance contracts, and agreements with availability payments/shadow tolls). Furthermore, direct user fees (i.e., tolls) are not the only way that the private sector can be compensated. The PPP debate, specifically related to long-term concessions paid through tolls, is caught in the middle of a debate about tolling policy. Tolling policy and use of revenue is an important public responsibility that can be clearly articulated in contracts. · The public sector loses total control of the facility. Under a PPP agreement, the public sector never loses ownership of the facility; however, some responsibilities are trans- ferred to the private sector. The extent to which these responsibilities are transferred is defined by contract. Well-crafted agreements, along with monitoring and enforcement of contract terms, can ensure that the public interests are protected. An open process helps build trust and support, as long as project sponsors can demonstrate that decisions are being made with the public interest in mind. Future research on this subject could focus on the PPP valuation process and the develop- ment of a framework to assist project sponsors in the selection of project delivery options, including the various types of PPPs. In addition, additional research is needed on how to develop an annual growth rate to establish toll rate caps on PPPs that rely on tolling. However, this report provides a basic understanding of PPP efforts to date in this country.