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CHAPTER THREE
PUBLICPRIVATE PARTNERSHIPS DECISION-MAKING TOPICS
PPP projects raise a variety of concerns as they move from The existing transportation infrastructure is aging and
concept through project delivery. These concerns range from travel demand continues to increase. At the same time, tra-
the initial decision to use a PPP procurement/delivery mech- ditional transportation revenues are growing at a slower
anism through specifics of who has control over toll setting rate than transportation needs, leading to an increasing
(where there are tolls involved), how risks and revenue are funding gap.
shared, and how the complexities of agreements can be com-
municated to the public and decision makers. This synthesis
has been organized into the following topical areas:
Opinion/Comment from "Other Individuals/Interest
· Project selection and delivery: Groups" Survey:
Criteria for deciding whether to use a PPP approach; CONCERN: Inadequate criteria for selecting candidate
Unsolicited proposals and the transportation plan- projects for P3 implementation.
ning process; MITIGATION: Better public sector understanding of the
Roles of public and private sectors, risk allocation, trade-offs inherent in P3--private sector money is not
and rates of return; "free" and P3 is not necessarily the answer when everything
PPP valuation tools; and else has failed.
Bonding, bonding capacity, letters of credit, and ini-
tial construction warranties.
· Transparency:
Transparency and public participation; In response, some governors, legislators, and others in posi-
Adequacy of legislative branch review; and tions of transportation policy leadership have proposed raising
Perceptions of foreign control of domestic assets and motor fuel taxes or vehicle fees to close the transportation
the role of local contractors. funding gap; however, few attempts at revenue enhancement
· Terms of PPP agreements: have succeeded. It is tempting for government to consider
Asset control and ownership; PPPs a "quick cash" scheme to close the transportation fund-
Tolling policy; ing gap, but in reality, a PPP provides several tools that can
Non-compete and other unanticipated event pro- help narrow the gap between transportation needs and fund-
visions; ing. Many aspects of PPPs introduce extensive changes to
Use of proceeds and revenue sharing; the way things have always been done, and the changes
Maintenance standards and hand-back provisions; may not be well understood. With this in mind, PPPs must
Environmental safeguards; be pursued carefully, and decision makers need a set of cri-
Labor relation issues; teria to help guide the decision between using a PPP or tra-
Length of agreement; ditional procurement when considering their transportation
Termination and buyouts; priorities.
Safety and enforcement;
Commercial development rights;
Data privacy and ownership;
International trade agreement implications; and Opinion/Comment from "Other Individuals/Interest
Liability, indemnification, and insurance. Groups" Survey:
Put in place solid PPP processes that help promote the
best projects and finance plans moving forward and limit
PROJECT SELECTION AND DELIVERY the highly risky projects/schemes from moving forward.
Criteria for Deciding Whether to Use a
PublicPrivate Partnership Approach
Various factors have led to an increased interest in trans- OECD, in its Principles for Private Sector Participation
portation PPPs by public decision makers in recent years. in Infrastructure (2007), laid out the following four principles
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related to the decision to provide infrastructure services by been a public sector enterprise. The enabling legislation in
the public or private sectors: nine states includes specific criteria to evaluate PPP propos-
als. Only 9% of the respondents to the DOT survey indicated
1. The decision should be based on a cost-benefit analysis that a lack of PPP criteria is not important. In addition, the
that includes all alternative procurement and delivery lack of criteria to evaluate candidate projects for PPP imple-
methods, and both financial and non-financial costs and mentation was called an important concern by one respondent
benefits should be projected over the project life cycle. of our survey of other interested parties. These respondents
2. The project sponsor should assess how the costs of suggested that the public sector needs a better understanding
infrastructure will be recovered (e.g., user-fees), and of the trade-offs inherent in PPPs, and in particular that PPPs
what other financing sources are available in case of are not "the answer when everything else has failed."
shortfalls.
3. The selection of a PPP model and allocation of risks Several studies that address selection of PPP projects have
should be based on the public interest. been published (Zhang 2005; Abdel-Aziz 2007; AECOM
4. Fiscal discipline and transparency must be safe- 2007b). Abdel-Aziz (2007) suggests that the decision to pro-
guarded, and the potential public finance implications ceed with a PPP should depend foremost on the program-
of PPPs must be understood. matic environment. If the program environment is supportive
of PPPs, only then should project-specific characteristics be
Countries with extensive experience in PPPs have devel- evaluated. Abdel-Aziz identifies eight critical success factors
oped guidance (see Table 2) that might be useful to states at the programmatic level:
considering PPPs for project delivery. Project sponsors must
note that each PPP project is different and these guidelines 1. Availability of a PPP institutional/legal framework,
might have to be adapted on a case-by-case basis. 2. Availability of PPP policy and implementation units,
3. Perception of private finance objectives,
Not all projects present viable opportunities for a PPP. 4. Perception of risk allocation and contractor's com-
Public decision makers need to understand the criteria for suc- pensation,
cessful projects to inform their decisions about whether or 5. Perception of value-for-money,
how to involve the private sector in what has traditionally 6. PPP process transparency and disclosure,
TABLE 2
LIST OF FOREIGN GUIDANCE DOCUMENTS FOR PPP PROJECTS
Country Guidance Document URL
United Kingdom Standardisation of http://www.hm-treasury.gov.uk/documents/
Private Finance public_private_partnerships/ppp_standardised_contracts.cfm
Initiative Contracts,
Version 4 (Mar.
2007)
Canada (province Alberta http://www.infratrans.gov.ab.ca/
of Alberta) Infrastructure and INFTRA_Content/doctype309/production/ait-p3-
Transportation, procurementframework.pdf
Management
Framework:
Procurement Process
(Sep. 2006)
Canada (province Alberta http://www.infratrans.gov.ab.ca/
of Alberta) Infrastructure and INFTRA_Content/doctype309/production/ait-p3-
Transportation, assessmentframework.pdf
Management
Framework:
Assessment Process
(Sep. 2006)
Australia Partnerships http://www.partnerships.vic.gov.au/CA25708500035EB6/0/
(Victoria) Victoria, Policy and C0005AB6099597C2CA2570F50006F3AA?OpenDocument
Guidelines (various
documents)
Netherlands Ministry of Finance, http://www.minfin.nl/nl/onderwerpen,publiek-private-
DBFM Manual, samenwerking/publicaties/DBFM-algemeen.html
Version 5 (Jan.
2008, in Dutch)
Ireland Department of http://www.ppp.gov.ie/keydocs/guidance/central/
Finance, Central PPP
Policy Unit (various
documents)
Note: URLs last accessed on May 28, 2008.
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7. Standardization of PPP procedures and contracts, and the competitive nature of PPP procurements in one instance
8. Performance specifications and method specifications. apparently led to withholding proprietary technical informa-
tion from elected officials, even as they voted to approve a
Once a transportation agency has established a PPP program, project. In the case of The Canada Line, an extension of the
it can more effectively develop individual projects (AECOM Vancouver urban rail line, local elected officials responsible
2007b). Zhang (2005) suggests 47 project-specific critical for approving the PPP responded to public criticism by claim-
success factors in five categories: ing that they did not know the extent of the controversial cut-
and-cover tunneling method to be used on the project. Because
1. Favorable investment environment, the amount of cut-and-cover tunneling was a proprietary part
2. Economic viability, of the contractor's bid information regarding its use that was
3. Reliable concessionaire consortium with strong tech- appropriately withheld--this did prevent the elected officials
nical strength, from not getting a complete picture of the project that they
4. Sound financial package, and approved (Siemiatycki 2007).
5. Appropriate risk allocation via reliable contractual
arrangements. If more than one project is anticipated, however, project-
by-project legislation is time and cost intensive for both the
The author surveyed both academics and practitioners with public and private sector, and standardization of PPP proce-
respect to the importance of these subfactors, and compared dures can streamline the procurement process. The United
the differences between the survey results of academics with Kingdom developed a standardized Private Finance Initiative
all those surveyed. He concluded that academics and practi- contract to simplify negotiations, enable consistent pricing of
tioners at-large generally agree on the relative importance of projects, and promote common understanding of risks among
the critical success factors. PPP projects (Abdel-Aziz 2007).
The AECOM "Guidebook" (2007b) reviews key criteria Ghavamifar and Touran (2008) conducted a comprehen-
from both public and private perspectives for identifying sive survey of the codes of all 50 states within the United
potential projects to pursue as PPPs; the criteria that are gen- States to identify enabling legislation for alternative project
eral precedents to successful implementation of PPPs by the delivery systems: design-build, construction management-at-
public partner are summarized here. risk, and PPP project. They found that an increasing number
of states are moving toward more fully authorizing alternative
· Enabling legislation in place, delivery systems.
· Urgent transportation need,
· Political and institutional support, According to a study prepared for the FHWA, state-
· Lack of internal resources to effectively deliver the enabling legislation should, at a minimum, provide an oper-
project, ating environment that allows a state DOT to enter into part-
· Leverage public resources and transfer risks to private nerships and to approve specific activities associated with
sector, that partnership. To be effective, it could designate a lead
· Expedite schedule through access to capital markets agency, such as the state DOT or a toll authority to imple-
and innovative project delivery, ment highway partnerships. The lead agency should have the
· Increase cost-effectiveness through best practices and authority to act on behalf of the state and should have certain
access to new technology, statutory powers including the power to procure projects
· Competitive market environment based on firms with through negotiation, to acquire right-of-way through eminent
proven experience, domain (or otherwise) and transfer use of it to a private part-
· Capability to manage transparent procurement/contract ner, to acquire and confer environmental permits, to confer
administration processes, and exclusive franchises, to establish a geographic non-compete
· Public accountability through monitoring of contract zone, to enter into binding concession agreements and lease
performance standards. arrangements, to regulate tolls or rates of return, to accept
unsolicited proposals, and to blend or lend state and federal
funds to a project (Apogee Research, Inc. 1995; U.S.DOT
PPP Enabling Legislation 2004). Enabling legislation may also include provisions that
define the maximum repayment term for debt (e.g., 30 years)
Enabling legislation is a necessary step for any PPP imple- and surety/performance bond requirements. Bloomfield (2006)
mentation and it can be provided on a project-by-project or warns against relaxing procurement laws too much, citing an
program basis. PPP legislation in seven states limits PPPs to example of local enabling laws that waived the need for com-
selected "pilot" or "demonstration" projects. petitive procurement for a long-term lease of a new cor-
rectional facility in Plymouth, Massachusetts. On the other
Project-by-project-enabling legislation allows public rep- hand, some terms provided by enabling legislation may dis-
resentatives to consider the details of each project. However, courage the private sector from investing in transportation
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infrastructure. For instance, the PPP legislation in Washing- Unsolicited Proposals and the Transportation
ton State requires post-legislative approval of proposed PPPs Planning Process
after a private partner has been selected, which some observers
say appears to have discouraged private investors from sub- The use of a PPP raises concerns that private investors may
mitting unsolicited proposals, because there is no guarantee circumvent the transportation planning process set by state,
that the negotiations will be closed even after a PPP project regional, and local governments, specifically by allowing
has been selected and approved by the DOT. them to submit unsolicited proposals. The public concern is
that the private sector will "cherry-pick" the most profitable
projects, leaving the public sector with other needed, but less
Public Interest Evaluation profitable projects (Buxbaum and Ortiz 2007). Others may
argue that the most profitable projects might be those with
Some government sponsors have found value in setting out the highest projected traffic and therefore the most needed.
specific criteria that need to be met before a PPP can be Attracting private investment for these projects would leave
pursued. A recent GAO report, Highway Public-Private public funds available for other needed projects that may not
Partnerships . . . (2000a) on PPPs reported that the states of be good candidates for PPPs.
Victoria and New South Wales in Australia have developed
the following criteria that consider the public interests before
entering into a PPP agreement. In New South Wales, the pub-
Opinion/Comment from "Other Individuals/Interest
lic interest evaluation is conducted before advertising the Groups" Survey:
project as a PPP, and the analysis is constantly updated as the
project moves through the procurement process, including Because a private corporation is most interested in the most
profitable project, and not the one that is most needed, they
before the government signs the PPP agreement.
may force the public agency to entertain construction of pro-
jects that are not a priority for the public--but of course the
· Victoria public will pay.
1. Effectiveness in meeting government objectives
2. Accountability and transparency, ensuring that com-
munities are informed of both public and private
sector obligations, and that there is oversight of An unsolicited proposal is a bid by a private company to the
projects government for a project for which proposals have not been
3. Affected individuals and communities, whether they solicited. Unsolicited proposals are sometimes perceived to
have been able to contribute during planning stages, serve special interests or favor individual companies. Mean-
and whether their rights are protected through appeals while, a variety of stakeholders including state representatives,
and conflict resolution mechanisms law firms, private companies, and trade associations recom-
4. Equity, ensuring that disadvantage groups can make mend elimination of state prohibitions on accepting unso-
use of infrastructure licited proposals (U.S.DOT 2004). Conversely, in a letter to
5. Public access, whether there are safeguards to ensure state DOTs, Congressmen Oberstar (chairman of the House
access to essential infrastructure Committee of Transportation and Infrastructure) and Con-
6. Consumer rights, whether the project provides safe- gressman DeFazio (chairman of the House Subcommittee on
guards for consumers Highways and Transit) (2007), asserted that states should not
7. Safety and security of the community are secured allow unsolicited proposals because they circumvent the estab-
8. Privacy, whether the project adequately protects lished planning process by favoring projects that are profitable
users' rights to privacy. to private developers. A response from the National Governors
· New South Wales Association (NGA 2007), asserted that PPPs have been care-
1. Effectiveness in meeting government objectives fully evaluated by states to ensure that the public interest is
2. Accountability and transparency, ensuring that com- protected, and that a PPP proposal where the public interest is
munities are informed of both public and private sec- not protected should not be considered.
tor obligations, and that there is oversight of projects
3. Value for Money used to determine if the PPP
approach is in the public interest Opinion/Comment from "Other Individuals/Interest
4. Community consultation, whether affected individ- Groups" Survey:
uals and communities have been able to contribute
CONCERN: PPP may undermine comprehensive trans-
during planning stages
portation planning and work of MPOs [Metropolitan Plan-
5. Consumer rights, whether the project provides safe- ning Organizations].
guards for consumers MITIGATION: Require PPP projects to be consistent with
6. Health and safety of the community are secured state, local, and MPO transportation plans. PPP projects
7. Privacy, whether the project adequately protects need to be part of plans, not separate from them.
users' rights to privacy.
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The interested party's survey done for this synthesis con- Buxbaum and Ortiz (2007) noted that short time periods
firmed this concern and provided some mitigation suggestions: for competing proposals may lead to inadequate competition
among bidders. On the other hand, a long period may dis-
· Require PPP projects to be consistent with state, local, courage private investors in submitting unsolicited proposals.
and MPO transportation plans;
· Prohibit PPP vendors from participating in project plan-
ning activities; Roles of Public and Private Sectors,
Risk Allocation, and Rates of Return
· Limit or prohibit unsolicited bids; and
· Provide sufficient time for submittal of competing The roles and responsibilities of public and private sectors
proposals. under traditional procurement are well understood by state
DOTs, architectural/engineering firms, and contractors that
International experience suggests three methods that deal are involved in the process. The introduction of a PPP changes
with unsolicited proposals in a way that introduces competi- the traditional roles of these entities in the development,
tion and transparency (Hodges and Dellacha 2007): operations, and management of transportation infrastructure.
The public sector's goal is to provide a transportation infra-
1. The "Bonus System" invites additional competition but structure (and system) that is safe and improves user mobil-
gives a small advantage to the unsolicited bidder. Thus, ity, whereas the private sector's main goal is to achieve a
later bidders are incentivized to submit high-quality, return on investment. Because these goals may be in conflict,
low-cost projects, but may have slightly less incentive the public sector must ensure that the assignment of roles,
to submit at all. This system is used by Chile and South responsibilities, and risk is done in a manner that protects the
Korea. public goals.
2. The "Swiss Challenge System" invites additional com-
petition and gives the unsolicited bidder the opportu-
nity to beat or match the new bids. This system is used Risk Transfer
by Guam, India, Italy, and Taiwan.
3. The "Best and Final Offer System" involves multiple The transfer and sharing of project risks is considered by
rounds of tendering and the original bidder is automat- many as one of the main benefits of PPPs. Much of the risk
ically guaranteed participation in the final round. This associated with the design, construction, financing, operations,
system is used by South Africa and Argentina. and maintenance of transportation projects is traditionally
managed by the government. In contrast, a PPP seeks to allo-
British Columbia developed its Capital Asset Manage- cate risks to the parties best able to manage them (Bettignies
ment Framework to standardize and streamline its PPP pro- and Ross 2004; U.S.DOT 2004). Three factors drive risk
curement process. The Capital Asset Management Framework sharing in PPPs. First, the private sector is in charge of a
follows a three-stage process of solicitation, evaluation/ number of activities during the lifetime of the project, includ-
negotiation, and contract award and allows for unsolicited ing financing, whereas the government usually holds a resid-
proposals, but invites competitors to submit a better pro- ual ownership right. Second, the two contracting parties in a
posal. It adopts the Swiss Challenge System (Abdel-Aziz PPP arrangement have different stakeholders and different
2007). objectives, risk perceptions, and constraints. Third, the pub-
lic and private partners may have different abilities to diver-
PPP legislation in 18 states allows unsolicited proposals sify the risk (Checherita and Gifford 2008). For example, the
for PPP projects. One of the first laws to enable use of trans- private partner can diversify the risks of construction and
portation PPP, Virginia's PPTA of 1995, allows private financing across many projects.
entities to submit both solicited and unsolicited project pro-
posals and specifies similar steps to evaluate, select, and Concern about how this risk allocation is handled was
implement both types of projects (U.S.DOT 2004). Changes borne out by the two surveys done for this synthesis. Risk
to the PPTA law in 2005 direct the program toward solicited sharing and allocation among public and private sectors
proposals, although the Virginia DOT may still accept unso- on PPPs is considered as an either "very important" or
licited proposal by statute. In the case of unsolicited propos- "somewhat important" concern by all respondents in our
als, Virginia has developed a quality control process in which state DOT survey, with 88% responding that it is a "very
unsolicited proposals are reviewed to determine if these are important" concern. Also, most U.S. states and Canadian
in the interest of the public sector and then make a decision on provinces that have completed or are currently are negoti-
whether the project should be pursued. The Commonwealth's ating a PPP project use risk assessments when considering
PPP guidelines provide that if the state decides to moves for- PPP proposals.
ward with the proposed project, competing proposals may be
submitted within a minimum of 90 days if the project does not One of the respondents to our interested parties' survey
involve federal funding, or a minimum of 120 if using federal identified the need for strong demarcation of responsibili-
funding. ties between the public and private sectors. In the survey, the
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Central Artery/Tunnel project in Boston (also known as the efforts to limit foreign involvement or state/local polit-
"Big Dig") was cited as an example of a project where there ical and public grassroots efforts to oppose PPP with
was a "too cozy" relationship between the public and private significant foreign company involvement.
sectors leading to lack of oversight and enforcement of pub- · Political stability--Continuity of political support for a
lic interests. The Big Dig included a design and construction PPP project should there be a change in political struc-
management contract with a joint venture between two large ture or composition.
engineering firms, where considerable independent responsi- · Moral hazard--Public sponsor to avoid conflict of inter-
bility was handed over to the private sector. Another survey ests and fraudulent activities during procurement and
respondent indicated that the public sector may be unaware execution phases of the project. Public sector to hold
of what risks are being transferred and which ones remain. PPP provider publicly accountable for proper execution
of the project consistent with the terms of the contract
agreement.
· Demand/volume--Level and timing of traffic.
Opinion/Comment from "Other Individuals/Interest
Groups" Survey:
· Revenue--Level and timing of proceeds from tolls or
congestion pricing of highway use.
How can distribution of transportation benefits/burdens · Environmental/archeological--Site conditions that may
and risks be decided in a strategically equitable manner?
require mitigation, and the cost of mitigation measures
Government deal making in transportation infrastructure
development may only include stakeholders and interests
and their responsibility.
of upper class membership. However, it is the role of gov- · Right-of-way costs--Uncertainty in cost of acquiring
ernment to assure that these deals benefit society as a parcels of land needed for project.
whole, including the underclasses. If the spectrum of pub- · Construction costs--Impacts from availability and cost
lic interests is not represented, inequitable distributions of of materials, labor, and maintenance of traffic, plus the
benefits, burdens, and risks may occur. There must be an cost of surety bonds.
approach to uncovering hidden and indeterminate public
· Maintenance costs--Cost of maintenance and repair
risk. In a PPP, the paradigm for business interests where
the business interest short term gain means the long-term
activities that may be affected by factors such as quality
public loss, must be changed. The public interest must be of design and construction, and changes in traffic vol-
of paramount benefit. umes, among others.
· Liability/latent defect--Potential for defects in design
or construction, and the effect on project costs and the
responsibility for paying these costs.
The FHWA's PPP website (2008) and Table 2 in chapter · Life-cycle costs--Cumulative costs of facility mainte-
two show a continuum of public/private mixes in order from nance, rehabilitation, and reconstruction/expansion over
those of greatest public responsibility to those of greatest pri- the term of the contract and its effect on cash flow and
vate responsibility. The amount of risk allocated to each party reserves.
depends on the type of partnership, the risk profile of each · Regulatory/contractual--Changes in regulation or con-
partner, and details specified in the partnership contract. Allo- tract provisions that affect the cost exposure of one or
cation of risks among private and public partners has been more partners.
reviewed extensively in the literature (Fishbein and Babbar · Payment structure/mechanism--Effect on value of proj-
1996; FHWA 2004; AECOM 2007b; Checherita and Gifford ect participation based on source, method, and timing of
2008). Checherita and Gifford (2008) provide a comprehen- project cost reimbursement or availability payment.
sive typology of risks and identify risks most likely to arise · Transaction costs--Level of costs associated with com-
under a PPP arrangement rather than under traditional financ- pleting various transactions involved in completing the
ing or complete privatization. Risks are classified in three PPP contract agreement and responsibility for payment
broad categories: (1) fiscal risks, (2) residual value or valua- of these costs.
tion risks; and (3) bidding risks. AECOM (2007b) provides · Changes of law--New statutes and regulations, includ-
discussion of risks, as summarized here: ing design/construction standards, which affect the cost
of the project and delivery schedule.
· Public acceptance--Degree of public acceptance of the · Compensation/termination--How PPP team will be
project, its procurement as a PPP, and the means by compensated for work completed if contract is termi-
which the project will be paid (e.g., tolling). nated, depending on reasons for termination, and any
· Control of assets--Perceived loss of control, particularly penalties for early termination by the sponsoring agency.
the level and frequency of toll rate increases, physical · Economic shifts--Changes in economic activity and
condition and appearance of the facility, and protection demography of the region that could affect traffic and
of the public interest. revenue over the term of the contract.
· Protectionism--Concern about nationality of firms com- · Currency/foreign exchange--Changes in relative value
prising the PPP team, which may result in legislative of national currencies that can affect the cost of the
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project and value of revenue to a PPP provider based on ect construction/schedule risks and traffic/revenue risks. The
another country with different currency used for project GAO report noted international examples that show the ben-
reimbursement or payment of revenue proceeds. efits of transferring the aforementioned risks to the private
· Taxation constraints--National, state, or local taxes on sector. One such project was the CityLink highway project in
the materials used in developing the transportation facil- Melbourne, Australia, which was subject to extensive delays
ity and the proceeds from operation of a priced facility and additional costs. Because all construction risks had been
that can affect financial viability. transferred to the private sector, none of the additional costs
of this project were a responsibility of the public sector. An
AECOM (2007b) also provides a detailed table summa- example of the benefits of transferring traffic and revenue
rizing risks fully or partially transferred to the private sector risks cited in the GAO report is the Cross City Tunnel in Syd-
based on 17 types of alternative PPP approaches, as shown in ney, Australia, where public officials have indicated that the
Table 3. For instance, in a DBFO agreement, finance, design, public sector has not been affected (financially) by the low
construction, construction inspection, maintenance, opera- traffic and revenues, because those risks were borne by the
tions, and traffic-revenue risk are often transferred to the pri- private sector. The project was sold in 2007 to new private
vate sector. owners, after the first concession failed.
In a PPP, risk should be allocated to the party that can best The original Pocahontas Parkway project, on the other
manage such risk. According to a 2008 GAO study, some of hand, is an example of what some might consider poor risk
the typical risks transferred to the private sector include proj- allocation on the part of the public sector. Under the original
TABLE 3
RISK TRANSFER RESPONSIBILITIES UNDER DIFFERENT PPP ARRANGEMENTS
Functional Responsibilities and Project Risksa
Environmental
Preservationb
Construction
Construction
Maintenance
Final Design
Preliminary
Acquisition
Long Term
Ownership
Operations
Inspection
Alternative PPP and
Clearance
Planning
Revenue
Finance
Traffic-
Design
Procurement
Asset
Land
Approaches
Asset Sale
Greenfield
Concession
Brownfield
Concession
Multimodal
Agreement
Joint Developmentc
Transit-Oriented
Developmentc
Build-Own-Operate
Build-Own-Operate-
Transfer
Build-Transfer-
Operate
Design-Build-
Finance-Operate
Design-Build-
Operate-Maintain
Design-Build w/
Warranty
Design-Build
Construction
Management at
Risk
Contract
Maintenance
Traditional Design-
Bid-Build
a
Functional Responsibilities and Project Risks noted with a check mark ( ) may be transferred in whole to the private
partner or shared with the public sponsor, depending on the contract.
b
Refers to long-term risk of asset failure or physical obsolescence.
c
Refers to private developer portion of infrastructure.
Source: FHWA Office of Policy and Governmental Affairs, ìUser G uidebook on Implementing Public Private
Partnerships for Transportation Infrastructure in the United States," prepared by AECOM, July 2007.
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PPP agreement, the Virginia DOT would operate and main- Revenue sharing provisions, refinancing regulations, and
tain the facility, thus retaining some of the traffic and revenue contract rebalancing provisions are strategies that allow the
risk by providing funding to cover operations and mainte- public sector to benefit from revenues that are higher than
nance (O&M) until the facility generated sufficient toll rev- projected and/or limit excessive returns to the private sector
enue to meet its debt obligations, fully cover O&M expenses, (Mayer 2007). In Virginia, both the Pocahontas Parkway and
and pay back the state's investment [including both capital the I-495 Capital Beltway HOT lanes concessions include
(State Infrastructure Bank loan) and O&M]. Actual traffic provisions requiring the private partners to share toll rev-
was much lower than projections, and revenues were not suf- enues based on the rate of return achieved. Revenue sharing
ficient to pay back debt (with bond holders bearing this risk); provisions are also common in Texas' CDA and were also
therefore, the state paid for O&M expenses on the facility included in the Northwest Parkway lease agreement.
until it was leased in 2006.
Some observers have suggested that a facility should be
Some of the risks that are better managed by the public sec- returned to the public sector once the private partner has met
tor include environmental, right-of-way acquisition, statutory/ a specified rate of return, and the French and Spanish conces-
regulatory, and public acceptance risks (AECOM 2007b). The sion models allow for termination of a concession once an
environmental process can be lengthy, especially if federal agreed upon internal rate of return is achieved, although esti-
funding is involved, and can add significantly to the project mating and determining when the rate of return has been
cost (GAO 2000b). The South Bay Expressway in California achieved could be difficult (Mayer 2007; see also section on
is a good example of the environmental risk and uncertainty: Use of Proceeds and Revenue Sharing later in the chapter).
it took almost a decade after the project had been awarded to This would allow for the benefits of private capital being used
a private partner to get environmental clearance (AECOM for transportation infrastructure, but also guard against excess
2007b; GAO 2000b). The delay resulted in increased construc- profits. However, it provides no incentive to keep costs down.
tion costs and foregone toll revenues. The original private part-
ners sold the franchise to Macquarie Infrastructure Group Another way that the public sector can maximize the work
in 2003, and shortly after construction of the facility began performed in a PPP agreement that is based on a set amount
of available funding is through "bidding scope," which has
(AECOM 2007b).
been used by the Missouri DOT. On the I-64 reconstruction
project, the Missouri DOT set a "not to exceed" price avail-
Risks are not always fully transferred from one entity to
able for the project and provided some minimum scope items,
another. For example, some PPP arrangements include traffic/
as well as a conceptual design of the project for information.
revenue risk sharing and/or include mechanisms that help
The bidding teams were asked to propose the "most scope"
mitigate the traffic risk to the private sector (Izquierdo and
they could deliver for the set price, and this was evaluated as
Vassallo 2004). Minimum revenue guarantees (Chile) or eco-
the most significant portion of the "best value" determination.
nomic rebalancing provisions (Spain) are used to mitigate this
A similar approach is currently being considered for the re-
risk. In the case of minimum revenue guarantees, the conces- bid of Missouri's bridge program to replace more than 550 of
sion contract also includes revenue sharing if traffic exceeds the state's lowest-rated bridges. The Missouri DOT will set a
projections, such that the public sector also benefits from addi- price and then list all the bridges to be replaced in a priority
tional revenues. Rebalancing provisions allow for revision of order. Bidding teams will be asked to propose how many
toll rates or changes in the length of the concession if a chosen bridges from this list they would complete for a set price.
metric (e.g., traffic, revenues) falls outside a specified range.
PublicPrivate Partnership Valuation Tools
Rate of Return
The decision to pursue a PPP project should be supported by
The main objective of the private sector in a PPP is to achieve analytical processes that show the PPP procurement as a bet-
a target return on investment on the equity invested. The ter option than traditional procurement or public provision.
European private sector expects a return on its investment of The valuation process should include the careful selection of
7% to 17% (Jeffers et al. 2006). Data analysis by Infrastruc- inputs/variables that properly characterize the chosen procure-
ture Management Group shows that the long-term return on ment method and risk allocation, using quantitative methods
equity on recent concession deals involving "brownfield" toll that include sensitivity analysis to better assess the risk vari-
roads was expected to be around 12%, whereas returns of ables for a particular project. Several states in the United States,
14% or higher were expected on greenfield projects (Page including Florida and Alaska, as well as the United Kingdom,
2008). Buxbaum and Ortiz (2007) identified windfall rev- Victoria (Australia), and British Columbia have widely used
enues as one of the main public concerns related to long-term "value for money" as a tool to assess PPPs. Other methods
concessions. This concern was further validated by the pub- have also been used in the United States, including shadow
lic agencies surveyed in this synthesis, where all but one bids and market valuation in Texas, and asset valuation in
respondent indicated that excessive rates of return to private both Chicago and Indiana, to set a minimum value for the pro-
investors are an important concern. posed project. Proper development and use of valuation tools
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is potentially one of the most important means of helping the oversight of PPPs in Europe (Jeffers et al. 2006). The report
public and elected officials better understand the benefits, indicates a need for personnel with skills, including value
costs, risks, and rewards of PPPs. engineering, business modeling, capital budgeting, traditional
financial problem-solving methodology, and performance
auditing. The report concludes that a state DOT team should
develop a public sector comparator (PSC) and a business
Opinion/Comment from "Other Individuals/Interest
model for each PPP opportunity to determine whether the
Groups" Survey:
project can return VfM to public.
Need to adopt level-playing-field competition procedures, to
permit fair competitions that do not tilt toward either public- Grimsey and Lewis (2005) and Morallos and Amekudzi
sector or private-sector bidders.
(2008a) have thoroughly explored the VfM concept. Although
cost-benefit analysis is widespread, there are few examples
of VfM in the United States, largely because of the limited
Value for Money Analysis experience with PPPs. British Columbia, the United Kingdom,
and Other Valuation Tools and Victoria, Australia, have made PPP/public procurement
decisions for many projects using VfM analysis and have
Consideration of the PPP option can be fraught with emo- established set procedures for its calculation. Table 4 provides
tionally charged ideological rhetoric, but this debate can be a list of some of the publicly available guides for VfM analysis.
informed by well-defined and executed business case analy-
sis. Value for Money (VfM) calculates the difference between An estimate of VfM is achieved by calculating the present
the costs and benefits associated with both traditional and value of the PSC and then comparing it with one or more bids
PPP procurements. Some of the benefits to developing a finan- from private companies. The PSC examines life-cycle proj-
cial model to evaluate PPP proposals include (Oakley 2008): ect costs, including construction, operations, maintenance,
and additional improvements that will be incurred over the
· Helps establish the business case for a PPP, course of the concession term (GAO 2000b). To prepare the
· Provides important insights about the project's ability PSC, the sponsoring agency needs to define the project scope
to obtain financing, in advance to the extent that a realistic determination of what
· Allows for testing of assumptions (e.g., toll increases, project requirements, costs, and revenues are likely to be.
traffic growth, length of agreement) early in the process, This may involve the following actions:
and
· Provides a method for "optimizing" the transaction and · Develop greater understanding of project geotechnical
encouraging competition and innovation. and site conditions through advanced reconnaissance;
· Advance project design to the point where there is a
The VfM analysis has been widely used outside the clear understanding of the key attributes of the project
United States, particularly the United Kingdom. Our state design and functional characteristics;
DOT survey confirms that the availability and consistent · Perform advanced value engineering to ensure that the
application of evaluation tools, such as VfM, are important to most cost-effective design parameters are considered;
state decision making. Of the nine states that have at least one · Revise assumptions typically used to estimate traffic
PPP project in place, two (22%) have not used VfM, and four volume and revenue potential, especially the possible
(44%) reported using VfM frequently. The preliminary size and frequency of toll rate changes when tolling is
results of a survey of VfM analysis tools in the United States involved to reflect current fiscal concerns;
conducted by Morallos and Amekudzi (2008b) showed that · Recognize the risks inherent in the inflationary effects
only one-third of the states use VfM or similar tools to eval- on the costs of project materials (AECOM 2007b); and
uate PPPs. Florida, Virginia, and Oregon reported using VfM. · Consider value of speed in construction execution asso-
ciated with minimizing public inconvenience.
Texas has used a process called "shadow bids" for two
PPPs. These involve the state, through its own resources and Once the characteristics of the project are better under-
consultants, making detailed estimates of design and construc- stood, the PSC is constructed using four components:
tion costs, operating costs, and a detailed financial model (GAO
2000b). The results of the shadow bids are compared with the 1. Raw PSC is the discounted cash flows of benefits
private sector proposals. In addition, the moratorium bill passed and costs attributable to the project assuming no pri-
in 2007 (SB 792), requires the Texas DOT to conduct a "mar- vate sector involvement. Cash flows are discounted
ket valuation" analysis for new toll roads to assess how much by a rate reflective of the government's time value
value a facility might attract from the private sector. of money plus a systematic risk premium for risks
inherent to the project. Costs include direct and indi-
An International Technology Scanning report by the FHWA rect costs and are reduced by third-party revenues
documented best practices regarding audit stewardship and including user charges, increased demand for a facility
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TABLE 4
VALUE FOR MONEY GUIDES
Country Document URL
United Kingdom HM Treasury, Value http://www.hm-treasury.gov.uk/documents/
for Money public_private_partnerships/additional_guidance/
Assessment Guidance ppp_vfm_index.cfm
(Nov. 2006); Value
for Money
Quantitative
Assessment User
Guide (Mar. 2007)
Canada Industry Canada, The http://strategis.ic.gc.ca/pics/ce/ic_psc.pdf
Public Sector
Comparator: A
Canadian Best
Practices Guide
(2002)
Victoria, Partnerships Victoria, http://www.partnerships.vic.gov.au/CA25708500035EB6/0/
Australia Public Sector C0005AB6099597C2CA2570F50006F3AA?OpenDocument
Comparator (2001);
Public Sector
Comparator
Supplementary
Technical Note
(2003)
Ireland Central PPP Unit, http://www.ppp.gov.ie/keydocs/guidance/central/
Value for Money and Value%20for%20Money%20Technical%20Note.doc
the Public Private
Partnership http://www.ppp.gov.ie/keydocs/guidance/central/
Procurement Process PSB%20Guidelines%20Jan%2007.doc
(2007); Compilation
of a Public Sector
Benchmark (2007)
Note: URLs last accessed on May 28, 2008.
or service, or payments received by third-party use of Besides the previous quantitative analysis, qualitative
the facility. factors could also be considered. The public agency must
2. Competitive neutrality value removes inherent com- identify the objectives and desired project outcomes and
petitive advantages or disadvantages of a government translate these into the performance standards on which to
agency compared with the private sector. This value is base the payment mechanism. The qualitative analysis con-
added to the PSC to allow for comparison with the PPP siders whether the long-term contract can meet the objec-
option. For example, public sector advantages include tives. It also considers important regulatory, public equity,
exemptions from land taxes or other taxes and fees that efficiency, or accountability issues. Does the PPP improve
would otherwise be levied from a private investor. On on traditional delivery, financing, management, operations,
the other hand, public sector disadvantages may include or maintenance structures? Is the PPP procurement option
political risks or economies of scale that would allow feasible given current market conditions, the public agency's
the private sector to operate more efficiently. available resources (monetary and management experience),
3. Transferable risks are those that are likely to be trans- and the attractiveness of the proposed project? The GAO
ferred from the procuring agency to the chosen private (2000b) found that both the states of Victoria and New South
partner(s). The risk valuation includes estimating the Wales, in Australia, have used qualitative analysis, along with
probability of the risk occurring, and could be a simple quantitative analysis, to evaluate how the public interest is
estimation of an amount above or below the raw PSC, affected in a PPP.
or the application of Monte Carlo simulation using a
probability distribution of risk. Although VfM appears to be a useful tool to lead the PPP
4. Retained risks are those risks that the public partner decision process, there are several criticisms of the VfM
will retain. The present value of retained risks will also process. The most significant is that the PSC is a hypotheti-
be added to the cost of the private bids to reflect the cal case entirely dependent on the experience of the person(s)
true cost of the PPP options. conducting the calculation. Inaccurate or erroneous estimates
of cost and/or risk may seriously impair the PSC (Bloomfield
The four components are summed and compared with the 2006). Furthermore, the PSC is estimated using numerous
combined cost of the private bids and the cost of the public's assumptions and projections well into the future, adding a
retained risks, as shown in Figure 1. high degree of uncertainty (GAO 2000b).
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FIGURE 1 PSC and value for money comparison. Source: Grimsey and Lewis (2005).
Selection and Use of Assumption in PPP Valuation lower discount rate for the public monetization scenario was
equivalent to the Pennsylvania Turnpike Commission's (PTC)
The concern about selection and use of assumptions is true borrowing cost of 4.5%, whereas the discount rate of a pri-
for other valuation tools as well, such as those used to deter- vate lease was estimated at 7.75%. The PTC discount rate
mine the value of an existing asset for potential brownfield was based on the yield of PTC's AA/Aa3 debt in today's
concessions. The NW Financial Group conducted a review market, and assumed that the state would pursue to public
of both long-term lease agreements for the Chicago Skyway monetization as proposed in Act 44, which includes raising
and the Indiana Toll Road, concluding that the public sector tolls on the Turnpike and adding tolls on I-80 (contingent to
could have generated as much revenue as the private sector federal approval). The higher discount rate for the private
(Buxbaum and Ortiz 2007; Enright 2007). The analyses for monetization scenario was estimated based on the weighted
both projects included key assumptions, such as periodic toll average cost of capital, assuming 6.65% for private borrow-
increases, that are uncommon and politically difficult under ing costs (for Baa rated corporate bonds), a cost of equity of
public ownership. Similarly, a Pennsylvania Turnpike valu- 12.5%, and assuming an equity/debt ratio of 19% to 81%
ation (Foote et al. 2008) showed that public monetization (based on the Indiana Toll Road concession equity/debt ratios).
would provide the best value ($26.4 billion for Act 44 com- A critique to the Foote et al. analysis (Poole and Samuel 2008)
pared with $14.8 billion for a 50-year asset lease), assuming suggested that the PTC discount rate should have been raised
that tolls are applied on I-80, which is an assumption that to account for risk, owing to the uncertainty of adding tolls
carries a very high risk. Later, a private offer for the Penn- on I-80. Grout (2003) recounts a decades-long controversy
sylvania Turnpike actually yielded $12.8 billion for a over this issue, and concludes that there are powerful argu-
75-year lease, which is about $2.0 billion less than Foote et ments for using a higher discount rate for the PPP delivery
al. estimates, for a longer lease term, which might be the mechanism.
result of current market conditions.
Valuation After PPP Contract Award
Discount Rate for PPP Valuation
Observers maintain that VfM analysis should be assessed even
There are highly contentious arguments among critics over after the contract is awarded so that prices and risks may be
using a higher or lower discount rate for the PPP. A recent readjusted as necessary to maintain VfM. However, it may be
analysis of the procurement options for the Pennsylvania impossible to compare the actual costs of the project with the
Turnpike monetization (Foote et al. 2008) used different dis- original PSC as the PSC quickly becomes obsolete; the origi-
count rates, further supporting this argument by applying nal PSC is only valid before the PPP implementation (Edwards
lower discount rates to the public monetization scenario. The 2004; Stambrook 2005). Presumably this comparison cannot
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be achieved because the original PSC would represent some credit crunch that is causing interest rates to increase, along
ideal conditions that could have changed if the public sector with increases in the cost of bond insurance (although the
implemented the project, and the actual PPP costs represent latter affects both public and private debt). Foote's evalua-
real conditions. Furthermore, the value of the PPP will con- tion concluded that because of the higher borrowing costs of
tinue to change over time, and the actual value will be realized the private monetization, toll rates under Act 44 (i.e., public
when the lease period expires, which, in the case of recent monetization through the existing Turnpike Commission)
PPP projects in the United States, will occur many decades were estimated at 71.5% the private toll rate. However, the
from today. use of public debt to support transportation infrastructure
may be restricted by a state's or toll authority's debt capacity
and statutory debt limits, and the unwillingness on the part of
Life-Cycle Costs decision makers to regularly raise tolls to meet debt require-
ments (Buxbaum and Ortiz 2007). In addition, some financial
As noted by Buxbaum and Ortiz (2007), future expansion experts indicated that some tax benefits available to private
and/or extensions, or other major capital improvements investors (e.g., interest deductions and accelerated deprecia-
throughout the lease period, must be identified and the respon- tion) can help bridge the gap between tax-exempt and private
sibilities for such investments should be defined in the con- debt (Florian et al. 2007). Furthermore, these federal tax pro-
cession agreement and included in the valuation process. The visions, combined with availability of other finance tools
use of life-cycle cost analysis that includes the costs of initial (e.g., Private Activity Bonds and TIFIA), may substantially
construction, operations, maintenance, and other costs antici- reduce the cost difference between private and public debt
pated during the life of a project has been encouraged by orga-
(Goldman Sachs 2008).
nizations such as the ASCE. The use of life-cycle cost analysis
may lead to higher project costs in the short term, but may
The financing package for some PPP projects included the
lead to long-term savings in O&M (Lehman 2007). In addi-
use of tax-exempt debt, such as debt issued by 63-20 corpo-
tion, for PPP projects that either include transfer O&M over a
rations in the 1990s (e.g., Pocahontas Parkway) and, in more
period of time or have warranty requirements, the private sec-
recent deals, the use of TIFIA and/or private activity bonds
tor is provided incentives to provide a higher quality of design
for toll road projects (e.g., I-495 Capital Beltway HOT
and construction (Grout 2005) to minimize O&M costs.
lanes). GAO (2004) estimated federal foregone tax revenues
of between $25 and $35 million in 2003 from outstanding
debt for the Pocahontas Parkway, Southern Connector, and
Additional Costs of PPP
Las Vegas Monorail projects.
The use of PPP for transportation infrastructure brings some
additional costs compared with traditional procurement (GAO The last three items on the list are related to the additional
2008). The valuation and decision-making process to pursue a procurement and performance monitoring costs incurred by
PPP should account for these to estimate the real costs of PPPs. the public sector when deciding to have a PPP program. For
These additional costs include: example, unsolicited proposals require the state to devote
time and resources for review (Buxbaum and Ortiz 2007).
· Higher cost of borrowing (for private debt), although Although some PPP legislation allows states to charge a pro-
there are ways that the private sector can lower this, for posal fee, it may be insufficient to cover the actual costs of
example, with private activity bonds; reviewing the proposal. Having a PPP program also requires
· Foregone tax revenue, when tax-exempt debt is used, the state DOT to either develop in-house expertise to evalu-
although this is revenue that may not have materialized ate and execute these deals or contract with legal and finan-
in any case; cial experts, both resulting in additional costs to the agency,
· Cost of reviewing unsolicited proposals; compared with the status quo (i.e., using only traditional pro-
· Cost of contracting financial and legal advisors, and/or curement). Beyond procurement, the agency will also incur
developing PPP expertise in-house; and monitoring costs, especially if the contract specifies perfor-
· Cost of performance monitoring. mance measures to be met by the concessionaire.
The first two items are related to the financing of the PPP
project. The borrowing costs of private debt are higher Opinion/Comment from "Other Individuals/Interest
than public tax-exempt debt; therefore, those higher costs Groups" Survey:
are passed onto the public, either through a lower up-front
[If deciding to pursue a PPP] "It must be clearly estab-
payment (compared with the public sector issuing debt to
lished that the same up-front borrowing could not be
raise money) or through higher toll rates than under public done more cheaply by public entities. The public should
ownership--assuming tolls are part of the finance plan not pay a premium for higher private borrowing costs,
(Baxandall 2007). And, as discussed by Foote et al. on their oversight costs for monitoring private entities, and share-
Pennsylvania Turnpike monetization analysis, the cost of holder profits."
borrowing is expected to rise in the near term, with the current
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Bonding, Bonding Capacity, Letters of Credit, formance warranties. Under the former, the contractor is
and Initial Construction Warranties responsible only for defects caused by poor materials and
workmanship. Under the latter, the contractor is responsi-
Bonding Capacity of Contractors ble for the facility meeting certain agreed upon performance
thresholds over an agreed upon period of time irrespective of
Many PPP projects are of such a size (more than $100 mil-
lion) that small contractors may have difficulty obtaining whether materials and workmanship meet initial require-
financing. And, even if a smaller contractor had the financing ments (U.S.DOT 2004).
capacity, the level of financial risk would negatively affect its
bonding capacity. Performance bonding is an important ele- Warranties may have a higher initial cost because con-
ment to a PPP, as it provides the public sector some assur- tractors may increase their initial bids to include contin-
ance that a project will get completed if the concessionaire gency funds for correcting problems during the warranty
has financial difficulty. period. However, warranties may result in lower life-cycle
costs than those of traditionally contracted projects because
In its Report to Congress on Public-Private Partnerships there is an improvement in the quality of the initial project
(2004), U.S.DOT identified bonding capacity and warranty (U.S.DOT 2004). The Wisconsin DOT explored the rela-
requirements as potential impediments to small businesses tionship between quality and whether or not the project had
competing for PPP projects. This concern was echoed at a a warranty, and found that warranted pavements performed
House Committee on Transportation and Infrastructure significantly better. The Wisconsin DOT study indicates the
hearing on innovative contracting (April 2007) by various warranted pavements are performing better than similar non-
industry representatives. According to Thomas (2007), few warranted pavements based on the measured International
sureties are willing to accept risk exceeding $250 million Rough Index and Performance Distress Index (Carpenter
under any given bond. This situation is further affected by the et al. 2003).
requirement for extended warranties in many of these PPP
projects. Warranties require larger bonds, driving project However, despite the performance advantages of war-
costs up, limiting participation as prime contractors of small ranties, some state transportation agencies cite the additional
and mid-sized companies. However, these companies can resources and expertise required to specifying them as a
and do still participate as subcontractors. disadvantage. As mentioned earlier, the warranties require-
ment may preclude smaller contractors from competing
In contrast, an FHWA representative stated in his testimony against larger firms that have the financial capacity to acquire
that, in the case of design-build, the higher bond requirements, large bonds that support the warranty requirement. Also,
among other factors, do not appear to affect small businesses some contractors are reluctant to enter into warranty agree-
participation (Ray 2007). In his written testimony, Ray indi- ments owing to the increased liability and risk (Carpenter
cated that data on design-build contracting show that "the per- et al. 2003).
centage of design-build project costs going to small businesses
is almost the same, on average, as the amount under the tra- Initial construction warranties (along with maintenance
ditional design-bid-build" contracting. standard) were considered as an important concern by all
respondents in our state DOT survey, with almost three-
A related concern is that states need to verify that their quarters of the U.S. respondents considering it as "very
performance and payment bond statues allow flexibility that important."
the private sector can respond to, because the amount and
term of typical state statute bonds are not available in the Examples of warranties in practice are Virginia's State
marketplace. Route 288 and New Mexico's US Highway 550 (former
SR-44). For Virginia's State Route 288, a design-build-
Warranties warranty approach, was chosen for the construction of
10.5 miles of new highway, expansion of 7 miles of exist-
Warranties have been used for years in a wide variety of con- ing highway, construction of six new interchanges, modifi-
sumer products to protect consumers from inferior workman- cation of two interchanges, and construction of 23 bridges
ship. Historically, however, state DOTs have not used war- along the roadway to finish the road quickly and with min-
ranties for road construction but have internalized the risk of imal delays. The project is thought to have been completed
poor workmanship. Warranty clauses in PPP agreements guar- 3.5 years earlier than if a traditional DBB approach was used
antee that a roadway will meet a certain level of quality or else (U.S.DOT 2004). The state saved $47 million in construction
repairs will be made at the private contractor's expense. The costs, and the project was completed seven months ahead
intent is to create incentives for the contractor to deliver a high of schedule.
quality product to reduce future maintenance and repair costs.
New Mexico's construction of US Highway 550 encom-
Two types of warranties are used in highway construc- passed an innovative warranty concept. In 1998, the state
tion: (1) materials and workmanship warranties and (2) per- entered an agreement with a private partner to design, manage
