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39 CHAPTER FOUR CONCLUSIONS As governments struggle with the growing costs to develop, to estimate the value of these and other toll facilities proposed construct, maintain, and operate transportation infrastructure for PPPs (e.g., SH-121 in Texas and the Pennsylvania Turn- in the face of flat or declining revenues, publicprivate part- pike), it has become clear that the value of the facility depends nerships (PPPs) are likely to be looked on as a potential way of on the assumptions used in the valuation process. reducing costs and bringing in new financial resources. This NCHRP synthesis identified a wide variety of concerns about To accomplish valuation, there is a need for personnel with how decision makers can protect the public interest. In sum- skills including value engineering, business modeling, capital mary, there are three major themes drawn from this synthesis: budgeting, traditional financial problem-solving methodol- ogy, and performance auditing. Furthermore, different valua- · How might government decide whether or not to pursue tion techniques have their merits and limitations, and the deci- a PPP? sion makers might be informed of these. A sensitivity analysis · How could the public interest be protected? could help to put in perspective some of the potential pitfalls · Misperceptions about PPPs can be a distraction from and could assist the public sector to determine whether the the real issues. disadvantages of pursuing PPPs are minor when compared with the public benefits of implementing the project. Each of these themes is discussed here, along with sugges- tions for further research. The transfer and sharing of project risks is considered by many as one of the main benefits of a PPP. In a well-designed · How might government decide whether or not to PPP, risk may be allocated to the party that can best manage pursue a PPP? such risk, and in some instances, there are risks to be shared by both partners. For example, construction risk is typically trans- PPPs encompass a variety of project delivery options, with ferred to the private sector in any PPP that involves design- varying levels of private sector participation, based on risk build, whereas the public sector is considered better able to transferred. A PPP is not a one-size-fits-all solution, and the manage environmental risks and right-of-way acquisition. The decision to use one of the many PPP types or traditional type of PPP to be pursued also dictates what risks are trans- approaches could consider and incorporate: ferred and/or shared with the private sector. · Valuation of alternative approaches, PPP agreements are complicated, and there have been crit- · Appropriate risk transfer, icisms over deals being rushed through without the public or · Transparency and public participation, and their elected officials understanding the implications. The · Unavoidable complexity of the transactions. lack of transparency in the PPP process has been voiced as one of the main concerns and it is mentioned as an important Although some states use some kind of valuation process, issue by both supporters and opponents of PPPs. The interna- there is a need for a framework or process to carry out this tional experience provides lessons on how to incorporate the analysis that is well understood by decision makers and define public interest into the PPP valuation, and a major element of appropriate assumptions that characterize the differences this is community consultation and involvement through the between public versus private delivery. The value for money PPP valuation and decision-making process. The Virginia (VfM) is one of the most well-known techniques to evaluate PPP process provides a good example of how to ensure PPP projects, and has been widely used internationally; three transparency and public participation during the review of states in the United States (Florida, Oregon, and Virginia) PPP proposals. have reported using it. Other states have applied alternative tools, other than VfM, to evaluate PPP projects. Local con- Transparency is not limited to the procurement process, and ditions and project characteristics will be the final determi- public access to financial statements and performance over the nant of the assumptions used in the valuation process, but it project lifetime has been included as part of PPP contracts. is essential that there be a clear understanding of those, and they could be subject to a sensitivity analysis. After the Chicago States are motivated to find creative solutions, and they Skyway and Indiana Toll Road deals and attempts by observers are interested in quick results. However, the PPP process is
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40 complex, from the valuation and procurement process through transportation investments that will bring long-term benefits the duration of the partnership. There is no uniform set of rules to the public. or standards to follow for all projects; therefore, there is a high level of expertise required when pursuing a PPP. A PPP can potentially raise environmental standards for highway operation. Furthermore, PPP contracts can be Enabling legislation might provide an attractive environ- designed to encourage environmentally sound behavior; for ment for the private sector to invest, whereas the public sector example, through incentives that encourage the conces- is able to protect the public interest. Also, after the project is sionaire to provide free-flow service. As for environmental successfully procured and implemented, it is important that the impacts, any PPP that will receive federal money is required public sector can monitor performance and ensure that the to comply with the National Environmental Policy Act; and terms of the agreement are met if the PPP includes a long-term most states have environmental laws and requirements that concession to operate and/or maintain the facility. need to be met for any major infrastructure project. · How could the public interest be protected? The public interest is also protected by addressing potential labor issues arising from a PPP. In a brownfield concession, Transportation infrastructure, specifically highways, has been labor issues are related to displacement of existing employees the responsibility of the public sector for many years. The tra- at the toll facility and the loss of pension plans; whereas in ditional procurement for highways has been design-bid-build. greenfield projects these issues are related more to the private The public sector develops designs, often with consultant sector meeting prevailing wage requirements. Past brown- support. The design is then let to the lowest bidder who then field concessions have dealt with labor issues by providing delivers the highway under government oversight. Long-term opportunities to maintain jobs with the public sector (e.g., the maintenance and operation of the highway is in public hands. Chicago Skyway) or by including contract terms that guar- antee the pay and benefits for employees that remained work- A PPP allows a much larger role for the private sector, from ing for the concessionaire. For greenfield projects using fed- bundling design and construction in one contract (design- eral funding, it is necessary that the requirements of the build) to long-term operations and maintenance of existing or DavisBacon Act relating to prevailing wages be met. In new facilities (concessions). Some PPPs include equity contri- other cases, the contract may include terms to address labor butions from the private partner, and may also transfer toll col- issues and concerns. lection and rate setting responsibilities to the private sector. When transferring these responsibilities, it is important to · Misperceptions about PPPs can be a distraction ensure that the private sector has the proper motivations to pro- from the real issues tect the public interest, while allowing investors to meet a return on the investment that is in line with the risk they take. Many public concerns are rooted in concerns raised over past transactions, even though more recent approaches have Most of the concerns about PPPs can be managed through learned from the past and resolved the issues in contracts. contract terms. Although recent contracts have addressed many Some negative perceptions about PPPs have remained over of the issues that have caused concerns in the past, unforeseen time. Also, a lack of public information and openness in the situations may arise. That is when the strength and flexibility process (coupled with sensational press coverage and the of the contract is tested, and clauses that allow for contract ter- political grandstanding that can arise) may lead to mistrust. mination or buyout are important. Project sponsors might communicate with citizens and deci- sion makers in an effort to build trust and to educate the pub- A PPP may be monitored over its sometimes long lifetime lic about some of the misperceptions related to PPPs, such as: to ensure that the private sector meets safety, maintenance, and other standards specified by contract. When valuing the deci- Misperception #1: Non-compete clauses are always sion to pursue a PPP to protect the public interest it is essential part of a PPP with a long-term lease component. Actually, that the public sector account for the additional cost of per- after the experience with strict non-compete clauses in the formance monitoring by qualified, independent, public sector/ 91 Express Lanes PPP in California, most PPP deals have department of transportation staff. included "limited-compete" clauses, requiring the public part- ner to provide compensation for projected loss revenues result- Long-term asset leases of brownfield toll roads have ing for certain types of improvements, although these have arguably caused the most concern because a few transactions not been eliminated altogether (e.g., Denver's Northwest Park- have resulted in large up-front payments to government. This way lease). The public sector can make the decision whether revenue may be used for an appropriate public purpose con- to include "non-compete" or "limited compete" provisions in sistent with public policy objectives. PPP-enabling legisla- a PPP, and explain why such provisions have been included tion in some states prohibits revenues from being diverted to in the contract. The exclusion of such provisions would lower the states' general fund or for non-transportation uses. Some the value of the contract, but will give the public sector more other uses of up-front proceeds include paying off debt and flexibility.
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41 Misperception #2: A PPP is a synonym for tolls, and An open process helps build trust and support, as long as with that, sky-high toll increases are inevitable, resulting in project sponsors can demonstrate that decisions are being windfall profits. The PPP debate, specifically related to long- made with the public interest in mind. term concessions paid through tolls, is caught in the middle of a debate about tolling policy. The recent long-term concession · Future Research Needs deals (again, one of the several PPP types) have transferred toll responsibility to the private concessionaire. However, the pub- The most pressing research need surrounding PPPs is related lic sector still controls the toll setting policies by including toll to PPP valuation tools. There is very little public understand- growth caps in the agreement, even when the toll setting and ing about how PPP deals are evaluated. In 2008, Morallos and collection responsibilities are transferred to the private sector. Amekudzi and the U.S. Government Accountability Office In an attempt to distance toll setting policy from PPPs, Florida (GAO) documented some of the valuation tools (including adopted periodic increases for its public-sector toll roads. VfW), citing some of the benefits and limitations of these However, the public worries about super profits from increas- methodologies. The GAO report found that there has not been ing tolls, even within set growth caps. To counter this, some of a consistent application of methodologies, and other literature the international experience, and other more recent PPP deals shows how the valuation of a PPP is highly dependent on the have included revenue sharing that ensure the public sector selection of certain value drivers (e.g., length of agreement, benefits of additional profits after the concessionaire reaches a toll policy, and discount rates). The industry would benefit certain return on investment. from a compilation of existing valuation methodologies, a description of the advantages and disadvantages of each of There are several types of PPPs that do not require the these tools, sample applications, and the development of a implementation of tolls (e.g., design-build, maintenance con- framework that would help project sponsors to evaluate poten- tracts, agreements with availability payments/shadow tolls). tial PPP deals objectively. This framework could include rec- Furthermore, direct user fees (i.e., tolls) are not the only way ommended value drivers and require a sensitivity analysis to that the private sector can be compensated. The United King- help drive decisions. dom has used shadow tolls extensively to support its Private Finance Initiative, and availability payments are another alter- In the area of tolling policy, additional research is needed native to compensate the concessionaire based on facility per- on appropriate escalation factors for toll rate caps. The litera- formance measures. The latter could be combined with tolls ture review shows that recent PPP deals that transfer toll col- that are retained by the public sector, thereby providing the lection to the private sector has included Consumer Price needed revenue stream, but insulating the project from con- Index and gross domestic product to determine the maximum cerns about the private partner getting rich at the expense of annual toll rate increase, but little is known about what are the toll payers. appropriate economic indicators that could be used. Misperception #3: The public sector loses total control There is also a continuing need for professional practitio- of the facility. Under a PPP agreement, the public sector never ners, elected officials, and their staff to stay abreast of devel- loses ownership of the facility; however, some responsibilities opments in PPPs and, in particular, efforts to separate fact from are transferred to the private sector. The extent to which these fiction. Digestible, easy-to-understand primers on PPPs high- responsibilities are transferred is defined by the contract. Well- lighting the key issues raised in this synthesis could go a long crafted agreements may ensure that the public interests are way toward encouraging states to use PPPs in appropriate protected. ways that advance the public interest.