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7 CHAPTER TWO PUBLICPRIVATE PARTNERSHIP DEFINITION AND HISTORY The high-profile asset monetization lease contracts executed This definition is widely adopted across the PPP literature on the Chicago Skyway in 2005 and the Indiana Toll Road in (Jeffers et al. 2006; AECOM 2007b) as related to trans- 2006 are but one way the private sector can take a greater portation PPP, and we continue to use that definition in this than usual interest in transportation infrastructure develop- synthesis. ment, operations, and maintenance. There are many other varieties of PPPs, and any discussion of the merits of PPPs needs to be clear on what is being discussed. This section Opinion/Comment from "Other Individuals/Interest provides an overview of the many types of PPPs that have Groups" Survey: been implemented or considered in North America. PPPs range from concessions to construction contracting methods. It is very important to differentiate between the various types of PPPs in use rather than lumping them all DEFINITION OF PUBLICPRIVATE together. The public accountability varies significantly PARTNERSHIPS from type to type. References to PPPs are wide-ranging and ambiguous, with lit- tle precision in how the term is used. Some consider a partner- ship simply a term used to describe relationships between Types of PublicPrivate Partnerships any contracting parties, whereas others interpret it as an advancement on or alternative to "contracting out" (Wettenhall The literature documents several alternative approaches to 2003). Grimsey and Lewis (2005) consider whether PPPs are partnerships (U.S.DOT 2004; AECOM 2007b; FHWA 2007; a form of privatization and assert they are not, because with Pakkala et al. 2007). The approaches relevant to highway infra- privatization, the government no longer has a direct role in structure are summarized in Table 1, and are sorted by involve- ongoing operations, whereas with a PPP the government retains ment to the private sector, from least to greatest. The first, ultimate responsibility. Leavitt and Morris (2007) suggest Design-Bid-Build (DBB) is the traditional method of project partnerships encompass a continuous range of public/private delivery; the last two are considered complete privatization, mixes. At one end of the continuum the government agency whereas the rest are considered PPP. Build-Own-Operate and provides for and produces products or services. At the other Asset Sales represent full privatization of public-use assets, extreme the government completely divests all responsibil- and the FHWA PPP Guidebook reports that "these contracts ity for products or services. A partnership is any arrange- are perceived as not in the public interest," because the public ment that exists between these two extremes. The FTA spec- sector relinquishes control over how the asset is maintained ifies that a PPP is essentially a form of innovative procurement and priced. The Chicago Skyway and Indiana Toll Road deals in which private capital is invested, and not an innovative are sometimes referred to as "asset sales," but this is incorrect-- finance tool such as "joint development" or "transit ori- in reality, they were "long-term lease agreements." ented development" deals that are typical of transit projects and that provide additional capital and operating revenues The survey of state PPPs enabling legislation (prepared by (FTA 2007). Nossaman, Guthner, Knox, & Elliott, LLP for FHWA) shows that 21 states allow DBFO procurement for toll facilities. The U.S.DOT's Report to Congress on Public-Private Partnerships (U.S.DOT 2004) defines a PPP as: Common Perceptions A public-private partnership is a contractual agreement formed The Chicago Skyway and the Indiana Toll Road deals fall into between public and private sector partners, which allow more private sector participation than is traditional. The agreements the long-term lease agreement/concession category defined usually involve a government agency contracting with a private earlier. Although PPPs in various forms (mostly through company to renovate, construct, operate, maintain, and/or man- design-build) have been used in the United States before age a facility or system. While the public sector usually retains ownership in the facility or system, the private party will be these concession agreements, the large payments from private given additional decision rights in determining how the project investors to the public sector raised awareness in the trans- or task will be completed. portation community about this PPP option, and the deals were
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8 TABLE 1 ALTERNATIVE APPROACHES TO INFRASTRUCTURE DEVELOPMENT (from least private involvement to most) Traditional Approach (non-PPP) Definition Design-Bid-Build (DBB) The traditional method of project delivery in which the design and construction are awarded separately and sequentially to private firms. PPP Approaches Design-Build (DB) Combines the design and construction phases into a single fixed-fee contract, thus potentially saving time and cost, improving quality, and sharing risk more equitably than the DBB method. Private Contract Fee Services / Contracts to private companies for services typically performed in- Maintenance Contract house (planning and environmental studies, program and financial management, operations and maintenance, etc.) Construction Manager @ Risk A contracted construction manager (CM) provides constructability, (CM@R) pricing, and sequencing analysis during the design phase. The design team is contracted separately. The CM stays on through the build phase and can negotiate with construction firms to implement the design. Design-Build with a Warranty A DB project for which the design builder guarantees to meet material workmanship and/or performance measures for a specified period after the project has been delivered. Design-Build-Operate- The selected contractor designs, constructs, operates, and maintains the Maintain (DBOM), Build- facility for a specified period of time meeting specified performance Operate-Transfer (BOT), or requirements. These delivery approaches increase incentives for high Build-Transfer-Operate (BTO) quality projects because the contractor is responsible for operation of the facility after construction. The public sector retains financial risk, and compensation to the private partner can be in the form of availability payments. Design-Build-Finance (DBF), DBF, DBFO, and DBFOM are variations of the DB or DBOM methods Design-Build-Finance-Operate for which the private partner provides some or all of the project (DBFO), or Design-Build- financing. The project sponsor retains ownership of the facility. Private Finance-Operate-Maintain sector compensation can be in the form of tolls (both traffic and revenue (DBFOM) risk transfer) or through shadow tolls (traffic risk transfer only). Long-Term Lease Publicly financed existing facilities are leased to private sector Agreements/Concessions concessionaires for specified time periods. The concessionaire may pay (brownfield) an upfront fee to the public agency in return for revenue generated by the facility. The concessionaire must operate and maintain the facility and may be required to make capital improvements. Full Privatization Build-Own-Operate (BOO) Design, construction, operation, and maintenance of the facility are the responsibility of the contractor. The contractor owns the facility and retains all operating revenue risk and surplus revenues for the life of the facility. The Build-Own-Operate-Transfer (BOOT) method is similar, but the infrastructure is transferred to the public agency after a specified time period. Asset Sale Public entity fully transfers ownership of publicly financed facilities to the private sector indefinitely. Source: Based on FHWAís "User Guidebook on Implementing Public-Private Partnerships for Transportation Infrastructure Projects in the United States," with some modifications made by the authors. widely covered by the media, leading to an extensive dis- approval. The other was a long-term lease of the existing Penn- cussion of the merits and issues of long-term concessions. sylvania Turnpike to private investors. As of July 2008, Penn- Concession proposals in Pennsylvania and New Jersey to lease sylvania had requested bids from private investors and accepted their existing toll roads fueled the debate among supporters and a bid for $12.8 billion that is pending legislative approval. The opponents, and alternative proposals have been put forth in Pennsylvania Turnpike has already provided payments to the both states to move away from the long-term concession model Pennsylvania DOT under Act 44. The request to implement involving the private sector to what has been dubbed as tolls on I-80 was resubmitted to FHWA; the proposal was "public-public" partnerships. In New Jersey, the state decided rejected by the federal government on September 11, 2008. not to pursue a publicpublic toll road monetization approach because public support was lacking. Pennsylvania has two In 2006, the Harris County Toll Authority conducted a competing initiatives simultaneously. One involved a PPP study to assess the revenue generation potential of three dif- through Act 44 (enacted in the summer of 2007) that would ferent financial arrangements: asset sale, long-term conces- generate annual payments from the Pennsylvania Turnpike to sion, and keeping the system under public control. The Harris other transportation uses in the state, and includes the possible County commissioners made a decision to maintain public tolling of the currently toll-free I-80, which is pending federal control over the toll road system. Under the public ownership