Public-Sector Decision Making for Public-Private Partnerships (2009) / Chapter Skim
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Pages 10-37
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From page 10... ...
• Transparency: – Transparency and public participation; – Adequacy of legislative branch review; and – Perceptions of foreign control of domestic assets and the role of local contractors. • Terms of PPP agreements: – Asset control and ownership; – Tolling policy; – Non-compete and other unanticipated event provisions; – Use of proceeds and revenue sharing; – Maintenance standards and hand-back provisions; – Environmental safeguards; – Labor relation issues; – Length of agreement; – Termination and buyouts; – Safety and enforcement; – Commercial development rights; – Data privacy and ownership; – International trade agreement implications; and – Liability, indemnification, and insurance.
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From page 11... ...
Public decision makers need to understand the criteria for successful projects to inform their decisions about whether or how to involve the private sector in what has traditionally 12 been a public sector enterprise. The enabling legislation in nine states includes specific criteria to evaluate PPP proposals.
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From page 12... ...
The lead agency should have the authority to act on behalf of the state and should have certain statutory powers including the power to procure projects through negotiation, to acquire right-of-way through eminent domain (or otherwise) and transfer use of it to a private partner, to acquire and confer environmental permits, to confer exclusive franchises, to establish a geographic non-compete zone, to enter into binding concession agreements and lease 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.
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From page 13... ...
14 Unsolicited Proposals and the Transportation Planning Process The use of a PPP raises concerns that private investors may circumvent the transportation planning process set by state, regional, and local governments, specifically by allowing 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 profitable projects (Buxbaum and Ortiz 2007)
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From page 14... ...
In the case of unsolicited proposals, Virginia has developed a quality control process in which unsolicited proposals are reviewed to determine if these are in the interest of the public sector and then make a decision on whether the project should be pursued. The Commonwealth's PPP guidelines provide that if the state decides to moves forward with the proposed project, competing proposals may be submitted within a minimum of 90 days if the project does not involve federal funding, or a minimum of 120 if using federal funding.
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From page 15... ...
The Big Dig included a design and construction management contract with a joint venture between two large engineering firms, where considerable independent responsibility was handed over to the private sector. Another survey respondent indicated that the public sector may be unaware of what risks are being transferred and which ones remain.
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From page 16... ...
An example of the benefits of transferring traffic and revenue risks cited in the GAO report is the Cross City Tunnel in Sydney, Australia, where public officials have indicated that the public sector has not been affected (financially) by the low traffic and revenues, because those risks were borne by the private sector.
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From page 17... ...
In the case of minimum revenue guarantees, the concession contract also includes revenue sharing if traffic exceeds projections, such that the public sector also benefits from additional revenues. Rebalancing provisions allow for revision of toll rates or changes in the length of the concession if a chosen metric (e.g., traffic, revenues)
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From page 18... ...
The VfM analysis has been widely used outside the United States, particularly the United Kingdom. Our state DOT survey confirms that the availability and consistent application of evaluation tools, such as VfM, are important to state decision making.
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From page 19... ...
http://www.partnerships.vic.gov.au/CA25708500035EB6/0/ C0005AB6099597C2CA2570F50006F3AA? OpenDocum ent Ireland Central PPP Unit, Value for Money and the Public Private Partnership Procurem ent Process (2007)
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From page 20... ...
estimates, for a longer lease term, which might be the result of current market conditions. Discount Rate for PPP Valuation There are highly contentious arguments among critics over using a higher or lower discount rate for the PPP.
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From page 21... ...
The last three items on the list are related to the additional procurement and performance monitoring costs incurred by the public sector when deciding to have a PPP program. For example, unsolicited proposals require the state to devote time and resources for review (Buxbaum and Ortiz 2007)
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From page 22... ...
New Mexico's construction of US Highway 550 encompassed an innovative warranty concept. In 1998, the state entered an agreement with a private partner to design, manage Bonding, Bonding Capacity, Letters of Credit, and Initial Construction Warranties Bonding Capacity of Contractors Many PPP projects are of such a size (more than $100 million)
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From page 23... ...
noted that transparency in the PPP process is key for public support of long-term concession agreements. The Chicago Skyway and the Indiana Toll Road concessions are particularly noted as examples in which transparency was lacking from the public perspective (as reported through the news media)
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From page 24... ...
. Because this method seeks more innovation from private partners, those partners have more intellectual property to protect, and thus transparency is necessarily lessened.
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From page 25... ...
The concession agreements for Chicago Skyway, Indiana Toll Road, and SR 125 in California mandate public disclosure of annual finances and performance (Replogle 2007)
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From page 26... ...
In contrast to these legislative reactions, our "state DOT" survey found that a significant number of the respondents (18%) considered the concern of lack of time for legislative review or no legislative branch review as "not important" when compared with other PPP concerns from the survey.
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From page 27... ...
TERMS OF PUBLIC–PRIVATE PARTNERSHIP AGREEMENTS Many of the public concerns related to PPPs are mainly related to the loss of public control over the facility, and whether the contract clauses adequately protect the public interest. PPP agreements include hundreds of pages of contract terms and standards that should be met by the concessionaire, and are developed to best address risk and the interests of both parties entering into the agreement.
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From page 28... ...
Unlocking the value of a transportation asset actually means allowing toll rates to be set at market levels and/or permitting them to increase in accordance with inflation, and leveraging that future revenue stream into up-front cash. When tolling as a revenue source and PPPs as a project delivery mechanism are pursued at the same time, toll rate setting control appears to move from the public sector, where elected officials are accountable, to private companies that are motivated by rates of return.
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From page 29... ...
PPP legislation and/or concession agreements may include provisions setting toll rates lower than required to support financing; however, in exchange, the public sector would provide funding or subsidies to attract private sector participation. In Chile, the public sector establishes the maximum toll rate, and the evaluation of PPP proposals takes into account the proposed toll rates, among other factors (Izquierdo and Vasallo 2004)
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From page 30... ...
. Also, given that the toll setting rights are transferred to the private sector, the public sector is restricted from controlling the effect of traffic diversions into public roads, and would not have the power to reduce tolls to restore "normalcy" in other parts of the highway network.
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From page 31... ...
. Use of Proceeds and Revenue Sharing Several projects, including the Indiana Toll Road and the Chicago Skyway, yielded large up-front payments to governments by concessionaires in exchange for the right to operate transportation facilities.
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From page 32... ...
The value of the facility is also driven by the length of concession, toll rates and toll increase assumptions, private equity, and risk. Some commentators are concerned that the public sector may be achieving less value than it should for its capital infrastructure (Baxandall 2007; Enright 2007)
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From page 33... ...
The PPP contract terms could specify the condition at which the facility must be returned to the public, and may include penalties to the private sector for not meeting these requirements. Opinion/Comment from "Other Individuals/Interest Groups" Survey: There should be strong consideration for policy provisions that require the governmental entity to share in the upside revenue on the lease of toll roads.
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From page 34... ...
Performance-based contracts that compensate the concessionaire for providing free-flow service and meeting environmental goals, variable toll rates for traffic management, and the use of revenues to support public transportation are some of the strategies presented in his testimony. PPP contracts can make environmental performance standards enforceable as part of the environmental approvals process, as well as through incentive-based methods such as performance bonds, funding set-asides, and enforceable contingency measures (Regional Plan Association 2007)
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From page 35... ...
. In the United States, recent PPP agreements have included contract provisions that address some of the concerns related to workforce protection in both long-term leases of new or existing toll roads.
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From page 36... ...
These objectives would suggest shorter concession agreements. As the experience level has risen, European Union countries have restricted the length of PPP contracts to 21 to 35 years.
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From page 37... ...
It is expected that these clauses are crafted such that the interests of each party entering the agreement are protected. The FHWA PPP website describes some of the provisions that limit liability and the indemnity obligations of each party for some PPP projects, including the Chicago Skyway, the Pocahontas Parkway, and Texas SH-130, and the PPP legislation survey describes how these are addressed by state.
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