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7The high-profile asset monetization lease contracts executed on the Chicago Skyway in 2005 and the Indiana Toll Road in 2006 are but one way the private sector can take a greater than usual interest in transportation infrastructure develop- 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 provides an overview of the many types of PPPs that have been implemented or considered in North America. DEFINITION OF PUBLICâPRIVATE PARTNERSHIPS 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 any contracting parties, whereas others interpret it as an advancement on or alternative to âcontracting outâ (Wettenhall 2003). Grimsey and Lewis (2005) consider whether PPPs are a form of privatization and assert they are not, because with privatization, the government no longer has a direct role in ongoing operations, whereas with a PPP the government retains ultimate responsibility. Leavitt and Morris (2007) suggest partnerships encompass a continuous range of public/private mixes. At one end of the continuum the government agency provides for and produces products or services. At the other extreme the government completely divests all responsibil- ity for products or services. A partnership is any arrange- ment that exists between these two extremes. The FTA spec- ifies that a PPP is essentially a form of innovative procurement in which private capital is invested, and not an innovative finance tool such as âjoint developmentâ or âtransit ori- ented developmentâ deals that are typical of transit projects and that provide additional capital and operating revenues (FTA 2007). The U.S.DOTâs Report to Congress on Public-Private Partnerships (U.S.DOT 2004) defines a PPP as: A public-private partnership is a contractual agreement formed between public and private sector partners, which allow more private sector participation than is traditional. The agreements usually involve a government agency contracting with a private company to renovate, construct, operate, maintain, and/or man- age a facility or system. While the public sector usually retains ownership in the facility or system, the private party will be given additional decision rights in determining how the project or task will be completed. This definition is widely adopted across the PPP literature (Jeffers et al. 2006; AECOM 2007b) as related to trans- portation PPP, and we continue to use that definition in this synthesis. CHAPTER TWO PUBLICâPRIVATE PARTNERSHIP DEFINITION AND HISTORY Opinion/Comment from âOther Individuals/Interest Groupsâ Survey: 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 together. The public accountability varies significantly from type to type. Types of PublicâPrivate Partnerships The literature documents several alternative approaches to partnerships (U.S.DOT 2004; AECOM 2007b; FHWA 2007; Pakkala et al. 2007). The approaches relevant to highway infra- structure are summarized in Table 1, and are sorted by involve- ment to the private sector, from least to greatest. The first, Design-Bid-Build (DBB) is the traditional method of project delivery; the last two are considered complete privatization, whereas the rest are considered PPP. Build-Own-Operate and Asset Sales represent full privatization of public-use assets, and the FHWA PPP Guidebook reports that âthese contracts are perceived as not in the public interest,â because the public sector relinquishes control over how the asset is maintained and priced. The Chicago Skyway and Indiana Toll Road deals are sometimes referred to as âasset sales,â but this is incorrectâ in reality, they were âlong-term lease agreements.â The survey of state PPPs enabling legislation (prepared by Nossaman, Guthner, Knox, & Elliott, LLP for FHWA) shows that 21 states allow DBFO procurement for toll facilities. Common Perceptions The Chicago Skyway and the Indiana Toll Road deals fall into the long-term lease agreement/concession category defined earlier. Although PPPs in various forms (mostly through design-build) have been used in the United States before these concession agreements, the large payments from private investors to the public sector raised awareness in the trans- portation community about this PPP option, and the deals were
widely covered by the media, leading to an extensive dis- cussion of the merits and issues of long-term concessions. Concession proposals in Pennsylvania and New Jersey to lease their existing toll roads fueled the debate among supporters and opponents, and alternative proposals have been put forth in both states to move away from the long-term concession model involving the private sector to what has been dubbed as âpublic-publicâ partnerships. In New Jersey, the state decided not to pursue a publicâpublic toll road monetization approach because public support was lacking. Pennsylvania has two competing initiatives simultaneously. One involved a PPP through Act 44 (enacted in the summer of 2007) that would generate annual payments from the Pennsylvania Turnpike to other transportation uses in the state, and includes the possible tolling of the currently toll-free I-80, which is pending federal 8 approval. The other was a long-term lease of the existing Penn- sylvania Turnpike to private investors. As of July 2008, Penn- sylvania had requested bids from private investors and accepted a bid for $12.8 billion that is pending legislative approval. The Pennsylvania Turnpike has already provided payments to the Pennsylvania DOT under Act 44. The request to implement tolls on I-80 was resubmitted to FHWA; the proposal was rejected by the federal government on September 11, 2008. In 2006, the Harris County Toll Authority conducted a study to assess the revenue generation potential of three dif- ferent financial arrangements: asset sale, long-term conces- sion, and keeping the system under public control. The Harris County commissioners made a decision to maintain public control over the toll road system. Under the public ownership 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 / Maintenance Contract Contracts to private companies for services typically performed in- house (planning and environmental studies, program and financial management, operations and maintenance, etc.) Construction Manager @ Risk (CM@R) A contracted construction manager (CM) provides constructability, 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- Maintain (DBOM), Build- Operate-Transfer (BOT), or Build-Transfer-Operate (BTO) The selected contractor designs, constructs, operates, and maintains the facility for a specified period of time meeting specified performance requirements. These delivery approaches increase incentives for high 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), Design-Build-Finance-Operate (DBFO), or Design-Build- Finance-Operate-Maintain (DBFOM) DBF, DBFO, and DBFOM are variations of the DB or DBOM methods for which the private partner provides some or all of the project financing. The project sponsor retains ownership of the facility. Private sector compensation can be in the form of tolls (both traffic and revenue risk transfer) or through shadow tolls (traffic risk transfer only). Long-Term Lease Agreements/Concessions (brownfield) Publicly financed existing facilities are leased to private sector concessionaires for specified time periods. The concessionaire may pay 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 FHWAÃs âUser Guidebook on Implementing Public-Private Partnerships for Transportation Infrastructure Projects in the United States,â with some modifications made by the authors.
9scenario, the implementation of more aggressive tolling would generate financial gains close to those under the long- term concession scenario and still allow the county to retain full control of its toll roads. The significant exposure of these deals in the media has led the public, and even some transportation professionals, to view or refer to PPPs as only long-term concessions and/or Design-Build-Finance-Operate (DBFO), in which the rights to collect tolls and set toll rates, and the operations and main- tenance of a toll facility are transferred to the private sector. As noted previously, however, PPPs encompass a wider range of procurement methods with varying levels of private respon- sibility based on risks transferred. Furthermore, the public con- cerns raised by PPPs vary within each PPP type, and these increase as the level of private involvement increases. It is also important to distinguish between âgreenfieldâ and âbrownfieldâ PPPs, where the former refers to any PPP for new infrastructure (e.g., DBFO) and the latter refers to long- term lease agreements or concessions for existing facilities. EVOLUTION OF PUBLICâPRIVATE PARTNERSHIPS IN THE UNITED STATES The history of PPPs in the United States presented in this sec- tion comes from various sources including the U.S.DOT PPP âReport to Congressâ (2004), the USC Keston Institute study on PPPs (2007), the FHWA PPP Guidebook (2007), and the recent GAO report on PPPs and the public interest (GAO 2000b). Modern PPP agreements are not new in the United States. In 1990, FHWAâs Special Experimental Project Num- ber 14 (SEP-14) authorized the use of innovative contracting techniques, including design-build and, as reported by the FHWA PPP Guidebook, 42 states, the District of Columbia, Puerto Rico, and the Virgin Islands have the ability to deliver transportation projects through design-build. Private sector participation in road development dates back to the 1790s, with the development of the Philadelphia and Lancaster Turnpike in Pennsylvania. The private role in highway development, however, diminished over time. Toll facilities were developed by public turnpike authorities after World War II, mainly in the north and the east of the United States (U.S.DOT 2004). In addition, with the development of the Interstate Highway System and a higher reliance on gas taxes for road development, private sector involvement in highways was mainly through either design contracts between state DOTs and architectural/engineering firms or construc- tion contracts. In the late 1980s, states began to explore the potential for increased private sector participation in highway develop- ment. In Virginia, the Dulles Greenway was authorized by leg- islationin 1988, and developed under one of the first PPP agree- ments in the United States. This project was the precursor of the Virginia Public-Private Transportation Act of 1995 (PPTA), one of the first state PPP-enabling legislations. Some of the early PPPs for development of toll roads in the 1990s, such as the Pocahontas Parkway in Virginia and the Southern Connec- tor in South Carolina, included the creation of 63-20 non-profit corporations to issue debt. California enacted PPP legislation in 1989, allowing for four pilot PPP projects. Two, the SR-91 Express Lanes and the South Bay Expressway, were developed under the Build-Transfer-Operate model with private finance. On the federal side, SEP-14 was created in 1990, allowing states to experiment with innovative contracting options, such as cost-plus-time bidding, lane rental, and the use of warranties for certain project elements. Subsequent transportation acts, such as ISTEA, TEA-21, and SAFETEA-LU created pilot programs and innovative finance tools that added flexibility for implementation of tolling and also encouraged states to pursue private participation in transportation infrastructure. For example, the Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) was created to leverage fed- eral resources and stimulate private capital investment by pro- viding credit assistance for large transportation projects. The precursor to the creation of this credit assistance program was the Alameda Corridor. Recent PPPs that have been approved for TIFIA loan assistance include the refinancing and funding of the Pocahontas Parkway (for a future extension), SH-130 Segments 5 and 6, SR-125, and the I-495 Capital Beltway high-occupancy toll (HOT) lanes. Interest in the TIFIA pro- gram has increased recently owing to relaxed rules emerging from SAFETEA-LU, coupled with the recent credit crunch that has raised significantly the cost of private debt, making TIFIA credit assistance more attractive. SAFETEA-LU amended the Internal Revenue Service Code to allow tax-exempt Private Activity Bonds (PAB) for privately developed and operated highway and freight facil- ities, authorizing up to $15 billion through 2009. As of March 2008, $3.3 billion had been allocated to various projects, including the Port of Miami Tunnel in Florida (availability payment concession) and the I-495 Capital Beltway in Vir- ginia (HOT lane concession), among other projects. FHWA created the Special Experimental Program 15 (SEP-15), which allows for experimentation on new PPP approaches to project delivery, focusing primarily on four major components includ- ing contracting, compliance with environmental requirements, right-of-way acquisition, and project finance. Although many of the toll roads developed in the late 1990s included private participation, some, including the Pocahontas Parkway and Southern Connector, were financed through tax- exempt bonds, TIFIA assistance, and commercial debt, with no equity from the private sector. PPPs in recent years have involved private equity investment in DBFO (e.g., Texasâ SH-130 Segments 5 and 6 and Virginiaâs I-495 Capital Belt- way HOT lanes) and long-term leases (e.g., Chicago Skyway and Indiana Toll Road), and some of the toll roads financed in the 1990s through non-profits have been refinanced in recent
years through transfers to private investors (e.g., Pocahontas Parkway and Dulles Greenway, and the Northwest Parkway toll road outside Denver) after failing to meet traffic and rev- enue projections. PUBLICâPRIVATE PARTNERSHIPS PARTICIPANTS A PPP in transportation consists of several participants that come together to deliver a specific project, including: ⢠Public sector decision makers (i.e., members of the legislature); 10 ⢠State or public toll authority (project sponsor); ⢠Equity participants, such as: â Integrated transportation companies, â International construction companies, â Funds, and â Developer/concessionaire. ⢠Lenders (e.g., commercial banks); ⢠Design and construction companies; ⢠Operating companies.