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Suggested Citation:"Chapter 2 - P3s: Definitions and Applications." National Academies of Sciences, Engineering, and Medicine. 2013. Effect of Public-Private Partnerships and Nontraditional Procurement Processes on Highway Planning, Environmental Review, and Collaborative Decision Making. Washington, DC: The National Academies Press. doi: 10.17226/22643.
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Suggested Citation:"Chapter 2 - P3s: Definitions and Applications." National Academies of Sciences, Engineering, and Medicine. 2013. Effect of Public-Private Partnerships and Nontraditional Procurement Processes on Highway Planning, Environmental Review, and Collaborative Decision Making. Washington, DC: The National Academies Press. doi: 10.17226/22643.
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Suggested Citation:"Chapter 2 - P3s: Definitions and Applications." National Academies of Sciences, Engineering, and Medicine. 2013. Effect of Public-Private Partnerships and Nontraditional Procurement Processes on Highway Planning, Environmental Review, and Collaborative Decision Making. Washington, DC: The National Academies Press. doi: 10.17226/22643.
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Suggested Citation:"Chapter 2 - P3s: Definitions and Applications." National Academies of Sciences, Engineering, and Medicine. 2013. Effect of Public-Private Partnerships and Nontraditional Procurement Processes on Highway Planning, Environmental Review, and Collaborative Decision Making. Washington, DC: The National Academies Press. doi: 10.17226/22643.
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Suggested Citation:"Chapter 2 - P3s: Definitions and Applications." National Academies of Sciences, Engineering, and Medicine. 2013. Effect of Public-Private Partnerships and Nontraditional Procurement Processes on Highway Planning, Environmental Review, and Collaborative Decision Making. Washington, DC: The National Academies Press. doi: 10.17226/22643.
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Suggested Citation:"Chapter 2 - P3s: Definitions and Applications." National Academies of Sciences, Engineering, and Medicine. 2013. Effect of Public-Private Partnerships and Nontraditional Procurement Processes on Highway Planning, Environmental Review, and Collaborative Decision Making. Washington, DC: The National Academies Press. doi: 10.17226/22643.
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Suggested Citation:"Chapter 2 - P3s: Definitions and Applications." National Academies of Sciences, Engineering, and Medicine. 2013. Effect of Public-Private Partnerships and Nontraditional Procurement Processes on Highway Planning, Environmental Review, and Collaborative Decision Making. Washington, DC: The National Academies Press. doi: 10.17226/22643.
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Suggested Citation:"Chapter 2 - P3s: Definitions and Applications." National Academies of Sciences, Engineering, and Medicine. 2013. Effect of Public-Private Partnerships and Nontraditional Procurement Processes on Highway Planning, Environmental Review, and Collaborative Decision Making. Washington, DC: The National Academies Press. doi: 10.17226/22643.
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Suggested Citation:"Chapter 2 - P3s: Definitions and Applications." National Academies of Sciences, Engineering, and Medicine. 2013. Effect of Public-Private Partnerships and Nontraditional Procurement Processes on Highway Planning, Environmental Review, and Collaborative Decision Making. Washington, DC: The National Academies Press. doi: 10.17226/22643.
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13 This chapter summarizes the many forms of transportation P3s and also provides a brief history of P3s’ evolutionary appli- cation in the United States. The chapter also reviews the moti- vations for and benefits of using a P3 approach to transportation project delivery, both from public-sector and private-sector perspectives. P3 Definitions: A Spectrum of Delivery Options and Risk Transfer The United States Department of Transportation (U.S. DOT) defines P3s as contractual agreements between public agencies and private entities that allow for greater private-sector par- ticipation and responsibility in the design, delivery, financing, operation, and maintenance of transportation improvements, as compared with the traditional design–bid–build process that involves public-sector financing, operations, and maintenance (FHWA 2012a). There are many different P3 models, and the degree to which the private sector assumes responsibility (including financial risk) differs from project to project. Trans- portation P3 arrangements range from design–build procure- ments (where design and construction services are grouped into a single, fixed-price procurement) to concessions (where a private investor/operator is responsible for financing, design- ing, constructing, operating, and maintaining new highway projects in exchange for the right to collect toll proceeds or to receive periodic availability payments for the duration of the concession period). In certain cases, P3 projects may involve transferring the operation of existing highway facilities to private-sector operators, who are also obligated to make capital improvements to the facilities. Each of these P3 models has somewhat different implica- tions on the interface between the planning and environmental approval processes and the development of P3 procurements. In addition, between public agencies and private industry interests, there are varying degrees of interpretation within this standard definition of what a P3 offers in terms of opportunity and value relative to a baseline project delivery model, typically design–bid–build. These interpretations are discussed further in this chapter under Improving the Characterization of P3s. The rest of this section provides detailed information on different types of P3 arrangements used today in the United States. Many of the definitions and concepts presented are adapted from the FHWA Office of Innovative Program Deliv- ery P3 website (FHWA 2012a) and the American Association of State Highway and Transportation Officials (AASHTO) Center for Excellence in Project Finance (AASHTO 2012). Design–Build Design–build is a project delivery method combining design and construction functions within a single contract, rather than as two independent services performed by separate con- tractors. Design–build procurements feature a single, fixed-fee contract for engineering services, as well as for construction. The design–build firm, also known as a constructor, may be a single entity or a joint venture among multiple firms. With design–build delivery, the design-builder assumes responsibil- ity for completing a final design for projects and undertaking construction activities, as well as taking on the responsibility of risk associated with completing the work for a fixed fee. With design–build delivery, project sponsors finance and later oper- ate and maintain the project, while the private-sector design- builder assumes a significant portion of the risk of construction cost overruns and often also schedule delays. Design–build delivery is often used on large and complex projects and also as part of other delivery models that are described in this section. Design–build delivery offers numerous benefits to public agencies developing transportation improvements: one ben- efit is that it helps to accelerate completion because design and construction work can proceed concurrently. Opportunities for creative design solutions and the ability to align the proj- ect design with construction techniques and equipment also C h A P T e R 2 P3s: Definitions and Applications

14 is a great variety in DBFOM structures and the degree to which financial responsibilities are actually transferred to the private sector; however, DBFOM projects are either partly or wholly financed by debt-backed project revenues. With DBFOM projects, future toll or availability payment revenues are used to secure bonds or other debt to raise capi- tal for project development costs. With real toll concessions, project revenues are often supplemented by grants from proj- ect sponsors and other contributions, such as right-of-way or complementary construction projects. Often referred to as the concession model, DBFOM con- tracts have concession periods that often extend for 30 to 50 years, and sometimes as long as 99 years. With DBFOM delivery, the project sponsor retains ownership of all proj- ect assets and establishes the maintenance standards and other improvements to be made over the concession period, such as the addition of new capacity. This ensures that the project is properly maintained and returned in good condi- tion at the end of the concession period. DBFOM conces- sions are often attractive to public transportation agencies, because they can provide access to new sources of equity and financing and deliver similar schedule and cost-efficiency benefits as design–build and DBOM procurements. DBFOM projects may be sponsored by numerous public agencies, including state DOTs and other state, regional, and local agencies. DBFOM projects may also be sponsored by public-benefit entities, which are able to issue tax-exempt debt on behalf of private project developers, pursuant to IRS Revenue Ruling 63-20. Real Toll DBFOM Concessions User fees in the form of tolls are the most common revenue source used to support P3 highway projects. Toll rates can be based on several variables, including distance traveled, vehicle class, number of trips, the time of day, vehicle occupancy, and congestion levels. P3 transactions using tolls as their primary revenue source are often referred to as “real toll projects.” The user-fee approach involves the risk that revenue levels will not meet expectations or forecasts, particularly with green- field projects, which lack constraints imposed by previous projects. With publicly sponsored toll projects, the govern- ment assumes the revenue risks associated with tolling; how- ever, with real toll P3 concessions, this risk is transferred to the private partner. If forecasts indicate that toll revenues will not be sufficient to cover the complete cost of financing, build- ing, and operating a candidate P3 facility, the public sponsor may opt to provide a subsidy to the concessionaire to enable the project to be financed, particularly if the P3 procure- ment with private financing would result in additional cost and schedule efficiencies. provide the potential to accelerate implementation time frames and may result in overall cost savings. Shifting the risk of design defects to the private sector eliminates one of the most com- mon causes of construction claims that create greater up-front cost certainty for the public sponsor. Design–Build–Finance Design–build–finance (DBF) is a P3 arrangement that uses private capital to accelerate the implementation of a project in advance of the availability of public funds that have been dedi- cated to a project. Essentially a variant of a design–build pro- curement, in DBF, the project constructor agrees to provide all or some of the construction financing to be repaid through either milestone or completion payments made by the proj- ect sponsor. These arrangements are typically short term and extend no longer than the duration of the construction period. Although DBF procurements transfer design and construc- tion risk to the private partner, they do not transfer ongoing operating or maintenance risks and do not generate greater efficiencies than do design–build procurements. The primary benefit of DBF arrangements is that they provide project sponsors with short-term gap financing. Design–Build–Operate–Maintain The design–build–operate–maintain (DBOM) delivery model combines design and construction responsibilities with the ongoing operation and maintenance of highway facilities. These services are provided by a private-sector contractor through a single contract, with financing provided by the pub- lic sector. The advantage of DBOM procurement is that by combining these services, the private partner has an incentive to use cost-saving, life-cycle costing principles to align the design of the project with long-term maintenance activities. DBOM procurement is common in the transit sector and may also be used with highway improvements. It is also known by several other terms, including “turnkey procurement” and build–operate–transfer (BOT). Design–Build–Finance–Operate–Maintain With design–build–finance–operate–maintain (DBFOM) P3 arrangements, the private partner assumes responsibili- ties for designing, building, financing, and operating highway improvements for a designated time period. In exchange, the private-sector partner may have the right to collect all reve- nues generated by the project during the concession period, or the public sector may agree to make availability payments to the private-sector partner during the concession period, while retaining the right to collect toll revenues itself. There

15 activities and later meeting operational performance stan- dards, including lane closures, incident management, or snow removal. In the case of congestion pricing P3 projects, includ- ing high-occupancy toll (HOT) lanes, traffic level of service may be used as the primary performance metric. Availability payments are often used for projects that are not tolled or for which project revenues are not expected to cover debt service costs. With availability payment models, the project sponsor retains the underlying revenue risk asso- ciated with developing the project, and the private partner receives a predictable, fixed set of payments throughout a concession period. Payments owing to the concessionaire may be secured by a revenue pledge or are subject to appro- priations. Availability payment P3 concessions are also likely to involve private equity, federal credit assistance, and com- mercial debt. With some availability payment contracts, the private part- ner receives no payments until construction is completed, whereas with others the private partner may receive milestone payments during the construction period. The frequency of the payments once projects are operational may vary and be subject to deductions, if the private partner does not maintain specified performance standards. Availability payments have been used extensively in Canada, Europe, and Australia. In the United States, availability pay- ment concessions are now being used for the first time on the following three projects (others are under consideration, for example, the East End Bridge near Louisville, Kentucky): • Port of Miami Tunnel: $1.1 billion, 1 mile, opens 2014, 30-year concession. • I-595 Express (Fort Lauderdale): $1.8 billion, 10.5 miles, opens 2014, 30-year concession. • Presidio Parkway Phase II (San Francisco): $456 million, 1.5 miles, opens 2015, 30-year concession. Asset Monetization Concessions Asset monetization P3s involve the long-term lease of existing, publicly financed toll facilities to private-sector concessionaires for a prescribed concession period in exchange for an up-front payment and possibly an ongoing revenue sharing agreement. Under these arrangements, the private concessionaire has the right to collect tolls on the facility and is required to operate and maintain it to prescribed standards and, in some cases, make improvements. Much like the financing structure of DBFOM transactions, private investors raise financing for these size- able fees by leveraging future toll proceeds that are generated by the leased facilities. Long-term leases for asset monetization P3 projects are procured on a competitive basis, with awards based primarily In the United States, most recent P3 projects, particularly those with high implementation costs, have been financed using a combination of toll revenues, government grants, pri- vate debt, and private investor equity. These transactions are often further enhanced by financial mechanisms, such as the Transportation Innovation Finance Innovation Act (TIFIA), and by private activity bonds (PABs). These federal tools encourage the use of toll financing and P3s by providing more favorable interest rates when compared with the private capi- tal market. The TIFIA program also offers flexible repayment terms, and together these mechanisms help public agency sponsors of real toll projects and their private investment partners mitigate the risk associated with these transactions. Four of the operating U.S. P3 highway projects identified in Table 1.1 have been implemented as real toll DBFOM con- cessions. They include • Dulles Greenway (Northern Virginia): $350 million, 14 miles, opened 1993, 60 years. • SR 91 Express Lanes (Orange County, California): $130 mil- lion, 10 miles, opened 1995, sold to public agency 2003. • South Bay Expressway (San Diego): $658 million, 9.3 miles, opened 2007, sold to public agency 2011. • SH 130 Segments 5 and 6 (Central Texas): $1.3 billion, 41 miles, opened 2012, 50 years. Five of the eight P3 projects in construction as this research was being completed are real toll DBFOM concessions: • LBJ Express (Dallas); $2.6 billion, 13 miles, opens 2015, 52 years. • North Tarrant Express (Fort Worth): $2.0 billion, 13 miles, opens 2015, 52 years. • I-495 Capital Beltway HOT Lanes (Northern Virginia): $2.1 billion, 14 miles, opens 2013, 75 years. • I-95 Express Lanes (Northern Virginia): $938 million, 29.4 miles, opens 2015, 76 years. • Downtown Tunnel/Midtown Tunnel/MLK Extension (Norfolk/Portsmouth, Virginia): $2.1 billion, 2.5 miles, opens 2017, 58 years. Availability Payment DBFOM Concessions Providing an alternative to real toll concessions, a small num- ber of DBFOM P3 concessions in the United States have been or are being implemented using availability payments pledged by the project sponsor as their primary revenue source. Avail- ability payments compensate private concessionaires for imple- menting and operating a tolled or nontolled roadway for a set time period. The payments are made by project sponsors based on milestones, such as completion of specified construction

16 Other Models for Private Participation In addition to the P3 arrangements described, there are other models for private participation in the implementation of transportation improvements. They come primarily in the form of proffers, in which a private firm or individual, who stands to benefit from the development of an improvement, gives money, land, or other services to the project sponsor to help expedite the implementation of the project. Proffers often involve improvements to highway entrance and exit ramps that provide improved access to facilities or land owned by the donors or possibly the extension or expansion of an existing road. Projects benefitting from proffers must go through the Decision Guide process, be included in fiscally constrained long- and short-range transportation plans, and gain any required environmental approvals. However, proffers may change the anticipated schedule for advancing the project into construction. If an agency receives a monetary offer or other contribution in kind for a project it is developing, it must weigh the benefits of receiving the private contribution and accelerating the implementation of the project against possible delays in implementing other improvements it had intended to advance. This scenario becomes an issue of project programming and prioritization, and the private party’s offer may influence the public sector’s decision on when to con- struct the project. It is up to the project sponsor and regional planning officials to weigh the pros and cons introduced by the proffer, and to decide whether it is in the region’s best interest to accept the offer. Washington State has taken an interesting alternative approach to P3 development resulting from several legislative requirements that make P3 highway development unrealistic. Instead, the Washington State Department of Transportation (WSDOT) is looking at nonhighway P3 opportunities, focus- ing primarily on policy initiatives. The largest proposal is the West Coast Green Highway, which involves the develop- ment of clean energy technology on the I-5 corridor in California, Oregon, Washington, and British Columbia. WSDOT used $1 million in seed money to attract private developers to propose, finance, own, and operate a series of electric vehicle charging stations along the I-5 corridor. WSDOT received six proposals and awarded the contract to AeroVironment Inc., which is making a $1.6 million invest- ment at their own risk. Interestingly, this project has been implemented outside the NEPA and planning processes, because WSDOT wanted to implement the project with the lowest level of approval possible and did not want to dictate where the charging stations would be located. Instead, the department established performance specifications and let the private partner identify locations for the charging stations. on the value of the up-front concession fee. Additional criteria may include the length of the concession period and the credit worthiness and professional qualifications of the bidders. As the research was being completed, five asset monetiza- tion P3 concessions have been executed in the United States: • Puerto Rico PR 22 and PR 5 lease: $1.436 billion, 40 years, 55 miles, awarded 2011. • Northwest Parkway (Denver): $603 million, 99 years, 8 miles, awarded 2007. • Pocahontas Parkway (Richmond): $610 million, 99 years, 8.8 miles, awarded 2006. • Indiana Toll Road: $3.850 billion, 75 years, 157 miles, awarded 2006. • Chicago Skyway: $1.83 billion, 99 years, 7.8 miles, awarded 2005. Three of these transactions involved publicly financed, legacy toll facilities with a track record of generating sig- nificant toll revenues. The remaining two lease transactions involved financially troubled toll facilities that were headed toward bankruptcy. In cases where asset monetization P3 projects do not involve the development of new highway capacity, this P3 model is not germane to the Decision Guide process. Build–Own–Operate With this P3 model, all aspects of infrastructure develop- ment, including the outright ownership of facilities, lie with the private sector. Build–own–operate (BOO) projects are often implemented by real estate owners to provide access to new tracts of land they are developing. BOO projects tend to be smaller in scale than other P3 projects. Several of the proj- ects identified in Table 1.1 have been implemented using the BOO model. They include (by project number) 1. Alabama River Parkway (Alabama): $12 million, 5.8 miles, opened 1998. 2. Black Warrior Parkway (Alabama): $25 million, 6.4 miles, opened 1998. 3. Emerald Mountain Expressway Bridge (Alabama): $4 mil- lion, 2.4 miles, opened 1994. 4. Foley Beach Expressway (Foley, Alabama): $44 million, 13.5 miles, opened 2000. 7. Camino Columbia (Laredo, Texas): $90 million, 22 miles, opened 2001. 9. Adams Avenue Parkway (Utah): $10 million, 1.0 mile, opened 2001. 11. South Norfolk Jordan Bridge (Norfolk, Virginia): $100 mil- lion, 1 mile, opened 2012.

17 Greenville in South Carolina has faced revenue shortfalls since opening in 2001, because most drivers prefer to use a free inter- state that passes through the center of town rather than the newer tolled route around Greenville’s southern fringe. Actual traffic levels are approximately one-third of initial estimates. After refinancing negotiations with the state legislature failed, the public-benefit corporation sponsoring the project filed for bankruptcy in 2010, and the project’s creditors may be facing losses (Samuel 2010). In 1989, the California legislature approved the Assembly Bill 680 (AB 680) of July 1989, enabling the California Depart- ment of Transportation (Caltrans) to issue a request for state- ments of interest for up to four transportation projects to be financed by private investors under a demonstration pro- gram (Perez 2004). Investors were invited to identify projects they believed would be of greatest benefit to the state. Several consortia responded to Caltrans’ request, and 13 groups were prequalified and invited to submit franchise proposals. Nine of the consortia submitted detailed proposals for eight differ- ent private toll road projects, and ultimately four groups were selected. Caltrans made its selection based on criteria that included the need for the project, environmental effects, con- structability, right-of-way requirements, the experience of the consortium, incorporation of innovative concepts, and the promotion of economic development. The following four projects were selected: • SR-57: A 10-mile, $700 million extension of SR-57 in Orange County from Anaheim to I-405. • Mid-State Corridor: An 85-mile, $1.2 billion toll road joining I-680 at the southeastern end of San Francisco Bay to I-80 near Vacaville, providing an alternative route to Sacramento. • SR-125: A 9.3-mile, $660 million toll road in the southeast flank of San Diego connecting a Mexican border crossing with the regional freeway network. • 91 Express Lanes: A 10-mile, four-lane, $130 million HOT lane facility in the median of a congested freeway connect- ing Orange and Riverside counties. Of these, only the SR-125 (now known as the South Bay Expressway) and the 91 Express Lanes were built. Ironically, both of these facilities have since been purchased by the public sectors. The 91 Express Lanes opened to service in December 1995 as the second privately financed toll facility in the inter- state era operated by the California Private Transportation Company (CPTC). CPTC was financially viable, but the com- pany’s concession agreement with Caltrans contained a non- compete clause, prohibiting the state from expanding nontolled highway capacity in the congested SR-91 corridor connecting Riverside and Orange counties. Ultimately, the need to expand The evolution of U.S. P3 highway Procurements As shown in Table 1.1, the number of P3 projects operating or being advanced in the United States is small. Nonetheless, clear trends are evident among the types of projects being implemented on a P3 basis, as well as trends in the types of P3 models chosen for development. The earliest P3 projects tended to be smaller and often were initiated by local regions that sought to implement projects that were not necessarily viewed by state DOTs as having the same priority. There are also several early P3 projects that were identified and initiated by private firms that were interested in developing and oper- ating them on a concession basis. Several early projects are now owned outright by their developers, who had initially implemented them on a BOO basis. Early P3 Projects Yield Mixed Results In 1988, Virginia became the first U.S. state to enact legisla- tion allowing private companies to finance, build, and oper- ate tolled highways. Shortly thereafter, the Toll Road Investors Partnership II (TRIP II)—composed of Shenandoah Green- way Corporation of Virginia, Italy’s Autostrade per l’Italia, and the Texas-based engineering and construction firm Brown & Root—proposed to develop an extension of the Dulles Toll Road into Loudoun County as a private project (Perez 2004). In 1993, the Virginia Department of Transportation (VDOT) awarded the group a 40-year DBFOM concession to complete the 14-mile, $350 million four-lane highway linking the exist- ing public toll facility with Leesburg in Loudoun County. Construction was completed 6 months ahead of schedule in September 1995, when the Dulles Greenway opened as the first P3 DBFOM concession to be built in the interstate high- way era. Unfortunately, the new toll road suffered from dis- appointing financial results, with initial traffic daily traffic volumes of 8,000 vehicles rather than the forecasted 35,000. The concessionaire struggled to avoid bankruptcy for sev- eral years, despite toll rate adjustments. This instability was eventually rectified in 2001 by the state legislature, which lengthened TRIP II’s concession by 20 years and enabled the company to extend the Greenway, further boosting use and revenue levels. Several other early P3 projects have been less successful in avoiding financial collapse. The Camino Colombia in Texas is a $90 million truck bypass route providing access to the Mex- ican border. Sponsored by the city of Laredo, this P3 facility opened in 2000 and was sold at auction three years later for $12 million. It is now owned and operated by the Texas Depart- ment of Transportation (TxDOT). Similarly, the 16-mile, $240 million Southern Connector sponsored by the city of

18 A Trend Toward Larger, High-Priority P3 Projects Defined by Owners Despite the mixed outcomes of the first P3 projects in the U.S. highway sector, eight new P3 projects are in construc- tion and many other potential P3 projects are under study or development. This newer group of P3 projects represents a marked departure from the earlier P3 activity in three impor- tant areas: size, use of public subsidies, and public-led project definition. Larger Projects With an average construction value of over $1.6 billion, these P3 projects are far larger than their earlier cohorts. Four of the eight projects being built have construction values in excess of $2 billion. The largest is the LBJ Express in Dallas, Texas, which has a capital cost in excess of $2.6 billion. Unlike the earlier P3 projects, which tended to be second tier priorities often supported by local regions rather than state DOTs, today’s P3 projects are often of the highest priority to their sponsors. Many are projects on heavily traveled and congested corri- dors and have the potential to cover a large portion of their implementation costs with anticipated toll revenues; or they are high-priority needs projects to which sponsors are will- ing to commit future DOT revenues in the form of availabil- ity payments. A Need for Public Subsidy In addition to their size, today’s P3 projects are notable because they are true partnerships, rather than ones for which pri- vate partner raise all project financing, as was the case with earlier projects such as the Dulles Greenway or South Bay Expressway. Instead, agencies sponsoring today’s larger P3 projects commonly recognize that it is not feasible to imple- ment DBFOM projects on a limited-recourse basis without public subsidies. This is true with the three projects under construction in Virginia (the $2.1 billion I-495 Capital Belt- way HOT Lanes, the $938 million I-95 Express Lanes, and the $2.1 billion Downtown Tunnel/Midtown Tunnel/MLK Extension) and the $2.0 billion North Tarrant Express in Fort Worth, Texas. These projects have received sponsor subsidies ranging from $64 to $600 million to make them bankable. Three of the DBFOM P3 projects in construction and one project in procurement are receiving a different type of public subsidy in the form of availability payments to be paid out over the duration of the concession period by the project sponsor. These are high-priority projects, such as the $456 million sec- ond phase of the $1.05 billion Presidio Parkway, a replacement of the southern access road to the Golden Gate Bridge in San Francisco. This road is in danger of failure if a severe seismic the freeway prompted the Orange County Transportation Authority to purchase the 91 Express Lanes from CPTC for $207.5 million in April 2002. The South Bay Expressway reverted to public ownership for different reasons after filing for bankruptcy in 2010. This greenfield facility providing access to developing areas east of San Diego opened in 2007 at the same time that a recession brought commercial and residential growth in the corridor to a halt. Weak ridership and revenue levels were complicated by the cost of claims filed by the contractor against the project. In December 2011, the San Diego Association of Govern- ments (SANDAG, the local MPO) agreed to purchase the $660 million facility at a cost of only $350 million. The project was proposed by California Transportation Ventures, Inc. (CTV), an equal partnership among four private-sector firms. After 6 months of negotiation, Caltrans signed a development franchise agreement in January 1991 with a limited partnership company, San Diego Expressway Limited Partnership (SDELP), with CTV as its managing partner (Perez 2004). The project was fraught with challenges from its inception. SDELP had been required to gain environ- mental clearance for the project by December 1997 and to commence construction within the following 3 years. Several legal challenges soon emerged, including two lawsuits that resulted in a project hiatus for more than 2 years. During this time, Caltrans was also required to complete additional envi- ronmental studies as a result of the sighting of the endan- gered Quino checkerspot butterfly, with SDELP assuming the cost for the state’s work, resulting in an additional 4-year delay. The project gained final environmental approval in mid-2000. It took SDELP an additional 3 years to reach finan- cial close and to begin construction. The outcomes of this initial cohort of P3 projects are decidedly mixed. Three of the 11 operating projects that were implemented on a P3 basis are now in public ownership and no longer operate as concessions. The 91 Express Lanes was purchased by the Orange County Transportation Authority because of its concession’s noncompete clause. As described, the Camino Columbia and the South Bay Expressway were purchased by public agencies after their private developers entered bankruptcy as a result of weak toll revenues and other complications. Of the eight facilities that are still privately operated as this research was being completed, six are smaller projects with capital costs ranging from $4 to $100 million owned outright by their developers on a BOO basis. The operator of the Green- ville Southern Connector has declared bankruptcy and may be forced to sell that facility, which leaves the Dulles Greenway as the only financially healthy DBFOM toll concession in opera- tion at this time. Located in five different states, together the 11 operating highway facilities implemented as DBFOM or BOO concessions represent over $2.7 billion in investment.

19 then using the environmental review process to assess such a possibility, vetting it in front of the public. The Attraction of P3 Projects As will be discussed in Chapter 4, P3s bring a host of challenges to their implementation, so their benefits to implementation must ultimately outweigh the effort taken to overcome them. Initiation for P3 consideration rests with the public, likely ren- dered first through legislative authorization, followed by the decision to act on it, although in the case of unsolicited pro- posals, serious initial consideration of a particular project by a public-sector agency may be preempted by the private sector. Overall, the decision to pursue P3s is largely a public-sector one, and thus characterizing P3s’ attractiveness derives mostly from the public sector’s perspective. The attractiveness to the private sector can be explained more simply as business deci- sion in response to available opportunity. The Public-Sector Sponsor Perspective The motivations for public-sector sponsors to consider imple- menting projects on a P3 basis are well documented and cor- roborated by those interviewed for this research. The principal attractions of P3s are the need to tap into new sources of rev- enue and finance to overcome funding gaps and the potential to benefit from design and long-term efficiencies compared with traditional procurement methods. At both state and federal levels, budgetary constraints have led to a situation where the demand for improvements to U.S. surface transportation infrastructure far outstrips existing resources to provide for these needs. This gap can be attrib- uted largely to impediments at the policy and funding level and, addressing the first point above, P3s have been increas- ingly seen as one opportunity to help bridge the gap. One recent U.S. DOT report cites the following failings within the existing institutional and financing setting for U.S. surface transportation as reasons for the increasing attractiveness of P3s (U.S. DOT 2008): • Poor system performance—worsening traffic congestion and decreasing travel time reliability; • Growing resource scarcity—traditional funding sources are decreasing or stagnant regarding inflation and increasing demand; • Poor investment decision making—political processes impede projects with the greatest value from routinely being selected; and • Contradictory policy goals—highway funding that relies largely on fuel consumption conflicts with efforts to increase energy independence and improve the environment. event were to occur. This facility is not tolled, but other avail- ability payment projects such as the I-595 Express in Fort Lauderdale (a $1.8 billion HOT lane and highway reconstruc- tion project) and the $1.3 billion East End Bridge project near Louisville (in procurement) will be tolled. These tolling arrangements will allow project sponsors to recapture some of the cost of the availability payments from toll proceeds, while shielding their private partners from the revenue risks of underperforming toll facilities. A Move Away for Early P3 Involvement A third trend is also evident among the projects being imple- mented on a P3 basis: a movement away from early involvement of P3 partners in the definition of projects during environmen- tal clearance and in favor of post-NEPA P3 procurements. This is the case with four out of the eight P3 projects in construction, as this research was being completed. Although there are clear merits to early involvement of private partners in the definition of projects, there are also counterproductive complications, as discussed in detail in Chapter 5. In general, P3 partners are far more interested in making money by implementing projects than by acting as consultants during project definition. As witnessed by the experience with the South Bay Express- way, with its 16-year gestation period from 1991 (when the concession was awarded) to 2007 (when the facility finally opened), the risks of gaining clearance for projects are far too great for at-risk involvement by private partners. The high level of risk to the franchisee associated with South Bay Expressway project is frequently cited by private developers as one of the reasons that they are unwilling to consider early involve- ment in projects without a guarantee of compensation if the environmental decision does not permit the developer’s preferred project to proceed. A senior MPO official notes that “investors want a project that is all wrapped up in a bow. Final approval of a NEPA document is highly advisable because experience has taught investors not to pursue projects that are pie in the sky.” Public project sponsors are also coming to this recogni- tion, preferring to seek P3 procurements after NEPA to max- imize competition and avoid the appearance of compromising the objectivity of any NEPA analysis or preferred alternative selection with the profit-seeking motives of the private sector. Early involvement also tends to reduce competition and the number of project cost comparisons available to the public sponsor (these issues are also discussed further in the South Bay Expressway section). Although early involvement can lead to good outcomes, a state like Virginia, which historically has accepted unsolicited P3 offers, is moving more toward post- NEPA solicited P3 procurements. Virginia is also taking a more programmatic approach in identifying projects that may be suitable for P3 development early on in their definition and

20 focus solely on its capability to act simply as a funding source, a financing tool, or a procurement method. Although in prin- ciple, these are standard features of a P3, too often a P3 is viewed by public decision makers faced with the issues out- lined in the previous section (e.g., poor system performance, resource scarcity) as magic, that is, a solution to be introduced when the traditional approach fails. Without a full apprecia- tion of how P3s generate value in practice, a tendency exists to adopt such a narrow definition, which in turn inhibits success- ful use or exacerbates challenges to implementation, such as building public and stakeholder support for the process. Care- ful consideration of when and why to contemplate a P3 pro- curement is often lacking. This (and previous) research has concluded that there may only be a small subset of projects (although substantial on a total project cost basis) brought forth through the appropriate project development process where a P3 may be the most desir- able option. With this in mind, a more nuanced interpretation of P3s’ definitions with respect to the full value a P3 can offer may better facilitate the proper consideration of P3s through- out the planning and environmental approvals processes. As suggested by those interviewed, these characterizations focus on the cumulative effect of P3s’ advantages as previously outlined. Two simple examples illustrate this reasoning. P3s as Service Delivery Models A P3 can act as a financing and procurement tool, which con- tributes to its value obtained through risk transfer to the pri- vate partner in arranging financing or guaranteeing delivery under a fixed price and schedule. The ultimate value of a P3 is derived from the necessary long-term service delivery approach taken. In the case of a P3 concession agreement, a private part- ner must consider the management of long-term operations and maintenance, which likely would include one or more cycles of major maintenance or renewal. The P3 agreement then guarantees a certain level of facility performance and con- dition during the concession period and at the point of hand back, shifting considerable risk to the private partner and gen- erating value to the public sector that would not otherwise have been realized. This benefit can more than offset the poten- tially higher cost of securing private financing up front. P3 as Means to Reduce Costs A primary focus of the U.S. transportation infrastructure sector is on the problem of inadequate funding and the need to find more of it. From this comes the common misperception that P3s are beneficial because they provide a much-needed alterna- tive funding source. However, this view is shortsighted and not quite accurate. Private partners can access a larger market for financing, albeit, at generally higher costs, and can contribute In addition to the context in which P3s may help address the issues cited above, their advantages relative to traditional project delivery also contribute to their attraction. Two com- prehensive previous research efforts are in broad agreement on the advantages of P3 procurements: the FHWA’s Transpor- tation PPP User Guidebook (FHWA 2007) and the National Conference of State Legislatures’ PPP Toolkit (Rall et al. 2010). A summary of their results follows: • Accelerated project delivery—P3s can help deliver trans- portation improvements at a faster rate than through tra- ditional DOT project scheduling and delivery methods. • Access to new sources of capital—private financing (although typically more expensive than public financing) offers the potential to realize additional or larger projects that other- wise would have been delayed or not built. Taxable equity and both taxable and tax-free debt can supplement or lever- age scarce public resources. • Introduction of life-cycle efficiencies—P3s can foster effi- ciencies over a project’s life cycle throughout its construction, operations, and maintenance phases by 44 Encouraging innovation in service delivery; 44 Providing incentives in the P3 contract; 44 Offering potentially greater “value for money”; and 44 Facilitating involved parties’ collaboration. • Superior project quality—a P3 may facilitate a private part- ner’s ability to apply improved design and construction tech- niques or technologies resulting from performance-based contractual terms (incentives) or warranties by applying a life-cycle costs approach that may result in higher initial quality to minimize long-term maintenance and opera- tions costs. • A better distribution of risks—allocating certain project risks to the private-sector (e.g., financing, schedule, long-term operations, and maintenance) and retaining others with the public agency (e.g., program management, environmental clearance, permitting, and right-of-way acquisition) may result in overall reduced project risk and costs. • An opportunity for greater public accountability—though not without considerable controversy, there is some evidence to support the assertion that a comprehensive and transpar- ent contractual arrangement with a private partner offers an opportunity to set project performance expectations and responsibilities to enhance public control over project outcomes. Improving the Characterization of P3s Despite the formal and accepted definitions of the forms of P3s presented earlier, several industry participants interviewed cautioned against adopting too narrow an interpretation of what a P3 is. A common pitfall with characterizing a P3 is to

21 developer or concessionaire who manages a wider portfolio of facilities to a full-service design and construction engineering or contracting firm. Often in P3 ventures, two or more indus- try players come together as a team to synergize their respec- tive skills and share in project risk. Certainly there are many other critical participants on the private side (e.g., technical, legal, and financial advisors, other engineering or technology service providers), but for those with a direct financial stake in the long-term success of a P3 project, those with “skin in the game,” as multiple interviewees put it, the process for how P3s progress through the planning and environmental review pro- cesses are of utmost significance. There is broad agreement among private partners that the political landscape, project size (large in scope), duration of project (e.g., a long-term commitment to achieve a return on investment), resolution level of large risk items (such as legal and environmental issues), and degree of public support are the most significant factors in evaluating the attractiveness of a P3 opportunity. Many interviewees pointed to the demon- strated need of the project or “criticality of the asset” as a cru- cial determinant for pursuing a P3. A highway project that solves an existing congestion or access problem is far prefer- able to a speculative venture where, for example, facility use is dependent on anticipated new residential or commercial development. Finally, in keeping with the business decision outlook inherent to private P3 partners, the appeal of a par- ticular P3 opportunity may be dependent on a measure of the public-sector sponsor’s credibility or ability to execute an appraisal of the competitive landscape. In addition, another factor is the likelihood of being selected as the preferred part- ner, along with other enterprise-level considerations, such as portfolio balancing in the case of a large concessionaire. their own equity, but a singular concern for greater funding is misplaced. Transportation discourse lacks a focus on reduc- ing costs, when streamlining costs can be just as important as finding funding. A private partner may be much better posi- tioned than a public partner to identify and take advantage of opportunities to reduce project construction costs through design efficiencies, especially if construction performance or long-term operational incentives are incorporated into the P3 agreement. Design efficiencies can be derived from techni- cal expertise, access to superior technologies, or by capitaliz- ing on the revenue risk model of the transaction. In this last instance, a private partner has an incentive to scale the scope of the project to its revenue potential by providing highway access or capacity where most appropriate, as the return on their investment is linked to roadway use. Naturally, this out- come is dependent on the extent to which the project’s design can conform to the desires of the private partner compared, along with the expectations of the public sponsor, to prevail- ing design standards and constraints. The Private-Sector Partner Perspective A range of private-sector partners have participated in P3s in the United States and worldwide. A key, unifying attribute among partners considered in this research is their direct par- ticipation in the revenue risk and financing of the project through an equity contribution or obligation to debt issued on behalf of the project. The extent to which the partner has invested in the project, including the partner’s subsequent role in promoting, defining, constructing, and operating the proj- ect long term, can vary: from a pure investor who only seeks a return on equity (such as a pension fund) to an infrastructure

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Effect of Public-Private Partnerships and Nontraditional Procurement Processes on Highway Planning, Environmental Review, and Collaborative Decision Making Get This Book
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TRB’s second Strategic Highway Research Program (SHRP 2) Report S2-C12-RR-1: Effect of Public-Private Partnerships and Nontraditional Procurement Processes on Highway Planning, Environmental Review, and Collaborative Decision Making explores the different points in the overall project development process when public-private partnership involvement can be introduced. The report also explores other types of nontraditional contracting arrangements and their impact on the project development process as set forth in the PlanWorks (formerly Transportation for Communities—Advancing Projects through Partnerships) (TCAPP) Decision Guide.

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