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P3 Defined

Design Build Finance Operate Maintain Concession
 [ New Build Facilities ]

Public Owner (state or local government, through equity or debt) bundles/transfers services to a Private Concessionaire (with funding from commercial debt, private equity or possible public subsidy/guarantee) and Concessionaire's Constructor (engineer and contractor) and Operator.

With the design-build-finance-operate-maintain (DBFOM) approach, the responsibilities for designing, building, financing and operating are bundled together and transferred to private sector partners. There is a great deal of variety in DBFOM arrangements in the United States, and especially the degree to which financial responsibilities are actually transferred to the private sector. One commonality that cuts across all DBFOM projects is that they are either partly or wholly financed by debt leveraging revenue streams dedicated to the project. Direct user fees (tolls) are the most common revenue source. Availability payments have also been used in this capacity. Future revenues are leveraged to issue bonds or other debt that provide funds for capital and project development costs. Often they are also supplemented by public sector grants in the form of money or contributions in kind, such as right-of-way. In certain cases, private partners may be required to make equity investments as well.

A Range of Project Sponsors

A range of organizations can function as the sponsor in DBFOM arrangements including:

  • Departments of transportation
  • Toll authorities
  • Transit agencies
  • Local governments

In Europe, Latin America, and Asia, where the DBFOM approach is commonly used to develop new toll road projects, the debt is usually raised by private concession companies who are responsible for designing, building, financing, and operating the projects. Given the ability of public sector agencies in the United States to issue low-interest tax-free debt, it is often more cost-effective for public project sponsors to issue debt than their private sector partners. Federal financing tools such as private activity bonds, however, help lower the borrowing costs for the private partner. A second option is to use a nonprofit public benefit corporation established pursuant to IRS Revenue Ruling 63-20. In addition, public sponsors may provide subsidies as part of an overall financing package. Ultimately, any cost premium from privately financing a project must be offset by other project execution efficiencies derived from the private partner’s participation, such as design or construction innovations or lifecycle operations and maintenance cost savings.

Responsibilities and Benefits

DBFOM concessions can be awarded for the construction of a new asset or for the modernization, upgrade or expansion of an existing facility. DBFOM concessions often extend for a period of 30 to 50 years or even longer, and are awarded under competitive bidding conditions. DBFOM procurements can be expected to shift a great deal of the responsibility for developing and operating surface transportation infrastructure to private sector partners. In nearly all cases, the public agency sponsoring a project retains full ownership over the project. However, as with the BOT approach, the private partner assumes design-build responsibilities along with maintenance and operations to levels stipulated in the concession agreement. Depending on the revenue sources used and revenue risk allocation, private partners in the United States may or may not be exposed to revenue risks. DBFOM concessions are often attractive to public transportation agencies, as 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.

Design Build Finance Operate Maintain Roles and Responsibilities

  Own Conceive Design Build O&M Financial Responsibility
Design Build Finance Operate Maintain (DBFOM) Public Public or Private      Private by fee contract     Public, Public/Private, or Private

DBFOM Models

Two DBFOM models have been used in the United States.

Real Toll DBFOM Concessions

With this DBFOM model, tolls generated by the project are the primary revenue source for the P3 transaction. The private sector partner maintains the right to collect the revenues during the concession period but bears the risk that they may not meet expected forecasts. To facilitate the agreement or make the project financeable in some cases, the public sector may provide limited financial assistance, taking such forms as a development subsidy, right-of-way provisions or limited revenue guarantees, but ultimately the private sector partner expects that the funds generated will be adequate to pay the underlying project loans and interest and make a fair profit on its investments of time, expertise and money. To protect the public sector interest in the event of robust revenue generation, some concession agreements can include a revenue-sharing provision between the private partner and public sector if revenues exceed certain specified thresholds or metrics.

Availability Payment DBFOM Concessions

With availability payment DBFOM concessions, the project’s revenue risk is retained by the public sector sponsor. The sponsor pledges availability payments to compensate the concessionaire for its role in designing, constructing, operating, and maintaining the facility for a set time period during which it receives a predictable, fixed set of income. Availability payments are often used for projects that are not tolled or for which project revenues are not expected to cover debt service costs. Payments owed to the concessionaire may be secured by a revenue pledge or subject to appropriations. Availability payment P3 concessions are also likely to involve private equity, federal credit assistance, and commercial debt.

Availability payments are made based on milestones, such as initially completing specified construction activities or subsequently meeting operational performance standards, including lane closures, incident management, or snow removal. In the case of congestion pricing P3 projects, such as HOT lanes, traffic level of service may be used as the primary performance metric. Depending on the structure of the P3 agreement, a private partner may not receive any payments until construction is complete, which could affect the magnitude of required upfront financing.

Resources

Downtown Tunnel / Midtown Tunnel / MLK Extension
Comprehensive Agreement and other documents related to the Downtown Tunnel / Midtown Tunnel / MLK Extension project being delivered as a partnership between Elizabeth Rivers Crossings and the Virginia Department of Transportation.

Dulles Greenway
Comprehensive Agreement for Dulles Greenway between the Virginia Department of Transportation and Toll Road Investors Partnership II (TRIP II).

Projects

Design Build Finance Operate Maintain (Real Toll)

Design Build Finance Operate Maintain (Availability Payment)