"Public-private partnerships" (P3) refer to contractual agreements formed between a public agency and private sector entity that allow for greater private sector participation in the delivery of transportation projects.
Traditionally, private sector participation has been limited to separate planning, design or construction contracts on a fee for service basis - based on the public agency's specifications.
Expanding the private sector role allows the public agencies to tap private sector technical, management and financial resources in new ways to achieve certain public agency objectives such as greater cost and schedule certainty, supplementing in-house staff, innovative technology applications, specialized expertise or access to private capital.
The private partner can expand its business opportunities in return for assuming the new or expanded responsibilities and risks.
Some of the primary reasons for public agencies to enter into public-private partnerships include:
Accelerating the implementation of high priority projects by packaging and procuring services in new ways;
Turning to the private sector to provide specialized management capacity for large and complex programs;
Enabling the delivery of new technology developed by private entities;
Drawing on private sector expertise in accessing and organizing the widest range of private sector financial resources;
Encouraging private entrepreneurial development, ownership, and operation of highways and/or related assets; and,
Allowing for the reduction in the size of the public agency and the substitution of private sector resources and personnel
In this website, the term "public-private-partnership" is used for any scenario under which the private sector assumes a greater role in the planning, financing, design, construction, operation, and maintenance of a transportation facility compared to traditional procurement methods.
P3s provide benefits by allocating the responsibilities to the party - either public or private - that is best positioned to control the activity that will produce the desired result. With P3s, this is accomplished by specifying the roles, risks and rewards contractually, so as to provide incentives for maximum performance and the flexibility necessary to achieve the desired results.
The primary benefits of using P3s to deliver transportation projects include:
Expedited completion compared to conventional project delivery methods;
Project cost savings;
Improved quality and system performance from the use of innovative materials and management techniques;
Substitution of private resources and personnel for constrained public resources; and,
Access to new sources of private capital.
Project risks are allocated to the party that is the best equipped to manage them. P3 contracts often include incentives that reward private partners for mitigating risk factors.
View a table that identifies common risk factors[pdf 19 kb] associated with the implementation of transportation infrastructure projects and suggests how responsibilities for these risks are often assigned with P3 projects.
Public-private partnerships can be applied to a large range of transportation functions across all modes. These include:
Project conceptualization and origination;
Financial Planning and finance;
Toll Collection; and,
These activities are typically bundled into contract packages reflecting the public agency's objectives related to: schedule and cost certainty; innovative finance; or transfer of management and/or operational responsibility.
Typical procurement packages include:
Private sector operations and maintenance on a performance basis;
Private sector program management for a fee and/or with program costs and schedule maintenance incentives;
Design-build for fixed fee on fixed time frame;
Project build-operate-transfer (BOT);
Design-build finance-operate-transfer (DBFO); and,
P3 projects are often undertaken to supplement conventional procurement practices by taking additional revenue sources and mixing a variety of funding sources, thereby reducing demands on constrained public budgets. Some of the revenue sources used to support P3s include:
Grant anticipation bonds (GARVEEs and GANs);
General obligation bonds;
State infrastructure bank loans;
Direct user charges (tolls and transit fares) leveraged to obtain bonds; and,
Other public agency dedicated revenue streams made available to a private
franchisee or concessionaire:
- Direct user charges from other tolled facilities
- Shadow tolls
Additional information on these financing approaches is available in the Project Finance section of the site.
P3 financings often involve the co-mingling of different federally-sponsored tools and private commercial debt. The following federal innovative finance programs are important tools that the public agency sponsors can use to make P3 projects financially viable and attractive investment opportunities for private sector developers:
Grant Anticipation Revenue Vehicles (GARVEEs)
Grant Anticipation Notes (GANs)
State Infrastructure Banks (SIBs)
Section 129 Loans
Transportation Infrastructure Finance and Innovation Act (TIFIA) Credit
Additional information on these tools is available in the Project Finance section of the site.
From the public agency's perspective, expanding the role of the private sector to offer a range of advantages relevant to specific project needs. Projects are likely to benefit from P3s when tight schedules, complex design and construction or innovative finance are involved. In such cases, P3s are beneficial because of their ability to provide:
Expedited project completion by grouping multiple responsibilities in a single contract (such as combined design and construction);
Access to specialized expertise (such as financial management or toll collection);
Access to proprietary technology (such as special pavement design)
Relief from staff burdens (such as maintenance);
Ability to apply special incentives and disincentives to improve project performance; and,
Access to private investment and innovative finance to augment scarce resources (such as Finance/Design/Build).
For example, toll roads - normally financed by debt - require scheduled and cost-certain project delivery. Using a Design-Build contract for toll road projects shifts the risk and responsibilities of meeting these objectives onto the private design/build entity, which is best positioned and incentivized to meet these requirements. Some toll road partnerships also involve the private sector providing innovative approaches to supplying debt and equity finance that can augment scarce agency tax resources for special projects or program expansion.
From the private sector business entity perspective, P3s provide expanded business opportunities to provide services not part of traditional highway development. Private entities are able to compete on the basis of a broader set of technical skills and expertise. Expanded partnership arrangements also often provide increased flexibility to employ new approaches such as innovative finance. And while the expanded roles may introduce new risks (such as meeting fixed schedules and cost commitments), they also offer new rewards in the way of expanded fee opportunities.
P3s in transportation involve contractual arrangements between a facility owner and one or more private sector businesses.
The public partner is typically a state department of transportation, a local county or municipal public works department or a state chartered state or local toll road, bridge or transit authority that is the owner and operator of highway and transit facilities. In addition, there are certain public benefit authorities (joint power authorities, public benefit authorities) that are authorized by states to undertake transportation development projects using some or all of the P3 approaches. Federal law and program regulations established by the Federal Highway Administration and the Federal Transit Administration also impact the ability to utilize P3s on federal aid facilities through both their restrictions and supportive programs ( see FAQ 13).
The private partners are professional service companies, contractors, and financial entities pursuing business with owner-operators. In the US, P3 private sector participants have been businesses providing services to public agencies for a fee, such as engineering and construction companies and specialized financial and legal advisors. In other parts of the world - where partnerships include concessions or franchises where private entities assuming full ownership-like responsibilities (including collecting toll revenues) are more common - new types of "road owning" business entities are emerging. These transportation companies are in the business of developing long-term operating and maintaining responsibility for toll roads as an attractive opportunity for equity investment.
Public agencies and the private sector have both shared and separate goals when entering into any partnership agreement.
Public agencies are established to provide standardized public services and facilities based on established and agreed-upon public objectives - making the most efficient use of public resources in an equitable manner with a strong emphasis on stable baseline level of service. At the same time, staff and budgetary resources are often fixed and public regulations inhibit rapid innovation or technology upgrades. P3s in their various forms (see FAQ 3) allow public agencies the flexibility to minimize these constraints while still achieving their public objectives
Private businesses are established to provide an attractive return on company resources by providing needed services to clients and by making strategic investment decisions. P3s can offer them opportunities to improve profitability and expand markets.
New forms of P3 can synergize on both public and private objectives through appropriate partnership arrangements. Formal contractual agreements can be structured that describe the public services to be provided and the standards to be met, while providing the appropriate flexibility and incentives to harness the dynamism and efficiency of profit seeking private investors to provide improved public services and facilities.
Public agency objectives are achieved by structuring P3 contracts to allocate roles, risks, and rewards to the entity - either public or private - that is best able to manage them (see FAQ 4). Traditional roles are often redefined or transferred from one party to the other, and when financial incentives are introduced, private entities are often willing to assume new risks.
P3s are often used to meet such public objectives as:
Accelerating implementation of high priority projects by compressing and overlapping services normally sequenced;
Providing management resources for large or complex programs to insure quality, cost and schedule deadlines are met;
Accessing advanced (and possibly proprietary) technologies not available through standard procurement approaches;
Improving asset management and the scientific application of life-cycle cost practices;
Achieving set levels of environmental or aesthetic quality; and,
Accessing new sources of private capital (debt and equity), thereby eliminating the need to wait for future budget cycles to pay for needed infrastructure projects.
Public agencies generally determine the scope of a public-private partnership based on their specific transportation needs and policy objectives. The first step in the process then involves identification of the activities to be included in the procurement. Traditionally, public transportation owners acquire services through a competitive procurement process for each separate activity, either on a qualifications basis (for professional services) or low bid basis (for construction and technology). However, the traditional procurement process is often not conducive to the use of public-private partnerships.
Prescriptive project specifications offer little reward to the private sector for its ability to bring innovative design and construction applications to a project.
Low bid construction contracts for projects with significant technology and systems may not accommodate risks of new approaches
For such projects, many states and agencies have found that special approaches (often requiring legislation) may be necessary. In particular, procurements for more complex projects where the private partner is providing multiple services may involve trade-offs that may require direct discussion and negotiation.
Alternative procurement methods include quality-based awards in which the owner establishes a benchmark for comparing the services and qualifications of potential private sector partners in order to identify the bidder that can provide the public partner with the best overall value for services sought. For example, for a project that involves the installation of electronic toll collection equipment, the owner may want to include performance standards for reliability and speed of installation, and offer the bidders the opportunity to share in the increased revenue from accelerated installation and reliable operation.
P3s depart most substantially from conventionally developed projects when they are financed with private market debt or equity that is to be repaid from project-derived direct user charges (tolls and prices) - on a limited-recourse basis.
To obtain favorable financial terms, these projects must meet certain lender requirements that support secure payment and value. In such cases, guaranteed capital and operating costs, minimal and fixed completion schedules, efficient technology, and assured utilization levels are required to meet commercial lender requirements at an attractive interest rate. The required level of project performance is usually higher than traditional roads constructed solely with public funds. Toll roads typically use P3s to shift a substantial portion of the risk of meeting these requirements directly to the private sector entity performing the activities and do so in arrangements most able to reduce the risk of non-performance. Such projects are usually procured on a design-build basis at a minimum, and often add additional private roles in finance, maintenance, and operations.
Even so, project owner-sponsors themselves typically carry a portion of the risk as most limited recourse financings require some type of contribution from the public agency sponsoring the project. In the end, it is the role of the sponsor to make projects bankable in order to maintain the confidence of the investor.
The management of a P3 - from a public agency point of view - requires special expertise at several levels. This includes both the project development phase and contract management. In particular, it is essential to involve personnel that clearly understand agency objectives and regulations as well as private business and contracting conventions. Some P3s also involve special financial issues (where finance is part of the procurement) and the need to assess financial capabilities. Furthermore, non-standard procurement methods themselves also require special legal and contracting expertise. In some cases, an agency with limited experience may find it advantageous to capitalize on the background of other state or local agencies.
A number of federal regulations have the potential to constrain the use of P3s. These constraints are being revisited as part of the transportation reauthorization process, and the ultimate reauthorization act may reverse some of these issues. The major constraints are two-fold:
The prohibition of tolling federal aid system; and,
Constraints on federal tax exemption for private activity bonds and long term leases.
Many states have legislation inhibiting public-private partnerships. This type of legislation ranges from requirements for low bid awards on construction contracts and prohibitions against design/build or outsourcing certain agency functions. In addition, there may also be prohibitions against tolling or commingling public and private funds.
As of August 2006:
21 states and one U.S. territory have passed legislation providing the legal authority for private sector participation in transportation projects to varying degrees; and,
38 states have laws allowing the use of design-build;
The development of projects using tolls or other forms of direct user charges may also require special legislation. In most states, the authority to develop toll roads is limited to special public authorities. New enabling legislation may be needed to expand and transfer these powers.
Even in states where P3 arrangements are not specifically prohibited in regulation, law or state constitutions, experience has indicated that specific state legislation can minimize the risks of litigation and delay.
Yes, P3s are used regularly in several sectors including: water and wastewater, education, health care, corrections, building construction power, parks and recreation, and technology. Additional information on the use of P3s in other sectors is available on the National Council for Public-Private Partnerships' website.
No. With design-build arrangements or partnerships that involve transferring traditional public agency functions, such as facility maintenance and operations to the private sector, the private sector partner is reimbursed directly by the responsible public entity on a fee, use level or performance basis.
No. However, any P3 project that involves private sector financing needs a dedicated revenue source to repay any underlying project debt. Direct user charges (tolls) are not the only potential source of debt repayment. Payments may also be provided by the government from either general revenues or specific taxes. Debt service payments can also be met through leasing arrangements, as with the Route 3 North project in Massachusetts.
When procuring highway projects, governments generally have two options for underwriting capital expenditures: tax revenues or user fees. The tax-based approach has traditionally been favored in the United States, Northern Europe and Japan, and involves using general tax revenues, earmarked fuel taxes or other dedicated taxes to pay for projects. Southern European nations such as France, Italy, Portugal, and Spain - together with many developing nations - have favored the use of user fees collected in the form of tolls to finance their infrastructure needs.
Transportation P3s were pioneered in Europe and by the 1990s, two types of partnership approaches had evolved. Under the more common "real toll" scenario, private concessionaires arrange financing, construct roadways, maintain them, service their debt, and derive revenue from tolls collected directly from motorists. One of the main benefits of the "real toll" concession approach is that it enables governments to tap into sources of private capital and avoid using public monies to build highways. Real toll P3 precedents established in France and Spain have been replicated in such diverse locations as Iceland, Malaysia, South Africa, Croatia, Australia, China and Brazil. An equally wide range of countries is now poised to launch ambitious surface transport partnership projects, including Poland, Romania, Lebanon, Egypt, and Austria.
As P3s have become more common, many governments have become eager to capitalize on the increased efficiencies of the private sector and have found that private developers deliver greater value for money. This has precipitated the "shadow toll" approach initially adopted in the United Kingdom, where governments award concessions to build-operate-maintain toll-free highways and then compensate the investors based on roadway usage and/or availability of those facilities. Privately-financed shadow toll highways are currently operational in the United Kingdom, Finland, Spain and Portugal.
In the United States, the private sector historically had an important role in highway construction operation and financing. Although the role of the private-sector in highway financing and operation declined in the mid-part of the 20th century, in the late 1980's, private-sector involvement in these cases reemerged. As Federal and State highway funding becomes more constrained, and as the need for highly efficient surface transportation systems continue to grow, the role of the private sector will continue to reemerge. As in Europe , transportation officials in the United States have been eager to find new ways to capture the efficiency and value for money that the private sector can provide. This has led to new forms of partnership in which public owners have transferred responsibility for activities, for which it has traditionally been responsible, to the private sector. These activities range from the maintenance and operations of individual highways or large highway networks to managing the financing and procurement of large highway capital expansion programs.
Maintenance and Operation Fee Service Contracts
Program Management Fee Service Contracts
Build-Operate-Transfer (BOT) / Design Build Operate Maintain (DBOM)
Asset management is a strategic business process and decision-making approach to managing the on-going maintenance needs of physical assets such as transportation infrastructure.
Asset management requires the use of outcome-based performance measures, and uses data-driven analyses to link those goals to a maintenance program. It involves the economic assessment of trade-offs among alternative maintenance investment options, and as such combines engineering and economic analysis to identify cost-effective investment decisions over an extended time frame.
Given the notion of long-term, life cycle efficiencies, asset management analysis often results in the use preventive maintenance techniques, rather than waiting for a highway, bridge or tunnel to deteriorate significantly before rehabilitating it. Asset management can result in significant cost savings over the life cycle of transportation infrastructure.
Given current budget limitations and the deteriorating condition of the nation's aging highway system, an increasing number of Departments of Transportation are using asset management practices. Asset management is also commonly employed in partnership projects because of the cost efficiencies it creates. Asset management practices can be used equally well by either the public or private sector.
There are a number of useful sources of information on transportation-related P3s provided in the Resources section of this website.