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Challenges and Opportunities Series: Public Private Partnerships in Transportation Delivery

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Availability payment - Under this P3 financing arrangement, the public entity agrees to make regular payments to the private entity based on the facility’s availability and level of service achieved for operations and maintenance. Unlike shadow tolls, availability payments do not depend on traffic volume (see "shadow toll"). In the United States, availability payments are more common for transit projects. Florida’s I-595 Managed Lanes project is the first U.S. highway project to use this approach.

Bid stipend - a payment made by a public agency to a bidder on a particular contract to encourage competition or offset transaction costs. Stipends can also be used to compensate losing bidders for specific concepts proposed in their bid that may be incorporated into the final design of the project.

Bond - refers to a negotiable note or certificate which evidences indebtedness. It is a legal contract sold by one party, the issuer, to another, the investor, promising to repay the holder the face value of the bond plus interest at future dates.
Bondholder - the owner or keeper of a bond, to whom repayment is issued.

Cash flow waterfall - defines the order of priority for project cash flows as established under the loan and financing documents. In a typical cash flow waterfall, dedicated revenues are used to pay for project costs and debt repayments before other parties derive benefits from the project. This ensures that project debt and maintenance are covered before surplus revenues are used to pay back investors or shared with the public sector.

Concession - A P3 project delivery structure involving a lease of an existing public asset to a private concessionaire for a specified period of time. Generally, the concessionaire agrees to pay an up-front lump sum fee to the public agency in exchange for the right to collect availability payments or direct revenue generated by the asset over the life of the contract (typically 25 years to 99 years). The concessionaire agrees to operate, maintain and/or improve the facility during the term of the lease.

Concessionaire - the private-sector party to a concession agreement.

Debt Service Coverage Ratio (DSCR) - the ratio of cash available for debt servicing to interest, principal and lease payments. A DSCR of 1.0 suggests that there is exactly enough revenue to cover debt payments, while a ratio above 1.0 (e.g., 1.2) reflects the fact that revenues exceed debt payments and a ratio below 1.0 (e.g., 0.95) reflects the fact that revenues are not sufficient to cover debt payments.

Design-Bid-Build (DBB) - the traditional procurement approach for transportation projects in the United States, in which the design and construction of a facility are sequential steps in the project development process and each activity is bid separately. This is not a P3.

Design-Build (DB) - a procurement or project delivery arrangement whereby a single entity (a contractor or team of contractors) is entrusted with both design and construction of a project. This contrasts with traditional procurement where one contract is bid for the design phase and then a second contract is bid for the construction phase of the project. Potential benefits can include time savings, cost savings, risk sharing and quality improvement.

Design-Build-Operate-Maintain (DBOM) - a project delivery structure that includes not only design and construction into a single contract, but also the operations and maintenance of a facility.

Design-Build-Finance-Operate-Maintain (DBFOM) - a project delivery structure that includes include some private financing of the design, construction, operation and/or maintenance of a facility. Under a DBFOM, the public sponsor retains ownership of the facility and uses revenues generated from operation of the facility (such as tolls) to repay the private and other financing used to construct it. Potential benefits include transfer of financial risk to the private contractor.

Discount rate - a percentage representing the rate at which the value of equivalent benefits and costs decrease in the future compared to the present. The discount rate is used to determine the present value of future benefit and cost streams.

Equity - commitment of money from public or private sources for project finance, with a designated rate of return target.

Equity investor - an investor that has contributed towards the financing of a P3.

Hand back provision - the terms, conditions, requirements and procedures governing the condition in which a private partner is to deliver an asset to the public sector upon expiration or earlier termination of the agreement, as set forth in the contract.

Innovative finance - alternative methods of financing construction, maintenance, or operation of transportation facilities. The term covers a broad variety of non-traditional financing, including the use of private funds or the use of public funds in a new way, such as in a P3 agreement.

Internal Rate of Return (IRR) - interest rate that equates the present value of the expected future cash flows net of on-going costs for operations, maintenance, repair, reserve funds, and taxes, to the initial capital cost outlay or investment. This is the rate at which the net present value of the project equals zero.

Junior debt - debt having a subordinate or secondary claim on an underlying security or source of payment for debt service, relative to another issue with a higher priority claim.

Lease - see "Concession."

Lender - the issuer of debt.

Lifecycle cost - the total cost from a project’s inception to the end of its useful life.

Municipal bond - interest bearing obligations issued by state or local governments to finance operating or capital costs. The principal characteristic that has traditionally set municipal bonds apart from other capital market securities is the exemption of interest income from Federal income tax.

Net Present Value - the difference between the present value of the benefits and the present value of the costs of a project, including capital investment, maintenance and any other costs)

Non-compete clause - In P3 agreements, non-compete clauses prevent the public sponsor from building or improving highways or other transportation facilities that might provide a competing route for traffic on a privately leased toll road. Such clauses are used to help reduce revenue risk for the private toll road operator, but have been criticized for limiting the public sector’s ability to deliver needed transportation infrastructure.

Performance measure - outcome-based metrics used to specify standards in a P3 agreement. These measures are used throughout all phases of project, and enable the public sector to determine specifications that the private sector must meet in order to be in compliance with the terms of the contract. Failure to perform to these standards may result in a compensation event, whereby the private-sector party is penalized a sum of money. Adherence to these measures may result in a reward for the private-sector party.

Private capital - equity contributed to a P3 project by the private sector partner, with a designated rate of return target.

Privatization - the full transfer of public infrastructure to the private sector. This is distinct from a P3, in which ownership remains in the public sector.

Private Activity Bond (PAB) - a form of tax-exempt bond financing that can be issued by or on behalf of state or local governments for privately developed and operated projects, such as P3s. This gives private entities access to tax-exempt interest rates.

Public-Private Partnership (P3) - a contractual agreement formed between public and private sector partners, which includes private sector financing and allows for more private sector participation than is traditional. The agreements involve a government agency contracting with a private company to renovate, construct, operate, maintain, and/or manage a facility or system. The public sector retains ownership of the facility, however the private party may be given additional decision rights in determining how the project or task will be completed.

Public Sector Comparator (PSC) - an objective assessment of project costs if delivered by the public sector under traditional procurement processes, against which potential and actual private sector contract bids and evaluations may be judged.

Revenue - the proceeds generated by a P3 facility, usually in the form of tolls.

Revenue bond - instruments of indebtedness issued by the public sector to finance the construction or maintenance of a transportation facility. Revenue bonds, unlike general obligation bonds, are not backed by the full faith and credit of the government, but are instead dependent on revenues from the roadway they finance.

Risk - an uncertain event or condition that, if it occurs, has a positive or negative effect on a P3 project's objectives.

Risk allocation - the process of attributing or transferring risk between the public and the private parties within a P3 contract, generally to the party best able to manage that particular risk.

Risk premium - an additional required rate of return that must be paid to investors who invest in risky investments to compensate for the risk.

Senior debt - debt obligations having a priority claim on the source of payment for debt service.

Shadow toll - also known as pass-through tolls. Under this P3 financing arrangement, the sponsoring public agency agrees to make payments to the private operator based on usage of a facility, which gives the private sector an incentive to maximize volume. Thus, shadow tolls are not paid by facility users. Shadow tolls are similar to availability payments, except that shadow tolls depend on traffic volume (see "availability payments").

Special purpose vehicle (SPV) - a corporate body (usually a limited company of some type or, sometimes, a limited partnership) created specifically to implement a P3 project, primarily to isolate risks.

Subordinate debt - see "junior debt."

Transportation Infrastructure Finance and Innovation Act (TIFIA) - this program provides federal credit assistance in the form of direct loans, loan guarantees or standby lines of credit to public or private sponsors of major surface transportation projects, including P3s. The program’s goal is to leverage federal funds by attracting substantial private and other non-federal co-investment in transportation infrastructure.

Unsolicited proposal - a proposal by the private sector that does not come as a result of a public sector solicitation. Unsolicited proposals may often result from the identification by the private sector of an infrastructure need and opportunity that may be met by a privately financed project. Such projects may also involve innovative proposals for infrastructure management and offer the potential for transfer of new technologies.

Value capture - arrangements in which the private sector contributes financial or other resources in exchange for benefits, such as increased property values, resulting from public investment in transportation improvements. Examples include development impact fees, joint development agreements (usually used for transit projects), tax increment financing, air rights development and assessment districts.

Value for Money (VfM) - the estimated project cost savings associated with using a P3 delivery approach, accounting for all project factors throughout the full lifecycle of the asset and length of the contract.


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