1. What is a P3?
"Public-private partnerships" (P3) are contractual agreements formed between a public agency and private sector entity that allow for greater private sector participation in the delivery and financing 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 public agencies to tap private sector technical, management and financial resources in new ways to achieve public agency objectives. These objectives include greater cost and schedule certainty, supplementing in-house staff, innovative technology applications, access to 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:
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 conventional procurement methods.
2. What are the key benefits of P3s?
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, to provide incentives for maximum performance and flexibility necessary to achieve the desired results.
The primary benefits of using P3s to deliver transportation projects include:
3. How are risks and rewards allocated in public-private-partnerships?
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 which suggests how responsibilities for these risks are often assigned with P3 projects.
4. What activities can be included in transportation partnerships and how are they typically combined?
Public-private partnerships can be applied to a large range of transportation functions across all modes. These include:
These activities are typically bundled into contract packages reflecting the public agency's objectives related to: schedule and cost certainty; capturing technical expertise on constructability; innovative finance; or transfer of management and/or operational responsibility.
Typical procurement packages include:
As the use of P3s grows and diversifies , public agencies are executing different structures for P3 contracts. The services included are tailored to the programmatic, technical and financial needs of the project and public agency.
5. What types of financing mechanisms are available for P3s?
P3 projects are often undertaken to supplement conventional procurement practices by combining existing sources of revenue with new financing resources. New funding sources can reduce pressure on constrained budgets by replacing traditional public funds and/or delaying payments for the public sponsor. They also have the added effect of speeding up the construction timeline for projects that might have been delayed waiting for sufficient public funding capacity.
Some of the revenue sources used to support P3s include :
Some of the financing sources used to support P3s include:
The public agency may make payments to a private franchisee or concessionaire through various mechanisms, including:
Additional information on these financing approaches is available in the Project Finance section of the site.
P3 financings often involve the combination of federally-sponsored tools and private commercial debt. The following federal project finance tools and programs are available to public agency sponsors to make P3 projects financially viable and attractive investment opportunities for private sector developers:
Additional information on these tools is available in the Project Finance section of the site.
6. What are the incentives for public transportation agencies and private entities to form P3s?
From the public agency's perspective, the rationale for expanding the role of the private sector is to gain a range of benefits relevant to specific project needs. Projects are likely to benefit from P3s when tight schedules, complex design and construction, and/or financing gaps are involved. In such cases, P3s are beneficial because of their ability to provide:
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 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. While the expanded roles may introduce new risks (such as meeting fixed schedules and cost commitments), they also offer rewards in the way of expanded fee opportunities and returns on equity investments.
7. What entities can potentially be involved in a P3?
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 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, multi-state 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. These firms are in the business of developing and operating and maintaining responsibility for toll roads as an attractive opportunity for long-term equity investment.
8. Do the public and private sectors each have a unique set of goals when entering into a P3 agreement?
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 4) 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 into new and existing markets.
New forms of P3s can synergize 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.
9. How can P3s be structured to achieve public agency objectives?
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 3). 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:
10. How do public agencies procure P3 projects?
Public agencies generally determine the scope of a P3 based on their specific transportation needs and policy objectives. The first step in this process 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.
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 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.
11. How and when do P3s depart most substantially from traditional project delivery practices?
P3s depart most substantially from conventionally developed projects when they are financed with private commercial debt or equity that is to be repaid from project-derived direct user charges (e.g., tolls) - 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.
12. Is special expertise required for a public agency to execute a P3?
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 experienced state or local agencies, or outside financial and legal experts that can guide the sponsor through complicated issues in the procurement process.
13. How do federal regulations affect P3s?
In the past, a number of federal regulations had the potential to constrain the use of P3s. These constraints were revisited as part of recent transportation reauthorizations, Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) enacted in 2005, and Moving Ahead for Progress in the 21st Century (MAP-21), enacted in 2012. Prior to SAFETEA-LU and MAP-21, t he major constraints were two-fold:
MAP-21 relaxed (to a small extent) prior prohibitions outlined in the Section 129 General Tolling Program. Public agencies may impose new tolls on the federal-aid highway system in the following cases, most of which were permissible under prior legislation:
Public agencies no longer have to execute a tolling agreement with FHWA to impose tolls on federal-aid highways as of October 1, 2012. MAP-21 also includes provisions for imposing tolls on high-occupancy vehicle (HOV) lanes that are converted high-occupancy toll (HOT) lanes, as well as four toll pilot programs managed by FHWA prior to MAP-21.
SAFETEA-LU expanded eligibility for private activity bond use to highways and freight transfer projects , and imposed a $15 billion volume cap. Private activity bonds used for highway improvement projects have tax-exempt status, making them an attractive source of low-cost financing. All these provisions were unchanged in MAP-21.
14. Is special state legislation required for P3s?
Special state legislation is generally required for P3s. Legislation varies from allowing broad application of all forms of P3s and granting authority for the state DOT or other public agency to enter into agreements without further legislative approvals, to allowing only the use of design-build contracts, to constraining how public and private funds can be commingled on a project.
As of January 2013 :
As of October 2012:
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, and new enabling legislation may be needed to broaden the use of 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. This may be true for projects that span two or more states, where each state has varying levels (or none) of P3 enabling legislation.
15. How has the use of P3s changed after the financial crisis in 2008?
Prior to the 2008 financial crisis, the consideration of P3s in the U.S. and the execution of deals was increasing. This trend has not slowed, but what has changed is that credit markets are tighter and many public agencies have reduced revenues at their disposal. These circumstances affect decisions on how to structure P3 transactions, as well as the mix of revenue and financing. Tight credit markets have made it harder and more expensive to secure long-term private commercial debt, especially when backed by direct user tolls that carry the uncertainty of forecasted traffic volumes. Accordingly, federal innovative financing programs, such as TIFIA and PABs have seen greater demand. TIFIA in particular has seen a boost in popularity that has led to oversubscription of the program for the past few years. In response, MAP-21 has expanded TIFIA's lending capacity, which was boosted to $750 million in FY13 and $1 billion in FY14, and the percentage of project costs that may be covered by TIFIA has been expanded to 49%.
Some public sector project sponsors are also using availability payment structures that shield P3 investors from traffic risk. Availability payment concessions involve fixed payments to the private partner for the duration of a designated concession period. The payments are usually tied to performance measures in order to incentivize the private partner to maintain operations standards. As state and local agencies face reduced budgets due to diminished tax revenues, they are considering alternative revenue sources such as sales tax measures, gas tax increases and value capture techniques to leverage additional revenue for transportation needs.
16. Are P3s used in other sectors?
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.
17. Do all transportation P3s involve financing?
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.
18. Do all transportation P3s involve direct user charges?
No. However, any P3 project that involves private sector financing needs a dedicated revenue source to repay any underlying project debt and provide a return on equity. Direct user charges (tolls) are not the only potential source of debt repayment. Payments, in the form of completion payments, shadow tolls or availability 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.
19. What is the history of P3s?
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.
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 continues to grow, the role of the private sector will continue. 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 to the private sector responsibility for activities for which it has traditionally been responsible . 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.
20. What are some recent examples of transportation P3s in the United States?
See the project profiles section of the P3 website for project examples.
21. What is asset management?
Asset management is a strategic business process and decision-making approach to managing the ongoing 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 timeframe.
Given the notion of long-term, lifecycle 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 lifecycle 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 (although this may be constrained by annual budgetary appropriations in the public sector).
22. What are the best sources of information on transportation-related P3s?
There are a number of useful sources of information on transportation-related P3s provided in the Resources section of this website.