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P3 Toolkit

Guidance Documents

Establishing A Public-Private Partnership Program: A Primer

November 2012

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Chapter 4 - Legal and Statutory Issues

Before implementing a P3, States need to create a legal framework. P3 enabling legislation varies widely among States, but the basic goal is the same: to allow public entities to take advantage of the benefits of P3 project delivery while protecting the public interest. Some States provide broad authority for public entities to enter into and manage P3 agreements, while others strictly limit P3s to specific projects or project types and define the type of provisions that must or must not be included.

It is up to each State to determine the appropriate approach to legislation, starting with an understanding of the goals it is trying to achieve. Enabling legislation varies from State to State because policymakers consider the needs and goals of their constituencies and the unique political and institutional environment of their State. Policymakers often include language in legislation that reassures specific constituencies - such as tax-payers, road users, or road builders - that their interests are protected. There is a fine line, however, between prescribing processes or provisions intended to protect the public interest, and those that create inefficiencies or deter private sector interest.

Table 4-1 presents the factors that State policy makers may consider in creating a legal framework for P3s. It may be used to authorize or restrict who may enter into P3 agreements, how partners and proposals may be selected, and what types of agreements may be entered into. Other key issues that legislatures have attempted to address are:

  • Labor union issues;
  • Whether to approve a specific list of projects;
  • Whether to require approval of every project by the legislature vs. programmatic approval;
  • Whether to establish a pilot program vs. a permanent program;
  • The trade off in "loss of control" of assets by the State DOTs vs. the benefits from risk transfer to the private sector or funds received for existing "brownfield" facilities. (Note, however, that a strong case can be made that P3s will actually increase public control over the facility since they typically include clear performance standards and can make those standards enforceable via credible penalties and rewards; under traditional delivery a state would effectively have to penalize itself for poor performance, which is not a credible deterrent.)

As States gain experience in P3s, there is a growing body of literature, cases, and models that can serve as references in developing appropriate legislation. Drawing from these resources, the Federal Highway Administration and the law firm Nossaman LLP have created model legislation to serve as a guide.1 In addition, the National Conference of State Legislatures has developed a "Public-Private Partnerships Toolkit" that lays out a set of recommended principles for legislators to follow in making policy decisions.2 A recent paper3 finds that political sentiment, unionization rates, and traffic congestion are important predictors of both the passage of P3 legislation and of its favorability to private investment. It also finds evidence that fiscal stress leads states to adopt P3 enabling legislation.

Table 4-1. Legal Issues Commonly Addressed Through Statute, Policy or Contract
Issue Type Description
Primarily Statutory Issues: These issues are typically addressed through State legislation.
  • Types of P3 agreements allowed
  • Authority to enter P3 agreements
  • Authority to approve or review P3 agreements
  • Types of facilities allowed.
Issues typically addressed through Policy and/or Statute: These issues may be addressed in legislation, to authorize or clarify specific capabilities, as necessary, but the details are frequently addressed through program policy.
  • Types of financing/subsidies allowed
  • Public uses of proceeds
  • Ability to hire external advisors
  • Types of procurement allowed
  • Whether unsolicited proposals are allowed
  • Whether bidder stipends are allowed
  • Whether administrative fees are allowed
  • Whether to require performance security
  • Criteria to evaluate potential P3 projects
  • Criteria to select bidder
Issues typically addressed through Contract and/or Statute: These issues are typically addressed in contracts although the general parameters may be set by statute or policy.
  • Length of contract term
  • Toll rates and toll rate setting mechanisms
  • Allocation of risks
  • Revenue sharing
  • Dispute resolution
  • Buy back provisions
  • Refinancing provisions
  • Ongoing performance audits or reports

Federal Legislation: Special Experimental Project No. 15 (SEP-15)

SEP-15 is a new experimental process to identify, for trial evaluation, new P3 approaches to project delivery. SEP-15 is designed to allow the FHWA to identify regulations that currently inhibit the creation of P3s and private investment in transportation improvements, and to develop procedures and approaches to address these impediments. SEP-15 addresses, but is not limited to, four major components of project delivery: innovative contracting, compliance with environmental requirements, right-of-way acquisition, and project finance.

 

Footnotes:

1. Federal Highway Administration. www.fhwa.dot.gov/ipd/pdfs/legis_model_0610.pdf

2. National Conference of State Legislators. Public-Private Partnerships for Transportation: A Toolkit for Legislators. http://www.ncsl.org/research/transportation/public-private-partnerships-for-transportation.aspx

3. R. Richard Geddes. Why do U.S. States Adopt Public-Private Partnership Enabling Legislation? http://www.human.cornell.edu/pam/people/upload/Why-Do-States-Adopt-PPP-Leg-Dec-2010.pdf

 

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