USDOT Federal Highway Administration USDOT Home | FHWA Home | Feedback
Skip to main content

P3 Toolkit

Guidance Documents

Establishing A Public-Private Partnership Program: A Primer

November 2012

« Previous | Table of Contents | Next »

Chapter 6 - Conducting Procurement

Key issues that public agencies must consider in this phase are:

  1. How to structure a commercially viable P3 agreement that achieves policy goals, optimally allocates project risks, and brings value to the investment;
  2. How to conduct a fair and competitive procurement to select the best partner and negotiate a final agreement that is transparent and protects the public interest while addressing the private partner's concerns; and
  3. How to ensure transparency throughout the procurement phase and over the life of the P3 agreement.

Structuring Project Agreements

Once public agencies have identified a project as having the potential to be delivered as a P3, they can prepare a project for procurement. This typically involves scoping and preliminary engineering work for the project and specifying elements of the agreement.

Agencies typically develop the conceptual structure of an agreement before procurement. The optimal structure of an agreement depends on the characteristics of the project, the goals and capabilities of the public agency, and the incentives and capabilities of potential private partners. Key elements include allocation of responsibilities and risks, financial considerations including compensation mechanisms, and concession term (all discussed in the previous Chapter); and performance standards and performance management processes (discussed in the next Chapter).


Given the risks and complexity involved in using non-traditional methods of transportation project delivery, choosing the best partner(s) requires due diligence on the part of the public sector. Because of the size, complexity, and length of term of P3 agreements, special procurement processes are needed to ensure there is sufficient and qualified competition.

Unsolicited Proposals

Public agencies may use unsolicited proposals as a way of accessing private sector ideas about potential projects that could be commercially viable. Agencies that allow unsolicited proposals have developed various processes to introduce competitiveness and transparency into the procurement process.

Industry Outreach

A public agency may conduct industry outreach to gain a better understanding of private sector capabilities and interests with regard to a particular project. This process may occur prior to the procurement process or once an agency has selected a short list of qualified bidders. This can help an agency understand how to structure a commercially viable project that will generate competitive bids. Agencies may hold information-sharing meetings or workshops with industry representatives in order to describe the basic attributes of the project and of the potential agreement and to obtain participant feedback. Agencies may also issue a formal Request for Information (RFI) as a precursor to procurement.

Multi-Phase Procurement Process

To create a competitive and fair procurement environment, agencies often use a multi-stage, "best value" procurement process that includes a request for qualifications (RFQ), followed by a request for proposals (RFP) and then by negotiations with the preferred bidder. Figure 6-1 illustrates how this process could occur.

Figure 6-1 Example of a Multi-Phase Procurement Process.

Figure 6-1 Example of a Multi-Phase Procurement Process.

Request for Qualifications (RFQ)

The agency can use an initial procurement period to prequalify bidders by issuing a request for a letter of interest or a request for qualifications (RFQ) from prospective bidders. The RFQ typically asks prospective bidders to provide information demonstrating:

  • Technical capacity to meet project performance specifications;
  • Past performance on similar projects; and
  • Financial capacity to complete the project.

In addition, the RFQ may ask for a conceptual project development plan and/or a conceptual project financial plan.

Request for Proposals (RFP)

After selecting qualified bidders through the RFQ process, the agency invites those short-listed qualified bidders to submit a binding bid through a Request for Proposals (RFP). Bidders are typically required to submit a proposal that includes both technical plans for how the project will meet the design, construction, maintenance and operational requirements as well as a financial plan demonstrating the financial feasibility of the proposal.

Bid selection can be based on different criteria, such as the dollar value of the offer, the lowest subsidy or availability payment required, the lowest proposed length of the concession term, or the lowest net present value of gross revenues required. The selection of the preferred partner may be based on the bid price in conjunction with qualitative factors ("best value").

A well-structured procurement should generate competition and allow the public agency to select the partner that will best help the agency meet the project goals. Bidding firms may spend more than one percent of the bid value to develop bids. They are more likely to place a bid if they have confidence that the procurement process will be fair and that it will be seen through to completion. In addition, most bidding processes are structured so that the public agency can use design ideas contained in one proposal while selecting a different bidder. To encourage competition, defray bidding costs, and compensate proposers for the value of ideas that might be used, some public agencies offer stipends to pre-qualified bidders. Bid stipends rarely, if ever, cover the entire cost of a proposal, and the value of an idea that is used in another proposal may be well in excess of the stipend amount.

Negotiation with the Preferred Bidder

The basic elements of the concession are usually either established early in the procurement process, and are the same for all bidders, or bidders are allowed to use them to differentiate themselves in the bidding process. In the U.S., provisions that are left to negotiation generally relate to the implementation, oversight, and monitoring details of the concession. The negotiation stage generally does not include negotiations on key commercial issues or scope. These are identified during the bidding process, so that all bidders have the opportunity to provide a bid on similar terms.

Negotiations with the preferred bidder can allow both parties to establish a mutually-agreeable, project-specific solution to issues identified after the procurement process. This requires skilled legal counsel with expertise in developing long-term, enforceable agreements between the public and private sectors. The negotiation process can help to ensure mutual understanding of both parties regarding the details of an agreement and the smooth implementation and oversight of a project.

However, there are potential disadvantages to addressing items in negotiations with the preferred bidder. For one, the bargaining position of the public partner may be diminished at this point in the process due to substantial sunk costs in procurement. Secondly, there may be a perception of unfairness if the items negotiated are basic elements of the concession that could have changed the outcome of the selection process. For example, if provisions regarding revenue share or concession length are left to negotiation after selection of a successful bidder, other bidders who might have been willing to offer higher levels of revenue sharing or shorter concession terms than the preferred bidder offered might feel that they were unable to offer their best value in the competition.

Details of agreement provisions that may be subject to negotiation with the preferred bidder include:

  1. Compensation structure (payout schedule, revenue sharing provisions, and subsidies). Issues that may be negotiated regarding the compensation structure include: when, how, and under what circumstances the concessionaire will receive payments; what portion of revenues will be shared at what revenue levels; and the degree to which the public sector will contribute to the project with grants, in-kind donations, tax breaks, or public financing.
  2. Risk sharing and mitigation measures. While the risk allocation is generally specified by the public agency in the procurement process, the precise performance measures and mitigation processes for specific risks may be subject to negotiation.
  3. Toll rate setting mechanism. Toll rate setting mechanisms may include defined toll rate schedules, maximum annual percentage increases (often tied to inflation or GDP increases), or regulatory review and approval of proposed rate increases.
  4. Performance standards and measures. P3 agreements typically set output- and outcome-based performance standards and management regimes for enforcing standards, as discussed in the next Chapter. These standards may be subject to negotiation.
  5. Termination/buyback provisions. The rights to terminate the contract and the conditions under which those rights may be invoked are typically negotiated in the final contract. In the event of early termination, mechanisms are usually described in the contract to ensure that the harmed party is compensated for any losses or for the residual value of the asset.
  6. Refinancing provisions. The concessionaires may refinance a project once the project is well established and uncertainty diminishes or operational efficiencies are established. Also, changing macroeconomic conditions such as declining interest rates can make refinancing attractive. Refinancing can result in greater returns to equity from interest rate reductions, extensions of debt maturity or increases in the amount of debt. Contract provisions related to refinancing may include a negotiated share between the public and private partner in the gains made from refinancing.

Ensuring Transparency

There have been criticisms of P3 deals being rushed through without the public or their elected officials understanding the implications. Transparency should be ensured during the procurement process as well as throughout the life of the P3 agreement. The Regional Plan Association12 suggests full disclosure of:

  • Current and proposed contract standards;
  • Toll policy;
  • Use of toll revenue for other investments;
  • Non-compete clauses or other potential limitations in making infrastructure improvements; and
  • Transaction costs incurred by the public sector.

The Virginia Department of Transportation (VDOT) has developed a process to review P3 submissions that incorporates transparency and public participation13. P3 proposals are reviewed by an independent review panel comprised of members from stakeholder groups, and affected jurisdictions receive the proposals and have a 60-day period to review them and submit comments.

Auditors can play an important role in the procurement of P3 projects. FHWA's report on audit stewardship recommends14:

  • Use of a process auditor for each project;
  • Conducting audits throughout the project life cycle;
  • Involving internal audit staff and financial experts early in the tendering process to improve the quality of the RFP; and
  • Specifying outcomes desired.

The report notes that States need to develop in-house capabilities to negotiate with and oversee private sector partners. Non-in-house auditors and consultants may potentially have clients on both sides of an agreement and therefore may have conflicts of interest. To develop in-house expertise, a public agency may task any consultants hired by them to assist with a P3 procurement to also train its in-house staff.

While public scrutiny of decision-making is important to accountability of government spending, it is also important to maintain confidentiality during the proposal process, in order to provide bidders with incentives to deliver innovative designs at the lowest possible cost and thus ensure a competitive tendering process. The public sector should be clear up-front about what type of information should remain confidential and provide an explanation as to why confidentiality is necessary during the proposal process. Temporary confidentiality could be balanced with full disclosure of selection criteria, scoring, and agreements.



12. Regional Plan Association. Proceed with Caution: Ground Rules for a Public-Private Partnership in New Jersey. White paper, January 8, 2007.

13. Buxbaum, Jeffrey N. and Iris N. Ortiz. Public Sector Decision Making for Public-Private Partnerships: A Synthesis of Highway Practice, NCHRP Synthesis 39. Transportation Research Board, 2009.

14. Jeffers, J.P. et al. Audit Stewardship and Oversight of Large and Innovatively Funded Projects in Europe. FHWA-PL-07-001. Federal Highway Administration, Washington, DC, 2006.


« Previous | Table of Contents | Next »