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|Federal Highway Administration > Publications > Public Roads > Vol. 69 · No. 3 > Working With the Private Sector to Meet Transportation Goals|
Publication Number: FHWA-HRT-05-001
Working With the Private Sector to Meet Transportation Goals
by Jim March
A panel discussion explored increasing the use of public-private partnerships for highway projects.
Increasingly, the public sector is looking to the private sector for creative, cost-saving solutions to complex transportation problems. Private-sector involvement in design-build projects, intelligent transportation systems, emergency relief, and other program areas has led to such innovations as longer lasting pavements, prefabricated panels, and even seatbelts.
As Federal and State highway funding continues to be stretched and as needs for efficient surface transportation systems continue to grow, transportation officials are looking for new ways to capture the efficiency and value provided by private industry. The Federal Highway Administration (FHWA) and the U.S. Department of Transportation (USDOT) believe that public-private partnerships can contribute to reducing traffic congestion, improving the quality of the Nation's transportation system, and increasing the efficiency of the operation and maintenance of the system. FHWA and USDOT are examining opportunities for increasing private-sector involvement in transportation projects, plus potential challenges. Public-private partnerships (PPPs) are defined as contractual agreements that allow more private-sector participation and investment than is traditionally the case.
The USDOT December 2004 Report to Congress on Public-Private Partnerships indicates that public-private agreements usually involve a government agency contracting with a private company to renovate, construct, operate, maintain, and/or manage a transportation system or facility. Although the public sector usually retains ownership of the facility, the private party is typically given additional responsibility for determining how the project or task will be completed or how a particular facility or system of facilities will be operated and maintained. PPPs might be applied to a range of transportation functions, including project origination and conceptualization, design, financial planning and finance, construction, operation, maintenance, toll collection, and program management.
To explore the role of PPPs in more detail, the Transportation Research Board (TRB) hosted a forum titled "Let's Make A Deal!--Fostering Partnerships for Critical Transportation Projects" on January 10, 2005. The session was structured as an open forum between USDOT and private-sector representatives involved in project financing and delivery, focusing on how the parties need to think creatively and strategically to advance critical surface transportation projects through PPPs.
"®There are some remarkable, albeit underreported, examples of where the private sector has really come in and helped us innovate," said former Federal Highway Administrator Mary E. Peters during the meeting. "Market forces will give us more options, and I think we can complete projects significantly sooner than we otherwise would."
At the TRB meeting, Peters posed a series of questions to the five panel members: (1) Geoffrey S. Yarema, chair, infrastructure practice group, Nossaman Guthner Knox & Elliott LLP (Nossaman); (2) James T. Taylor II, managing director, public finance, Bear, Stearns & Co. Inc. (Bear Stearns); (3) Allan Rutter, then-deputy and now executive director, North Texas Tollway Authority (NTTA); (4) Robert Prieto, senior vice president, Fluor® Corporation (Fluor); and (5) D.J. Gribbin, former chief counsel, FHWA.
How would you define a successful public-private partnership?
Although the definition of a PPP is clear, the definition of a successful PPP is more subjective. The panelists' responses varied based on their unique perspectives; all agreed, however, that successful PPPs are those that produce the maximum value for the traveling public.
Geoffrey Yarema (Nossaman): "Success is when the public sector involves the private sector in delivering sufficient added value for the sponsoring agency to justify deviating from standard procurement and contracting procedures. That added value can come in many forms: new sources of funding, creative financing techniques, operating efficiencies, accelerated project delivery, reduced life-cycle costs, and innovation in project definition and design."
"By the very nature of PPPs, the private sector takes on more project risk, and the public sector takes on more political risk. Profit is not guaranteed for the private sector, and policy issues--such as public dissatisfaction with the protections given to the private sector--may prove to be controversial for the public sector. But success for both private and public sectors should be defined in terms of progress and quicker, more efficient project delivery--not in terms of a friction-free or loss-free environment."
Allan Rutter (NTTA): "Success is when the end user gets more out of the facility in terms of design, materials, and/or the implementation timeframe because the private sector was involved."
D.J. Gribbin (FHWA): "If you end up with a quality project constructed quicker and at less cost, then you have a successful project. Additionally, from a Federal standpoint, a successful project is one that advances knowledge, such as the Chicago Skyway, which people were able to learn from and apply that learning elsewhere."
Bob Prieto (Fluor): "A successful PPP delivers the maximum infrastructure for the lowest cost to both the taxpayer and the user. Three financial measures can be used to assess whether maximum public infrastructure is being provided. The first is the net present value, or the lowest compliant bid for the infrastructure and project objectives. The second is affordability, to the extent that there's a government subsidy or a user that is able to afford the facility. The third is a comparison of costs between those of the PPP model versus those of a traditional government approach.
"Successful PPPs also require appropriate risk-weighted returns. This doesn't mean that every return and every investment will produce the kind of return you want. But both the public sector and private sector need to make those risk judgments and set return levels that make it worth taking the risk."
"Finally, successful PPPs must protect the interest of the public. By this, governments need to ensure that pricing systems reflect broader societal objectives, which may influence their decisions about how to buy facilities, or the kind of subsidy they're willing to provide."
How would you define an environment that is attractive to successful public-private partnerships?
FHWA and USDOT want to remove obstacles to the formation of public-private partnerships, and also to create incentives for the promotion of PPPs. How to create an environment that is conducive to successful PPPs was the second topic discussed by the panelists.
D.J. Gribbin (FHWA): "From a big picture perspective, some significant statutory changes are needed at the State level. We have 18 States that have no provisions even allowing the design-build project delivery method. There are a large number of States that also prohibit tolling. This needs to change."
"Another significant change that's needed is for us to allow markets to work in the transportation sector the way they do in every other service. The notion that we should be able to travel unimpeded by tolls seems to be very much a part of the American personae, but that line of thinking-when applied to the current highway system--creates a number of economic price distortions that don't serve American drivers very well in the long run. If we're going to create an environment to attract PPPs, we need prices to create a market to allow the private sector to play a larger role. We're starting to see some changes in this area, with Interstate 15 and the congestion pricing that's been used around the country, like S.R. 91 [State Route 91 Express Lanes in Orange County, CA]. Also, Minnesota is now looking at the whole network of variable price lanes, and Maryland is considering express toll lanes."
Allan Rutter (NTTA): "We need to understand what markets are and what they're not. In the marketplace, people make mistakes and pay the price. But people in the public sector, particularly engineers, grow up to be risk averse--because we don't want things to fall apart. Yet, things do fall apart--pavements don't last as long, soil behaves in weird ways--and risks are taken every day. Within the marketplace, the transportation community needs to allow itself to make mistakes, to not fear retribution, and to learn from those mistakes by fixing supply and delivery."
Jim Taylor (Bear Stearns): "State DOTs [departments of transportation] should receive resources from the Federal Government or their legislature to properly pursue PPPs. Additional support staff and access to outside expertise are often needed to level the playing field in negotiations with the private sector."
Geoffrey Yarema (Nossaman): "We have our own internal checklist to determine whether a PPP [would] work in a given case. First, the community needs to want the project and be willing to have it tolled, or accept whatever other financial mechanisms are being used to pay for it.
Second, the project needs to be one that can be environmentally cleared in a relatively short period of time. In addition, legal authority and bipartisan political support for PPPs are needed, as is the support of DOT senior management. In terms of the procurement selection process, it must be fair, transparent, and competitive, and carefully designed to ensure that the private partner delivers what the public agency is seeking. Also, the process must not create public perceptions of conflicts of interest or abuses of the system. Finally, the contract terms also need to be fair, reasonable, and reflect an appropriate balance between public and private concerns."
Bob Prieto (Fluor): "There are four key things we look for in identifying opportunities. The first is political will at the level of the executive office and/or legislature, which is needed for the tough decisions to get made and the project cycle to proceed in a timely manner.
Second, there must be good legislation. From my perspective, one key characteristic of good legislation is the ability to submit an unsolicited proposal, because it provides for maximum innovation. Third, the procurement process must be transparent, with objective criteria.
Fourth, the agency involved--be it the State DOT or other transportation authority--must embrace change to reap the full benefit of the innovation that the private sector can bring."
What is the appropriate role of the Federal Government in encouraging public-private partnerships?
FHWA has already taken a number of steps to promote PPPs. For example, in 2004, FHWA published a report to Congress on PPPs and created a new Special Experimental Project (SEP-15) to explore alternative and innovative approaches to the overall project development process. SEP-15 enables FHWA to identify new PPP approaches to project delivery for trial evaluation, addressing (but not limited to) four major components of project delivery: (1) contracting, (2) compliance with environmental requirements, (3) right-of-way acquisition, and (4) project finance. Also, in 1998, the Transportation Infrastructure Finance and Innovation Act (TIFIA) established a new Federal program under which USDOT may provide credit assistance to major transportation investments. The TIFIA program is designed to fill market gaps and leverage substantial private coinvestment by providing supplemental and subordinate capital and credit rather than grants.
The panelists offered additional ideas on how the Federal Government can foster more PPPs in the transportation sector.
Jim Taylor (Bear Stearns): "Although there may be a role for the Federal Government in pushing PPPs, we need to be careful because some Federal initiatives to promote innovative finance in the past have had unintended consequences. For example, in the late 1980s and early 1990s, a number of successful project development efforts were undertaken by people who recognized that there was not going to be any money coming from Federal or State Governments for some important projects. They found ways to get the projects done without private activity bonds or special legislation. But much of that activity stopped after TEA-21 [Transportation Equity Act for the 21st Century], because it was much easier to use GARVEE bonds [Grant Anticipation Revenue Vehicles--a type of project financing issued by a number of States that uses financing mechanisms involving the payment of future Federal-aid highway funds to retire debt] to fund projects, for example, than to embark on a 2-year development effort for standalone project financing. Likewise, we had a number of contractors who were willing to put money into projects prior to TIFIA, but now project sponsors question why they should accept expensive private investment when they can secure better terms on a TIFIA loan from the Federal government. Although not the intent of GARVEEs or TIFIA, these initiatives did result in a hiccup in private-sector involvement in transportation infrastructure finance."
Geoffrey Yarema (Nossaman): "I feel strongly that we need Federal tools--such as GARVEE bonds, TIFIA, and private activity bonds--that save money and make deals more efficient. The idea is to line up as many tools as possible and optimize them for your particular project, not to use them just because they're there. You don't use a hammer when you need a screwdriver."
"I think that the role being played by FHWA in providing grants, Federal credits, and environmental assessments to the States is right on. FHWA should continue to remove procurement restrictions and allow the States significant flexibility to experiment, such as through SEP-15. Allowing long-term private operations and warranties, as well as a combination of private equity, tax-exempt debt, and long-term operations, is also critical. Administration support of private activity bonds programs should be continued, and toll credits should be expanded to create additional incentives for toll implementation. Finally, the Federal Government should continue its leadership in articulating the vision of advancing PPPs."
Bob Prieto (Fluor): "I don't think the Federal role is to legislate, regulate, or mandate. Rather, the experimentation that's occurring now is absolutely essential. That said, I do think there is a role to be played by the Federal Government. SEP-15 is a great tool, and moving forward, the Federal Government can help facilitate the sharing of best practices and lessons learned, and help States identify the 'must haves' in a contract. Environmental streamlining for all capital projects--not just PPPs--should also be promoted, and some kind of a risk-weighted facility should be created, such that Federal money can be advanced to the States and repaid with a return following financial close. This type of risk-weighted facility would free the States from worrying about their annual budget cycles and effectively accelerate the process."
Allan Rutter (NTTA): "The USDOT Report to Congress on Public-Private Partnerships is important because it provides information about experiences, even if they're not all glowing successes. Many States want to pursue PPPs but are afraid, so they need to see what others are doing in this area. The States that don't have any experience are actually in the best position--they can learn from everybody else's mistakes and cherry-pick all the best and most effective approaches."
D.J. Gribbin (FHWA): "I also think FHWA can help the public-private process through knowledge sharing. Currently, we have a contract to create both draft model legislation for States and a draft contract for an innovative project. This draft contract will address many different issues, including the risks of greater private-sector involvement, which is important given that many CFOs [chief financial officers] have never negotiated these types of contracts." The draft legislation is available online at www.fhwa.dot.gov/ppp/.
What areas of expertise do public and/or private sectors need to develop to maximize the potential for successful PPPs?
The procurement, management, and implementation of a PPP require special expertise at various levels, which may be different from the sets of skills and experiences of existing workers in the public and private sectors. The panelists provided insights into the types of expertise that both sectors will need to maximize the potential for successful PPPs.
Allan Rutter (NTTA): "To start, a rudimentary understanding of project finance is needed. For example, many people in transportation agencies are clueless when it comes to what a bond is or how to do project finance. They don't have to become experts, but they do need to understand the terms and know the risk factors. Agencies need to come up with a team [of experts] who know what they're doing, who understand the owner's perspective, and who can negotiate such that both sides can get something out of it."
Jim Taylor (Bear Stearns): "State DOTs need to develop a clear vision before they can figure out how public-private partnerships fit into their long-term strategies. If they focus only on getting a certain project done without having a vision of where they're going, they'll end up taking detours. I think DOTs need tools to help them articulate their vision to both the legislature and the general populace, so that then they can evaluate any given initiative in the context of getting them closer to their ultimate goal."s
Geoffrey Yarema (Nossaman): "State DOTs need someone to run the project or program who is well respected within the DOT senior management and the legislature. Although this role does not need to be filled by a chief engineer, it does require someone with the ability to command the respect of the line engineers so they don't form a wall that the program can't get through. Additionally, the role requires someone who thrives 'outside the box' and is somewhat of a natural leader-because almost by definition, they're going to have a newly formed team."
"On the other hand, the private sector needs to have a very soft touch when it comes to dealing with local stakeholders, public officials, and community concerns. Also, thought needs to be given to organizational conflicts of interest, which have arisen in the past, and there is a need for long-term operations and asset management services. However, it remains to be seen whether U.S. industry is ready to reengineer itself to pursue such services, as this would entail an increase in the ability to predict costs, long-term liability, and balance-sheet risk."
Bob Prieto (Fluor): "The public sector needs to add a set of skills to assess total taxpayer impact. This is not a financial evaluation; it's an economic calculation, which requires a different type of analysis. If PPPs are to have a long-term future at the State level, their economic benefits are going to have to be demonstrated."
"On the private-sector side, you need a strong set of financing skills and a firm understanding of the available tools (such as GARVEE bonds, TIFIA) to determine which will provide the best risk-weighted return for you and your public-sector partner."
D.J. Gribbin (FHWA): "On the private-sector side, [companies] need to do a better job of understanding the risk that the public sector takes in these projects and that public-sector decisions are not made project-by-project, but across the entire program. This can be frustrating because it may render the public sector hesitant to take action on a given project knowing that that decision may affect many other projects in [the] future."
How do you choose partners in a public-private partnership?
Typically the public partner in a transportation PPP is a State DOT, a county or municipal public works department, or a State-chartered toll road, bridge, or transit authority. In addition, certain public-benefit organizations are authorized by States to undertake transportation development projects using PPP approaches.
Private partners include professional service companies, contractors, and financial entities pursuing business with owner-operators. Private-sector participants in PPPs have included businesses that provide services to public agencies for a fee, such as engineering and construction companies and specialized financial and legal advisers.
But on what basis should public-private partners choose one another? This question was the final one posed to the panelists.
Bob Prieto (Fluor): "Both the public and private sectors need partners that clearly understand their obligations and are fully able to stand behind them. Too often a party on one side does not really understand what they've signed up for. In the public sector, this requires a fair and objective evaluation process and true political will. The key for us [the private sector] is the reputation of the public-sector partner."
Jim Taylor (Bear Stearns): "A transparent process is key. I think we need to focus on the process that will lead to a partner, not on defining the category of partners that is ideal."
Geoffrey Yarema (Nossaman): "Defining the kind of competition for a particular project and how to select a partner that has the most likelihood of success is a core part of our business. In doing this we try not only to identify the most proficient partners for a particular project, but also to engender public confidence over the long term--and expediency on a particular project isn't necessarily in the long-term interest. Ultimately, we want to select partners that will contribute to a vibrant PPP future; a single major public controversy could damage not only a particular project or the State program, but the entire national industry. Therefore, robust competitions with transparent, nonbiased selection processes are needed. So it's very important that no one, including unsolicited proposers, be practically guaranteed to win."
"Also, while there are many models of competition, there is no right or wrong model. To decide among options, agencies should ask themselves a series of questions that will allow them to get the most out of the private-sector partner and be clear about needs and expectations upfront."
Allan Rutter (NTTA): "In addition to what's been said, we aim to create a pool of people who can work for us. So we try to design the procurement in such a way that we're not beholden to one provider, and somebody who doesn't get picked still wants to work with us."
The Time Is Now
If the telecommunications sector is any indication of what private-sector involvement can do, PPPs may lead to dramatic improvements in our roadway systems over the coming decades. To mainstream PPPs in the transportation sector, the Federal Government needs to continue removing barriers, sharing experiences, and building expertise.
In the words of former Administrator Peters, "Highways in the United States are traditionally Government-funded, Government-planned, and Government-maintained ... It's time to let the free markets deliver innovation, deliver cost savings, and deliver quality improvements."
The challenge awaits.
Jim March is leader of the Industry and Economic Analysis Team in FHWA's Office of Policy.
For more information, contact Jim March at email@example.com or 202-366-9237. The complete transcript of the panel session is available at www.fhwa.dot.gov/ppp/lmd050110.htm.
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