Public-private Partnerships (P3s) are contractual agreements between a public agency and a private entity that allow for greater private participation in the delivery of transportation projects. Typically, this participation involves the private sector taking on additional project risks, such as design, construction, finance, long-term operation, and traffic revenue. At present, there are more than 40 current or anticipated P3 projects involving private financing in the U.S portfolio. Generally, the value of each of these P3s ranges from a few hundred million dollars to more than a billion dollars.
Under traditional procurement, private contractors construct projects based on a public design with public financing and turn them over to the public sector upon completion for operations and maintenance. More recently, Design-Build procurement - under which the private sector is responsible for designing and building projects for a fixed price - has been increasing. Under P3 models, the private sector may also participate in design, finance, operations, and maintenance.
In addition to differing risk allocations, P3s also feature different ways to repay private investors. In some cases, private investors can receive compensation through obtaining the right to collect the tolls on a facility. In that case, the concessionaire is also accepting "traffic risk" - the risk that the facility's traffic will not be sufficient to provide adequate revenue. Another model involves availability payments, in which the concessionaire receives a payment based on the availability of a facility at the specified performance level. In this case, the concessionaire accepts operational and appropriation risks - the risks that (a) the concessionaire does not meet the contractual performance targets; or (b) the public sector does not receive sufficient appropriation to make the required payment.
The chart on side 2 presents a sampling of payment models for P3s; States can create other compensation structures that provide incentives to achieve their goals.
P3s can provide access to private capital, reduce costs borne by transportation agencies, accelerate project delivery, shift project risk, spur innovation, and provide for more efficient management.
Long-term concessions can improve asset management - the same party that constructs the project is responsible for long-term operation. This creates incentives to build a higher quality facility that is easier to maintain.
P3s are undertaken for a variety of purposes. In some cases, the purpose is to use existing assets to generate funds (asset monetization), such as with the Chicago Skyway. In other cases, P3s are used to develop greenfield (i.e., new construction) projects (e.g., South Bay Expressway in San Diego, CA) or to rehabilitate and expand existing facilities (e.g., the Capital Beltway high-occupancy toll lanes in Northern Virginia). It is important to note that P3s are a procurement option, not a revenue source. Although P3s may increase financing capacity and reduce costs, the public sector still has to identify a source of revenue to pay for the project.
| P3 Structure | Design Risk | Const. Risk | Financial Risk | O&M Risk | Traffic Risk | Revenue Risk |
|---|---|---|---|---|---|---|
| Traditional Design-Bid-Build | X | |||||
| Design-Build | X | X | ||||
| Design, Build, Finance, Operate, and Maintain | X | X | X | X | Yes, if traffic-based payment (i.e., toll or shadow-toll payment structure) | Yes, if performance based payment (i.e., availability payment structure) |
Note. Const. = Construction; O&M = Operations and Maintenance.
| Model | Description |
|---|---|
| Toll Concession | Private partner takes on project in exchange for receiving tolls. Public sector usually limits rate of toll increase in some way. |
| Shadow Toll Concession | Private partner receives payment for each vehicle that uses the facility. Sometimes payment is adjusted based on safety, congestion, or pre-established floors and ceilings. |
| Availability Payment | Private partner receives payment based on availability of the facility at a specified performance level. |
The Center for Innovative Finance Support is a one-stop clearinghouse for expertise, guidance, research, decision tools, and publications on program delivery innovations. Our website, workshops, and myriad resources support transportation professionals in the delivery of innovative approaches.
The Center for Innovative Finance Support's P3 program focuses on the potential of design-build-operate-finance maintain (DBFOM) concessions funded through tolls or availability payments to reduce project cost, improve quality outcomes, and provide additional financing options.
The Center for Innovative Finance Support's Alternative Project Delivery program provides information on contractual arrangements that allow for greater private participation in infrastructure development by transferring risk and responsibility from public project sponsors to private sector engineers, contractors and investors.
Center for Innovative Finance Support's Project Finance program focuses on alternative financing, including State Infrastructure Banks (SIBs), Grant Anticipation Revenue Vehicles (GARVEEs), and Build America Bonds (BABs).
The Center for Innovative Finance Support's Federal Tolling and Pricing program focuses on the use of tolling and other road user charges as a revenue source to fund highway improvements, and the use of variably-priced tolls as a tool to manage congestion.
The Center for Innovative Finance Support's Value Capture program explores strategies for tapping into the added value that transportation improvements bring to nearby properties as a means to provide new funding for surface transportation improvements.
