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New Build Facilities

P3s for new build facilities can involve construction of a new surface transportation asset or modernization, upgrade, or expansion of an existing facility. These P3s are structured as design-build-finance-operate-maintain (DBFOM) concessions that bundle together and transfer to a private sector partner responsibilities for design, construction, finance, and long term operations and maintenance over the concession period. In the U.S., DBFOM concessions have been use for toll roads, waterbody crossings (bridges and tunnels), priced managed lanes, and transit projects.

DBFOM concessions often extend for a period of 30 to 50 years or even longer, and are awarded under competitive bidding conditions. DBFOM procurements can be expected to shift a great deal of the responsibility for developing and operating transportation infrastructure to private sector partners. In nearly all cases, the public agency sponsoring a project retains full ownership of the project. A range of organizations can function as the public sponsor in DBFOM arrangements including state departments of transportation, toll authorities, transit agencies, and local governments.

Financing

There is a great deal of variety in the degree to which financial responsibilities are transferred to the private sector. One commonality among all DBFOM projects is that they are either partly or wholly financed by debt leveraging revenue streams dedicated to the project. Tolls and availability payments are the most common revenue sources.

Future revenues are leveraged to issue bonds or other debt that provide funds for capital and project development costs. Often the financing raised from these revenue streams is supplemented by grants from project sponsors and other contributions, such as right-of-way or complementary construction projects. In certain cases, private partners make equity investments as well.

Given the ability of public sector agencies in the U.S. to issue low-interest, tax-free debt, it is often more cost-effective for public project sponsors to issue debt than their private sector partners to do so. However, federal financing tools such as private activity bonds help lower the borrowing costs for private partners. Another less common option is to use a nonprofit public benefit corporation established pursuant to IRS Revenue Ruling 63-20. Public sponsors also may provide subsidies as part of an overall financing package. Ultimately, cost premiums from privately financed projects should be offset by other project execution efficiencies derived from the private partner's participation in order to provide a net benefit to the project sponsors. These efficiencies may include design or construction innovations or lifecycle operations and maintenance cost savings.

Benefits

Although financial capacity often motivates the initial consideration of P3 procurements, under the right conditions the incentives created by concessions may also lead to greater potential value for the public sector through improved asset management and on-time and on-budget delivery.

The most important potential benefits of using DBFOM concessions to deliver transportation projects include:

  • Risk sharing protecting project sponsors from the cost and consequences of negative events
  • Accelerated project delivery compared to traditional public sector project scheduling and delivery methods
  • Introduction of project construction and life-cycle cost efficiencies, and improved quality and system performance from the use of innovative materials and management techniques that may result in higher initial quality to minimize long term maintenance and operations costs
  • Ability to apply special contractual incentives and disincentives to improve project performance and operating efficiencies
  • A more optimal distribution of risks, that is allocating certain project risks to the private sector (e.g., financing, schedule, long term operations, and maintenance) and retaining others with the public agency (e.g., program management, environmental clearance, permitting, and right-of-way acquisition)
  • Use of private financial resources and personnel freeing constrained public resources for other needs
  • Access to new sources of private capital, while leveraging scarce public resources and conserving public sector debt capacity
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