P3 DBFOM concessions are contractual agreements formed between a public agency and private sector entity that allow the private partner to design, build, finance, operate and maintain a transportation improvement for a designated period of time in exchange to collect the revenue generated by or assigned to the facility. Project revenue may be in the form of tolls or availability payments made by the public sector project sponsor.
Traditionally, private sector participation has been limited to separate planning, design or construction contracts on a fee for service basis—based on the public agency's specifications. Expanding the private sector role can allow public agencies to tap private sector technical, management and financial resources in new ways to achieve public agency objectives. These objectives include greater cost and schedule certainty, supplementing in-house staff, innovative technology applications, access to specialized expertise, or access to private capital.
P3 long-term lease concessions are contractual agreements that lease existing publicly-financed tolled facilities to private sector investor operators for a specified period of time during which they have the right to collect tolls on the facility. In exchange, the private partner must operate and maintain the facility and in some cases make improvements to it. The private partner must also pay an upfront concession fee for the right to operate the road and retain toll revenues.
Long term lease concessions may allow public agencies to reduce ongoing costs associated with a facility, restructure debt for an underperforming toll road, accelerate new construction or maintenance and capital improvements to a leased facility, generate a large upfront lease payment for investment into other transportation improvements, and transfer risk to the private sector associated with traffic and revenue, as well as the politicization of a toll setting process.
P3s have the potential to provide benefits by allocating the responsibilities to the party—either public or private—that is best positioned to control the activity and produce the desired result. With P3s, this is accomplished by specifying the roles, risks and rewards contractually, to provide incentives for maximum performance and flexibility necessary to achieve the desired results.
The primary benefits of using P3s to deliver transportation projects include:
Project risks are allocated to the party that is the best equipped to manage them. P3 contracts often include incentives that reward private partners for mitigating risk factors. View a table that identifies common risk factors associated with the implementation of transportation infrastructure projects, and which suggests how responsibilities for these risks are often assigned with P3 projects.
P3s can be applied to a large range of transportation functions across all modes. These include:
These activities are typically bundled into contract packages reflecting the public agency's objectives related to schedule and cost certainty; capturing technical expertise on constructability; innovative finance; or transfer of management and/or operational responsibility.
P3 projects are often undertaken to supplement conventional procurement practices by combining existing sources of revenue with new financing resources. New funding sources can reduce pressure on constrained budgets by replacing traditional public funds and/or delaying payments for the public sponsor. They also have the potential of speeding up the construction timeline for projects that might have been delayed waiting for sufficient public funding capacity.
Some of the revenue sources used to support P3s include:
Some of the financing sources used to support P3s include:
The public agency may make payments to a private franchisee or concessionaire through various mechanisms, including:
Additional information on these financing approaches is available in the Project Finance section of the Center for Innovative Finance Support website.
P3 financings often involve the combination of federally sponsored tools and private commercial debt. The following federal project finance tools and programs are available to public agency sponsors to make P3 projects financially viable and attractive investment opportunities for private sector developers:
Additional information on these tools is available in the Project Finance section of the site.
From the public agency's perspective, the rationale for expanding the role of the private sector is to gain a range of potential benefits relevant to specific project needs. Projects may benefit from P3s when tight schedules, complex design and construction, and/or financing gaps are involved. Under the right conditions, P3s may be beneficial because of their ability to provide:
From the private sector business entity perspective, P3s provide expanded business opportunities to provide services not part of traditional highway development. Private entities are able to compete based on a broader set of technical skills and expertise. Expanded partnership arrangements often provide increased flexibility to employ new approaches such as innovative finance. While the expanded roles may introduce new risks (such as meeting fixed schedules and cost commitments), they also have the potential to offer rewards in the way of expanded fee opportunities and returns on equity investments.
P3s for transportation improvement projects involve contractual arrangements between facility owners and one or more private sector businesses.
The public partner is typically a state department of transportation, a local county or municipal public works department, or a state or local toll road, bridge or transit authority that is the owner and operator of highway and/or transit facilities. In addition, there are certain public benefit authorities (joint powers authorities, multi-state authorities) that are authorized by states to undertake transportation development projects through a P3 concession approach. Federal law and program regulations also affect the ability to utilize P3s on federal-aid facilities through both their restrictions and supportive programs (see question below, How do federal regulations affect P3s? ).
Private sector partners may include professional service companies, contractors, and financial entities pursuing business with owner-operators. These firms view developing, operating, and maintaining toll roads and availability payment projects as an attractive opportunity for long term equity investment.
Public agencies and the private sector have both shared and separate goals when entering into any P3 arrangement. Public agencies are established to provide standardized public services and facilities based on established and agreed-upon public objectives—making the most efficient use of public resources in an equitable manner with a strong emphasis on stable baseline level of service. At the same time, staff and budgetary resources are often fixed and public regulations inhibit rapid innovation or technology upgrades. P3s allow public agencies the flexibility to minimize these constraints while still achieving their public objectives.
Private businesses are established to provide an attractive return on company resources by providing needed services to clients and by making strategic investment decisions. P3s can offer them opportunities to improve profitability and expand into new and existing markets.
Under the right conditions, P3 arrangements may create the synergy needed to meet the objectives of both public and private sector P3 partners. Formal contractual agreements can be structured that describe the public services to be provided and the standards to be met, while providing the appropriate flexibility and incentives to harness the dynamism and efficiency of profit-seeking private investors to provide improved public services and facilities.
Public agency objectives may be achieved by structuring P3 contracts to allocate roles, risks, and rewards to the entity - either public or private—that is best able to manage them (see question above, How are risks and rewards allocated in P3s? ). Traditional roles are often redefined or transferred from one party to the other, and when financial incentives are introduced, private entities may be willing to assume new risks.
P3s are may be used as a strategy to meet such public objectives as:
P3s depart most substantially from conventionally developed projects when they are financed with private commercial debt or equity that is to be repaid from project-derived direct user charges (e.g., tolls)—on a limited-recourse basis.
To obtain favorable financial terms, these projects must meet certain lender requirements that support secure payment and value. In such cases, guaranteed capital and operating costs, minimal and fixed completion schedules, efficient technology, and assured utilization levels are required to meet commercial lender requirements at an attractive interest rate. The required level of project performance is usually higher than traditional roads constructed solely with public funds. Toll roads typically use P3s to shift a substantial portion of the risk of meeting these requirements directly to the private sector entity performing the activities and do so in arrangements most able to reduce the risk of non-performance.
Usually project sponsors typically assume a portion of the risk, as most limited recourse financings require some type of contribution from the public agency sponsoring the project. In the end, it is the role of the sponsor to make projects bankable in order to maintain the confidence of the investor.
The management of a P3—from a public agency point of view—requires special expertise at several levels. This includes both the project development phase and contract management. In particular, it is essential to involve personnel that clearly understand agency objectives and regulations as well as private business and contracting conventions. Some P3s also involve special financial issues and the need to assess financial capabilities. Furthermore, non-standard procurement methods themselves also require special legal and contracting expertise. In some cases, an agency with limited experience may find it advantageous to capitalize on the background of other experienced state or local agencies, or outside financial and legal experts that can guide the sponsor through complicated issues in the procurement process.
The Fixing America's Surface Transportation Act (FAST Act) of 2015 supports the use of P3 procurements by allowing states to use Federal Surface Transportation Block Grant (STBG) funds to create and operate a State office to oversee the implementation of P3 procurements. It also allows these funds to be used to pay stipends to unsuccessful P3 bidders in certain circumstances. It also allows U.S. DOT, at a state's request, to use the state's STBG funding to pay the subsidy and administrative costs for TIFIA credit assistance for an STBG-eligible project.
The Moving Ahead for Progress in the 21st Century (MAP-21) Act of 2012 relaxed (to a small extent) prior prohibitions outlined in the Section 129 General Tolling Program. Public agencies may impose new tolls on the federal-aid highway system in the following cases, most of which were permissible under prior legislation:
Public agencies no longer have to execute a tolling agreement with FHWA to impose tolls on federal-aid highways as of October 1, 2012. MAP-21 also includes provisions for imposing tolls on HOV lanes that are converted to high-occupancy toll lanes, as well as four toll pilot programs managed by FHWA prior to MAP-21.
The SAFETEA-LU authorization act of 2005 expanded eligibility for private activity bond use to highways and freight transfer projects, and imposed a $15 billion volume cap. Private activity bonds used for highway improvement projects have tax-exempt status, making them an attractive source of low-cost financing. These provisions were unchanged in the FAST Act and MAP-21.
Special state legislation is generally required for P3s. Legislation varies from allowing broad application of all forms of P3s and granting authority for the state DOT or other public agency to enter into agreements without further legislative approvals, to allowing only the use of design-build contracts, to constraining how public and private funds can be commingled on a project.
As of June 2016, 35 states, the District of Columbia, and one U.S. territory have passed legislation providing the legal authority for private sector participation in transportation projects to varying degrees.
The development of projects using tolls or other forms of direct user charges may also require special legislation. In most states, the authority to develop toll roads is limited to special public authorities, and new enabling legislation may be needed to broaden the use of these powers.
Even in states where P3 arrangements are not specifically prohibited in regulation, law, or state constitutions, experience has indicated that specific state legislation can minimize the risks of litigation and delay. This may be true for projects that span two or more states, where each state has varying levels (or none) of P3 enabling legislation.
Yes, P3s are used regularly in several sectors including: water and wastewater, education, health care, corrections, building construction, power, parks and recreation, and technology. Additional information on the use of P3s in other sectors is available on the National Council for Public-Private Partnerships website.
No. However, any P3 project that involves private sector financing needs a dedicated revenue source to repay any underlying project debt and provide a return on equity. Direct user charges (tolls) are not the only potential source of debt repayment. Payments, in the form of completion payments, shadow tolls or availability payments, may also be provided by the government from either general revenues or specific taxes. Debt service payments can also be met through leasing arrangements, as with the Route 3 North project in Massachusetts.
When procuring highway projects, governments generally have two options for underwriting capital expenditures: tax revenues or user fees. The tax-based approach has traditionally been favored in the United States, Northern Europe and Japan, and involves using general tax revenues, earmarked fuel taxes or other dedicated taxes to pay for projects. Southern European nations such as France, Italy, Portugal, and Spain—together with many developing nations—have favored the use of user fees collected in the form of tolls to finance their infrastructure needs.
Transportation P3s were pioneered in Europe and by the 1990s, two types of partnership approaches had evolved. Under the more common "real toll" scenario, private concessionaires arrange financing, construct roadways, maintain them, service their debt, and derive revenue from tolls collected directly from motorists. One of the main benefits of the "real toll" concession approach is that it enables governments to tap into sources of private capital and avoid using public monies to build highways. Real toll P3 precedents established in France and Spain have been replicated in such diverse locations as Iceland, Malaysia, South Africa, Croatia, Australia, China and Brazil.
In the United States, the private sector historically had an important role in highway construction operation and financing. Although the role of the private sector in highway financing and operation declined in the mid-part of the 20th century, in the late 1980s, private sector involvement in these cases reemerged. As federal and state funding becomes more constrained, and as the need for highly efficient surface transportation systems continues to grow, the role of the private sector will continue. As in Europe, transportation officials in the United States have been eager to find new ways to capture the efficiency and value for money that the private sector can provide. This has led to new forms of partnership in which public owners have transferred to the private sector responsibility for activities for which it has traditionally been responsible. These activities range from the maintenance and operations of individual highways or large highway networks to managing the financing and procurement of large highway capital expansion programs.
See the Projects section of the P3 website for project examples.
Asset management is a strategic business process and decision-making approach to managing the ongoing maintenance needs of physical assets such as transportation infrastructure.
Asset management requires the use of outcome-based performance measures, and uses data-driven analyses to link those goals to a maintenance program. It involves the economic assessment of trade-offs among alternative maintenance investment options, and as such combines engineering and economic analysis to identify cost-effective investment decisions over an extended timeframe.
Given the notion of long term, lifecycle efficiencies, asset management analysis often results in the use of preventive maintenance techniques, rather than waiting for a highway, bridge or tunnel to deteriorate significantly before rehabilitating it. Asset management can result in significant cost savings over the lifecycle of transportation infrastructure.
Given current budget limitations and the deteriorating condition of the nation's aging highway system, an increasing number of departments of transportation are using asset management practices. Asset management is also commonly employed in partnership projects because of the cost efficiencies it creates. Asset management practices can be used equally well by either the public or private sector (although this may be constrained by annual budgetary appropriations in the public sector).