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Early Involvement of Private Developers in the Consideration of Long-Term Public-Private Partnership Concession Options: A Discussion Paper

February 2017
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Notice

This document is disseminated under the sponsorship of the U.S. Department of Transportation in the interest of information exchange. The U.S. Government assumes no liability for the use of the information contained in this document.

The U.S. Government does not endorse products or manufacturers. Trademarks or manufacturers' names appear in this report only because they are considered essential to the objective of the document.

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Technical Report Documentation Page

1. Report No. FHWA-HIN-007 2. Government Accession No. 3. Recipient's Catalog No.
4. Title and Subtitle
Early Involvement of Private Developers in the Consideration of Long-Term Public- Private Partnership Concession Options
5. Report Date
February 2017
6. Performing Organization Code
7. Author(s) Sharon Greene, Albert Amos, Amanda Vandegrift, Murat Omay, Thomas Frawley, Tamar Henkin 8. Performing Organization Report No.
9. Performing Organization Name And Address
Battelle Memorial Institute (Battelle) HDR
505 King Avenue 8404 Indian Hills Drive
Columbus, OH 43201 Omaha, NE 68114
Thomas E Frawley Consulting (TEFC) High Street Consulting Group (HSCG) 551 Daventry Road 2306 Washington Avenue
Berwyn, PA 19312 Chevy Chase, MD 20815
10. Work Unit No. (TRAIS)
11. Contract or Grant No.
DTFH61-13D-00014

12. Sponsoring Agency Name and Address
Federal Highway Administration Office of Innovative Program Delivery 1200 New Jersey Avenue, SE Washington, DC 20590

13. Type of Report and Period Covered
14. Sponsoring Agency Code
15. Supplementary Notes
Contracting Officer's Technical Representative: Patrick DeCorla-Souza, FHWA Office of Innovative Program Delivery
16. Abstract
This discussion paper was developed for transportation professionals who may be involved in a Public-Private Partnership (P3) concession project. P3 concessions are an integrated service delivery approach where a public transportation agency enters a contractual agreement with a private sector entity to deliver a service and/or facility for a specific period. Under the P3 approach, the private sector entity is singly responsible for the design, construction, finance, operations, and maintenance of facilities for a specified concession period. This document draws upon past and current experience to examine different mechanisms used by public agencies for involving private developers during the early stages of a project delivered through a P3. The document provides an overview of the experiences of state departments of transportation (DOTs), Metropolitan Planning Organizations (MPOs), local agencies, private developers, and financial institutions in soliciting potential innovations of private companies during project planning and procurement. The document also evaluates consultative mechanisms used during project procurement and after contract award, and considers introducing these types of activities earlier in the project development and programming process to encourage private sector input. The findings are used to identify approaches that have been effective in securing early input from the private sector to enhance opportunities for P3s.
17. Key Words
Public-private partnerships, PPP, P3, DBFOM, DBOM, concession, project delivery, project planning
18. Distribution Statement
No restrictions
19. Security Classif. (of this report)
Unclassified
20. Security Classif. (of this page)
Unclassified
21. No. of Pages
69
22. Price
N/A

Form DOT F 1700.7 (8-72) Reproduction of completed page authorized

Preface

The Build America Bureau was established in July 2016 as USDOT's go-to organization to help project sponsors who are seeking to use Federal financing tools to develop, finance and deliver transportation infrastructure projects. The Bureau serves as the single point of contact to help navigate the often complex process of project development, identify and secure financing, and obtain technical assistance for project sponsors, including assistance in P3s. The Bureau is home to DOT's credit programs, including Transportation Infrastructure Finance and Innovation Act (TIFIA), the Railroad Rehabilitation and Improvement Financing (RRIF) and Private Activity Bonds (PAB). The Bureau also houses the newly-established FASTLANE grant program and offers technical expertise in areas such as P3s, transit oriented development and environmental review and permitting. The Bureau is also tasked with streamlining the credit and grant funding processes and providing enhanced technical assistance and encouraging innovative best practices in project planning, financing, P3s, project delivery, and monitoring.

Working through the Bureau, USDOT has made significant progress in its work to assist project sponsors in evaluating the feasibility of P3s, and helping simplify their implementation. In response to requirements under the Moving Ahead for Progress in the 21st Century Act (MAP-21) and the Fixing America's Surface Transportation Act (FAST Act) to develop best practices and tools for P3s, the Bureau, jointly with FHWA, is publishing this discussion paper on Early Involvement of Private Developers in the Consideration of Long-Term Public-Private Partnership Concession Options.

Executive Summary

This discussion paper draws upon past and current experience to examine different mechanisms used by public agencies for involving private developers during the early stages of a project delivered through a public-private partnership (P3). The discussion paper is structured in accordance with the three major stages in the project planning and development process - planning, procurement, and post-procurement - during which private parties may participate in and/or comment on a given project to improve its financial and technical feasibility and achieve other public sector objectives, as shown in the figure below (Figure ES-1).

Figure ES-1. Private Sector Feedback and Involvement Mechanisms by Project Stage

Figure ES-1

Text of Figure ES-1

Flow chart: Mechanisms Used During Project Planning » Mechanisms Used During Project Procurement » Mechanisms Used During Post-Procurement

Public Agency Objectives:

  • Improve financial and technical feasibility
  • Reduce, allocate, and mitigate risks
  • Create environment conducive to achieving a "win-win" for all parties

The study relied on a literature review, interviews with P3 practitioners, and a review by P3 experts at a roundtable which identified the consultative and feedback mechanisms used during planning, procurement and post- procurement; recommended introducing these types of activities earlier in the project development process to encourage private sector input; and identified approaches that have been effective in securing early input from the private sector to enhance opportunities for public-private partnerships.

Early Involvement Mechanisms

There are a variety of ways in which the public sector can either solicit input or receive unsolicited input from the private sector during different stages of the project development process. Table ES-1 summarizes strategies for involving private sector entities while P3 projects are being initially identified and screened in the planning phase prior to procurement. The mechanisms may be used by public agencies to solicit and gain increased feedback from the private sector on potential P3 viability and project development strategies. Table ES-2 provides a summary of strategies for soliciting feedback from the private sector during the procurement of P3 projects. Table ES-3 provides a summary of possible approaches which, while implemented post-procurement, are intended to encourage developer participation early in the procurement process.

Table ES-1. Early Involvement Mechanisms, Planning to Procurement
Mechanism Description Examples
P3 Program Development and Project Screening The planning branches of State, metropolitan, and/or local transportation agencies develop criteria for screening projects in their short range and/or long range plans for P3 potential. Additional technical, financial, and value for money analysis is conducted on the screened projects and information made available for public review including the private sector project development community. The resulting P3 pipeline of projects may be adopted and periodically updated by the agency's governing body.
  • Virginia Department of Transportation (Virginia DOT)
  • Texas Department of Transportation (TxDOT)
  • Los Angeles County Metropolitan Transportation Authority (LA Metro)
Industry Forums Pre-procurement meetings with developers, financiers, construction companies, and other interested parties to gauge private interest in candidate P3 projects and P3 procurement strategies and to identify ways to enhance project viability as a P3.
  • TxDOT: Multiple projects
  • Maryland DOT: Baltimore Red Line
  • Kentucky Public Transportation Infrastructure Authority: Ohio River Bridges
  • P3 Institute: Miami Forum
Market Sounding Separate, one-on-one discussions are conducted with developers and advisors to assess financial feasibility, risk allocation, and other related topics.
  • Province of Alberta: Transmission Line
  • Arizona DOT: Electronic Truck Screening Project
Request for Information (RFI) Interested parties formally respond to a list of questions on potential technical solutions, financial packages, and/or risk allocation.
  • City of Los Angeles: L.A. Streetcar
  • Arizona DOT: Freeway Lighting Upgrade Project
  • Maryland DOT: I-270 corridor
  • Virginia DOT: Multiple projects
Unsolicited Proposals Private sector developers provide an initial project concept without a formal request for qualifications or proposals, or in response to an open solicitation without reference to a specific project or scope.
  • Georgia DOT/SRTA: NW Corridor
  • Virginia DOT: I-495
  • Florida DOT: SR54/56
  • Virginia DOT: I-95 Express Lanes
  • LA Metro
Pre-Development Agreements (PDA) and Master Development Agreements (MDA) Private contractors or consortia compete for the right to develop a project in collaboration with the procuring agency and then have the right of first refusal to implement the project.
  • TxDOT: North Tarrant Express
  • TxDOT: Trans-Texas Corridor
  • North Carolina Turnpike Authority: Mid-Currituck Bridge
  • Oregon DOT: I-205 South
Progressive Design-Build Agreements Through a qualification-based procurement, the Design-Build contractor is selected prior to preliminary design or a construction cost estimate.
  • Maryland: I-270
  • Virginia: Silver Line Phase 2
Collaborative Risk Workshops Private entities are invited to participate in pre-procurement risk workshops to be able to better assign risk to minimize overall cost. N/A
Collaborative Evaluation of Project Alternatives Very early in the project development process, while projects are not yet fully defined and environmental review is in progress, private entities are invited to participate in discussions regarding potential project alternatives. N/A
Table ES-2. Early Involvement Mechanisms, Procurement Phase
Mechanism Description Examples
Industry Meetings Meetings are held with the private sector prior to advertisement to gauge interest in the procurement and obtain feedback on the draft procurement documents.
  • Maryland DOT and the Maryland Transportation Authority (MdTA): Maryland Purple Line
Multi-Stage Procurements Multiple and increasingly detailed requests for proposals are issued with proposal responses at each stage. Proposers are provided opportunities to comment on the project at each stage.
  • Maryland DOT/MdTA: Maryland Purple Line
  • TxDOT: LBJ Managed Lanes
Multiple P3 Delivery Procurements Proposers are requested to provide separate bids for the same project using distinct delivery mechanisms.
  • TxDOT: Grand Parkway Project
  • Virginia DOT: I-66 (Transform 66 - Outside the Beltway)
Alternative Technical Concepts (ATC) Proposers can suggest innovative design or technologies beyond what is required in the procurement documents.
  • Maryland DOT/MdTA: Maryland Purple Line
  • Riverside County Transportation Commission: SR-91 Managed Lanes
Interweaving A procurement that takes place in advance of the planning concept decision which allows bidders to "interweave" the project alignment into their proposal.
  • A2 Tunnel, Maastricht, Netherlands
"Sole Source" Bids Direct negotiations occur with a single proposer as a result of an unsolicited proposal or a solicitation with one proposal.
  • TxDOT: SH 130 Segments 5&6
  • Virginia DOT: Elizabeth River Crossings
Table ES-3. Early Involvement Mechanisms, Post-Procurement
Mechanism Description Examples
Early Lender Engagement Lenders are engaged early in the procurement process to build in opportunities for refinancing and/or refunding of developer and/or public equity in the post-procurement phase.
  • Alameda Corridor
  • Georgia NW Corridor
Competitive Stipends to Unsuccessful Proposers The private sector is made aware early in the project development process of competitive stipends to be awarded post-procurement as an incentive to motivate private sector interest and to confirm public sector commitment.
  • Maryland DOT Public Private Partnership Program Regulations

Conclusions

Public agencies are incorporating a variety of mechanisms to enhance opportunities for early involvement of the private sector in the project development process. While these mechanisms are fostering development of better projects through increased information sharing, greater technical and financial innovation, and improved risk management, it is unclear if these mechanisms have expanded private investment in P3s. The lack of clarity may be partly due to the extent to which different mechanisms have been tested. The frequency with which these mechanisms have been used varies widely, with some practices - such as industry forums - being employed almost universally, while other practices, such as use of Pre-Development Agreements (PDAs), having only a limited track record in the United States.

Table ES-4 summarizes the potential effects of the different mechanisms examined in this study. Broader adoption of some of these mechanisms would be of value to public agencies. The majority of the mechanisms have the potential to foster positive effects by adding value, reducing schedule and cost, and managing risk. Such effects are denoted in the table in blue and through the use of plus (+) signs. With some mechanisms, there is potential that the benefits of early private sector involvement could be countered by negative impacts such as reduced competition. Such effects are denoted in the table in red and through the use of minus (-) signs. The relative magnitude of these potential effects is indicated by the intensity of the blue and red shading in individual cells.

As indicated in Table ES-4, one of the key tradeoffs that public agencies may encounter in employing early involvement mechanisms with P3 projects is the potential for reduced competition. The increased information sharing between private and public sectors associated with early involvement mechanisms may reduce competition, particularly when the procurement process "locks in" a private entity at an early stage. This may diminish the creative tension that results from competition. Conversely, early "lock-in" may result in positive synergies by reducing the private sector's perception of risk, which could encourage its willingness to invest.

Early involvement requires an additional investment of time and resources early in the project development process, but it has the potential to produce a better defined and more financially feasible project. This dynamic may also produce efficiencies later in the process, expediting project implementation.

Table ES-4. Potential Effects of Early Involvement Mechanisms.
Involvement Mechanisms Add Value & Foster Innovation Maintain or Reduce Cost & Schedule Maintain or Increase Competition Reduce Public Sector Risk Reduce Private Sector Risk
Planning to Procurement
Program Development and Project Screening High (+) Medium (+) Low/No Low/No Low/No
Industry Forums Medium (+) Low/No Low/No Low/No Low/No
Market Sounding High (+) Low (+) Low/No Low/No Low/No
RFIs High (+) Medium (+) Low/No Low/No Medium (+)
Unsolicited Proposals Medium (+) Medium (+) High (-) Low (-) Low (+)
PDAs/MDAs Medium (+) Medium (+) High (-) Medium (-) Medium (+)
Risk Workshops Medium (+) Low (+) Medium (+) Medium (+) Medium (+)
Collaborative Evaluation of Alternatives Medium (+) Low (+) Low (-) Medium (+) Medium (+)
Progressive Design-Build Medium (+) Medium (+) Medium (-) Medium (+) Low (-)
Procurement
Industry Meetings Medium (+) Low/No Low/No Low/No Low/No
Multi-Stage Procurement High (+) High (-) Medium (+) Medium (-) High (-)
Multiple P3 Delivery Procurements Medium (+) High (-) Medium (+) High (-) High (-)
ATCs High (+) High (+) Medium (+) Medium (+) Medium (+)
Interweaving Medium (+) Medium (+) Medium (-) Medium (+) Medium (+)
Sole Source Procurements Low/No High (+) High (-) High (-) Medium (+)
Post-Procurement
Lender Engagement Medium (+) Low/No Low/No Low/No Low/No
Competitive Stipends Medium (+) Low/No Medium (+) Medium (+) Medium (+)
Legend Positive Negative
High High (+) High (-)
Medium Medium (+) Medium (-)
Low Low/No Low (-)
Barriers to Early Private Sector Involvement

There are a number of barriers to early private sector involvement in P3s. Political, legal, and regulatory procedures, put in place to protect the public interest, can complicate early involvement. The private sector may be reluctant to engage early in the absence of a well-defined and publicly supported project. Given the resource commitment, the private sector must determine if:

  • The project is financially viable, in terms of public funding and/or revenue risk;
  • The public agency can politically deliver on the project;
  • The procurement process is likely to be efficient and successful;
  • It has a realistic possibility of contract award and, if selected, achieving a reasonable rate of return on its investment in the project; and
  • The appropriate legal and regulatory framework is in place.

Responsive proposals require significant financial and human resources over multiple years. Although early private sector involvement can enhance a project's financial viability through reduced costs and/or increased revenues, it also entails higher development costs, opportunity costs, and risks for both the private and the public sectors.

Increasing the Consideration for Early Involvement of the Private Sector in P3s

Based on the findings reported in this Discussion Paper, public project sponsors considering early involvement of the private sector in the development of P3 projects may consider the following successful practices:

  • Mechanisms for private sector involvement are identified and incorporated early in the project development process. Strategies likely to yield the greatest overall benefit are identified early in the project development process. Before pursuing these strategies, the public agency is aware of potential trade-offs regarding early private sector involvement, is cognizant of the statutory, legal, regulatory, political, and financial barriers which limit their potential application, and develops a strategy to address and overcome these barriers.
  • Assessment of alternative project delivery options is valuable early in the project development process (e.g., prior to preliminary engineering). This is particularly valuable for projects over a certain project size (e.g., $100 million to $300 million) and can result in the avoidance of project development and early design costs that might not be necessary if a P3 delivery model were selected.
  • Early involvement mechanisms are aligned with the objectives of the P3 procurement process. Early involvement of the private sector can assist public agencies in their due diligence review to achieve project development and financing goals.
  • Procurement rules are well defined and not overly prescriptive. The private sector representatives interviewed for this discussion paper recommended that the procurement rules should be sufficiently flexible to allow for and encourage potential innovations.
  • Greater information sharing and innovation are balanced with the potential for reduced competition. To the extent that strategies for early private involvement may adversely affect competition as the procurement process advances, steps are taken to ensure that the earliest parts of the procurement process stimulate adequate competition.
  • The public interest is prioritized, while still focusing on enhancing financial feasibility and encouraging private sector innovation. Public officials interviewed for this paper suggested that early involvement strategies are carefully calibrated to preserve the public interest while giving the private sector sufficient opportunity to design and develop a financially feasible transportation project within existing legal statutes and procedural guidelines.
  • Early involvement strategies consider risk and resource utilization. Representatives from the both public and private sector emphasized that adequate staff time and financial resources need to be devoted to early risk identification.
  • Early involvement mechanisms maintain transparency while preserving the confidentiality of sensitive business information. Private sector representatives are mindful of the amount of information that can be shared with the public sector given the legal transparency requirements, the loss of potential competitive advantages, and the impacts to their future negotiating position with the procuring agency.
  • The exchange of information does not confer a competitive advantage. Public sector officials are concerned that early private sector involvement may give one or more firms an unfair competitive advantage due to unbalanced information, or confer a "head start" advantage. They should carefully consider how much project related information can reasonably be exchanged, and the optimal point in the planning and procurement process for sharing this information.

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