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Establishing A Public-Private Partnership Program: A Primer

November 2012

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Chapter 1 - Introduction

Establishing a Public-Private Partnership (P3) program within a public agency involves issues from enabling legislation through identification, evaluation, negotiation and management of P3 projects. Public agencies will need:

  • A legal framework to establish and enforce long term P3 agreements;
  • Policies, processes, and tools to guide policy decisions;
  • Technical skills to identify, develop and evaluate P3 projects and to negotiate agreements; and
  • Skilled staff to manage and oversee projects over the long-term.

This primer explores key issues involved in establishing a P3 program at a public agency with a focus on P3s for new capacity for highway infrastructure.

Building the organizational capacity needed to develop P3s while protecting the public interest presents a major challenge to transportation agencies. Transportation agencies will need capabilities they have not traditionally possessed in order to identify and develop projects and negotiate and manage agreements with private partners. Agencies will need to acquire or develop new policy, legal, technical, financial and managerial skills and establish processes and structures, such as specialized P3 units, that allow them to apply those skills in a multidisciplinary way.

Cultural Perspectives

To design partnerships that are both in the public interest and attractive to private investors, public agencies will need to gain a better understanding of private sector interests and perspectives and become comfortable transferring a greater degree of responsibility to the private sector - a cultural shift. With a P3, risks that are traditionally retained by the public sector are transferred to the private sector. Managing the organizational changes needed to develop, implement, and monitor P3s will require agencies to involve and educate agency staff and external project stakeholders and build committed leadership at multiple levels that can champion P3 policies and projects.

Because P3s are long term agreements, they require greater flexibility and trust than traditional contractual arrangements. The private sector brings equity to the table, creating opportunities that might not otherwise exist, from which both partners can share in the benefits and returns. Public organizations have different interests, values, cultures, competencies and processes than private sector organizations. Significant differences in the way the public and the private sector perceive project development are summarized in Table 1-1.

Table 1-1. Public and Private Sector Cultural Perspectives
Public Sector Private Sector
Projects - Seeks to address transportation needs by developing "projects" to improve the infrastructure network. Deals - Sees the process in terms of negotiated transactions.
Stakeholders - Seeks to address the concerns of various parties, including local residents, facility users, and political representatives. Stockholders - Seeks to generate dividends for its stockholders.
Process - Applies and complies with prescriptive, standard operating procedures designed to provide uniformity, minimize risk and build consensus among stakeholders. Outcome - Demands greater flexibility and expediency to arrive at final objective.
Policy Goals - Develops projects to achieve policy goals such as improvements to mobility and safety. Profits - Interested in a competitive return on investment
Transparency - Seeks to share information with the public to ensure public participation and accountability. Confidentiality - Protects intellectual property and the competitive advantages derived from innovations.

In effective P3 arrangements, these differences are leveraged to create value for both parties. However, these differences can also be barriers to negotiating agreements that create value. Differences between the two parties can create conflicting interests that can undermine perceptions of value and raise perceptions of risk. Surmounting issues that lead to distrust and implementing an effective P3 program requires commitment of leadership to develop new processes and capabilities within public agencies.

Just as the public agency wants a private partner that can meet its commitments and create public value, the private partner wants a public sector partner it can trust to see a deal through. Public agencies will need sufficient commercial knowledge and experience to understand the perspectives of the private sector, develop attractive P3s, and select and manage qualified advisors and concessionaires. Challenges that public agencies will face are discussed in Chapter 2 and strategies to overcome these challenges are discussed in Chapter 3.

P3 Program Needs

To deliver P3 projects, a public agency will need to acquire or develop new knowledge, skills and abilities that vary by phase of project development, including policy, legal, technical, financial and managerial capabilities. These capabilities are needed in each project phase, including:

  • Establishing a Statutory and Policy Framework;
  • Identifying, Evaluating and Structuring Potential P3 Projects;
  • Conducting Procurement; and
  • Monitoring and Oversight.
Establishing a Statutory and Policy Framework

A State's statutory framework typically determines the types of P3 arrangements that are allowed and may define project selection, funding, management and other policies. Beyond the enabling legislation, agencies may establish specific policies that guide P3 project development. Key issues are discussed in Chapter 4.

Identifying, Evaluating and Structuring Potential P3 Projects

Identifying projects that have the potential to be delivered as P3s early in the planning process allows agencies to more carefully consider how P3s fit into their long-term performance objectives and fiscal constraints. Early identification can help to position P3 projects for success by ensuring that the P3 delivery model is considered in the scoping, preliminary design and environmental review of the project. To effectively identify projects with the potential for P3 delivery, agencies need to build the capacity of transportation planners, project engineers and financial analysts to evaluate proposed projects for their potential to be delivered as P3s and compare P3 delivery to other delivery methods. Evaluating the feasibility of a P3 project requires estimating the potential life cycle costs of the project, the value of long term revenue streams, and the value of transferring specific risks to the private sector. Similarly, tax expertise is needed to assess tax benefits and obligations that may accrue to the private partner in a long-term agreement. Public agencies can evaluate the potential feasibility and value of a P3 agreement through technical planning, financial and engineering studies. Chapter 5 discusses the decision-making processes that will need to be developed.

Conducting Procurement

P3 procurement requires greater flexibility than traditional procurement to allow for innovation on the part of bidders and to provide for more room to negotiate with multiple stakeholders. Flexibility is needed in negotiating a final agreement to ensure that it is deemed creditworthy by commercial lenders and provides a return on investment that is adequate to attract private equity investors. During procurement, agencies need financial expertise to assess the financial quality of the bids and technical expertise to assess the qualifications of the bidder. A public agency may want to have experienced legal and technical advisors to help negotiate with the private partner. Key issues in conducting procurement are discussed in Chapter 6.

Monitoring and Oversight

After the agreement is signed, the public agency must manage the contract to ensure that it achieves the performance standards established in the agreement. The performance monitoring and oversight phase will require building a strong set of skills within the public agency due to the need to maintain these oversight responsibilities in-house. This includes the need for contract management skills to monitor the established performance standards and manage accordingly. In addition, the capacity to monitor technical performance during construction and operations can be critical to ensuring efficient service delivery. Key issues in managing contract performance are discussed in Chapter 7.

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