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:
Responsive proposals require significant financial and human resources over multiple years at the cost of other project pursuits. 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 public and the private sectors.
Insufficient political support has contributed to delaying, derailing, or cancelling P3 procurements in multiple jurisdictions in the United States and internationally. Political support encompasses concerns raised by the general public, key stakeholders, and elected officials. Below is a summary of the political issues that have served as barriers to the early involvement of the private sector in P3 procurements.
The public procurement agency needs a "champion" to support the project from within the agency (i.e., to motivate technical staff and management) and externally (i.e., to stimulate political support for the project). The absence of a political champion limits the extent of early involvement as sufficient political support is needed to conduct publicly visible activities, such as industry forums and RFIs.
Political support must establish the right balance between encouraging private investment while avoiding the negative perception that the procurement unreasonably favors the private sector. Involving the private sector early in a P3 procurement may create public, user, and stakeholder concerns that the final design and contract will be biased toward one or more of the following:
Although most procurement processes are designed to protect against selection bias, the appearance of bias can pose a disincentive to the early involvement of the private sector in a P3 project. Project sponsors need to establish a transparent and accountable process that protects the public interest while allowing for greater collaboration with the private sector during project planning and procurement.
Early demonstration of financial viability is important to inspire confidence among prospective developers in the private sector. Sharing of information necessary for the private sector to properly evaluate risks as early as feasible is similarly essential.
Given the potential opportunity costs and limited financial and staff resources, a private developer may choose not to engage with the public sector during the project's early stages if it is not confident that the project is financially viable. A feasible financial plan including specifics regarding public funding and, if applicable, credible forecasts of toll revenue, is critical for the private sector to consider investing time and resources in a potential P3 project.
Similarly, the private sector may not pursue the project if it determines that the public sector has not carried out adequate due diligence and risk assessment, appropriate for the phase within the project development process.
Public and private entities may be reluctant to engage in early discussions due to insufficient information to identify and price risks properly. Concerns raised by the private sector regarding risks include the following:
Numerous legal and regulatory considerations may discourage private sector interest in potential transportation-related P3 opportunities, or even act as outright barriers to developing such opportunities.
An obvious barrier would be the absence of necessary P3 enabling legislation. Considerations that may discourage private sector interest consist of those laws and regulations that affect the private sector's expectations regarding risk and profit. Various such considerations are addressed in the following subsections.
The existence of statutory authority for a public sector entity to enter into a P3 agreement with a private sector entity is a fundamental issue. Currently, 33 states plus the District of Columbia and Puerto Rico have enabling legislation in place, authorizing P3s for highway and bridge projects. Of these 35 jurisdictions, 25 have broad statutory authority to employ P3 project delivery, while 10 have limited or project-specific authority.8 (Examples of project-specific authority include Alaska for the Knik Arm Bridge, Illinois for the Illiana Expressway, and Nevada for Project Neon.) The aforementioned 35 jurisdictions are listed in Table C-1 in Appendix C, along with selected key features of their enabling legislation. Table C-1 does not include states that have enacted P3 statutes for purposes other than transportation (e.g., New Jersey, where community colleges have the authority to enter into P3 agreements).
In most instances, prospective P3 proposers or concessionaires are unwilling to invest resources or otherwise show an interest in participation, without a specific P3 opportunity being identified and announced by a public sector sponsoring agency. However, on some occasions, even the absence of enabling legislation might not act as a barrier, if there is a reasonable expectation that the necessary authority will be enacted in the relative near term and one or more firms are willing to invest resources to secure first-to- market advantage in anticipation of such enactment. Beyond the breadth of statutory authority, enabling legislation varies from jurisdiction to jurisdiction with regard to several factors that may affect the level of interest of prospective proposers or concessionaires.
Selected examples include:
Some States Limit the Number and/or Size of P3 Projects
In states where the number of P3 projects is limited and/or the anticipated value or size of a project must meet specified criteria, early private sector involvement may be inhibited by the uncertainty over whether a particular P3 opportunity will be advanced. Minimum and maximum anticipated cost and total number of projects permitted to be delivered may also be specified in P3 statutes.
Enabling legislation tends not to be static. Amendments are enacted periodically, and the body of applicable case law expands over time. Depending upon the substance of such amendments and case law, they may affect the private sector's appetite for early involvement positively or negatively.
Some state constitutions afford incorporated cities and municipalities municipal home rule, which provides them with the authority to self-govern on a number of issues. If this is the case, municipalities may have the authority to enter into P3s without state legislative authority. For example, municipal home rule in Illinois enabled the City of Chicago to conduct the asset sale of the Chicago Skyway and to set up the Chicago Infrastructure Trust. At present, 39 states have full or partial home rule authority. 10 In states without municipal home rule, an incorporated city or municipality can pass its own P3 legislation, provided P3 authority exists at the state level. P3 enabling legislation at the municipal level is typically modeled after state statutes, containing a similar level of authority, restrictions, and review periods. For example, the City of Miami, which enacted a P3 ordinance in 2014, modeled its statutes after FDOT's legal requirements, particularly as it pertains to the receipt and review of unsolicited proposals.
Funding for P3 projects often relies on the ability to combine public funding and private financing sources and may also require long debt maturities and the ability to refinance private debt. The following issues may inhibit private interest in early participation in P3 projects:
A related legal issue is the ability to authorize and obligate future federal and state funding appropriations to cover project related availability payments to a private sector developer or concessionaire over the term of the concession. The absence of such authority may decrease private sector interest in DBFOM contracts with availability payments.
The ability of states and other jurisdictions to implement tolling on federally-funded highways is limited. However, states are free to regulate tolling authority on their state highway systems. In both contexts, toll authority includes two distinct aspects, both of which affect a private sector developer's view of risk. The first is the legal authority of the project sponsor to impose and collect tolls. P3 projects are often funded through tolls, and without the ability to toll it is challenging to advance projects on a P3 basis. The second is the legal authority of the private sector to impose and collect tolls.
For P3 projects that involve the private sector's assumption of revenue risk, the impact of future competing projects could jeopardize the potential profitability of the P3 project. To attract large-scale private sector investment in such projects, the developer may wish to have the public sector project sponsor commit to providing compensation if it builds a parallel or competing project during the concession term. Some states, such as Arizona and Colorado, are prohibited from entering into non-compete agreements, which may discourage the level of private sector interest in P3s. Having the legal authority to enter into a non-compete agreement, and an early public indication of the intent to use such authority, could motivate early private sector interest in P3 projects, especially in projects with significant revenue risk.
Procurement laws may preclude agencies from conducting industry forums in some jurisdictions. To maintain a competitive balance, legal and regulatory guidelines can require the proactive disclosure of information shared between the public and private sector during industry forums or other early involvement discussions. A related challenge is that while statutes governing information disclosure may be relatively prescriptive in some jurisdictions, public agencies may lack formal guidance and processes regarding information disclosure. Both situations tend to limit information exchange.
The rationale for required public disclosure of unsolicited proposals include:
In the absence of formal disclosure requirements, public agencies and the private entities may have incentives to avoid divulging detailed information early in the project development process due to concerns that this may impair their respective negotiating positions later in the procurement process. State and local rules regarding public disclosure of proprietary or business confidential information have been barriers to the early involvement of the private sector, particularly in the execution of master planning agreements and the submission of unsolicited proposals. To maintain a competitive advantage, developers are often unwilling to disclose key financial and technical information unless it is held confidential and/or a formal contract has been signed. For example, sunshine laws in Florida and Ohio can discourage the private sector from entering into preliminary discussions or submitting unsolicited proposals for P3 projects, as confidential information would be required to be released publicly.
Unsolicited proposals generally take one of two forms: proposals completely initiated by the private sector; or proposals submitted in response to an open solicitation for proposals not tied to any specific project or projects. Enabling legislation in a given state may or may not explicitly address the authority of public sector entities to receive and act upon unsolicited proposals. In some states, the enabling legislation explicitly prohibits acceptance of unsolicited proposals or prohibits the solicitation of proposals not tied to any specific project or projects. Even in states in which unsolicited proposals are accepted, depending upon other applicable circumstances, the size of the fee required to accompany such a proposal may be large enough to discourage private sector interest. In states that allow unsolicited proposals, private sector interest can be significantly affected by whether the public sector recipient of an unsolicited proposal may negotiate with the proposer on a sole source basis, or must invite competing proposals; the latter is more common.
Some states permit public sector entities to compete in P3 procurements or to develop post-award bids that directly compete with private sector proposers. In Texas, for example, the SH 121 project in the Dallas-Fort Worth corridor was ultimately awarded to the North Texas Turnpike Authority (NTTA) after the project had been previously awarded to a private sector concessionaire. This situation created negative perceptions in the marketplace, which TxDOT has had to work diligently to repair. In other states with public toll authorities, there may be concerns over the possibility of similar occurrences that could discourage private sector interest in P3 project opportunities.
The clarity of the P3 procurement process and the certainty that a P3 project will actually proceed are also important risk factors that are typically considered by private sector developers. Questions affecting perceptions of process clarity and certainty may include:
To the extent that processes and procedures for selection and approval of P3 proposals are well defined, early involvement by the private sector would tend to be encouraged.
Given the cost involved with preparing P3 proposals, private developers prefer to pursue projects that have a realistic probability of being procured, rather than projects that appear to be "speculative". As a result, private firms often make the business decision to engage the public sector only when it is reasonably certain that a proposed P3 project is ready for implementation. Project readiness issues that can potentially discourage early involvement include the following:
As noted in SHRP 2 report S2-C12-RW-1, federal regulations prohibit private entities from preparing a NEPA document or from having any decision-making responsibility in the process. The involvement of private-sector entities is limited to producing studies, providing information related to the environmental process, or, more generally, providing viewpoints of key project-related issues. While it can make suggestions for consideration by the project sponsor, the private sector cannot have any direct involvement in decision-making aspects of the NEPA process. This may make it challenging to advance the development of a project which a private entity has ultimate responsibility to design, construct, and operate in a manner that satisfies the public sponsor's requirements, but which also achieves an appropriate return on investment. 11
One of the greatest unknowns in implementing transportation projects is the amount of time for obtaining the necessary environmental approvals. The lack of a Record of Decision (ROD) or Finding of No Significant Impact (FONSI) or the lack of a reasonable expectation of environmental clearance may discourage the active participation of the private sector until there is greater certainty that the environmental review will be successfully completed. Similarly, the private sector may be concerned by potential mismatches in timing, as the planning and procurement process may be concluded long before there is a formal determination of the potential environmental impacts.
Where it is feasible to conduct the project planning and environmental review process in parallel, concerns may be raised publicly that the early involvement of the private sector may result in the biasing of the environmental process towards the selection of a potential alignment or alternative that has the greatest financial feasibility. This concern is greater with respect to the approaches that provide the private sector with significant input during the planning process, e.g., master development agreements or unsolicited proposals. To the extent that such concerns or perceptions arise, rigorous firewalls need to be put in place between the private sector partner's early development activities and the NEPA process. This was the case with the I-395 HOT lane project in Northern Virginia, where the private partner was able identify design concepts and then VDOT vetted those ideas independently through its NEPA review. Despite the success of the I-395 HOT lane project, the added cost and uncertainty of such early involvement typically remain significant barriers that often lead private developers to wait until the environmental process is complete before pursuing a P3 opportunity, limiting any innovation that may have been realized through involving the private sector earlier in the planning process.
Limitations on the legal authority for public agencies to hire technical, financial, or legal advisors for the development of a project to be delivered through a P3 is another potential legal barrier that discourages early involvement by the private sector. This restriction can be perceived as a major impediment by the private sector, as external advisors are often critical in helping the public agency to sound out the market during the early stages of the project using the approaches discussed in the previous chapter and to develop the documentation needed to carry out these consultative mechanisms. This barrier is more pronounced for agencies with limited P3 experience.
Early private sector interest in P3 opportunities may be affected by other procurement requirements contained in the P3 enabling legislation, other public sector procurement laws, and the procurement policies and procedures established by public entities to implement such laws. These considerations may vary in relevance between the state level and lesser political subdivisions, such as counties or municipalities. Examples include:
This section summarizes the institutional and organizational barriers that may restrict or complicate the ability of the public sector entity to carry out a P3 procurement as well as encourage the early involvement of the private sector in advance of and during the procurement process.
The organizational structure of the public procuring agency needs to be aligned properly in order to develop and procure a transportation project through an alternative delivery mechanism. For P3 procurements to be successful, organizational alignment needs to occur at multiple levels within public agencies. For example:
The project sponsor's institutional experience is an important factor in the involvement of the private sector during the early phases of a P3 project. However, there are two contrasting viewpoints cited by the private sector. Some private entities prefer to work with experienced public agencies because it increases their comfort level that their feedback will be considered and that the procurement process will be successfully concluded. If the public procuring agency lacks the experience to manage large and complex projects, some private entities have expressed a preference to be involved during the planning stages. The rationale is that public agency inexperience increases the likelihood of being able to shape project development by providing feedback on project design and risk allocation. This is one of the advantages associated with unsolicited proposals. Early involvement with less experienced agencies can help to ensure there is a realistic and thoroughly understood procurement process in place can lead to the ultimate success of the project.
Private sector developers have also noted that the financial position of the project sponsor is another factor in determining whether to engage with the public sector during the early stages of projects that are dependent upon agency funding rather than project revenue risk. There are public organizations with strong credit ratings that have experience securing relatively inexpensive financing. Because these entities may not necessarily benefit financially from a P3 structure, which imposes new constraints and documentation requirements, they may not sufficiently engage with the private sector given their perceived strength in the credit markets. If these agencies do engage with the private sector, there is a concern that they will not value the private sector's concerns and interests. Conversely, public agencies with weaker credit ratings have a greater need to access alternate capital sources and generate revenue for project development, making these entities more willing to consider and possibly incorporate the feedback received from the private sector.
Internal barriers within private sector teams vying for P3 concessions are also important. The private parties involved in the bid need to be aligned internally with respect to the scope and timing of services required and maintain effective means of communications among the equity partners, contractors, and equipment suppliers, all of whom have different risk tolerance levels. Internal barriers can be expected to include a mix of hard "organizational" and soft "people" issues. An example of the former would be the lack of a dedicated bid manager to interact with the relevant parties at an early stage of the project to identify potential deal breakers, risk events, and key contractual clauses. Moreover, both the private partner and the project sponsor benefit from having transparent communication and a harmonious working environment so that concerns and feedback are shared in a relatively integrated and unified manner.
Public sector entities are interested in P3s primarily as a mechanism to gain access to new sources of finance and capital and accelerate project delivery in order to achieve societal objectives, such as increased mobility, faster travel times, economic growth, or increased public safety. In contrast, private sector interest in P3s is based on achieving an adequate rate of return in relation to risk, and on expanding investment opportunities. Table 5-1 summarizes the differing, and at times competing, incentive structures of public and private entities.
| Incentive Area | Public Sector | Private Sector |
|---|---|---|
| Objectives | Develop projects that improve mobility, accessibility and connectivity, support economic growth, reduce bottlenecks, minimize risk, and support the public good | Be selected as the preferred bidder, minimize risk, and maximize rate of return |
| Accountability | Accountable to stakeholders (e.g., public office holders, public agencies, voters, and the general public) | Primarily accountable to shareholders and management; may be accountable to clients and public, as part of being good corporate citizen |
| Process | Required to follow prescriptive procedures to encourage transparency, uniformity among proposers, and optimize risk allocation | Prefers that procurement procedures are streamlined and fast-tracked to obtain a competitive advantage and reduce proposal development costs |
| Competition | Required by statute or strongly encouraged by stakeholders to maintain a reasonable and manageable level of competition in line with project schedule and agency resources | Prefers to have competitive advantage to increase the likelihood of selection and contract award, minimize risk, and maximize rate of return |
| Information Disclosure | Required by statute and strongly encouraged by stakeholders, public office holders, public agencies and stakeholders, and voters to share information and maintain transparency | Prefers to limit information exchange as much as possible to maintain competitive advantage, protect intellectual property, reduce transaction costs, and improve its negotiating position with the public agency |
| Early Involvement | Is open to the early involvement of the private sector provided that the approaches used comply with statutes and are in line with political and public expectations | Would like to see more opportunities to be involved early in the procurement process to obtain a competitive advantage and to shape project design |
Sources: Adapted from Eno Center for Transportation, Partnership Financing: Improving Transportation Infrastructure Through Public Private Partnerships (2014) and from FHWA, Challenges and Opportunity Series Public and Private Partnerships in Transportation Delivery (2012).
8 National Conference of State Legislatures, Public-Private Partnerships for Transportation: A Toolkit for Legislators, May 2015 Update and Corrections.
9 Nebraska was, until recently, in this category, having enacted legislation in 2016 authorizing the use of design-build and CM/GC project delivery methods; refer to Nebraska Revised Statutes Chapter 39-2801, et seq.
10 States without some form of municipal home rule authority include Alabama, Delaware, Mississippi, Nebraska, New Hampshire, New Mexico, Oklahoma, Vermont, Virginia, West Virginia, and Wyoming. However, it should be noted that West Virginia has recently enacted a pilot program, which is due to conclude by the end of 2017.
11 Parsons Brinckerhoff, Nossaman LLP, and HS Public Affairs (2015), Effect of Public-Private Partnerships and Nontraditional Procurement Processes on Highway Planning, Environmental Review, and Collaborative Decision Making (SHRP 2 S2-C12-RW- 1), p. 43.
