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Consideration of Tax Issues in Developing and Evaluating P3 Concessions for Transportation

June 22, 2017
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Presenters: Jim Ziglar, Lucian Spatoliatore and Michael Mariani, Deloitte


Mark Sullivan

Mark Sullivan
Center for Innovative Finance Support
Federal Highway Administration


  • Jim Ziglar
    Specialist Leader
    Deloitte Transactions and Business Analytics LLP

    Lucian Spatoliatore
    Deloitte Tax LLP

    Michael Mariani
    Senior Manager
    Deloitte Tax LLP

Presentation Outline

  • Part 1: Key Public and Private Sector Considerations
  • Part 2: Taxes in the Context of P3 Project Delivery Evaluation

Part 1: Key Public and Private Sector Considerations


Public Sector - Key Considerations »
  • Understanding indirect vs. direct taxes generated by the project
  • Types of direct taxes generated by the P3
  • Incremental economic impact of P3s
Private Sector - Key Considerations »
  • Entities usable by a P3 investment structure
  • Investor-specific tax considerations
  • Non-federal taxes relevant to P3 transactions
  • Tax-exempt and foreign entity tax considerations
Toll and Availability Payment Concessions »
  • General observations for these two common P3 delivery models
  • Underlying reasons for the differences in tax treatment

Public Sector Sponsors: Key Considerations

Tax considerations involve evaluating overall economic impact of project, as well as parsing direct and indirect taxes generated

Direct vs. Indirect taxes
  • Direct taxes: Local, State, Federal taxes paid by Concessionaire
  • Indirect taxes: based on increased economic activity
Direct taxes
  • Income, Sales, Property
Incremental Economic Impact
  • P3 lifecycle costs reduction
  • P3 accelerated delivery

Incrementality of P3 Taxes

  • P3s can create an additional tax-paying entity relative to traditional procurement
  • Some exemptions given to "level the playing field"

Flow Chart explaining Incrementality

View larger version of flow chart

Heterogeneity of P3 Taxes

Heterogeneity of tax treatment
  • Variety of tax rules
  • Bespoke tax strategies and corporate structures

Private Sector - Key Considerations for Investment Structure

Private Sector Investors will typically structure the Special Purpose Vehicle (SPV) as a "pass-through" entity

P3 Legal Entity
  • Minimize tax burden
  • Increase flexibility
  • SPV impacts on cash distributions
Income tax for SPV
  • Limited Liability Company (LLC): pass-through to members
  • C Corporation: double taxation
Tax attributes
  • Treatment of Net Operating Losses (NOLs)
  • Exit considerations

Private Sector Investors: Key Considerations

Each P3 will be unique based on the taxes levied and the tax status of the equity investors

State & Local taxation
  • Treatment of Partnerships
  • Non-residency
  • Franchise tax
  • Tax relief
Tax-exempt investor
  • Unrelated Business Taxable Income
  • Corporate Blocker (pays taxes)
Foreign investor
  • U.S. taxation
  • Corporate blocker (pays taxes)

A pass-through LLC with multiple owners, each having unique tax characteristics

Pass Through flow chart

View larger version of flow chart

Implications of Different P3 Structures

Two common P3 concession structures are "toll concession" and "availability payment", each having unique tax characteristics

  • Use of partnership by SPV for income tax purposes
Toll Concession
  • Tax Losses in initial years
  • Depreciation of real assets and intangible rights
Availability Payments
  • Percentage Completion Method (PCM) impact on taxes
  • Allocation of concession into Operating and Capital


Part 2: Taxes in the Context of P3 Delivery Evaluation


Taxes in the Context of P3 Evaluation »
  • Benefit Cost Analysis (BCA) overview
  • Value for Money (VfM) analysis overview and application
Methods for Tax Revenue Analysis »
  • Competitive Neutrality Adjustment (CNA) analysis overview and application
  • Trade-offs between levied taxes and overall project value
  • Perspectives and methods on performing VfM and CNA

P3 Evaluation

Valuing potential tax revenues typically depends on a robust evaluation of the project's impact and the delivery method

Benefit Cost Analysis
  • Benefits and costs of a project over a no-build scenario
  • Indirect taxes
  • Early stage analysis for "go / no-go" decision
Project delivery method
  • Value for Money analysis
  • Public Sector Comparator vs. Shadow Bid
Competitive Neutrality Adjustment
  • Adjusts for distortions to the VfM
  • Taxes and risk allocation

VfM analysis focuses on understanding trade-offs between options

Public Sector Comparator
  • Increased focus on increasing the quality of PSC
  • PSC used as "auction reserve price"
Shadow Bid vs. Actual Bid
  • Disconnect between shadow bids and actuals
  • Revenue estimates
  • Discount rates
Decision Tool
  • Adapting to assist public entities in making the multi-factor decisions associated with procurement
  • Trade-off analysis between procurement strategies
  • Quantitative and Qualitative factors

VfM in Practice - U.S. Trends, contd.

Quantitative assessments of VfM have looked beyond the traditional net present value comparison to adding a "flow" analysis

Evolution of VfM
  • Annual VfM comparison provides additional insight
  • Conventional present value analysis may "penalize" early project delivery

Chart - Traditional VfM

Annual VfM

Chart - Annual VfM

View larger version of chart

Tax Revenue Valuation for Competitive Neutrality Adjustment (CNA)

CNAs attempt to quantitatively "level the playing field" between conventional and P3 procurement

CNA for tax revenue valuation
  • Opportunity cost of foregone taxes added to PSC
Taxes included in the CNA
  • Dependent on project sponsor
  • Typically, includes taxes levied at sponsor's level
  • Assumption-driven
Taxable debt
  • Additional tax stream for Local, State, and Federal
  • P3 debt usually tax-exempt

Value for Money with Competitive Neutrality Adjustment

A common method for incorporating taxes into CNA is to add the opportunity cost of foregone taxes paid directly by the P3 owners to the costs of the Public Sector Comparator

Chart - Value for Money Public Sector Comparator or P3

View larger version of chart

Tax Revenue Valuation: P3 Tradeoffs and Incentives

There is an inherent trade-off between the amount of taxes paid directly by a P3 and the cost of the P3 to the public broadly

P3 impact on taxes
  • Indirect taxes not linked to procurement
  • Direct taxes only relevant if collected by public sponsor
Tax particulars
  • Balancing tradeoffs between value and taxes for public sponsor
  • Taxes accounted as cost in private investors' bids

Like all P3 costs, taxes paid by P3s come from user fees or public payments

Balance of costs

Tax Revenue Valuation - Modeling Tax Revenue Streams

Modeling direct taxes
  • Scenario analysis to assess tax impacts
  • Demand (toll) and performance (availability) analysis over time
  • Assumptions made for P3 tax structure and impact
Modeling indirect taxes
  • Assumptions on impact of project on tax base
  • Calculations of incremental tax revenues
Eye of the beholder
  • Analysis focus dependent on interest of entity performing the analysis
  • Assumption-driven
  • VfM and CNA as tools inform the decision



Contact Information

Patrick DeCorla-Souza
P3 Program Manager
FHWA Center for Innovative Finance Support

Mark Sullivan
P3 Program Director
FHWA Center for Innovative Finance Support

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