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III: Defining PPPs and Their Benefits

A. Defining PPPs

PPPs are contractual arrangements between public and private sector entities pursuant to which the private sector is involved in multiple elements of public infrastructure projects. Unlike conventional methods of contracting for a project, in which discrete functions are divided and procured through separate solicitations,[16] PPPs contemplate a single private entity being responsible and financially liable for performing all or a significant number of functions in connection with a project. The "private partner" is typically a consortium of private companies with expertise in the different functions to be performed (design, construction, financing, operation and/or maintenance). In transferring responsibility and risk for multiple project elements to the private partner, the procuring agency shifts certain risks to the private partner and focuses on desired outcomes instead of detailed project specifications. The private partner receives the opportunity to earn a financial return commensurate with the risks it assumes. Structured in multiple forms, PPPs vary generally according to the scope of responsibility and degree of risk assumed by the private partner with respect to the project. In each case the private partner assumes financial risk in some form – for example, through an equity investment, liability for indebtedness, a fixed priced contract, or a combination thereof – and risks related to project design, construction, operation and maintenance, as applicable.

The 2004 Report provided a broader definition of PPPs which included any approach to project delivery that allowed more private sector participation than is traditional. For that report, the term "PPP" encompassed an expansive set of relationships – from agreements for a limited number of project elements, e.g., contracts where the private sector is responsible for designing and constructing a facility ("Design-Build"), to agreements for several project elements that can be very complicated and technical, e.g. contracts under which the private sector is responsible for the design, construction, financing, operation and maintenance of a facility.

The more focused definition in this report reflects the success of an increasingly utilized subset of PPPs. Long-term, concession-based PPPs were rarely considered, let alone implemented, in the United States prior to 2005. Over the last three years, however, long-term, concession-based PPPs have become more prevalent. In long-term, concession-based PPPs, the private sector generally assumes a significant portion of the financial risk of the project, risks associated with the operation and maintenance of the project, and, in the case of new capacity and capital improvements, risks associated with the project's design and construction. Whether the private sector assumes a significant portion of the risk that the project will not generate enough traffic and revenue to pay for the project's costs is an important component of the structure of a long-term, concession-based PPP. While most of the PPPs in the United States have been for toll road projects in which the concessionaire assumes the traffic risk, some states have begun procuring PPPs utilizing toll free structures in which the concessionaire does not assume any traffic risk, but does assume risks inherent in the facility's design, construction, financing, operation and maintenance.

There are currently more than 20 long-term, concession-based PPP projects at various stages of procurement in the United States.  Generally, the value of each of these PPPs ranges from a few hundred million dollars to a few billion dollars, and the total value should all of these projects be delivered can be expected to exceed several billion dollars. Long-term, concession-based PPPs for highway projects have been implemented over the last three years, and the tangible benefits that these projects provide are becoming increasingly clear, especially as the PPP structures utilized by these projects are compared with traditional approaches to project funding and procurement.

B. The Benefits of PPPs

Many of the benefits of PPPs were described in the 2004 Report, including the efficiencies gained from PPPs in project delivery, operations and maintenance.[17] These and similar benefits have been documented by multiple studies over the last few years[18] and are identified below. As PPPs are increasingly utilized in the United States , the value of many of these benefits becomes increasingly clear, including the following:

These examples demonstrate that state and local authorities are using PPPs to reduce costs, accelerate project delivery, allocate risk more effectively and encourage innovation.

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