Overview

Public-Private Partnerships

A Public-Private Partnership (PPP) is a mutually beneficial collaboration between a public agency and a private sector entity. Through this contractual arrangement, the skills and assets of each sector are shared in delivering a service or facility for the use of the general public. In addition to the sharing of resources, each party shares in the risks and rewards potential in the delivery of the service and/or facility.

Projects with the greatest likelihood of success are those high priority projects that are clearly defined and have a demonstrated public sector commitment. Projects delivered through a PPP must allocate the risks fairly between the parties, with each sector assuming the risks they are best able to manage. The public agency usually assumes the project definition risk by undertaking the environmental clearance effort, assessing financial feasibility and garnering stakeholder and political commitment. The private sector can best assume the financial risk, such as project financing, construction and perhaps facility management.

Advantages of PPPs

Metro is looking at PPPs as a means to accelerate delivery of our much-needed transportation projects. If we can use up-front private investment to finance some of the projects, we will likely see construction cost savings due to today's favorable bidding environment, efficiencies in alternative delivery and/or management strategies, congestion mitigation, faster achievement of CO2 emissions reductions and earlier completion of our planned rail-bus-highway transportation network.

Of course, a private investor will be entitled to a reasonable return on the project financing investment made in the public project. Therefore, to determine whether delivering the project through a PPP is the most financially responsible method for the public agency to pursue, we must undertake a thorough analysis and comparison of life-of-project costs to be incurred both by delivering, operating and maintaining a project as a strictly public project, and by delivering a project with private financial participation.

Benefits

Benefits of Public-Private Partnerships

1. New Sources of Capital

Private equity, pension funds and other sources of private financing must still be repaid, but shifting responsibility for arranging the financing to a private partner can help deliver needed infrastructure in instances where the government agency is facing shortages in infrastructure funding.

2. Faster Completion of Projects

Conventional procurements usually require the public sector to provide significant upfront capital for project construction. Securing private financing allows the public sector to spread the public’s cost of infrastructure investment over the lifetime of the asset, much as homeowners do when they take out home mortgages. Typically, the private contractor also has a strong incentive to complete the project as quickly as possible to begin collecting the stream of revenues needed to recapture its capital costs.

• In Canada, Terminal 3 at the Toronto Pearson Airport was completed 18 months ahead of schedule under a PPP contract.
• The UK’s National Audit Office reported in 2003 that 73% of non-PPP construction projects were over budget and 70% were delivered late.
• Only 22% of the projects built using the Public-Private Partnership model came in over budget and 24% were late.

3. Shifting Construction and Maintenance Risks from Taxpayers to Private Partners

The ability to shift the risks a contractor can best manage to the private sector is an important benefit of the public-private partnership concept. The private entity is allowed to earn a financial return commensurate with the risks it assumes on the project. Among the risks that can best be assumed by the private partner are:

• Design risk
• Risks associated with meeting contracted quality standards
• Construction cost overrun risk
• Risks associated with meeting contracted completion deadlines
• Risks associated with post-completion operations

Some Partnership agreements require the private sector to maintain the assets over the full term of the concession. California currently carries approximately $12.5 billion in deferred transportation maintenance at the state level and $10.5 billion locally. This deferred maintenance imposes huge costs in the long run—early intervention costs about 20% less than maintenance postponed to the latter quarter of a facility's life. Continual maintenance deferral can result in more safety problems, a shorter infrastructure lifespan and reduced quality of services.

4. Lower Costs - Construction Savings

Experience from several countries has demonstrated that public-private ventures cost comparatively less during the construction phase thanks to innovations in design and construction methodologies.

• A 2000 report commissioned by the UK Treasury found that among a sample of 29 public-private investment programs, average savings were about 17%.
• In the US, the costs of completing construction for segments of the Denver E-470 toll road that used a Public-Private Partnership approach came in $189 million below the original cost estimate of $597 million.

5. Reduced Life-Cycle Costs

In traditional contracting, the private sector’s role is typically limited to immediate construction. This can create a perverse incentive to economize on elements of construction today even though maintenance costs might be higher in the long run. Shifting long-term operation and maintenance responsibilities to a private entity creates a stronger incentive to ensure long-term construction quality because the firm will be responsible for maintenance costs down the road.

• A UK study of benefits flowing from operating Public-Private Partnership projects found that, on average, government realizes a saving of 17% over the whole life cost of services by using the public-private finance approach.

6. Superior Customer Service

Private infrastructure providers, often relying on user fees from customers for revenue, have a strong incentive to focus on superior customer service. And, since the asset is not managed by the public sector, government agencies are better able to concentrate on ensuring the provider maintains customer service levels. In the case of accommodation Public-Private Partnership model agreements, such as schools or defense facilities, customer satisfaction metrics can be built into the contract to ensure a strong customer orientation.

• In the UK, more than 75% of end users reported their Public-Private Partnership program projects were performing as expected or better than expected; 25% said that the facilities were “far surpassing” expectations.

Project Evaluation Process

The chart below outlines the process for evalauting and considering a project for Public-Private Partnership. Click on image to view information in Acrobat format (87KB, PDF).

Initial Projects

Initial Public-Private Partnership Projects

Highway Projects

• I-710 Corridor – Improvement of 18 miles of the Long Beach Freeway from the Ports of Los Angeles and Long Beach to the north, and includes potential provision for exclusive freight and goods movement facilities.
• SR-710 Gap Closure – Construction of an extension to the existing Long Beach Freeway to I-210, and incorporates a proposed tunnel for a significant portion of its alignment.
• High Desert Corridor – New 50-mile highway through both Los Angeles and San Bernardino Counties. The project extends eastward from SR 14 to I-15.

Transit Projects

• Crenshaw/LAX Transit Corridor – An extension to the Metro Rail light-rail transit system, potentially linking LAX Airport to existing and planned rail lines.
• Westside Subway Extension (“Subway to the Sea”) – 8.5 miles of heavy rail subway, completing the line between Downtown Los Angeles to West Los Angeles, and will be constructed in three phases.
• Regional Connector Transit Corridor – 2-mile transit link between the Metro Gold Line, Metro Blue Line and Expo light rail transit (LRT) systems through Downtown Los Angeles.