A Public-Private Partnership (PPP) is a mutually beneficial collaboration between a public sponsor 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 sharing 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 sponsor 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.
A variety of Public-Private Partnership models have been utilized throughout the world, having the common objective of facilitating private sector participation in the provision of public works and sharing with the private partners some of the traditional public responsibility and risks for financing, designing, constructing, maintaining and/or operating various infrastructure projects. Most PPP models take one of the following forms:
Design-Build (DB) : The public sponsor contracts with a private party to design and build a project to the specifications provided by the public sponsor, and certain risks for design and construction are assumed by the private contractor. After completion, the public sponsor operates and maintains the facility.
Design-Build-Maintain (DBM) : This is similar to Design-Build but also transfers maintenance responsibility to the private contractor for a specified period. The public sponsor bears full funding responsibility and retains ownership and operation of the facility.
Design-Build-Operate (DBO) : This is also similar to Design-Build, with the private party also assuming facility operation responsibility and risk for a specified period, while the public sponsor bears full funding responsibility and retains the maintenance role.
Design-Build-Operate-Maintain (DBOM) : The public sponsor contracts with a private partner to design, build, operate and maintain the facility for a specific period, while the public sponsor typically bears full funding responsibility. At the end of that period, operation and maintenance transfers back to the public sponsor in a pre-prescribed state of good repair.
Design-Build-Finance-Operate-Maintain (DBFOM) : The public sponsor contracts with the private sector to design, build, finance, operate and maintain a facility under a long-term agreement, while the public sponsor retains ownership of the facility. At the end of that time frame, full responsibility for the facility is transferred to the public sponsor in a state of good repair.
Utilizing definitive value for money analyses, cost analyses, evaluation of risks assessment, and other rigorous and thorough project evaluation exercises, the mission of the PPP Program is to determine ultimately which project delivery method, design/build or PPP, provides the best value for Metro and the citizens of Los Angeles County.
Metro adopted specific criteria and a progressive evaluation process with which to assess likely PPP delivery potential of all our transit and highway projects.
An initial survey of some 81 projects listed in our Long Range Transportation Plan identified 14 as having likely PPP potential, and three highway projects have emerged from that initial survey. These are:
I-710 South Corridor (including I-710 South Early Action Projects)
Two more, the group of projects identified as the Accelerated Regional Transportation Improvements (ARTI) Project (highway projects) and the Sepulveda Pass Corridor Project (highway and transit projects), are also in the development phase, with ARTI scheduled for a Request for Qualifications solicitation release in the summer of 2013.
Although at various stages of development, all our projects follow the same evaluation workflow process, considering both traditional delivery models and PPP delivery, to ensure a thorough and objective consideration of appropriate project implementation.
The three highway projects identified above are currently being analyzed as alternatives in the on-going environmental clearance efforts, and would only be considered for implementation if ultimately selected by Metro’s Board as the locally preferred alternatives. Our assessments indicate they would provide financial and project delivery benefits when undertaken as PPPs, particularly when evaluated on a whole-life costing basis, which considers the cost of designing, building, and maintaining a project over a 35-50 year contract period. Each project offers a unique set of opportunities for potential acceleration and/or cost savings, although the benefits differ substantially among the projects. All of the projects have aspects that could interest major contractors and equity and debt sponsors.
At this time, we don’t anticipate commencing a procurement solicitation for any of these three projects until the environmental work is completed. More information about the SR-710 North gap, the I-710 South and the High Desert Corridor can be found here .
We are interested in working with consortiums of nationally and internationally qualified PPP‑experienced infrastructure providers.
Partners may be financial institutions of various kinds including banks and private equity funds, as well as union, public and private pension plans, to name a few. They may also likely be construction firms that specialize in highway and/or public transit design, construction, operation, and/or maintenance.
Check in with our Basics for Vendors site and follow Metro’s current solicitations site for procurement listings.
A critical issue in PPPs is the selection of the right private sector partners. When public•private venture projects are selected by Metro’s Board to be advanced through procurement, we will identify and refine a set of appropriate selection criteria for each of the projects. Criteria Metro will employ in selecting private partners would include:
• Previous track record in providing the assets it is offering to contribute to the partnership
• Experience with PPPs
• Public and private reputation for integrity and reliability
• Adequacy of the partners’ resources to meet Metro's requirements
• Willingness to be flexible in working through development of PPP agreement
• Quality of the match between the partners’ assets and Metro's specific project requirements
Fares charged on Metro's transit facilities, whether operated by a private operator under contract to Metro, or by Metro itself, would be consistent with the agency's overall fare structure, which is established by Metro Board action. On Metro’s tolled highway facilities, the toll rates would be established by Metro and approved by the Board.
If the transit or highway facilities are to be privately financed, owned and operated, the private operator establishes the fares and/or tolls, and assumes “revenue risk”. This means the private operator will receive the revenues but also assumes the risk of people using, or not using, the facility. Charging uneconomically high fares or tolls could discourage use, reducing potential revenue the operator would generate, thus making the high user rate ultimately counter-productive.
Prior state law authorized the California Department of Transportation (Caltrans) and Regional Transportation Agencies to enter into comprehensive development lease agreements with public and private entities, for certain projects that may charge tolls and user fees, but limited the number of projects to two in northern California and two in southern California. The SR-91 tolled facility and the I‑125 South Bay Expressway were the two southern California projects built under this authorization.
California Senate Bill 4 (SBX2 4), effective May 21, 2009, extended the authorization term to January 1, 2017, and deleted the restriction on the number of projects that may be undertaken. This legislative authorization now enables us to explore the possibility of sector investment in badly-needed state infrastructure projects at a time when public funding is extremely scarce.
Not all public-private partnerships are successful. But one of the key features of the partnership is the assigning of risks to the party best able to manage those risks. Therefore, if the partnership agreement is structured correctly, and the financial risk is transferred to the private investor, the equity investors and lenders must be the party to work out the debt repayment. The public sector has gained a fully-constructed, functioning facility, available for public use many years earlier than would otherwise be possible.
In many cases, toll concession projects that have failed have not been taken over by the public sponsor, but instead by other private buyers who assume ownership and keep the roads in operation.
Metro will not transfer ownership of any of our facilities. Our agreements with the private sector partners (whether from the U.S. or international) could involve designing, building, financing, maintaining and/or possibly operating our facilities, and Metro will constantly monitor those agreements to assure compliance with its terms. We will search for the finest, most experienced, capable firms possible to partner with us to deliver our projects. It must be recognized that companies with the most proven track record in PPPs are international firms, as the public-private partnership concept is still relatively new in the U.S.
Roles and responsibilities of all parties to a PPP project are determined through negotiations leading to the execution of a concession agreement between the parties. The agreement will set forth the project specifications, requirements and performance criteria that Metro expects the private partner to meet so that the project achieves the desired outcome-based goals.
Abiding by these parameters, decisions made during project design, construction and possibly operation will best be made by the party assuming responsibility for the outcome of those decisions. For example, if the private partner is to assume maintenance responsibility for all the elevators in a subway station during the full 35 year term of a concession agreement, the decision as to selection of specific elevators to be used would likely be left to the private partner. Metro must specify the performance requirements of the elevators in the agreement (i.e. limited time for maintenance and repair; limited number of repair episodes within a month, etc.), and if these requirements are not met, the private partner suffers financial consequences as specified in the agreement.
Some of the potential PPP projects are on California’s State Highway system, and Metro will therefore be working in close collaboration with California’s Department of Transportation (Caltrans). The specific roles and responsibilities of both Metro and Caltrans will be fully identified and outlined in cooperative agreements between the agencies.
Public input for our projects is solicited during the environmental clearance and preliminary design phases, when we are preparing the Environmental Impact Report or Statement (EIR/S). It is in the EIR/S phase that the project is defined by the consideration of mobility need, engineering, cost, operational feasibility, community collaboration and other factors. That process does not change, even if we are considering the delivery of a project as a PPP. The PPP component defines how the project is ultimately delivered, whether as a strictly public project or as a partnership with the private sector.
Additionally, regardless of the delivery method, the construction contractors will always be required to initiate an aggressive public outreach program to address and manage construction impacts.
Public-Private Partnerships are most effective when the various risks and responsibilities of project delivery are appropriately allocated to the party best able to manage them. When structured effectively, PPPs can result in significant cost savings, shorten project delivery time and encourage innovations and the incorporation of life-cycle costs, which can often lead to delivery of a higher quality project.
Public-Private Partnerships are a tool in the project delivery toolbox. They are viewed as one of a number of techniques and mechanisms for funding, financing, delivering, and sustaining transportation facilities and services. PPPs are not an ultimate financing solution in the absence of other resources, but offer an opportunity to leverage existing and traditional sources of funding for service expansion, modernization, and infrastructure investment.
Any public-private project that involves private sector financing needs a dedicated revenue source to repay any underlying project debt. Direct user charges (tolls or fares) are not the only potential source of debt repayment. Debt service payments can be provided by the public sponsor from general revenues, specific taxes or possibly leasing arrangements.
Public-Private Partnership projects are often undertaken to supplement conventional procurement practices by providing additional revenue sources and mixing a variety of funding sources, thereby reducing demands on constrained public budgets. Some of the revenue sources used to support Public-Private Partnerships includes:
- Shareholder equity
- Grant anticipation bonds
- General obligation bonds
- State infrastructure bank loans
- Direct user charges (tolls and transit fares) leveraged to obtain bonds
- Other public agency dedicated revenue streams made available to a private sector developer:
- Dedicated sales tax revenues
- Direct user charges from other tolled facilities
- Shadow tolls
Public-Private Partnership financings often involve the co-mingling of different federally-sponsored tools and private commercial debt. The following federal innovative finance programs are important tools that the public sponsors can use to make Public-Private Partnership projects financially viable and attractive investment opportunities for private sector developers:
- Flexible Matching
- Toll Credits
- Grant Anticipation Revenue Vehicles
- Grant Anticipation Notes
- State Infrastructure Banks
- Section 129 Loans
- Transportation Infrastructure Finance and Innovation Act Credit
Leveraging occurs when public and private partners combine some of their assets and/or expertise to produce an outcome better than the outcome either party could achieve on its own. Public-Private Partnerships combine financial resources, provide in-kind contributions, and share knowledge in order to accelerate achievement of project objectives, often at a lower total cost than would otherwise be possible.
- Accelerating implementation of high priority projects by compressing and overlapping services normally sequenced
- Providing management resources for large or complex programs to insure quality, cost and schedule deadlines are met
- Accessing advanced (and possibly proprietary) technologies not available through standard procurement approaches
- Improving asset management and the scientific application of life-cycle cost practices
- Achieving set levels of environmental or aesthetic quality
- Accessing new sources of private capital (debt and equity), thereby eliminating the need to wait for future budget cycles or future sales tax revenues to pay for needed infrastructure projects on a pay-as-you-go basis
Public agency objectives are achieved by structuring consortium agreements with private partners that allocate roles, risks, and rewards to the entity – public or private – that is best able to manage them. Traditional roles are often redefined, and when financial incentives are introduced, private entities are often willing to assume new risks.
Public-Private Partnerships are often used to meet such public objectives as:
Traditionally, public transportation owners acquire services through a competitive procurement process for each separate activity, either on a qualifications basis (for professional services) or low bid basis (for construction and technology). However, because this direct procurement process does not involve the transfer of risk, the traditional procurement process is not conducive to the development of Public-Private Partnerships.
Metro will likely undertake a two-step procurement process, involving the determination of a subset of qualified proposers through a Request for Qualifications, who will be requested to submit proposals in response to a Request for Proposals, culminating with intensive negotiations with the consortium team offering the apparent overall best value to Metro. We plan to hold Industry Outreach meetings at various stages of this process, inviting input from the private sector to guide our scope development and project structure.
Public-private ventures are used regularly all over the world to deliver infrastructure such as water and wastewater systems, education, health care, corrections, building construction, power distribution, parks and recreation, communications technology and security.
To achieve long-term success in partnering with governments, private contractors must provide quality, value and dependability. Private companies have high levels of accountability with the public, media and regulators at various levels. In addition, the concession contract with the private company usually includes strong provisions for public agency oversight, and the contract contains financial incentives to encourage the private operator to abide by the concession agreement provisions.
One of the reasons government agencies are increasing their participation in partnerships with private contractors is because their constituencies approve of the high quality of services being provided without a commensurate increase in taxes. The profits made by the private-sector in these partnerships come from increased efficiencies, economies of scale and long-term financing that may not be available to the public sector, rather than from cuts in the quality of service. A decrease in the quality of service would likely reduce the possibility of repeat and/or new business.
An EIR/EIS is a document required under the California Environmental Quality Act (CEQA) and National Environmental Policy Act (NEPA). It evaluates potential impacts that a proposed project might have on people or the environment and addresses issues such as, air quality, health risk, noise, visual disruption, and construction impacts, among others.
For a proposed project to move forward to construction, the extent of environmental impacts must first be determined according to State of California and federal law. If potentially significant impacts are anticipated, or if the project is considered controversial, an EIR/EIS is required. The EIR/EIS process simultaneously ensures that the requirements for documenting and reducing environmental impacts of a project are met. Additionally, the process provides for technical analysis as well as public input and participation.
CEQA is a State of California law and requires an EIR for projects that may have a significant impact on one or more environmental resources. NEPA is a federal law, and requires the preparation of an EIS for projects that may significantly affect the quality of the human environment. Under CEQA, an EIR requires the determination of whether individual impacts to environmental resources are “significant.”
If there are significant impacts, the lead agency must adopt the mitigation measures outlined in the EIR, or it cannot pursue the project. By contrast, an EIS considers both beneficial and adverse effects when determining the significance of the project impact as a whole. CEQA also focuses on “the physical environment,” while NEPA provisions identify “the human environment,” which appears broader than the CEQA focus.