How to use this white paper:
This white paper can be considered independently or as part of HNTB's public-private partnership white paper series, written to reflect the milestones in the life cycle of a P3. These papers are not intended to be exhaustive works but rather to trigger ideas and questions of how the topic might be applied to your agency's program. To learn more about P3s, contact Scott Smith, director strategic initiatives, at ssmith@hntb.com, or Tim Heilmeier, program director Georgia Department of Transportation Public-Private Program, at theilmeier@hntb.com.

America is not behind in its adoption of P3s

Between 1985 and 2011, there were 377 public-private partnerships in the United States — only 9 percent of the worldwide figure, according to a paper from the Brookings Institution.

"Part of the reason, we think, is that while 31 countries currently have an entity at the national or state/provincial level dedicated to helping design and implement PPPs (known as PPP Units), the U.S. does not have one on the national level. They do exist on the state level but only in 3 states (Virginia, California and Michigan)," study co-author Robert Puentes wrote.

Some critics label the United States as "slow" to adopt public-private partnerships, but America should not be disparaged for its hesitation to embrace a delivery mechanism the rest of the world has implemented out of necessity. The fact is U.S. transportation agencies simply are determining how best to integrate P3s into their existing systems, so the new delivery mechanism generates the best value.

P3s have become the preferred method for delivering critically needed infrastructure in other countries because it is far more difficult for them to issue their own debt. And, in most cases, P3s are the easier alternative to navigating bureaucracies and debt limits.

If anything, the U.S. has been ahead of other countries in financing projects with tax-exempt debt — a proven and still quite effective way to fund transportation infrastructure. Experienced transportation providers at the local level can issue their own tax-exempt debt at cheaper rates than the private sector can. Having said that, U.S. interest is on the rise, indicating P3s soon may have a permanent place in the project development toolbox.

P3s are an alternative way to generate transportation investment States are struggling with uncertainties surrounding the transportation reauthorization bill and, more important, pledging themselves to budget austerity, which could signal a reduction in current SAFETEA-LU commitment levels. Further, the 2009 American Recovery and Reinvestment Act has kept state transportation programs afloat the past few years and delayed the reality of the looming funding crunch. With stimulus funding and congressional general fund transfers coming to end, transportation agencies are looking for any means to generate new transportation investment.

Why P3s, and why now? There are three reasons:

1. Raising taxes is taboo in the current political environment; thus, tolling and P3s are garnering more interest as alternative funding sources. State debt capacity and state credit ratings also are factors as is Standard & Poor’s Aug. 5, 2011, downgrade of U.S. sovereign debt from AAA to AA+. Few states are willing to undertake multibillion dollar bond issuance for transportation if that is going to potentially lower their bond ratings and make borrowing more expensive for other needs, such as schools, capital projects, etc.

2. With strategic injections of private equity, states can reallocate public funding to other projects. Two recent Texas Department of Transportation toll concessions attracted a total of $1.1 billion in private equity that allowed vital mobility projects to move forward, while it allowed TXDOT to redistribute its money to other projects.

3. In a P3, risks are allocated to the party best suited to assume them. For example, it is common for the private sector to assume the risks inherent in the cost and timeliness of construction, while the public sector is more capable of accepting risks associated with environmental clearance and public acceptance. Proper distribution of risk can minimize public subsidy costs over the long term.

Each day, a new headline announces another state is contemplating, enhancing or has passed P3 legislation. As of December 2011, 32 states and Puerto Rico have P3-enabling legislation.1 And, at least 15 states considered 21 P3-related bills in 2011 legislative sessions. But only a handful of states have ventured beyond the basic P3 design-build model to implement the full-blown concessions model. Those states include Florida, California, Texas, Virginia, Indiana and Colorado. Georgia, North Carolina, and the Port Authority of New York and New Jersey are advancing specific P3 projects. Texas is expanding its universe of P3 projects, and Indiana lawmakers recently voted to allow Gov. Mitch Daniels to build toll roads without any new legislative approval. Eighteen states do not have P3-enabling legislation. They are:

As states look for funding solutions, public officials should note that 55 percent of Americans support using P3s to build critical infrastructure projects. Thirty-five percent oppose using P3s to fund highways, airports and other infrastructure, according to a December 2011 Reason-Rupe poll.

The best P3 legislation is short and simple
HNTB's role as a trusted adviser to transportation agencies puts our firm in a unique position to observe how various states have developed or are developing P3 legislation. From those vantage points, we are able to identify the following best practices for maximizing the legislation’s value:

1. Keep the language simple. The best P3 authorizing legislation often is just a few paragraphs.

2. Establish best-value selection criteria. The sponsoring agency should be able to choose the right bid to ensure the preferred project is advanced, which is not always the lowest bid.

3. Ensure flexibility. Sponsors should be able to take advantage of different project types and concession lengths and the option to perform cursory reviews of unsolicited bids.

4. Limit the barriers to contract execution. The sponsoring agency should have attained the appropriate departmental/legislative authority to execute procurement without further legislative or governmental approval.

5. Include implementation enhancements, e.g., video tolling and collection enforcement provisions, to maximize revenue.

6. Allow public-public, as well as public-private partnerships. The legislation should supersede existing laws that could prohibit implementation of certain P3 facets. For example, a DOT may receive exclusive P3 powers among state agencies. However, existing statutes may give other transportation agencies in that state, and not the DOT, the ability to set and enforce tolls. A DOT must have the power necessary to carry out its mission of procuring and implementing P3 projects. It is very important to note that many states have statutes or even constitutional language that could run contrary to the concepts in a "typical" concession contract. When enacting P3 legislation, it is important to perform a detailed inspection of current legislation and either "clean it up" or add a statement that the statute supersedes any conflict with existing law.

7. Permit co-mingling of federal, public and private funds. The legislation should ensure maximum flexibility by enabling the partnership to use multiple funding sources to deliver a project. In addition, the law either should be left open-ended, or it should specifically state that owners can enter into different forms of P3 contracts as applicable to each project.

Let transportation experts install proper governance

Once legislation is in place, the transportation agency and its consultants should establish a robust set of policies and procedures that meet the sponsoring entity’s objectives, define the procurement process and ensure public interests are protected. Policies and procedures should outline the procurement process and ensure a competitive, transparent environment to maximize value.

A P3 is not a blanket solution — certain criteria must be in place
P3s can add value. They can provide their own financing. They can build, construct, operate, maintain and finance projects. In most instances, they add their own equity in addition to what debt markets will allow. But, P3s are not the silver bullets of transportation finance. Certain criteria must exist for them to be a viable option. Projects suitable for P3s have:

• A revenue source. A P3 will work only if the private sector knows it will get paid for its efforts and earn a return on the equity it invests. Thus, the overall plan needs to have a revenue source, such as tolling, tied to the project or a tax-based transportation trust fund. Return on investment depends on the project's overall risk, but 12 percent is a common benchmark with some internal rate of return estimates as high as 16 percent for greenfield concessions. (Note: The range can be less for availability arrangements.)

• Traditional public funding to help cover subsidies. P3s are attractive because they offer private equity as a way to supplement traditional funding sources. The key word being supplement. In most large-scale, new-capacity projects, P3s cannot fully fund their upfront capital costs — even if the equity is being used to build a user-fee based system, such as a toll road. Without reciprocal funding from the public entity, the project most likely will not proceed.

• Federal legislative enhancements that encourage private investment. These include private activity bonds and the TIFIA program. A draft U.S. Senate transportation bill has suggested raising annual TIFIA appropriations from $122 million to near $1 billion. TIFIA is a game-changer and provides tremendous leverage.

• A special need. A P3 may be applicable if the sponsor needs to transfer the risk of construction, operation or maintenance, needs access to private equity to finance the final portion of a project, or needs specialized expertise to execute a complicated project, such as a bridge or tunnel.

P3s are not a one-size-fits-all solution, but they are becoming a viable alternative in the United States, and they should be given their rightful place in the project delivery toolbox. Enacting simple but flexible legislation is the first step in preparing a solid foundation for developing future P3 transportation projects.

Additional resources
For more information about public-private partnerships, consult the following:

Brad Guilmino, HNTB Corporation
Chief Financial Consultant
(212) 915-9517; bguilmino@hntb.com

Scott Smith, HNTB Corporation
Director Strategic Initiatives
(816) 527-2425; ssmith@hntb.com

Tim Heilmeier, HNTB Corporation
Program Director Georgia Department of Transportation Public-Private Partnership Program
(404) 946-5710; theilmeier@hntb.com

For a map of P3 activity in the United States, visit:
http://www.hntb.com/sites/default/files/P3_2011.pdf

The Brookings-Rockefeller Paper
"Moving Forward on Public Private Partnerships: U.S. and International Experience with PPP Units"
http://bit.ly/rpHRCy

Design-Build Institute of America
http://dbia.org/

The Federal Highway Administration’s website on public-private partnerships
http://www.fhwa.dot.gov/ipd/p3/index.htm

InfraAmericas
http://www.infra-americas.com

Institute for Public-Private Partnerships
http://www.ip3.org/about-ip3.html

The National Council for Public-Private Partnerships
http://ncppp.org

The Reason-Rupe December 2011 Poll
http://reason.com/poll/2011/12/20/77-percent-opposeraising-gas-tax/print

For other HNTB-issued papers and viewpoints on P3s, visit HNTB.com.

¹ Based on figures from the National Conference of State Legislatures.

HNTB Corporation is an employee-owned infrastructure firm serving public and private owners and contractors. With nearly a century of service, HNTB understands the life cycle of infrastructure and solves clients' most complex technical, financial and operational challenges. Professionals nationwide deliver a full range of infrastructure-related services, including award-winning planning, design, program delivery and construction management. For more information, visit www.hntb.com.

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