Public private partnerships (PPP) are in the news. In Virginia, a consortium of Skanska Infrastructure Development, Macquarie Financial Holdings and others have closed a $1.2 billion deal to finance, design and build a new tunnel under the Elizabeth River between Norfolk and Portsmouth. In California, the $490 million Long Beach Courthouse — the first major new courthouse built in California in forty years — is nearing completion by a team including Meridiam Infrastructure, AECOM Design, Clark Construction and Johnson Controls. In Texas, Governor Rick Perry has signed into law a sweeping new PPP statute and local governments are considering PPP for projects such as a state-of-the-art 500,000 square foot courthouse in Travis County. In Florida — where Balfour Beatty Campus Solutions and Capstone Companies recently completed a 1200-bed dormitory and stadium project for Florida Atlantic University — awareness of PPPs was raised when the Florida House passed a new and broader PPP statute. While the Florida Senate adjourned without acting on the bill, the trend toward increased use of PPPs in Florida shows no signs of abating.
In short, financially-constrained state and local governments are considering, and in certain instances using, PPP to provide critical infrastructure for their constituents.
While the details of individual PPP projects vary widely, PPP has generally been defined as a transaction involving a public sector authority and one or more private parties, in which the private parties agree to provide a public service or project and assume substantial financial, technical or operational risks. In a successful PPP, the objectives of the government are aligned with the profit motives of the private parties. This alignment results in a win/win project that provides “value-for-money” and the optimum amount of risk transfer to the private party.
Around the world, PPPs have been used to develop both “horizontal” infrastructure such as roads, railways, water- and waste-water treatment facilities, and “vertical” or “social” infrastructure such as hospitals, government buildings, schools and housing. The local political environment and circumstances can greatly affect the outcome of a particular PPP project. Still, a recent study in Canada shows that PPPs are developing a track record of on-time, on-budget completion for a wide variety of horizontal and vertical/social infrastructure projects. Using an analysis that compares the actual cost of private-sector delivery to a Public Sector Comparator (PSC) — a figure reflecting the all-in lifecycle cost of public sector development — the study concludes that PPP projects have delivered efficiency gains over traditional procurements as well as a high degree of cost and time certainty from financial close through completion of construction.
Generally speaking, the cost of financing a project by traditional government procurement is less than the cost of private finance. This is true because governments can typically borrow at a lower interest rate than private sector entities. Some critics focus on this single fact and conclude that PPPs can never compete with traditional procurement on the basis of cost efficiency. PPP projects can, however, finish ahead of traditionally-procured projects on a value-for-money basis, which accounts for cost savings in the management of the project (including more efficient recognition of lifetime costs and risks) and delivery of a qualitatively superior project.
Sophisticated financial models have been developed to help government owners conduct value-for-money analyses and determine which projects are good candidates for PPP. Many government owners have found that, by engaging in a value-for-money analytical process, they receive a superior project at a better price no matter what procurement method they ultimately decide to use.
Specific enabling legislation is not always required for a government entity to use PPPs to build infrastructure projects. Still, many states are enacting new PPP statutes or revising existing PPP statutes to facilitate and encourage the use of PPPs in appropriate circumstances. The National Conference of State Legislatures reports that in the past three years, the number of states with statutes creating a legislative framework for PPPs has increased by 50 percent.
An empirical study conducted by two Cornell University professors identifies the characteristics of so-called “high-intensity” PPP statutes. These characteristics include a broad definition of eligible facilities and express authorization for counties, municipalities, authorities and other lower-level governmental entities to enter into PPP contracts. High-intensity statutes also typically allow for unsolicited PPP proposals, long-term leases and concessions, and availability and capacity payments by governments to PPP developers. Other common characteristics of high-intensity PPP statutes include provisions that protect confidentiality of PPP proposals within reasonable limits, express authorization for multiple sources of funding and financing, and provisions that exempt PPP projects from otherwise-applicable public procurement rules. While no “model” PPP statute has been developed for use in the United States, most new or revised state statutes reflect these high-intensity characteristics.
Public private partnerships are not appropriate delivery systems for all infrastructure projects. PPPs are most often used for large or complex projects that do not fit neatly into traditional capital programs. A critical need for the project must exist. Criticality ensures strong public sector buy-in, which is an essential ingredient for success. Criticality also helps to ensure that the facility will operate and generate revenue over the long term. A PPP project must have a reliable revenue stream or it won’t attract investors or lenders. Ancillary sources of revenue tied to the project, such as shares of federal funds, sales taxes or impact fees, will often attract investors. Projects with a high degree of revenue risk may fail to lure investors. Historically, critical projects have included transportation and water/wastewater treatment facilities as well as social infrastructure such as schools, courthouses and hospitals.
PPP projects are also more likely to be successful when there is a clear definition of the public’s needs and desired outcomes. Ideally, the government owner will express its needs and desires in specific written measures of performance. Finally, PPPs are most likely to succeed when there is top-down leadership, bottom-up support, and a financial value-for-money analysis that shows private financing to be a competitive alternative to public financing.
Estimates of the amount of private money “on the sidelines” and available for deployment on quality PPP projects around the world range from $2 trillion to $4 trillion. Under the right circumstances, PPP projects in the United States can successfully compete for those funds. When used properly, PPPs can generate win/win/win outcomes for government owners, public users and private investors.