Public-Private Partnerships

1. Public-Private Partnerships Dr. Joe Saviak, J.D., Ph.D., Associate Professor of Public Administration, Flagler College Dr. Lawrence Martin, M.B.A., Ph.D., Professor of Public Affairs, University of Central Florida

2. Public-Private Partnerships This research is from a forthcoming guide for elected officials & senior administrators – research funded and will soon be published by the Government Services Partnership Institute, a national organization which provides research, resources, & support to local governments so they can successfully select & adopt contracting and P3s to reduce costs, improve service, & meet citizen expectations State & local governments are in financial crisis while also needing significant funding to improve the condition of our current infrastructure on which our economy and revenues to govt. depend – how do we close this funding gap and meet our infrastructure needs for the 21st century? One way in which many state and local governments have dealt with their budget deficits is by deferring maintenance on existing infrastructure and delaying the construction of new infrastructure - somewhat helpful in the short term but results in longer term financial problems. Is there another strategy available to state and local governments?

3. Public-Private Partnerships • P3s involve an alliance between government and the private sector – decisions, risks, & rewards are shared – trust is key – true partnership – long term relationship. • State & local govts. have only begun to realize benefits of P3s - primarily employed by them the financing and delivery of infrastructure and facilities (capital projects). • Key differences from traditional govt. contracting: 1) Change in government/private sector roles and responsibilities 2) Longer contract time periods - involve longer contract time periods (5, 20, 25+ years) - can last as long as 99 years 3) Private sector partner sometimes provides all or some of the funding for the project & may assume significant risks from the government partner 4) Involves a potentially higher degree of risk for the partners 5) Contracting process does follow traditional government procurement and policies and procedures (note: with several key differences) • 377 public-private partnerships (P3s) have been initiated in 24 states - 104 of these P3s for transportation infrastructure - Florida (16), California (12) and Texas (9) have initiated the greatest number of P3s.

4. Public-Private Partnerships Benefits: 1) Accelerating infrastructure maintenance and construction 2) Substantial risk transfer from government to the private sector 3) On-time and within budget delivery of infrastructure projects 4) Source of infrastructure funding 5) Cost Savings 6) Equal or better quality The Impact of P3s on Project Duration, Cost, & Quality • The Virginia Pocahontas Parkway (Route 895) was completed for $10 million less than the original cost estimate. • The Denver, Colorado E470 toll road was originally estimated to cost $597 million, it was completed at a cost of $408 million. • A study conducted by the Federal Highway Administration found that design-build infrastructure P3s reduced project duration by 14%, reduced total costs by 3% and maintained the same level of quality.

5. Public-Private Partnerships Most Common Public-Private Partnerships (P3s) Airports Bridges Highways Hospitals Parking Facilities Prisons Rail Systems Roads Tunnels Water/Wastewater

6. Public-Private Partnerships • Operations & Maintenance (OM) - the private partner operates and maintains a public facility or asset, the government partner owns the public facility or asset. • Design-Build (DB) - the private partner both designs and builds a facility or asset, the government partner provides the funding and owns and operates the facility or asset. • Design-Build-Operate (DBO) - the private partner designs, builds and operates the facility or asset, the government partner provides the funding and owns the facility or asset. • Design-Build-Operate-Transfer (DBOT) - the private partner designs, builds and operates a facility or asset and transfers ownership to the government partner. • Build-Transfer-Operate (BTO) - the private partner constructs a facility or asset and transfers title to the government partner. The public partner leases the facility or asset back to the private partner under a long term contract. • Build-Own-Transfer-Operate (BOTO) - the private4 partner builds, owns and operates a facility or asset for a period of time at which point ownership is transferred free of charge to the government partner. • Build Lease-Transfer-Maintain (BLTM) - the private partner designs, finances and builds a facility or asset and leases it to the government partner for a predetermined period for a predetermined price. • Lease-Renovate-Operate-Transfer (LROT) - the private partner renovates a facility or asset . The government partner grants the private partner a concession to operate the facility or asset for a specified period of time and to charge a fee for the service or activity. • Design-Build-Finance-Operate-Maintain (DBFOM) - the private partner designs, builds, finances, operates and maintains for a period time, e.g. 25 years), a facility or asset, the government partner provides the operating funds during the life of the facility or asset or during the term of the contract.

7. Public-Private Partnerships P3 Policy & Planning Issues • Determine if state P3 enabling legislation exists? • Determine infrastructure needs. • Determine the “gap” between needs and available resources. • Determine infrastructure priorities. • Determine how available revenues will be apportioned between competing infrastructure needs. • Determine how to deal with unsolicited proposals. • Determine if P3 expertise is available in-house (or require outside consultants). Procurement Process – RFP, RFQ & RFP, Follow-up to unsolicited proposal (if allowed) P3 Partner Selection is Key Criteria for Selecting a P3 Partner • Qualifications & Experience • Financial Capability • Risk Transference • Litigation & Controversy

8. Public-Private Partnerships State Enabling Legislation 31 states have enacted laws authorizing at least some form of public-private partnerships (P3s). Enabling legislation is important because it sends a strong message to private sector firms that a state and its local governments are “open for business” when it comes to P3s - removes uncertainty and risk for both the public and the private sector partners. The first step in starting a P3 initiative is to determine if P3s are recognized under state statutes and what the legislation permits and prohibits. Iflegislation does exist, then it is important to know what it covers and how it applies. For example, some state legislation prohibits the inclusion of non-compete clauses in P3 contracts. If no state legislation exists, then the risks of starting a P3 project can be considerable. The state legislature or the governor can involve themselves in a P3 project at any time with negative consequences, even after lengthy negotiations have already been conducted and the private sector partner has incurred costs. State legislation dealing with P3s is constantly being altered, updated and revised.Case in point is the State of Florida which in 2012 introduced significant new legislation dealing with P3s.

9. Public-Private Partnerships Managing Risk in P3s Partner (government or private sector) best positioned to deal with the risk should assume the risk. Demand Risk - Usually assumed by the private sector P3 partner. Problem when a dedicated funding stream (tolls or fees) is used to fund the operating expenses of a P3 project. Demand forecasts and revenue projections - highly unreliable – especially for P3s of long duration (10, 20, 30, 99 years). Everyone loses if private sector partner to default on the P3 project or to declare bankruptcy because of insufficient revenues. Structure P3 so that if demand declines to a point where revenues are insufficient to fund operations, then tolls or fees can be increased or some other remedy invoked in order to maintain desired service levels. Service Interruption Risk- Prescreen and select capable private sector P3 partners. Trust is one of the most important components of a P3. The government must be able to trust that the private sector P3 partner “will do the right thing” to make the project work. Political Risk- Managing and mitigating political risk is largely related to how well government explains the value and benefits of P3 projects to stakeholders and mobilizes their support. Financial Risk- Financial risk varies depending upon the type of project. O&M projects have less overall financial risk than do DBFOM projects. Force Majeure Risk- Generally shared equally by both the government partner and the private sector partner. Additional P3 Risks- P3 projects create additional risks including site risk (e. g., suitability) and design and construction risks. P3s are usually structured so that these additional P3 risks are assumed by the private sector partner.

10. Port of Miami Tunnel P3 The Port of Miami actually sits on an island. Traffic entering and exiting the Port of Miami must do so on surface streets. The Florida Department of Transportation (FDOT) has entered into a transportation P3 with a private sector consortium partner, MAT Concessionarie LLC, to design-build-finance-operate-maintain (DBFOM) a tunnel that will connect the port with interstates I-395 and I-95. The total cost of design and construction of the tunnel is $607 million. The state of Florida will pay for 50 percent of the capital costs (design and construction) with the other 50% being provided by Miami-Dade County and the City of Miami. All operating and maintenance costs will be paid by the State of Florida. The FDOT will collect container and passenger fees to provide the revenue stream to fund the partnership. Construction of the tunnel began in May 2010 and completion is expected by May of 2014. Operational control of the tunnel will revert to the FDOT at the end of the P3 contract in October 2044.

11. The Chicago Skyway An Operation & Maintenance P3 The Chicago Skyway is a 7.8 mile toll road connecting Interstate 94 to Interstate 90. In 2005, the City of Chicago was looking for ways to unlock value in its fixed assets. The city made a decision to enter into a public-private partnership (P3) for the operation and maintenance (O&M) of the Skyway. The city leased the Skyway for 99 years to a consortium of Macquarie/Cintra for an up-front payment of $1.8 billion. Macquaire Infrastructure Group is an Australian company; Cintra is a Spanish company. The private sector partner operates and maintains the Skyway in accordance with contractual provisions that require the use of industry best practices including: safety concerns, drainage issues, snow removal, toll collection procedures and others. The private sector partner immediately moved to install more lanes and switched to electronic tolling, improvements the city could not undertake due to budgetary constraints. The P3 contract specifies predetermined tolls through 2017. After 2017, the private sector partner may increase tolls annual by: (a) 2%, (b) the Consumer Price Index, or (3) the increase in the nominal gross domestic product per capita, whichever is greater. The City of Chicago has used the $1.8 billion in proceeds from the P3 to: pay down debt, fund other non-transportation projects and create a reserve fund. In addition, the city has avoided future operation and maintenance costs for the Skyway.

12. Public-Private Partnerships Lessons Learned in Managing the Implementation of P3s • In contracting, we manage the contract – in P3s, we manage the relationship. • Creation of a P3 Unit – specific organizational units should be created to oversee P3s. • Designation of P3 Project Manager – primary interface with the private sector partner. • Use of Outside P3 Consultants - if outside P3 consultants are used, they should also be tasked with helping to train in-house staff. • Project Management Teams - should be created consisting of representatives of all government units involved in a P3 project. • Early Involvement of Private Sector Partner - private sector partners should be involved earlier, not later, in decision making about the scope of the P3 project. • Contract Provisions -a P3 contract should also: (1) focus on outputs and outcomes rather than inputs & methods used; (2) identify the number of asset upgrades, if any, and when they are to occur; (3) identify if, when and how much tolls or user fees may be increased; and (4) specify what happens to the asset at the end of the P3 project. • Documentation of Decisions and Directions - P3s terms can run for 20, 30, 50 even 99 years. Staff of both the government and the private sector partners at the end of a P3 will most likely not be the same ones from the front end - important to document all decisions made throughout the term of the P3 project. • Contract Term – international experience finds that most P3 terms range from 30 to 40 years.

13. Public-Private Partnerships Sources: G. Segal, A. Moore & M. Brouillette (2007). The Emerging Paradigm: Financing and Managing Pennsylvania’s Transportation Infrastructure and Mass Transit. Boston: Commonwealth Foundation, p. 1. National Academy of Public Administration (NAPA). (2003). Powering the Future: High Performance Partnerships. Washington, DC: Author; W. Lawther & L. L. Martin (2005). “Innovative Practices in Public Procurement Partnerships: The Case of the United State.” Journal of Purchasing & Supply Management 11:202-220. L. Gilroy, R. Pool, Jr., P. Samuel & G. Segal (nd). Building New Roads Through Public-Private Partnerships: Frequently Asked Questions. Policy Brief No. 58. Los Angeles: Reason Foundation. T. Williams (2003). Moving to Public-Private Partnerships: Learning from Experience Around the World. Washington, DC: IBM Center for the Business of Government. E. Istrate & R. Puentes (2011). Moving Forward on Public Private Partnerships: U. S. and International Experience with PPP Units. Washington, DC; The Brookings Institution, p. 2. T. Williams (2003). Moving to Public-Private Partnerships: Learning from Experience Around the World; L. L. Martin & C. Stutte (2008). “Public-Private Partnerships.” In K. Thai (Ed.). International Handbook of Public Procurement. Atlanta: Taylor & Francis, pp. 699-772; USDOT – Federal Highway Administration (2006). Design-Build Effectiveness Study. Washington, DC: Author, p. v.; W. Eggers & T. Dovey (2007). Closing America’s Infrastructure Gap: The Role of Public-Private Partnerships. Washington, DC: Deloitte Research. R. Ward & L. Dadayan (2009). “State and Local Finance: Increasing Focus on Fiscal Sustainability.” Publius: The Journal of Federalism 39(3):455-475. C. Hoene & M. Pagano (2011). “City Fiscal Conditions in 2011.” Research Brief on America’s Cities. Washington, DC; National League of Cities, p. 5. E. McNichol, P. Oliff & N. Johnson (2011). States Continue to Feel Recession’s Impact. Washington, DC: Center on Budget & Policy Priorities, p. 1. American Society of Civil Engineers (ASCE). (2009). Report Card on America’s Infrastructure. Reston, VA: ASCE, p. 6. C. Hoene & M. Pagano (2011). “City Fiscal Conditions in 2011.” Research Brief on America’s Cities, p. 5.

14. Public-Private Partnerships Sources: American Society of Civil Engineers (ASCE). (2009). Report Card on America’s Infrastructure. W. Eggers & T. Dovey (2007). Closing America’s Infrastructure Gap: The Role of Public-Private Partnerships. E. Istrate & R. Puentes (2011). Moving Forward on Public Private Partnerships: U. S. and International Experience with PPP Units, p. 2. L. Gilroy, H. Kenny, L. Snell, S. Ybarra & T. Millhouse (2011). Annual Privatization Report 2010: State Government Privatization. Los Angeles: Reason Foundation, pp. 26 & 27; Administrative Office of the Courts, Judicial Council of California (2009). “Request for Proposals – New Long Beach Court House.” http://www.courts.ca.gov/documents/new/courthouse/pdf (01/02/12); P. Eakins (2011). “Groundbreaking is Thursday for new Long Beach courthouse.” http://presstelegram.com/news/ci_17760987 (01/02/12); “Port of Miami Tunnel Project - Overview.” http://www.portofmiamitunnel.com E. Istrate & R. Puentes (2011). Moving Forward on Public Private Partnerships: U.S. and International Experience with PPP Units; Public Works Financing (October, 2011). “2011 Survey of Public-Private Partnerships Worldwide.” www.PWFinance.net (12/21/11); National Conference of State Legislatures (2010). “2010 State Legislation Concerning PPPs for Transportation Projects.” Washington, DC: Author. www.ncsl.org (12/21/11); National Conference of State Legislature (2010). “Public-Private Partnerships for Transportation. September 11, 2011 Updates and Corrections.” Washington, DC: Author. www.ncsl.org. (12/21/11); PriceWaterhouseCoopers (2010). Public-Private Partnerships: The US Perspective. http://www.pwc.com/en-US/us/capitalprojects. . . (01/13/12); The Pew Center on the States (2009). Driven by Dollars: What States Should Know When Considering Public-Private Partnerships to Fund Transportation. Washington, DC: Author. Pew Center for the States (2009). Driven by Dollars: What States Should Know When Considering Public-Private Partnerships to Fund Transportation; E. Thornton (2007). “Road to Riches. BusinessWeek(May 7):50-57. Arizona Department of Transportation (ADOT) (2012). “ ICA Proposal for Arizona Rest Areas.” http://www.azdot.gov/highways/Projects/Public_Private_Partnerships/projects.asp (1/02/12). Martin & Miller (2006). Contracting for Public Sector Services; Fryklund, Weil & McCullough (1997). Municipal Service Delivery: Thinking Through the Privatization Option.

15. Public-Private Partnerships Sources: National Association of State Purchasing Officials (NASPO) (2008). State & Local Government Procurement – A Practical Guide. Principles and Practices. Lexington, KY: Author. California Debt & Investment Advisory Commission (DCIAC). (2008). Public-Private Partnerships: A Guide to Selecting a Private Partner. Sacramento: CA: Author. Martin & Stutte (2008). “Public-Private Partnerships.” In K. Thai (Ed.). International Handbook of Public Procurement. Martin & Miller (2006). Contracting for Public Sector Service; NASPO (2008). State & Local Government Procurement: A Practical Guide; S. Cohen & W. Eimicke (2008). The Responsible Contract Manager. Washington, DC: Georgetown University Press; S. Kelman 1990). Procurement and Public Management.Washington, DC: American Enterprise Institute; W. Dobler, B. Burt & L. Lee (1990). Purchasing & Materials Management: Text & Cases. New York: McGraw-Hill; W. Keyes (1990). Government Contracts. St. Paul: West Publishing; J. Rehfuss (1980). Contracting Out in Government. San Francisco: Jossey-Bass. L. Martin (2004). “Bridging the Gap Between Contract Service Delivery and Public Financial Management: Applying theory to Practice. In A. Kahn & W. Hildreth (Eds.) Financial Management Theory in the Public Sector. Westport: Praeger, pp. 55-70; L. Martin & J. Miller (2005). Alternative Dispute Resolution. Herndon, VA: National Institute of Governmental Purchasing; P. Cooper (2003). Government by Contract. Washington, DC: CQ Press,. L. Martin (2004). “Bridging the Gap Between Contract Service Delivery and Public Financial Management: Applying theory to Practice. In A. Kahn & W. Hildreth (Eds.) Financial Management Theory in the Public Sector. Westport: Praeger, pp. 55-70. U. S. Department of Transportation, Federal Highway Administration (2009). Public-Private Partnerships for Highway Infrastructure: Capitalizing on International Experience. Washington DC; Author; G. Hodge & C. Greve (2005). The Challenge of Public-Private Partnerships: Learning from International Experience; Ministry of Transportation Ontario, Canada (2006). Regional Finance Workshop on Public-Private Partnerships: Highway 407: Lessons Learned. PowerPoint presentation. http://www.thetbwg.org/meetings/200612 . . . (02/01/12; P. Cobey (2009). “ Lessons Learned from Across the Ponds: A P3 Primer.” PowerPoint presentation made at the National Center for Public-Private Partnerships conference in San Diego, CA, July 7; U. S. Department of Transportation, Federal highway Administration 2009). Public-Private Partnerships for Highway Infrastructure: Capitalizing on International Experience. Washington Dc: Author; European Commission (2004). Resource Book on PPP Case Studies. Bruxelles, Belgium http://ec.europe.edu/regional_policy/sources/docgener/guides/pppresourcebook.pdf (02/03/12); United Nations Economic and Social Commission for Asia and the Pacific (2011). A Guidebook on Public-Private Partnership in Infrastructure. Bangkok, Thailand: Author. http://www.unescap.org/ttdw/common/TPT/PPP/text/ppp_guidebook.pdf (02/01/12).