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 . 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
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?
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
Most Common Public-Private Partnerships (P3s)
P3 Policy & Planning Issues
Procurement Process – RFP, RFQ & RFP, Follow-up to unsolicited proposal (if allowed)
P3 Partner Selection is Key
Criteria for Selecting a P3 Partner
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.
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.
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.
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.
Lessons Learned in Managing the Implementation of P3s
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