Approximately half of the states currently have statutes which either substantially restrict, or effectively prohibit altogether, the use of design-build for public works projects.17 Similarly, many states' statutes do not provide their state and local transit and other transportation agencies with the authority to contract out the operation of their transportation facilities. These limitations preclude such states from engaging in the most advantageous forms of PPPs that are proving so successful in other states. DBOM, DBFO, AND DBFOM projects generally are prohibited in these states. By taking these options off the table, these states fail to provide key ingredients for successful PPP projects:
• Providing for the private partner to assume greater risk of the ultimate project cost and delivery time;
• Harnessing and incentivizing the private sector to participate in the management of life cycle costs of the project; and
• Allowing private partners to invest capital and take an equity stake in the success of the project.
There is no doubt that design-build alone can provide significant time savings for implementation of transportation projects. Without coupling the design-build services with operation and maintenance obligations, however, the agencies miss out on a very substantial benefit: when the private partner's profits are tied to operations and maintenance, it has a direct incentive to provide the highest quality design, construction and service delivery. In other words, where the private partner's interests depend on the long-term performance of the transportation asset, it has every reason to strive to control project costs for the project's full life cycle.
To foster the leveraging of private capital in public transportation infrastructure, states should be encouraged to enact statutes granting transit agencies the necessary flexibility to contract out for operation and maintenance services. Only by allowing private partners to participate in transportation facilities on a long-term basis can the transit agencies truly have a private sector partner.
Absent the opportunity to earn a reasonable return commensurate with its risk, there is little incentive for the private sector to invest capital. To take advantage of the maximum amount of risk sharing by the private sector, state laws must facilitate longer-term private investment than is available with design-build or DBOM. Some might argue that the transit sector would have trouble attracting private equity to the construction of transit systems because most transit projects are "revenue negative," with farebox revenues providing only a percentage of operating costs and making no contribution to design and construction costs. They might look to the Las Vegas Monorail Project as an example. Completed in 2004 and currently experiencing ridership and revenue shortfalls relative to projections, the project is the only urban fixed guideway project since the 1920s with financing based in large part on projected farebox revenues and the private sector solely responsible for project risks.
This argument fails to take into account that for transit projects that are not expected to provide farebox revenue exceeding the project's costs private participation can be structured to provide for a future "non-farebox" stream of payments to the private operator. This may include an agreement by the public entity to make "availability payments" to the private operator based on project performance. The Tranvia de Tenerife project, a 7.7 mile light rail project serving the Spanish Canary Island of Tenerife, utilizes availability payments together with farebox revenues to provide compensation to the private partner under a DBFO contract providing for a 50 year term of operations services. The fixed compensation paid to DBOM contractors typically is adjusted based on factors such as downtime events and availability of fare collection machines and escalators. Payments could also reflect the number of passengers boarding, thereby shifting ridership risk to the private operator, while the transit agency retains control over fares and the related revenue risk. State laws should provide for these types of contractual arrangements.
In fact, BART is currently soliciting proposals for private financing of the Oakland Airport Connector that would be only partly dependent on farebox revenues. While BART plans to transfer design, construction, start-up, and operations risk to the consortium selected to deliver the project, BART will retain most of the risk associated with ridership and fare revenue. Only a small portion of the consortium's monthly payment (between 10 and 20 percent) will likely be tied to project fare revenues, so that there is some incentive for the consortium to design, construct, and operate a facility that is attractive to riders.
Private investors in certain international transit projects have accepted ridership and revenue risk. The proposed concession agreement for the Tel Aviv Red Line in Israel includes assumption of modified revenue risk, with the public agency providing a makeup between indexed fares and actual fares.
Pricing transportation facilities during congested periods has the potential to increase farebox revenue and make ridership and revenue risk more manageable for the private sector. USDOT, State DOTs and other public agencies are increasingly looking at congestion pricing as an important mechanism for managing congestion. Congestion pricing involves charging travelers more to use a facility or system during peak congestion periods. Congestion pricing works by shifting purely discretionary rush hour travel to other modes of transportation or to off-peak periods. Congestion pricing on highways and other congested roads could potentially increase ridership and revenue significantly on transit systems that provide viable alternatives to these congested roads because it reveals to commuters the true cost of travel by automobile and increases the "pricing power" of transit agencies for their services. In addition, where congestion pricing on a highway includes managing toll lanes through variable pricing to ensure a free flow of traffic, bus rapid transit (BRT) could be incorporated into the project and bus fares could contribute to the revenue dedicated to pay off the project's financing. Revenues could also be increased, and contribute more meaningfully to revenue streams dedicated to pay off financing, if transit facilities themselves were variably priced during congested periods.
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17 United States Department of Transportation, Report to Congress on Public-Private Partnerships, December 2004, Section 4.A.ii and Appendices F and G. http://www.fhwa.dot.gov/reports/pppdec2004/index.htm.