Despite their many merits, however, PPPs aren't the optimal approach for every project. In fact, Pagdadis cautions that while the monetized value of the asset itself can be enticing, "it should not be the reason to enter into such a venture." Public-private partnerships are not always completely thought through because states in debt forge PPPs with a "trophy" asset to generate significant cash up front that can be used to support other desperately needed projects. This might well have been the case for the attempts to structure PPPs of Chicago's Midway Airport, the Pennsylvania Turnpike, and the New Jersey Turnpike. "The problem with monetization alone is that it creates suspicion in the minds of the public because the premise for advancing this form of procurement appears to be based on the wrong factors," says Pagdadis. "This also encourages states to enter into longer term concessions than they would normally feel comfortable entering into. The longer the concession period, the more up-front cash they can realize. A public asset in the hands of the private sector for an indeterminate amount of time simply creates unnecessary anxiety."
"There is no way to overstate the importance of early public involvement in the process and of giving context to private-sector participation."
-Chris Lippincott,
Texas Department of Transportation
Generally, PPPs are best suited to complex and expensive large-scale projects rather than simpler, short-term projects. PPPs involve substantial transaction costs that would typically rule out such smaller projects, whereas life-cycle costing and project management complexities in a decades-long project offer financial savings and long-term overall project efficiencies. In British Columbia, for example, the provincial government has mandated that all capital projects valued at $48 million or more be assessed for PPP viability; the threshold in the Netherlands is about $85 million.20, 21
The UK Treasury reports that PPPs are appropriate "where there are major and complex capital projects with significant ongoing maintenance requirements."22 Those characteristics certainly fit the M25 project, which will widen lanes, increase capacity, and improve access on the orbital motorway encircling London, one of the busiest roadways in Europe.
Even though the M25 seemed an ideal candidate for public-private partnership, it still underwent a business-case assessment that included a value for money analysis. After the VfM analysis, a PPP was in fact deemed to be the best approach for the M25. Given the M25 project's design and construction complexities, a lengthy evaluation and negotiation ensued when the three short-listed bids were tendered. Eventually, a design-build-finance-operate contract was awarded to special-purpose vehicle Connect Plus, which includes Swedish construction firm Skanska.23
The $10 billion deal closed in May 2009, but only after some tense moments in nailing down the financing after the severe credit crunch developed in 2008. When it became clear that there was a real risk of insufficient capacity in the commercial banking markets, the UK Department for Transport stepped up and was prepared to provide up to 500 million British pounds of senior debt itself as a cofunder. Uncertainty about whether such government cofunding would be necessary remained until the end, when the deal was in fact oversubscribed. Widening of the first two sections of the M25 is expected to be completed in time for the start of the Olympic Games in London in 2012.24
___________________________________________________________________________
20 Partnerships British Columbia, http://www.partnershipsbc.ca/documents/project_overview22-jun-09.pdf.
21 Martin Blokland and Fons Koop, "A New Dawn for PPPs: Improving Public Services in the Netherlands," PricewaterhouseCoopers Netherlands, 2009.
22 HM Treasury, PFI: Meeting the Investment Challenge, July 2003.
23 US Department of Transportation Federal Highway Administration, Public-Private Partnerships for Highway Infrastructure: Capitalizing on International Experience, March 2009.
24 Paul Davies and John Carr, "The M25 PPP: The Challenges and Lessons of Large PPPs," PricewaterhouseCoopers LLP, June 10, 2009.