Other than the obvious enabling authority, PPP legislation sends a strong signal that a state is open to private involvement in infrastructure financing and delivery. It provides predictability for the private sector engaging in a partnership with the public sponsor.64 PPP legislation sets the rules of engagement and reduces transaction costs by outlining main principles in the statute, thereby creating a more transparent and criteria-specific environment for negotiations between parties on bidding and contract specifics. On the other hand, the lack of state PPP legislation can prove a real hindrance to the development of the PPP market. The 2007 failed $12.8 billion bid for the lease of Pennsylvania Turnpike would have benefited from a state PPP legislation in place before the negotiation began.65
Thirty-one states have PPP enabling legislation for highways, roads and bridges and 21 have PPP legislation for transit projects.66 The state PPP transportation legislation generally refers to PPP delivery models that allow the public sector to contract with a private entity to design, construct, repair, expand, operate and/or finance highway, road or bridge projects.67 Sometimes, the state PPP transportation legislation includes provisions referring to design-build projects, such as in the case of the PPP legislation in Alabama, California, Colorado and Massachusetts.68
As illustrated in Appendix C, state legislation enabling PPPs varies greatly across several factors:
Broad application of PPP legislation. Twenty-two states with PPP legislation allow eligible public authorities to engage with the private sector on infrastructure projects beyond highways and roads, such as ferries, pipelines, and rail or other public facilities. The states with narrowly defined PPP eligibility have confined PPPs only to roads. Roads-limited PPP legislation is often the result of states adopting a law related to a specific project, to "test the waters" for private involvement before defining a broad set of modes for investment.69 However, the more modes are included in PPP eligibility, the more private sector interest it will attract.
Unsolicited and solicited proposals. States differ as to whether they will accept unsolicited proposals from bidders for a specific project. Solicited bids outline the public sponsors' priorities and evaluation criteria, creating a predictable foundation for all those bidding for the PPP contract. Further, they increase accountability and transparency by outlining the contract objectives and impact that the project is expected to have on the community. Unsolicited bids, conversely, do not have criteria to meet from a request for proposals, as well as are not part of a process where there are other competitive bids. Their benefit is that they provide the public sponsor with new ideas that they may not previously have considered.70 The majority of states with PPP legislation allow for unsolicited PPP proposals.
Availability payments and shadow tolls (pass-through tolls). The option to provide availability payments or shadow tolls to the private sector can be useful in structuring a PPP when user fees are insufficient to make the project financially viable or they are not feasible. Availability payments are reimbursements made by a public entity to a private concessionaire for its responsibility to design, construct, operate, and/or maintain a facility for a set period of time. Shadow tolls, or pass-through tolls are similar payments by a government agency to a private operator, but their rates are based on the traffic on the leased road and agreed rates per vehicle and vehicle type. The use of payments or shadow tolls increases the variety of projects that can be entered into, but in some cases increases the risk borne by the government because they guarantee the traffic and revenue risk.71 Only eight states allow for these types of payments as part of their PPP legislation, and only two (Texas and Florida) have used them.
PPP authority for lower level agencies. The authority of lower level transportation agencies to engage in PPPs is of particular interest in larger states, such as California, Florida and Texas that have numerous projects in large metropolitan areas (Figure 3). For example, the 2009 California PPP legislation allows for regional transportation agencies to enter into PPPs, alone or with the California Department of Transportation.72 Fifteen states provide PPP authority for lower level public entities, allowing for bottom-up innovative project development and attracting private involvement that can be tailored to the needs of local communities.
Prior state legislature approval. In nine states, PPPs need prior approval by the state legislature before they can be developed. For example, in Tennessee if the state DOT wants to pursue the development or operation of a tollway by a private entity, it has to obtain the approval of the legislature for the proposed project.73 Legislative approval for a project can be seen as a public mandate in favor of the PPP project and render the politicians that voted in favor of the PPP deal accountable for guaranteeing success of the project. At the same time, waiting for legislative approval may be seen as too burden-some and unpredictable to the private sector as costs associated with the bidding process are sunk and public relations campaigns have to be launched to garner public support for the project.74
Besides state legislature approval, PPP legislation may allow lower levels of government to reject a proposed PPP project. For example, the Minnesota PPP legislation specifies that "the governing body of a county or municipality through which a facility passes may veto the project within 30 days of approval by the commissioner."75 Minnesota Trunk Highway 212, the only project that has been attempted under Minnesota's PPP legislation, was stopped by the veto of the city of Eden Prairie, one of the four communities on the toll road project's right of way.76
Overall, most PPPs need some type of approval before they get implemented. However, this approval usually comes from executive branch agencies such as the state transportation commission (California, Oregon), the Board of Public Works (Maryland), or Special Public-Private Partnership Infrastructure Oversight Commission (Massachusetts).77
Non-compete clauses. Some state PPP legislation expressly allows or prohibits a non-compete clause, article added in the PPP contract for a privately built or operated toll road. A non-compete clause stipulates that the public entity will not build another facility that would directly compete with the PPP toll road. Among the 31 states with PPP legislation, four specifically allow while five expressly prohibit the inclusion of this type of clause. For example, the Arizona PPP legislation specifies that the private operator of a toll road cannot sue for the construction of an alternative public road that was planned at the time of the PPP contract.78 The existence of some type of non-compete clause is attractive to the private sector because it lowers the risk of competition from substitute assets.79 However, a strict non-compete clause paralyzes the state from building new assets in the public's interest. Over time, the non-compete clause structure has changed, allowing narrow competition, such as the construction of small access roads parallel to the toll road.80
Outside technical and legal consultants. As discussed, the lack of adequate skill in the public sector to consider PPPs is one of the recurring problems in developing projects and one of the main reasons for the creation of PPP units. About 14 out of 31 states with PPP legislation expressly allow public agencies to hire outside consultants to help with PPP evaluation and implementation. For example, the Louisiana PPP enabling legislation specifies that the public authority may use the advice of internal staff or external consultants for evaluation of proposals.81 As explained in Section 3, the PPP market is still rather undeveloped in the United States and public agencies have not had the opportunity to deal with a substantial number of PPP projects to build sufficient expertise. Therefore, the use of private sector consultants is necessary to develop the proper design and implementation of PPP projects. In the same time, PPPs are complex ventures and states need to strike the balance between public and private expertise.