Criteria for Deciding Whether to Use a Public-Private Partnership Approach

Various factors have led to an increased interest in transportation PPPs by public decision makers in recent years. The existing transportation infrastructure is aging and travel demand continues to increase. At the same time, traditional transportation revenues are growing at a slower rate than transportation needs, leading to an increasing funding gap.

In response, some governors, legislators, and others in positions of transportation policy leadership have proposed raising motor fuel taxes or vehicle fees to close the transportation funding gap; however, few attempts at revenue enhancement have succeeded. It is tempting for government to consider PPPs a "quick cash" scheme to close the transportation funding gap, but in reality, a PPP provides several tools that can help narrow the gap between transportation needs and funding. Many aspects of PPPs introduce extensive changes to the way things have always been done, and the changes may not be well understood. With this in mind, PPPs must be pursued carefully, and decision makers need a set of criteria to help guide the decision between using a PPP or traditional procurement when considering their transportation priorities.

OECD, in its Principles for Private Sector Participation in Infrastructure (2007), laid out the following four principles related to the decision to provide infrastructure services by the public or private sectors:

1. The decision should be based on a cost-benefit analysis that includes all alternative procurement and delivery methods, and both financial and non-financial costs and benefits should be projected over the project life cycle.

2. The project sponsor should assess how the costs of infrastructure will be recovered (e.g., user fees), and what other financing sources are available in case of shortfalls.

3. The selection of a PPP model and allocation of risks should be based on the public interest.

4. Fiscal discipline and transparency must be safeguarded, and the potential public finance implications of PPPs must be understood.

Countries with extensive experience in PPPs have developed guidance (see Table 2) that might be useful to states considering PPPs for project delivery. Project sponsors must note that each PPP project is different and these guidelines might have to be adapted on a case-by-case basis.

Not all projects present viable opportunities for a PPP. Public decision makers need to understand the criteria for successful projects to inform their decisions about whether or how to involve the private sector in what has traditionally been a public sector enterprise. The enabling legislation in nine states includes specific criteria to evaluate PPP proposals. Only 9% of the respondents to the DOT survey indicated that a lack of PPP criteria is not important. In addition, the lack of criteria to evaluate candidate projects for PPP implementation was called an important concern by one respondent of our survey of other interested parties. These respondents suggested that the public sector needs a better understanding of the trade-offs inherent in PPPs, and in particular that PPPs are not "the answer when everything else has failed."

Several studies that address selection of PPP projects have been published (Zhang 2005; Abdel-Aziz 2007; AECOM 2007b). Abdel-Aziz (2007) suggests that the decision to proceed with a PPP should depend foremost on the programmatic environment. If the program environment is supportive of PPPs, only then should project-specific characteristics be evaluated. Abdel-Aziz identifies eight critical success factors at the programmatic level:

1. Availability of a PPP institutional/legal framework,

2. Availability of PPP policy and implementation units,

3. Perception of private finance objectives,

4. Perception of risk allocation and contractor's compensation,

5. Perception of value-for-money,

6. PPP process transparency and disclosure,

7. Standardization of PPP procedures and contracts, and

8. Performance specifications and method specifications.

TABLE 2
LIST OF FOREIGN GUIDANCE DOCUMENTS FOR PPP PROJECTS

Note: URLs last accessed on May 28, 2008.

Once a transportation agency has established a PPP program, it can more effectively develop individual projects (AECOM 2007b). Zhang (2005) suggests 47 project-specific critical success factors in five categories:

1. Favorable investment environment,

2. Economic viability,

3. Reliable concessionaire consortium with strong technical strength,

4. Sound financial package, and

5. Appropriate risk allocation via reliable contractual arrangements.

The author surveyed both academics and practitioners with respect to the importance of these subfactors, and compared the differences between the survey results of academics with all those surveyed. He concluded that academics and practitioners at-large generally agree on the relative importance of the critical success factors.

The AECOM "Guidebook" (2007b) reviews key criteria from both public and private perspectives for identifying potential projects to pursue as PPPs; the criteria that are general precedents to successful implementation of PPPs by the public partner are summarized here.

• Enabling legislation in place,

• Urgent transportation need,

• Political and institutional support,

• Lack of internal resources to effectively deliver the project,

• Leverage public resources and transfer risks to private sector,

• Expedite schedule through access to capital markets and innovative project delivery,

• Increase cost-effectiveness through best practices and access to new technology,

• Competitive market environment based on firms with proven experience,

• Capability to manage transparent procurement/contract administration processes, and

• Public accountability through monitoring of contract performance standards.