For purposes of this report, U.S. DOT has adopted the following definition of a public-private partnership: A public-private partnership is a contractual agreement formed between public and private sector partners, which allows more private sector participation than is traditional. The agreements usually involve a government agency contracting with a private company to renovate, construct, operate, maintain, and/or manage a facility or system. While the public sector usually retains ownership in the facility or system, the private party will be given additional decision rights in determining how the project or task will be completed. The term public-private partnership defines an expansive set of relationships from relatively simple contracts, e.g., A+B contracting, to development agreements that can be very complicated and technical, e.g. design-build-finance-operate-maintain. In the context of this report, the term public-private partnership is used for any scenario under which the private sector would be more of a partner than they are under the traditional method of procurement. Further, this broad definition of public-private partnerships includes many elements that are being utilized on a more routine basis.
Traditional transportation projects financed from fuel tax and other highway user fees have the greatest public sector roles and the least private sector participation. In these projects, the role of the private sector is limited to entering into design and construction contracts with the State to build roads. Public-private partnerships usually involve a government agency contracting with a private company to renovate, construct, operate, maintain, and/or manage a facility or system. While the public sector usually retains ownership in the facility or system, the private party will bear additional risks or be given additional decision rights in determining how the project or task will be completed. The term public-private partnership defines an expansive set of relationships from relatively simple contracts, such as contracts where the private sector assumes the risks of delays in schedule through financial incentives and penalties. On the other end of the spectrum, it includes very complicated and technical development projects, where the private sector builds, owns, and operates a transportation facility. In the context of this report, the term public-private-partnership is used for any scenario under which the private sector would be more of a partner than they are under the traditional method of procurement.
Public-private partnerships generally fall into one of five categories, based on the reasons for their creation. The five key public-private partnership categories are:
1. Partnerships designed to accelerate the implementation of high priority projects by packaging and procuring services in new ways;
2. Partnerships that turn to the private sector to provide specialized management capacity for large and complex programs;
3. Partnerships focused on arrangements to facilitate the delivery of new technology developed by private entities;
4. Partnerships drawing on private sector expertise in accessing and organizing the widest range of financial resources; and
5. Partnerships to allow and encourage private entrepreneurial development, ownership, and operation of highways and/or related assets.[6]
Some partnership arrangements may involve several or all of these functions. Regardless of the specific functions involved, partnership arrangements are intended to provide greater flexibility to achieve transportation program objectives by altering traditional public and private sector roles to take better advantage of the skills and resources that private sector firms can provide.[7] However, even when the private sector has a high level of participation, the government will continue to play a role in granting permits, ensuring safety, verifying fulfillment of environmental requirements, or even exercising its power of eminent domain to obtain land for rights-of-way.[8]
In between the extremes of public and private provision of roads are partnerships between government and private firms for building transportation projects. The roles and responsibilities of each partner in financing the project are specified in contracts between the parties, as illustrated by Figure 2.1. In the majority of cases, the private sector risks some capital and is rewarded if the investment is successful. The partners often form a new entity-either a special-purpose government agency or a private, nonprofit corporation-to finance and oversee the project. Another nontraditional arrangement is that of a government contracting with a private firm to operate and maintain a roadway that the government has built. Great Britain is experimenting with such a form on a limited basis, but the United States has yet to explore its possibilities in any systematic way. [9]
Figure 2.1
Sponsors and Features of Highway Financing[10]
Sponsor | Major Features of Financing | Examples |
Private Equity Investors | Finance and develop the project using primarily private resources | Dulles Greenway (Virginia) 91 Express Lanes project (California) SR-125 South Toll Road (California) |
Private, Nonprofit Entity | Issues tax-exempt debt backed by tolls (and without recourse to taxes) and oversees the project under the terms of the agreement between the state and the private developer | TH 212 (Minnesota) Southern Connector (South Carolina) Interstate 895 (Virginia) |
Special-Purpose Public Agency | Issues tax-exempt debt backed by tolls (and without recourse to taxes) and oversees the project under the terms of the agreement with a private developer | E-470 (Colorado) Orange County, California, transportation corridor agencies |
State Agency | Issues tax-exempt debt backed by tolls (and without recourse to taxes) | Some turnpikes |
State Agency | Issues tax-exempt debt backed by taxes | Most highway projects that are financed by debt |
State Agency | Finances highway on a pay-as-you-go basis using state taxes and fees plus federal aid | Most highways |
In addition to private sector involvement in financing the project, a variety of contracting methods also can increase the level of private sector involvement in surface transportation construction. Figure 2.2 describes the name of the contracting method, the major features of the contracting methods, including the level of public and private sector involvement, and examples of projects for which the contracting method was used. These contracting methods are further discussed in Chapter III.
Figure 2.2
Contracting Methods Involving Different Levels of Private Involvement
Contracting Method | Major Features of Contracting Method | Examples |
Purely Private Project | There is virtually no involvement by the public sector in the project and no contract or other formal agreement between the public and private sectors. | Dulles Greenway (Virginia). |
Design, Build, Finance, Operate (concession or franchise) | Under the DBFO contracting method the private sector is responsible for all or a major part of project financing as well as facility design, construction, operation, and maintenance. Typically the facility reverts to the State after 25+ years. Revenues to the private sector can come from direct user charges, payments from the public sector, or both. Operations typically would be covered by performance incentives, and contracts would have to include such things as maximum rate of return, non-compete clauses, and maximum toll rates, etc. | SR-91and SR-125 (California) Southern Connector Toll Road (South Carolina), Massachusetts Rt. 3, Las Vegas monorail. |
Design, Build, Operate, Maintain (concession or franchise) | This is similar to the DBFO contract, but involves a lesser role by the private sector in project finance. Like the DBFO, the private sector assumes major responsibilities for project design, construction methods, operations, and maintenance. Payments from the public sector may include performance incentives/disincentives for operational performance and physical condition. | Central Texas Turnpike Project, Hudson Bergen Light Rail (New Jersey), I-15 (Utah), Seattle monorail. |
Design, Build, Warrant | Based on general information concerning the type of facility desired and the performance expected from that facility, the private sector is given the responsibility for design and construction of the facility. This promotes innovation in design and efficiencies in the construction process since the same firm or group of firms are responsible for both design and construction. In many cases the private sector will provide a warranty for key components of the project. The private sector may or may not participate in project financing. | Pocahontas Parkway (Virginia), San Joaquin Hills Toll Road (California). Many States have experimented with design build for large or complex projects. Other States, like Florida, use design-build almost on a routine basis. |
Asset Management Contract | This type of contract is used for long-term maintenance and/or operation of an existing facility or system of facilities. The private sector typically would be responsible for financing needed improvements and would be paid a fee by the public sector for doing so. The fee may include performance incentives or disincentives. Experience to date is that private sector management contracts can often result in substantial cost savings over traditional public sector management of the road system. | Texas, Virginia, Florida. |
A+B Contracting | This is a modification of the traditional design, bid, build contract in which the private contractor bids both the project cost (A) and the time to complete the project (B). The contractor assumes the risk of not completing the project in the specified time, and bonuses for early completion or penalties for late completion typically are included. | Used most frequently for major highways where completion time is a critical element. |
Traditional Design, Bid, Build Contract | Public agency designs the project and awards construction contract to private sector. Very little opportunity for innovation or efficiencies. | Most highways. |