Most of the studies and literature on public-private partnerships highlight the benefits of using public-private partnerships for government procurement. As discussed throughout this chapter, innovative procurement methods can result in a variety of benefits, including significant savings in time and cost. However, not all projects fit a public-private partnership model and the increased complexity of public-private partnership procurement can create unusual challenges. States and localities interested in pursuing public-private partnerships should consider some of the shortcomings of public-private partnerships before engaging in this type of procurement.
Public-private partnerships do not always result in cost savings. As demonstrated in Figure 3.1, Florida's use of innovative contracting resulted in cost overruns more often than they resulted in cost savings. Another example of cost overruns is Washington State's first design-build project, the SR 500 Thurston Way Interchange, in Vancouver, Washington. The actual design-build project costs were approximately 23% more than the estimated costs for the project under the traditional design-bid-build methods ($25,610,004 vs. $20,878,121). This comparison is based primarily upon a Washington State Department of Transportation (WSDOT) engineer's estimate used to construct an equivalent design-bid-build cost model.[116] Dr. Keith Molenaar with the University of Colorado at Boulder, Department of Civil, Environmental, and Architectural Engineering, evaluated the use of design-build on the SR 500 Thurston Way Interchange on behalf of WSDOT. In his report, in his view, the risk of cost increases in this case outweighed the potential benefits.[117]
Public-private partnerships do not always create time savings. Again, Figure 3.1 shows that innovative procurement methods, including those directly providing incentives for on-time delivery, often failed to be completed when required. And when public-private partnerships do create time savings on a project basis, it can be at the expense of other projects. A+B contracting is designed to focus contractors on the importance of completing projects in a timely manner. Even when effective, however, this type of procurement can produce an increased burden on the resources of State agencies.[118] Extended work hours may be required to provide appropriate inspection of the project and training of personnel.[119]
Concerns have also been expressed about the impact procurement methods like design-build might have on the quality of a project. The shortened schedule and the increased control of the contractor could lead to lower quality because the public sector partner typically has less of an opportunity to design and inspect the project.[120]
As a new approach to procurement, public-private partnerships create significant challenges to both the public and private sector partners. States using public-private partnerships have experienced an initial sharp increase in workload as they adapt their procedures for guaranteeing the timeliness, efficiency, and safety of a project to fit the unusual requirements of public-private partnerships. Virginia, for example, experienced a noticeable increase in the amount of time senior officials spent on projects built under the Public-Private Transportation Act of 1995. The private sector can also experience difficulties with public-private partnerships. Smaller contractors and designers have expressed concern that it is difficult for them to bid on public-private partnership work because the projects tend to be larger than their firms can manage. Public-private partnerships also tend to shift risks away from the public sector and toward the private sector. This shift in risk can frequently be so significant that smaller firms are not able to absorb it, and as a result, cannot bid on the work.
In addition, private sector funding does not always ensure financial solvency when the project financing is secured by tolls or other revenue streams from the project. Sometimes public use is not as high as projected, resulting in revenues that are inadequate to pay off the debt on the project. An example of this is the Dulles Greenway, a project that was initially financed with equity contributions from the TRIP II partnership, bank loans, and long-term, fixed rate notes. After construction costs of roughly $340 million, the project ran into financial troubles. Traffic and revenues were initially lower than expected, in part due to improvements made by the State to a competing road, State Route 7. As a result, TRIP II went into default on its loans and note agreements in 1996. Refinancing occurred in 1996, allowing it to create project reserve funds and issue $370 million in senior bonds and $76 million in subordinate bonds. While the project is still yet to make a profit for its investors, development in the area is increasing and bringing with it increased usage of the Greenway.[121]
Although TRIP II had to refinance its debt, neither VDOT nor Virginia taxpayers were incurred any additional debt or financial obligation because of the shortfall in anticipated toll revenue. From a public-sector perspective, one of the key benefits of including private equity in a public-private partnership is the protection from financial risk private equity may incur. In the case of the Greenway, a future, unexpected drop in toll revenue or a large, unforeseen expense could trigger the need for another restructuring of the debt. However, even in the worst-case scenario, VDOT and the Commonwealth of Virginia incur no additional liability. If all project sponsors abandoned the project, VDOT would be left with a toll highway that did not cost them anything.