APPENDIX. AGENCY COMMENTS

Public Private Partnerships (P3), which offer an alternative and innovative means to leverage Federal funding on transportation projects, are highly complex and dependent on project specific variables. As a result, the applicability of P3s to any given project must be determined on a case-by-case basis. While the Office of Inspector General (OIG) report provides some insights on financial metrics, as recognized in the OIG report, it is not a comprehensive analysis of applicable factors for P3 decisionmaking. Large projects are unique and complex and require each public sponsor to carefully review the financial and policy implications of its delivery options - from traditional design-bid-build through a long-term concession such as a P3. A key and often decisive element not addressed by the OIG report involves the valuation of risk. Absent these specific valuations, it is impossible to draw any definitive conclusions regarding the comparative financial merits of a P3 option.

A comprehensive analysis of P3 financial viability must evaluate risk versus reward. Starting with the premise that the private sector will have a higher cost of capital, the public sponsor must place a dollar value on the risks a private partner would be willing to assume. While the OIG report recognizes the private sector's added value as a combination of "efficiencies" in construction and revenue collection, it does not explicitly recognize the key financial elements of valuing risk, both from a public cost reduction perspective and from the perspective of the private partner. For example, toll road revenue projections depend largely on estimates of future regional economic performance and growth that cannot be precisely determined at the time the project is being financed. As experience has shown, both public and private operators can be overly optimistic when estimating potential revenue, but when the private sector has taken this risk, it is equity investors that absorb any financial loss.

A more comprehensive approach that is being increasingly employed by public sponsors of P3s is project-by-project Value for Money (VfM) analysis of total costs and benefits. A VfM analysis will evaluate the public delivery option directly against the P3 option, establishing a threshold for private firms to meet or exceed. These studies require an analysis of a more comprehensive and project-specific set of detailed factors than is included within the OIG analysis. Since the OIG report does not offer a comprehensive review of the factors associated with P3 decisions, particularly the key consideration of risk valuation in the financial analysis associated with P3s, the reader is cautioned against drawing any larger conclusions from the OIG's analysis. For example, the report's flowcharts are not general decision tools, but simply an illustration within the limited domain of the analysis.

It is also important for the OIG report to recognize that projects are not equally likely to advance under either public or P3 based financing. The availability of innovative financing methods could be a determining factor over whether a project proceeds. A key reason that State and local governments consider P3s is that public financing is often constrained by statutory or policy limits on debt amounts, maturities, and offering terms. Recognizing that public debt financing capacity might be inadequate to undertake the project under consideration, States and localities may face the choice between delivering the project as a P3, or not at all.

While a noteworthy share of P3 development in the United States was essentially the monetization of preexisting highway assets,¹⁵ these types of agreements may represent a smaller share of P3 opportunities in the United States compared to new development and investment. Recognition of this potential is based on the Agency's experience with the Transportation Infrastructure Finance and Innovation Act (TIFIA) credit program, which has since 2003 executed loans for seven P3 projects, each of which meets the report's definition of a "greenfield" facility, in California, Texas, Florida, and Virginia. The "brownfield" projects that the report examines (two of which are patterned after Chicago and Indiana) would be ineligible for TIFIA or private activity bonds, the innovative finance tools that the report notes are available for lowering the private sector's cost of capital to the benefit of the public owner. These programs require new capital investment and cannot help finance a mere change of control.

Based on a full consideration of risk valuation, innovative financing options, and the potential to leverage public investment, P3s offer a viable option for advancing transportation solutions. Under the right circumstances with a well-structured arrangement for sharing risk, a P3 can offer the potential to accelerate project delivery, provide capabilities not affordable under public finance options only, and provide a viable investment for the private sector.

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15 Examples include the Chicago Skyway and the Indiana Toll Road transactions in which the public sector leased existing highways to private concessionaires in exchange for a lump sum payment.