Definition and Use

Contracting work to private companies to deliver what are traditionally considered public goods and services has a long history in the United States. As state and local governments struggle to address growing public infrastructure needs with a scarcity of funds, they are turning to the private sector for an investment of non-traditional resources. The public-private partnership (PPP), a concept now becoming increasingly popular in the United States, is essentially a contractual arrangement under which the private sector carries out some or all of a function that was traditionally the responsibility of the public sector.3

Transportation in the United States has a history of private sector involvement dating back to the beginning of road construction and operation in the country. In fact, there were more than 2,000 private toll roads in operation in the 19th Century. Over time, as federal and state financing of road construction increased, private sector involvement in the construction and operation of roads declined. However, as state and federal highway funding has become more constrained and the demand for efficient transportation infrastructure has increased, governments are now turning to the private sector to provide more services.

Traditionally, private sector participation has been limited to separate planning, design, or construction contracts on a fee for service basis, based on government specifications, an approach that does not fully utilize the private sector's innovation and expertise. The public-private partnership approach allows public agencies to benefit from the technical, management and financial resources of the private sector, while maintaining control of assets.

As defined by the U.S. Department of Transportation, PPPs are "contractual agreements formed between a public agency and private sector entity that allow for greater private sector participation in the delivery of transportation projects."4 While maintaining oversight, PPPs allow states to direct responsibility (and funding) of transportation projects to private entities, allowing the states to leverage the firm's expertise and place the cost onto the private industry.

The private firm is entitled to keep revenue collected from the use of the road (in Virginia, tolls paid by drivers is the most typical financing method for the private sector to recoup its cost expenditures). One other method of revenue collection is a special tax district, the chosen financing method for the construction of Route 28 corridor improvements in Loudoun and Fairfax counties.

Numerous states are currently using PPP approaches for large transportation projects in excess of $50 million. The roles of the public and private sectors in PPPs can vary depending upon the goals of each sector, the type of facility involved, the structure of the financial arrangement, and the limits of the state's enabling legislation. Two common types of PPP relationships relevant to the Capital Beltway are:

•  Design-Build (DB): Under this option, the private partner designs and builds a facility to specifications agreed to by a public agency within an agreed upon timeframe and at a pre-determined price. FHWA-funded DB projects that include construction of highways of $50 million or more and those that include Intelligent Transportation Systems (ITS) of $5 million or more are subject to FHWA DB guidelines. DB projects do not require private financing.

•  Design-Build-Operate-Finance (DBOF): The state transfers responsibility for designing, building, financing and operating the roadway to private sector partners. There is a great deal of variety in DBFO arrangements in the United States, especially the degree to which financial responsibilities are transferred to the private sector. One commonality that cuts across all DBFO projects is that at least some financing is through debt leveraging revenue streams dedicated to the project. Direct user fees (tolls) are the most common revenue source. However, other sources range from lease payments to shadow tolls and vehicle registration fees. Future revenues are leveraged to issue bonds or other debt that provide funds for capital and project development costs. Public sector grants frequently supplement them in the form of money or contributions in-kind, such as right-of-way. In certain cases, private partners may be required to make equity investments as well.

Figure 1: The Spectrum of Public-Private Partnerships

Source: FHWA PPP website www.fhwa.dot.gov/ppp/