In order to develop new capacity, the private investor (or investors) generally agrees to finance, build, operate, and maintain the project, which the public sector continues to own. In the United States, the public sector increasingly has used different forms of contracts to accelerate project delivery, control development and/or life cycle costs, increase capital formation for construction, minimize public-sector exposure for claims and change orders, and/or achieve greater operation efficiencies.
In a minority of projects with particularly robust revenue potential, the concessionaire may be able to not only finance the improvements and cover all operating and maintenance costs but also provide the public-sector agency with an upfront concession fee and/or share a percentage of the facility's revenues over the concession period (commonly referred to as "revenue sharing"). Alternatively, for projects with less revenue potential the public-sector agency may be required to make a capital contribution to partially fund the project and reduce financing requirements to a level that can be supported by the toll or other available revenue stream. Once the project is constructed and open to revenue operation, the concessionaire collects the cash flow generated through tolls, other user fees, or revenue streams in accordance with a public sector agency-mandated rate mechanism. The concessionaire applies revenue to meet operating expenses, pay debt service, and make any needed capital improvements. Residual revenue represents the concessionaire's profit. The concession agreement will require the concessionaire to operate the facility within prescribed standards, satisfy any revenue-sharing arrangement, and return the facility to the public sponsor in a specified condition at the conclusion of the lease period. (See Exhibit 7-1 for a short list of examples of the toll concession approach in the United States).
Concession agreements are not limited to revenue-generating projects. For new capacity projects that do not generate user fee revenues and must instead be supported by tax revenues, governmental owners still may seek to outsource project development and operations and maintenance responsibility to reduce cost, transfer risk, or improve service. To the extent that payments to the concessionaire are conditioned on attainment of certain performance standards, they are termed "availability payments."9 The availability payment concession approach is used widely in Canada, the United Kingdom, continental Europe, and Australia-and it is gaining interest among a number of transportation agencies in the United States.
Pre-development agreements-used less in other countries but more extensively in the United States to date-are sometimes used to advance the kinds of project that ultimately may become toll concessions or availability payment type projects. In these arrangements, the private-sector party agrees to share costs and perform the preliminary environmental, technical, and financial analysis for one or more projects to determine project feasibility. In exchange, the public sector grants the private partner the exclusive right to negotiate for the right to implement the project, should the public sector approve it environmentally and choose to proceed. Public agencies use pre-development agreements for projects that are not yet cleared environmentally, to bring private-sector expertise in value planning and value engineering, and to assist in defining optimal facilities and achieving financial feasibility. Subject to validation of the reasonableness of the terms and conditions negotiated, the public sector ultimately may pay for or share in the costs of the analysis if the projects are deemed infeasible but they gain by accelerating the pre-development phase and by the application of private- sector development expertise. The implementing terms and conditions for a pre-development agreement may take the form of a conventional design-build contract, an availability payment contract, or a toll concession.
EXHIBIT 7-1: REPRESENTATIVE U.S. CONCESSION AGREEMENTS FOR SURFACE TRANSPORTATION PROJECTS WITH PRIVATE-SECTOR LONG-TERM OPERATING RESPONSIBILITY: NEW CAPACITY ("GREENFIELD") PROJECTS | ||
Project and Location (year of transaction) | Contract Term | Description |
91 Express Lanes (High Occupancy Toll) (2004) Orange County, CA | 35 years | Development of new capacity toll project in 1993; sold to Orange County Transportation Authority in 2003. No public funds were programmed for this project at the time of the initial transaction. Private finance, with a cap on private return on investment and without public protection from potential losses, enabled the project to go forward. |
Capital Beltway High Occupancy Toll Lanes (2008) Northern VA | 75 years | Development of toll-backed new capacity express lanes within an existing highway whereby concessionaire will design and build the extra capacity and operate and maintain the HOT lanes. Private financing filled a significant gap in the project's finance plan unavailable from public sources. |
Las Vegas Monorail (2000) Las Vegas NV | 50 years | Development of new capacity transit project to accelerate project development and lock in long-term operations and maintenance costs early in the design phase. The first U.S. rail transit project to finance 100 percent of capital, operations, and maintenance costs with private investment. |
SH 130 (Segments 5-6) (2008) Austin, TX | 50 years | Development of 40-mile new capacity turnpike project that had languished with a $700 million gap in its finance plan. Private investors agreed to fund 100 percent of capital, operations, and maintenance costs and operate under an agreed toll rate schedule. |
South Bay Expressway (2003) San Diego, CA | 35 years | Development of new capacity turnpike project. The state had allocated no tax revenues to the project. By agreeing to finance 100 percent of the capital, operations, and maintenance costs (backed by toll revenues), the private partner was able to leverage limited federal and local funding as well as federal credit support to deliver the project, with a contractual cap on private-sector return on investment and no limit on potential losses. |
Sources: Public Works Financing, Project Sponsors.