Because transportation project sponsorship is typically a state or local rather than federal responsibility, public-private partnerships are generally entered into by state departments of transportation or regional or local transportation agencies. The federal government nonetheless can help set appropriate safeguards to protect the public interest, provide technical assistance, and foster Pest-practice peer exchanges among the states.
States and localities are struggling now more than ever to fill the gap left unfunded by inadequate federal resources. This reality requires a very difficult decision to raise new revenues, use new tools, and/or delay much-needed capital improvements. Federal policy should be structured to afford states and localities substantial flexibility in making these decisions. The federal government also can play an important supporting role by providing technical assistance and fostering best-practice peer exchange.
Regarding protection of the public interest and specific concerns expressed regarding asset monetizations, every project has its own facts and circumstances, and state and local officials will need to weigh financial considerations against other policy goals on a project-by-project basis. Since private-sector investment in existing assets does play a fundamentally different role than in new capacity projects, transportation officials will have to address three central questions: Is it in the public's best interest to lease the facility? If so, what is an appropriate lease term or duration? And how should proceeds received by the public sector be used and/or limited? To the extent that these fundamental questions can be answered in a manner that supports the positive assessment of general feasibility and public interest, the Commission recognizes the targeted role that asset monetization transactions may be able to play for states and localities in managing their transportation infrastructure assets. | States and localities are struggling now more than ever to fill the gap left unfunded by inadequate federal resources. This reality requires a very difficult decision to raise new revenues, use new tools, or delay much-needed capital improvements. |
In terms of the appropriate lease term for asset monetizations, the longer the lease term, the greater the potential value to a concessionaire and therefore the higher the bid price. Policy makers will need to balance financial policy and the public interest. As a general rule, the Commission considers it appropriate to limit lease terms to the lesser of 75 years or the remaining estimated useful life of the facility (at the time of the transaction). Leasing proponents have claimed that bid prices may be as much as 10-20 percent higher if the concessionaire can claim tax ownership (including depreciation and amortization benefits) from leasing the facility. On that basis, applying a 120-percent rule to this guideline consistent with the standard for tax ownership (i.e., a maximum term equal to 120 percent of the useful life of the asset to be financed) may be appropriate. On the question of how the proceeds received by the public sector should be used, the Commission believes that such proceeds should be limited to surface transportation investment purposes in the state or other relevant jurisdiction (as explained more fully in Chapter 8).
Once these fundamental questions are addressed, the legal and procurement issues are similar for asset monetizations and new capacity projects, and the suggested government oversight guidelines quite similar. Box 7-7 summarizes legal and procurement issues attendant to both concession types entered into by state and local governments. While no one solution works for every project, the table includes general guidelines based upon prior experience in transportation and other sectors, lessons learned, and the policy debate to date. Many of these restrictions are already provided for through existing state and local procurement and ethics processes, so this set of guidelines is not meant to imply adequate protections do not already exist in many cases. Further, the federal government should be judicious when considering direct regulation of private-sector financial participation, recognizing that consistent with state and local responsibility for project delivery, this role is in the purview of these levels of government. There also are myriad state-specific procurement and related open records laws that must be considered. Preserving states' ability to apply appropriate standards to particular circumstances in each state is important in developing federal oversight.13
BOX 7-7. GUIDELINES FOR GOVERNMENT OVERSIGHT OF PRIVATE-SECTOR FINANCIAL PARTICIPATION | ||
Topic | Potential Guideline | |
Planning | Projects with potential as public-private partnerships should be included in the long-term transportation planning of public entities, and the use of public-private partnerships should complement but not be limited solely by such planning, in order to encourage innovation. | |
Value-for- Money (Cost Effectiveness) Assessment | Public entities should undertake an analysis of the potential project to determine whether the use of a public-private partnership provides value compared with traditional public works delivery methods. Using best practices, the analysis would account for factors such as the public entity's life-cycle cost for the work and its ability to finance the capital for construction and financing leverage provided by the private entity, the risks shifted to the private entity, design and construction quality, schedule, capacity to perform, and potential for additional scope. | |
Conflict of Interest | Public entities should have conflict-of-interest policies in place regarding the use of outside consultants to ensure the integrity of the procurement process and that outside advisors are providing services in the best interest of the public entity. | |
Transparency: Procurement Process and Proposals | Final documents soliciting qualifications and proposals from private-sector entities should be made available to the public. Essential portions of solicited proposals for public-private partnerships should be disclosed after the conclusion of successful negotiations with a selected proposer or upon the termination of the procurement. Confidential and proprietary information contained in the proposals should not be subject to public disclosure, in order to encourage proposers to disclose as much information to the public entity as needed without the risk of losing a competitive advantage in the marketplace due to subsequent public disclosure. | |
Transparency: Agreements | Prior to execution of a concession agreement, key terms should be made available to the public, taking into account proprietary information. The final terms of any agreement for a public-private partnership should be available for public review after execution. | |
Treatment of Unsolicited Proposals | Unsolicited proposals may provide public entities with insight into infrastructure solutions that may not have been previously considered. While the Commission believes there should be no prohibition to the submittal of unsolicited proposals, it also recognizes the consideration of these proposals can be lengthy and costly. Therefore, the public entity receiving the proposals should review them but not be required to engage in any lengthy consideration process. If the public entity decides the unsolicited proposal has merit, it should be required to invite competing proposals and evaluate all proposals against specified criteria. | |
Concession Term | Agreements should be limited to a term appropriate for the project. Generally, the Commission considers term limits equal to the lesser of 75 years or the remaining estimated useful life of the facility (at the time of the transaction) as reasonable to allow private entities an adequate return on investment without imposing high costs on the public. Longer terms should be examined carefully in relation to the trade-off between raising more capital and control considerations. | |
Early Termination for Convenience | The agreement should permit the public entity to buy back the facility during the lease term upon payment of fair market value for the facility. | |
Environmental Approvals | Infrastructure created through public-private partnerships should be subject to state and federal environmental regulations. Procurements for projects should be allowed to proceed prior to final environmental approvals, with the risk of delays or denial allocated appropriately among the parties without prejudicing any alternative, including the no-build alternative. | |
Performance and Handback Standards | The public entity should consider and have in place appropriate performance security to ensure completion of the design and construction work, which need not be 100 percent of the value. Outcome-based performance specifications should be permitted for the design, construction, operation, and maintenance of the facilities to allow for innovation and efficiency. The public entity should provide adequate oversight and/or inspection to ensure compliance. The agreement should set forth the standards the facility must meet or be brought up to at the end of the term of the agreement to ensure the facility at reversion is in an appropriate state of repair, given its anticipated life expectancy. | |
Facility Access | The agreement should prohibit the closing of facilities or portions thereof except for specifically enumerated instances, such as for routine and capital maintenance or accident clean-up. Any unpermitted closure should result in a default under the agreement for which the public entity may immediately enter and take control of the facility to reopen and continue operations, until such time as such breach is cured. The agreement should provide for the facility to be opened for evacuations for certain periods during declared emergencies. Public entities should consider limited restrictions on uses-for instance, truck-only lanes or non-truck lanes-based on the nature and location of the facility. | |
Competing Facilities | Public entities should not be barred by contractual arrangements from building and maintaining facilities contemplated in their long-term plans. States can retain the absolute right to build any and all facilities at any time by agreeing to compensate the concessionaire for any significant adverse revenue impacts. | |
Toll Rate Setting | Procurements and resulting agreements should specify how toll rates are to be set and adjusted over time. This information and resulting toll schedules should be publicly available (including methods for any variable rate-setting). The option of variable/dynamic pricing should be available when necessary to ensure level of service. | |
Revenue Allocation | Public entities should have discretion to impose caps on rates of return on investment, to share revenue over time, or to receive capital contributions for construction at the outset. | |
Financial Reporting | Private entities should provide yearly reporting regarding the performance of the facility, including matters such as toll revenues and the number and types of vehicles that used the facility | |