1. Public-Private Partnerships
Neil McMonagle
August 2010

2. America's Infrastructure Report Card
(American Society of Civil Engineers, 2009)
Subject
Grade
Comment
Drinking Water D-
$665 million in infrastructure investment required by 2020
Energy D+
$2 trillion in electric utility investment by 2020
Rail C-
$150 billion in improvements required by 2030.
Roads
$130 billion in infrastructure investment by 2020
Schools D
$332 billion required to bring schools into good repair
Wastewater
$335 million in infrastructure investment required by 2020
Overall Grade
The Bottom Line: America will need to spend $2.2 trillion in infrastructure investment over the next five years for the nation’s infrastructure to be ranked in “Good” condition (Overall Grade: B).

3. America's five year infrastructure funding requirements are immense
Schools
Energy
11% ($160bn)
5% ($75bn)
Water
17% ($225bn)
Roads
Rail
63% ($930bn)
4% ($63bn)
Estimated Spending
Projected Shortfall

4. Paying for infrastructure at a State and Local level
Traditional Model #1:
Raise Taxes
Higher taxpayer burden immediately
Full retention of revenue and operating risks by public sector
Traditional Model #2:
Issue Bonds
Decreases funds available for other projects
Retention of financing and operating risks by public sector
Alternative Model:
Public-Private Partnerships
Reduces immediate impact on taxpayer
More capital available for other projects
Operating and financing risks transferred to private party 4

5. What is a Public Private Partnership (PPP/P3)?
Public Private Partnerships are….
“A contractual agreement between a public agency and a private sector entity to share the risk and rewards of asset and service delivery – in order for projects to leverage the private sectors’ skills and funding, and provide enhanced value for money.”
Around 28 US States have PPP enabling legislation, including Georgia, Texas, Michigan, Virginia, California.
Projects have focused on transport infrastructure, although each State has a different approach:
NY/ NJ’s Goethals Bridge is being replaced through a 30 year "Design, Build, Finance and Maintain" (DBFM) PPP contract
Texas' North Tarrant Expressway and LBJ highway P3 projects use "managed lane" concepts and dynamic user tolls to control traffic flow.
California's Presidio Parkway P3 is using an availability payment structure but no tolls, partly because a tolling structure would require complex agreements between regional funding partners 5

6. PPP should be a true, long term partnership
Public sector brings:
Public interest and need
Institutional knowledge of service
Capital resources
Balance of commercial and public interests
Secure revenue stream and covenant?
Private sector brings:
Management disciplines and preventative maintenance
New technologies
Personnel development
Finance and resources
Control of risks
Efficiencies through integration of design, construction, and operations
Speed of construction – no payment until completion
Cost certainty

7. Basic Public Private Partnership Structure
Demand / Revenue Based: The private sector controls and collects user fees which serve as their only source of revenue to service debt and generate a return (e.g. toll road PPP projects).
Availability Payment: The private sector receives periodic payments over the operational contract period from the public sector if the project is available and maintained to the standard specified (e.g. non-tolled roads or social infrastructure).
Shadow Payment: The public sector retains control of fare policy, but the private sector is paid based on the number of users so takes demand risk. A risk sharing approach, although pricing of risk by the private sector is questionable since they arguably cannot control demand. 7

8. Developing a partnership structure8

9. Many partnership models exist
Level of risk transfer to private sector 9

10. Different levels of risk transfer

11. Potential benefits of PPP
Long term contract between public sector (federal, state or municipality) and private sector for provision of capital asset and services
Typically 20 to 40 year contracts for private sector contractor or consortium to Design, Build, Finance and Maintain (DBFM) or Design, Build, Finance and Operate (DBFO) a facility, equipment and ancillary services
May extend to a full concession, an economic right to operate a project on an exclusive basis for a prolonged period
"Whole life cost" approach to asset provision – incorporates maintenance and mid-life refurbishment
At the end of the contract period, the asset reverts to the public sector.
Substantial proportion of payment fixed for contract life
The asset and services to be provided by the private sector contractor are specified in output terms by the public sector authority
The public sector pays a single periodic contractual payment for the asset and services over the life of contract
Payment by the public sector only commences when the asset and service are available, and performance regime reduces the payment if performance is below required standard. ("Payment Mechanism")
Material risk transfer to private sector contractor – e.g. cost of construction cost overruns or delay borne by the private contractor, not the public sector 11

12. International experience of PPP as delivery method
PPP has been largely successful in improving efficiency of delivery for infrastructure across a range of sectors.
The table below reflects the UK National Audit Office report on the performance of PFI (PPP) procurements (2003), and a PPP study by Allen Consulting/ University of Melbourne (2007).
PPP procurement
Non-PPP procurement
Time over-run UK
22%
73%
Australia
12%
35%
Cost over-run
24%
70%
13%
26%

13. What can PPP be used for? Selected sectors – slightly different structures in each
Roads, highways and street lighting
Toll road concessions, non-tolled roads, urban roads "from curb to curb", street lighting, traffic management systems/congestion control
Education
School buildings and maintenance, school IT, colleges and universities, student residences, science and research parks
Justice
Prisons, court facilities, police/fire/rescue stations
Energy
All energy sectors, renewable energy facilities
Health (note public sector role in Europe)
Primary care facilities, hospitals, medical equipment, IT systems (records projects), mental health
Transit
Light rail projects, metro schemes, high speed rail, rolling stock fleets
Urban regeneration & Leisure
Stadiums, car parking, city security, urban regeneration

14. Different types of project attract different types of investor

15. Significant market interest and availability of private funds15

16. PPP – part of a wider procurement toolbox
PPP is not suitable for all projects – but should be considered as part of the options appraisal for major capital procurements.
Recognize parameters of PPP
Long contracts, so can be inflexible if material future changes in demand are likely
Procurement process can be complex.
Private sector cost of capital normally higher than public cost of finance.
Although high practical risk transfer can be achieved to the private sector, catastrophic risks can revert to public sector as the ultimate procurer.
Should only use PPP where it offers better value for money than traditional procurement routes.

17. Assessment of value for money17

18. Conclusion: PPP as an option - not the only answer
Consider the characteristics present in most successful PPP projects:
Statutory and political environment
Organized structure (public sector delivery capability, governance)
Detailed Business Plan (business case to contract)
Guaranteed revenue stream
Stakeholder support
Careful selection of partner
(NCPPP's six success factors)
PPP should be one of the procurement and financing options considered for capital by State and Local governments – but it needs to be evaluated against other procurement routes, and only used where it offers better value.

19. Questions?

20. Contact Details Bob Childree Director 334-324-4481 Bob.Childree@gt.com
Christian Fuellgraf
Neil McMonagle
Senior Manager