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Table of Contents


executive summary 1

why explore public-private partnerships? 1

Models of Highway Delivery Through Public-Private Partnerships 1

Role for Public-Private Partnerships 2

THIS study builds on Earlier EFforts 2

FINDINGS 3



Scope and Legislation 3

Public Support And Outreach -- “Selling” P3 4

Financing, Risk Allocation, and the Division of Public and Private Sector Roles 4

Relations With Private Proposers 4

Where do we go from here? 4



introduction 6

STUDY OBJECTIVE 6

What are Public-Private Partnerships? 6

structure of this report 7



lessons learned 8

Introduction 9

Scope and legislation 9

Maximizing Legislative Flexibility For The DOT 10

Solicited And Unsolicited Proposals And Open Scopes 11

Using a Two-Step Selection Process for Unsolicited Proposals 12

public support and outreach 15



Garnering Internal Support 15

Gaining External Support 15

Financing, risk allocation, and the division of public and private sector roles 17


Issues Regarding Public and Private Sector Role Definitions 19

Relations with the private sector 20



Attracting Private Involvement 20

Maintaining Private Sector Interest 21

Negotiating With The Private Sector 21

Conclusion 22



review of state p3 programs 23

INTRODUCTION 24

STATE BY STATE REVIEW 26

ARIZONA 26

CALIFORNIA 29

DELAWARE 31

FLORIDA 33

MINNESOTA 35

OREGON 37

PUERTO RICO 39

SOUTH CAROLINA 40

VIRGINIA 43

WASHINGTON 45

FLOW diagrams 50

OTHER STATES 60

COLORADO 60

Maryland 60

Missouri 61

New Jersey 61

NEW YORK 61

Pennsylvania 61

Texas 62


Utah 62

Public-Private Project Experience (By State) 63


PUBLIC-PRIVATE PROJECT EXPERIENCE (BY STATE) 64

VA 65


VA 66

WA 66


case studies 67

introduction 68

Virginia 69

Overview 70

Dulles Greenway Public-Private Partnership 70

Background/Scope and Legislation 70

Process and Agreement 70

Project Description 71

Status 71

Lessons and Highlights 71

Public-Private Partnerships Under Virginia’s Public-Private Transportation Act of 1995 73



Background 73

Process 73

Project Descriptions 75

Project and Program Status 79

Lessons and Highlights 80

washington state: new partners initiative 83

Background 84

Process 84

Program Development 84

Scope and Legislation 85

Initiation of P3 Proposals 85

Selection 86

Finance 86

Project Descriptions 87

Project and Program Status 90

Timeline 92

Lessons and Highlights 92


Widespread Support in the DOT and in the General Public 93

Rate of Return was Regulated but Flexible 93

Financial Assistance was Available from the State 93

Outreach Should Be A Joint Responsibility 93

Public Outreach Efforts Must Use The Right People To Reach The Right People 94

Undertaking Six Partnership Projects From Scratch Overwhelmed The DOT 94

Transparency Vs. Confidentiality 94

States May Wish To Guide Proposers To Projects Wanted By Regional Jurisdictions 94

E-470: Public-Private Partnership in Denver Metropolitan Area 95

Background 96

PROCESS AND PROJECT DESCRIPTION 96

LESSONS and highlights 99



Locally Initiated Programs Need To Involve The State 99

Outreach Can Alleviate The Perception Of “Bait And Switch” 100

California: San Diego Expressway Project 101

Background 102



Effects of NAFTA 102

TransNet Program 103

Process: AB 680 103


Scope and Legislation 103


California Transportation Ventures, Inc. (CTV) Rationale for Proposing San Diego Project Under AB 680 104

Project Description 104

Timeline for SR 125 Tollway 106

project Status 107

Lessons and Highlights 109

Financial Arrangements Should Be A Function Of The Project’s Risk Profile 109

Environmental Clearances Should Be Sought To Maximize Flexibility and Minimize Objections 109

Any Non-Compete Clause Must Be Clear and Binding 110

Using Funds to Support Private Toll Road Projects 110

Appendix 1: Individuals contacted for this Report 112

Appendix 2: “Role of 63-20 Nonprofit Corporations in Public/Private Infrastructure Financings” 115


executive summary

why explore public-private partnerships?

Our nation’s potential for economic growth hinges on, among other factors, its ability to provide adequate infrastructure, such as bridges, roads, rail and port terminals. Indeed, recent empirical evidence suggests that regional and national transport networks directly support growth in private-sector economic productivity.1 Highway infrastructure in recent decades has been pro­vided largely with public funds based on motor fuel taxes and other user fees, channeled through the Federal Highway Trust Fund and comparable state transportation trust funds. This system has worked well, providing a reliable source of development capital to build new roads and rebuild old ones. Public funds, however, have not kept pace with the demand to maintain and improve the nation's extensive network of roads and bridges.

At the Federal level, fiscal and budgetary pressures have held Federal aid for highways to gradual, uneven growth. In fact, Federal aid has declined significantly relative to State and local highway spending over the period since the Highway Trust Fund was initiated in 1956, not withstanding periodic Federal tax increases. State and local government highway programs are feeling these same pressures. Moreover, traditional sources of funding are no longer sufficient to meet transportation needs and public resistance to general tax increases is high and growing. States are thus in a seemingly impossible situation: they cannot afford to rely on traditional methods to meet their infrastructure needs, and they cannot afford to wait to meet those needs. As a result, Federal, state, and local administrations and leg­islatures are exploring many options for new funding sources. One of the more promising options is to allow partnerships with the private sector to develop, finance, own, operate, and maintain highway facilities.
In recognition of the critical importance transportation plays in supporting and facilitating economic health and growth, states have begun to make broader use of market-based techniques to supplement traditional public grants, in particular engaging the private sector in transportation service provision. While experience is still developing across the US, public-private partnerships (commonly referred to as P3) show promise both for attracting private capital to projects traditionally financed solely by the public sector and for getting projects built faster.

It is imperative, therefore, that FHWA continue to assist states as they work to implement P3 programs, helping them to understand not only the kinds of programs being used across the country, but what lessons can be learned from these efforts and how they may be applied to their state. This report is intended to provide that roadmap.

Models of Highway Delivery Through Public-Private Partnerships

A public-private partnership can be built on virtually any mix of public and private financial sponsorship that departs from the traditional public highway model. Several prototypical models have developed, incorpo­rating increasing amounts of private involvement in development and operations along with the infusion of non-governmental funds. As the private sector contributes more equity financing and assumes more risks, the partnership develops more characteristics of full privatization. The array of potential structures span the continuum from traditional public to mostly private:


  • Traditional New Public Highway. Government owner­ship and funding with investment commonly justified by general system-wide public needs.




  • Traditional New Public Toll-Road Delivery. Public authority ownership and operation, using toll rev­enues to finance non-recourse or state-backed tax-exempt debt to construct the facility and provide interim operating funds.




  • Innovative Financing for New Public Faci1ities. Public ownership and operation with full or partial reliance on local benefits, captured by targeted exactions such as development-impact fees as well as tolls.




  • Blended Public-Private Financing for New Public Toll Road Delivery. Control and direction under governmental oversight, usually by a local authority; non­-recourse financing delivers a complete, stand-alone project.



  • Public-Private Partnerships to Deliver New Road Capacity. Substantial private equity participation and a strong private role in structure, delivery, and operation; public role tends more toward framing the concession agreement, contributing predevelopment costs, or assembling rights-of-way.





  • Privately Supplied New Highway. Finance provided and risk borne almost entirely by private developers and their financial supporters; significant at-risk equity combined with the issuance of taxable debt or, in some instances, special purpose non-recourse tax-exempt debt.

Role for Public-Private Partnerships
The appropriate role for partnerships is evolving. Two essential determinants are public acceptance and the level of unmet highway needs. Beyond these are a number of unresolved issues regarding the blending of public and private roles in project development and finance. It is clear, however, that partnership development can effectively augment traditional financing sources for highway construction and reconstruction. The infusion of private financial participation necessarily introduces marketplace discipline: essentially, the relative uncertainty of an attractive return on investment will be required. Hence, an important feature of a majority of partnership projects is the imposition of project-related user fees, tolls, development impact fees, and other exactions associated with value capture from the project.

In essence, project users and beneficiaries will be expected to pay for use of a given facility in a given location. Where the facilities are needed and users are willing to bear these direct charges, public-private partnerships should enable highway development to proceed more quickly than traditional funding sources. The development of proposals by private syndicates is also likely to produce some innovative solutions to transport problems. Reliance on user charges, in turn, may well moderate the demand for some potential new facilities and result in more disciplined or realistic highway needs assessments.

THIS study builds on Earlier EFforts

This report builds on a continuous effort on the part of FHWA to educate and help states as they explore P3 options. Preceding this report, FHWA has:


  • Sponsored a Symposium on Overcoming Barriers to Public-Private Partnerships (December 1993);

  • Published the Symposium Summary in the Searching for Solutions Series (Number 11, September 1994); and

  • Published Implications of Changes and Procedures and Laws to Advance Public-Private Partnerships (April 1995).

Since 1995, however, many more states have passed enabling legislation or otherwise embarked on P3 programs. The continued mixed success of these efforts indicates that a further examination of how these programs are structured and what lessons can be learned from state efforts is warranted.

FINDINGS
In general, state experience with P3 efforts indicate:


  • Substantial benefits -- Public-private partnerships can offer significant benefits to both the public and private sectors, lowering costs and speeding project completion while creating and expanding business opportunities.

  • Mixed success -- Implementing partnerships in the US has met with only mixed success.

  • Movement away from complete privatization towards true partnership -- As the public and private sector each have different advantages, the more successful efforts have involved substantial contributions from both sectors.

The path some states have taken reflect a number of specific lessons that may help other states achieve the potential benefits and establish successful partnerships. This report focuses on drawing out these lessons. “Lessons learned” may be characterized in terms of how a state approaches:



  • Program Scope and Legislation;

  • Public Support And Outreach -- “Selling” P3;

  • Financing, Risk Allocation, and the Division of Public And Private Sector Roles; and

  • Relations with Private Proposers.

Scope and Legislation

Most, but not all, P3 efforts have begun with general enabling legislation that has described a program scope and implementation process. The success or failure of partnerships under different legislative structures suggests:



  • Flexibility is critical to negotiate partnerships that meet the unique nature of individual proposals, specifically with respect to project selection, negotiation, and the overlay between the P3 legislation and existing laws and procedures for procurement of bids;

  • States may wish to think carefully about whether to accept unsolicited proposals and under what conditions they are permitted as this structure affects other activities such as outreach and selection;

  • Some projects lend themselves better to a P3 approach than others and states may want to guide or dictate the nature of proposals submitted; and

  • The public partner does not necessarily need to be the state -- local governments can also play a role.

Public Support And Outreach -- “Selling” P3
While there is no single model for implementing P3, all successful P3 efforts share two characteristics:

  • Strong public sector support among the key stakeholders: (i.e., the DOT, the legislature, and the Governor’s office); and


  • A strong, visible, and continuous outreach effort headed by the public sector to the general public (with private participation in latter phases).

While many states have understood the importance of the latter, many have downplayed the critical role played by the former, and in particular, the importance of internal support: If the DOT does not support and want a P3 program (where this support must extend beyond the Secretary and designated P3 champion) the program will fail. This is the single most important “dealbreaker” that exists.

Financing, Risk Allocation, and the Division of Public and Private Sector Roles
Two lessons regarding risk sharing and financial roles stand out:


  • The public partner must first identify and be able to articulate their objectives in risk and return sharing; and

  • The financial arrangements need to reflect the nature of the project, the financial strengths of the private partner, and the project’s risk profile.

Even where the public sector’s ability to provide direct cash to a project is limited or prohibited, it can share risk with the private sector in other ways.



The public sector can:

  • Play a lead role in outreach;

  • Facilitate the environmental and governmental permitting approval process;

  • Take complementary planning actions to support the project; and

  • Use their position to provide transparency and consistency to every activity.

Relations With Private Proposers

To take advantage of private participation, the public partner needs to:


  • Attract good teams and good proposals -- by conducting outreach to private proposers and using a transparent and well-defined process;

  • Maintain private sector interest and support -- by adhering to the program developed in terms of purpose and goals, selection, and schedule; and

  • Conduct negotiations successfully -- focusing on the fact that conclusion of an agreement is a joint goal -- the partners will be working together for a long time.

Where do we go from here?
There is no single model for success. State efforts have succeeded, however, where support is widespread, the DOT (or responsible government entity) has clear goals and has communicated those goals, and private players have been willing to enter into a real partnership. The lessons learned presented in this report can help states think about whether private participation is something that will help meet their goals, and if so, how to travel down this new path to project development and finance.

introduction

STUDY OBJECTIVE


This report is intended to fulfill two objectives:


  • To inform states of current public-private partnership (P3) activities; and

  • To provide specific guidance to states considering initiating private participation

in transportation service provision.

It builds on previous efforts by FHWA to keep states abreast of recent P3 developments and potential barriers to success. This report, however, is far more specific than prior reports, thus providing a roadmap to states as they begin the possible journey down the road to private participation in the provision of public transportation services.

What are Public-Private Partnerships?

Public-private partnerships are a relatively new and rapidly evolving financing tool already contributing significantly to highway development. At the Federal level, the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) provides the flexibility to enable private partners to be part of a Federal-aid project. Likewise, several states have passed enabling legislation in order to integrate private funds into their highway programs.
A public-private partnership can be built on virtually any mix of public and private financial sponsorship that departs from the traditional public highway model. Several prototypical models have developed, incorpo­rating increasing amounts of private involvement in development and operations along with the infusion of non-governmental funds. As the private sector contributes more equity financing and assumes more risks, the partnership develops more characteristics of full privatization. The array of potential structures span the continuum from traditional public to mostly private:


  • Traditional New Public Highway. Government owner­ship and funding with investment commonly justified by general system-wide public needs.




  • Traditional New Public Toll Road Delivery. Public authority ownership and operation, using toll rev­enues to finance non-recourse or state-backed tax-exempt debt to construct the facility and provide interim operating funds.




  • Innovative Financing for New Public Faci1ities. Public ownership and operation with full or partial reliance on local benefits, captured by targeted exactions such as development-impact fees as well as tolls.



  • Blended Public-Private Financing for New Public Toll Road Delivery. Control and direction under governmental oversight, usually by a local authority; non­-recourse financing delivers a complete, stand-alone project.





  • Public-Private Partnerships to Deliver New Road Capacity. Substantial private equity participation and a strong private role in structure, delivery, and operation; public role tends more toward framing the concession agreement, contributing predevelopment costs, or assembling rights-of-way.




  • Privately Supplied New Highway. Finance provided and risk borne almost entirely by private developers and their financial supporters; significant at-risk equity combined with the issuance of taxable debt or, in some instances, special purpose non-recourse tax-exempt debt.

structure of this report
This report is composed of three sections. It first describes lessons that may be learned from individual states’ experiences with P3. A brief review of state programs follows. The report concludes with four in-depth case studies from which many, but not all, of the lessons were drawn.
lessons learned

Introduction
In this section, lessons and highlights of the public-private partnership process are given. The section is broken up into four parts. The first describes enabling legislation used in Washington State and Virginia, considered models for legislation development. Following is a review of the need for both internal and external support for the program. Here, examples from several state experiences are given. The final sections look at the experience of states in financing, allocating risk, the division of public and private sector roles, and the on-going relationship with private partners in the process. Examples from several projects are given, including, for instance, Denver’s E-470 and Virginia’s Dulles Greenway projects.

Program highlights and lessons learned are drawn from in-depth research and interviews with states and project sponsors actively engaged in the P3 development process. Interviews with representatives from ten states (Arizona, California, Delaware, Florida, Minnesota, Oregon, Puerto Rico, South Carolina, Virginia, Washington) form the basis of the majority of findings presented. These states have developed and at least partially implemented a statewide process for solicitation, acceptance, and review of proposals from the private sector regarding surface transportation-related activities. This section also draws on information gathered on several other states’ initiatives (for instance, Colorado, Maryland, Missouri, New Jersey, New York, Pennsylvania, Texas, and Utah) who are just beginning their own programs or considering program alternatives. Finally, in-depth case studies of two programs (Virginia and Washington, and two individual projects—Denver’s E470 and the San Diego Expressway) provide further lessons. Summaries of the state programs noted here are provided in the next section of this report.




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