Photo by Maryland GovPics on Flickr.
Earlier this week, Maryland Governor Martin O’Malley announced plans to build and operate the Purple Line using a public-private partnership, also known as a P3. What does that mean for riders and taxpayers?
A P3 is a partnership between a government agency (in this case, the Maryland Transit Administration) and a private firm (called a “concessionaire”) to build and operate an infrastructure project. Many P3s are toll roads, like the new Beltway HOT lanes in Northern Virginia. But transit P3 projects are fairly new to the United States. Currently, the only example in the nation is in Denver, which is using one to build almost 70 miles of rail projects.
The details of the public-private partnership won’t be hammered out for some time, so there’s still a lot we don’t know about what this method of construction and operation will look like. But a recently-published “presolicitation report” from the Maryland Department of Transportation (MDOT) tells what they have in mind.
What is a P3?
Essentially, the idea is to leverage private capital and the efficiency of private firms to reduce the public cost of building and operating a project. It also helps the agency by making costs more predictable and assigning risk to the private contractor. MDOT currently estimates that they could save about 20% of the cost of constructing and operating the Purple Line for 30 years by entering into a P3.
While they aren’t common in the United States, our neighbors in Canada use them a lot. One notable example is Vancouver’s new Canada Line, opened in 2010, though it’s not without its criticism.
Where do the savings come from?
In P3s, the cost savings come primarily from two factors: private firms may be more efficient, and risk may be more properly assigned and managed.
One way projects end up wasting money is through “interface problems.” For example, a crew comes out to string catenary wire, but they discover that the catenary supports haven’t been installed yet. That risk is still there with a P3, but since the contractor has assumed the risk, it’s their problem, not the public’s.
Meanwhile, the contractor, which is likely to be a major firm, may be able to leverage their other investments to get a good deal on steel. Or they might have a subcontractor who builds railcars, which saves them from having to do a separate procurement.
How will this P3 work?
In a few months, MTA will ask qualified contractors to submit bids to operate the Purple Line. These bids will be very detailed, and MTA will use a “best value” method to pick the contractor, not necessarily picking the cheapest bid.
Each prospective concessionaire will include their estimate for what they can build the Purple Line for, plus what they think it will cost them to operate and maintain the line for 30 years. MTA estimates that the selected contractor will also put in between $400 to $900 million. The agency will put in additional money, as will the federal government, through the New Starts program.
MTA will pay the contractor an annual “availability payment,” which equals the contractor’s contributions plus the operating costs the contractor estimated in their bid, divided by 35 (5 years of construction, plus 30 years of maintenance). During construction, the contractor will have to take out a performance bond that MTA keeps in case they can’t complete the project. If they go out of business after construction is complete, MTA would have to rebid the contract.
Will the concessionaire hike fares or cut service to make a quick buck?
MTA, not the concessionaire, will set the fares, service hours, and train frequency.
The concessionaire wouldn’t make money from this, anyway. Like all transit lines in the United States, the Purple Line will not earn enough fare revenue to be profitable. If the contractor can provide their services for less than what was budgeted, they’ll keep the difference as (additional) profit. But if they go over budget, they’ll lose money.
How will Maryland hold the operator accountable?
MTA will write very detailed requirements in the contract setting performance standards for on-time performance and cleanliness. If the operator can’t meet these standards, the MTA could pay them less. That gives the operator a financial incentive to provide good service.
What will the concessionaire be responsible for?
The concessionaire’s responsibilities can differ from one P3 to another, but the private firm selected for the Purple Line will be responsible for completing design, building the project, acquiring railcars, and then operating the line for 30 years.
Will the private firm own the line?
No, the state of Maryland will own the Purple Line. After 30 years, the firm operating the line will be responsible for giving it back to the state in a certain pre-specified condition. At that point, the MTA could decide to operate the line on its own or rebid the project to a different firm or even the same firm.
Why is the Purple Line a good choice for a P3?
The Maryland Transit Administration’s operations, including local buses, light rail, and subway, are primarily focused in Baltimore, 30 miles from the Purple Line. Because it’s so far away, the MTA would likely need a new management and operations structure just for that one line, meaning it would basically stand alone. That makes it a good candidate for a P3, as opposed to the Baltimore Red Line, which interacts with several other MTA services and is much closer to home.
According to the MTA’s Henry Kay, the Purple Line’s risk profile is well suited to the private sector. In many cases, there will be tight quarters and traffic management plans. There’s lots of risk that those conditions will delay the project or make it more expensive. One overarching contractor can better manage that risk than a public agency with multiple contractors. And if the contractor can’t manage the risk well, it’s their money, not the state’s.
There are other risks, like unpredictable weather or even subway tunneling, which are difficult to manage. Contractors may be reluctant to assume the risks of building the Baltimore Red Line, with its long downtown subway. That makes it a less likely candidate for a P3.
Why consider a P3 for transit at all?
Using a P3 for the Purple Line will allow the MTA to spend a little less up front for the project, allowing Maryland to make better use of its gas tax revenues for projects around the state.
According to the MTA’s
Executive Director for Transit Development and Delivery Henry Kay, the P3 will be more predictable for MTA. For example, once MTA grants the contract, they’ll know exactly how much it will cost to run the line every year for 30 years. If energy costs go up or labor costs go up, the contractor is on the hook. But the state will always pay the same price, unless the contractor fails to meet their performance targets (in which case, Maryland would pay less). That could help keep fares and tax rates in check.
Of course, there are risks in a P3. The contractor could go bankrupt, or they could fail to deliver what they promised. MTA’s goal is to provide good transit service, and they need to find a reliable partner who they can hold to the same high standard. Over the next several months, the MTA will release a Request for Proposals and companies will respond, allowing us to get a better understanding of how this P3 might work.
Since public-private partnerships for transit are generally untested in the US, communities and transit agencies across the country will watch the Purple Line to see how well they work. Hopefully, it will set the bar high.