The I-95 Express HOT lanes in Northern Virginia. Photo by Virginia Department of… on Flickr.

Public-private partnerships (PPPs) are an increasingly common way to fund new construction. But what are they, exactly, and in what circumstances are they appropriate?

A PPP, also known as a concession in some cases, is broadly defined as an agreement between a public and private entity where, as Brookings puts it in a new report, the parties share in the risks and rewards of the project. They range from small scale community partnerships, for example when a private developer agrees to take on the risk of renovating a historic building in exchange for some form of reward at the end, or large billion dollar projects, like the new 95 Express lanes south of the Capital Beltway.

The Brookings report emphasises how PPPs can be beneficial for things like getting a project done quicker or with guaranteed maintenance standards for the life of the asset, but also notes that they are not always the cheapest option compared to government entities simply taking on a project themselves. These tradeoffs must be weighed ahead of any potential PPP deal with the granting jurisdiction deciding what works best in its case.

“PPPs are rarely the lowest-cost way to procure infrastructure,” writes the think tank. “[But] a well-structured PPP can deliver better value for the public dollar.”

Brookings outlines four scenarios where PPPs work well: when the public sector entity has funding or debt constraints, when a project can benefit from private sector expertise, when a private company can bring value for money benefits like lower costs over the life of an asset or when the project involves assets outside the public entity’s core mission.

At least three projects in the Washington region benefit from the circumstances being right for a PPP: The Virginia Department of Transportation (VDOT) leveraged private sector expertise for two high-occupancy toll (HOT) lane projects— the 495 Express lanes on the Beltway and the I-95 Express lanes from Alexandria to Stafford County— and the Maryland Port Administration used the expertise and financing capabilities of Highstar Capital to expand the Seagirt container terminal in Baltimore.

A PPP helped build a new courthouse in Long Beach, California…

A key part of any PPP is deciding whether the public or private entity assumes more financial risk. Deals have to strike a balance between the risks a private investor is willing to take on and what the public is willing to give up. Brookings cites an array of arrangements that range from the private sector only being responsible for construction of a project to where it has a long-term financial interest in its success.

Diagram by Brookings.

The Long Beach Courthouse concession is an example of where a PPP was valuable to a public entity with funding constraints. California officials used a concession to replace an obsolete courthouse with one where the private sector took responsibility for both the financing and the long-term upkeep of the facility.

In the case of Long Beach, California passed as much financial risk and responsibility to the private sector as is possible under a PPP structure. In exchange, it will pay the concessionaire to keep the building running and in good repair for the life of the contract - eliminating the possibility of maintenance going unfunded as it has in the past with the state’s notoriously volatile budget cycles.

...but a project in Chicago was less successful with a PPP

On the other hand, many point to the Chicago Parking Meters deal as an unsuccessful PPP. In 2008, Morgan Stanley Infrastructure Partners paid Chicago $1.16 billion for the right to operate and collect revenues from the city’s on-street parking meters for 75 years. Once it came to light that the concession would likely generate about $11.2 billion in revenues, or $9.6 billion in profits, for the private operator there was an outcry from local groups.

Some see the widely-derided deal as putting the damper on future parking meter concessions deals in the US. However, the deal did result in some future PPPs including profit sharing agreements, for example in a long-term concession of two toll roads in Puerto Rico in 2011, that ensure that the public entity will benefit from some of the concessionaire’s profits.

PPPs can work in the Washington region

Well-structured and vetted PPPs can work here. The Purple Line light rail project in Maryland is a prime candidate, where the private sector can likely build the line faster and operate it better than the Maryland Transit Authority. Four teams are ready to bid on a long-term deal for the line.

Maryland governor-elect Larry Hogan should take note. A Purple Line PPP would place Maryland at the forefront of transit project innovation in the US, joining only the Denver Eagle commuter rail project for pursuing such a deal.

DC’s proposed network of streetcars is also a good PPP candidate. The District Department of Transportation (DDOT) has already sought bidders for a concession to build and operate the proposed system, which suits the piecemeal approach the District has taken to building the 22-mile network.

There are countless other opportunities for PPPs in the Washington region, ranging from transportation projects to entertainment facilities like the new DC United stadium at Buzzard Point. A public-private deal will not fit every project, but it will suit some.

As the Brookings study puts it, “a well-executed PPP is simply another tool for procuring or managing public infrastructure.”