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 put it in a 2014 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 95 Express lanes south of the Capital Beltway.
The Brookings report emphasises how PPPs can be beneficial for things like getting a project done more quickly 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 five projects in the Washington region have benefitted from the circumstances being right for a PPP: Virginia Department of Transportation’s (VDOT) high-occupancy toll (HOT) lanes on the Beltway, I-95 from Alexandria to Stafford County and I-66 from the Beltway to Haymarket, the Maryland Transit Authority’s Purple Line light rail, and the Maryland Port Administration’s Seagirt container terminal expansion 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.
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 projects in Virginia and Chicago were less successful with PPPs
The Midtown Tunnel project in Hampton Roads was initially touted as a success when it was awarded to the Elizabeth River Crossings consortium in 2011. Virginia would get a $2 billion second two-lane tunnel between Norfolk and Portsmouth in exchange for just $367 million from the Commonwealth and authority for the private operator to toll both the Midtown and Downtown tunnels.
However, a common clause in the concession contract regarding competing facilities may leave Virginia with the bill for any lost toll revenue if the Commonwealth's plan to widen the Hampton Roads Bridge Tunnel by 2024 moves forward.
A similar clause exists in Virginia's contract with the private consortium that was selected for the I-66 HOT lanes project last year. I-66 Express Mobility Partners could seek damages from the commonwealth if it adds free general purpose lanes to the interstate during the period of the concession or extends the Metro Orange Line to Centreville in the next 10 years.
Many also 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 the long-term concessions of two toll roads and the San Juan airport in Puerto Rico, 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 has proved a prime example, where the Purple Line Transit Partners consortium responded to governor Larry Hogan’s demands for cost savings and shaved $550 million off the expense of the concession. In addition, it will invest roughly $140 million in the rail line.
DC’s proposed network of streetcars could also be a good PPP candidate. The District Department of Transportation (DDOT) has previously 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 a new Redskins stadium. 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.”
This post initially ran in 2015, but since the overall message hasn't changed, we wanted to share it with you again. The author did, however, update some specifics!