Public Private Partnerships What they are, how they work, and what s being done

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1 Public Private Partnerships What they are, how they work, and what s being done Western Region Symposium National Association of County Engineers Laughlin, NV November 4, 2010 Presented by: David McCarthy, PE, DBIA Vice President, Psomas dmccarthy@psomas.com P S O M A S 1

2 Definition / Description of a Public Private Partnership (PPP, or P3) Generally, a PPP involves a contract between a private entity and a government authority in which the private entity provides a project or public service while assuming significant financial, technical, and often operational risk in the project. In some cases, the provided service is paid directly by users of the service. In others, the governmental authority agrees to reimburse the private entity per some prescribed formula or lease payment. Generally, physical improvements revert to the governmental authority after a set period of time. Some PPPs involve the granting of a concession to a private entity. P S O M A S 2

3 Basic Types of PPPs Service Contracting (e.g.; operating a library; facilitating a park s recreation services) Finance/Design/Build/Own/Operate/Maintain/ Transfer (e.g.; office building; water treatment plant) Concession/Long-term Lease of Assets (e.g., National Park Service hospitality services; lease of existing roadway toll facilities) Sale of Assets/Privatization (e.g.; military housing; water or sewer utilities) Government Incentivized Private Development (e.g., tax incentives for development that will create jobs, future tax revenue, etc.) P S O M A S 3

4 Real-Life PPPs in Southwest Clark County Detention Center, 1,000 Bed Jail; North Las Vegas, NV Las Vegas Monorail; Monorail People Mover, Las Vegas, NV Las Vegas City Hall, Las Vegas, NV El Dorado Solar Power Plant; 10-MW, Boulder City, NV Salt Palace Conference Center Solar Panels; 2.6MW; Salt Lake City, UT Arizona Game & Fish State Headquarters Bldg, Phoenix, AZ (More) P S O M A S 4

5 Real-Life PPPs in Southwest (Cont) Mohave County Administration Building, Kingman, AZ Taylor Place: ASU Downtown Campus Student Housing, Phoenix, AZ Lake Pleasant Water Treatment Plant (80 MGD), Phoenix, AZ Inderkum High School, Sacramento, CA Parking Structure with Solar Renewable Energy System, Fremont, CA Routes 73, 133, 241, 261 Toll Roads, Orange Co., CA SR91 Express Lanes, Orange County, CA P S O M A S 5

6 Enabling PPP Legislation: Selected States Generally, specialized legislation allowing PPP is required. Arizona General Government ARS Public Private Partnerships Contracts / Chap 23: Arizona Procurement Code / Article 3: Source Selection and Contract Formation Allows PPP for all government agencies with certain agency exemptions including ADOT: Transportation ARS through / Title 28: Transportation / Chap 22: Public-Private Partnerships in Transportation / Article 1: General Provisions Applies to: any agency, office or department of the state, city, county, district, commission, authority, entity, port or other public corporation organized and existing under statutory law or under a voter approved charter or initiative, and any intergovernmental entity. (More) P S O M A S 6

7 Enabling PPP Legislation: Selected States (Cont) California Cities, Counties, Special Districts (e.g., School Districts) The Local Government Privatization Act of 1985 (Sections of the Government Code): This Act had a great deal of ambiguities and encumbrances and therefore is not really useful for implementing PPPs. CA Government Code Section : A viable process for implementing PPPs. Allows local government agencies to use PPP to construct fee producing infrastructure facilities. Does not include State agencies. Transportation Assembly Bill No (Signed into Law May 19, 2006): Transportation Projects: Facilities: Public-Private Partnerships. This bill allows CALTRANS and Regional Transportation Agencies up to 4 projects (2 No. CA, 2 So. CA) which charge user fees for high occupancy travel lanes (Legislation good through ). (More) P S O M A S 7

8 Enabling PPP Legislation: Selected States (Cont) Nevada General Nevada Revised Statues: Chapter 279; Redevelopment of Communities Nevada Revised Statues: Chapter 278; Tax Increment Areas (More) P S O M A S 8

9 Enabling PPP Legislation: Selected States (Cont) Colorado General The State allows Tax Increment Financing (TIF), typically used for Urban Renewal Authorities and Downtown Development Authorities; Private Activity Bonds typically used to help with industrial facility development. Transportation Revised Statutes and following. "Funding Advancements for Surface Transportation and Economic Recovery Act of 2009" (More) P S O M A S 9

10 Enabling PPP Legislation: Selected States (Cont) Utah Education Utah Code: 53A Establishment of Public Education Foundations Powers and Duties Tax Exempt Status. Title 53A: State System of Public Education / Chapter 4: Public-Private Partnership for Educational Excellence Act Transportation State Code : Authority to Enter into Public- Private Partnership Agreements for Tollways; Title 72: Transportation Code; Chapter 6: Construction Maintenance, and Operations Act P S O M A S 10

11 States with Significant Transportation PPP Authority Twenty-five states have passed some form of PPP or privatization legislation Source: US Dept of Transportation Federal Highway Administration Sept P S O M A S 11

12 States with Currently Authorized PPPs (All Types) Source: : Public Works Financing, 2009 P S O M A S 12

13 National Infrastructure Needs The American Society of Civil Engineers calculates that the U.S. would need to spend an additional $1.1 trillion over the next five years to restore roads, bridges, dams, levees and other infrastructure to good condition. In its latest report card, the engineering society gave the nation's public works a "D" grade. NPR/AP, Newark, NJ, October 21, 2010 (Emphasis Added) P S O M A S 13

14 Public s View Regarding Infrastructure A report this month by the Treasury Department and the Council of Economic Advisers paints a picture of a country dissatisfied with the state of America's aging infrastructure and in favor of improvements, but not necessarily eager to commit the dollars to fix it. NPR/AP, Newark, NJ, October 21, 2010 PPPs are a logical answer to the dilemma P S O M A S 14

15 Some Common Myths Regarding PPPs PPPs are more expensive and lead to excessive costs. Companies are incentivized to reduce costs and are generally in a competitive environment; profits can be regulated. Private companies are not accountable to public, will cut corners, allow project deterioration. Projects are performance based with strict guidelines; public has remedies if private companies fail to perform. PPPs are a means to cut jobs. They actually create jobs during construction and for O&M of facilities in most cases, project, and related jobs, wouldn t even exist without PPP. PPP procurements are secretive, lack transparency. Laws require the opposite and usually involve open competition. PPPs diminish environmental protection. All the same environmental laws and requirements apply as in public and other private development projects. Notes from CE News, July 2010 P S O M A S 15

16 Some of the Common Motivations for PPPs Agencies lack sufficient funds for new projects Agencies lack bonding capacity for new projects Don t have to obtain public bond approval by voters Growth has increased infrastructure needs while overall revenues have declined For transportation projects, gas tax revenues are declining as fuel efficiency increases Transfers financial, construction and operational risk to private sector while reducing demand on agency resources Private sector can generally construct and maintain new infrastructure at less cost without loss of quality Generally, does not affect a governmental agency s bonding capacity or credit rating P S O M A S 16

17 Percent of Mean Project Cost Cost Effectiveness of PPPs For water/wastewater Systems: The EPA has declared that on wastewater treatment programs, the private sector has been 15 to 20 percent more cost-efficient than public programs. They also indicated that PPPs can often result in higher-quality service and shorter implementation time. 100% 50% 0% Public Constructed and Operated Private Constructed and Operated (More) P S O M A S 17

18 Cost Effectiveness of PPPs (Cont) General Infrastructure: A number of other studies have indicated that the private sector can build projects that cost as much as 40% less than government agencies can. Some of the reasons are: Creative methodologies and construction techniques Entrepreneurial innovation that brings cost down, making project viable Design and construction schedules are generally reduced Generally, eliminates change orders, scope creep, cost overruns Can take advantage of tax credits not available to public entity Operations and Maintenance costs are generally lower for private companies P S O M A S 18

19 Possible PPP Funding Mechanisms Tax Incremental Financing (TIF) Lease-Lease Back / Privatized Lease to Own (PLTO) Lease-Funding options: 100% Private Investment Funds Taxable Bonds Tax-Free Bonds (63-20 non-profit corporations) Franchise/Concession Tolls/User Fees Availability Fees/Charges (More) P S O M A S 19

20 Possible PPP Funding Mechanisms (Cont) Private Activity Bonds (Tax free, local government sale of bonds to fund a private project)* GARVEE** Bonds (Tax Free, backed by Annual Federal Appropriations for Transportation Projects) TIFIA*** Loans / Other Federal Loan Programs Combinations of programs * Must provide a public good or service within legal guidelines ** Grant Anticipation Revenue Vehicle *** Transportation Infrastructure Finance Innovation Act (TIFIA) P S O M A S 20

21 Examples of Transportation Funding Options Express Toll Lanes (All vehicles pay toll, even multiple occupancy vehicles) FAST Lanes (Use of electronic tolls using transponders) HOT Lanes (Single driver access to HOV lanes for fee; multiple occupancy still free) FAIR Lanes (Dedicated electronically tolled lanes segregated from free lanes) Queue Jumps (Fees for using a localized bypass to avoid historically congested roadway sections) Variable Tolls for Heavy Vehicles (Tolls are adjusted for time of day use) Cordon Pricing (Fee for driving in a particular area e.g. downtown) Value Pricing (road and parking pricing increased during peak demand) P S O M A S 21

22 Private Sector Investment Interest in Public Projects Infrastructure is emerging as one of the fastest growing asset classes. Pension and private equity funds increasingly seek out these investments. Some examples are: Australian Superannuation Funds Canadian Income Trust and Public Pensions Infrastructure Funds- Macquarie, JP Morgan Asset Management, Goldman Sachs, Morgan Stanley Infrastructure Fund These are of interest because they represent for investors low risk profiles, stable cash-flows, long-term assets that provide sustainable returns. P S O M A S 22

23 An Indirect Measure of PPP Successes: Stated Interest in PPPs for Transportation Projects OFFICIALS WITHOUT PPP EXPERIENCE OFFICIALS WITH PPP EXPERIENCE 8% 48% 52% 92% MODERATE TO HIGH INTEREST LITTLE INTEREST Source: McGraw-Hill Construction, 2009 P S O M A S 23

24 Kinds of PPPs Being Undertaken Government Office buildings Government Maintenance buildings K-12 Schools Higher Education; classrooms, parking structures, dormitories Water and Wastewater Treatment Plants Municipal Parking Structures Roadways, Freeways, Bridges Prisons and Jails Court Facilities Museums City Halls P S O M A S 24

25 Considerations for Selecting the Right PPP Model Regulatory/Legal Considerations: Confirmation of enabling legislation and agency guidelines; environmental constraints; rate setting requirements Political Considerations: Must assess public reaction and media focus; opposition to placing historic public assets under private control; possibility of ownership by foreign entities; public education my be required Economic Considerations: What are the economic objectives? Funding for needed infrastructure; cost efficiencies; spur economic growth; transfer of financial responsibility Risk Transfer Considerations: Evaluate various aspects of risk and who is best able to manage the risk; what risk can best be transferred to private sector; construction, financial, operational risk P S O M A S 25

26 Lease-Lease Back or Privatized-Lease-to-Own (PLTO) Generally for non-transportation projects, one form of PPP that has been fairly popular in the Southwest had been Lease-Lease Back, or PLTO s. Public entity owns property, enters into long-term ground lease with private entity Private entity finances, designs, builds, owns, and operates facility and leases it to public entity At end of lease term (e.g., years) public entity will take ownership of the fully amortized facility Public entity has option to purchase facility outright at any time Typically public entity leases property for $1 to minimize the cost of its lease P S O M A S 26

27 Typical Structure of a Lease-Lease Back (PLTO) Program PUBLIC ENTITY Development Team FACILITY LEASE (LEASE BACK) GROUND LEASE DESIGNER (ARCH / ENGR) TRUSTEE DRAW PAYMENTS NON-PROFIT SPECIAL PURPOSE ENTITY (VEHICLE) DESIGN BUILD CONTRACTOR OPERATOR PPP DEVELOPER TRUST ACCOUNT FINANCIER Denotes Contract P S O M A S 27

28 Summary of PPP Advantages Build infrastructure faster, at less cost, with greater quality Don t need to increase taxes or incur greater debt Agencies don t need to sell bonds or obtain voter approvals Preserve agency s bonding capacity Transfer risk to private sector Do more with less agency staff P S O M A S 28

29 The proverbial Questions, Answers, Discussion P S O M A S 29