The Growing Use of transportation public-private partnerships
By James B. Reed | Vol . 22, No. 19 / May 2014
Did you know?
- Gas taxes—the primary source of transportation funding—are on the decline as people drive less and use more fuel-efficient vehicles.
- Public-private partnerships, or P3s, are increasingly being used as a way to bridge the financial gap states face as they try to improve roads and bridges with declining revenues.
- Thirty-three states allow public-private partnerships to complete transportation and other projects.
Faced with completing transportation projects like building or improving roads and bridges in an era of declining revenues, more and more states are turning to the private sector. As people continue to drive fewer miles and use more fuel-efficient and electric vehicles, lawmakers are looking beyond gas tax revenues and other funding sources, such as federal and local governments, bonding and other borrowing, and tolls. To help make up for dwindling resources, they are turning to innovative financing models and greater efficiency in construction. Among these innovations are public-private partnerships (PPPs or P3s).
Public-private partnerships are contracts between the public sector and a private entity to complete transportation (and sometimes other infrastructure) projects. While a traditional design-bid-build approach to completing such projects uses only public funds, in a P3 agreement, a private company is contracted not only to help build a project, but to take on financial, technical and operational risks. The most recently completed P3 projects include a financial contribution from the private partner in the form of equity or other types of capital. These contributions do not create new money for states—the private investment is paid back over time with tolls and state transportation revenue like gasoline and diesel taxes, as well as vehicle and driver fees.
The number of states with a legislative framework allowing public-private partnerships for roads and bridges grew from 23 states in 2006 to 33 states and Puerto Rico in 2013. The trend continues in 2014 as an additional six states are considering such legislation. About $61 billion has been committed to P3 projects over 25 years, with half of this amount approved in the last five years.
Proponents of P3s argue that additional capital from private sources can help complete projects that otherwise might have been delayed or not built at all because of state and local fiscal constraints. Though P3s are not appropriate for all transportation projects, they can lower costs by: offering direct incentives to the private contractor for on-time delivery; making contracts performance-based; encouraging competition among bidders; transferring risk to the private sector for cost and schedule overruns and/or revenue shortfalls; using warranties to assure contractual outcomes; and incorporating life-of-the-project maintenance and operational efficiencies.
Opponents of P3s are wary of the increased involvement by the private sector. Their concerns include losing public control, flexibility and future revenues; private companies profiting at public expense; risking project bankruptcy; compromising accountability and transparency in the process; potentially harming the environment; conforming with prevailing wage requirements; involving foreign companies; adding controversial toll roads; and fairly negotiating contract terms such as liability, maintenance standards, safety enforcement and commercial development rights.
Some policymakers are working to achieve the benefits and mitigate the concerns by enacting comprehensive enabling legislation that protects the public interest by thoroughly reviewing the fiscal, management, procurement and policy implications of P3s. NCSL’s Public-Private Partnerships for Transportation: A Toolkit for Legislators offers guidance on these issues.
Thirty-three states and Puerto Rico have enacted enabling legislation to allow transportation P3s. Two key enactments were in Maryland and Florida.
Maryland. After a two-year process of gathering information and recommendations from a special commission, the legislature formalized the state’s policy on P3s by:
- Issuing a public policy statement encouraging the use of public-private partnerships to develop and strengthen Maryland’s infrastructure;
- Streamlining the review process by having the Board of Public Works conduct the initial assessment, followed by a review by legislators and the public;
- Improving both transparency and confidentiality by requiring that P3 proposals be published online after the first review, with certain proprietary information withheld; and
- Providing new wage protections, environmental safeguards and a minimum procurement provision for minority businesses.
Florida. The Legislature modified Florida’s existing P3 statute, adding a statement of legislative intent that endorses the use of P3s to attract private investment by:
- Authorizing P3 projects outside of transportation and for not-for-profit entities;
- Establishing additional P3 rules to ensure that such projects safeguard the public interest; and
- Creating a task force to recommend guidelines to the Legislature for establishing a uniform P3 selection and review process.
The Florida Department of Transportation opened the 10-mile I-595 Express Corridor Improvements Project in Broward County in March 2014 under Florida’s P3 statutetandards.
States are primarily responsible for implementing P3s, but the Federal Highway Administration developed a P3 Toolkit to help states assess the use of partnerships for highway projects. In addition, the federal Transportation Infrastructure Finance and Innovation Act (TIFIA) is designed to offer credit assistance to certain projects in order to overcome financing obstacles related to the size or complexity of a project, or uncertainty over the timing of revenues.
The U.S. House of Representatives has expressed renewed interest in P3s by creating a Panel on Public-Private Partnerships (P3) as part of the Transportation and Infrastructure Committee as it reauthorizes the federal surface transportation law.