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|U.S./Mexico Joint Working Committee on Transportation Planning|
Public-Private Partnerships Potential for Arizona-Mexico Border Infrastructure Projects
Chapter 7 - Public-Private Partnerships Background
Public-private partnerships are contractual agreements formed between a public agency (federal, state, or local) and a private sector entity that allows for greater private sector participation in the delivery, operation, and financing of infrastructure projects. Public-private partnerships can include projects where significant design, construction, financial, and operational risk is transferred from the public sector to the private sector. Through these types of arrangements, inherent project risks are borne by that party best suited to control and manage those risks. A public sponsor's responsibility during a public-private partnership project includes:
Some of the benefits of public-private partnerships for state and local governments include:
Public-private partnerships are very flexible delivery systems that can be structured to meet the objectives of the sponsoring public agency. Public-private partnership structures can cover an entire spectrum of risk transfer. On one end of the spectrum is a fully self-funding concession agreement where the private sector takes all development, design, construction, revenue, finance, and operations risk. The other end of the spectrum is a design-build contract where the public sector retains all project risks and simply transfers design and construction risk.
In evaluating the appropriateness of a specific public-private partnership structure for a given project, the public agency's goals and objectives must be clearly defined. These goals and objectives may differ from project to project. Examples of potential objectives that a public sector sponsor may have for a project include:
The objectives that a private entity has in entering into a public-private partnership arrangement are based on the viewpoint that public-private partnerships are essentially business ventures. Ventures where, within the context of the public-private partnership agreement, the private entity is attempting to maximize a return on investment, while minimizing and/or managing its risks. The view of risks, and required returns for those risks, vary significantly among private parties and across projects. As a result, specific public-private partnership projects must compete with other investment opportunities available to a private party, and with other public-private partnership projects offering differing perceived risk and return formulas. The perception of these factors vary substantially among private entities participating in the public-private partnership markets and are often significantly influenced by business objectives and strategies that are only tangentially related to a specific project.
While the various elements of a specific public-private partnership project may vary from project to project, there is considerable evidence that the following seven factors are critical to a successful public-private partnership undertaking:
7.1 Types of Public-Private Partnerships
Public-private partnerships can be structured to deliver a wide range of infrastructure projects. Properly designed public-private partnerships are a means to efficiently allocate risks and returns between the public sector and the private sector. Some of the typical types of infrastructure projects include the following:
Though specific objectives vary significantly by project, there are generally four basic objectives for a public agency to enter into a public-private partnership:
In the US there are four basic public.private partnership models which have been utilized: design/build/finance, design/build/operate/maintain, design/build/finance/operate/maintain, and a concession. Each of these models is discussed below.
DBF public-private partnerships allow the public sponsor to pay for infrastructure over a term which extends beyond the facilities construction period. Under this model the private partner finances the construction based on a promise by the public sponsor to make a series of payments. DBF projects are often utilized for governmental buildings, where the financing is secured by a lease or rent payment.
DBFs allow public infrastructure projects to be expedited and not wait for all of the funds to be accumulated. Public agencies traditionally utilize bond offering to accomplish the same objective. However, payments pledged under a DBF are typically subject to prior appropriations and do not have the same financial reporting implications as a bond offering.
Typically these are D/B contracts here the D/B contractor retain the responsibility to operate and maintain the facility. The public sponsor retains all revenue and financing risks. DBOMs typically are used in two scenarios: when the specific infrastructure requirement is specialized and requires operational and or maintenance expertise which is not otherwise available to the public sponsor; or where it is felt that outsourcing the operations and maintenance will result in a better facility by incorporating life cycle costs in the design of the facility.
DBFOMs are also referred to as availability payments. DBFOMs are similar to DBOMs except that the private partner is responsible for financing a stream of revenue pledged by the public partner. Under an availability payment structure, the private partners compensation is based on the performance, or availability, of the facility. Under this structure the public partner retains control of the revenue stream.
DBFOM projects are gaining increasing popularity for new toll projects which have significant startup risks and require public sector support or guarantees in order to make them commercially viable. Under this model the public partner retains revenue risk, but also receives the benefit of increases in future revenue streams. Like DBOMs, DBFOMs incorporate life cycle costs into the design of project by linking compensation to performance or availability.
Pure concessions transfer all design, construction, financing, and operational risks from the public sponsor to the private partner. The fees that constitute the revenue source are set by contract. Increases or decreases in these revenues impact the private partner's compensation.
Concessions can be used for any revenue producing facility such as toll roads or parking facilities. Pure concessions usually work best for established facilities with predictable revenue streams. Such facilities often result in significant upfront payments for the right to the concession, though more recent concessions incorporate some form of revenue sharing. For new facilities, the revenue stream is less predictable and therefore is viewed as more risky. In order to make such projects commercially viable, some form of support or enhancement is required of the public partner. Depending upon the level of public support a DBFOM may be a preferred alternative.