Public-Private Partnerships

It takes a certain situation to make a design, build, operate and maintain (DBOM) public-private partnership an option, and in the United States that can often be easier said than done.

Arthur Guzzetti, vice president of policy for the American Public Transportation Association (APTA) says that while DBOM public-private partnerships are good, they are not necessarily always good in all cases. These procurements are complex and in many cases the procurement laws need to catch up to the times.

According to the Federal Transit Administration, a Public-Private Partnership Pilot Program was authorized in the 2005 Highway and Transit bill (SAFETEA-LU) to demonstrate the advantages and disadvantages of P3’s in public transportation. Three pilot projects were selected — Oakland Airport Connector, Houston Metro Light Rail, and the Denver RTD Eagle P3 project.

Guzzetti says one reason these projects are perhaps less common in the United States than they are elsewhere is because sometimes procurement laws don’t allow them for public contracts.

“It’s lumping all these things together into one contract ... that’s a mega deal and some people might say, ‘why don’t we break this up a little bit into this stage and that stage?’” he says.

On the other hand Guzzetti says others look at a public-private partnership deal and say, “let’s just get government out of the way.” That, he says, is wrong for many reasons. There are two main reasons government can’t be completely eliminated from the equation. If the project is dealing with a public-policy objective, like transportation, government needs to be part of it for policy oversight and to ensure the project intent is being achieved.

The second reason is, the government needs to be part of the revenue stream. “This isn’t benevolence that’s bringing the private sector into the equation. They see an opportunity,” Guzzetti says. “But, you need a revenue stream. The private sector isn’t going to just come in and do it and pay for it.

“The government is at risk for the price tag, but we’re going to put our neck on the line too and we’re going to be taking risks and we’re going to be accountable for the results.”

Finding the Right Fit

Then what makes the ideal situation for a DBOM public-private partnership project to work? First, Guzzetti says you have to be willing to and understand that you will have to put up some sort of revenue stream to support the project. The revenue stream is what piques the private sector’s interest. “It absolutely won’t work without that,” he says.

However, Guzzetti warns that farebox revenue alone won’t be able to support a project in most cases.

The project also will have to be segmented from the rest of the transit system. “If you have a line that just blends into your system that is going to be very hard. You want to separate the accounting of this new line that the private sector is going to take on,” Guzzetti explains.

Finally, there has to be a condition of the project that the private sector is doing something that the public sector can’t do as well on its own. That could be managerial expertise or previous project experience.

What makes DBOM public-private partnerships — and all public-private partnerships for that matter — a bit trickier in the United States is having to navigate through not only federal laws but state laws as well.

Guzzetti says: “In addition to these federal laws, there are state laws on contracts ... procurement laws and how you can do that. And rightfully, … there are a lot of procurement scandals across the country so you do need to have procurement laws that protect the public interest and provide procedural process for the private sector to seek government contracts. You need that. But then, different states have different laws, so maybe there are some states that are more open to these creative procurement uses, and some states are more restrictive on it.”

Currently APTA is working on a project looking at all the states and their procurement laws to determine where public-private partnerships are plausible and where they are not.

The FTA has no formal assistance program to help transit agencies with public-private partnerships, but has held a number of workshops on the topic.

According to the FTA, the Denver RTD Eagle P3 project is a great example of successful public private partnerships because during recent spirals in the economy, this project sustained itself.

The Eagle P3 Partnership

RTD’s Eagle P3 project includes the east corridor into Denver International Airport (DIA), the Gold Line to Wheat Ridgeland Arvada, and segment 1 of the Northwest Rail Line.

The project is being delivered and operated under a concession agreement. The concessionaire selected through a bid process is Denver Transit Partners (DTP), which includes Fluor Enterprises, Uberior Investments and Laing Investments. Other firms involved include Ames Construction, Balfour Beatty Rail, Hyundai-Rotem USA, Alternative Concepts Inc., Fluor/HDR Global Design Consultants, PBS&J, Parsons Brinckerhoff, Interfleet Technology, Systra and Wabtec.

DTP will design build finance operate maintain (DBFOM) these lines over a 34-year period, the total contract length. Bill Van Meter, FasTracks Team assistant general manager Planning Department says, “I think because these concessionaires to bid on the job, they really have skin in the game.” He says, “If they don’t meet defined metrics on operating performance, they can be penalized by up to 25 percent of the availability payments, so it’s in their interest to build this line and operate it to a very high level.”

WHY PPP?

The public-private partnership route was a financial strategy to get projects underway. But at this point, Van Meter says, “The more we got into it, we just felt it was a good procurement process and we get a lot of innovation and risk-sharing with the private sector.”

Phil Washington, RTD general manager, says, “You’re moving the project forward sooner than you would be able to without this private sector financial involvement.”

He calls it the three-legged financing stool and says he thinks it’s the process that’s going to be used in this country for megaprojects. “This three-legged financing stool is the private sector with that one leg of that stool, in our case to the tune of about $486 million,” Washington says. “Then you add the local investment, i.e. sales tax to the tune of about $500 million and then you add the federal involvement of the $1.03 billion full funding grant agreement.”

LESSONS LEARNED

It didn’t come without its share of challenges. RTD recently published a “lessons learned” report for the procurement. “A lot of those challenges are defined in there,” Van Meter says.

One of the lessons learned was to have very high-level support before you get into it because of the tough decisions along the way. “Our board of directors had to make some tough decisions and they stood up for it,” says Van Meter. “These companies, they’re risking a lot of their company and a lot of their money based on this, so they want to make sure there are good financial guarantees from the agency to go through with it, that we’re not going to pull the plug at some later time. Those all involve some major decisions that we had to get our board to buy into.”

Washington says it’s important with a PPP, to understand the allocation of risk between the public agency and the concessionaire. “Understand how to put together the risk allocation matrix,” he explains. “Who takes on what risk; who takes on the risk of the ridership; who takes on the fare risk? Put these risks in some type of matrix and decide who does what and how you cross those things out.

“That was a big one for us in terms of this procurement,” he stresses.

A Detailed Process

FasTracks Team Senior Manager, TOD and Planning Coordination Bill Sirois says that after the award was made, both teams complimented them on the process because of the fact that RTD set a schedule and most importantly, stuck to it. “We were able to take a little bit more time at the front end and then kind of got our ducks in a row.” He also said that allowed them to make some big decisions from a scheduling standpoint. “I think that was a real important piece of why we were successful.”

And with such a huge project — at $2.1 billion — there are a lot of eyes on RTD. And there were a lot of people that didn’t think they were going to pull it off, especially during this tough economy. “They thought these funding partners will never stay in the mix and what have you, and you know what? We pulled it off,” says Pauletta Tonilas, RTD FasTracks public information officer.

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