Chapter 6: Principal Findings
The scan team learned a significant amount about established PPP programs during its visits with the host countries. The diversity among policies and practices provided numerous valuable insights. The relative maturity of the host nation PPP programs offered a rich environment for the collection of useful and tested information on PPP policies and practices. This experience base provided the team with numerous findings, which are organized below into general, project life cycle, and additional findings.
- PPPs are generally a modest but critically important percentage of the overall highway and roadway network. As described previously, only a moderate percentage of the overall highway and roadway networks are under PPP arrangements. Typically, however, the segments that are PPPs are critical components of the national or regional system for vehicular mobility. For instance, CityLink in Melbourne, Australia, is a vital perimeter road that provides commuters and freight access into the city's central business district via a high-quality, limited-access route.
- Public agencies in the host countries have faced or continue to face challenges similar to those in the United States when it comes to providing serviceable highways and roadways. Not a single public agency visited indicated that it had a surplus of funds available for expansion, restoration, and preservation of highway assets. The usual factors— escalating demands, deteriorating assets, insufficient public resources—cause the general scarcity of funds. The countries visited have used PPP arrangements to leverage private sector investment in highway assets, but they are doing so through established and credible processes.
- Significant institutional learning has occurred in both the public and private sectors over roughly the last decade. Most PPP programs in the countries visited began in response to fiscal crises, and the private sector was viewed, particularly by politicians, as a potential solution. Early PPP arrangements in these countries, while well intentioned, did not necessarily provide the best value for the public. Since that time, the planning, procurement, and management of PPP projects have improved substantially. Significant institutional learning was evident in all the host nations. This circumstance is advantageous for the United States, a late mover in this market, because its institutions can adopt tested second- and even third-generation policies and practices.
- Highway PPP arrangements, particularly in the most mature markets, are not primarily financial transactions, but are the selected project delivery strategy based on a value-for-money or feasibility analysis. In the majority of the countries visited, this perspective was either firmly held or gaining traction. For instance, the policy in Victoria on any potential infrastructure project is that budgetary funds must be available to support it for it to be considered for inclusion in a capital program. If the potential project has the attributes necessary for a PPP, it will be evaluated through Victoria's value-for-money guidelines. Only if the project demonstrates value for money as a PPP will it proceed that way. Otherwise, the budgetary funds will be used to finance its conventional delivery. In Spain, the philosophy is slightly different. If the public sector's feasibility analysis indicates that a PPP approach is viable, highways are typically delivered by PPPs. In either case, though, the government determines that a PPP arrangement is the preferred method of delivery based on a systematic methodology.
- Highway PPP arrangements do not automatically require user fees. The scan team found that various sources of funds are used throughout the world— from exclusively real tolls to a combination of real tolls and shadow tolls to exclusively shadow tolls or direct payment mechanisms (often principally availability based). While the user-pays concept remains a solid economic argument, the reality is that as in the United States, is a barrier to widespread tolling.
- The maximum contract period (or concession period) observed was 50 years and most periods ranged from 30 to 40 years. This is a contrast to several recent long-term lease agreements of existing assets with periods ranging from 75 to 99 years coupled with large upfront payments in the United States. None of the countries visited have implemented a model of this sort recently. The two primary determinants described for the contract period were that (1) the timeframe should be long enough for most structures in the project to have gone through at least one major renovation, and (2) the period must be adequate to allow the PPP contractor a reasonable timeframe to collect the revenue necessary to obtain its expected return on investment.14
- All public agencies indicated that PPP arrangements allow the delivery of projects sooner than possible through conventional channels. This is a common refrain among agencies with significant PPP experience. In some cases, this detail is used as a tool to promote the PPP approach over traditional delivery methods.
- One man's BOOT (build-own-operate-transfer) is another's DBFO (design-build-finance-operate). The definitions, acronyms, and nomenclature used worldwide for PPPs are far from standard. In lieu of trying to keep all of this straight, the key variables to consider are what scope of services the private sector is being asked to provide (or alternatively how the project life cycle activities are organized and packaged) and what source of funds supports the scope of services being solicited.
- The necessary public sector mindset and skills base for successful PPP programs and projects differ substantially from those needed for conventional practices. All of the public agencies visited emphasized the significance of these two points and indicated the importance of building public sector capacity in PPP program management. In Australia, Victoria and Queensland have found it beneficial to establish temporary, independent authorities to manage highway PPP procurements, while Portugal created EP specifically to administer concessions. A U.K. Highways Agency representative also commented that when the Private Finance Initiative began, the agency was not "risk averse, but rather was risk ignorant." This circumstance has remedied itself with experience and effort.
- Innovation by the private and public sectors in PPP arrangements is evident. In the case of the private sector, innovation is typically stimulated by competition for the award of an integrated, commercial enterprise (i.e., the right to develop, enhance, and manage an infrastructure asset for a finite time period). The resulting innovations are generally borne out of the integration of design, construction, and operation within a single entity and during asset utilization. Often, the private sector's creativity is tapped in the nonconforming proposals allowed and encouraged during the procurement process. In the case of the public sector, innovation is typically driven by stewardship of public interests. For instance, the EastLink project in Victoria, Australia, has provisions to return to the users of the facility a share of any debits (penalties) collected from the PPP contractor for failure to meet key performance indicators.
- A reasonable balance among technical, commercial, and legal conditions and terms in a PPP contract is integral to its success. While all highway projects are engineering efforts, PPP projects are also long-term enterprises. As one public official put it, once the agency's engineering staff has established the project's principal technical provisions, it's a good idea to have the agency's commercial and legal team take them for a "road test" to assess their alignment with the business dimensions of the project.
- In general, the representatives of the PPP contractors the scan team met with exhibited a focus on their customers, an emphasis on life-cycle management and value, and a pride in ownership and stewardship of their assets. While the team recognizes that these individuals had an interest in behaving this way, their comments and answers demonstrated that their business model depends on these attributes. Moreover, if they desire to transfer this business model elsewhere, their track record will either enable or hinder this transfer.
- Similarly, public agencies have recognized that a PPP arrangement is in fact a long-term partnership with the private sector founded on a contract. As such, the public sector's contract management team is responsible for sustaining this relationship. Doing so may require understanding the spirit as well as the letter of the contract.
Project Life Cycle Findings
These findings follow the chronological order of a PPP arrangement's life cycle—from preliminary project planning through project handback:
- All public agencies emphasized the importance of adequate front-end or preliminary planning for a project to fully comprehend its business case and potential life-cycle value. This is necessary to understand what service a potential asset should provide and where value is derived. Such comprehension will undoubtedly influence the remaining decisions on project delivery, including whether the project is a PPP candidate.
- The two most commonly cited attributes of a project that make it a PPP candidate were scale and complexity. The scale attribute is necessary to offset the transaction costs of PPPs, although variable monetary amounts (ranging from $10 million to $50 million) were suggested as the minimum scale necessary. Complexity is often coupled with scale, and this attribute is generally seen as the ingredient that enables, or perhaps compels, the private sector to find novel or unique project solutions.
- When defining or scoping a PPP project, the primary focus should be on identifying and conveying the outputs desired without inappropriately compromising existing technical standards. Customers focus on project outputs—reliable travel times, safe travel environment, comfortable ride, etc. Thinking first about what customers desire rather than developing a prescriptive definition of the asset is a major transition in practice. However, an emphasis on defining and measuring outputs should not come at the expense of sound engineering. Most countries visited still rely on existing technical specifications and standards, at least to establish baseline technical requirements.
- Risk analysis and allocation are paramount to PPP project success. Certainly, proper risk allocation is not a novel concept, but the public agencies visited with significant PPP experience have evolved from stressing maximum to reasonable risk transfer in PPP arrangements. Indeed, one public official described this evolution as a move away from "maximum risk transfer to optimal risk allocation."
- All public agencies emphasized the need for transparency during the procurement process for PPP projects. The typical scale and complexity of PPP highway projects generate an unusually high level of public, political, and media attention. Nearly all of the agencies visited go to substantial lengths to make project documents and records accessible. More often than not, they publish all nonsensitive material on multiple government Web sites. In addition, some agencies use a public auditor to monitor proceedings. A practice such as this is particularly important in a procurement process that uses competitive negotiations. Further, most agencies stressed engaging citizens throughout the project's life cycle, from the earliest planning stages through the operating phase. Particularly, the need to inform the public about how to access and use a new facility before its opening was highlighted.
- The commitment of the government to see PPP project procurements through to closure is essential to stability in this market. Given the enormous transaction costs involved in PPP projects, private participants must have confidence that the public sector is committed to closing deals expeditiously, with rare exceptions. Without this confidence, private participants will search for other places to put their business development funds at risk.
- In many of the countries visited, the PPP project development time was remarkably efficient. In some countries, the entire procurement process, from circulation of an environmental document to attainment of financial close, averages 12 months. In such cases, the government has clearly done substantial front-end planning. Regardless, this level of efficiency is enviable, especially since environmental standards and public involvement appear to be embraced.
- Multiple public agencies claimed that PPP projects provide better price and time certainty on design and construction when compared to the conventional approach. Several of the countries visited indicated that the scale and complexity of and competition for PPP contracts generally lead to design and construction efficiencies, which result in better pricing and scheduling by the private sector. In addition, public and third-party studies indicated significant advantages in these two areas.
- Most countries use an independent verifier or reviewer to monitor the design and construction phases of a PPP project. The independent verifier serves as an objective third party to generally administer (certify pay requests, etc.) and review (check compliance with requirements, make onsite visits, etc.) the project during design and construction. The payment schemes and contractual relationships used for the independent verifier varied. Victoria, Australia, introduced a proof engineer and a construction verifier to augment the independent verifier in its second PPP project (EastLink).
- All countries use key performance indicators (KPIs) or performance measures in their PPP contracts to assess service, along with incentives and disincentives to motivate contractor performance. KPIs are the means for assessing whether the PPP contractor is providing the outputs desired from the asset. Contractors are usually monetarily rewarded for exceeding performance targets or showing positive trends, and they are monetarily debited for missing performance targets or showing negative trends. In one project, the public sector agency has decided to distribute any amounts debited from the contractor to the highway's users, since they paid for a level of service they did not receive.
- Practices for managing changes and uncertainty throughout the contract period range from rebalancing actions to limited material adverse effect impacts. Rebalancing is a significant modification process, but it is intended to be applied symmetrically; the conditions can be modified in either the public or private sector's favor. Similarly, material adverse effect changes can be quite arduous, but in the countries where this approach is taken, the public agencies have evolved to substantially limit the triggers of such provisions. For instance, in lieu of granting zones with protection from competition or including no-compete provisions in contracts, the agencies have employed a range of techniques for handling this issue.
- Effective PPP contract management is vital to maintaining the public sector's risk posture and to sustaining a good working relationship with the PPP contractor. The public agency's contract manager must understand the line between risk liability and risk transfer when interacting with the PPP contractor on issues. Further, the contract manager must recognize that the PPP contractor is likely his or her counterpart for the better part of 30 years, so keeping the bigger picture in perspective is more important than a petty disagreement or discrepancy.
- Handback provisions appear to necessitate good asset management practices by the private sector, but the handback process is generally untested in the countries visited. Typically, the handback provisions specify residual service lives for the different elements of a facility, such as pavements, at the end of the contract's term. Undoubtedly, this is easier said than done. Many skeptics also worry that private contractors will permit the assets to gradually deteriorate and then attempt to renovate them to the minimum standard just before the end of the contract. Several comments a private operator made to the scan team might calm such concerns. First, the private contractor wants customers to use the asset, so it has an implicit incentive to maintain it. Second, and perhaps more important, delaying timely routine maintenance and performing major renovations toward the end of the contract period when traffic volume is stable and likely at its peak would disrupt this cash flow. Finally, the escalating cost of deferred maintenance is also a deterrent to poor asset management practices.
- None of the public officials or private participants consulted had direct experience with the handback provisions or processes for a PPP contract, even
though some countries, such as Spain, have had concessions expire.
- Business development costs of PPP proposals are substantial for both the public and private sectors.
- Tax benefits appear to be gained more easily by PPP contractors abroad. This is likely due to accounting practices that focus more on the risk held relative to an asset than on the control and ownership held relative to an asset.
- Selection criteria used for award of PPP contracts are generally similar across the countries visited.
- Most countries visited still rely on existing technical specifications and standards in PPP arrangements, at least as a means to establish baseline technical requirements.
- Fully electronic toll collection is common abroad, which improves throughput and efficiency.
- Some countries use innovative performance measures for highway safety, which has reportedly improved crash and fatality rates.
- Spain, in particular, is considering extending concession periods as an incentive or reward for PPP contractors that consistently meet or exceed required service levels.
14 More amenable tax treatment of PPP arrangements abroad also appears to help reduce contract periods.