Comprehensive highway public-private partnership (PPP) programs are relatively new to the United States and not widely used. Limited highway funds, unmet needs for new highway capacity, interest from private investors, and other factors have led to substantial discussion of PPP projects and programs at the State and Federal levels and implementation of projects in a few leading States. In contrast, some countries have extensive and, in some cases, long-term experience with infrastructure PPPs, particularly highways. This presents a unique opportunity to capitalize on the knowledge and experience gained in the international community, where tested policies and practices are in place.
A desk study was completed to identify the countries with the most potential to provide relevant and current information on PPPs. Subsequently, a team of nine professionals representing government, private industry, and academe visited Australia, Portugal, Spain, and the United Kingdom in June 2008 to collect and evaluate information about PPP programs and projects for highway infrastructure. The team met with representatives of the public and private sectors involved in PPP arrangements. The Federal Highway Administration (FHWA) and the American Association of State Highway and Transportation Officials (AASHTO) jointly sponsored this scan through the National Cooperative Highway Research Program (NCHRP).
The purpose of this scan was to (1) examine programs, policies, and practices used by other countries that actively solicit and involve the private sector in the delivery of highway infrastructure; (2) document lessons learned; and (3) make implementation recommendations that will improve U.S. policy and practice.
For the purposes of this report, a public-private partnership is defined as a contract between the public and private sectors for the delivery of a project or service in which the private partner has responsibility for acquiring the majority of the necessary financing.
Key Learning Points of the Scan
The scan team learned a significant amount about established PPP programs during its visits with the host countries. The team identified several critical points that it consistently observed across the nations. These points are the salient messages from the scan:
- PPPs are an effective strategy for delivering highway projects, and they are service arrangements as much as financial ones.
- Potential PPP projects must be analyzed, selected, structured, and procured thoughtfully to preserve public interests.
- Managing the partnership over the life of the contract is critical to providing the services expected and maintaining the public-private relationship.
- Public sector institutional capacity requires strengthening and continuous improvement for PPP program effectiveness.
The team gained valuable insights about established PPP programs during its visits with the host countries. Foremost, 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. In many cases, the team received details on secondand even third-generation PPPs. Hence, the degree of institutional learning that had occurred was clear. Further, the diversity among policies and practices observed also provided alternative perspectives of various issues.
This experience base provided the team with numerous findings. The most significant ones are highlighted below in two categories: general and project life cycle findings.
- Highway PPP arrangements, particularly in the most mature markets, are not exclusively financial transactions; rather, they 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. In nearly all cases, the government determines that a PPP arrangement is the preferred method of delivery based on a systematic analysis and selection methodology.
- PPPs are a critically important and growing percentage of the national highway network. A moderate percentage of the overall highway and roadway networks are under PPP arrangements, but the PPP segments are typically critical components of the national or regional system for vehicular mobility.
- 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).
- 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.
- 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. A fundamental difference exists between prescribing a highway that an agency wants constructed versus granting a private entity the right to operate an enterprise within the bounds of a contract. The latter demands establishing equilibrium between business and engineering aspects of a highway project.
- Public agencies recognize 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 will be the one responsible for sustaining this relationship. Doing so may require understanding the spirit as well as the letter of a contract.
Project Life Cycle Findings
- 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.
- 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. Project outputs are what customers focus on: 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.
- Risk analysis and allocation are paramount to PPP project success. Certainly, risk allocation is not a new concept, but the public agencies with significant PPP experience the scan team met with have evolved from stressing maximum risk transfer to optimal risk allocation in PPP arrangements.
- 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 administer (certify pay requests, etc.) and review (check compliance with requirements, make onsite visits, etc.) the project during design and construction.
- 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 rewarded monetarily for exceeding performance targets or showing positive trends, and they are debited monetarily for missing performance targets or showing negative trends.
- 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 or more, so keeping the bigger picture in perspective is more important than a petty disagreement or discrepancy.
Beyond the principal findings, the team made other important observations:
- 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 indicated that it had a surplus of funds available for expansion, restoration, and preservation of its highway assets.
- Significant institutional learning, in both the public and private sectors, has occurred in the countries visited over roughly the last decade. Most PPP programs in the countries visited began in response to fiscal crises, and the 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.
- The maximum contract period (or concession period) for road or highway contracts observed was 50 years, and most periods ranged from 30 to 40 years. This is a contrast to several recent 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.
- All public agencies indicated that PPP arrangements can allow the delivery of projects sooner than would be possible through their other delivery methods. This is a common refrain among agencies with significant PPP experience.
- 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.
- 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. In the case of the public sector, innovation is typically driven by stewardship of public interests.
- 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. The comments and answers of the private participants visited demonstrated to the team members that their business model depends on these attributes.
- The two most commonly cited attributes of a project that potentially make it a PPP candidate were scale and complexity. The scale attribute is necessary to offset the transaction costs of PPPs, while complexity is generally seen as the ingredient that enables or perhaps compels the private sector to find novel or unique project solutions.
- 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. In addition, some agencies use a public auditor to monitor proceedings.
- The commitment of the government to see PPP project procurements through to closure is essential to stability within 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.
- 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, averaged 12 months.
- 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.
- Practices for managing changes and uncertainty throughout the contract period vary and range from rebalancing actions to limited material adverse effect impacts. Rebalancing is a significant modification process, but one that 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.
- 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 the facility, such as pavements, at the end of the contract's term.
After some discussion, the team agreed that this scanning study and its implementation strategies should facilitate the pervasive use of a project development process by State and local highway agencies that selects an effective project delivery system from a range of options that includes PPPs. An effective project delivery system is defined as one that provides the greatest benefits to society and meets government objectives.
The recommendations and implementation actions that follow are geared toward this end.
- Convene executive workshops at which representatives from countries visited or elsewhere speak directly to public and private sector decisionmakers. Providing information to both decisionmakers (executives) and those implementing the programs (directors or staff members) will benefit State departments of transportation (DOTs).
- Develop training guidelines for PPP program managers, procurement officers, contract managers, and financial and legal specialists that State DOTs can use to tailor development and training programs to their specific needs.
- Encourage FHWA to convert the scan team into an expert task group to implement scan findings.
- Encourage AASHTO to establish a group focused on PPPs, perhaps as a section of one of its subcommittees. Implementation of this recommendation will allow the discussion on the development of PPPs to stay active and involve stakeholders at all levels of AASHTO, State DOTs, and FHWA.
- Create a set of state-of-the-practice publications that further highlight the lessons learned from the scanning study and possibly expand the scope of inquiry to include other nations not studied. Issues such as business case development and analysis, value-formoney and risk analysis, procurement processes, contract provisions, and change management are all important topics for these publications to address.
- Develop comparative case studies of representative projects, past and current, that highlight maturing and evolving policies and practices. For instance, the Victoria government has developed two projects, CityLink and EastLink. An indepth review of the project specifics, lessons learned, procurement changes, and program evolution would meet one of the principal objectives of the scanning study.
- Develop a strategy to facilitate research in the following areas:
- Investigate advantages and disadvantages of alternative organizational forms for PPP divisions.
- Examine methods for identifying and analyzing candidate PPP projects.
- Investigate the evolution and effectiveness of KPIs.
- Investigate the risk mitigation practices of the private sector in PPP arrangements to determine if private participants assume real levels of risk.
- Investigate the determinants of concession length, both domestically and abroad.
- Evaluate methodologies for establishing and managing toll structures.
- Investigate and identify appropriate metrics for assessing benefits and costs of PPP programs and projects and overall PPP program and project performance.
- Develop and publish principles and guideline documents that update or complement existing documents that are similar in nature, such as the following:
- Establishing a PPP program
- Identifying and evaluating candidate PPP projects
- Procuring PPP projects
- Creating PPP contracts
- Managing PPP contracts
- Measuring PPP program and project performance