Public–Private Partnership Concessions for Highway Projects: a Primer Quality Assurance Statement
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Public–Private Partnership Concessions for Highway Projects: A Primer Quality Assurance Statement The Federal Highway Administration (FHWA) provides high quality information to serve Government, industry, and the public in a manner that promotes public understanding. Standards and policies are used to ensure and maximize the quality, objectivity, utility, and integrity of its information. FHWA periodically reviews quality issues and adjusts its programs and processes to ensure continuous quality improvement. Contents Chapter 1: Introduction 3 Chapter 2: How Does A P3 Concession Work? 4 Concession Goals—Public Perspective 4 Why Do Public Agencies Enter into P3 Concessions? 4 Increase Up-Front Financing Through Private Equity 5 Make Greater Total Debt Capacity Available Through Private Structure 5 Share Revenue and Risks with the Private Sector 5 Provide Incentives for Better Asset Management and On-Time and On-Budget Delivery 6 Concession Goals—Private Perspective 6 Concession Compensation—Basic Options 6 Toll and Project Revenues (from Project to Private Sector) 6 Availability Payments and Performance Payments (from Public to Private Sector) 7 Shadow Tolls (from Public to Private Sector) 7 Up-Front Payment (Private to Public Sector—for a Toll-Based Concession on an Existing Facility) 8 Concession Term—Basic Options 8 Fixed 8 Dynamic 8 Extendable 9 Chapter 3: Who Are the Primary Participants in a P3 Concession, and What Are Their Roles? 10 Primary Public Participants 10 State Legislatures 10 Governors 10 Public Sector Project Sponsor 10 Local Governments (Non-Sponsors) 10 Conduit Issuer 11 Public Sector Contracted Advisors 11 U.S. Department of Transportation 11 Other Public Sector Sponsors 11 Primary Private Participants 11 Concession Company or Concessionaire 11 Expert Service Providers 12 Equity Investors 12 Commercial Lenders 12 Bondholders 12 Chapter 4: What Characteristics Are Associated with Viable P3 Projects? 13 Large Size 13 Complexity 13 Strong Public Support 13 Reliable Revenue Source(s) 13 Completed or Near-Completed Environmental Process 13 Chapter 5: What Are Some Common P3 Misconceptions? 14 P3s Are a Source of Revenue 14 P3s Mean Privatization 14 P3s Are a Fit for Every Project 14 P3s Are Free to Implement 14 P3s Are Guaranteed to Succeed 14 Chapter 6: Why Aren’t There More P3 Concessions? 15 Lack of Suitable Projects 15 Lack of Legal Ability to Enter Into a P3 15 Lack of Revenue Sources 15 Lack of Organizational Capacity 15 Chapter 7: Basic Concepts: Project Finance 16 Equity and Debt in P3 Concessions 16 Public Sector Project Finance 16 Chapter 8: What Are the Typical Steps in Establishing a P3 Program? 18 Establish a P3 Working Group 18 Establish Legal Authority or Develop a Program 18 Identify Potential Projects 18 Chapter 9: What Are the Typical Steps in Evaluating a Potential P3? 20 Establish Project Goals 20 Hold Industry Meetings 20 Examine Revenue Options 20 Evaluate Financial and Other Risks 20 Evaluate Public Sector Capacity for Project Development or Create a Public Sector Comparator 21 Consider Possible Benefits of P3 Models or Conduct Value for Money Analysis 21 Determine Whether and How to Implement a P3 21 Chapter 10: What Are the Typical Steps in a P3 Procurement? 22 Develop a First-Stage Procurement Document: Request for Information 22 or Request for Qualifications Develop a Second-Stage Procurement Document: Request for Proposal 22 Develop Draft Project Agreements 22 Conduct Bidding Process 22 Select a Private Partner 23 Negotiate with Chosen Partner 23 Chapter 11: What Are Typical P3 Implementation Steps? 24 Gather Debt and Equity Capital (Private Partner) 24 Begin and Complete Design Build (Private Partner) 24 Operate and Maintain (Private Partner) 24 Monitor Performance (Public Partner) 24 Evaluate Success of P3 and Lessons Learned (Public Partner) 24 Chapter 12: What Are Some Examples of P3 Concessions? 25 Capital Beltway (Virginia) 25 Port of Miami Tunnel (Florida) 25 Puerto Rico 22 (Puerto Rico) 26 Chapter 13: What Are Some Resources for More P3 Information? 27 FHWA’s Office of Innovative Program Delivery Web Site 27 National Conference of State Legislatures P3 Partners Project on P3s 27 Chapter 14: Summary 28 Chapter 15: Glossary 29 2 | P3 Concessions for Highway Projects CHAPTER 1 Introduction his primer provides a brief introduction to public– in which a private party will agree to design, construct, private partnership (P3) concessions for transporta- finance, and operate a replacement bridge crossing in Ttion project finance. P3 concessions are public–pri- exchange for receiving a share of the tolls on the bridge for vate agreements in which the private sector takes on some 35 years. By taking on the construction, design, and financ- of the risks and rewards of financing, constructing (or leas- ing, as well as the long-term operation, the private sector ing), and operating and maintaining a transportation facility also assumes many of the risks involved, including cost in exchange for the right to future revenues or payments for overruns due to design flaws, unexpected soil conditions, a specified term. or certain catastrophic events. Each P3 arrangement will Although many types of P3s exist, this primer will focus define which risks are assumed by the private partner and on P3s that involve assumption of financing risk by the pri- which remain with the public sector. vate sector, as well as long-term (i.e., 10+ years) operations This primer will review the basic structure of a P3 proj- and maintenance. These types of long-term P3s are typically ect finance concession and introduce key public and pri- termed Design-Build-Finance-Operate (DBFO) concessions, vate participants and their roles. It will also describe the because the private sector assumes the obligation to design, motivations of public and private partners for entering into build, finance, operate, and maintain a facility for a specified P3s, present some typical P3 concession characteristics, and term in exchange for the right to some form of compensa- clarify common misconceptions/misperceptions of what tion (please refer to table 1 for a summary of the different P3s can and cannot accomplish. Finally, the primer will types of P3s and the respective risks and activities assumed outline typical P3 implementation steps and provide some by private partners). For example, a State Department of examples of P3 concessions. Transportation (DOT) might enter into a P3 arrangement Table 1. Types of P3s by risks and activities assumed by private partners. Risks/Activities Assumed by Private Partner Project Type Design Build Finance Operate Maintain Traffic Traditional Design-Bid-Build X Design-Build X X Design-Build-Finance X X X Design-Build-Finance-Operate X X X X X (Availability Payment Concession) Design-Build-Finance-Operate (Toll Concession) X X X X X X Note: Shaded areas represent the types of P3s covered in this primer. P3 Concessions for Highway Projects | 3 CHAPTER 2 How Does a P3 Concession Work? nder traditional project development, most public agencies design a project and then request sealed Examples of Refinancing and Ubids from private sector firms for construction. The Monetization public agency selects the lowest bidder, and that company constructs the project. Upon completion, the public agency Broomfield County, CO, entered into a public–private is responsible for future operations and maintenance. agreement with the Portuguese firm BRISA in order to A P3 concession is an alternative way for a public agency provide refinancing on the Northwest Parkway. The State to deliver a public-purpose project. A P3 concession has of Indiana entered into a public–private agreement to three primary elements: a concession goal, a compensation lease the Indiana Toll Road for 75 years in exchange for structure, and a term or length of time. Each element is es- an upfront payment of $3.8 billion, which the State used to tablished by the public agency that implements the P3 con- fund other transportation projects. cession, sometimes in negotiation with the private partner. road in good condition. To avoid confusion, this primer will Concession Goals—Public Perspective use the term brownfield only for those projects in which no Public agencies may use P3 project finance concessions to substantial expansion or rehabilitation occurs and in which construct new facilities or to expand or rehabilitate existing the primary goal is either restructuring the financing or al- facilities, such as highways, bridges, or tunnels, that a State lowing the public sector to receive monetary compensation DOT, local government, or other project sponsor would for the value of an existing facility. All other P3 project fi- otherwise have undertaken through traditional project de- nance concessions on existing facilities will be termed hy- velopment. In some cases, public agencies that enter into brids, because they involve construction and rehabilitation P3s have goals that do not involve construction, expansion, of a facility as well as financial goals. or rehabilitation of a facility but rather involve refinancing of a facility in financial trouble ormonetization (receiving Why Do Public Agencies Enter Into P3 compensation from the private sector for allowing a lease of Concessions? a financially successful existing facility). Concessions whose goal is to construct a new facility are Expanded financial capacity is one of the primary reasons often called greenfields, whereas concessions that involve ex- public agencies consider P3 concessions for transportation isting facilities are often called brownfields.1 The goal and facilities. Equity contributions, commercial loans, and other nature of the P3 transaction can be very different for exist- debt taken out by the private partner can substitute for ing facilities, depending on their condition and future plans. A brownfield toll road that the public sector wishes to ex- 1. The use of the term brownfields in the P3 context is different from the term used by pand or reconstruct involves much greater up-front capital the Environmental Protection Agency to refer to reused, potentially contaminated outlay and less certain returns than does an existing toll property.