Commentary
Viewpoint: The 10 commandments of public-private partnerships
By Penny Pittman Cobey
A public-private partnership (PPP) offers enormous advantages to cash-strapped public agencies seeking ways to finance infrastructure projects. Yet, far too many state and local agencies in the United States fear and distrust PPPs, and lack certainty about how potential PPPs should be evaluated. The following 10 principles will go a long way toward protecting the public interest in a PPP deal.
- Establish a long time frame. PPPs work best for projects with a stable, long-term life span where use by the public can be reliably predicted. Roads, bridges and utilities are ideal.
- Commit to transparency. Careful “value for money” analysis of a proposed PPP project will make all costs, including long-term maintenance, clear. Maintenance costs cannot be buried or ignored as is often the case in large projects delivered conventionally through fixed-price bidding. For example, in California’s Long Beach Courthouse PPP, the winning proposal provided that the operations and maintenance subcontractor would execute a fixed-price contract tying fees to service standards, and as security for decades of maintenance obligations would provide a letter of credit sized to the equivalent of a year’s maintenance fees. In the typical public works fixed-price bidding process, competitors bid construction work only, and maintenance costs are not addressed.
- Welcome public comment and participation. California’s Infrastructure Financing Act, for example, requires a public hearing before user fees can be raised at any time during the life of a PPP.
- Be prepared for complex bidding and procurement procedures. Negotiated competitive proposals, evaluated for quality as well as price, are fundamental to PPP project delivery.
- Develop performance standards that protect the public interest. Reach for the best. Ambitious performance goals encourage creativity and innovation from private sector PPP development teams.
- Shift risks to the private sector, which is prepared to bear them. The best example of beneficial PPP risk shifting is operations and maintenance costs, which can be wrapped into PPP pricing from the outset and will no longer be vulnerable to the prevailing political winds.
- Secure labor protections. If maintenance standards are set unrealistically high, for example, it may be impossible for the PPP operator to meet them without cutting pay and laying off staff.PPPs were initially denounced by organized labor as “privatizations” that would cost jobs. PPP developers today competing to renovate or rebuild projects where labor is already employed have responded by guaranteeing jobs to those public employees willing to make the transition to a private sector employer. As a result, PPPs can become job creators and even attractive investments for union pension funds. The Dallas Police and Fire Pension System is a substantial investor in Texas’ North Tarrant Express, a major toll road project being built as a PPP.
- Choose a revenue-sharing model. Early PPPs in the U.S. were typically “concession” projects in which the public agency received a large upfront payment, but no further payment through the life of the concession. Today, well-advised public agencies will insist on sharing revenues throughout the life of the PPP project.
- Maintain public control. In addition to revenue sharing, agencies can limit a PPP developer’s return on equity and retain the right to set user fees. The PPP developer’s right to periodic payments can be conditioned on continuing to meet operating and maintenance standards.
- Protect PPP revenue from general fund demands. Taking a single payment upfront for an infrastructure asset, then pouring that revenue into the general fund, is akin to burning up the furniture to heat the house. Indiana has shown agencies the better way by committing the bulk of its $3.8 billion revenue from the Indiana Toll Road PPP to a 10-year plan to improve and expand the state’s highway, bridge and other infrastructure. The California Infrastructure Financing Act expressly prohibits transfer of PPP revenue to general funds.
These 10 commandments, if followed, offer substantial protection to public agencies contemplating a PPP. Agencies under the impression that they have a choice between delivering a project conventionally or through PPP should look long and hard at the PPP’s financial viability. The real choice may be between a PPP project — and no project.
Penny Pittman Cobey is counsel in the Los Angeles office of McKenna Long & Aldridge LLP, where she is also a leader in the firm’s global infrastructure group. Her practice focuses on transactional construction matters and public-private partnerships. She can be contacted at [email protected]
