Understanding P3s in Transportation: Definitions, Benefits, Challenges, and Examples, Study notes of Project Management

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Introduction to

Public-Private Partnerships

(P3s)

Today’s Instructor

Patrick DeCorla-Souza

P3 Program Manager Office of Innovative Program Delivery Program Development Team

Course Outline

Lesson 1 Definitions

Lesson 2 Benefits and Challenges

Lesson 3 Types of P3s & Examples

Lesson 4 Financing Tools

Course Summary

OIPD – Role in Transportation P3s

 Technical Assistance

 Educate

 Facilitate P3s

Innovative Delivery

Revenue

Procurement Finance

Lesson 1

Definitions

What is a P3?

 Public-Private Partnerships

• P3s are contractual agreements between a public agency and a private entity that allow for greater private participation in the delivery of financing of projects
• More than Design-Bid-Build

Project Procurement and Delivery

Conventional Projects (design-bid-build)

P3 Projects (design-build-finance-operate- maintain)  Public sector burden with all risks  Risk sharing

 Succession of separate (and multiple) contracts

 Integration of two or more project phases  Public Financing  Private Financing

 Lowest bidder  Best suited

 Public sector project stewardship (incl. with contract management firm)

 Private sector project stewardship

Definitions – Terminology

 A Concession is a long term lease of public facilities to a private party (concessionaire)

• Greenfield and Brownfield Facilities

 A Special Purpose Vehicle (SPV) is a legal entity created to fulfill narrow, specified tasks

• Isolates the financial risks from the parent company or companies

 Leveraging is the degree to which an investor or business is utilizing borrowed money (debt)

• If a project is leveraged at 70/30, 70% debt and 30% equity

 Debt is a bond or loan, with an obligation to pay interest and principal at a later date

• Obligation has payment priority over equity
• Includes Private Activity Bonds (PABs) and Transportation Infrastructure and Finance Act (TIFIA) loans

 Equity defines ownership interest in a corporation

• Requires a higher internal rate of return than debt holders as equity interest is riskier
• Can be lost in certain instances

 The Internal Rate of Return is the percentage return on investment.

• Weighted average cost of capital (WACC) of project vs. return on equity

Definitions – Terminology

Why P3s Now?

 Growing congestion

• Need for new highway capacity

 Increasing costs to maintain system

• Aging infrastructure
• Increasing construction costs
• Increasing operations and maintenance costs

 Mounting budget pressures

• Revenue growth slowing
• Voter resistance to tax increases

 Poor long-term system performance

• Deferred maintenance

Why Undertake a Project as a P3?

Answer: When the public sector can get more

value using P3 approach

 “Value” can be:

• Lower construction and/or operation costs
• Time savings in construction and/or delivery
• Innovation -- cutting edge technologies or expertise

 Public Sector must assess “value”:

• Value for Money Analysis
  • Public Sector Comparator
  • Value of risks transferred to private partner
  • Potential for efficiencies
  • Qualitative factors

Slide 16Slide 16

True or False:

P3s may be only be done on greenfield facilities.

Multiple Choice:

Among the considerations for entering into a P3 are…

• Budget pressures
• Upgraded long-term performance
• Improved risk allocation
• All of the above

Test Your Knowledge

Slide 17Slide 17

Questions

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*1 to ask a question by phone

P3 Benefits to Public Sector

 Expedited project delivery

 Protection against some risks

 Construction and operational efficiencies

 Increased investment in transportation assets where unmet needs are the greatest

 Opportunities for “new” money (i.e. from equity investors)

 Brings together multiple financing sources required for large-scale projects

 Enhanced cost control

 More certainty regarding cost and schedule

 Brings innovation

 Introduces life-cycle perspective – better quality up front and improved maintenance

 Improved customer focus

 Leverages each partner’s strengths

 Conserves public sector debt capacity

P3 Benefits to Public Sector