Improving Infrastructure Through Public-Private Partnerships
THE NEED FOR ALTERNATIVE APPROACHES TO INFRASTRUCTURE DEVELOPMENT
State and local governments provide the majority of highway funding and are responsible for designing, constructing, and maintaining most of our nation’s infrastructure.1 They increasingly struggle to update aging infrastructure in the face of reduced funding and limited budgets, along with rising demand for new highways and bridges to serve a growing population.(a) In response to these challenges, many states are experimenting with public-private partnerships (P3s) as an alternative approach to funding, building, operating, and maintaining major transportation projects.2 P3s allow states to partner with private design firms, construction companies, and investors to spread the risk and share the responsibility for infrastructure development.
As in many other states, Rhode Island’s transportation infrastructure is facing serious problems: 22% of its bridges are considered structurally deficient and 35% are functionally obsolete, while 41% of its roads are classified as in poor condition. Unfortunately, Rhode Island doesn’t have adequate funds allocated for bridge rehabilitation or highway resurfacing.(b) The state may want to consider alternative sources of funding such as P3s to meet its infrastructure needs. However, Rhode Island transportation agencies do not yet have the state legislative authority necessary to implement such a system.
(a) The American Society of Civil Engineers reviews and rates America’s infrastructure every four years. Their latest report card gave U.S. infrastructure an overall grade of D+.3
(b) In 2013, the Rhode Island General Assembly identified $928 million in unfunded infrastructure needs from 2015 to 2019.4
FIG. 1 CONDITION OF RI BRIDGES
American Society of Civil Engineers3
To better understand how public-private partnerships might be implemented in Rhode Island, this article provides an overview of P3s, explores their advantages and disadvantages, and describes policy and legal issues related to the implementation of P3s.
FIG. 2 THE OHIO RIVER BRIDGES
Federal Highway Administration15
FIG. 3 PUBLIC VS. PRIVATE SECTOR RESPONSIBILITIES
THE BENEFITS AND DRAWBACKS OF PUBLIC-PRIVATE PARTNERSHIPS
Public-private partnerships are long-term contractual agreements between public entities and private companies that facilitate greater involvement of the private sector in infrastructure development and management.7 P3s allow private partners to contribute innovative approaches to the financing, design, construction, renovation, operation, and maintenance of public projects.8 Contracts outline the participation and responsibilities of the private firm, the performance expectations required by the public agency, and how project risks should be transferred and shared. The P3 model differs from the traditional Design-Bid-Build approach in that the public agency specifies its end product requirements but does not dictate exactly how these services are to be provided.
P3s offer several potential benefits related to project financing and risk sharing, as well as quality, efficiency, and cost.9 They create access to new sources of funding from commercial banks and bond investors not typically available to the public sector.10 The government does not have to cover the full costs of construction upfront; instead, payments are made to private firms over the life of the contract on a predetermined schedule. Expanded funding options enable states to proceed with infrastructure projects that might not have been possible otherwise or might have been delayed until public funding had been secured. By spreading out government financial obligations over time, P3s enable better allocation of public resources and free up funding that can be used to close budget gaps or support other public projects.
The P3 model allows the public sector to reduce its exposure to risks by transferring them to the private sector, which is better suited to mitigate risk.10 Private firms will act diligently to safeguard the profitability of their projects, thereby reducing the likelihood that a problem will materialize and affect the project as a whole. In return, investors obtain profits on their investment based on the risks they take on and the work they perform.
In addition to increasing access to private funding and reducing risk, P3s can speed up the delivery of projects and improve efficiency. P3 projects have a strong record of finishing on time and within budget because of financial incentives built into the structure of the contracts stipulating that private parties will not be paid until they deliver.11 In the case of projects involving tolls, for example, the sooner the project is operational, the more quickly the managing firm can start collecting revenues.
Putting one entity in charge of multiple stages of a project can also reduce costs, as that company has an incentive to design and construct the facility to minimize costs over the entire life cycle. This may result in savings in maintenance and operating expenditures over the life of the contract, even if the initial capital investment is higher. Private entities can also introduce innovative, money-saving approaches and new technologies that have yet to permeate the public sector, potentially improving practices for future infrastructure projects.
While P3s offer several potential benefits, there are also drawbacks to be considered.9 Though they allow the public sector to transfer some risk to the private sector, at the end of the day, the government ultimately holds the risk of financing, building, and operating large infrastructure projects, including the possibility that a private partner may fail to deliver or file for bankruptcy. Furthermore, the non-compete clauses that are found in many P3 contracts can constrain the government’s ability to adapt plans during the period of the contract. In addition, transaction costs are often higher for P3s because the private partners have to spend money on legal fees, financing costs, and procurement expenses. For this reason, P3s often work best for large and complex projects.
There are also concerns that are particular to the type of P3 project or partner.7 In so-called “brownfield projects,” where contracts are granted to private entities to manage, operate, or renovate existing infrastructure, firms may make disruptive changes such as increasing toll rates or laying off existing employees. Having private partners with foreign ties or ownership involved in infrastructure or in key domestic assets can also raise national security concerns.
FIG. 4 STATES WITH LEGISLATION ENABLING P3S
Federal Highway Administration13
CREATING LEGAL FRAMEWORKS FOR PUBLIC-PRIVATE PARTNERSHIPS
The United States has been slower than other countries to embrace the P3 model. P3s gained traction in Europe, South America, and Asia in the 1980s, but have been adopted more slowly in the U.S. This is due in large part to federal policies on highway funding and to existing laws and standards of practice at the state and county level.12 A critical obstacle is that some states, including Rhode Island, lack the legal provisions that would allow public agencies to engage in P3s.
Thirty-three states, plus the District of Columbia and Puerto Rico, have legislation authorizing public-private partnerships.13 About two-thirds of these states permit a broad range of P3s, while the remaining third limit the model to specific types of projects.14 Currently, no government agencies in Rhode Island have the authority to execute P3 projects.(c)Instead, the state follows conventional bidding and project delivery methods. The Rhode Island Department of Transportation (RIDOT) is required to use a competitive bidding process for all construction contracts, and the lowest bid that falls within the project specifications and budget is typically selected.
In order for its infrastructure projects to incorporate private sector funding and expertise via P3s, Rhode Island would need legislation granting public agencies the authority to implement P3 projects and outlining a structure for such collaborations. A strong framework would be needed to protect the public interest while at the same time offering opportunities that are attractive to the private sector. State P3 legislation typically lays out how P3s will be implemented, what types of projects are allowed, and what roles and responsibilities will be assigned to each partner. To assist states interested in passing P3 legislation, FHWA has produced a number of resources, including a template of key issues for states to consider in crafting their legal frameworks.15 The National Council of State Legislatures has also conducted thorough reviews of existing state statutes authorizing P3s.14 The next section offers an overview of issues related to P3 legislation, with insights from the FHWA guidelines and the experiences of other states.
(c) In 2010, Rhode Island Senate Bill 2132 was proposed to authorize the RIDOT to engage in public-private partnerships and involve private firms in a range of infrastructure activities.7 The legislation outlined procurement processes and permitted both solicited and unsolicited proposals. However, the bill was not passed and there have not been any further proposals relating to P3s in the state since.
FIG. 5 PROVISIONS IN P3 LEGISLATION, BY STATE
Federal Highway Administration15
Many states new to P3s start by implementing a handful of pilot projects before extending the model to full scale. Rhode Island could test the success of P3s in the state by allowing experimentation with a wide range of P3 approaches while still initially limiting the overall number of projects. If this degree of flexibility is desired, legislation could permit P3s to be applied to all modes of transportation and any type of procurement. By allowing private entities to take on a range of roles, from funding to construction to operations and maintenance, the state may get a better sense of where P3s are most effective. Some states further encourage P3 experimentation by allowing both solicited and unsolicited proposals, a move that lets the private sector take initiative to develop ideas for innovative P3 projects.
To further encourage the development of a broad range of P3 models, many states permit a variety of types of funding options, including the combination of public and private funds and the use of TIFIA loans that leverage federal funding to attract private investors.(d) In terms of funding, Rhode Island may also want to consider restrictions on diverting revenues from P3 projects to other unrelated uses, because keeping revenue within the project where it originated makes it easier to gauge the fiscal sustainability of a project.
In addition to governing what types of P3 models should be permitted in a state, legislation typically outlines the process for soliciting, procuring, and authorizing P3 projects. Legislation generally provides both evaluation criteria for rating each proposal and selection criteria for assessing each private vendor. Unlike in traditional procurement models, the evaluation criteria do not necessarily have to require that contracts be awarded to the lowest bidder. The selection process may consider other factors such as the technical competency of the vendors and the proposed allocation of risk between the public and private sector.
Rhode Island will need to consider which agencies should be granted the authority to engage in P3s. The Department of Transportation (RIDOT) is the lead agency for infrastructure creation and maintenance in the state, but Rhode Island also has three quasi-public agencies responsible for distinct transportation-related functions: the RI Public Transit Authority, the RI Turnpike and Bridge Authority, and the RI Airport Corporation. One possibility would be to authorize all four agencies to oversee P3s relevant to their jurisdiction; the agency involved would depend on whether a P3 is a highway, airport, bridge, or public transportation project. The managing agency could be encouraged to study each project carefully and only select those that are most appropriate for implementation as a P3.
Another issue for consideration is the legislature’s involvement in approving P3 projects. Some states have streamlined the procurement process by providing prior legislative approval for projects, rather than requiring the legislature to step in and approve individual projects later in the process. Either state transportation agencies are granted the authority to approve projects themselves or the legislature approves the use of a P3 model for a particular project before the procurement process begins.
IMPROVING INFRASTRUCTURE THROUGH PUBLIC-PRIVATE PARTNERSHIPS
An increasing number of states are passing legislation to authorize P3s as an alternative method for funding, delivering, and managing infrastructure.12 While public-private partnerships are not right for every project, they can be a valuable option for states to have in their infrastructure arsenal.
FHWA also encourages states to carefully consider provisions relating to public and private sector control over various aspects of P3 projects. It should be clear which partners have the authority to create user fees (i.e. tolls) or change fee rates. Some states choose to avoid non-compete clauses because they can restrict the government’s ability to initiate other infrastructure development projects.
(d) The Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) authorized the U.S. Department of Transportation to provide various forms of credit assistance to state and local governments, private firms, and special transit authorities for use in funding infrastructure projects.12 The main goal of these loans is to leverage federal funds to attract private investors to finance infrastructure development.
If Rhode Island wanted to test the waters in this area, legislation would be needed to authorize and govern the use of P3s in the state. Potential legislation could benefit from the lessons learned by other states and from the FHWA guidelines listed in Figure 5. With P3 authority in place, the state could begin to consider what planned infrastructure projects might benefit from a P3 model and start to identify potential private partners and funding sources.
- Federal Highway Administration (2012) “Challenges and Opportunities Series: Public Private Partnerships in Transportation Delivery,” Washington, D.C.: U.S. Department of Transportation.
- On the growth in state experimentation with P3s, see: R. Richard Geddes and Benjamin L. Wagner (2013)“Why do U.S. States Adopt Public-Private Partnership Enabling Legislation?,” Journal of Urban Economics, 78: 30-41. Dan McNichol (2014) “The United States: The World’s Largest Emerging P3 Market,” New York: American International Group (AIG).
- American Society of Civil Engineers (2013) “2013 Report Card for America’s Infrastructure,” Reston, VA
- Rhode Island House Fiscal Advisory Staff (2013) “Infrastructure and Funding in Rhode Island,” presentation to the Special Legislative Commission to Study the Funding of East Bay Bridges, Providence, RI, September 26.“A river runs through it: A natural experiment in infrastructure,” The Economist, May 2nd.
- Indiana Department of Transportation (2013) “Indiana’s P3 Success – East End Crossing,” Indianapolis, IN.
- Jaime Rall, James B. Reed, and Nicholas J. Farber (2010) Public-Private Partnerships for Transportation: A Toolkit for Legislators, Washington, D.C.: National Conference of State Legislatures.
- For more background on P3s, see: Federal Highway Administration “P3 Toolkit,” Washington, D.C.: U.S. Department of Transportation [website accessed on April 5, 2015]. Wisconsin Commission on Transportation Finance and Policy (2012) “Public-Private Partnerships: Policy Issue Paper,” Madison, WI: Wisconsin Department of Transportation. Federal Highway Administration (2004) “Report to Congress on Public Private Partnerships,” Washington, D.C.: U.S. Department of Transportation.
- On the benefits and drawbacks of P3s, see: Rall, Reed, and Farber (2010). Federal Highway Administration (2012). Baruch Feigenbaum (2011) “Risks and Rewards of Public-Private Partnerships for Highways,” Policy Brief 98, Washington, D.C.: Reason Foundation.
- On the financial dimensions of P3s, see: Jean Shaoul (2008) “Using the Private Sector to Finance Capital Expenditure: The Financial Realities,” in Akintola Akintoye and Matthias Beck (eds.) Policy, Finance & Management for Public-Private Partnership, Oxford, UK: Wiley-Blackwell. U.S. House of Representatives, Committee on Transportation and Infrastructure (2010) “Using Innovative Financing to Deliver Highway and Transit Projects,” Hearing, Washington, D.C., April 14.
- William D. Eggers and Tiffany Dovey (2007) “Closing America’s Infrastructure Gap: The Role of Public-Private Partnerships” New York: Deloitte Research.
- On the history of P3s in the U.S. and internationally, see: Mary Jane Breinholt (2014) “Partnership Financing: Improving Transportation Infrastructure Through Public Private Partnerships,” Washington, D.C.: Eno Center for Transportation. William Reinhardt (2011) “The Role of Private Investment in Meeting U.S. Transportation Infrastructure Needs,” Washington, D.C.: The American Road & Transportation Builders Association Transportation Development Foundation.
- Federal Highway Administration (2014) “State P3 Legislation,” Washington, D.C.: U.S. Department of Transportation [website accessed April 5, 2015].
- “Appendix B: State PPP Enabling Statutes for Transportation Projects, as of October 2010,” in Rall, Reed, and Farber (2010). Jaime Rall (2012) “Public-Private Partnerships for Transportation: A Toolkit for Legislators – March 2012 Updates and Corrections,” Washington, D.C.: National Conference of State Legislatures.
- Karen J. Hedlund and Brian F. Chase (2005) “Overview of Key Elements and Sample Provisions,” Arlington, VA: Nossaman, Guthner, Knox, & Elliott LLP. Federal Highway Administration (2007) “Key elements of State P3 Enabling Legislation for Highway Projects,” Washington, D.C.: U.S. Department of Transportation [website accessed on April 5, 2015].
How do other states fund their infrastructure development and maintenance, and how have funding mechanisms changed over time?
How have public/private partnerships to fund infrastructure development been structured and what models are considered best in class?
Type of Research
- Responds to questions of Policy Leaders with research projects that closely align with state priorities
- Provides implications for challenging state issues