January 2009

Will Private Investment in Public Transit Fill the Funding Gap?

by Ed Fishman

The concept of public-private partnerships (PPPs) has captured the attention of the U.S. public transit industry in the last few years. Faced with growing challenges to the traditional method of financing transit projects with public monies, and a steady increase in riders that is straining transit system capacity, many transit leaders are looking closely at PPPs as a potential solution to the funding problem confronting the industry.

The funding difficulties at the federal level are enormous. The recent economic crisis and the allocation of billions of federal dollars to support
U.S. banks (and possibly other industries) will further expand the gap between transit funding demand and available monies. States are facing similar economic hardship, with California recently asking the federal government for billions of dollars to cover its budgetary shortfall. These funding constraints have encouraged many state and local government officials to explore alternative ways of financing transit projects.

PPPs have emerged as an important alternative with tremendous potential upsides, but virtually no track record in the U.S. transit industry. Several major transit systems, including Denver’s Regional Transportation District (Denver RTD) and the Metropolitan Transit District of Harris County (Houston Metro), are actively engaged in efforts to facilitate private investment in their transit projects. Both systems are participants in a pilot program sponsored by the Federal Transit Administration (FTA) to encourage the use of PPPs. Other transit systems have been approached by private sector companies that are making unsolicited proposals to finance the design, construction, operation and maintenance of certain transit projects, in some cases without using federal or even state and local funds. The outcome of these and other pending transit projects is likely to determine whether PPPs will be a viable option to address the transit funding gap.

Overview of PPPs
The term “public-private partnership” generally refers to a range of project delivery arrangements between the public and private sectors on infrastructure projects that differ from traditional public procurements. Under the traditional “design-bid-build” approach to building a public works project, the public sector designs the project, contracts with the lowest responsible bidder to build the project, operates and maintains the project, and finances the entire capital cost and large portions of the operating and maintenance budget for the completed facility with public monies. As noted above, the lack of sufficient transportation funding at the federal, state and local levels — and the increasing competition for such limited funding — has prompted many public transit agencies to consider PPPs as an alternative project delivery method to the traditional approach.

In a typical PPP, the private sector assumes greater financial, construction or other risks in exchange for a greater potential return on its investment. Depending on the particular type of project delivery structure implemented, the potential benefits to the public transit system include capital cost and schedule savings, greater use of private sector innovation and technology, and the ability to finance all or part of the overall lifecycle costs of the project with private funds. One of the key objectives of a PPP is to allocate various project risks to the party best able to manage those risks. Thus, the private sector often will be responsible for cost, schedule and quality risks while the public sector will maintain responsibility for regulatory approvals, environmental review and right-of-way acquisition.

For analytical purposes, PPPs can be divided into two separate categories: (1) innovative contracting arrangements, and (2) innovative financing arrangements. Innovative contracting methods, such as design-build or design-build-operate-maintain (DBOM) arrangements, involve the private sector’s assumption of greater cost, schedule and quality risks, but do not involve private sector financing of the project. In contrast, innovative financing arrangements, such as long-term concessions and design-build-finance-operate (DBFO) contracts, involve some level of private sector financing of the project.

 


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