PPP: What works — and doesn't

Posted on April 9, 2007 by Cliff Henke

Because public-private partnerships (PPPs) have become such a buzz term of late, let’s take a closer look at what they are, what works and what is less likely to be successful, particularly for U.S. rail transit applications.

The term is really an umbrella, covering a range of techniques including private participation in the finance of projects, (bonding is a common example) the operation of systems under a contract or an arrangement more like what is used abroad, a concession where the private entity, typically a consortium of banks, suppliers, contractors, consulting firms and contract operators, does the job under shared risk for a fixed term. These are typically decades in length, with an option to renew the concession agreement based on mutual satisfaction.

Abroad: rhetoric, reality
PPPs outside the U.S. represent the rule rather than the exception regarding project delivery. In the United Kingdom, for example, the light rail systems in Manchester, Sheffield and Croydon were built and continue to be operated this way, as does the metro in Birmingham. This is not to say that PPPs there are a panacea — just ask Londoners. Reams of copy in the newspapers have been written about the dissatisfaction with the two mammoth PPP contracts signed to upgrade the London Underground.

Nor is it a panacea in Asia. While PPPs have designed and built virtually every new light rail and heavy rail line in the past half century, there are also examples of shortcomings. Bangkok’s Skytrain is one. The consortium hired there could not imagine that it was going to be built and just about to open in one of the world’s worst financial panics, requiring a sizable loan guarantee by the German government.

By and large, though, PPPs do save governments considerable sums of money and help to deliver projects much faster with less cost to taxpayers than entirely government-managed projects. The trick is to find contractual arrangements that manage risk on both sides as well as incentivize what both government and the private sector do best.

In the U.S.: equally mixed
The recent and historical record of the public and private sectors working together has been equally complex in this country. It has a long past. After all, the New York City subway was a publicly commissioned project built by private companies.

In recent times, a variety of public-private projects were undertaken with the FTA’s Turnkey Demonstration Program a few years ago. Most of them were simply consortia that tested design-build or design-build-operate-maintain contracting methods, but a few had a financing component from the private sector as well.

Critics of the projects point out that some did not realize the projected savings from this project delivery method. However, most of the criticism was focused on San Juan’s Tren Urbano project, which underwent expensive design changes — something that turnkey simply is unable to accommodate on the cheap — and because it was not simply one turnkey project but a series of turnkey projects overseen by another PPP. The rest in the FTA program did well, as do virtually all airport peoplemover projects and many of the most recent BRT and rail projects built with some form of turnkey or PPP.

One area of PPPs that could use an increase in this country is a concession approach that allows more private financial participation. It is at least partly how most public transport projects are financed outside the country. An area of promise is joint highway-transit programs that use toll financing, such as San Diego’s Managed Lanes Project or the Fastracks program in Denver. Houston’s five-corridor BRT and LRT expansion is also to be financed in part by shared development revenues and delivered and operated in a PPP, so it, too, is worth watching.

In short, PPPs are not a universal cure, but with the right structure and shared-risk arrangement, they do offer an opportunity to close the widening gap between the public’s demand for more public transportation and the government’s willingness to pay for it.

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