Texas A&M Transportation Institute

Transportation Policy Research

Public-Private Partnerships

Statewide Approaches

Introduction

A public-private partnership (PPP or P3) is an agreement for a private company to work with public agencies in funding and/or operating new and existing public roadways. This allows private companies to perform different combinations of design, development, finance, construction, maintenance, repair, and operation. States, regional planning authorities, and municipalities are increasingly considering public-private partnerships as a possible solution to the delivery of transportation projects.

Despite a range of approaches, philosophies, and roles, P3s share common elements. Most deals are structured so that the government maintains ownership and overall accountability for a transportation P3 project. To date, 33 states and the District of Columbia have used a P3 process to help finance, procure, and construct transportation projects, as shown in the figure below.

For the past decade, Texas has used P3s to deliver highway improvements. The state has created an enabling legislative frame work and pioneered P3, even serving as a model for other states in some cases.

Types of P3s include:

  • Comprehensive development agreements (CDA) . A CDA is a common type of P3 used in Texas. A CDA may be used for toll projects, improvement projects that include both tolled and non-tolled lanes, improvement projects in which a private entity has an interest in the project, or improvement projects financed wholly or partly with private activity bonds.  A state highway subject to a CDA with a private entity is still public property.
  • Design-build and design-build-maintain. In a design-build, a private partner designs and constructs a project for a public agency. The public agency is responsible for the operation and maintenance of the facility after construction.
  • Build-operate-transfer or build-transfer-operate. The facility is built by a private partner as specified by the public agency. The private partner operates the facility for a specified period of time and then transfers the facility to the public agency. The length of time that the private partner operates the facility is usually determined by the amount of financing they provided. The operation period allows the private entity to collect enough user fees to get a return on its investment.
  • Facility operations, maintenance, and management. A public agency enters into a contract with a private entity to operate, maintain, and/or manage a facility. The public agency maintains ownership, and the private entity’s return on investment is received through toll charges.
  • Sale/leaseback. This financial arrangement occurs when the public or private owner of a facility sells it to another entity and then leases it back from the new owner. This could involve the sale of a public facility to a public or private holding company for the purposes of limiting governmental liability or refinancing public bond debt. The public agency that sold the facility would continue to operate it.

Executive Summary

How Will This Help?

  • Reduces cost to the public. A P3 allows public agencies to share costs with the private sector. Reducing the required capital for any single projects allows the dedicated transportation dollars to be stretched for more projects.
  • Help funds keep pace with rising highway construction costs. Since 1991, roadway construction costs have almost doubled, while Texas transportation revenues have grown at a much slower rate. Engaging in P3s would help the slower growing transportation revenues keep pace with rising construction costs.
  • Reduces need for borrowing. Texas has increasingly turned to debt mechanisms such as bonds to finance transportation. Allowing P3s would reduce the amount of public capital needed and slow the growing trend of using debt to pay for roadway projects.

Issues

  • Some public agencies have limited power. The Texas Transportation Code limits the regional tollway authorities’ power to enter into agreements.
  • Public control and flexibility may be lost. Some have argued that P3s, if not structured to adequately protect the public interest, could result in a loss of public control and flexibility. Some of this risk can be because it is difficult to predict the future demand of a toll facility into the future.
  • Future public revenues may be lost. Revenue generated from the operation of a privately maintained or operated facility would not benefit the public agency. According to the U.S. Government Accountability Office, the higher private-sector costs relative to public-sector financing costs may result in higher overall project costs. However, some research suggests that these issues can be addressed through careful asset valuation and risk-sharing agreements.
  • The facility may go bankrupt and default. While P3s have provisions in place to protect the public sector in the event of a bankruptcy, some have expressed concern that a private-sector partner could default, affecting the public sector in a negative way.

For  More Information

Texas Department of Transportation. Current Comprehensive Development Agreements. http://www.txdot.gov/government/partnerships/current-cda.html.

Texas Transportation Code, Chapter 371 Comprehensive Development Agreements for Highway Toll Projects. http://www.statutes.legis.state.tx.us/Docs/TN/htm/TN.371.htm.

National Conference of State Legislatures, 2010. Public-Private Partnerships for Transportation: A Toolkit for Legislators. http://www.ncsl.org/research/transportation/public-private-partnerships-for-transportation.aspx

U.S. Government Accountability Office. Highway Public-Private Partnerships: More Rigorous Up-Front Analysis Could Better Secure Potential Benefits and Protect the Public Interest. GAO-08-44, February 2008. http://www.gao.gov/assets/280/272041.pdf.