Public-Private Partnerships: State of Practice and Research Needs

The 14th Annual Public Private Partnership ConferenceWorld Bank, Washington, DC

September 8, 2014

Nobuhiko DaitoGeorge Mason University

School of Policy, Government, and International Affairsndaito@gmu.edu

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Presentation Outline

• Who we are• Market Conditions of P3s in the U.S.• Advantages and Disadvantages of P3s• Financing P3s: Challenges and Policy Tools• Risks of P3 Projects• Critical Policy Discussions

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• Research projects on P3s– Data needs for socioeconomic assessment of infrastructure P3s– Viability of multi-jurisdictional transportation P3s: an institutional framework

review– Does political contestability affect implementation of P3s?– Renegotiation of transportation P3s– Cost differences of P3s and traditionally procured highway projects in the U.S.

• White Papers– Research & policy issues white paper– Best practices white paper

• Co-sponsoring National Conference on P3s • Graduate education: master-level courses on P3s• Conference Participation & Outreach Activities• Center Website: p3policy.gmu.edu

Center for Transportation Public-Private Partnership Policy George Mason University

School of Policy, Government and International Affairs

Market Conditions of P3s in the U.S.

4Source: Public Works Financing

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0

5

10

15

20

25

30

35

40Number of P3 Financial Closes in the U.S. 1988-2013, by Sector

Building

Misc.

Transportation

Water

Total

- Types of US P3 projects that reached financial close, 1986-2013

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Source: Public Works Financing

Airport (23)

Building (60)Miscellaneous (5)

Motorway (63)

Parking (5)

Rail (30)

Seaport (8)Toll bridge (16)

Toll motorway (46)Toll tunnel (4)

Wastewater (101)

Water (43)

Water/Wastewater (50)

Airport (23)Building (60)Miscellaneous (5)Motorway (63)Parking (5)Rail (30)Seaport (8)Toll bridge (16)Toll motorway (46)Toll tunnel (4)Wastewater (101)Water (43)Water/Wastewater (50)

Market Conditions of P3s in the U.S.

P3s: Advantages & Disadvantages

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Advantages• Utilization of private financial resources• On-budget, on-time delivery• Innovative technologies and management know-hows of the

private sector• Improved O&M efficiency• Improved asset managementDisadvantages• Substantial transaction costs

– Legal, financial and technical consulting service fees – Higher interest costs in cases of private debt-financing

• Complexity makes the projects more prone to risks

Financing P3s: P3s Are Not Free Money

Revenue Streams• Direct User Charges (Tolls, Transit Fares, User Fees)• Public sector contribution/subsidy (e.g., Availability Payments)Debt & Equity Sources: repaid through revenue sources• Private shareholder equity• Non taxable bonds (private activity bonds)• Taxable bonds• Bank debt (senior and/or subordinate)• State infrastructure bank loans• Federal loans

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Types of Government Support for Financing P3s

Equity participation• Monetary and in-kind (e.g. right-of-way) government contribution to a

project– Assures public involvement and support for its implementation and operation– Helps achieve a more favorable debt-equity ratio when other sources of equity capital

are not available or limited

Government loans• Loans with favorable terms to reduce financing costs• E.g., Transportation Infrastructure Finance and Innovation Act (TIFIA)

– Subordinated loans to transportation projects with e dedicated funding sources (e.g., tolls), but might not be fully financeable without assistance

– Can account for no more than 49% of the project cost

Other policy tools• Other forms of credit support (e.g., loan guarantees, line of credit)• Performance guarantees (e.g., revenue guarantee)• Tax benefits • Protection from competition (e.g. non-compete clause)

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P3 Project Risks

Broader Sets of Risks for the Developer/Contractor • Political

– Confrontational political climate: “politicizing” projects– Changes in law

• Regulation– Permit– Environmental lawsuits

• Capital Expenditures– Project schedule overrun– Inflation / material and labor costs

• Revenue– Lower than projected traffic and toll revenue/income– Changing market conditions

• Operation & Maintenance (O&M)– Performance risk– Operating cost overrun

• Financing– Spread between O&M and revenue growth rates 9

Readiness for Successful P3 Implementation

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Factors for successful P3s (OECD Action Points)• A credible pipeline of robust projects• A legal and regulatory framework that commands confidence• A capable public interface with the private operator• Political will to use private sector operators• Strong investor protection• Project assessment and appraisal norms that focus on value for

money• Transparent budgeting practice to minimize sovereign fiscal risk

Critical Policy Discussions: How are P3s Actually Doing?

Both successes and failures:• What is a success of P3s? Distinct perspectives: citizens; policy

makers, operators, investors, etc.• Are they really achieving value for money?• Evaluation is difficult: small Number of US P3 concessions have

reached maturity– Other countries have successfully used P3s to invest in infrastructure and

providing social services– U.K., Canada, Australia, etc.

• Evaluation is difficult: each jurisdiction is a unique market with distinct institutions

• These issues need to be adequately addressed to effectively continue providing services to citizens through P3s

• The need for unbiased public education on this issue• Research to evaluate performance and improve practice

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Center for Transportation Public-Private Partnership Policy George Mason University

School of Policy, Government and International Affairs

For more information:

Visit us at: p3policy.gmu.edu

Nobuhiko DaitoOn behalf of

Jonathan L. Gifford, Ph.D.George Mason University School of Public Policy

3351 Fairfax Drive, Arlington, VA 22201 USAjgifford@gmu.edu / +1(703)993-2275

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