1208 Transportation Istrate Puentes

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BROOKINGS-ROCKEFELLER | PROJECT ON STATE AND METROPOLITAN INNOVATION | December 2011 1

BROOKINGS-ROCKEFELLER

Project on State and Metropolitan Innovation

Moving Forward on Public

Private Partnerships:U.S. and International Experiencewith PPP UnitsEmilia Istrate and Robert Puentes

Dedicated

PPP units help

governments

develop and

expedite the PPP

market, while at

the same timeprotecting the

public interest.

Summary

In a time o constrained public budgets, leveraging private-sector fnancial resources and exper-

tise to deliver a range o inrastructure projects has growing appeal. However, these public/pri-vate partnerships (PPPs) are oten complicated contracts that dier signifcantly rom project toproject and rom place to place. In the United States, many states lack the technical capacity and

expertise to consider such deals and ully protect the public interest. To address this problem,countries, states, and provinces around the world have created specialized institutional enti-tiescalled PPP unitsto ulfll dierent unctions such as quality control, policy ormulation, and

technical advice. This report recommends that U.S. states should:

nEstablish dedicated PPP units to tackle bottlenecks in the PPP process and protect thepublic interest

nPass legislation and change the procurement culture to a more transparent and outcome-

based project selection process

nWork with the federal government to address technical assistance gaps on PPPs, on an

as-needed basis

I. Introduction

With its emphasis on consumption rather than production, the Great Recession un-

veiled an American economy dangerously out-o-whack. During the sluggish recoverythat has ollowed, national, state, and metropolitan public and private sector leaderscontinue to push or investments in inrastructure to put Americans back to work and

rebalance the economy.Despite the attention, inrastructure has proven to be a challenging and complex solution to imple-

ment given current fscal austerity and restraint. Declining resources and an apparent political unwill-

ingness to raise additional public revenue or target inrastructure spending to put the economy backon solid ooting means the enthusiasm to invest in U.S. inrastructure is not matched by the same

level o investment activity.One approach requently oered to potentially break the logjam is to use contractual agreements

between governments at all levels and the private sector to design, build, operate, maintain and/orfnance inrastructure. Whether repairing, upgrading, or augmenting an existing asset or building new,the intent is to leverage private sector fnancial resources and expertise, improve project delivery and

to better share responsibilities and costs between the public and private sector. 1 The evidence rom

other countriessome with less riendly business environments than in the United Statesshows thatthese arrangements, i designed and implemented correctly, do have the potential to improve on inra-structure delivery.2


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BROOKINGS-ROCKEFELLER | PROJECT ON STATE AND METROPOLITAN INNOVATION | December 2012

However, these public/private partnerships (PPPs) are complicated contracts that oten dier sig-

nifcantly rom project to project and rom place to place. As the challenges to inrastructure develop-ment throughout the United States become more complex, there is a constant concern in the UnitedStates that public entities are ill-equipped to consider such deals and ully protect the public interest. 3From poor procurement incentives to lack o coordination, expertise, and inormation to potentiallyhigh transaction costs, PPPs remain the next great idea to our inrastructure woes always on the

horizon.To address these concerns, countries around the world have created public/private partnerships

(PPP) units. A PPP Unit is an entity designed to ulfll unctions such as quality control, policy ormula-tion and coordination, technical advice, standardization and dissemination, and/or promotion o PPPs.

This study analyzes the particular potential o this institutional solution or the inrastructure PPP

market in the United States. For a better understanding o the role o a PPP unit, the paper starts byexplaining the concept and characteristics o an inrastructure PPP, ocusing mainly on transporta-

tion, and analyzing the PPP activity in the United States to date. It then discusses the notion o a PPPunit, based on international experience. Ater turning back to the United States to analyze existingPPP legislation and potential PPP units at the state level, it concludes with a range o implications or

policymakers at all levels to consider.

II. Background: What is a Public/Private Partnership for Infrastructure?

At its core, a public/private partnership (PPP) is a contractual agreement between a public

agency and a private sector entity resulting in greater private sector participation in thedelivery and/or fnancing o inrastructure projects.4

PPPs dier signifcantly rom sector to sector and rom project to project. They also dierrom country to country given the contracts are based on dierent legislative rameworks across theworld. For example, the U.S. Department o Transportation considers both contracting out operations

and maintenance, as well as the arrangement or design and construction o a project by a single con-tractor (known as design-build), as a PPP. In other countries, this is generally outside o the defni-

tion or PPPs.5

There are numerous ways to classiy PPPs, but the most important rom a public policy perspec-

tive is based on the sharing o responsibilities and risks.6 The simplest orm o a transportation PPPproject, or example, involves contracting out o individual operations, such as design, paving, or main-tenance. On the other end o the continuum, the private sector would build, own, and operate a new

piece o inrastructure, with the government providing maybe tax-exempt status or the project but nodirect unding. In reality, there is a plethora o combinations o PPPs that mix dierent elements and

transer dierent types o risk to the private sector.Traditionally in the United States, a public entity in transportation (a state government, local govern-

ment, or transit agency) decides, plans, and fnances the construction o a new piece o inrastructure

and ultimately maintains and operates it. Dierent private entities (e.g., an engineering frm and aprivate contractor) bid or the individual tasks o frst designing then, later, actually constructing it.7

In a design-build arrangement, these operations are bundled into one fxed-ee contract with aprivate entity that assumes the delivery o these services. The Bay Area Rapid Transit extension to the

San Francisco International Airport is an early case o design-build.8 A design-build-operate-maintain

contract adds private entity responsibilities ater construction, in terms o the operation and mainte-nance o the asset. In these cases, the public entity is in charge o fnancing and assumes all the risksrelated to operating costs and revenues. The Hudson-Bergen light rail system in New Jersey is oneexample. Some PPPs include a private fnance component. The Denver Eagle Commuter Rail project

has a design-build-fnance-operate-maintain arrangement. In such projects the private party is alsoresponsible or all or a major part o the projects fnancing and is generally paid through revenues

directly related to the project itsel (e.g., tolls or ares) while the public sector retains ownership.9

Much popular attention is directed to PPPs that are Long Term Lease Agreements such as the

Chicago Skyway. In this case, a private company is granted a lease on a piece o inrastructure ora certain amount o time, or which it pays an initial concession ee. The private entity operates,


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maintains and collects revenue rom a ees charged to users o the acility. The public entity maintains

ownership over the inrastructure.10

The sharing o risks and responsibilities o a PPP project attempts to attain the goal o asset maxi-mization, which is the optimal distribution o risks and value between the public and the private sector

or a specifc project.11 Further, PPPs may be a useul mechanism to deliver a portion o the procure-ment o a piece o inrastructure at a lower cost than through traditional inrastructure provision.

Through a Value or Money analysis, a public entity can assess whether the traditional method (thePublic Sector Comparator) or the private sector bid costs less or the outsourced stage o procure-

ment.12

PPPs may be a tool towards better sharing o risks and costs o inrastructure provision, but most

governments have pursued them or other reasons. Governments in developed and developing coun-tries see PPPs as a way to access new sources o unding and push some o the inrastructure fnanc-ing o-budget.13

However, it is important to note that PPPs are a fnancing tool, not a new source o unding. Projectunding is still derived rom the public entity or directly rom the users o the acility, who will pay

the private party or its services in the PPP project. It is true that PPPs oten involve direct revenuestreams (such as tolls), thereore helping to better match the benefts and costs o the use o a acilityand shit the unding burden rom the government to the users. In addition, i the public entity pays

periodic disbursements to the private party or post-construction services (i.e. availability payments),

the public organization gets a piece o inrastructure, while paying or it over time, relieving some othe pressure on the annual budget. Thus, PPPs should be a tool or better risk and cost allocation, andnot merely a way to fll in budget gaps.14

Lastly, despite the considerable attention to them, the evidence on PPPs is rustratingly sparse. Thisis partly because inrastructure PPPs are long term arrangements and most have only been imple-

mented in the last ew decades. Thereore, there are ew projects that have completed their lie-cycle,allowing or ex-post analysis. Further, it is difcult to construct the hypothetical alternative to a PPP,which is the outcome in the absence o the PPP.15 At a more basic level, there is evidence rom the

United Kingdom and Australia that PPP projects do achieve efciencies in comparison with traditionalprocurement. In 2009, the UK National Audit Ofce ound that 65 percent o UK PPP construction

projects were completed on budget, compared to 54 percent o public construction projects deliveredto the contracted price.16 Based on an analysis o 21 PPP projects and 33 traditional projects under-

taken since 2000 in Australia, the PPP projects had a 1.1 percent net cost overrun, in comparison with15 percent in the case o traditional procurement.17

II. Transportation PPPsExperience to Date

It is difcult to estimate the total value o transportation PPP projects given the various defni-

tions o PPPs across countries and sectors. Private investment in inrastructure does not equalPPP unding, because it may include privatization contracts, while not all PPPs have a privatefnancing component, as explained in the previous section.18Public Works Financing maintains a

database o PPPs rom around the world and uses the British Private Finance Initiative PPP defnitionor cross-country comparisons.19

By any measure, the United States is a laggard in terms o PPP projects. Between 1985 and 2011,

there were 377 PPP inrastructure projects unded in the United States, only 9 percent o totalnominal costs o inrastructure PPPs around the world. Europe leads the inrastructure PPP market,concentrating more than 45 percent o the nominal value o all PPPs (Figure 1).

With regard to just transportation projects, Public Works Financing records 104 PPPs (including

design-build), between 1989 and 2011.20 Most o them (81 percent) are or highways, bridges, and tun-nels both in terms o number o projects and value. The rest are or rail projects, save the construction

o International Air Terminal at John F. Kennedy Airport in New York, which is the nations only airportPPP project.

The design-build orm o PPP has been the most intensely used over the years in the United Statesrepresenting 67 percent o the total number o PPPs, but only 52 percent o the cumulative value o

PPPs should be

a tool for better

risk and cost

allocation, and no

merely a way to

ll in budget gaps


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the projects. More complex versions o PPPs where the private partner designs, builds, fnances, oper-

ates, and maintains the acility (a DBFOM project type) show a reversed trend, with only 12 percent oprojects, but 24 percent o the contracted amount. Showing the increasing sophistication o the United

States market, seven o the twelve projects o this type have been implemented between 2008 and2010 (Figure 2).

Twenty-our states undertook at least one transportation PPP project, including design-build,

between 1989 and 2011. Western and Southern states tend to be at the oreront on PPP adoptionaccounting or 34 and 38 percent, respectively, o the number o PPP projects over the last 23 years.

Florida (16) has the largest number, ollowed by Caliornia (12), and Texas (9). These three states, alongwith Colorado and Virginia, were responsible or 56 percent o the total amount o all U.S. transporta-tion PPP projects rom 1989 to 2011. By contrast, the Midwestern and Northeastern states have been

slow in implementing PPPs (Figure 3).Most o the transportation PPP projects are located in the top 100 metropolitan areas, reecting the

higher demand or transportation services. Eighty-two percent o all transportation PPPs contractedbetween 1989 and 2011 are located in 32 o the top 100 metro areas (Appendix A). These projects rep-resent 88 percent o the total value o U.S. transportation PPP investment over the last twenty-three

years. As ound in the state analysis, most o the projects are located in Southern and Western metroswith only six Northeastern and Midwestern top 100 metros having contracted any PPP projects.

While metropolitan Los Angeles holds the top spot in terms o the number o transportation PPPprojects, Washington, D.C. dominates when it comes to the total value o PPP projects. The trans-portation authorities in this region have been developing PPP projects since 1993, pursuing not only

design-build projects, but also the complex DBFOM projects. The eight PPP transportation projects inthe Washington metro area, two which are rail projects, are worth $7.2 billion in total. In general, PPP

projects are ound in the largest metro areas including New York, Dallas, Miami, and Chicago. However,there is no one-to-one relationship between the value o the PPP contracts and metro economy size.

For example, top 10 metro economies such as Houston, Philadelphia, and Atlanta have not contracted

Figure 1. Public/Private Partnerships (PPPs) Worldwide,

Nominal Total Costs (in billions $USD), 19852011

Note: Includes funded road, rail, buildings, and water projects through October 2011 in nominal dollars converted into U.S. dol-

lars at the time of nancial close. Excludes U.S. design-build projects.

Source: PWF, 2011

Asia, Australia187.2

Africa, Middle East

31.5

Europe

353.3

Mexico, Latin America,

Caribbean

88.5

Canada45.2

U.S.

68.4


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Figure 3. Transportation PPPs by State, Number of Projects, 19892011

Note: includes design-build projects.

Source: PWF, 2011

Figure 2. Transportation PPPs in the United States, 1989-2011

Includes design-build projects.

Note: Annual totals in 2011 billions of dollars. The nominal values of the cumulative contract amounts were adjusted using the

GDP price deator. Source: PWF, 2011; BEA, 2011

Number of PPPs (by state)

0

1-4

5-9

10+

Billionsof2011Dollars

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

$11

$12

$13

$14

Inflation Adjusted Annual Amount

0

2

4

6

8

10

12

14

Number of Projects

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1993

1991

1989


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any while smaller metros like Denver and Austin have projects worth billions o dollars.

Despite this activity, the data shows that the United States has been slow to pursue PPPs in com-parison with European and Asian countries. There appear to be several discrete, but related, reasons.In some cases, there is lack o institutional capacity and expertise in some cities and states to properly

promote the benefts and costs o PPP deals. In Pittsburgh, an arrangement to lease the citys park-ing operations to a private entity collapsed when the city council voted against the transaction. At the

same time, the deals are getting more complex, politically heated, and cumbersome as some stretchacross jurisdictions, and even international borders as is the case with the New International TradeCrossing intended to connect Detroit to Windsor, Ontario. And with state and municipal fnances under

strain, the public sector is also trying to transer greater responsibility to the private sector, includingproject fnancing.

In this regard, the U.S. Government Accountability Ofce recently noted that while the United Stateshas done much to promote the benefts o PPPs it needs to do more to assist states and metro areas

to think through potential costs and trade-os, as well as assessing national interests. 21 A possiblesolution is the creation o specialized institutional entities to assist with the expanding opportunities

or PPPs. The next section discusses how these so-called PPP units ulfll dierent unctions such asquality control, policy ormulation and coordination, technical advice, standardization and dissemina-tion, and promotion o PPPs.

IV. Public/Private Partnership (PPP) UnitsInternational Experience

Countries and subnational governments around the world have been developing institutionastructures or the promotion, development, and management o PPPs or several decades.

None are precisely alike and they serve dierent unctions depending on the needs, cul-tures, and traditions o the nations in which they operate. For this analysis we ocused on

international examples in developed countries that would possibly provide the most relevant models

or the United States. No less than 31 countries currently have a PPP unit at the national or subna-tional level (Appendix B).

A. Denition of a PPP Unit

Similar to the lack o uniormity in PPP defnitions, there is no strict defnition o a PPP unit. TheWorld Bank defnes a PPP unit as any organization designed to: promote or improve PPPs [...]; [and]has a lasting mandate to manage multiple PPP transactions, oten in multiple sectors. 22 One study

emphasizes this role as servicers on PPP-related matters to public entities within or connected togovernment that provides services related exclusively to PPPs to other governmental bodies [].23

Another describes a PPP unit as any organization set up with ull or partial aid o the governmentto ensure that necessary capacity to create, support and evaluate multiple public/private partnership

agreements is made available and clustered together within government.24

Based on these studies and the evidence rom around the world, several characteristics emerge:A PPP unit is a public entity (government, public/private corporation, or nonproft) that supports

other government agencies to procure projects through a PPP process; it is not the procuring agency.It is a dedicated agency, meaning that it has a permanent structure dealing with multiple projects

versus ad-hoc teams put together in ministries and departments to deal with procurement through a

specifc PPP project. It may support government agencies in procuring PPP projects that span multiplesectors or in just a specifc sector, such as transportation.

B. Functions of a PPP Unit

A PPP unit is the response to an identifed institutional problem encountered by a government inmanaging its PPP program.25 The government ailures (or nonmarket ailures) may include poor pro-

curement incentives, lack o coordination among government agencies, lack o expertise or sufcientinormation, and high transaction costs in proceeding with PPP deals.26 Given that governments ace a

diverse range o these ailures in dealing with their PPPs, the PPP units ulfll dierent unctions suchas these identifed by the World Bank:

No less than

31 countries

currently have

a PPP unit at

the national

or subnational

level.


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Policy Formulation and Coordination.A PPP unit may act as a consolidator o inormation and

policy regarding PPPs, overcoming the traditional siloed structure o government agencies. While thisunction has a wider applicability at a central level, it is still easible in a specifc department sector orministry with numerous ofces involved in the PPP process. For example, the UK Treasurys PPP Policy

Teampart o Inrastructure UKis responsible or ormulating the national PPP policy guidelines. InCanada, Partnerships British Columbia, the PPP unit or that province establishes policies and best

practices or PPP management.A PPP unit may coordinate the stakeholders involved in the PPP program at dierent levels. In case

there are multiple departments or ministry-led PPP units, the central PPP unit may serve primar-

ily to coordinate an overall national policy ramework. For example, Irelands Central PPP unit chairsthe Inter-departmental Group on PPPs, which brings together the PPP units rom various ministries

and representatives o other interested agencies. The coordination may also happen across levels ogovernment, especially in a ederal structure. The National Australian PPP orum, created in 2004, is a

national coordination and cooperation mechanism among the ederal, state and local governments onPPPs.

In addition, the PPP unit may coordinate not only with government agencies but also with other

stakeholders. For example, Irelands Central PPP unit coordinates the Public/Private InormationalAdvisory Group, ormed by representatives o employers organizations, unions, engineers organiza-

tions and public sector.

Quality Control. PPP units may respond to poor PPP procurement incentives by acting as the frstreviewer o the potential PPP project proposals. This may occur when agencies or ministries promote

PPP projects without ully taking into consideration the long term fscal impact on the governmentsbudget. For example, South Aricas PPP Unit was created to prevent ministries rom pursuing PPP

projects that allowed them to avoid the national budgetary limits. 27 In addition, a PPP unit may veriy

whether the proposed project ulflls all the desired criteria set beorehand. Portugals central PPP unit,Parpblica SA, conducts a technical assessment o proposed PPP projects beore the procurementphase and provides its recommendation to the Ministry o Finance.28

Technical Assistance. One o the recurring problems in PPPs is the lack o adequate and necessaryskill in the public sector to deal with PPP deals. This profciency is not limited to fnancing issues such

as the assessment o the Value or Money and the discount rate o the project, which may be con-tracted out to private consultants. More important is to understand the place o the PPP project in the

governments long term plan, its fscal consequences, the allocation o risk between the public and theprivate sector and what government reorms would be required or a successul implementation. Whilethere is a role or private advisors in pursuing PPPs due to the complexity o the contracts, the public

sector should be able at least to adequately provide oversight o the consultants to secure the publicinterest.

The creation o a PPP unit with the necessary technical skills to help procuring agencies wouldsimpliy the PPP process and allow or a more eective negotiation process. Further, it provides a con-solidated authority in negotiations. This is especially important when the PPP project involves several

departments o the procuring public client.29Most PPP units currently in existence provide technical assistance to public entities procuring proj-

ects through PPPs. This is one o the major reasons, Parpblica SA was created in 2003. Portugal hada poor experience with PPPs in the 1990s, due to inadequate consideration o long term fscal con-

sequences, insufcient risk transer to the private sector and rigidities in the procurement process.30

The lack o public sector capacity in evaluating and managing PPP deals added to these problems.31

Aspart o the reorm o the PPP process, the Portuguese government created Parpblica SA not only toconduct quality control upstream but also to provide technical assistance in project procurement andmanagement.

There is some concern about the potential conict o interest in PPP units that provide both qualitycontrol and technical assistance. This would be similar with an accounting frm that provides both audit-

ing and consulting services to the same client. The mix o incentives may lead to disastrous results aswas the case with Enrons auditor, Arthur Andersen in 2001.32 While most PPP units do not have a direct

proft motive, these two unctions should be clearly delimited in the structure o a PPP unit.


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Standardization and Dissemination. In a PPP arrangement, the teams o bidders have to deal with

myriad statutes and government regulations. Moreover, these regulations dier rom state to state, inthe case o a ederal government structure. This contributes to substantial transaction costs related tothe procurement o PPPs, or both the private sector and the government, estimated to be 10 percent

o a projects capital costs.35

A PPP unit may deal with these transaction costs by standardizing the procedures and require-

ments at dierent levels o the procurement process. This standardization process may take the ormo documentation or recommended guidelines and best practices. The companies interested in PPP

opportunities can see beorehand a standard o the contracts employed and the required PPP charac-teristics, reducing the uncertainty in the market. In addition, it reduces the costs incurred in flling thepaperwork or the bid. The public agencies beneft rom the cutback in costs and time. Standardized

documentation requires less time to grant approvals, create the tender documents or negotiate thecontract with the bidders.

Standardization complements the other unctions o a PPP unit. By providing standardized docu-

mentation, the PPP unit helps public entities to avoid pitalls in structuring and managing the PPPcontract. Further, it provides another level o assurance that the contracts pursued ulfll the standard

requirements and protect the public interest. In addition, it helps the promotion o PPPs, because itcreates certainty and legitimizes the PPP market.

Qubecs PPP unit, LAgence des partenariats public-priv du Qubec (PPP Qubec), establishedin 2005, created a series o guidelines to be ollowed by the public sector in dealing with PPPs. Forexample, public bodies are required to use the criteria set up by the unit in evaluating the potential o

a PPP proposal. PPP Qubec recommends that public agencies use their standard assessment meth-odology in selecting a PPP project.36 Upon request, the unit may provide technical assistance to thepublic sector along the procurement process.

The U.K. Experience with Supporting the Public Sector in the PPP process

A PPP unit may provide technical assistance to dierent members o the public sector, such as ministries, state and local gov-ernments, state agencies, and other public agencies involved in PPPs. The UKs relatively long history with PPP units providesa good example. In the summer o 2010, the U.K. government created Inrastructure UK (IUK), a Treasury unit responsible or

implementing that nations long-term inrastructure strategy and acilitating private investment across a variety o inrastruc-ture sectors. This is the latest reorganization o PPP units since the UK started experimenting with this governance structure

in the late 1990s. IUK consolidates two previous PPP units (Partnerships UK and the U.K. Treasurys PPP Policy Team) togetherwith a newly created U.K. Treasurys Inrastructure Finance Unit.33

IUK takes over the role o Partnerships UK (PUK), responsible or the technical assistance in procurement and management oPPP deals. Like PUK, IUK engages with central government ministries, departments, and other public bodies in a varied numbero sectors including transportation, housing, deense, education, and inormation technology. It provides technical assistance to

these entities at the procurement policy phase and downstream in individual projects. Its technical assistance in individual proj-ects is comprehensive, rom assessing Value or Money, structuring competitive bids, supporting negotiations with the private

sector to designing quality monitoring systems. IUK has a team o 60 proessionals rom various inrastructure-related felds,including commercial and fnancial experts, lawyers, economists, and policy advisors.

At the municipal level, another PPP unitLocal Partnershipsalso provides technical assistance on PPPs. It is a joint venture

between the Local Government Association and the U.K. Treasury. Launched in 2009, Local Partnerships provides project sup-

port as well as other unctions such as gateway reviews on projects considered or PPP, asset management reviews, and trainingto build local capacity. Its technical assistance to local governments on PPPs covers all the stages o a PPP project rom develop-ment, structuring, and procurement, to execution and delivery. Local Partnerships project support ocuses on nine sectors, cho-sen based on unding availability or PPPs, priorities established by the Local Government Association and the latest national

Efciency Review report.34 These nine sectors are: corporate property and regeneration, housing and sustainable communities,

culture and sports, fre and police services, corporate and transactional services, social care, transportation and regeneration,schools, and waste management.


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Promotion. The creation o a PPP unit increases the credibility o the governments commitment to

PPPs. Further, a PPP unit may act as a consolidator o inormation on PPP opportunities, given thatinvestors are not always aware o the projects that the government would consider ripe or PPPs.Both developed and developing countries have used PPP units as means to increase private interest in

PPPs. The Flemish PPP Knowledge Centre provides the private sector with inormation on PPP policyand possibilities. Partnership, BC also serves as a resource or the private sector interested in PPPs in

British Columbia. The Philippines PPP Unitthe Philippines Build Operate Transer Centrehas amongits unctions the promotion o the PPP Program to potential investors.37

Incorporating both promotion and advisory unctions in a PPP may lead to a conict o interestproblem. I the PPP unit is considered successul by the number o PPP deals completed, the PPP unitmay have an incentive to accelerate the process and not do ull diligence on the projects. The optimal

arrangement is to split the unctions in dierent entities or have the promotion department o the PPPunit reporting to dierent government bodies.

Based on their unctions, PPP units may be categorized as review bodies, ull service agencies andcenters o excellence.38 The review bodies limit their activity to a gateway quality control unction and

provide recommendations on the easibility o PPP proposals to decision makers. The ull service agen-cies ulfll additional unctions to the quality control responsibility o the review agencies. The Centerso Excellence consolidate inormation and disseminate research and best practices regarding PPPs.

C. Institutional Design of a PPP UnitFrom an organizational point o view, PPP units represent a way to delegate operational responsibili-ties regarding the provision o government services. While PPPs represent the most complex orm o

outsourcing government provision o public goods, the PPP unit is a devolved organization or theoperational responsibilities.39 Based on the model o devolution o government responsibilities in the

provision o surace transportation, the structure o a PPP unit may vary rom that o an ofce in aministry to a private corporation.

The institutional structure o PPP units worldwide reects a number o priorities: the goals o the

PPP unit, the existing administrative structure in that country/state and the level o development othe country/states PPP market.

At the lowest level o devolution, PPP units are in a ministry, most oten in the Ministry o Financedue to the centrality o the department to the entire government structure. For example, InrastructureUK and Partnership Victoria are part o the Treasury Department. This situation may be ound in

developing countries too. Indias PPP Cell is part o the Inrastructure Division o the Departmento Economic Aairs, located within the Ministry o Finance. A special case is Japan, with its Private

Finance Initiative Promotion Ofce within the Prime Ministers Ofce. Few countries place their PPPunit in a line ministry, usually a department in charge o inrastructure policy. For example, the DanishEnterprise and Construction Authority is within the Ministry o Business and Economic Aairs and the

PPP Task orce in Poland is in the Ministry o Inrastructure. 40

Several countries or states have chosen to set up their PPP units as corporations, either publiclyowned or with mixed ownership. For example, Partnerships BC is a company owned by the govern-ment o the Province o British Columbia with the Minister o Finance as its shareholder. Both the

Czech Republic as well as Portugals PPP units are similarly arranged. The German national PPP unit,Partnerships Germany (PP Deutschland AG) is a mixed corporation. Created in November 2008, this

unit is 60 percent owned by all the levels o government and 40 percent by a holding company. The

holding company is 65 percent private and 35 percent public.41

The reasons or creating a PPP unit as a corporation are similar to the devolution o governmentresponsibilities in inrastructure. The corporate structure allows or more political independence incomparison with ministries and public ofces. In addition, the structure is more exible in reacting to

the changes on the PPP market. Another important reason is the higher potential to attract and retainemployees with the necessary expertise in PPPs.42

Whether a corporation or government agency, the PPP units are unded by the government throughthe budget o the public agency, department, or ministry to whom they report. Even autonomous PPP

unitssuch as Private Inrastructure Investment Management Center (PIMAC) in South Koreaareunded by its overseeing agency. However, user ees levied upon procuring agencies that get project


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support are also a source o income. PIMAC draws additional resources rom this type o ees, whose

level is regulated by the Ministry o Strategy and Finance. Partnerships Germany supports itsel romuser ees charged to the public entities to which it provides technical assistance.43

A PPP unit may be located at the national or subnational level o government, depending on the gov-

ernment structure. Most o the PPP units surveyed in this study are in unitary government systems, sothe PPP unit is only at the national level. The UK may present a possible exception in the uture. Whilethe UK is a unitary state, it has undergone substantial regional devolution since the 1980s. In February2009, the Finance Committee o the National Assembly o Wales recommended the Welsh government

to create a PPP unit.47In ederal systems, the states are oten the frst to experiment with PPP units. As in the United

States, states are usually in charge o inrastructure development, so they are the most interested inalternative ways o project delivery.

PPP Canada: A National PPP Unit as a Corporation

The choice o an institutional orm depends on existing legal and government structures that accommodate the new PPP unit.For example, the Canadian government created its ederal PPP unit as a crown corporation in 2008. Owned by the ederalgovernment but unctioning as a business, PPP Canada reports through the Minister o Finance to Parliament.44 The corporation

has an independent Board o Directors, ormed by a Chairperson, the CEO, and six other private sector members. The Canadiangovernment chose this institutional ormat based on the example o the Canadian provinces PPP units, such as Partnerships BC

and Inrastructure Ontario. Further, the corporate structure allows private sector oversight through the board o PPP Canada,higher administration exibility and a business-like approach.

A unique characteristic o PPP Canada is its P3 Canada Fund, part o a multi-billion Building Canada plan or public inrastruc-

ture. PPP Canada has a mandate to identiy and advise on ederal PPP projects, and to work with public authorities at provincial,territorial, municipal, and national level to support greater adoption o PPPs. The P3 Canada Fund, with a $1.2 billion, fve-year

budget, is the ederal fnancial incentive to sub-national public authorities to consider PPPs. Any sub-national authority canapply or unding rom the P3 Canada Fund in a variety o sectors: transportation, water, energy, security, solid waste, culture,sports, connectivity and broadband, maritime, aerospace, and tourism. The projects are selected based on merit, including

Value or Money assessments, and the unding can take dierent orms, depending on the needs o the project. While the sizeo a project is not bound by any Fund condition, the Fund limits its fnancial contribution, together with any other direct ederal

fnancial assistance, to 25 percent o the direct construction costs o a project.45 This arrangement is similar to the idea in the

United States or the creation o a national inrastructure bank.46

PPP Canada perorms several unctions. It creates policies and best practices or PPP management in Canada, which areoptional or provinces and municipalities. Further, it works with provinces on their PPP best practices. PPP Canadas policy is not

a standard, but allows variations, such as in the case o Value or Money assessments. The ederal unit is also the frst revieweron projects submitted or unding to its P3 Canada Fund.

The biggest unction o PPP Canada is technical assistance, both to ederal agencies that are interested in PPP projects and to

projects receiving unding rom P3 Canada Fund. The ederal agencies are not obligated to engage the ederal PPP unit i theyare pursuing PPPs. However, PPP projects are rather new at the ederal level and the ederal entities still need to build capacity.

PPP Canada can provide technical assistance to ederal agencies, but the procuring agencies are ultimately responsible or theprojects.

PPP Canada has no authority to impose a standard on PPP management across all government levels, but the institutionmeets regularly with the provinces to share best practices and fnd areas or standardization. Dissemination o existing practice,especially to provinces and municipalities that are new to the PPP process, is more important or the ederal PPP unit than mere

standardization. Through this activity, PPP Canada educates public agencies about PPPs.While operational only or the last two years, PPP Canada is already in the third round o applications to its P3 Canada Fund.

This rapid growth has been helped by the robust stafng o the institution, with about three dozen employees, grouped in threeunits: business development, analysis and technical assistance, and administration.


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Australia: A Federalist System of PPP Units

The state o Victoria is a pioneer in PPPs, creating one o the frst subnational unitsPartnerships Victoriain 2000. Victoriais Australias most urbanized state, with 70 percent o its population concentrated in the Greater Melbourne Metropolitanarea. Partnerships Victoria was established in the Commercial Division o Victorias Department o Treasury and Finance. It is

the PPP unit and the name o the state o Victorias PPP policy. The PPP unit is a ull service agency, providing all the unctionso a PPP unit.48

Partnership Victoria was preceded by a 1980s PPP program created mainly to move a series o inrastructure projects outo the states budget. In the 1990s, the ocus changed towards risk transer to the private sector and higher economic beneftsrom PPP projects. Building on this program and experience rom the UKs Private Finance Initiative program, Partnerships

Victoria was created with the goal o better inrastructure delivery, better fnancing options or the government, both in termso amount and risk transer, and more private competition or the PPP bids.

Victoria requires that any inrastructure project proposed by state agencies to have a procurement analysis done early in theproject planning process. This analysis has to consider alternative ways o delivery o the project considered, including a PPP

option. The state PPP unit creates the policy ramework or all the state agencies and provides standards (guidance) on aseries o elements o the procurement and management process, such as the states risk position (The Standard CommercialPrinciples), the Public Sector Comparator in determining Value or Money or the use o the discount rate. The public agen-

cies contracting PPPs have to ollow these standards and any deviation rom them needs strong justifcation. 49 In addition,

Partnerships Victoria provides technical assistance during contract management, but the initiating agency is responsible orimplementing the PPP contract.

An independent review o the activity o Partnerships Victoria in 2004 considered the program eective. Due to the short

period o operation (three years when the review started), only eight PPP projects were reviewed, o which only two wereoperational. The review concluded that the state saved about nine percent, on average, by contracting these projects to theprivate sector in comparison with public sector procurement.50 Between 2002 and 2010, Partnerships Victoria PPP projects haveaccounted or approximately 10 percent o annual public investments. 51

Due to its early creation and successul operation, Partnerships Victoria became a model or other states interested in PPP

units. South Australia modeled its PPP unit and policy on Partnerships Victoria as well as the New South Wales TreasuryPrivately Financed Projects policy. Partnerships BC in Canada combines elements o the PUK and Partnerships Victoria.52

On the national level, Inrastructure Australia was created by ederal legislation in 2008. This institution is not primarilyocused on PPPs, but on the larger inrastructure system, needs and policy across all the levels o government in Australia. In

addition, it evaluates and advises the Ministry o Inrastructure on projects submitted to Build Australia Fund, a und created in2009 to fnance capital investments in inrastructure sectors, such as transportation, energy, communication, and water.53

This statutory independent body has a Council, ormed by twelve members: fve rom the private sector, three rom the

ederal level, three rom the state level and one member representing the local governments. The Chair is Sir Rod Eddington,ormer CEO o British Airways, who chaired in 2006 a landmark report on reorming the UK transportation sector.54 The

Council members are appointed by the Federal Minister or Inrastructure and Transport, to whom they report on InrastructureAustralias operations.55 Through this Minister, the Council reports regularly to the Council o Australian Governments.56

Inrastructure Australia is unded through the Australian Department o Inrastructure and Transport and had an initial appro-priation or three years.57

As part o its unctions, Inrastructure Australia created a national PPP policy ramework and a national standard or PPPs

late 2008, together with the National PPP Forum. The National Public Private Partnership Policy and Guidelines range rom pro-curement options, commercial principles or social inrastructure, to specifcs on the Public Sector Comparator and the discount

rate methodology. In addition, this new PPP policy establishes that the ederal, state and territory governments will have to

consider a PPP alternative or any project with a capital cost in excess o $A50 million.58

While Inrastructure Australia has no decision-making authority, the National PPP Guidelines were endorsed by the Council o

Australian Governments. As a result, they replace all the PPP policy and standards implemented previously by the states and theederal government. However, the agency created a guide on how these national PPP guidelines apply to the ederal government

and each state and which deviations are allowed rom the national standards. 59 For example, the guidelines may not necessarilyapply to ederal national security projects. The ederal government also retained its power over guidelines on the creation o the

business case or PPPs by ederal departments, agencies and commissions.60Beyond PPP policy guidance and standardization, Inrastructure Australia promotes the Australian PPP market. It publishes a

list o contracted PPPs, pipeline o PPP projects, and potential PPPs across Australia. As o November 2010, Australia had elevenprojects in the PPP pipeline.61

Also in Australia the National PPP Forum, a ministerial orum o all the Australian levels o governments (ederal, state andterritories), works in conjunction with Inrastructure Australia on PPP policy and PPP promotion.62


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V. Public/Private Partnership Units: U.S. Experience

While the U.S. PPP market is maturing, it is still only moderately sophisticated. Improvedpublic entities ability to contract, execute and manage PPPs is an essential part o

advancing the growth o these arrangements.63 Having the statutory allowance to getinto contracts with private partners is also an important condition.

A. State PPP Legislation

Other than the obvious enabling authority, PPP legislation sends a strong signal that a state is opento private involvement in inrastructure fnancing and delivery. It provides predictability or the privatesector engaging in a partnership with the public sponsor.64 PPP legislation sets the rules o engage-ment and reduces transaction costs by outlining main principles in the statute, thereby creating amore transparent and criteriaspecifc environment or negotiations between parties on bidding and

contract specifcs. On the other hand, the lack o state PPP legislation can prove a real hindrance tothe development o the PPP market. The 2007 ailed $12.8 billion bid or the lease o Pennsylvania

Turnpike would have benefted rom a state PPP legislation in place beore the negotiation began.65Thirty-one states have PPP enabling legislation or highways, roads and bridges and 21 have PPP

legislation or transit projects.66 The state PPP transportation legislation generally reers to PPP deliv-ery models that allow the public sector to contract with a private entity to design, construct, repair,

expand, operate and/or fnance highway, road or bridge projects.67 Sometimes, the state PPP transpor-tation legislation includes provisions reerring to design-build projects, such as in the case o the PPPlegislation in Alabama, Caliornia, Colorado and Massachusetts.68

As illustrated in Appendix C, state legislation enabling PPPs varies greatly across several actors:Broad application of PPP legislation. Twenty-two states with PPP legislation allow eligible public

authorities to engage with the private sector on inrastructure projects beyond highways and roads,such as erries, pipelines, and rail or other public acilities. The states with narrowly defned PPPeligibility have confned PPPs only to roads. Roads-limited PPP legislation is oten the result o states

adopting a law related to a specifc project, to test the waters or private involvement beore defn-ing a broad set o modes or investment.69 However, the more modes are included in PPP eligibility, the

more private sector interest it will attract.Unsolicited and solicited proposals. States dier as to whether they will accept unsolicited propos-

als rom bidders or a specifc project. Solicited bids outline the public sponsors priorities and evalua-tion criteria, creating a predictable oundation or all those bidding or the PPP contract. Further, theyincrease accountability and transparency by outlining the contract objectives and impact that the proj-

ect is expected to have on the community. Unsolicited bids, conversely, do not have criteria to meetrom a request or proposals, as well as are not part o a process where there are other competitive

bids. Their beneft is that they provide the public sponsor with new ideas that they may not previouslyhave considered.70 The majority o states with PPP legislation allow or unsolicited PPP proposals.

Availability payments and shadow tolls (pass-through tolls). The option to provide availabilitypayments or shadow tolls to the private sector can be useul in structuring a PPP when user ees areinsufcient to make the project fnancially viable or they are not easible. Availability payments are

reimbursements made by a public entity to a private concessionaire or its responsibility to design,construct, operate, and/or maintain a acility or a set period o time. Shadow tolls, or pass-through

tolls are similar payments by a government agency to a private operator, but their rates are based on

the trafc on the leased road and agreed rates per vehicle and vehicle type. The use o payments orshadow tolls increases the variety o projects that can be entered into, but in some cases increases the

risk borne by the government because they guarantee the trafc and revenue risk.71 Only eight statesallow or these types o payments as part o their PPP legislation, and only two (Texas and Florida)

have used them.PPP authority for lower level agencies. The authority o lower level transportation agencies to

engage in PPPs is o particular interest in larger states, such as Caliornia, Florida and Texas thathave numerous projects in large metropolitan areas (Figure 3). For example, the 2009 Caliornia PPP

legislation allows or regional transportation agencies to enter into PPPs, alone or with the CaliorniaDepartment o Transportation.72 Fiteen states provide PPP authority or lower level public entities,

Thirty-one

states havePPP enabling

legislation for

highways, roads

and bridges and

21 have PPP

legislation for

transit projects.


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allowing or bottom-up innovative project development and attracting private involvement that can be

tailored to the needs o local communities.Prior state legislature approval. In nine states, PPPs need prior approval by the state legislature

beore they can be developed. For example, in Tennessee i the state DOT wants to pursue the develop-

ment or operation o a tollway by a private entity, it has to obtain the approval o the legislature or theproposed project.73 Legislative approval or a project can be seen as a public mandate in avor o the

PPP project and render the politicians that voted in avor o the PPP deal accountable or guaranteeingsuccess o the project. At the same time, waiting or legislative approval may be seen as too burden-

some and unpredictable to the private sector as costs associated with the bidding process are sunk andpublic relations campaigns have to be launched to garner public support or the project. 74

Besides state legislature approval, PPP legislation may allow lower levels o government to rejecta proposed PPP project. For example, the Minnesota PPP legislation specifes that the governingbody o a county or municipality through which a acility passes may veto the project within 30 days

o approval by the commissioner.75 Minnesota Trunk Highway 212, the only project that has beenattempted under Minnesotas PPP legislation, was stopped by the veto o the city o Eden Prairie, one

o the our communities on the toll road projects right o way.76

Overall, most PPPs need some type o approval beore they get implemented. However, this approval

usually comes rom executive branch agencies such as the state transportation commission (Caliornia,Oregon), the Board o Public Works (Maryland), or Special Public-Private Partnership Inrastructure

Oversight Commission (Massachusetts).77

Non-compete clauses. Some state PPP legislation expressly allows or prohibits a non-competeclause, article added in the PPP contract or a privately built or operated toll road. A non-compete

clause stipulates that the public entity will not build another acility that would directly compete withthe PPP toll road. Among the 31 states with PPP legislation, our specifcally allow while fve expresslyprohibit the inclusion o this type o clause. For example, the Arizona PPP legislation specifes that the

private operator o a toll road cannot sue or the construction o an alternative public road that wasplanned at the time o the PPP contract.78 The existence o some type o non-compete clause is attrac-

tive to the private sector because it lowers the risk o competition rom substitute assets.79 However,a strict non-compete clause paralyzes the state rom building new assets in the publics interest. Over

time, the non-compete clause structure has changed, allowing narrow competition, such as the con-struction o small access roads parallel to the toll road.80

Outside technical and legal consultants. As discussed, the lack o adequate skill in the public sec-tor to consider PPPs is one o the recurring problems in developing projects and one o the main rea-sons or the creation o PPP units. About 14 out o 31 states with PPP legislation expressly allow public

agencies to hire outside consultants to help with PPP evaluation and implementation. For example, theLouisiana PPP enabling legislation specifes that the public authority may use the advice o internal

sta or external consultants or evaluation o proposals.81 As explained in Section 3, the PPP market isstill rather undeveloped in the United States and public agencies have not had the opportunity to deal

with a substantial number o PPP projects to build sufcient expertise. Thereore, the use o privatesector consultants is necessary to develop the proper design and implementation o PPP projects. Inthe same time, PPPs are complex ventures and states need to strike the balance between public and

private expertise.

B. PPP Units in the United States

As in the case o PPP projects, the United States is a late comer in the feld o dedicated PPP units.While some states created PPP ofces in their departments o transportation as ar back as 2003, it isonly in the last three years that U.S. states have established dedicated PPP units. Today, seven stateshave a PPP ofce though only three can be considered to be dedicated PPP units, based on character-

istics identifed in Section 4 and also Table 1.Virginia. Virginia has had a transportation PPP program (the Public Private Transportation Act)

since 1995, with the ofces o innovative fnance and project delivery involved in implementing theprogram. A review o the PPTA program in 2010 recommended the establishment o a dedicated PPPofce to create a unifed leadership team on PPPs, more accountable and more cohesive across several

disciplines, and able to deal with multiple transportation modes.82


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In December 2010, Virginia created the Ofce o Transportation Public-Private Partnerships (OTP3).On June 6, 2011, the sta moved into permanent ofces and ofcially opened.83 The purpose o the

ofce is to develop, implement and administer state PPP projects across all modes o transportation.In this way, OTP3 serves as the authority on state transportation PPP projects across all modes. Whilehoused by the Virginia Department o Transportation, OTP3 works closely with other state agen-

cies (Department o Transportation, Department o Rail and Public Transportation, Department oAviation, Virginia Port Authority, and Department o Motor Vehicles) to procure P3 projects. VirginiasPPP unit also works in coordination with the multi-modal Secretariat o the ofce o the Secretary o

Transportation on PPP policy.84 As with international PPP units, the responsibility or the PPP projectremains with the procuring transportation agency. OPT3 has nine employees and a budget or opera-

tional purposes provided by the Secretary o Transportation.85

California. As part o its 2009 PPP legislation, Caliornia created a Public Inrastructure Advisory

Commission (PIAC) to advise the Caliornia Department o Transportation (Caltrans) and regionaltransportation agencies on developing PPP projects.86 Located in the Business, Transportation and

Housing (BTH) agency, PIAC was created to acilitate and encourage the development o PPP projects.A group o 20 commissioners rom academia, industry and government, provide eedback on transpor-tation PPP projects proposed by Caliornia transportation agencies. The commissioners examine the

business case o a proposed project, its fnancial soundness, its Value or Money, how it impacts stateunding, and provide a recommendation on the best way to move orward.87 PIAC is unded by the BTH

agency but has no line item in its budget.The Presidio Parkway was the frst project reviewed by PIAC. Ater several meetings, the commis-

sioners recommended the Caliornia Transportation Commission to allow the public entities in chargeo the project (Caltrans and the San Francisco County Transportation Authority) to pursue it as a PPP.Ater the PPP contract was concluded, PIAC provided an additional set o comments on its benefts

and weaknesses and lessons or uture PPP agreements in Caliornia.88

Michigan. In July 2008, Michigan created the Ofce or Public Private Partnerships to promote the

development o PPPs in the state. The ofce is a statewide dedicated PPP unit in charge o helping

state agencies to procure projects across all sectors. Similar to international PPP units, Michigansofce is located in the Treasury Department. This allows or exibility in dealing with projects romany sector.

One o the innovations in the organization o the Michigan Ofce or PPPs is its unding structure.

The unit was set up with the goal to become sel-sustaining by including its expenses into the closingcosts o PPP projects. Until the unit has operational PPP projects, it is unded through a loan rom the

Michigan Economic Development Corporation. The purpose o this type o structure is or the Ofcenot to depend on state general unds and to also show perormance and accountability. 89

These three dedicated state PPP units dier in terms o unctions perormed. While Virginias andMichigans ofces are ull service agencies, Caliornias PIAC is a mix o a review body and center or

Table 1. State PPP Ofces

Location in the State Dedicated Year

State Name of the PPP ofce Government PPP unit Type Created

Virginia Ofce o Transportation Public-Private Partnerships (OTP3) Department o Transportation Yes Public agency 2010

Caliornia Public Inrastructure Advisory Commission Business, Transportation Yes Commission/and Housing Advisory Board 2010

Michigan Ofce For Public-Private Partnerships Treasury Department Yes Public agency 2008

Oregon Ofce o Innovative Partnerships and Alternative Funding Department o Transportation No Public agency 2003

Colorado Colorado High-Perormance Transportation Enterprise Department o Transportation No Government-owned

business 2009

Georgia P3 Program Department o Transportation No Public agency 2009

Washington Transportation Partnerships Ofce Department o Transportation No Public agency 2005


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excellence. PIAC is ocused on providing high-level reviews on the business case and on promotion

o PPPs through the creation o a pipeline o potential projects. The projects in the PIAC pipeline arecategorized based on their level o readiness or a PPP process. In addition, PIAC acts as a resourcecenter o best practices and news on PPPs around the world.

Virginias and Michigans ofces perorm most o the unctions o a PPP unit but while Virginiashelps only transportation agencies, Michigans has jurisdiction over all sectors. Both units aect poli-

cies and best practices or PPP management, Virginia through its implementation manual o the PPTAprogram and Michigan through recommendations on policy and use o PPPs. They are reviewers oPPP deals proposed by agencies under their jurisdiction and they also provide them with technical

assistance.States are rapidly learning that they need to build capacity or development o PPP projects. Large

and complex, PPP projects require expertise rom the public sector in a range o felds. Virginia,Caliornia and Michigan understood this gap and set up dedicated PPP units in the last three years.

While too early to tell i they are successul, these three PPP units are an experiment in new gover-nance structures in developing the PPP market in the United States.

VI. State and Federal Policy Implications

This analysis ound that or inrastructure PPPs to be considered appropriately, the privatesector needs to approach projects with a strong sense o commitment and understandingo the public interest. This will not happen without a shared sense and clarity o objectives,

clear understanding o roles and responsibilities, and consistency o decision-making. Stateand ederal action is needed.

To date, the interest in PPPs or inrastructure ocuses mainly on procurement, fnance and project

delivery. Yet in addition to the inusion o capital that accompanies some PPP arrangements and apartrom the projects themselves, there are signifcant policy issues that must be part o the discussion to

both take advantage o the private sector unds ready to be invested and achieve other national goalsand objectives.

A. States should establish dedicated PPP units to tackle bottlenecks in the PPP

process and protect the public interest

Most o the countries with well-developed PPP markets have dedicated PPP units that help them designand implement their PPP projects.90 Given their primary role in inrastructure development, states and

provinces in Australia, Canada and Germany are some o the early adopters o the PPP unit model. Theederal PPP units are rather recent, and are oten built on models that proved successul at the state

level. Several lessons or U.S. states emerge rom the international experience with PPP units:First, it is clear that most oten governments start developing the PPP market with the primary

goal o ooading the budgetary burden o certain projects. However, they soon realize the complex-

ity o PPP projects and the potential negative consequences i the PPP agreements are not properlyassessed and the sharing o risk and revenue not well understood by all parties. Dedicated PPP units

help governments develop and expedite PPP markets. while at the same time protecting the publicinterest, by addressing any identifed gaps in dealing with PPPs rom the public side.

Second, the location o the unit in a central agency is essential to its mandate. Most PPP units are in the

department o fnance/treasury or report to this department, which allows agencies rom any sector tobeneft rom the PPP units services. Further, not setting the unit in a procuring agency prevents any poten-

tial conict o interest between audit and technical assistance unctions and procurement incentives.91

Third, there is no single model or type o unctions o a PPP unit. Whether the PPP unit is an agency,

independent body, or a public/private venture depends on existing legal and government structuresin a specifc country or state. Few PPP units are ull service agencies, such as Inrastructure UK and

Inrastructure Ontario. A recent review o PPP units in OECD countries revealed that technical assis-tance and policy guidance are the most prevalent unctions. Most also perorm PPP promotion.92 In

addition, the unctions and legal status o a PPP unit change over time, with the increasing maturity othe PPP market, the expertise o the institution and changes in the economy.93


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B. U.S. states have recently started to develop capacity to deal with PPPs, but most

still need to pass legislation and change their procurement culture to a more transpar-

ent and outcome-based selection of projects

Beyond dedicated PPP units, states have dierent agencies procuring projects through a PPP rame-work. As shown in Table 1, three states have dedicated PPP units and our others have ofces incharge o PPPs in their departments o transportation. Others have tolling authorities contracting and

implementing the state PPP road projects. Further, some transit agencies have the authority to bundledesign, construction, fnance, operations and maintenance into a single contract without special

enabling legislation. For example, New Jersey Transit concluded its contracts based on the agencysexisting authority, not through state legislation.94

These state agencies ace numerous barriers in developing PPP projects: institutional, legislative,political, and fnancial.

First and oremost, there is little expertise with respect to PPPs in most state agencies, legislatures

and the public. Oten, state legislatures and executive bodies look at PPPs only rom diametricallyopposed two points o view: as a unding source, to plug in budget holes or as asset striping o the

state. PPPs should instead be considered a risk and revenue sharing arrangement between the publicand private sector in developing a project. Further, PPPs are a business or the private entity; there-ore it should be expected that the private entity seeks out proft rom the PPP venture.

Many state agencies do not have the institutional mindset and the organizational ramework to

pursue PPPs. They will need to change their procurement culture towards a more transparent andoutcome-based selection o projects.95 The PPP process, with its Value or Money evaluation andthe estimation o the Public Sector Comparator is part o this new type o procurement. While state

transportation agencies have well-developed engineering teams, they oten lack the fnancial exper-tise, which is essential or developing PPP projects. Internal policies and project prioritization shouldreect this outcome-based procurement system.

Existing statutes or regulations may preclude state agencies rom ully developing the PPP potentiao their projects. State fscal rules may not be ully applicable or PPP projects which are oten more

complex than projects purchased through traditional procurement. While designed to support PPPs,PPP statutes are not necessarily enabling PPP contracts. Sometimes, PPP legislation may become the

largest hindrance to the development o PPP projects. Minnesota is a case in point. The state has hadPPP legislation since mid 1990s, which allows a private entity to partner with a transportation author-ity to develop, fnance, design, construct, improve, rehabilitate, own and/or operate toll acilities.96 In2008, in the wake o the long term leases o Chicago Skyway and Indiana Toll Road, the Minnesota leg-islation passed a new PPP statute that limits severely private involvement in toll acilities, the object

o the existing PPP legislation.97 As a result, new PPP-enabling legislation would be required or anysignifcant PPP road project to take place in Minnesota.98

The absence o state PPP legislation hampers the ability to unction o dedicated PPP units. Whileboth Caliornia and Virginia have PPP enabling legislation, Michigan lacks a PPP statute. Without PPP

legislation, Michigan Department o Transportation cannot procure projects through the PPP pro-cess.99 Thereore, the ability o the state to ulfll its unctions in the transportation sector is limited.

Support rom the legislature and governors ofce is essential in developing PPPs. Given all the

controversies around PPPs and the lack o education o policymakers on the subject o PPPs, stateagencies need to provide well-developed business cases or the projects proposed or procurement

through PPPs. A governors support alone is not sufcient; legislatures are indispensable, because

they authorize and appropriate the states transportation unding, including unds that would gotowards PPPs.

States need to better connect with the lower levels o government to ensure a broader understand-ing o the benefts and drawbacks o PPP projects. As seen rom the example o the ailed Minnesota

Trunk Highway 212 project, local governments can have a major role in the approval o a PPP. Inaddition, most o the current transportation PPP projects are in large metropolitan areas. While

states have the capacity to develop PPP projects, these projects happen in the jurisdiction o citiesand counties.

Finally, states oten lack the unding to participate in a PPP project. Any PPP project, with private

fnancing or not, requires a revenue source or paying the private partner. This may take the orm o


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availability payments, pass-through tolls, regular tolls, local or ederal unding, or ees rom land value

capture. Each has its benefts and drawbacks. For example, availability payments are a solution whenit is not easible to introduce user ees and the state is willing to provide general unding over severalyears. However, availability payments are a long term public subsidy, obligating a certain part o the

state budget over a certain period o time.With all the barriers ahead, states should learn rom other states experiences with building PPP

capacity. Best practices can be transerred through connections with public ofcials in cities andstates that have numerous experiences with PPP projects, and hold the bulk o uture potential orPPPs. Some states have managed to develop a signifcant number or amount o PPP projects, such

as Texas and Florida, others have created very supportive PPP legislation, such as Arizona; andseveral like Virginia, Michigan and Caliornia created their own PPP units. Creating better coordination

among these states and others that are in the initial learning stages will pass on lessons across dier-ent regions.

Other states should start incrementally by educating policy makers about PPPs and building sup-port around this new type o procurement. For example, the Minnesota Department o Transportation,together with the University o Minnesotas Humphrey School created a P3 taskorce in 2011. It consists

o approximately 30 high level stakeholders, including legislators, local elected ofcials, transportationexecutives, union, business and environmental representatives. The goal is to build understanding and

support or PPPs among the group, and to develop shared principles to guide uture PPP legislation,

evaluation and implementation. This taskorce approach is modeled ater a successul 2004 task-orce created to evaluate the conversion o the frst High Occupancy Vehicle lane in Minnesota into a

High Occupancy Toll lane acility.100 Since 2008, the National Conerence o State Legislatures (NCSL)

Working Group on Transportation PPPs has undertaken education eorts and created guiding prin-ciples or state legislatures to use when considering PPPs or transportation.101

C. The federal government could help the development of the PPP market by providing

technical assistance on PPPs, on a request basis

As the experience o other ederal structures shows, ederal PPP units appear later in the process obuilding PPP capacity, given that states are in charge o procuring transportation projects. Yet a ed-

eral PPP unit would be useul in providing technical assistance to states and other public entities thatcannot develop internal capacity to deal with the projects themselves. This does not exclude the assis-

tance o private consultants, but it provides a guarantee that public sector employees who are expertson the matter have reviewed the business case. This type o assistance should come on a request basisrather than regulations or conditions or ederal unding, which will make it even more difcult or

state agencies to pursue PPPs.The Federal Highway Administration has started building capacity in the Ofce o Innovative

Program Delivery (IPD) in this direction. Upon request, sta rom IPD could provide a general frstpresentation on alternative fnancing or a project proposed by a state agency. IPD can present in aworkshop how the project would be fnanced under several alternatives, including the PPP option.

They show the pros and cons o the fnancing options considered and present dierent types o PPP,appropriate or that specifc project (design-build, long-term concession, etc.) In addition, they provide

examples rom other states on PPPs conducted. While this is a start, IPD does not have the resourcesand the sta to assist other public entities in the procurement and management o a PPP.102

An important lesson or the United States is that some national PPP units are integrated in agencies

in charge o overall investment and inrastructure strategy. PPP units help other agencies to procureprojects through a PPP process, ensuring well-defned procurement processes with clear perormanceindicators. For best results, any capital project should be assessed or alternative fnancing, procure-ment and delivery methods, in order to ensure best Value or Money. Thereore, the work o a PPP unit

is integral in the capital strategy o a state or national government. Following this principle, both theUK and Australia have integrated the unctions o a PPP unit into newly created institutions in charge

o the countrys inrastructure strategy.


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VII. Conclusion

During this sluggish economic recovery public agencies in the United States have to fnd outnew ways to achieve efciencies rom operations and delivery.

Public/Private Partnerships could contribute to how we pursue inrastructure invest-ments in the United States because they represent a sharing o responsibilities and

costs between the public and private sector in project fnance and delivery. A dedicated PPP unit isa mechanism to build capacity to develop and implement PPPs. All the countries and states around

the world with well-developed PPP markets have built such units to help with quality control, techni-cal assistance, standardization, promotion, and policy guidance. The U.S. is a latecomer in the area oPPPs, but states have been very active in the last three years both in building capacity and in closing

PPP deals.There is no one-size-fts-alll design o a PPP unit, but U.S. public entities could learn rom experi-

ences o other countries or rom the growing track record in several states. A PPP unit reects notonly the needs o a particular PPP program, but also the administrative capacity and political struc-ture o a specifc government. Ultimately, a successul PPP unit is an entity that contributes to the

successul implementation o an overall PPP program.


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Appendix A. Value of Transportation PPP projects in the 100 Largest Metropolitan Areas,

1989-2011

PPP Cumulative PPP Cumulative

Value in Nominal Value, 1989-2011 Number PPP value,Dollars, 1989-2011 (in billions of of PPP as share of

Rank Metro Area (in billion dollars) 2011 dollars) projects U.S. Total

1 Washington-Arlington-Alexandria,DC-VA-MD-WV 6.7 7.2 8 10.8%

2 LosAngeles-LongBeach-SantaAna,CA 5.2 6.7 10 10.1%

3 Dallas-FortWorth-Arlington,TX 6.3 6.5 4 9.7%

4 NewYork-NorthernNewJersey-LongIsland,NY-NJ-PA 3.9 5.2 5 7.9%

5 Denver-Aurora-Broomeld,CO 4.3 5.1 6 7.7%

6 Miami-FortLauderdale-PompanoBeach,FL 3.5 3.7 8 5.5%

7 Seattle-Tacoma-Bellevue,WA 3.3 3.5 4 5.2%

8 Austin-RoundRock,TX 2.9 3.3 3 5.0%

9 SaltLakeCity,UT 2.5 3.0 2 4.5%

10 Chicago-Naperville-Joliet,IL-IN-WI 1.8 2.1 1 3.1%

11 St.Louis,MO-IL 1.1 1.2 2 1.8%

12 Minneapolis-St.Paul-Bloomington,MN-WI 0.9 1.1 4 1.6%

13 CapeCoral-FortMyers,FL 0.9 1.0 2 1.4%

14 Richmond,VA 0.8 0.9 2 1.4%

15 SanDiego-Carlsbad-SanMarcos,CA 0.8 0.9 1 1.4%

16 Providence-NewBedford-FallRiver,RI-MA 0.6 0.8 1 1.2%

17 LasVegas-Paradise,NV 0.6 0.7 2 1.1%

18 SanFrancisco-Oakland-Fremont,CA 0.5 0.7 1 1.1%

19 Charleston-NorthCharleston-Summerville,SC 0.5 0.7 1 1.0%

20 Raleigh-Cary,NC 0.6 0.6 2 0.9%

21 Portland-Vancouver-Beaverton,OR-WA 0.4 0.5 3 0.7%

22 Boston-Cambridge-Quincy,MA-NH 0.4 0.5 1 0.7%

23 Phoenix-Mesa-Scottsdale,AZ 0.4 0.4 3 0.6%

24 Tampa-St.Petersburg-Clearwater,FL 0.4 0.4 1 0.6%

25 Albuquerque,NM 0.3 0.4 1 0.6%

26 SanAntonio,TX 0.3 0.3 1 0.5%

27 Provo-Orem,UT 0.2 0.3 1 0.4%

28 Greenville-Mauldin-Easley,SC 0.2 0.3 1 0.4%

29 Jacksonville,FL 0.2 0.2 1 0.3%

30 Charlotte-Gastonia-Concord,NC-SC 0.1 0.1 1 0.2%

31 Orlando-Kissimmee,FL 0.1 0.1 1 0.2%

32 VirginiaBeach-Norfolk-NewportNews,VA-NC 0.1 0.1 1 0.1%

Top10Metros(asrankedbytotalPPPcontractamount) 40.5 46.5 52 69.6%

Top100Metros(bypopulation)withPPPs 51.0 58.6 85 87.7%

U.S. 58.2 66.8 104

Notes: Includes design-build projects. The metros are ranked by the ination-adjusted value of cumulative value of the contract amount of their PPP projects. Based

on PWF, 2011. BEA, 2011.


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Based on the project maps, most PPP projects in the Public Works Finance database are located

entirely in a metropolitan area or in non-metropolitan areas. 103 There were six instances in which aproject crosses several metropolitan areas or a metropolitan area and non-metropolitan areas. Inthese cases, the PPP project was allocated to the area in which the majority o the transportation

asset lies. Further, to avoid overestimation o PPP projects in the largest metropolitan areas, orcases in which a PPP project is situated in a rather equal manner in a top 100 metropolitan area and

a smaller metro area, this study assigned the PPP project to the smaller metropolitan area. There aresix cases with mixed spatial identifcation:

nThe Indiana Toll Road crosses seven counties: two in the Chicago metro area, three in smallermetro areas, and two in non-metro areas. The project value was assigned to the smaller metroareas because the Toll Road crosses the seven counties in airly equal parts.

nThere are two PPP projects on I-75 in Collier and Lee counties, FL which are in two dierentmetropolitan areas: Cape Coral-Ft Myers, which is a top 100 metro area, and NaplesMarco Island,

which is a smaller metro. Based on the project maps, a larger portion o I-75 is located in LeeCounty; thereore, this study assigns these projects to the Cape-Coral metro.

nA 1998 PPP project on US 550 (ormerly SR 44) in New Mexico crosses three counties, each

located in dierent metro areas: Albuquerque (top 100 metro), Farmington (other metro), andEspanola (non-metro.) Most o the road lies in Sandoval County, and thus the project was assigned

to the Albuquerque metro.nTriangle Parkway in North Carolina crosses two counties, located in two dierent metropolitan

areas: Raleigh (top 100 metro), and DurhamChapel Hill (other metro.) Triangle Parkway is part

o a larger Triangle Expressway project broken up into three parts: Triangle Parkway, NorthernWake Expressway, and Western Wake Freeway. The Triangle Parkway section lies predominately in

DurhamChapel Hill area and is assigned to that metro.nThe CPTC 91 Express Lanes in Caliornia is a 10-mile project that crosses two counties located

in two dierent metropolitan areas: Riverside and Los Angeles, both top 100 metros. The

project was assigned to the Los Angeles metro area, given that most o the project is located inOrange County.


21/28


Appendix B. Foreign PPP Units at National and Subnational Level

Note: As of December 2011. These are examples of PPP units around the world according to the denition that this study adopted. Depending on the denition consid-

ered, there may be other agencies/departments/teams that function as PPP units.

Private Finance

Initiative

Promotion

Office

JAPAN

PPP Team

UK

Partnerships

South

Australia

AUSTRALIA

Parpblica

SA

PORTUGAL

National PPP

Forum

AUSTRALIA

Secretariat

for

PPP

GREECE

PPP Unit

DENMARK

PPP

Canada

CANADA

PPP Centre

RUSSIA

Infrastructure

UK

UK

20092008200720062005200420032002200120001999 2010

Central PPP

Unit

IRELAND

Infrastructure

Investment

Facilitation

Center

BANGLADESH

PPP Knowl-

edge Center

NETHERLANDS

Efficiency Unit

HONG KONG

OECD NON-OECD

National-levelunit

State/provincial-

levelunit

Unit tecnica

Finanza di

Progetto

ITALY

PPP Unit

S. AFRICA

Partnerships

Victoria

AUSTRALIA

New South

Wales

AUSTRALIA

PPP Knowl-

edge Center

BELGIUM

PPP Taskforce,

North

Rhine-

Westphalia

GERMANY

PPP Taskforce

POLAND

Coordinacin

de Concesio-

nes

CHILE

PPP Unit

MAURITIUS

PPP Centre

PHILIPPINES

Partnerships

British

Columbia

CANADA

Alternative

Capital

Financing,

Alberta

CANADA

PPP Intermin-

isterial

Committee

HUNGARY

Missiond'Appui aux

PPP

FRANCE

PPPTaskforce,

Baden-Wrttemberg

GERMANY

PPP Center

CZECH REP.

FederalCommittee

on PPP

BRAZIL

Public andPrivate

InfrastructureManagement

Center

S. KOREA

Center forPPP

CHINA

Infrastructure

Ontario

CANADA

PPPQubec

CANADA

PPP Center ofCompetence,

Hessen

GERMANY

PPPTaskforceSachsen-Anhalt

GERMANY

PPP Unit

SRI LANKA

Central PPPUnit

FIJI

PPP Unit

INDIA

PPP CentralUnit

EGYPT

PPP Center ofExcellence

SPAIN

PPDeutschland

AG

GERMANY

InfrastructureAustralia

AUSTRALIA

Local Partner-ships

UK

LEGEND


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Appendix C. Characteristics of state PPP legislation, as of December 2011

Public sector

agency can

Availability Gives lower Prior state hire its own

Broad application Unsolicited payments/ level agencies legislature Non-compete technical andof legislation1 5 proposals4 shadow tolls3 PPP authority7 approval needed1 clauses3 6 legal consultants2

Alabama

Alaska

Arkansas N

Arizona

Caliornia

Colorado

Delaware

Florida N

Georgia

Illinois

Indiana

Louisiana

Maine

Maryland

Massachusetts

Minnesota

Mississippi N

Missouri

Nevada

North Carolina N

North Dakota

Ohio

Oregon

South Carolina

Tennessee

Texas N

Utah

Virginia

Washington

West Virginia

Wisconsin

1. NCSL, 2010: Appendix B.

2. PriceWaterhouse Coopers, Public-Private Partnerships: The US Perspective (June 2010).

3. Wagner, 2011.

4. PriceWaterhouse Coopers, 2010 for legislation through May 2010; Wagner, 2011 for legislation passed thereafter.

5. Brookings Metro Program analysis.6. A column with an N indicates that statute explicitly forbids PPP agreement from containing a non-compete clause.

7. Brookings analysis of Jaime Rall State Transportation PPP Enabling Statutes Relevant to Localities, National Conference of State Legislatures, March 2011; and

Wagner, 2011.

Note: While in Utah, prior state legislature approval is

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