Report Capital Spending

How Public-Private Partnerships Can Help New York Address Its Infrastructure Needs

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December 11, 2008

The public and private sectors work together in a variety of ways to provide many different services. Recently in the United States, much attention has been given to collaborations called public-private partnerships (PPP). These arrangements may include the provision of a service, but are primarily oriented toward the construction or renovation of infrastructure. In a typical arrangement, the public partner retains ownership of the capital asset, but contracts with the private partner for the design, build and maintenance of the asset. PPPs have been employed in Europe and other parts of the world as a mechanism for infrastructure delivery for many years. The United States has a history of using PPPs for certain types of projects, including projects in New York for waste-to-energy facilities and airport projects, but the use of PPPs is extremely limited in comparison to Europe and other parts of the world. Recently, high-profile arrangements for a few toll roads in the United States have generated a great deal of interest among state and local governments struggling to address adequately their transportation and other infrastructure needs.

PPPs can be structured in a variety of ways, and they have been defined in a variety of ways. This report restricts its definition of PPPs to a subset of public-private arrangements and excludes three types of arrangements sometimes viewed as PPPs. First, it excludes “privatizations,” or asset sales in which the public sector relinquishes ownership of the asset. Second, it excludes management and other outsourcing contracts in which the private partner is responsible for a service in a larger operation or undertaking, but is not responsible for the creation or care of a physical asset or infrastructure element.

Third, it excludes relationships known as “design-build” (DB) contracts, in which the design and construction of an asset are bundled together as the responsibility of a single private partner. DB contracts are an important and useful procurement mechanism; however, since they are limited solely to construction phases, they are excluded from the review of PPPs in this report.

The CBC definition of PPPs centers on two important elements that make the relationship more like a partnership with shared risks and rewards. The first is the extension of the relationship to include life-cycle costs, including maintenance, energy consumption, and others, of the facility over a long-term period; this is sometimes referred to as “design-build-maintain” (DBM). This is important because it imposes a life-cycle discipline on asset management that adds incentives for efficiency and can reduce long-term costs. These incentives are absent in DB contracts in which the contractor may choose design elements that facilitate lower costs and speedier construction, but do not hold up as well over the longer intended life of the facility.

The second element of a PPP is that the private partner finance at least part of the initial construction or renovation of the facility: “design-build-finance-maintain” (DBFM). The relationship becomes more of a partnership when the private party has invested some of its own capital and is at risk to lose that investment if other terms of the arrangement, such as maintenance standards, are not met. The private partner need not finance all of the initial construction costs; private financing is desirable for the incentives it provides to enhance efficiency, not necessarily because it creates “new money” for infrastructure. For the most part, the revenue streams – tolls, fees or tax revenues – used to repay private investment are the same as for public financing. The private funds represent only the substitution of one form of capital for another (equity for bonds) and not new sources of revenue to support the investments. While some private financial commitment may be highly desirable, because of the availability of tax exempt financing, some projects in the U.S. have the characteristics of a PPP without private equity investment. In many of these cases, the tax exempt financing is “conduit” debt for which the private partner is liable, but the debt is issued by a public authority and is not private equity. Nonetheless, this report considers these types of arrangements as PPPs.

Thus, PPPs are defined as relationships for physical assets in which private partners are responsible for life-cycle costs – including design, build, maintenance, and others – and for at least partly financing the projects. These types of PPPs have an extensive history in other parts of the world and are emerging in the United States. Of the over 1,100 such projects worth $509 billion worldwide, only 100 projects accounting for 5 percent of the total global value are in the United States. Many of these U.S. projects are smaller in scale, but some large-scale deals have been negotiated in recent years.

As public officials give increased consideration to PPPs, the Citizens Budget Commission believes that the creation of such relationships should be rooted in a clear understanding of their potential benefits and pitfalls based on a review of the global experience. This report is intended to provide guidelines for the application of PPPs to public infrastructure in New York, and stimulate thinking on where PPPs may be useful tools for infrastructure improvement.