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Unformatted text preview: MIT OpenCourseWare http://ocw.mit.edu 1.040 Project Management Spring 2009 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms. 1.040/1.401 1.040/1.401 Project Management Spring 2009 Public – Private Partnerships Public in Financing of Infrastructure Fred Moavenzadeh James Mason Crafts Professor Massachusetts Institute of Technology (Edited by Kyle Frazier) Historical Background Historical Participation of private sector in provision of infrastructure dates back to the Participation 19th century in the U.S. (turnpikes, tolled facilities) Public financing, especially in transportation systems, became the norm in the Public second half of the 20th century. second Shift to public financing Shift Highway Trust Fund; 2. Interstate Highway System; 3. Procurement reforms (leading to design-bid-build). These three factors were primarily responsible to shift form private to public vate financing financing 1. Re-entry of private sector Re The late 20th century demand outpaced the resources: The Federal Highway Trust Fund failed to keep up with the growth; thus Federal solicitation of private sector involvement. Definition and Types of Public-Private Definition Private Partnerships Partnerships Public - Private Partnerships are defined by the US DOT as Public Private follows: follows: “A public-private partnership is a contractual agreement formed between private public and private sector partners, which allows more private sector public ctor participation than is traditional. The agreements usually involve a participation ve government agency contracting with a private company to renovate, government construct, operate, maintain, and/or manage a facility or system. While construct, While the public sector usually retains ownership in the facility or system, the the ystem, private party will be given additional decision rights in determiining how ning private the project or task will be completed.” the Source: US DOT. Report to Congress on Public-Private Partnerships, December 2004. Source: Report http://www.fhwa.dot.gov/reports/pppdec2004/pppdec2004.pdf This implies shared responsibility for the delivery of the project and/or its This services and shared risks and rewards. Argument for private sector involvement Argument Leverage scarce public resources Leverage Expedite project delivery Expedite Improve cost-effectiveness of project development Improve Increased access to capital markets through applications of Increased alternative approaches to project: Funding Funding Financing Financing Contract delivery Contract Preservation Preservation Major Types of PPP Major 1. Private Contract Fee Services Most common form; this category includes: Most Contract Planning Contract Environmental Studies Environmental Facility and Right Of Way Maintenance Facility Of Way Maintenance Operation Operation 2.. 2 Alternative Project Delivery Design-Build: Design Saves Time Saves Saves Cost Saves Innovative Technologies Innovative Reduced Risk Reduced 3. Multimodal Partnership Park and Ride Park High Occupancy Lanes or Tolled Lanes (HOT) High Bus Rapid Transit (BRT) Bus Airport Transit Extension Airport Truck/Rail Transfer Facilities Truck/Rail PPP cont. PPP 4. Joint development Transit-oriented development Transit Economic development-based partnerships: these provide access to Economic based additional capital and operating revenues through: additional Receipt of tax increment financing Receipt Special assessment or business improvement Special Access fees Access 5. Long-term lease or concession agreements Long-term lease of publicly financed facilities Long Toll roads Toll Air rights Air Parking garages Parking Major Types of Transportation PPP Major High Asset Sale Full-Service, Long-Term Concession or Lease Multimodal Agreement (Public-Private Partnership) Joint Development Agreement (JDA – Pre-development) Transit Oriented Development (TOD – post-development) Build-Own-Operate (BOO) Build-Transfer-Operate (BTO) Build-Operate-Transfer (BOT) Project Design-Build-Finance-Operate (DBFO) Delivery Design-Build-Operate-Maintain (DBOM) Approaches Design-Build with Warranty (DB-W) Design-Build (DB) Construction Manager at Risk ([email protected]) Contract Maintenance Fee-Based Contract Services Low Major Phases of Infrastructure Project Development and Delivery Development Greenfield Life-Cycle Asset Development/Preservation PrePlanning & Acquisition Specialized Consultants Capital Projects Finance Design D-B Design-Build D-B-F-O Design-Build-Finance-Operate Long-Term Concession Development/Lease Construction Operations & Maintenance [email protected] Project Management Upkeep & Improvements Preservation Construction Manager at Risk Brownfield Asset Management D-B-O-M Design-Build-Operate-Maintain BOT/BTO Build-Operate-Transfer/ Build-Transfer-Operate BOO/BOOT Build-Own-Operate/ Build-Own-Operate Transfer Adapted from: Pekka Pakkala. Innovative Project Delivery Methods for Infrastructure – An international Perspective. Finnish Road Enterprise, Helsinki, 2002, p.32. Long-Term Maintenance Contracts Alternative PPP Arrangements Alternative 1. Fee-Based contract and contract maintenance Reduced work load Reduced Potential reduced costs Potential Opportunities for innovative technologies and efficiencies Opportunities 2. Alternative project delivery approaches Design-Bid-Build Design Division of work by specialization of effort Division specialization Reduced potential for collusion between design and construction Reduced Increased participation by local firms Increased 3. Construction Manager-at-risk ([email protected]) [email protected] enters the project development process under separate contract [email protected] Client selects [email protected] based on qualifications, not price Client [email protected] becomes the design-build contractor with a guaranteed [email protected] build maximum price maximum Advantages: Collaboration of client, designer and construction manager; anager; advancement of the project driving price negotiated. advancement ([email protected] continued) ([email protected] Potential for more optimal team Potential Direct client involvement Direct Reduced risk due to identification of design errors or omissions Reduced 4. Design-Build Combines design and construction into one phase with fixed-fee contract Combines Design-Build team assumes the risk Design Benefits Benefits Time savings Time Cost savings Cost savings Shared risk Shared Public sector better at managing risks associated with environmental Public associated ntal clearance, permitting, right-of-way acquisition clearance, Private sector better at managing the risks associated with: Private Design quality Design quality Construction costs Construction Delivery schedule Delivery Improved quality Improved 5.. 5 Design-Build with a Warranty Guaranty of materials, workmanship, performance measures for a Guaranty limited time (typically 5-20 years) 6. Design-Build-Operate-Maintain (DBOM) Increased incentives to provide high quality (e.g., JFK Airtrain) Increased 7. Design-Build-Finance-Operate (DBFO) Contractor responsible for financing, in addition to all commitment Contractor under DBOM Financial risk is borne by contractor Financial 8. Build-Operate-Transfer (BOT) Same as DBFO except the contractor retains Same DBFO except Ownership of the facility Ownership the The operating revenue risk The Any surplus Any 9. Build-Own-Operate (BOO) Ownership remains with contractor increased Ownership Full Delivery or Program Management Full Long-term concession or lease agreement (e.g., Chicago Skyway) Long Private sector concessionaire is given the lease of facility for a certain time period (typically Private 25-99 years) for an upfront fee paid to the public sector Private firm also agrees to maintain and/or upgrade and operate the facility Private Potential benefits Potential Transferring responsibility for increases in user fees to the private sector; Transferring Generating large up-front revenues for the public agency; Generating Transferring operations, maintenance, and capital iimprovement responsibilities to the private mprovement Transferring sector; Transferring most project, financial, operational and other risks to the private concessionaire; and Transferring private Taking advantage private sector efficiencies in operations and maintenance activities. Taking private 2 4 1 1 2 1 3 1 1 11 1 1 9 4 1 1 2 24 Sources: Infranews, Public Works Financing for highway projects, and FTA Budget and Policy Office, November 2006 4 4 1 1 States with existing concession projects States with potential concessiontype projects (number in preaward stage in November 2006) In Transit Sector In Transit-oriented development (TOD) Transit Joint Development Joint Business Improvement District Business Tax Increment Financing (TIF) Tax Joint Development Joint Ground lease Ground Air-rights lease Air Operations cost sharing Operations Ventilation Ventilation Utilities Utilities Parking Parking Construction cost sharing Construction Station connection fee Station Public and Private-Sector Benefits and Risks Public Sector of Transit-Oriented Development of Public Sector - Primary Benefits/Risks Private Sector - Primary Benefits/Risks Increased ridership and fare revenues Higher land values Joint sharing of costs for mixed-use stations Higher rental/lease rates and sales prices Potential for dedicated property/sales tax revenue More affordable housing opportunities Potential for lease payments or other developmentrelated revenues Risk of development market decline negating value of developer investment in transit project Risk that private development revenues fail to accrue due to delays in development activity Risk of commercial development delays caused by transit project delays Public Sector - Secondary Benefits/Risks Private Sector - Secondary Benefits/Risks Revitalized neighborhoods and commercial zones Higher retail sales from greater customer exposure Reduced traffic congestion and suburban sprawl Increased access to labor Reduced need for roads and other infrastructure Reduced parking costs in suburban locations Reduced crime and increased safety resulting from rejuvenated urban landscape Risk that transit service levels do not match needs of development lessees, patrons, or residents. Risk of development requirements requiring costly changes to transit facility designs and operations Risk of mismatch between transit patrons and retail or residential customers of related development Benefit Assessment District Benefit Those who benefit from the presence of a station pay a certain amount of Those additional tax. Equity Partnership Equity Land sale to private partner Land Business Improvement Districts Business Properties within the districts pay additional tax due to the enhanced transport Properties services. Tax Increment Financing (TIF) Tax Tax increment provides funds for rehabilitation and redevelopment of depressed Tax area(s) within a community. Multimodal Partnership Multimodal Multimodal projects provide opportunities to combine development, Multimodal financing and/or operation of facilities that serve more than one transport mode (e.g., Portland Oregon, Max Airport Extension). Types of Risks Associated with Transportation Project PPPs Transportation • Demand/Volume • Compensation and termination clauses • Revenue • Changes of law • Environmental/archeological • Economic shifts • Regulatory/contractual • Currency/foreign exchange • Payment structure/mechanism • Taxation constraints • Transaction cost • Moral hazard • Construction cost • Loss of control of assets • Maintenance cost • Political stability • Life-cycle cost • Protectionism • Liability/latent defects • Public acceptance Consequences and Mitigation Strategies for Major Types of PPP Project Risks Types Risk Category Description Consequences Mitigation Site Conditions • Existing structures may be inadequate. • Contamination of site. • Necessary approvals may not be obtained. • Additional construction costs and time delays. • Clean up costs. • Commission studies to investigate suitability of site and structures • Private sector to incorporate risk through refurbishment during construction phase. Design, Construction and Implementation Risk • Facility incapable of delivering at the anticipated costs. • Physical or operational implementation tests cannot be completed. • Increase in recurrent costs, delays. • Delayed/lost revenue. • Seek reputable constructors with strong financial credentials. • Private party may pass risk to builder/architects while maintaining primary liability. • Link payments to progress. Financial • Interest rate risk. • Financing unavailable. • Contingent funding requirements. • Increased project cost. • Interest rate hedging. • Financial due diligence. • Bank/capital guarantees from companies and directors. Operating • Inputs, maintenance may yield higher costs. • Changes to government with respect to facility operations. • Increase in operating costs. • Adverse effects on quality and service delivery. • Long-term supply contracts where quality/quantity can be assured. • Upfront specification by public sponsoring agency. Consequences and Mitigation Strategies for Major Types of PPP Project Risks (Continued) PPP Risk Category Description Consequences Mitigation Market • Fluctuations in economic activity or demand • Competition, demographic change and inflation. • Lower revenues. • Diminution in real returns to the private party. • Private operator to seek an availability payment element to minimize impact on risk premium. • Review likely competition for service and barriers to entry. Legislative • Additional approvals required during the course of the project cannot be obtained. • Changes in laws and regulation. • Further development or change in business operation may be prevented. • Increase in operating costs with regards to complying with new laws. • Private sector to anticipate requirements. • Public sponsor may mitigate such change by monitoring and limiting changes which may yield adverse consequences. Asset Ownership • Loss of the facility upon premature termination of lease or other project contracts upon breach and without adequate payment. • Loss of investment by private party • Possible service disruption as additional capital costs are incurred to upgrade the asset to the agreed value and useful life. • Private party will be given cure rights to remedy defaults. • Public sector sponsor may make payment for value in the project on a cost-to-complete basis if termination occurs pre-completion. • Impose on the private party maintenance and refurbishment obligations. • Secure services of a reputable maintenance contractor with strong financial credentials. Benefits of PPPs Benefits 1. 2. 3. 4. 5. 6. 7. 8. Stronger working relations Reduction of financial constraints Faster delivery Innovation and expertise Greater cost efficiency and productivity Integration of various stages of development Increased competition Risk management Concerns of/about PPPs Concerns Potential higher life-cycle costs -- private sector may demand Potential cycle -- private higher rate of return than public sector. higher No concerns for externalities & social benefits No Taxation constraints Taxation Federal government does not allow accelerated depreciation Federal Concession uses only taxable debt and equity (no tax-exempt debt Concession exempt financing) financing) Moral hazard Moral Loss of control over assets Loss Critical Success Factors for PPPs Critical PPP has to: Improve “service quality” Improve Promote socio-economic development Promote Success factors Success Consultation with and support of stakeholders Consultation Public sector’s active involvement Public Political leadership Political Secure public control Secure Limited complexity Limited Appropriate risk sharing and rewards Appropriate Effective working relationships among partners during and after contract Effective negotiations Legal authority Legal Legal Issues Associated with Transportation Infrastructure Project PPPs Infrastructure Legal capacity of parties and legal requirements of the sponsor to provide services Ability of the private sector to be involved in infrastructure development, particularly foreign companies Ability of the private sector to acquire and own public-use infrastructure, especially foreign firms Existence and legal basis of cost recovery tolling Ability to provide performance guarantees Property issues of land acquisition – condemnation, use, and disposal Administrative coordination Dispute resolution and liability provisions Special provisions associated with the use of public funds: Davis-Bacon, Buy American, etc. Competition and anti-trust regulations Currency and profit repatriation rules Public sector borrowing restrictions Tax and accounting liabilities Adequacy of procurement and selection procedures Contract provisions Property and intellectual property laws regarding proprietary technologies and transfer of know-how Adequacy of oversight and monitoring procedures Authority of other public entities over infrastructure assets and access to them Authority to regulate services Ability for and restrictions on transfer of private sector contract responsibilities to other parties Major Surface Transportation PPPs in the Major Continental U.S. since 1991 1H 1T 1H 1H 1 1T 3T 1H 1H 4H 1T 1T 2H 1 1 2H 7H 1H 1H 4H 1H 2H 5H 3H 5H 1T *States with PPP projects over $53 million with Notice to Proceed by 1991 #H #T States with Major PPPs* (number of highway projects) Number of major highway capital projects delivered as PPPs by the State States with Major PPPs* (number of highway projects) Number of major transit capital projects delivered as PPPs by state 1H 1 H 2T 1T 1T Use of PPPs for Major Highway and Transit Projects since 1991 Transit Major Highway PPP Projects Since 1991 (44 Projects) Major Transit PPP Projects Since 1991 (13 Projects) BOT, 1 DBM, 1 DBOM, 3 DBFO, 2 DBF, 3 DBFO, 1 Concession, 6 BOT, 1 DB, 8 DB, 31 Major Highway PPP Project Costs Since 1991 (Total: $22,431 Million) BOT DBM DBFO DBF 0% 6% 2% 3% DB 54% Concession 35% Major Transit PPP Costs Since 1991 (Total: $7,384 Million) DB 43% BOT DMFO 9% 5% DBOM 43% (Project costs shown in millions of dollars) Primary PPP Approaches for Surface Transportation Projects in the Near Future in the U.S. DB DB (medium to large new or reconstruction highway projects; transit new (medium starts) DBOM DBOM (new tolled or non-tolled roads; transit) (new DBOM-F DBOM (primarily new toll roads) (primarily Concession Concession (primarily existing and new toll roads) (primarily Joint Development Agreement/Transit-Oriented Development Joint (JDA/TOD) (transit new starts) (transit ...
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