Transportation, Infrastructures & P3 - A growing market
S&F International has been working during these last years in helping Infrastructure and Energy companies enter the US market, as well as supporting US companies and institutions when approaching Southern Europe. Due to the great differences among states, companies need to focus on specific states with the right market conditions and good business opportunities. At the same time, we have been helping authorities and business organizations in both sides of the Atlantic by promoting trade missions and enhancing a deeper understanding on different business and economic related issues.
Construction, Infrastructures and Transportation are important economic sectors that do provide creation of jobs (qualified and non-qualified), generate wealth for the local and State economies, improve business and economic development by facilitating trade of goods and services, as well as good infrastructures and transportation help the State and local authorities to attract investment.
While I was at Boston College doing my MBA, there was a famous marketing campaign that said “if we build it, they will come”, referred to the construction of the brand new Alumni Stadium. Of course, with no stadium, no one would go to the game, but with the new one, they really did a great business.
In these times of financial uncertainties and important budget cuts, infrastructures and transportation are some of the sectors that should be hurt the most, but the reality is that these sectors are booming in some states in the US, and investment in these areas are necessary in order to fuel the economy, as well as to better service their citizens. California is a good example on how municipalities, counties and the State are going through great efforts on upgrading and improving their transportation and energy infrastructures, being their first step in order to be able to service the public demand, the approval of the Public Private Partnership regulation in 2010.
Fortunately there are many ways of approaching the development of new infrastructures, by traditional means, where the states invest in the construction and then manage the projects as well as maintain it, or by constructing a toll road, where the private companies can exploit the road, assuming all the risks, or the latest developments in Public Private Partnerships, commonly known as P3s, that are allowing many countries and states to develop new public infrastructures for the public, but allowing the private sector to design, build, operate and maintain the infrastructures by sharing the associated risks.
“Public private partnerships are an important option that can be utilized in times of economic uncertainty and in periods of prosperity. There is a nexus between the public sector’s needs and the private sector’s goals. Local and state governments, particularly in today’s challenging economic times, need to find innovative ways to improve infrastructure that makes sense to the taxpayer.”
– Doug Domenech, Secretary of Natural Resource of the Commonwealth of Virginia
We are not stating that all projects should be done under P3 schemes, but in the 21st century, the State and local authorities should include in their business model the right mix of P3s. The good news about P3s is that they allow public entities to do more things, for the same money but better managed and maintained.
Although there are many ways on doing P3s, the most common is for the public sector to launch a Design-Build-Maintain and Operate project, where the private entities take the lead on the project, always under the control and conditions established by the public organizations, to be financed totally or partially by the private entities. The private entities will be paid every year by the public entities in the amount and way agreed, if the conditions of quality of service, operations and maintainance are met.
There are many different ways of payment agreements, as for example, if you build a tunnel for trains, trains may be paying a toll everytime they go through the tunnel, or payments based on the quality of service and availability for certain highways with no tolls, etc...
The P3 applications are diverse, like transportation (Roads, Rail, Tunnels, Ports, etc...), healthcare (public hospitals that are built and operated by private companies that charge an agreed amount based on patients, quality of service, etc... , and that may include or not the medical services, that may be operated by the public authority) or even the utility related infrastructures such as powerlines or water related developments. Another important parameter to take into account is the great evolution in construction technology and methodology, allowing projects to be built faster and cheaper.
In order to better understand what is P3 and with the help of several Public Private Partnership organizations, we have answered basic questions in order to better understand what it is and how it works.
What is Public-Private Partnership (PPP)?
The PPP is the formula produced by Public Administrations in order to develop infrastructures and public services in risk-sharing with private companies. This formula prevents the limitations in the budget of Public Administrations from braking the development and necessity for social equipments. In this relationship established between the Administration and the company, the first party defines the strategy of the project (organizing, regulating and supervising it), while the second one provides its know-how and experience.
It is a formula that helps financing, building, renewing or exploiting an infrastructure or service in a more efficient way. PPP is present in transports, public health, education, security, waste management and distribution of water or energy. This contribution to public wellbeing justifies the inclusion of the PPP in the European initiative for growth
What is the availability payment?
The availability payment is a model used by the Public Administration to pay a fee to concession holders not depending on the demand (as in the cases of the payment for use or tolls), but on the availability and the quality of the infrastructures and the services provided.
This model keeps under account a middle-long term vision that allows the evaluation, through time, of the quality of infrastructures and of the efficiency of services. In this case, the risk taken on by the concession holder derives from the availability, that is, it depends on the capacity of the private company to offer the user an infrastructure or service with a specific service level (previously determined). The Administration reduces the payments to the company if the provided service doesn’t supply the quality required.
Are there other formulas of relation between the public and private sectors?1
Yes, there are. We can enumerate, as an example: the outsourcing of services (in which the Administration takes on all the risk) and the privatization (that differs from Public-Private Partnership for the fact that the ownership of the infrastructures or services is private instead of public -as it is in the PPP-).
What are the advantages of the PPP for the Public Administration and the citizens?
The PPP allows the development of infrastructures and public services that otherwise the Administrations, for budgetary reasons, wouldn’t be able to carry out.
The past experience in Spain and in the rest of European countries has shown how, through the PPP, it is possible to realize projects in a shorter period of time, using the technical know-how and the experience of the private companies and saving largely on expenses.
Furthermore, the Administration can (by using the PPP) keep control over the public service. From the citizen’s point of view, the PPP is the way of obtaining and having benefit from services and public infrastructures that keep a high level and a universal access to what is public (by combining the experience and the efficiency of specialized companies in these projects).
Some Examples in USA
As state governments struggle to meet growing transportation infrastructure needs while revenues dwindle, leveraging existing resources through the use of public-private partnerships (PPPs or P3s) has become increasingly attractive. As of December 2010, twenty-nine states and Puerto Rico had legislated an authorization framework for transportation PPPs, and more than $46 billion had been invested in these projects over the last 20 years. The legislative trend grew in 2010 as 21 states and the District of Columbia considered 52 legislative measures concerning transportation PPPs.
PPPs are agreements that allow private companies to take on traditionally public roles in infrastructure projects, while keeping the public sector ultimately accountable for a project and the overall service to the public. In PPPs, a government agency typically contracts with a private company to renovate, build, operate, maintain, manage or finance a facility. PPPs cover as many as a dozen types of innovative contracting, project delivery and financing arrangements between public and private sector partners.
Though PPPs are not optimal for many transportation projects, they have been shown to reduce upfront public costs through accelerated or more efficient project delivery. PPPs don’t create new money but instead leverage private sector financial and other resources to develop infrastructure. In the end, a source of revenue such as tolls or other public revenue still is required to pay back the private investment. In this era of fewer viable choices for moving ahead with critical infrastructure development, PPPs are an option many states are contemplating.
First P3 project in California - Doyle Drive 3
The existing south access road to the iconic Golden Gate Bridge, known as Doyle Drive or Route 101, is structurally and seismically deficient and must be replaced. The roadway is facing the same problem that threatens other parts of our nation's infrastructure - the ravages of time and continual use. Originally built in 1936, Doyle Drive has reached the end of its useful life. Replacing this aging roadway is not only critical for seismic and traffic safety, but also provides an opportunity for major design improvements.
Doyle Drive has been re-envisioned as the Presidio Parkway - a roadway tucked into the natural contours of the Presidio of San Francisco and the Golden Gate National Recreation Area, one of the nation's largest urban parks. The project team strived to create a roadway that reduces impacts to biological, cultural and natural resources; respects the project setting within a national park, the National Historic Landmark District and surrounding neighborhoods; meets community needs; and provides a safer roadway.
Spain has been the european country that has done more transportation projects during the last 10 years, positioning its infrastructures sector and its industry among the most developed and advanced in the world. With the biggest High Speed Rail Network in Europe, behind China and Japan, one of the best underground and light rail systems located in Madrid and Barcelona, tunnels performed in record time, and eight companies among the biggest construction and concession companies in the world (the prime contractor of the Panama channel, the owner of airports such as London Heathrow, owners of several concessions all over the world, etc...) the country is one of the good examples in Europe to show when dealing with construction, concessions, P3 and efficiency in project delivery.
The Extraordinary Infrastructures Plan (PEI) is the Public-Private Partnership program presented in April 2010 by the Ministry of Public Works, which will mobilize 17 billion euro for railway and road concessions. This plan will unfold between 2010 and 2012. Based on a concession model, the PEI establishes the payment for infrastructures, once the work is finished and it’s working, through a wide period of time (about 25-30 years). This way, its repercussion over the public budget is delayed until 2014.
These are the first projects of the PEI that will be tendered:
• the railway access to the Alicante Airport
• the railway access to the Algeciras Harbor
• the stretch Benavente-Zamora of the A-66 divided highway
• the railway logistic centre of Aranjuez
• the High Speed line Albacete-La Encina-Alicante (facilities)
• the High Speed line Olmedo-Ourense-Santiago
• the High Speed line Zaragoza-Teruel (electrification)
Vialia complex in Vigo – High Speed station
Governments all around the world are visiting the country in order to learn from how they did it, how they financed it, and how they have achieved so much in such a sort time, as well as to discover the real impact on the economic growth of the country for the past ten years. Technology and processes used to reduce maintainance costs of the rail or road system is another matter worthwhile to explore.
1.- Foro PPP
2.- The National Council for Public-Private Partnerships
3.- San Francisco County Transportation Authority http://www.presidioparkway.org
4.- S&F International