As rhetoric at the federal level advocates for the private sector’s increased participation in infrastructure services, taking a look at how some of the different models of public-private partnerships (P3s) have evolved in the United States can be helpful. The two most popular P3 models are revenue-risk and availability payment models. Under a revenue-risk model, the private sector is paid for its services through user fees or tolls, whereas under an availability payment model, the private sector is paid for its services by the government regardless of how many users actually utilize the asset.

During the last 15 years, California, Texas and Florida state governments have been among the most frequent procurers of P3s, with each state having developed a different style of partnership with the private sector and each having successfully reached financial close on multiple P3s.
  • Texas: Texas in particular has used the P3 model prolifically for revenue-risk toll roads around its fast-growing urban centers of Houston, Dallas and San Antonio. Each of these cities has had a revenue-risk toll road designed, built, financed, operated and maintained by private partners at no additional cost to Texas taxpayers. These toll facilities have not been without opposition. Most recently, the legislature did not extend the ability of the Texas Department of Transportation and the Regional Mobility Authorities to procure P3s past the Aug. 31, 2017, expiration.
  • Florida: Florida also has been quite active in its use of P3s. Florida has more often opted to develop these projects either on an availability payment basis or through a design-build-finance process. In an availability payment P3, the public sector, not the private sector, retains the revenue risk of the asset. The Florida Department of Transportation’s embrace of these two models for its road P3s allows the public sector to procure projects through a single contract while transferring to the private sector some risks related to the design, financing, construction and performance of the asset over time. 
  • California: California has taken advantage of both revenue-risk and availability-based P3s for a variety of asset types. Primarily, California has used the availability payment model for social infrastructure assets such as the Long Beach Courthouse and the University of California Merced campus redevelopment project, while using revenue-risk projects for its road P3s. However, governments in California are pursuing or considering a number of availability-based transportation projects.
Other state governments have looked to P3s for a number of reasons depending on their needs. Some governments use revenue risk P3s when they want to deliver an infrastructure asset, but their balance sheet cannot carry the debt burden of the project. Other governments have used availability payment P3s to expedite the delivery of an asset through a single contract to address rapidly growing needs. Equally important, governments also have begun to take the concept of life cycle costing seriously, realizing that P3s are a way to achieve goals related to how best to manage and maintain assets during their entire life cycle.

As the delivery model has taken a more prominent role in public discourse, other state and local governments have engaged in the P3 space. New entrants are looking at projects in the transportation sector, including roads, bridges, transit and airports, as well as exploring the appropriateness of P3s for civic and educational facilities and water systems.

Two programs at the federal level—the Transportation Infrastructure Finance and Innovation Act (TIFIA) and Private Activity Bonds (PABs)—have been vital to the growing success of transportation P3s. These two programs have helped bring the cost of financing these projects more in line with the cost of financing these projects with traditional municipal bonds. While financing is not the only important factor in the decision of whether to pursue a P3, the sticker price of private debt can add to the political challenges of successfully procuring a project.

TIFIA has made more than $25 billion in loans or loan guarantees to major transportation projects, though not exclusively to P3s, and the PABs program has issued or authorized $10.8 billion in bonds. Governments can now somewhat move away from the issues of financing costs and can focus on using P3s to deliver high-performing assets. Colorado, Pennsylvania and Maryland have been active in recent years in pursuing transportation P3s that do not rely on toll road revenues to compensate the private partner, but rather are structured in a way that rewards the performance of the asset while penalizing non-performance. Structuring projects in this manner gives the public sector more power to ensure their infrastructure will not suffer the chronic problems of deferred maintenance.

With government officials’ increasing understanding of the P3 structure, the narrowing difference in financing cost thanks to federal programs, and a focus on life cycle costs and risk transfer, governments across the country are beginning to look to P3s as a way to deliver on promises of infrastructure investment. Many governments are in the process of evaluating public-private partnerships in meaningful ways, conducting rigorous analyses to determine whether a P3 is the prudent way to procure a project.

 
Tariq Taherbhai is senior director of Aon Infrastructure Solutions and Peter Fogel is a risk analyst. For more information, email tariq.taherbhai@aon.com.