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Types of Public-Private Partnerships (P3s)

Transportation Finance Innovations

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The use of Public-Private Partnerships (P3s) marks a shift away from traditional ways of procuring and financing highway projects. Under traditional procurement processes, private contractors construct projects based on a public design using public funding. The projects are then operated and maintained by public agencies. With the P3 model, a private partner may participate in some combination of design, construction, financing, operations and maintenance, including collection of toll revenues.

Three main types of public-private partnerships have been used for highway projects in the United States:

(1) Design-build (DB);

(2) Design-build-finance (DBF); and

(3) Design-build-finance-operate-maintain (DBFOM).

These are discussed below. While the term public-private partnerships may be applied to a range of contract types - as well as to the lease of existing assets - the focus of FHWA's Center for Innovative Finance Support is on DBFOM projects, i.e., P3s that involve private partners that design, finance, construct, operate and maintain new highway capacity over a long term.

Design-build (DB) projects are the most common type of public-private partnership. They are set up as fixed-price contracts between a private entity and a public agency to jointly manage the design and construction of a new roadway facility. Under such an arrangement, the private party accepts most or all of the risk of any increase in costs associated with the project's design, eliminating a common source of "change orders" that add to the cost of traditional design-bid-build projects. Having the same party design and construct the project allows the DB contractor to propose innovations in design that may result in construction savings or better value. Financing is provided by the public partner and comes from tax revenues or direct user charges such as tolls. The public partner retains ownership of the highway and control of its financing, operations and maintenance. According to Public Works Financing (PWF), a monthly newsletter that has reported on public-private partnerships for roughly 25 years, 79 design-build transportation projects valued at $50 million or more were undertaken in the U.S. between July 1989 and September 2012, including three that also involved operations.

Design-build-finance (DBF) projects: The same type of contract that is used for a design-build effort can be used in a design-build-finance arrangement except that in this case, the private partner provides the necessary up-front capital and is generally repaid by a state or local government in a series of installments funded by taxes, fees or tolls. PWF indicates that between July 1989 and September 2012, eight design-build-finance (or build-finance) projects valued at $50 million or more were undertaken in the U.S. DBF projects are typically short-term financing arrangements, ending five to seven years after construction. They spread out payments for a large project in order to make them more affordable.

Design-build-finance-operate-maintain (DBFOM) projects: The broadest private role encompasses the elements of the design-build-finance structure but also includes operations and maintenance performed by private firms. These types of partnerships use the same kind of contract as that used for design-build-finance projects except that in this case, the private partner agrees to perform operations (such as the removal of snow and debris and the collection of tolls) and carry out maintenance on the highway for a specific period. Long-term operation by the same party can provide incentives for better life-cycle cost management. Under traditional procurement, the construction contractor is not required to consider ongoing maintenance costs or difficulty. With a long-term DBFOM, the concessionaire has incentives to spend more up front on construction if there will be a payback in reduced maintenance costs over the life of the project.

The contract spells out how the private partner is to be repaid for up-front and ongoing expenses. Repayments are often made through future tolls or other fees imposed on users of the road. Alternatively, "availability payments" or "shadow tolls" funded by state or local governments may be used to repay the private partner. The payments may be funded by receipts from toll collections and/or taxes that are not linked directly to the use of the road. Availability payments are periodic payments from the public partner to the private partner based on the availability of a facility at the specified performance level. Shadow tolls are set payments for each vehicle that uses the facility, which may be adjusted based on safety, congestion, or pre-established floors and ceilings.

DBFOM projects are sometimes called build-own-operate-transfer (BOOT) partnerships if the private partner owns the road during the term of the agreement but then transfers ownership to the public partner at the end of the term. PWF indicates that between July 1989 and September 2012, public-private partnerships undertook 13 DBFOM projects in the U.S. valued at $50 million or more.

Key differences between the conventional and P3 procurement approaches

Conventional Projects (design-bid-build)	P3 Projects (design-build, design-build-finance, and design-build-finance-operate-maintain)
Public sector burdened with all risks	Risks shared between public and private partners
Succession of separate (and multiple) contracts	Integration of two or more project phases
Public Financing	Private Financing (except design-build)
Lowest bidder	Best suited bidder

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