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Private Sector Participation and Public-Private Partnerships

As traditional transportation revenue sources such as fuel and sales taxes continue to decline and operating deficits increase, transit agencies are increasingly looking to new sources of revenues to leverage funding and improve project feasibility and cost-effectiveness. There are numerous opportunities in which the private sector can engage in the public transportation industry, ranging from private operators participating in the planning and transportation improvement program process to a public-private partnership (PPP). One of the most successful methods used in other infrastructure projects (such as road, sewer, and utility improvements), PPPs are increasingly being utilized by transit agencies to increase efficiencies and cost-savings.

Public-Private Partnerships

PPPs are essentially a form of procurement. Unlike conventional methods of contracting for new construction, in which discrete functions are divided and procured through separate solicitations, PPPs entail a single private entity, typically a consortium of private companies, assuming responsibility and financial liability for performing all or a significant number of functions in connection with a project. In transferring responsibility and risk for multiple project elements to the private partner, the project sponsor relaxes its control of the procurement, and the private partner receives the opportunity to earn a financial return commensurate with the risks it has assumed.

Structured in multiple forms, PPPs vary generally according to the scope of responsibility and degree of risk assumed by the private partner with respect to the project. In each case, the private partner assumes financial risk in some form — for example, through an equity investment, liability for indebtedness, a fixed priced contract or a combination thereof.

Accordingly, the term "PPP" does not denote innovative finance as such, but instead, innovative procurements of major capital projects in which private capital is invested. PPPs may be distinguished from other collaborative arrangements between public and private sectors that are not procurements but instead are mechanisms to provide private capital to transit projects. Many transit agencies, for example, partner with the private sector to promote real estate development in and around transit facilities, which is often referred to as joint development or transit-oriented development. These partnerships provide access to additional capital and operating revenues for transit agencies through the receipt of lease payments, access fees, and increased fare revenues, as well as direct private sector funding of capital facilities that promote access between transit and private development. The capital-raising function, however, is but one element of a PPP.

It is important to note that not all innovative contracts referred to as PPPs adopt the principles of PPP project delivery. For example, project sponsors have defeated the purpose of having a single point of accountability and enhanced design constructability provided by a design-build contract by procuring multiple design-build contracts for a single project. Notable among such projects is the San Francisco Airport Extension (with four design-build contracts) and the Tren Urbano project (with seven design-build contracts).

Examples of transit projects utilizing a PPP approach include: