P3 Infrastructure

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Infrastructure: Developing the Public-Private Partnership Model Where it Doesn’t Exist and Making it Work for You

Jay R. LindgrenJocelyn Knoll

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In a time when state and local governments must balance shrinking revenue with deteriorating infrastructure, P3s have become a timely model for completing projects on time and on budget.

– A long-term performance-based contract between public sector and private sector to deliver public infrastructure

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The Issue

• Not enough resources for current infrastructure needs– Increasing Spending Levels: How Much is

Enough?

• Changing demographics and market needs demand new infrastructure– Development Trends

– Diversity in America

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Increasing Spending Levels: How Much Is Enough?

• Many groups claim that we are not spending enough. Comparisons of need differ based on what is being counted, but overall numbers are relatively consistent

American Society of Civil Engineers

Type $ billions annual spending

Roads 126

Bridges 9

Transit 21

Rail 13

Total 169

Note: Total government spending

American Association of State Highway and Transportation

Officials


Highways 63

Transit 16

Freight 7

Intercity Passenger Rail

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Total 91

Note: Federal government spending only

National Surface Transportation Revenue and Policy Study

Commission


Highways & Bridges

130-166

Transit 14-18

Freight 5-7

Intercity Passenger Rail

7-9

Total 156-200

Note: Federal aid eligible roads only

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Development TrendsUS Population 1900-2100

Source: All data from U.S. Bureau of the Census.Census Release NP-T1, "Annual Projections of the Total Resident Population as of JulyLowest, Middle, High Series: 1999 to 2100“,Population Estimates Program, Population Division, U.S. Census Bureau, Washington, D.C. 20233, February 14, 2000.

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Diversity in AmericaDistribution of Households by Type: 1950 to 2000

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New Demands: A More Urban Country

• Since 1956, we built 46,837 miles of Dwight Eisenhower National System of Interstate and Defense Highways at cost of $114 billion over35 years

• How to build the “urban half” of the system?

– Increasing demand

– Insufficient federal funding

– State transportation shortfalls

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One Tool: P3s

• Public-Private Partnerships

– Accelerates infrastructure projects deemed impractical under traditional funding

– Well-developed international tool

– $200 billion capital available

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Typical Models

• Build – Own – Transfer (“BOT”)

– Design, Build, Finance, Operate, Maintain

• Risk Shifting

• Performance-based Contracting

– Concessions

• “Privatization”

• Upfront fee in exchange for revenues

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BOT: Advantages/Disadvantages

Pros

• Risk-sharing

• Innovation and efficiency

• Public liquidity

• Public focus on other core functions

• Decreased reliance on traditional funding

• International investment

Cons

• Long-term/complex contracts

• Loss of public control

• Potential higher user costs

• Risk of quality sacrifice in exchange for profits

• Impact on public jobs

• Loss of accountability

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U.S. Examples

• Chicago Skyway - $1.8 billion (concession)

• Cincinnati Streetcar (BOT)

• British Columbia

– 75% of current infrastructure through P3s

– $3 out (??) $4 billion

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Minnesota Roadblocks

We’ll consider . . .

• What is currently authorized

• What is currently prohibited

• What is necessary to achieve P3 goals

• Good models

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What is currently authorized

• Local governments do not have inherent authority; authority must be expressly granted or implied from express grants.

• Mangold Midwest Co. v. Vill. of Richfield, 274 Minn. 347 (1966)

• Look to Minnesota Statutes for authority

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• Local Road Authorities have power to retain private contractors to design, build, and maintain roads within their jurisdiction.

• E.g. Minn. Stat. § 163.02 (counties)

• Must follow public bidding process prior to awarding contract

• E.g. Minn. Stat. § 471.345.

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• Implied authority to combine design, build & maintain into one contract?

“The awarding of a contract is an administrative act of discretion vested by the law in the governing authorities of the city. The courts cannot direct the authorities as to how they shall exercise that discretionary power nor direct to whom they must let a contract. They may only enjoin them from doing so illegally, which must include an arbitrary, capricious, or unreasonable exercise of power.”

• 33 Dunnell Minnesota Digest, § 12.01(b) (4th ed)

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• Implied authority to combine design, build & maintain into one contract?– Must conform to bidding requirements, then

discretion re: methods and terms of contracting process.

– Must exercise discretion in a reasonable manner, not contrary to the public welfare, not unreasonable, arbitrary, or capricious.

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• Implied authority to combine design, build & maintain into one contract?– Argument: By combining the contractual

obligations to design, build and maintain into a single procurement process which comports in all respects with the applicable contracting procedures, a local road authority may use and combine these private initiative variants.

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• Certain Toll Facilities– Since 1993, Minnesota Statutes have permitted

local road authorities to enter into agreements with private operators to develop, finance, design, construct, improve, own, and operate a toll facility for roads and bridges within the road authority’s jurisdiction.

• Minn. Stat. §§ 160.84–160.93

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• Certain Toll Facilities– Toll Facilities = “a bridge, causeway, or tunnel,

and its approaches; a road street, or highway; an appurtenant building, structure, or other improvement; land lying within applicable rights-of-way; and other appurtenant rights or hereditaments that together comprise a project for which a road authority or private operator is authorized to develop, finance, design, operate and impose tolls.”

• Minn. Stat. § 160.84

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• Certain Toll Facilities– NOTE: An important element of the definition of

“toll facility” is the ability of the road authority or the private operator to impose tolls.

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What is currently prohibited

• 2008 Transportation Finance Bill (passed over Governor veto)

• New provision restricting local road authorities from imposing new tolls on existing highways or using existing highways as toll facilities.

• Now road authorities may not limit operation of commercial motor vehicles to a toll facility or a tolled portion of a highway.

– Minn. Stat. § 160.845(b)

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• Three exceptions to ban on new toll facilities:

1.Toll facilities or HOV lanes constructed, converted, or established before 9/1/07

2.Any additional lane added to a highway after 9/1/07 (including price dynamic shoulder lane, HOV lane, or high-occupancy toll lane)

3.Any other general purpose lane that adds capacity

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• Also in 2008 Transportation Finance Bill:“A road authority may not sell, lease, execute a development agreement for a BOT facility or a BTO facility that transfers an existing highway lane, or otherwise relinquish management of a highway, if the highway is retained or utilized by the buyer, lessor, or operator for highway purposes.”

• Minn. Stat. § 160.98

• Aimed to prevent “privatization” of State’s roads and bridges

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• 2008 Minnesota Law, Key Terms– “BOT facility” = “a build-operate-transfer toll

facility developed, designed, constructed, improved, rehabilitated, and operated by a private operator who holds title to the facility subject to a development agreement providing that title will be transferred to the road authority on expiration of an agreed term.”

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• 2008 Minnesota Law, Key Terms– “BTO facility” = “a build-transfer-operate toll

facility developed, financed designed, constructed improved, or rehabilitated by a private operator who: (1) transfer any interest it may have in the toll facility to the road authority before operation begins; and (2) operates the toll facilities for an agreed term under a lease, management, or toll concession agreement.”

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• 2008 Minnesota Law, Key Terms– “Highway” includes all kinds of highways and

roads and the bridges or other structures thereon which form part of the same

– “Road Authority” applies to state, county, and city-level authorities.

• New law applies to all roads and bridges owned or managed by any road authority in the State.

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• What is necessary to achieve P3 goals

• Dialogue

– ULI/RCM “Connecting Infrastructure, Transportation and Land Use Initiative

• Legislation

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Good models

• Minnesota’s procurement laws specifically permit private ownership and operation of water and wastewater treatment plants.

• Citing the public benefits of faster construction, lower cost, and efficiency, the law permits privatization of facilities for the prevention, control and abatement of water pollution and the furnishing of potable water. – Minn. Stat. §§ 471.371 and 471A.01.

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Good models

• ABA’s 2007 Model Code for Public Infrastructure Procurement

– design – bid – build

– design – build

– design – build – operate – maintain

– design – build – finance – operate – maintain

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Resources

• Dorsey's Infrastructure Practice Group: http://www.dorsey.com/infrastructure/

• The National Council for Public-Private Partnerships: http://www.ncppp.org/

• The Institute for Public-Private Partnerships, Inc.: http://www.ip3.org

• U.S. DOT publication, “An Update on the Burgeoning Private Sector Role in U.S. Highway and Transit Infrastructure” (July 18, 2008):http://www.fhwa.dot.gov/reports/pppwave/ppp_innovation_wave.pdf

• British Columbia’s P3 agency: http://www.partnershipsbc.ca/index.html

P3 Infrastructure

Documents

public infrastructure

minnesota roadblocks

public sector

authorized implied authority

public welfare

public bidding process

inherent authority authority

total government spending