Mike Garvin discusses future of public-private partnerships
January 12, 2010
Over the roughly the last two decades, alternative approaches for delivering infrastructure projects such as public-private partnerships (PPP) have received significant attention in the United States, particularly in Virginia.
In Northern Virginia, the Dulles Greenway was one of the first U.S. highway projects to be delivered by a PPP franchise agreement. The extension of the existing Dulles Toll Road was intended to provide a more attractive commuter route and serve as a catalyst of property development.
Planning started in 1987, and a private consortium named TRIP II secured the right to develop the extension as a toll road. After schedule slip, the toll road opened in 1995 and was soon in financial distress. To make matters worse, the Virginia Department of Transportation (VDOT) started improving Route 7, a competing free road, marginalizing the government’s commitment to the Greenway project.
Seven years ago, VDOT issued a request for the private sector to join with the state to develop proposals for improvements to Interstate 81, one of the top eight trucking routes in the United States, and considered to be operating in a substandard, even dangerous condition. Several studies occurred but the extensive changes to the corridor envisioned never materialized.
These are just two examples cited by Michael J. Garvin, associate director of Virginia Tech’s Myers-Lawson School of Construction who is tenured through the Via Department of Civil and Environmental Engineering.
“Despite the recent economic turmoil, indicators suggest that the utilization of PPPs in the United States will not cease,” Garvin said.
“The current conditions have made these arrangements more challenging to implement, but this is not necessarily a bad thing. The due diligence necessary with such projects is significant, so the economic situation is forcing decision-makers and analysts to sharpen their pencils,” he added.
Garvin recently co-authored a paper with Doran Bosso, a former Virginia Tech graduate student now with Skanska Infrastructure Development, titled, “Assessing the effectiveness of infrastructure public-private partnership programs and projects” that appeared in the October 2008 issue of Public Works Management & Policy.
They wrote about several other projects, including the Pocohontas Parkway, near the commonwealth’s state capitol. Plans for this project started around 1980 when state transportation officials wanted an extension of the east-west connection between Interstate 95 and Interstate 295 south of Richmond. Progress stalled when state funds did not materialize in the late 1980s. An agreement was reached between VDOT and the joint venture team of Flour Daniel and Morrison Knudsen, and the 8.8-mile route began opening in stages in 2002 at a cost of $314 million. Once tolls were activated, consumer demand dropped, generating half of the expected revenue.
So, in 2006 Transurban, an international toll road owner and operator with interests in Australia and North America, acquired its first transportation asset in the United States, entering into an agreement with VDOT to effectively lease the parkway for 99 years.
“The public-private partnership movement is arguably the most significant worldwide trend in the public sector,” Garvin and Bosso wrote. In countries with emerging economies, financially challenged public administrations look toward the private sector to develop basic infrastructure. But in the United States, activity is just beginning to pick up, they noted.
With the examples they cite in their paper, they provide reasonable doubt that the expected benefits always occur. However, Garvin noted that with the proper “framework,” PPPs can succeed. The crux is the “notion that PPP strategies must balance the interests of society, state, industry, and the market for ultimate success.”
Garvin cited three interplaying factors driving the progress of the market: the general reluctance of public agencies and governments to raise taxes; the emergence of private sector participants who are capable of handling the risks and delivering the services of infrastructure projects; and the attractiveness of privately financed projects in terms of returns to investors.
PPPs must have “clear and enforceable partnership conditions,” Garvin said, and he and Bosso proposed the following working definition for these arrangements: A PPP is a long-term contractual agreement between the public and private sectors where mutual benefits are sought and where ultimately the private sector provides management and operating services and/or puts private finance at risk.
Garvin argued the “significance of this definition” is it excludes both design-build and the transfer or sale of infrastructure assets or services to the private sector. “Design-build is a modest derivative of the design-bid-build project delivery system, which is the dominant and often mandated delivery method for public works projects in the United States. This distinction is more than semantic as the transfer of an asset or a service qualifies as privatization.”
In a March, 2009 report for the Federal Highway Administration (FHWA), the American Association of State Highway and Transportation Officials (AASHTO), and the National Cooperative Highway Research Program (NCHRP), Garvin served as one of nine authors and as the report facilitator. The publication was titled, “Public-Private Partnerships for Highway Infrastructure: Capitalizing on International Experience.”
The three agencies commissioned the study through its International Technology Scanning Program aimed at evaluating innovative foreign technologies and practices. Since 1990, more than 75 international scans have been completed on topics ranging from bridge construction to intelligent transportation systems. As a result, the United States has implemented a number of improvements and incurred substantial savings in road program technologies and practices, according to the report.
In its scan of P3s, Garvin and his colleagues – members of the FHWA, various state DOTs, and the National Council for Public-Private Partnerships – examined the practices of other countries that involve the private sector in the construction of various types of highway infrastructure. They documented the lessons learned and made implementation recommendations to improve United States policy and practice.
Among their findings, Garvin said, “Highway PPP arrangements, particularly in the most mature markets, are not exclusively financial transactions. They are the selected project delivery strategy based on a value-for-money or feasibility analysis.”
In agreement with Garvin’s earlier writings, this group also strongly suggested that public agencies should recognize that a PPP arrangement should be a contractual long-term partnership with the private sector. There should be a balance among the technical, commercial, and legal conditions to insure its success. And user fees are not necessarily a requirement.
They also endorsed the idea of the U.S. establishing a comprehensive strategy for educating and training state and local officials. “PPPs are neither a panacea nor a fad,” Garvin said. “But they need to be one of the tools considered to address the nation’s infrastructure challenges.”