FINANCIAL MANAGEMENT/Alternative routes
Municipalities often have turned to either new taxes or bonds to fund essential transportation projects. While those methods provide needed capital, they rely upon public sentiment, ratings, agency solvency, strength of the market, and a somewhat speculative future. Other options now are becoming available that leverage government assets and resources in a fair and risk-free manner while stabilizing and enhancing their financial future.
Public-private partnership transactions (also known as Triple-P or 3-P) and privatizations are emerging as formidable alternatives for advancing transportation projects without the burdens of debt. When properly structured, the transactions offer opportunities to grow new transportation corridors, eliminate operational and maintenance costs, transfer costly and considerable risk generators, and eliminate significant annual debt servicing while achieving potentially large financial returns.
The $1.82 billion Chicago Skyway concession lease sale is a prime example of a privatization transaction that is helping the city rid itself of the burdens, costs and risks of ownership, while receiving a large financial return in the form of an up-front “rent” payment. The transaction is essentially a lease agreement between Chicago and a third party for a predetermined and fixed time frame. The concessionaire assumes all operating and maintenance responsibilities, while collecting and retaining the tolls collected. The transaction marked the first time in U.S. history that an entire highway system was divested to a private enterprise. Under the agreement, the city retains full and continual ownership of the highway, so it maintains the right of inspection and participation, and the right of refusal over decisions while transferring costs and risks to the third party.
While the structure and implementation of transactions can vary, recent success in Chicago and Indiana — and similar efforts in Texas and California — offer a clear direction of the construction of the transactions. Government agencies considering a 3-P transaction should assemble a team of financial and legal advisors, engineers and technical experts who can define the standard of care, maintenance, operation and practice for the asset. The standards create the necessary accountability required to gain the public’s confidence once the initial shock of the concession fees has waned. The team also must define a toll-rate structure that provides for escalation but protects the public from excessive or uncontrolled tolling.
The process of privatizing an existing transportation asset or creating a new system via a 3-P transaction is complex and lengthy. An early understanding of the public’s concerns, along with knowledge of the bidder’s metrics, will ensure that parity, progress, the interest of the public, and a transparent and open-bidding process will be achieved. Governments need to examine these types of transactions, engage public opinion, seek the advice of experts, and foster a relationship of partnership, rather than solely a sale, as a means of meeting the transportation solutions for the future.
The author is senior manager in the Privatization & Public-Private Partnership business line for San Francisco-based URS.