Public-Private Partnerships

Working Together: Public-Private Partnerships to Grow

By Gary L. Aller

Partnerships between public and private owners are expected to grow by $1.6 trillion in the next 10 years. The procurement method is useful for large-scale projects such as transportation projects and parking structures.

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The term 'public-private partnership' has been used for a variety of situations in which the public sector engages the private sector for financial support or in-kind help. The phrase originated in the United Kingdom and referred to a much more formal process in which a public sector entity provided a "service" for the public by procuring a project through the private sector. Additionally, when the private sector provides financing, another phrase is also used - Private Finance Initiative (PFI).

PPP/PFI projects are typically large projects with significant risks. The best local example is the new $100 million student housing project that ASU and Capstone Management recently announced. In this arrangement, Capstone Management will design, build, operate, maintain and finance a student housing project for downtown Phoenix and will rent/lease the space to recover its investment.

This method of procuring public services is expected to grow in the United States by $1.6 trillion over the next 10 years. Needless to say, if your work includes public works capital projects, this new trend is going to have an impact on your future. According to the Morrison Institute for Public Policy's latest publication, Arizona Ideas: Policies from A to Z for a Livable and Competitive State, some form of Public-Private Partnership will be required to sustain our growth.

PPP/PFI projects are good options for solving transportation woes.

According to the Texas Transportation Institute, we spend 3.7 billion hours sitting in traffic congestion nationwide, wasting valuable time, slowing sales, and polluting the air. The underlying problem is the inadequate gasoline tax set in the early 90s that was designed to fund our freeways. Revenue from this source will become even more inadequate in the future due to more fuel-efficient cars and hybrids.

BART in San Francisco has teamed with a private developer to build the $80 million Pleasanton Station using a form of PPP/PFI. The developer will pay BART about $15 million in advanced lease payments for 17 acres of land to be used for transit-oriented development that will include parking garages for the people using the rail. Another project that shows the flexibility of this approach is the Chicago Skyway Bridge project. The City of Chicago sold the bridge to private investors for cash and the investors took on the risk and responsibility of operating and maintaining the bridge, obtaining their return on investment through the toll charges. The toll concept for PPP/PFI projects is gaining popularity as a method of assuring return on investment. The State of Texas has embarked on a 381-mile Trans-Texas Corridor that will connect Oklahoma to San Antonio at a cost of $8 billion. The project is a PPP/PFI project headed by Cintra-Zachary LLP and will be built over the next 10 years. It will offer not only roadway, but rail and utility as well. Again, ROI will be accomplished through tolls.

Providing parking is another great use of PPP/PFI. The City of Phoenix has recently made an award for the parking building that is associated with the downtown redevelopment at 5th Street and Van Buren. This parking building will again, be designed, built and operated by a private company and they will obtain their ROI through parking leases and fees.

Although there are many benefits, the PPP/PFI procurement method does have its detractors. From the public perspective there is a general feeling that allowing a private firm to profit from providing a public service is just not right.

However, as we sit in traffic day after day for hours on end, we tend to reconsider and become more willing to pay a price to make our 20-mile commute take 20 minutes instead of an hour. Does that include a willingness to pay tolls?

For PPP/PFI to work, private partners must be required to provide a certain level of service. If that level of service is not provided then the private entity is at risk. It is the balance and shifting of risks that makes the PPP/PFI project work and results in value that is acceptable to the public.

To become involved in Public-Private Partnership and the Private Finance Initiative issues, join the PPP/PFI Task Force organized by the Alliance for Construction Excellence. The next monthly meeting is currently scheduled for Feb. 20, 2007.

Gary Aller is the director of the Alliance for Construction Excellence. ACE is housed within the Del E. Webb School of Construction and is part of the Ira A. Fulton School of Engineering at ASU.

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