Public-Private Partnerships
(PPP) in the United States:

A Snapshot of Recent Developments
and New Directions

By Katia Karpova

About the Author...

Katia Karpova has been with IP3 since 1995, serving various project management and technical roles. Currently Ms. Karpova oversees a number of IP3 PPP project initiatives in Central and Eastern Europe and the CIS. She is a frequent trainer in IP3 courses on topics such as PPP project structuring and analysis, tariff structuring, and financial modeling for PPP investment in infrastructure projects. Ms. Karpova received her B.A. in Finance from the University of Maryland.

1. Introduction

Public-private partnership (PPP) models and methodologies in the United States began to emerge in the 1970s. By the early 1980s, privatization of public services began in earnest. By the mid-90s, a number of US public services were privately built, financed, managed, operated, or owned. Today the PPP market in the US covers every aspect of "pure public" to "pure private", having employed a diverse range of techniques and their hybrids in almost every sector of the economy. In the United States, most of the effort today is aimed at improving the design and implementation of PPP arrangements, strengthening PPP techniques, enhancing legislative support, and increasing the scope of PPP utilization in yet more groundbreaking areas.

Similar to the worldwide trends in service provision and government finances, national and local governments in the United States are facing the burdens brought about by the widening gap between the government's ability to supply the finance and capacity for public sector projects, and the growing demand for investments and services needed to maintain and upgrade the existing infrastructure, let alone expansions and new construction. Unlike most emerging market economies, the United States enjoys the breadth and depth of readily available private finance and well-developed capital markets, strong and highly skilled private sector firms capable of bearing project risks, and effective enabling regulation in place to protect the interests of relevant stakeholders. This combination creates a sound environment to realize the potential benefits of public-private partnerships in each sector of the economy.

2. Rationale for PPP in the United States

The rationale for PPP in the United States is basically the same as it is in other countries. In order to narrow the financing gap needed to develop new and improved infrastructure and service delivery, public-private partnerships are expected to bring cost savings and improve service quality by introducing competition, achieve greater efficiencies by utilizing private sector expertise, and secure the required financial resources by tapping into the private capital. Numerous case examples of viable public-private partnerships exist in environmental infrastructure (water, sanitation, solid waste), energy, transportation, telecommunications, and social services (private service delivery in healthcare, education, and private pension funds). In addition to the traditional sectors, PPPs are also becoming commonplace in information and communications technology, e-government development, defense and military sectors, and correctional facilities (to date there are 150 privately run prisons in the US - the largest number in the world - providing government savings of 10-15% per year). Public-private partnerships are also used in other areas of highest national priorities, such as AIDS/HIV prevention, education, and treatment.

Public-private partnerships are becoming more sophisticated, environmentally innovative, financially viable, and consumer-oriented, addressing both public and private needs in many ways. Building upon the experience of the last 25 years, the number of PPP transactions has increased dramatically as have the cost savings in most cases. The benchmarks for cost savings to national and local governments from PPP arrangements are ranging between 20-25%, as opposed to the 10-15% in previous years. Now, new PPP arrangements are designed to feature longer-term contracts, greater levels of service delivery, and the use of new technologies. Contracts are increasingly more sophisticated in allocating the risks between the public and private sectors, and PPP opportunities in general are becoming more financially attractive to government and consumers alike.

The scope of PPP transactions is also expanding. For example, US Filter recently entered into a 20-year $1.5 billion deal with the city of Indianapolis, to provide and manage water facilities in one of the largest water transactions in U.S. history. The contract sets requirements and incentives to improve the quality of water and expand service provision to residential and commercial users. According to the CEO of US Filer, this is a groundbreaking contract in its size and scope¹ . In the transportation sector, the Fluor Corporation is the private partner to the city of New York in a $1.2 billion Design-Build-Operate (DBO) transaction for the new passenger terminal at JFK international airport, making it one of the largest PPP airport transactions to date.

3. New Legal Provisions in Support of PPP: Water Sector Review

In the water and sanitation sector alone, the demand for investment is estimated at $300 to $400 billion dollars over the next 10 years. In addition to the $200 billion allocated by the Congress, the federal government is committed to providing an additional $2 - 3 billion per year via State Revolving Funds to encourage public-private financing in partnerships to meet U.S. Environment Protection Agency (EPA) standards and requirements. Recently a new piece of legislation was introduced, the "Water Investment Act of 2002, " which authorizes $35 billion dollars over a 5-year period in state revolving fund programs, encouraging governments to consider "public-private partnerships or other cooperative partnerships" as a desired arrangement for obtaining the federal funds. Thus, local government must use a "market test" to determine if private finance can be preferred to publicly financed and implemented projects. This new legislation is dramatic in that it improves the incentive structure to promote more competition and attract capital, management, and technology in a sector often viewed as difficult to commercialize.

Another debated legislative change in support of public-private partnerships is aimed at removing the state volume caps on tax-exempt private activity bonds for drinking water and sanitation facilities. This other form of financial incentive will stimulate capital improvements, which can be financed through tax-exempt borrowings, as it has been the case in solid waste-to-energy projects.

Additionally, instead of the typical 5-year operation and maintenance (O&M) contract transactions in the water sector, which have been traditionally customary in many U.S. cities, today, local governments and utilities can enter into 20-year well-structured contracts using various PPP techniques (DBO, Concessions, etc.) thanks to new regulatory and tax incentives. Simultaneously, new federal legislation is making it easier to construct these long-term public-private partnerships through simplified contract operations. With most water and sanitation utilities continuing to be publicly owned, these changes will allow for greater involvement of the private sector and greater risk sharing between investors and local governments. This should lead to the unique case of increased investment, improved efficiencies, and lower tariffs.

4. Greater Efficiencies in PPP Implementation

The time it takes private sector providers to achieve the performance targets and objectives of public-private partnerships arrangements is also decreasing in the U.S. In the case of Thames Water's 20-year O&M contract in the water distribution system for the township of Edison, New Jersey, all environmental, financial, water quality and labor targets were fully achieved in 4 years. With the $4.8 million concession fee paid to the government, the company was able to decrease the discolored water complaints by 72%, increase customer service through the use of IT platforms, while putting a 5 year freeze on residential rates, all of which exceeded the terms set out in the contract. Another example is an incentive-based management contract between United Water and the city of Milwaukee to improve the quality of water services. By realizing greater efficiencies, United Water earned two annual $50,000 bonuses for exceeding the indicated performance levels for water quality.

The cost savings achieved through public-private partnerships are increasing. Varying from sector to sector, the rate of cost savings from utilizing a PPP technique in public service provision grew by 5-15% over the past ten years. In case of Camp Dresser & McKee 's DBO agreements with the city of Seattle, the cost savings to the city exceeded 40% in capital costs for the construction of a water treatment facility.

Greater consumer focus brings greater efficiencies. In municipal services, the city of Seattle is leading the way with innovative practices involving citizen participation in PPP project identification and implementation. The city has made a priority to clarify the PPP process to the public, which dramatically improved the chances of success in a range of municipal PPP transactions. Using primarily e-technologies (listserve and city website), as well as voicemail and television channels, the public has been involved in identifying problem development areas for the city, suggesting partnerships solutions, calculating the public benefits, and assessing the related benefit and impacts from the use of PPP policies.

5. Innovations in PPP Projects

To achieve the greatest benefits from engaging in a PPP transaction, the private sector is competing against each other in offering more and more creative solutions to public problems. Often these innovations are technical, through advanced engineering design, use of technology; and financial, focusing on unique financial packaging and risk sharing. The case of ECO Resources entering into a PPP contract with El Paso County Water Authority to construct, operate and maintain a reverse osmosis plant, demonstrates how creative approaches result in a success of a transaction. To be able to keep the same rates for customers, ECO Resources eliminated 17 low-quality wells, which in turn resulted in lower electricity costs. This PPP arrangement received NCPP's² transaction award in 2001 for cost savings, operational effectiveness, environmental compliance, and effective labor management.

In the transportation sector, recent innovations include the new public-private partnerships in the Intelligent Transportation Systems (ITS). Now, state and local agencies commonly barter access to public rights-of-way with telecommunication companies that desire to install fiber optic cables in return for receiving a certain amount of bandwidth. This fosters the creation of increased connectivity between urban and rural areas in the U.S. One ITS e-Public-Private Partnerships, is "Connecting Minnesota." In the same state, a public-private partnership initiative involved deployment of a Roadway Weather Information System, and Advanced Traveler Information System, as well as the generation of data useful for maintenance and construction operations. In this way, PPP is being "pushed down" to the local level as much as possible.

One of the recent financially innovative approaches to PPP involves the use of joint design and accelerated construction projects. The NM44 highway construction and contract in Santa Fe, New Mexico, was developed and constructed in 15 months. In this project, each partner negotiated their participation in the stage of the project they can control and maximizes their productivity and profit.

Some projects achieve success through effective packaging of services. In the unique case of the University of Maryland, College Park, with over 35,000 students, the university outsourced the operation and maintenance of its energy and utility infrastructure services to Trigen-Cinergy Solutions. In this PPP arrangement, Trigen is responsible for providing water and electric generation on university campus, as well as procurement of natural gas. As a result of this transaction, the university will save $120 million dollars and benefit from the higher reliability of utility services, reduction of regional emission of nitrogen oxide, and train its students in the field through a $2 million academic program established by Trigen. This is a unique PPP approach involving private sector participation in the activities of a publicly funded university.

6. Tri-sector Partnerships: Private Investment, Public Objectives, and Community Participation

Partnerships are redefining their meanings by involving all public and private sector actors, including non-governmental organizations, and civil society. Some of the more recent examples of Tri-Sector Partnerships include Houston's Neighborhood Oriented Government (NOG), designed to bring together businesses, government, and citizens in identifying and solving community problems; and Indianapolis' Violence-Free Zone Initiative, launched to mobilize the community, government and business resources in providing affordable housing, urban renewal, crime prevention, and unemployment reduction through social counseling in low income communities. Other social services, such as youth counseling, education, safety, traffic control, business development and others are also being provided in the U.S. through NGO's and community organizations in most areas of the country.

7. PPP for PPP

An interesting recent case of public-private partnerships exists in the ICT sector. The Commonwealth Competition Council (The Anti-Trust Regulator) entered into a partnership with Virginia Interactive Corporation to design and implement a web portal project with the objective of bridging the gap between government and businesses in planning and implementing public-private partnerships. This PPP initiative is in itself a vehicle to promote public-private partnerships at the state and local level. The web portal offers exchange of information, e-Gov toolkits, and best practices at no cost to the Council. What better way to promote PPP than using PPP in practice?

8. PPP Future in the US

Greater opportunities for public-private partnerships in the US and effective enabling environment are driving the creation of better and more transactions. Across the sectors, the performance targets are met and exceeded in short periods of time, allowing governments to rip full benefits from PPPs. Technically experienced private sector partners are now more capable of offering better services at lowest cost. Having tested the PPP success in traditional sectors, governments are realizing the need to further liberalize the regulatory control of public-private partnerships and bring PPPs to less customary sectors of economy and society, through effective tri-sector partnerships.

¹NYSE Magazine, July 1, 2002
² National Council for Public-Private Partnerships