A public-private partnership for a transportation project means a public agency signs a contract with a private entity to provide financing, complete the design, and build a public project, such as a new or widened state highway. Sometimes, the private entity can also be responsible for maintenance and/or operations of a facility for some years into the future. The private entity is typically compensated through either tolls or so-called “availability payments” from the public agency.
Although historically more typical in buildings and other infrastructure, P3s (as they are known) have encountered serious difficulties in California and elsewhere for transportation projects.
The first such California project involved construction of Route 91 toll lanes for a ten mile section in Orange County. The design-build approach increased the cost from $57 million to $130 million. A non-compete clause in the lease agreement was intended to ensure that tolls would be adequate to pay for the increased cost as well as a return on investment and profit. As a result, the public agency was prohibited from improving transportation facilities elsewhere in the corridor to reduce congestion. Ultimately, the public agency bought the project back for $207 million and has been operating it successfully ever since.
The next P3 attempt was construction of the Route 125 toll road in San Diego County. Construction costs increased from $360 million to $843 million and use of the toll facility was less than projected. The private consortium for the project filed for bankruptcy, becoming the first public project to default on the federal government’s TIFIA loan program. Ultimately, SANDAG bought the project and it is now operating it successfully as part of the public roadway network in San Diego County.
The latest P3 attempt is the Presidio Parkway project, which repaired a 1.6 mile section of Doyle Drive which connects the City of San Francisco to the Golden Gate Bridge. It was to be a two phase project, each consisting of four competitively bid construction contracts. Phase 1 was completed with some of the contracts being awarded 40% under the estimated cost during the economic recession.
However, in June 2009, Phase 2 was halted before it began so it could be converted to a P3 project. What had been a fully funded $473 million project became a $1.1 billion P3 project which will siphon money out of the State Highway Account for the next 30 years. The P3 contract was signed by representatives of the Schwarzenegger Administration on January 3, 2011, just hours before Governor Jerry Brown took office.
The Legislative Analyst concluded that the cost estimate justifying the P3 method “tended to favor a P3 procurement.” The LAO analysis found that “utilizing a different set of assumption would result in the cost of the Presidio Parkway project being less – by as much as $140 million in net present value terms – in the long run under a traditional procurement approach than the chosen P3 approach.”