Out of Control Policy Blog

Denver RTD Eyes Transit PPPs

Though they've been getting all the headlines lately, it's useful to keep in mind that public-private partnerships (PPPs) in transportation aren't just for highways:

RTD took one giant leap and one baby step Monday toward corralling the rising costs of its $6.2 billion FasTracks program.

A board committee recommended hiring a financial advisory team from JPMorgan and Goldman Sachs to put together bid packages under which private companies could take over all or some of the new commuter-rail transit corridors that are part of FasTracks.

RTD staff believe it could save hundreds of millions of dollars under the plan.

. . . .

RTD's staff believes that letting international construction and finance companies develop the rail projects serving the northern half of the metro area has the greatest potential for making up a $670 million deficit in the 12-year program.

The advisory team is represented by Bob Doherty of JPMorgan's Denver office and Tim Romer, son of former Gov. Roy Romer, who is with Goldman Sachs' Los Angeles office.

The team has worked on some of the largest private conversions of transportation projects in the nation, including long-term concession leases under which foreign partnerships operate the Indiana Toll Road and the tolled Chicago Skyway.

. . . .

If approved by the full board in two weeks, the Goldman/JPMorgan team would be paid a $50,000 monthly retainer to devise the most cost-effective package of bids to save RTD money on the program. It could hit the market in a year to 18 months.

Full article here.

While transit PPPs share some similar advantages to highway PPPs (such as transferring risk from the public to private sectors, improving performance, harnessing private sector expertise and innovation, faster delivery of new capacity, among many others), the key difference is that transit PPPs are premised upon subsidy minimization, as opposed to revenue maximization, as Federal Transit Administration Chief Counsel James Horner explained in his testimony to the House Subcommittee on Highways and Transit earlier this spring (emphases mine):

What are Transit PPPs? As applied to transit [...] PPPs are essentially a form of procurement for new capacity. Transit PPPs contemplate a single private entity, typically a consortium of private
companies (a "private partner"), being responsible and financially liable for performing all or a significant number of functions in connection with a project.

By agreement with the private partner, the project sponsor shifts final design and other short or long-term risks to the private partner, and the private partner receives the opportunity to earn a financial return commensurate with the risks it has assumed. In order for a PPP to work, the private partner must assume meaningful financial risk in some form–for example, through an equity investment, liability for indebtedness, a fixed priced contract, a long-term warranty, assumption of ridership risk, or a combination thereof. As I will explain below, the effectiveness of a transit PPP depends on the scope of responsibility and degree and kind of risk assumed by the private partner with respect to the project.

Economic Benefit. Because substantially all transit assets are cash-flow negative (and transit PPPs rarely, if ever, contemplate the escalation of fares by a private operator to increase revenues), the financial opportunity for transit agencies is the avoidance of costs–an opportunity known as "subsidy-minimization." The concept of subsidy minimization (and how transit PPPs differ from many highway deals) may be illustrated as follows: In the case of a transaction for an existing highway–a cash flow positive asset–the sponsoring agency asks the private sector "How large a concession payment will you pay me?" In the case of a transaction for new transit capacity–a cash flow negative asset–the sponsoring agency asks the private sector "How small a subsidy will I pay you?" Private operators then compete for the opportunity to provide service not by bidding up the concession payment but by bidding down the subsidy. The financial return to the private builder-operator, if any, is the difference between its cost to deliver and operate the system, on the one hand, and the system's total revenues, including public subsidy, on the other. The public agency sponsoring the project may pay the subsidy to the private operator in the form of "availability payments" over a term of years, subject to the system being delivered and operated–made "available"–according to performance requirements negotiated and approved by the project sponsor. The subsidy minimization model is being used with powerful effects for multiple types of infrastructure.

In transit, perhaps the most compelling example of a transit PPP is the first minimal operable segment (or "MOS-1") of the Hudson-Bergen light rail line in New Jersey. That project was delivered, and is now operated, by Washington Group International pursuant to a design-build-operate-maintain (or "DBOM") procurement by the New Jersey Transit Corporation ("NJTC"). The partnership between NJTC and the Washington Group resulted in the project entering revenue service five years ahead of schedule at substantial cost savings–by some estimates, totaling approximately $345 million–as against the cost that would have been paid under a conventional design-bid-build procurement.

Leonard Gilroy is Director of Government Reform


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