Risks and Rewards of Transportation Public-Private Partnerships (P3s), with Lessons from Texas and Indiana
September 19, 2017
Risks and Rewards of Transportation Public-Private
Partnerships (P3s), with Lessons from Texas and Indiana
A public-private partnership (P3) is a contractual
estimated, and will fail to generate the expected revenue.
arrangement between a public agency and a private
Transferring these and other risks to the private sector is not
company for the company to assume substantial
necessarily a money saver, as the private partner requires
responsibility for some or all of the planning, design,
compensation for assuming them, but the risk transfer may
financing, construction, operation, and maintenance of a
provide greater certainty for the public sector.
transportation facility. P3s have been used for highways,
airports, transit systems, and other types of facilities.
Concerns with P3s include the types of projects involved,
Statements by the Trump Administration have indicated
the risks retained by the public sector, and the
that P3s will be an important part of a forthcoming
administrative costs borne by the public sector. Private-
infrastructure initiative.
sector investors are drawn to projects that have the greatest
potential financial returns, adjusted for risk. P3s that are
There are many arrangements P3s can take, but the two
reliant on tolls or other user fees, therefore, are unlikely to
most often discussed are the following:
be suitable for airports with little patronage or roads that
carry relatively little traffic but provide important
Design-Build-Finance-Operate-Maintain (DBFOM), in
connections between more heavily traveled segments.
which the private sector takes on most facets of
However, P3s in these areas can be based on state and local
constructing, operating, and maintaining a new facility,
government availability payments.
including the up-front costs. The private-sector partner is
repaid by facility users through fares or tolls, or by
Although some risks are typically transferred to the private
availability payments from a state or local government
sector in a P3, the public sector may retain significant risk.
agency over the life of a contract.
In some P3s, the public sector retains revenue risk,
accepting responsibility to repay creditors if the project fails
Long-term lease agreements, under which the private
to generate anticipated revenue. Poorly written contracts,
party undertakes to run an existing facility for a specified
weak private-sector partners, and external events may force
amount of time. The private partner pays the public sector a
the public sector to renegotiate the P3 contract or to assume
concession fee and agrees to operate and maintain the
project ownership. And many transportation P3s involve
facility to prescribed standards. In return, the private
federal loans through the Transportation Infrastructure
company typically collects tolls or other user fees to pay
Finance and Innovation Act (TIFIA) program that expose
debt holders and to generate a return on equity investment.
federal taxpayers to losses.
Risks and Rewards of P3s
P3s typically entail complex and costly legal, financial, and
There are three main potential benefits of P3s. First, P3s are
technical issues that require public oversight over the
a way to attract private capital, including foreign capital, to
course of a long-term contract. This may require extensive
invest in transportation infrastructure. This can be
staff time and hiring outside experts.
particularly important when public sector budgets are
heavily constrained. P3s, therefore, can spur the building of
Lessons from Two P3 Bankruptcies
transportation facilities earlier than would be the case if left
Many P3s have been successful, but some have not. Among
to the public sector alone.
these are two highway DBFOM partnerships—State
Highway 130 (Segments 5-6) in Austin, TX, and Interstate
Second, P3s may be able to build and operate transportation
69 (Section 5) in Indiana. These two bankruptcies reveal
facilities more efficiently than the public sector through
some of the risks these partnerships pose, but they also
better management and innovation in construction,
highlight some of the rewards the public can receive despite
maintenance, and operation. Private companies may be
the problems.
more able to consider the full life-cycle cost of investments,
whereas public agency decisions are often tied to short-term
Texas State Highway 130
budget cycles.
Designed to relieve congestion on Interstate 35, SH-130 is a
90-mile, four-lane toll road on the east side of Austin, TX,
Third, through P3s the public sector can transfer to the
connecting I-35 in the north and I-10 in the south. In 2007,
private sector partner many of the risks of building,
the Texas Department of Transportation (TxDOT) entered
maintaining, and operating transportation infrastructure.
into an agreement with a concessionaire, the SH 130
One major risk is that construction will cost more and take
Concession Company, to design, build, finance, operate,
longer than foreseen. Another is that a facility to be
and maintain a 40-mile extension to the existing 50 miles of
financed by tolls or user charges will have less demand than
SH 130 known as segments 5 and 6. The agreement
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Risks and Rewards of Transportation Public-Private Partnerships (P3s), with Lessons from Texas and Indiana
specified a 50-year concession from the opening of the new
Interstate 69 in Indiana
segments, which occurred in 2012.
The intent of the I-69, section 5 project is to upgrade a 21-
mile stretch of four-lane highway to Interstate Highway
According to the Federal Highway Administration
standards as part of a program to extend I-69 in Indiana
(FHWA), the $1.3 billion project was primarily financed by
from Kentucky to Indianapolis. Section 5 is southwest of
the concessionaire with $686 million in senior bank loans,
Indianapolis, from Bloomington and Martinsville. Among
$210 million in private equity, and a $430 million federal
the intended improvements are a third lane within urban
loan from the TIFIA program. Interest payments on the
areas and four new interchanges and overpasses.
TIFIA loan were scheduled to begin in June 2017, with
final maturity of the loan in June 2047.
The Indiana Finance Authority (IFA) awarded a 35-year
DBFOM concession to I-69 Development Partners in
Since opening in 2012, the 40-mile toll road extension has
February 2014. According to FHWA, the project was to be
had lower traffic volumes than forecast and, therefore,
financed with $244 million in private activity bonds
generated much less revenue than the concessionaire
benefiting from a federal income tax preference and $41
needed in order to service its loans. SH 130 Concession
million in private equity. The state was to pay $93 million
Company filed for Chapter 11 bankruptcy in March 2016.
for design, right-of-way acquisition, utility relocation, and
A reorganization plan was approved by the bankruptcy
environmental mitigation, and four milestone payments to
court in May 2017.
the concessionaire during construction totaling $80 million.
Several risks were transferred to the private partner by
The concessionaire was to be repaid by state availability
TxDOT, including demand risk, construction cost risk, and
payments over the life of the contract. The 21 new miles of
operations and maintenance cost risk. Despite the problems
Interstate Highway were to open by October 2016.
of the original owner, SH-130 was built and in operation
The concessionaire experienced numerous problems,
much sooner than if the state had relied on its own funding.
including slow construction, unpaid contractors, and
Moreover, TxDOT received from the concessionaire an
bankruptcy of one of the firms in the partnership. The IFA
upfront payment of $142 million and a revenue-sharing
terminated the contract in August 2017 and reimbursed
agreement entitling it to 4.65% of gross revenues.
bondholders. At this time, according to reports, the project
Operation of the toll road was not interrupted by the
was two years behind schedule and 60% complete. The IFA
bankruptcy. However, the condition of the road may have
will issue new bonds to finance the project, which will now
suffered as financial problems mounted. Repairing the road
be directly controlled by the Indiana DOT. The new
is estimated to cost the new owners about $90 million.
estimated date of completion is August 2018.
The TIFIA loan was secured by a lien on project revenues,
The main advantage of the P3 contract was the capital
but the lien was subordinate to the bank loans. In
raised by the concessionaire, possibly allowing the project
bankruptcy, due to a statutory requirement known as the
to move ahead more quickly than if the state had pursued
“springing lien,” TIFIA debt claimed parity with other
traditional financing and delivery methods. The P3 also
creditors. According to the U.S. Department of
transferred two main risks to the private developer,
Transportation (DOT), the SH-130 TIFIA loan was
construction cost and operations and maintenance cost.
converted to 34% of the new company that will operate the
In a P3, the public partner relies on the expertise and
toll road until 2062, a payment to the government of $15
financial stability of the concessionaire. Reports have
million, and remaining debt of $87 million.
noted, however, that the winning bidder on the I-69 project
TxDOT has argued that state taxpayers are not at risk due to
had little highway experience in the U.S. and underbid
the way in which the P3 contract was written. There is risk
others by a significant amount. Presumably the state could
for federal taxpayers, however, because of the federal loan
have found another private partner to fulfill the obligations
to the project. It is not known at this time whether the
of the contract, but this could have delayed the project
federal government will recoup all the money it loaned to
further and required additional funding from the state. The
the original toll road company. Conceivably, the federal
construction delay has also led to safety concerns, as the
government might receive more money from the sale of its
pre-existing highway remains open to traffic.
equity stake than it anticipated from repayment of the loan.
According to one source, DOT’s equity stake in the new
Another lesson is that P3s are not necessarily cheaper for
the state. There is typically a price to transferring risks to
toll road company currently could be worth $600 million,
the private sector. According to the IFA, the state takeover
more than the original loan. However, the value of DOT’s
will bring the cost of the entire project, including
share in the company will be determined by market
maintenance, to $560 million, whereas under the P3 the
conditions when DOT attempts to sell. In this case,
cost would have been $590 million. However, the state now
therefore, the federal government has swapped its loan
assumes the risk of construction and maintenance cost
default risk for market risk. According to reports, DOT will
overruns. The state also has borne the costs associated with
attempt to sell its share in the company when the repair
establishing and subsequently canceling the P3.
work is complete, which could take a year.
William J. Mallett, Specialist in Transportation Policy
IF10735
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Risks and Rewards of Transportation Public-Private Partnerships (P3s), with Lessons from Texas and Indiana
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