State and regional transportation agencies in the United States have experimented with public private partnerships (PPP) for a variety of reasons. These include risk transfer, lower life-cycle costs for new or upgraded transportation facilities, greater budgetary certainty about both construction and operating costs, and access to private capital and expertise. One of the challenges in implementing PPPs is often a lack of clarity about the relative priority of these goals. This challenge is compounded when multiple agencies – perhaps with conflicting priorities – share responsibility for procurement and oversight of a PPP project.

In contrast to other jurisdictions, like the United Kingdom, France or Canada, US transportation projects (whether PPP or otherwise) are often subject to the overlapping jurisdiction of federal, state and local government agencies. To date, there has been no tradition of developing a national programme of infrastructure development in a top-down fashion, using best practices or a centre of excellence that would lead to standardised procurement practices for PPP projects, or even criteria for what types of projects should be delivered as PPPs. Such an integrated, centralised system is unlikely to arise, and may not even be desirable. So for private developers of PPP projects in the United States, it is critical to understand the political nuances of each project.

In California, PPP transportation projects often involve joint sponsorship from agencies at different levels of government. For instance, the $1 billion Presidio Parkway project to replace and upgrade the southern access highway to the Golden Gate Bridge was successfully procured jointly by the California Department of Transportation (Caltrans) and the San Francisco County Transportation Authority (SFCTA), with approval from the California Transportation Commission and with financial contributions (to be applied toward a portion of the availability payments to be paid by Caltrans to the project concessionaire) from other local agencies and special districts. This system is designed to achieve maximum transparency, to create multiple opportunities for project review (and public comment), and to access any necessary public funding from the widest variety of available public sources, with support from local stakeholders.

The Los Angeles County Metropolitan Transportation Authority (LA Metro) is procuring two key PPP projects this year in vastly different ways: the Accelerated Regional Transportation Improvements (ARTI) package of highway improvements and the proposed Sepulveda Pass Corridor (SPC) improvements. This sort of experimentation indicates a willingness to tailor projects’ procurement processes to differences in scale, time-frame, technology, level of design advancement, openness to innovation, and environmental entitlements. In so doing, LA Metro hopes to lower life cycle costs for these and other projects.

More critically, LA Metro seeks to speed up project delivery by entering into availability-payment backed concessions now that can unlock the future value of expected sales tax revenues that are dedicated under Measure R and other local measures in support of highways and transit. PPP projects will form a key part in LA Metro’s plan to deliver 30 years of projects over the next decade. The plan includes road and highway improvements, dedicated bus-ways, expansions to the region’s light rail and subway networks, and improved connections between LA Metro’s transit system and Los Angeles International Airport (LAX), MetroLink commuter trains, and the proposed California High Speed Rail project. Some of these will be procured as PPPs.

One benefit of a PPP that transfers risk to the private sector is to lower overall life cycle costs. Government, through availability payments and so on, or the users of the service, through tolls or fares, or a combination of methods, can then assume the burden of these costs. LA Metro says “We are looking at PPPs as a means to accelerate delivery of our much-needed transportation projects. If we can use up-front private investment to finance some of the projects, we will likely see construction cost savings due to today’s favourable bidding environment, efficiencies in alternative delivery and/or management strategies, congestion mitigation, earlier achievement of CO2 emissions reductions and earlier completion of planned rail-bus-highway transportation network.”

The programme in Los Angeles is immense. LA Metro is looking to PPP to accelerate the implementation of highway and transit projects funded by Measure R, the $0.005 sales tax for transportation projects throughout the county that took effect in July 2009 and is projected to raise $40 billion over the next 30 years. With the flexibility to leverage Measure R and other local funding and to pursue project activities in parallel with potential future bond financings, LA Metro may be able to procure more than $20 billion in assets over the next decade. These projects would otherwise be built as revenue flows in over three decades.

By building projects more quickly, LA Metro will benefit from lower financing and construction costs and avoid future inflation. Users will also realize the network effect of multiple, complementary projects coming on line together within a relatively short time frame, making the entire system more effective and efficient to reduce congestion and increase mobility throughout Southern California and increasing the base ridership and traffic served by each project.

The ARTI is now in active procurement as a PPP and has received significant interest from bidders and potential lenders and contractors. The Sepulveda Pass Corridor project (SPC) is a longer-term prospect. LA Metro received seventeen responses to a May 2013 request for information (RFI) on SPC, which would be a significantly larger and more complex multi-modal project that is in the preliminary stages of planning and development. The contrasting procurement and financing concepts for ARTI and SPC illustrate how private sector involvement can take a variety of forms under the broad umbrella of PPP. LA Metro hopes to take advantage of this flexibility to deliver project benefits – including reductions of congestion and pollution – to taxpayers and users more quickly than it could with conventional funding structures.

Accelerated Regional Transportation Improvements

ARTI is a bundle of six distinct highway projects located throughout Los Angeles county, the biggest component of which – capacity enhancements on I-5 between SR-14 and Parker Road in the form of truck lanes and either high occupancy vehicle (HOV) or high occupancy toll (HOT) lanes – would improve traffic flow between Los Angeles and Santa Clarita, now the third largest city in the county, with a projected population increase of 50,000 residents by 2035.

The other components of ARTI are pavement rehabilitation on the same 22km stretch of I-5, the SR-71 gap closure between I-10 and Mission Boulevard, the SR-71 gap closure between Mission Boulevard and Rio Rancho Road, sound wall construction along SR-170 in the San Fernando Valley and I-405 near Stagg Street, and sound wall construction along I-210 in Pasadena and Arcadia. Cost estimates for ARTI range from $730 million to $750 million.

LA Metro issued a request for qualifications (RFQ) and is expected to issue a request for proposals (RFP) to a shortlist by the end of this year. The RFQ solicitation phase for ARTI closed on 19 July 2013 and LA Metro has now shortlisted four consortiums on the project: Accelerate LA, Accelerate Los Angeles, LA Accelerated Mobility Partners and LA Mobility Partners.

ARTI would be procured using a design, build, finance, operate, maintain (DBFOM) concession, with the project receiving annual availability payments. The public funding contribution would be split between Caltrans for the operations and maintenance portion, preliminarily estimated at $100 million, and LA Metro for capital improvements and other project costs. If the modification from HOV to HOT lanes is approved for the I-5 component, tolls for vehicles with fewer than three passengers would bring an estimated $1 billion in additional revenue over the 30- to 35-year contract term and offset LA Metro’s funding contribution.

Each of the ARTI components has already received environmental clearance and nearly all required funds are allocated to the project, but those funds are not scheduled to be available until later in the life of Measure R. By packaging these highway improvements under one PPP concession, LA Metro can develop these geographically unconnected highway improvement projects more quickly. In effect, rather than waiting until it has funds available to build these projects, LA Metro can attract project financing from a concessionaire as a bridge to availability payments that LA Metro will pay from future tax revenues earmarked for the project.

While this bundling approach should be faster than a pay-as-you-go approach, and a concession should deliver risk sharing and accountability benefits, ARTI would not generate the economies of scale typically associated with a PPP project. The packaging of these discrete elements also results in a more conventional procurement process, in which private contractors would bid on a project of predetermined scope based on well advanced design standards.

Map of the Accelerated Regional Transportation Improvements project

Source: LA Metro

Sepulveda Pass Corridor

SPC is one of two multi-modal projects that LA Metro is considering for procurement with a PPP. LA Metro, working with Caltrans, is now completing a multi-year project of widening the I-405 Freeway through the Sepulveda Pass, bracketed by interchanges with the US-101 and I-10 freeways that are among the five most congested freeway interchanges in the country. Sepulveda Pass, which in 2010 handled an average of 374,000 vehicles a day, was ranked as the third most congested highway segment in the United States. But the widening will be insufficient to relieve current and future congestion.

Accordingly, SPC could add new managed or tolled highway lanes plus rail or other transit lines – possibly sharing a new tunnel under the Santa Monica Mountains – to relieve congestion in the roughly 50km highway corridor running between the northern San Fernando Valley and LAX, including the 21km stretch of I-405 that is now being widened. In an initial study completed last year, LA Metro identified six possible scenarios using different combinations of bus rapid transit, rail, managed freeway lanes, and a tolled highway/transit tunnel. Depending on which elements it ultimately incorporates, the indicative costs for SPC may range anywhere between $8 billion and $20 billion.

LA Metro issued an RFI in conjunction with an industry forum on 1 May 2013, for which responses were due on May 20. LA Metro expects to present its recommendations to the LA Metro Board by year-end, potentially issuing an RFQ in late 2013 or early 2014.

Compared to ARTI, SPC is a much more ambitious project, the economic feasibility of which has yet to be determined. The two-stage procurement process conceived for SPC, in contrast to the ARTI procurement, reflects the preliminary nature of the project development and the optionality that remains with respect to project design, right of way and scope.

A project development agreement (PDA) may be awarded through a competitive process in the first phase and cover project scope definition, planning and design, technical studies for environmental clearance, permitting and regulatory processes, and optimization of risk allocation. The winning bidder on the PDA would then have first negotiation rights for a concession agreement (CA) to cover the second phase, for the construction and operation of the project. Like ARTI, the project would be executed on a DBFOM basis, but for SPC the private contractor or concessionaire would also be involved in the pre-development work before construction. This should allow for greater innovation and cost savings – with all components optimised for economic feasibility and risk reduction – compared to a traditional procurement or more advanced design-build project.

SPC is envisioned as self-financing, with the private concessionaire recovering its costs from user-generated revenue (a combination of tolls from the managed lanes and farebox revenues from the dedicated bus or rail line sharing the right of way). LA Metro’s preliminary forecasts show potential annual revenues of $500 million to $800 million from tolls and transit fares.

While multi-modal, SPC nonetheless consists of a single, large project (as opposed to several smaller unrelated projects bundled together in the case of ARTI), creating potential economies of scale, and also allowing LA Metro to leverage tax revenues to start the project much sooner than it would be able to under pay-as-you-go. Similarly, in the long term, LA Metro contemplates developing a new 101km tollway/highway through Los Angeles and San Bernadino counties between Palmdale and Victorville with a potential for high-speed rail, called the High Desert Multi-Purpose Corridor, as a PPP project. Because it attracts innovation and offers economies of scale, the PPP model may be well suited for these types of large projects.

Policy objectives and benefits of PPP

LA Metro’s exploration of PPPs on ARTI and SPC aligns with its broader policy objective of accelerating the development and implementation of Measure R projects. PPP opens up additional financing avenues like strategic investment and private finance, which in turn enables LA Metro to leverage revenues from Measure R and other public funding sources to lock in lower hard costs now and lower its overall cost of capital. The enhanced cash flows also enable LA Metro to pursue projects in parallel and to complete projects sooner than if they were tied to the availability of public funds over the next three decades. For example, LA Metro anticipates that a PPP procurement for ARTI (with the modification for HOT rather than HOV lanes) would allow construction to be completed by 2019, at least a decade earlier than it otherwise could be.

Beyond the upfront benefits of faster delivery and lower overall costs, PPP offers life cycle benefits by allocating construction, operations and maintenance risks to the same entity. This encourages a focus on long-term project quality and operations and not just reduction of up-front construction capital costs. In a self-financing project such as that envisioned for SPC, performance-related concessions also create a profit incentive that should lead to operational efficiencies.

Private sector involvement

The current ARTI proposal involves a more conventional procurement process, in which the public entity delineates the scope of work and performs much of the groundwork, including environmental studies, permitting, obtaining rights of way, and preliminary engineering work. The private sector’s involvement begins at a later stage, making it easier for bidders to estimate costs and for the public entity in turn to compare bids. On the one hand this provides some clarity and standardisation, which helps because public funding will be disbursed throughout the life cycle of the project. On the other hand, the predetermined project scope also leaves limited room for innovation. One likely result is that the ARTI bids will fall within a relatively narrow range.

Nonetheless, this approach makes sense for a project like ARTI, where the needs are discrete and clearly defined. In this way, the PPP approach would provide LA Metro with a superior result than pursuing the ARTI projects on a pay-as-you-go basis, even if the economies-of-scale benefits are of a smaller magnitude than those of a cohesive, multi-pronged project like SPC. It also insulates LA Metro from cost escalation risks, whether from change orders and construction cost overruns or inflation.

Under the procurement process for SPC each bidder in the pre-development stage would submit a proposal that includes several possible project scenarios, making cost comparison among bids more difficult. However, the risk is offset by the fact that the project is to be economically feasible on a stand-alone basis without public subsidy, with the private partner responsible for recovering costs and earning a reasonable return through its operation of the project.

Could Los Angeles be a model for California?

The two projects vary greatly in size and scope, but blending some of the concepts from the procurement and financing of ARTI and SPC could further enhance the opportunities for private sector involvement and corresponding benefits to the public. For example, allowing ARTI bidders to propose alternative planning and design concepts would produce better project outcomes.

If the HOT lane alternative is approved for the I-5 capacity enhancements, a modified financing structure that grants the private contractor a concession on the toll revenues and lowers the total amount of LA Metro’s availability payments would create an added profit incentive for the contractor to minimise project costs, though the attendant risks could adversely affect the project’s finance plan.

In the case of SPC, LA Metro is casting a wide net for creative ideas on overall planning and design and will likely try to preserve its ability to draw on all of those ideas as the project concept is refined and implemented. The two-stage procurement process envisioned for SPC favours having the same contractor involved from pre-planning through operations and gaining efficiency.

It may not produce the lowest cost option, but that trade-off should result in offsetting benefits of risk transfer, higher project quality, and innovative thinking from the private sector. LA Metro may also consider paying for rights to use ideas from unsuccessful RFP bids. It may also be useful to structure the RFQ and/or the RFP in multiple steps to enable LA Metro to retain and incorporate concepts proposed in earlier stages that it favours, then issue revised requests that reframe the project scope, accordingly, resulting in streamlined bids that allow more direct cost comparisons. For that project, the road-map remains to be written.

Both projects will require close collaboration between LA Metro and Caltrans. If ARTI’s procurement attracts strong bids and an attractive concession, bringing the project in on time and under budget, then it will serve as a first-rate template for future, much larger PPP projects contemplated by LA Metro, like the I-710 Corridor improvements and the SR-710 North Gap Closure. While PPP projects generally deliver certain common benefits, comparing the current concepts for ARTI and SPC reveals that the term PPP covers a variety of procurement and financing structures.

Allan Marks is a partner, and Erin Hyun and Tracey Steele are associates, in Milbank’s Los Angeles office.