Reducing Risk in Public-Private Partnership Contracts

Abstract

In an effort to address financial constraints and environmental concerns states have increasingly turned to a combination of un-tolled (HOV) and tolled (HOT) lanes. Public-private partnerships (3Ps) are a popular mechanism for this more sustainable approach to highway infrastructure that couples environmental sustainability (efficient utilization of existing lanes, less congestion) with financial sustainability (private investment). This chapter offers an approach to 3P contract writing for HOV/HOT facilities that is structured by a stakeholder analysis of actors in the project accountability environment. By analyzing two Virginia 3P highway projects, the chapter shows it is possible to build into a contract a set of terms and conditions to enhance the likelihood of meeting the goals of multiple stakeholders. By necessity, such contracts cannot specify precise monetary returns and other stakeholder benefits, but they can be written to include trade-offs to minimize losses to one party at the expense of another.

Structuring Public–Private Partnerships for Public Value: Analysis of Two Transportation Infrastructure Case Studies

“…The public value concern regarding accountability has to do with the public sector transferring decision-making authority or the responsibility for delivering public services to private firms (Forrer et al, 2010; Hodge & Greve, 2017; Milward & Provan, 2000, 2003; Skelcher, 2010; Wu et al, 2016). As noted by Mayer et al (2019), government functions are “accomplished indirectly and at arms’ length” but “while government agencies can transfer power to the private sector, they cannot transfer legitimacy and accountability in the same way” (p. 179). Accountability has traditionally been viewed through a hierarchical, principal-agent lens.…”

“…Kearns (1996) calls this network the accountability environment, where any number of institutional factors and accountability perspectives collide to form emergent accountability. PPPs fit well within a network of accountability where the contractual agreement between partners provides the mechanism that defines emergent accountability (Mayer et al, 2019).…”

“…Ensuring a process in which stakeholders are truly interdependent requires substantial up-front effort to establish a process that ensures transparency and supports accountability to partners and the public (Battaglio & Khankarli, 2008; Mayer et al, 2019). In both cases, this involved working with each other and the public to identify and define the problem and society’s needs.…”

“…Both agreements include an agreed upon performance point system that applies 5 years after the service commencement date. The performance point system is an example of a built-in provision that affords flexibility to each sector, and “recognizes the inevitability of breaches” (Mayer et al, 2019, p. 184). It ensures that partners fulfill their responsibility and are accountable by providing clearly stated goals and objectives associated with each partners’ responsibilities, beginning with increased monitoring by VDOT, remedial plans, and termination if conditions are routinely not being met or are in dispute.…”

“…As traditional public funding mechanisms come up short, PPPs can fill the funding gap and provide needed infrastructure. However, PPPs are not without risk and accountability challenges (Mayer et al 2019; Urban Land Institute, 2013; Watkins & Wittstruck, 2015; Yusuf & Leavitt, 2014). Safeguards are needed to ensure issues and challenges associated with PPPs are not exacerbated in the future.…”