In the past 10-15 years, public agencies have increasingly partnered with the private sector to build and run major new transportation projects, typically through what is commonly known as Public-Private Partnerships, or P3s. In a P3, private-sector partners, either a single company or more often a consortium, are selected through a competitive procurement process to design, build, finance, operate, and maintain (DBFOM) the infrastructure, typically for the construction period plus an operating period of 25 years or longer. The private sector also invests equity and raises financing.
When done well, this results in a competitive price and delivery schedule, fair risk allocation among partners, innovative design and construction, and a superior passenger experience. When done poorly, pressure to win on price and imprudent risk transfer from the public to private sector can lead to cost and schedule problems during construction and delays to commercial operation.
Such experiences are causing public sector authorities to realize that many times they are not ready to implement projects as P3s. They need more time to define their objectives and goals for the project, properly define the scope and phasing, and understand and fairly allocate risks between the public and private sectors.
In response, a number of agencies are opting for or at least considering a different approach – engaging private-sector players earlier at a point more upstream in the planning process through what is known as a pre-development agreement (PDA). Industry is responding in kind. I believe this trend will continue as more agencies see the increased value of this approach for all parties, most of all the traveling public.
We are starting to see PDAs trend in passenger rail with transit authorities across the U.S. Transit authorities are starting to employ, or at least consider, a PDA approach in places such as Los Angeles and Miami. We are also seeing more airport authorities and airlines using PDAs to develop new terminal infrastructure, including projects at John F. Kennedy, LaGuardia, and Los Angeles International airports.
In a PDA, the public sector agency engages a PDA proponent – one that would eventually implement the project – to consider all the technical, commercial, and financial options for the project and arrive at the best solution. The right to be the PDA proponent is competitively bid, but once selected, the PDA proponent is paid to develop the project, from identifying viable alternatives to helping select a locally preferred alternative (LPA). If feasible, the PDA proponent would have the right to implement the project, normally as a DBFOM, if its offer to do so is competitive.
There are multiple benefits to this approach. The main benefit is that, for projects that are not ready for primetime, the PDA approach allows agencies to ensure the best option is identified before moving forward. This process also often requires better understanding project risks and how they should be allocated. In addition, a PDA allows an agency to engage the private sector in parallel with the critical and lengthy environmental review process.
Another benefit is that, rather than initially relying on consultants, the agency is able to collaborate with industry practitioners early and drive to a solution that is technically, commercially, and financially feasible. For example, for a passenger rail project, what technology should be used? Heavy rail, light rail, or something else? Where should the alignment be: a tunnel, at grade, or above grade? How should the line interconnect with other rail and transit lines and hubs?
Getting these kinds of decisions right early in the process is crucial to avoiding costly rework and getting the best value (rather simply the lowest cost) for the traveling public. Private-sector players who have the experience delivering and operating projects are ideally positioned to help agencies consider the myriad of options and navigate the complexities involved in any big transportation project.
Public sector agencies are starting to see the value of optimizing on a solution with the ultimate deliverers of the project as a way to ensure project viability and success. As this trend continues, the ultimate winners will be the traveling public.