There has been a serious dearth of analysis in the United States regarding how the PPP approach might contribute to better public policy and how US states and municipalities can encourage the right kinds of PPPs through their legislative frameworks. Many Americans confuse PPPs with complete divestiture to the private sector, which detracts from what PPPs do and do not offer and engenders hostility towards what they view as the privatisation of public assets. A more meaningful discussion about PPPs will go beyond centring exclusively on inputs by focusing on the outputs, outcomes, and long-term impacts of PPPs. In doing so, it should shed light on how PPPs have the potential to create greater benefits for the public than could be attained through traditional financing while still ensuring that governance remains with the public sector. This more balanced conversation must take place not just in the financial community, but also in Congress, and in public opinion, so that well-executed PPPs to be seen as both prudent investments and effective public policy that will improve the nation's infrastructure.

For a PPP to work well, the net present value (NPV) to society resulting from a given partnership must be greater than it would be through traditional procurement, while the private entity's NPV to its investors should exceed other options available. PPPs, it is usually stressed, are not a panacea, but when this overlap in interests occurs, synergies can lead to a long-term, iterative, and symbiotic relationship that benefits both sectors. To determine when this is the case, it is crucially important to establish a method of evaluation that will break down, on an apples-to-apples basis, whether traditional financing or a PPP would best serve public and private interests for a given project based on the distribution of costs and benefits.

The UK's Public Sector Comparator (PSC) has attracted much criticism, particularly on the grounds that politicians will now often require private funding for projects to be considered feasible. Other detractors have even suggested that the PSC allows for cooking numbers in the valuation to ensure that the project moves forward through the PFI. As one critic, John Quiggin, has put it, "The incentives generated by a policy framework under which approval of the PFI is a necessary condition for a project to proceed mean that PSCs are virtually worthless in ex ante analyses of value for money. Given the scope to vary results through arbitrary choices of parameters, and the fact that all parties involved in the evaluation have an interest in rejecting the PSC, the results of such comparisons are predictable."

As PPPs gain greater attention in the US, these limitations certainly deserve some attention; but truly protecting and furthering the public interest will depend on PPP practitioners' abilities to provide a more independent, dispassionate analysis of the costs and benefits offered by the PPP approach. To do so will involve creating concession structures, and bid processes, that better allow governments to measure and allocate these costs and benefits and fairly weigh risks and rewards. Below follow some recommendations that might help US governments in this respect.

How government might tighten up the PPP process

In order to reduce asymmetries of information, public entities should conduct the final phases of negotiations through a best and final offer (BAFO) stage. This will improve the private partner's understanding of public expectations even compared to previous stages of negotiations while allowing for better competition during the most crucial part of the bidding process. The BAFO process is not without risks, since it can add to the due diligence that lenders must go through on top of existing financing commitments in support of private sector bids, potentially lengthening the time that transactions take to close. Even so, the benefits of extracting the best possible value from a project can make PPP procurement more legitimate and publicly defensible.

The public sector should also make sure that a concession's original contract sets toll rate increases upfront on a schedule, which will have toll increases indexed to best practice metrics that are the same for every PPP contract. Such indices could entail a prearranged percentage per year, a certain percentage of CPI, a certain percentage of GDP per capita, a predetermined correlation with inflation, or a combination of, or the highest among, any of these. Road concessions that have been awarded to the private sector thus far in the US have typically included toll schedules, but the principles behind these should be made as consistent as possible. Public bodies should do likewise for the operations and maintenance requirements, penalties, and upgrade processes, which can also mitigate potential economic problems with PPPs. Standardising these metrics will ensure that each project is fair to both the public and private partners, thus improving the chances that the public's economic interests are being protected and encouraging public support of PPPs that work well.

Public entities should also establish an estimated range of fair risk-adjusted NPV values that can be expected for the private sector in the pro forma cashflow models initially developed in PPP contracts. Several contracts in Texas and Virginia have stipulated that after the uppermost limits of an expected NPV range are reached, the concession should then distribute rewards on a pre-determined basis between the two sectors in order to ensure that the private sector is fairly rewarded for its involvement while allaying fears of super-profit. This protects both public and private interests, and by placing parameters on the value that both sectors should receive from a given project, buyer's remorse can be reduced. A consistent approach to sharing these benefits will make both public opinion and private sector sentiment more comfortable with the process, eventually leading to stronger deal flow and healthier public infrastructure systems.

Similarly, the public sector should also standardise contractual triggers that enhance private sector incentives for performance in the interest of the public good. In addition to a fair return threshold based on NPV, other economic metrics can be factored into a PPP contract to allocate risks and costs more fairly for each project. Such metrics include bonuses for reducing construction time, reducing delays in travel time that result from maintenance activities or congestion, or increasing safety standards. These contractual triggers have been common features of availability payment-based road concessions in the UK and British Columbia; and they should also be applied to US states' procurement processes wherever possible.

Furthermore, the public sector must ensure that the review process is fully transparent to allay the public trepidation that these cost-benefit analyses are nothing more than manipulated valuations invented to justify the PPP approach. In so doing, all positive and negative externalities should be internalised in the calculation, including benefits like increases in land value and other economic development benefits within the vicinity as well as costs like environmental damage, public health costs, etc. The business case must also be made for other relevant economic factors, including the private sector's ability to introduce or increase reasonable usage fees, which may add efficiency and reduce historically problematic political obstacles. Along similar lines, fairly assessing a project's opportunity costs also becomes paramount when evaluating PPPs, in light of the fact that when a given project is not done as a PPP, it may be significantly more delayed or may not take place at all due to political and economic realities.

Another recommended way to balance the bidding process is to require that every private sector bidder pay for the review of the bids through a proposal review fee amounting to a certain percentage of anticipated project costs. While the public sector will need to monitor private sector responses to make sure that costs associated with preparing bids do not discourage bidders from participating in the process, this approach has proved successful in the Commonwealth of Virginia, where it has helped to level the playing field so that the public sector can hire the right legal, financial, and technical advisers to conduct more holistic and fair analyses.

This approach should be considered by all other states looking to pursue PPPs, yet establishing a pool of money to subsidise the review process, as well as developing these more robust cost-benefit tools, should only be the beginning of how PPP programmes become institutionalised. The next steps that naturally follow from these short-term solutions will require the creation of centres for excellence along the lines of Partnerships British Columbia or Partnerships UK. Since every state has different needs and concerns to be addressed by PPPs, these centres should be built on a state-by-state basis; but it a national coordinating body, such as the National Council for Public-Private Partnerships, could provide a more overarching program of shared practices to protect the general public interest.

The right PPP policy framework must ultimately ensure that the responsible governmental entity assumes more of a coordinating role as a portfolio manager of infrastructure projects. By placing specific PPP deals within the context of other potential projects required by a state's short and long term infrastructure needs, the PPP approach can move the public sector past individual project management and free up the government to concentrate on oversight, performance accountability, and other governance functions. To fulfil these objectives, the public sector may choose to use cross-jurisdictional authority to coordinate between multiple municipalities and package projects together for a single private partner or private consortium, thus avoiding the pitfalls created by pursuing PPP projects separately and through incongruent negotiation processes. In the end, this will reduce the tendency to cherry-pick the most profitable projects; and by packaging the most attractive opportunities with other infrastructure needs, the government will be able to turn to the private sector to achieve its full range of goals through increased and/or accelerated investment, innovative development strategies, enhanced economies of scale, and other efficiencies that would be otherwise unattainable.

Making this happen will require governments to build up large enough programmes of PPP projects and will depend upon harmonious and clear coordination between several levels of government. Such coordination has not been a feature of the most ambitious concession programme to date in the US – that of Texas – where disagreements between different stakeholders over the Trans-Texas Corridor and a lack of local government support resulted in the Texas Legislature passing Senate Bill 792, which placed a moratorium on all new PPP deals until they could be studied further by a joint legislative study commission. Texas' experience with PPPs demonstrates how failing to navigate the politics of policy processes can quickly bring all PPPs to a standstill.

At present, success or failure of US PPPs can thus depends on how the misconceived debate over the evils of privatisation might be reframed around a more realistic dialogue regarding the improved outcomes offered by PPPs. If more holistic analysis of PPPs is coupled with outreach to legislators, public education efforts, and grassroots organizing, then a stronger PPP programme could create substantial efficiencies in procurement and optimise public benefit. At the same time, the cost of such large portfolio projects, as well as increased bid costs in general, will need to be communicated to the private sector as the necessary price of establishing viable and transparent PPP programmes. This can be justified if greater deal flow is generated over the long-term, which can only be attained by building up public sector expertise and increasing public acceptance of PPP. Consequently, in addition to tightening processes, the public sector must also open up its approach to PPPs.

How governments might open up

From the private sector's perspective, the more that public officials make the business case for each project by demonstrating how the performance-based approach of PPPs can bring better value for taxpayers' dollars, the private sector should have more opportunities to prove how PPPs can genuinely add value for the public while yielding a reasonable return for the private parties. Since the above modifications and standardisations may lead to a PPP marketplace that places greater stress on private sector bidders to make sure that their returns are adequate for their participation in the marketplace, governments should put in place several measures to enhance both private sector and public opinion's confidence in the PPP process.

The abovementioned centres of excellence are indispensable towards opening these avenues towards a better environment for PPPs; but even before their development, states should ensure that all required enabling legislation is in place and that all actions that will be pursued will be beyond legal reproach.

Both in terms of conducting individual PPP deals and establishing statewide PPP programs, the necessary legal authority should be attained prior to pursuing any course of action. Moreover, the public sector should not bring in the private sector until all required environmental and due diligence reviews required by local, state, and federal regulations are complete. This will ensure that the public sector's complete expectations for a given project are known upfront, while making the greatest possible level of information available to the private partner. Although this process may delay substantially the introduction of hoped-for projects, it avoids the potential for a confused private sector response, particularly on larger projects.

In the context of the above recommendations for bundling projects and gaining necessary clearances, unsolicited project proposals can play a key part in the government's broader strategic plan for infrastructure development in order to bring private sector innovation into the planning process. The public sector must make sure that its plans remain coherent and disciplined when incorporating unsolicited bids, which have shown mixed results: some have provided innovative ideas that would otherwise not have been considered, while others have pre-empted the planning process and backfired as a result. In order to make sure that unsolicited proposals are evaluated properly, state authorities should first provide requests for projects that will meet general needs that are already a part of the state's infrastructure needs. Then, based upon a predetermined calendar, the state should move forward with those deals it deems worth pursuing by releasing unsolicited proposals in a solicited bidding process for which all private parties can place a bid.

Governments should also take measures to ensure that private sector involvement in infrastructure leads to fair distributional effects on all constituencies and thus resonates widely and positively throughout the public sphere. This is of particular importance when it comes to the transport sector. For one, the public sector should ensure that most, if not all, revenues will fund other public transport needs, preferably within the corridors from which they are generated.

Moreover, in order to maintain or improve equity, a share of the revenues returned to the public sector should be used to fund alternative transport methods for low-income individuals such as public transit, rail, and innovative multimodal transport approaches. This tack is just a small part of how public actors must establish a well-coordinated and unified public policy plan to increase public acceptance for PPPs at the grassroots level.

Balancing the demands

As more US states and municipalities move forward with their own PPP enabling legislation, both the economic and distributional effects of PPPs must be taken into consideration in order to make sure that when PPPs are pursued that they are done in the right way. From the private sector's perspective, the more that public officials make the business case for each project by demonstrating how the performance-based approach of PPPs can bring better value for taxpayers' dollars, the more likely it is that the US PPP market will become more consistent, sophisticated, and innovative. As the public sector builds its capacity, public appreciation of the merits of PPPs will also increase, and the private sector should have more opportunities to prove how PPPs can genuinely add value for the public while yielding a reasonable return for the private parties.

Robert Tice Lalka serves as Public-Private Partnership Liaison at the US Department of State. The opinions presented herein are solely those of the author and do not represent those of the US Department of State or the US Government. He can be reached at LalkaRT@state.gov