National Mall Underground PPP Project Design Information

Presented By: Felix Li to The National Coalition to Save Our Mall

Introduction: The objective of this research paper is to provide information that assists the director of

The National Mall Underground Project to construct a PPP arrangement with the private

sector prior to the construction phase.

In this report, we will first examine the most commonly used PPP arrangements that are

suitable for infrastructure development projects; following eleven actions for successful

PPP arrangements. Then, we will observe the three stages of PPP development in

business planning, project bidding, and performance evaluation. Additionally, we

examine the six dimensions that strengthen accountability and leadership, as well as risk

allocation among public and private partners.

Different Types of PPP Arrangements:

In this section, we will take a look at the most commonly used PPP arrangements and

their characteristics.

Operations and Maintenance (O&M): A public partner (federal, state, or local

government agency or authority) contracts with a private partner to provide and/or

maintain a specific service. Under the private operation and maintenance option, the

public partner retains ownership and overall management of the public facility or system.

Operations, Maintenance & Management (OMM): A public partner (federal, state, or

local government agency or authority) contracts with a private partner to operate,

maintain, and manage a facility or service. Under this contract option, the public partner

retains ownership of the public facility, but the private party may invest its own capital in

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it. Generally, the longer the contract term, the greater the opportunity for increased

private investment because there is more time available in which to recoup any

investment and earn a reasonable return.

Design-Build (DB): A DB is when the private partner provides both design and

construction of a project to the public agency. This type of partnership can reduce time,

save money, provide stronger guarantees and allocate additional project risk to the private

sector. It also reduces conflict by having a single entity responsible to the public owner

for the design and construction. The public sector partner owns the assets and has the

responsibility for the operation and maintenance.

Design-Build-Maintain (DBM): A DBM is similar to a DB except the maintenance of

the facility for some period of time becomes the responsibility of the private sector

partner. The benefits are similar to the DB with maintenance risk being allocated to the

private sector partner and the guarantee expanded to include maintenance. The public

sector partner owns and operates the assets.

Design-Build-Operate (DBO): A single contract is awarded for the design, construction,

and operation of a capital improvement. This method involves one contract for design

with an architect or engineer, followed by a different contract with a builder for project

construction, followed by the owner’s taking over the project and operating it. On a

public project, the operations phase is normally handled by the public sector under a

separate operations and maintenance agreement.

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Design, build, maintain, and operate (DBMO): A contract to design, build, maintain,

and operate a facility. The public sector party grants a concession to operate the facility to

the private sector party, which may receive payments directly from the public sector party

and/or charge through its users.

A DBMO contract may be suitable in circumstances where it is likely that value for

money will be achieved through a high degree of risk transfer to the private sector party,

and it is known that the private sector party will be able to manage this degree of risk

more effectively than the public sector party can.

Design, Build, Finance, and Operate (DBFO): With the Design-Build-Finance-Operate

(DBFO) approach, the responsibilities for designing, building, financing, and operating

are bundled together and transferred to private sector partners. In this type of

arrangement, the private sector, rather than the Agency, bears most of the risks attached

to designing, constructing, financing and operating the infrastructure project. One

commonality that cuts across all DBFO projects is that they are either partly or wholly

financed by debt leveraging revenue streams dedicated to the project. Direct user fees are

the most common revenue source. Future revenues are leveraged to issue bonds or other

debt that provides funding for capital and project development costs. They are also often

supplemented by public sector grants in the form of money or contributions in kind, such

as right-of-way. In certain cases, private partners may be required to make equity

investments as well. The Agency's objectives for this type of arrangement are:

-To promote innovation, not only in technical and operational matters, but also in

financial and commercial arrangements;

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-To minimize the financial contribution required from the public sector. The private

sector is subsequently responsible for the operation and maintenance of the project. The

main benefit of this type of arrangement is that, by transferring the responsibility of

designing, constructing, financing, and operating to the private sector, it will consider its

obligations as a whole, over the life of the contract, taking full account of the risks

inherent at each stage of the project. By allocating the cost to the private sector lowers its

project risk. It leads to an efficient service and a lower whole-life cost for the Agency.

Under a DBFO contract, the full potential of efficiencies, innovation and whole-life cost

analysis inherent is likely to be fully unlocked only when the private sector is involved in

the outline design of the project scheme.

For Agency employees, the introduction of the DBFO program has resulted in their role

changing from procuring the design and construction of a scheme, to compiling the

output specification and reviewing the bidders' proposals for the design and, following

contract execution, monitoring performance.

Design, build, finance, maintain, and operate (DBFMO): A contract to design, build,

finance, maintain, and operate a facility, involving financing by the private sector party in

whole or part. The public sector party grants a concession to the private sector party to

provide services. These contracts often involve the private sector party owning the

facility, and transferring ownership back to the public sector party when the contract

ends. The public sector party may reimburse the capital cost borne by the private sector

party through periodically paying for services provided during the contract period, and/or

the private sector party may have the right to charge users.

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Design-Build-Finance-Operate-Maintain-Transfer (DBFOMT): The Design-Build-

Finance-Operate-Maintain-Transfer (DBFOMT) partnership model is the same as a

DBFOM except that the private sector owns the asset until the end of the contract when

the ownership is transferred to the public sector.

Build-Operate-Transfer (BOT): The private partner builds a facility to the specifications

agreed to by the public agency, operates the facility for a specified time period under a

contract or franchise agreement with the agency, and then transfers the facility to the

agency at the end of the specified period of time. In most cases, the private partner will

also provide some, or all, of the financing for the facility, so the length of the contract or

franchise must be sufficient to enable the private partner to realize a reasonable return on

its investment through user charges. At the end of the franchise period, the public partner

can assume operating responsibility for the facility, contract the operations to the original

franchise holder, or award a new contract or franchise to a new private partner.

Build-Own-Operate (BOO): The contractor constructs and operates a facility without

transferring ownership to the public sector. Legal title to the facility remains in the

private sector, and there is no obligation for the public sector to purchase the facility or

take title. A BOO transaction may qualify for tax-exempt status as a service contract if all

Internal Revenue Code requirements are satisfied.

Build-Own-Operate-Transfer (BOOT): A contract under which the private sector party

is responsible for building and operating a facility, and owns it for the life of the contract.

The private sector party transfers ownership of the facility to the public sector party when

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the contract ends. This enables the project proponent to recover its investment, operating

and maintenance expenses in the project.

Due to the long-term nature of the arrangement, the fees are usually raised during the

concession period. The rate of increase is often tied to a combination of internal and

external variables, allowing the proponent to reach a satisfactory internal rate of return

for its investment.

Sale-Lease-Back Scheme: This is a financial arrangement in which the owner of a

facility sells it to another entity, and subsequently leases it back from the new owner. An

innovative application of the sale/leaseback technique is the sale of a public facility to a

public or private holding company for the purposes of limiting governmental liability

under certain statues. Under this arrangement, the government that sold the facility leases

it back and continues to operate it. One can also use a sale-lease-back scheme to reduce

the cost of capital by using tax advantages.

Tax-Exempt Lease: A public partner finances capital assets or facilities by borrowing

funds from a private investor or financial institution. The private partner generally

acquires title to the asset, but then transfers it to the public partner either at the beginning

or end of the lease term. The portion of the lease payment used to pay interest on the

capital investment is tax exempt under state and federal laws.

Turnkey: A public agency contracts with a private investor/vendor to design and build a

complete facility in accordance with specified performance standards and criteria agreed

to between the agency and the vendor. The private developer commits to build the facility

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for a fixed price and absorbs the construction risk of meeting that price commitment.

Generally, in a turnkey transaction, the private partners use fast-track construction

techniques (such as design-build) and are not bound by traditional public sector

procurement regulations. This combination often enables the private partner to complete

the facility in significantly less time and for less cost than could be accomplished under

traditional construction techniques.

In a turnkey transaction, financing and ownership of the facility can rest with either the

public or private partner. For example, the public agency might provide the financing,

with the attendant costs and risks. Alternatively, the private party might provide the

financing capital, generally in exchange for a long-term contract to operate the facility.

Concessionaire: An arrangement where a public sector party (the granter) grants rights to

a private sector party (the operator) to provide public services. The rights of the operator

may include having use of specified assets from which to provide the services, and the

right to generate revenue. The operator will also incur obligations to the granter, such as

to provide the services under specified terms and conditions, and to transfer the rights

back to the granter at the end of the concession period.

Private Finance Initiative (PFI): A Private Finance Initiative (PFI) action typically

involves three parties: (1) the public sector agency that conducts the procurement; (2) the

private sector consortium that bids to build and provide the public infrastructure and

services; and (3) the banker and/or other financial entities that financing the project. The

typical steps entail a set of complex activities by government managers.

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PFI projects involve long-term relationships between authorities and contractors who, at

first sight, appear to have inherently different objectives. A successful outcome for both

parties can be achieved through preparation to approach projects in a spirit of partnership.

This requires an understanding of each other’s business and a common vision of how best

they can work together as partners.

Franchise: An exclusive right granted by a public sector party (the franchiser) to a

private sector party (the franchisee) to occupy or use facilities owned by the franchisor

for the franchisee to deliver services. The franchisee pays a fee to the franchisor in return

for being awarded the franchise. The franchisee may be responsible for maintaining and

improving the facilities.

Eleven Actions for Successful PPP Arrangements:

Action One: Conduct a cost/benefit analysis to determine the most effective and efficient

way to accomplish the agency’s goals to ensure a contracting solution is the best

approach.

Action Two: Establish and communicate clear expectations as to the purpose, goals, and

objectives of the contracting relationship.

Action Three: Involve contracting and procurement professionals in the development of

the request for proposal and statement of work to ensure the contract will be structured to

meet the agency’s needs.

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Action Four: Involve members of the impacted community (e.g., users and contractors)

to gain their perspective before the contract is awarded to ensure proposed solutions will

serve the agency’s needs.

Action Five: Clearly articulate the purpose, goals, and objectives of the partnership

consistently and regularly to all levels of the workforce.

Action Six: Reinforce a partnership mentality through actions and words and hold others

accountable for the same.

Action Seven: Clearly articulate roles and responsibilities of contractors and agency

personnel as well as decision-making authority among agency staff.

Action Eight: Establish formal communication processes (e.g. regular meetings,

newsletters, podcasts, e-mails) to ensure the right people hear the right message at the

right time.

Action Nine: Create and utilize communication channels between contractors, users, and

agency program staff to promote mutual understanding of the project status and direction.

Action Ten: Set measurable goals to be met at regular time intervals to ensure the project

is staying on course and meeting objectives.

Action Eleven: Create fair agreements that incentivize the contractor to meet the goals

most vital to the agency’s mission.

The graphic illustrates the key constructs organized in an input-process-outcome model.

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Graph 1: Key Constructs for Success in Contracting Professional Services graph

Three Stages of PPP Development:

The three stages of PPP development are project planning and designing, project bidding,

as well as project construction, monitoring and evaluation.

Planning and designing: In the planning and designing stage of a PPP project, we could bring in

contract/procurement professionals to craft a business plan, with financial modeling, to

support the project. The plan should identify clear objectives for the project, including its

contribution to the public organization’s vision and policy objectives. It could show an

overview of the structure of the proposed arrangements; including governance and

accountability, contract management, value-for-money assessment, project management

responsibilities, review of funding options, appropriate risk allocation, asset management,

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performance evaluation, legislative compliance, and arrangement to deal with unexpected

changes. It is advisable to appoint an independent auditor to provide assurance that the

project planning process meets public sector probity requirements. The business plan

should specify arrangements for reporting performance, including the performance data

to be provided by the private sector party and the reporting intervals.

The type of partnering arrangement will be directly affected by whether there are realistic

options for it’s financing. It’s recommended to seek advice on best ways to obtain capital

funding at an early stage of the project design (Greve, Hodge). Permanent financing was

needed because of construction costs (direct costs + project development + interest

during construction), debt service, and special payments to the equity investors and the

development lenders for interest during construction. It will be raised through a

combination of institutional debt, bank term loans, and equity. In addition, the financing

partners would have to provide stand-by equity and a revolving credit facility.

The project planning should also include an analysis on the project’s value-for-money.

Value-for money considers whether the PPP arrangement has got the right mix of cost,

quality and flexibility. Several important factors to assess the value for money are the

scale of the project relative to the transaction costs, the whole-of life costs, potential to

free up public sector staff to concentrate on key service delivery activities, greater asset

utilization, and the scope for innovation (such as business practice and technology

application).

The ability to evaluate and allocate risks is also critical. A thorough review of risks

associated with the PPP, as well as a description of how risks will be distributed, is

required. A variety of risks must be considered, including technical, construction-related,

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operational, revenue-related, financial, those stemming from force majeure (or “acts of

God,” like natural disasters), regulatory-related, environmental, and those related to

project defaults (Wolf). Government managers must find a balance between shifting risk

to the private sector, providing incentives for superior performance, providing penalties

for default, and ensuring that the private contractor will receive a sufficient return to

fulfill the contract. At the same time, the public sector party should have a plan for any

default by the private sector party, and the contract should include default and remedy

provisions to make risk allocation enforceable.

In addition, a competent contract design and management is the public sector’s key

means of control over its outputs and their contribution to outcomes. Achieving both

forms of accountability requires careful and precise contractual stipulation of the rights of

each party to information, including reporting requirements, as well as the limits of

commercial confidentiality. Rules should be clearly established to govern public-private

relations (often in the form of commercial laws that specify private sector involvement in

government service delivery and/or property rights), and how enforcement mechanisms

should also be established to ensure that rules are followed (often in the form of

commercial courts or some other arbiter between business and government

organizations). At the same time, it prevents corruption and promotes integrity on the part

of government officials, especially in regard to awarding contracts and accepting work

performed under a contract (Wolf).

It is very likely that changes will occur during the project. Therefore, it will be important

for the parties to fully assesse potential situations that might lead to interruptions in

service delivery since it may not be possible to transfer the failure to the private sector

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party. The parties should ensure that they have business continuity and disaster recovery

plans to apply to potential situations that have been identified (Burman). The following

change management processes should be incorporated as part of contract design:

-Appropriate protocols are in place to manage change

-Appropriate staffs have the authority to request and authorize changes.

-Potential changes are assessed thoroughly by suitably experienced personnel, and

based on consultation with relevant stakeholders.

-Changes are appropriately prioritized and their implementation properly resourced.

-The implementation of changes is controlled and tested.

-Changes are appropriately documented

-Changes do not compromise value-for-money outcomes

-Changes do not result in the unintended acceptance of risk by the public sector party

The public sector party will need to seek assurance throughout the life of the contract.

It’s important that assets are being properly managed to agreed standards and, if relevant,

that it will be returned at the end of the contract in a reasonable condition. As part of the

contract, the private sector party should be required to provide an asset management plan

that includes clear benchmarks for existing asset condition and service levels, and

standards for the maintenance and enhancement of the infrastructure. In the meantime,

the asset management plan should provide a sound basis to establish clear procedures for

dealing with poor or non-performance by the franchisee; assessing the required condition

of assets before they are returned to the Council’s control at the end of the franchise;

dealing with a range of extreme events; communicating with the franchisee as a basis for

ongoing administration of the franchise. It should specify how any requirements for

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increased asset capacity in the future would be met. End-of-term arrangements for assets

owned or controlled by the private sector party should also be included in the contract

documentation. It is recommended that the asset management plan to be independently

reviewed by a third party (ex: auditing firm).

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Table 1 demonstrates a clear visual of the planning and designing stage of the PPP arrangement. It compares and contrasts with the traditional method of government contracting.

Table 1: The Institutional Structure of PPPs chart

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Project Bidding Key decisions have to be made about how the government agency selects the contractor.

It is vital to ensure that the process for selecting a private sector partner is fair and

transparent, and stands up to public scrutiny (Burman). After the public sector advertise

its project bids (in terms of anticipated service-levels or performance standards) to the

appropriate vendor market, government and contractor partners need assurance that their

objectives will be reached as an outcome of this relationship. The government agency

evaluates and pre-selects bidders based on the desired service outcomes that are defined

by the government managers (the consideration of technical and financial solutions). The

reviews of bids must consider technical elements (ex: project designs), financial

elements, and legal elements (ex: public sector lending and supervisory potentials

allowed by current legislation), as well as the extent of innovation.

Facilitating a bidding process for PPPs requires skills in maintaining competitive tension,

properly assessing the contractor market, designing project advertisements, and

establishing a bidding process that creates ample space for private sector innovation.

Bidding options ranges from sole-source procurement, where the government negotiates

with only one contractor, to open competition in which any firm is entitled to bid, and

have its bid fairly evaluated. Within a competitive regime, the government may choose

the bidder based on who complies with all contract requirements and bid at the lowest

price; and who provides the best tradeoff between price and various quality related

factors (Eggers, Goldsmith). Bidders are invited to submit, under seal, a statement

formally accepting all the requirements and conditions of the solicitation, along with the

price to do the work. Fixed time period for negotiation is recommended to further reduce

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overall bidding costs by limiting the potential for extended discussions around technical

or financial dimensions of the projects. Government can then negotiate detailed

specifications with short-listed firms, and finalize long-term agreement (30 years or

more) with a preferred bidder. It is recommended that confidentiality of each bidder’s

project design be ensured during negotiations to encourage private bidders to disclosure

the full details of their proposed plans.

Project Construction, Monitoring, and Performance Evaluation:The public entity, aside from designing a contract, will also need to identify adequate

resources to manage it. It is recommended to designate a contract manager, with external

expertise, to manage the contract earlier in the procurement process to ensure project

continuity. The contract manager needs to understand the financial dimensions of service

provision by private contractors, including cash flows and revenue streams that repay the

debt behind projects. The contract management requires a thorough review of project

operations, including estimates of the project’s future performance, as well as a

contractor’s “health” (in order to prevent gaps in the delivery of services). Indicators such

as “dividend payouts, debt coverage, liquidity, and published accounts” provide an

indication of whether or not the business scheme is operating effectively (Greve, Hodge).

It is important to ensure that contract documentation is properly stored and easily

retrievable, preferably through a quality control system, so that it could retains

knowledge and expertise internally to manage these types of contracts effectively.

Performance monitoring will focus primarily on outputs, such as:

-The extent to which project outcomes and objectives are being achieved;

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-The effectiveness of contract management; the continuing appropriateness of key

performance indicators;

-Changes in the project that have happened through specific events or as a result of the

project moving from one stage to another in its life cycle;

-Changes in the external environment in which the project operates;

-Community relations;

-Budget performance.

The contract documentation should also include specific arrangements for taking action

in the event of substandard performance or failure by the private sector party, and the

process by which the public sector party exercises any rights of intervention. These may

include default provisions and step-in rights (Forrer, Kee, Boyer).

The public entity should define a performance standard and provide regular, ongoing

oversight of the private sector delivery. Once the standards for success are defined, the

next step is operationalizing the standards into performance metrics and then monitoring

performance. It’s important to conduct periodic audits of PPP performance. The quality

of services can be compared to past performance, to performance by others, and to

performance standards established in the PPP. Payment should be made to the private

bidder on the basis of measured performances. Performance measures and standards

should be both quantitative and qualitative, using both hard and soft data. Hard data is

quantifiable and measurable data that can be used to make comparisons against past

performance or benchmarks. A soft data is the quality of the private sector party’s

management and operating personnel, which could provide an indication of future

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problems (Wolf). It is not easily quantifiable, and will probably depend on the expertise

of contract management staff.

During the construction stage, government managers must monitor all phases of

construction and the delivery of service. The public entity will need to have strong

internal arrangements, which includes well-defined responsibilities for day-to-day project

and contract management, and internal and external audit controls. A special purpose

vehicle (SPV) team made up of independent reviewer engineer and independent project

manager should be assembled during the construction stage to look after the public

sector’s interests (Eggers, Goldsmith). SPV is essential to achieving a successful

outcome. For example, it can oversee officers’ negotiations with the private sector partner

and make recommendations. The independent engineers have to ensure that the bidders'

solutions meet the public organization’s requirements, whereas the independent project

manager is involved on a regular basis with construction decisions.

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Accountability and Leadership:Accountability has long been recognized as the cornerstone of a successful public private

partnership. A key to ensuring accountability depends on clarifying responsibilities in

public and private relationships. It needs to create proper safeguards to ensure that public

services are not compromised for the sake of private profits. By this mean, it is the public

sector’s responsibility to develop a clear accountability structure (Forrer, Kee,

Newcomer, Boyer).

The structure could be built around six dimensions that revolve around risk allocation,

costs and benefits, political and social impact, sharing of expertise, partnership

collaboration expectations, and performance measurement (Forrer, Kee, Newcomer,

Boyer). Each party is accountable to one another for the performance of its respective

obligations under this structure.

Figure 1 Public-private Partnership Accountability Framework

Figure 1 displays six principles that guide the relationship with respect to PPP

accountability. The first dimension demonstrates an understanding and allocating risks

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among the collaborators. Collaborators must determine whether a comparative advantage

exists for the joint effort. Partnerships, networks, and contractual relationships require

benefits to all of the parties involved. The third layer of the framework is to assess the

impact of the partnership both socially and politically. Finally, Effective leadership

empowered throughout the organizations is required to ensure accountability from all

involved. Effective management can maintain the momentum of the partnership and

ensure that goals are met in the agreed-upon time frame and hold those accountable for

missteps and missed deadlines.

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Risk: The first dimension that is important in assessing PPP accountability involves

understanding and allocating risk among the partners. Risk allocation should have been

negotiated and specified in the contract documentation. Negotiations between the

partners should begin by explicitly define the risks and identify who is in the best

position to bear the responsibility for the risks in the partnership. Its allocation should be

based on analysis of which partner have the relevant resources, expertise, and knowledge

to manage and control the risk.

The different forms of risks that an infrastructure project must be parsed and addressed

are design and construction; operation and maintenance; patronage and revenue risks for

private investors; the obsolescence of technology; legislative and political change (such

as a change of government or council), resulting in a change of policy; financial (for

example, the financial structure might not be sufficiently robust to provide fair returns to

debt and equity over the life of the project).

However, risks are likely to change as the project progresses, and it’s essential for the

public sector to ensure that risks are regularly monitored and reviewed. The contract

documentation should address how these risks will be managed throughout the life of the

contract (Kettl).

Under a project alliance, participants collectively assume all risks associated with the

project, regardless of whether these risks are within the control of the alliance and

whether participants have considered them in advance. This excludes any risks that the

alliance participants specifically agree to retain individually. It should also be noted that

financial consequences of risks that materialize are usually shared only up to the point

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where private participants’ profits are lost. Beyond this point, risks are usually borne

solely by the public sector participant.

Reference:1. Public-Private Partnerships and Public Governance Challenges; Carsten Greve and Graeme Hodge

2. Building Effective Partnerships in Professional Services; Paige P. Wolf

3. Six Practical Steps to Improve Contracting; Dr. Allan V. Burman

4. Public Private Partnership and the Public Accountability Question; John Forrer, James Edwin Kee, Kathryn E. Newcomer, Eric Boyer

5. Government By Network: The New Public Management Imperative; William D. Eggers, Stephen Goldsmith

6. Managing Indirect Government; Donald F. Kettl

7. The nonprofit National Council for Public-Private Partnerships (www.ncppp.org)

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