Is there a private interest in public transit?

For the most part, modern public transportation around the U.S. is, well, public. Public agencies such as Metro work with cities, counties, and states to plan out the system and design individual routes, stops and stations. The agencies use a public process to hire construction contractors to build all the necessary infrastructure and vehicles, and then enlist public sector workers to operate and maintain them. All paid for with public dollars.

By and large, the public model is what we’ve used in the U.S. for nearly a hundred years. But after several years of experience with successful public-private partnerships (P3) to deliver transportation projects around the country, that’s changing. A P3 is simply the collaboration between a public agency and a private company to deliver a public service or facility. Each partner shares its key skills and takes on the risks it is best able to manage, leading to innovation, efficiency, cost savings, and project acceleration.

Ever since 1991, when a group of Denver-area cities and counties took an innovative approach that used private financing and construction to build a 47-mile toll highway connecting the Denver-area to the new Denver International Airport – the first modern American P3 – state and local governments began looking to replicate that model by partnering with private sector firms to deliver roads, bridges and transit systems better, faster, and cheaper.

And just this year, the first two major public transit P3 deals in the U.S. made headlines, with the opening of the Denver Eagle project in Colorado and the deal closing for the Purple Line light rail project outside of Washington, D.C.

In general, P3 deals have offered a few key benefits:

• Projects are delivered sooner, since repayment doesn’t generally begin until operations begin, and private firms can often move business transactions needed to start a project more quickly that public agencies.
• Construction costs are reduced, as private firms take on new responsibilities for helping to design and build projects, with incentives for cost savings and access to innovative construction and engineering techniques.
• Private partners take on project risks – delays, design problems, cost overruns, etc. – that otherwise would fall on the public’s shoulders.
• Performance is built in, in the form of milestones, incentives, and bonuses for projects that perform well, and penalties for those that don’t meet expectations.

A light rail station in suburban Vancouver that is being funded and built as a P3 project.

P3 arrangements can be complex, differ widely on a case-by-case basis and require long time frames to fully evaluate. But evidence from other countries, where P3s are more popular, is clear that P3s can and do achieve real benefits.

For example, the National Audit Office of the United Kingdom found that 65 percent of P3 projects were completed on-budget, compared to 54 percent of public construction projects. In Canada, 121 P3 projects agreed to between 2003 and 2012 saved approximately $9.9 billion in total project costs.

The Canadian P3 market is also seen as a stable investment for pension funds and asset management companies, which has increased the amount of capital available for building badly-needed projects.

And in Australia, an analysis of 21 P3 and 33 public projects showed that the P3 projects had a 1.1 percent net cost overrun, compared to 15 percent for traditional public delivery.

As L.A. Metro embarks on what is likely the most ambitious public transportation construction program in the U.S., this is exactly why we are keen to explore P3 options for all of our transportation projects that could help to reduce costs, accelerate project delivery, ensure performance and shield the public from risks. Not every one of our projects is likely to be a good candidate for P3 delivery. But if P3 will offer the public a better deal, we want to take advantage of that.

Over the last few months, Metro’s Office of Extraordinary Innovation has been working to make sure that potential private partners understand our interest in exploring P3 opportunities, and we’ve developed an Unsolicited Proposal policy so that these companies can submit their ideas for partnerships to us directly for review.

We’ve hired a top-flight financial advisory firm to help us do our due diligence, and just last week hosted a major forum with public sector stakeholders from around the region to help them understand what the benefits of P3s may offer, and how we’ll work with them to explore and possibly use P3s. Finally, we presented our information on the potential role of P3s in delivering Metro projects to Metro Board of Directors’ Executive Management Committee on October 20.

We’re excited about the substantial interest we’ve already received from potential investors. Los Angeles is one of the most attractive infrastructure markets in the nation, due to our substantial needs, large and growing economy and our region’s strong commitment to public transportation investments in recent years.

It will take some work and willingness to do things differently, but OEI firmly believes that Metro can add private partnerships to the list of tools we’re deploying to drive the transportation revolution in Los Angeles County.

This post was written by Colin Peppard of the Office of Extraordinary Innovation.