Aligning Public-Private Partnership Contracts with Public Objectives

214 Pages·2012·1.33 MB·English

Aligning Public-Private Partnership Contracts
with Public Objectives for Transportation Infrastructure

Martha E. Gross

Dissertation

Submitted to the Faculty of the Virginia Polytechnic Institute and State University
in partial fulfillment of the requirements for the degree of

Doctor of Philosophy

in

Civil Engineering

Committee:

Michael J. Garvin, Chair
Gary R. Allen
Gerardo W. Flintsch
Raman Kumar

August 18, 2010

Blacksburg, Virginia

Keywords: public-private partnerships, procurement,
transportation policy, toll roads, qualitative comparative analysis

© 2010 Martha Gross

Aligning Public-Private Partnership Contracts
with Public Objectives for Transportation Infrastructure

Martha E. Gross

Abstract

With its central role in the development of public-private partnership (PPP) contracts, procurement
structure has a significant influence on the economic and policy success of privately-financed toll
roads throughout their lifecycle. Following a review of PPP fundamentals and the public-policy
differentiation between public interest and public objectives, several approaches for establishing
the key contract strategies of toll pricing, concession length, and risk mitigation are explored.
These underpinnings motivate the central research question: Given specific policy objectives
for road pricing, how should public owners select PPP contract strategies which support these
outcomes?

Through qualitative comparative analysis (QCA), a recently-developed method for evaluating
qualitative data quantitatively, patterns of PPP contract strategies which correspond to three
common policy objectives—achieving a specific toll rate, managing congestion, and minimizing
state subsidy/maximizing revenue—are identified through evaluation of 18 domestic and inter-
national projects. Three practical decision-making tools resulting from this work are illustrated
through application to current PPP procurements: (1) a traffic-risk worksheet, which provides
a rapid estimate of a toll-financed project’s viability; (2) analytical QCA results, which offer
guidance for structuring PPP contracts based on the desired pricing objectives; and (3) case-
library comparisons, which enable drawing parallels between proposed procurements and
established PPP projects. Additional insights explore the nature of risk in this study, which
concludes with thoughts on the appropriate role of PPPs in infrastructure delivery.

ACKNOWLEDGEMENTS

“No man is an island,” wrote the poet John Donne in 1624, succinctly illustrating individuals’
reliance on each other. Likewise, the aid of countless supporters has been vital throughout my
journey toward developing this document. Although space permits highlighting only a few by
name, each one’s contributions are deeply appreciated, and I hope to pass similar assistance
along to many others in the future.

Drs. Francis X. “Buddy” Watson and R. Edward Minchin deserve special mention: without their
early mentoring and guidance, I would not have embarked on the unlikely transition from testing
concrete on construction sites to undertaking doctoral studies in public-private partnerships.

I owe particular gratitude to the Via Department of Civil and Environmental Engineering, the
Myers-Lawson School of Construction, and the National Science Foundation for their generous
support of my studies at Virginia Tech over these past three years.

During my journey up the PhD mountain, I am thankful to have met Dr. Raymond E. Levitt,
whose timely suggestion to consider qualitative comparative analysis as a research approach
provided a crucial breakthrough in the development of this work.

Not only have my committee and particularly my advisor, Dr. Michael J. Garvin, been a pleasure
to work with throughout this endeavor, but their guidance has made this document much stronger
and more practical. My friends and colleagues, especially those in the “Garvin Research Group,”
have been a greatly-appreciated cheering section along the way.

Finally, very few graduate students are blessed with a family as supportive as mine. Although
anything I write here is inadequate to express my gratitude, I offer them nonetheless a heartfelt
thank you.

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This work was funded by grant CMMI-0629260 from the National Science Foundation, whose
support is gratefully acknowledged. Any opinions, findings, conclusions, or recommendations
expressed in this paper are those of the writer and do not necessarily reflect the views of the
National Science Foundation.

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TABLE OF CONTENTS

List of Figures ............................................................................................................................... ix 
List of Tables ................................................................................................................................. x 
Chapter 1  Introduction ........................................................................................................... 1 
1.1.  Infrastructure Funding: The Historical Context ...................................................... 1 
1.2.  Private Involvement in Infrastructure Provision ..................................................... 3 
1.3.  PPP Contract Structures .......................................................................................... 4 
1.3.1.  Project Types .......................................................................................... 5 
1.3.2.  Revenue-Transfer Mechanisms .............................................................. 6 
1.4.  Sector Choice and Risk Assessment ....................................................................... 8 
1.5.  PPP Contracts and Public Interest ......................................................................... 10 
1.5.1.  Separating Public Objectives and Contract Structure ......................... 11 
1.5.2.  Structuring Contracts to Achieve Public Objectives ............................ 13 
1.6.  Research Pursuit.................................................................................................... 14 
Chapter 2  PPP Contract Strategies ..................................................................................... 17 
2.1.  Toll Pricing Approaches ....................................................................................... 17 
2.1.1.  Price as PPP Competition Factor ........................................................ 17 
2.1.2.  Rate-Adjustment Mechanisms .............................................................. 19 
2.2.  Economic Underpinning of Road Pricing ............................................................. 21 
2.2.1.  Average Cost Pricing (Maintenance-Cost Models) ............................. 22 
2.2.2.  Marginal Social Cost Pricing (Congestion-Cost Models) ................... 23 
2.2.3.  Revenue-Maximizing Pricing ............................................................... 24 
2.3.  Economic Theory: Monopoly Pricing .................................................................. 25 
2.4.  Concession Length Approaches ............................................................................ 27 
2.4.1.  Contract-Length Considerations .......................................................... 27 
2.4.2.  Duration as PPP Competition Factor .................................................. 29 
2.4.3.  Variable-Length Concessions ............................................................... 30 
2.5.  Summary ............................................................................................................... 32 
Chapter 3  Research Methodology ...................................................................................... 33 
3.1.  Selection of Research Method .............................................................................. 34 

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3.2.  Application of Qualitative Comparative Analysis ................................................ 37 
3.2.1.  Identifying Outcomes of Interest .......................................................... 38 
3.2.2.  Selecting Cases ..................................................................................... 40 
3.2.3.  Selecting Conditions ............................................................................. 42 
3.2.4.  Assigning Values to Conditions and Outcomes .................................... 44 
3.2.5.  Constructing and Reviewing the Data Table ....................................... 46 
3.2.6.  Analysis, Interpretation, and Refinement ............................................. 46 
3.2.7.  Application ........................................................................................... 48 
3.3.  Special Discussion of RISK Condition ................................................................. 48 
3.3.1.  Project Settings ..................................................................................... 49 
3.3.2.  Traffic Risk Index ................................................................................. 50 
Chapter 4  Analysis and Results ........................................................................................... 53 
4.1.  Data Collection and Conditioning ........................................................................ 53 
4.2.  Internal Validity Testing ....................................................................................... 58 
4.2.1.  Intermediate QCA Tests ....................................................................... 58 
4.2.2.  Inter-Rater Reliability Test ................................................................... 61 
4.3.  Minimization of the Data Table ............................................................................ 62 
4.4.  Results ................................................................................................................... 64 
4.4.1.  TOLLRATE Outcome: Achieving Specific Toll Levels ......................... 64 
4.4.2.  FREEFLOW Outcome: Maximizing Throughput ................................. 65 
4.4.3.  MINMAX Outcome: Minimizing Subsidy or Maximizing Revenue ...... 66 
4.5.  Descriptive Metrics and Sensitivity Analysis ....................................................... 67 
4.5.1.  Descriptive Metrics .............................................................................. 67 
4.5.2.  Sensitivity Analysis ............................................................................... 69 
4.6.  Interpretation ......................................................................................................... 73 
4.6.1.  TOLLRATE Outcome: Achieving Specific Toll Levels ......................... 73 
4.6.2.  FREEFLOW Outcome: Maximizing Throughput ................................. 74 
4.6.3.  MINMAX Outcome: Minimizing Subsidy or Maximizing Revenue ...... 75 
Chapter 5  Applications for Policy and Practice ................................................................ 77 
5.1.  Traffic-Risk Worksheet ........................................................................................ 77 
5.1.1.  Route 460 Project History .................................................................... 77 
5.1.2.  Risk Score ............................................................................................. 79 

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5.2.  Application of QCA Guidance for Structuring Procurements .............................. 81 
5.2.1.  Midtown Tunnel Project History .......................................................... 81 
5.2.2.  Identification of Pricing Objective ....................................................... 83 
5.2.3.  QCA Recommendations for Contract Structure ................................... 84 
5.3.  Comparison with Similar Projects from QCA Case Library ................................ 86 
5.3.1.  QCA Configuration: New Route 460 Procurement .............................. 87 
5.3.2.  Case-Library Comparison .................................................................... 87 
5.3.3.  Epilogue: Addendum to Route 460 Procurement ................................. 89 
Chapter 6  Discussion............................................................................................................. 91 
6.1.  Further Outcome-Specific Observations............................................................... 91 
6.1.1.  MINMAX Outcome: Minimizing Subsidy or Maximizing Revenue ...... 91 
6.1.2.  FREEFLOW Outcome: Maximizing Throughput ................................. 92 
6.1.3.  TOLLRATE Outcome: Achieving Specific Toll Levels ......................... 94 
6.2.  Review and Comparison of Risk Scores ............................................................... 94 
6.2.1.  Outcome Trends in Risk Scores ............................................................ 94 
6.2.2.  Chronological Trends in Risk Scores ................................................... 95 
6.2.3.  Geographic Trends in Risk Scores ....................................................... 96 
6.3.  General Observations on PPP Risk ....................................................................... 97 
6.3.1.  Renegotiation and Contingency Reduction .......................................... 97 
6.3.2.  Distinguishing Demand Risk and Project Risk .................................. 100 
6.3.3.  Practical Application of Modified Traffic-Risk Worksheet ................ 102 
Chapter 7  Conclusion ......................................................................................................... 105 
7.1.  Summary of Contributions .................................................................................. 105 
7.2.  Limitations of Study ........................................................................................... 106 
7.3.  Directions for Future Work ................................................................................. 107 
7.4.  Implications for Policy and Practice ................................................................... 107 
7.5.  Final Thoughts .................................................................................................... 108 
References .................................................................................................................................. 111 
Appendix A Survey of PPP Literature .................................................................................. 115 
Appendix B Rubric for Assigning QCA Values ................................................................... 141 
Appendix C Case Summaries ................................................................................................ 149 
Appendix D Risk Worksheets ................................................................................................ 169 
Appendix E Software Output ................................................................................................ 189 

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