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. iii 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. iv 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 v 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 vi 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 vii
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