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How will a Purple Line public-private partnership work?

Earlier this week, Maryland Governor Martin O'Malley announced plans to build and operate the Purple Line using a public-private partnership, also known as a P3. What does that mean for riders and taxpayers?

Photo by Maryland GovPics on Flickr.

A P3 is a partnership between a government agency (in this case, the Maryland Transit Administration) and a private firm (called a "concessionaire") to build and operate an infrastructure project. Many P3s are toll roads, like the new Beltway HOT lanes in Northern Virginia. But transit P3 projects are fairly new to the United States. Currently, the only example in the nation is in Denver, which is using one to build almost 70 miles of rail projects.

The details of the public-private partnership won't be hammered out for some time, so there's still a lot we don't know about what this method of construction and operation will look like. But a recently-published "presolicitation report" from the Maryland Department of Transportation (MDOT) tells what they have in mind.

What is a P3?

Essentially, the idea is to leverage private capital and the efficiency of private firms to reduce the public cost of building and operating a project. It also helps the agency by making costs more predictable and assigning risk to the private contractor. MDOT currently estimates that they could save about 20% of the cost of constructing and operating the Purple Line for 30 years by entering into a P3.

While they aren't common in the United States, our neighbors in Canada use them a lot. One notable example is Vancouver's new Canada Line, opened in 2010, though it's not without its criticism.

Where do the savings come from?

In P3s, the cost savings come primarily from two factors: private firms may be more efficient, and risk may be more properly assigned and managed.

One way projects end up wasting money is through "interface problems." For example, a crew comes out to string catenary wire, but they discover that the catenary supports haven't been installed yet. That risk is still there with a P3, but since the contractor has assumed the risk, it's their problem, not the public's.

Meanwhile, the contractor, which is likely to be a major firm, may be able to leverage their other investments to get a good deal on steel. Or they might have a subcontractor who builds railcars, which saves them from having to do a separate procurement.

How will this P3 work?

In a few months, MTA will ask qualified contractors to submit bids to operate the Purple Line. These bids will be very detailed, and MTA will use a "best value" method to pick the contractor, not necessarily picking the cheapest bid.

Each prospective concessionaire will include their estimate for what they can build the Purple Line for, plus what they think it will cost them to operate and maintain the line for 30 years. MTA estimates that the selected contractor will also put in between $400 to $900 million. The agency will put in additional money, as will the federal government, through the New Starts program.

MTA will pay the contractor an annual "availability payment," which equals the contractor's contributions plus the operating costs the contractor estimated in their bid, divided by 35 (5 years of construction, plus 30 years of maintenance). During construction, the contractor will have to take out a performance bond that MTA keeps in case they can't complete the project. If they go out of business after construction is complete, MTA would have to rebid the contract.

Will the concessionaire hike fares or cut service to make a quick buck?

MTA, not the concessionaire, will set the fares, service hours, and train frequency.

The concessionaire wouldn't make money from this, anyway. Like all transit lines in the United States, the Purple Line will not earn enough fare revenue to be profitable. If the contractor can provide their services for less than what was budgeted, they'll keep the difference as (additional) profit. But if they go over budget, they'll lose money.

How will Maryland hold the operator accountable?

MTA will write very detailed requirements in the contract setting performance standards for on-time performance and cleanliness. If the operator can't meet these standards, the MTA could pay them less. That gives the operator a financial incentive to provide good service.

What will the concessionaire be responsible for?

The concessionaire's responsibilities can differ from one P3 to another, but the private firm selected for the Purple Line will be responsible for completing design, building the project, acquiring railcars, and then operating the line for 30 years.

Will the private firm own the line?

No, the state of Maryland will own the Purple Line. After 30 years, the firm operating the line will be responsible for giving it back to the state in a certain pre-specified condition. At that point, the MTA could decide to operate the line on its own or rebid the project to a different firm or even the same firm.

Why is the Purple Line a good choice for a P3?

The Maryland Transit Administration's operations, including local buses, light rail, and subway, are primarily focused in Baltimore, 30 miles from the Purple Line. Because it's so far away, the MTA would likely need a new management and operations structure just for that one line, meaning it would basically stand alone. That makes it a good candidate for a P3, as opposed to the Baltimore Red Line, which interacts with several other MTA services and is much closer to home.

According to the MTA's Henry Kay, the Purple Line's risk profile is well suited to the private sector. In many cases, there will be tight quarters and traffic management plans. There's lots of risk that those conditions will delay the project or make it more expensive. One overarching contractor can better manage that risk than a public agency with multiple contractors. And if the contractor can't manage the risk well, it's their money, not the state's.

There are other risks, like unpredictable weather or even subway tunneling, which are difficult to manage. Contractors may be reluctant to assume the risks of building the Baltimore Red Line, with its long downtown subway. That makes it a less likely candidate for a P3.

Why consider a P3 for transit at all?

Using a P3 for the Purple Line will allow the MTA to spend a little less up front for the project, allowing Maryland to make better use of its gas tax revenues for projects around the state.

According to the MTA's Assistant General Manager Executive Director for Transit Development and Delivery Henry Kay, the P3 will be more predictable for MTA. For example, once MTA grants the contract, they'll know exactly how much it will cost to run the line every year for 30 years. If energy costs go up or labor costs go up, the contractor is on the hook. But the state will always pay the same price, unless the contractor fails to meet their performance targets (in which case, Maryland would pay less). That could help keep fares and tax rates in check.

Of course, there are risks in a P3. The contractor could go bankrupt, or they could fail to deliver what they promised. MTA's goal is to provide good transit service, and they need to find a reliable partner who they can hold to the same high standard. Over the next several months, the MTA will release a Request for Proposals and companies will respond, allowing us to get a better understanding of how this P3 might work.

Since public-private partnerships for transit are generally untested in the US, communities and transit agencies across the country will watch the Purple Line to see how well they work. Hopefully, it will set the bar high.

Matt Johnson has lived in the Washington area since 2007. He has a Master's in Planning from the University of Maryland and a BS in Public Policy from Georgia Tech. He lives in Greenbelt. Heís a member of the American Institute of Certified Planners. He is a contract employee of the Montgomery County Department of Transportation. His views are his own and do not represent those of his employer. 


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P4 purpleline public-private partnership

by Richard B on Aug 8, 2013 10:28 am • linkreport

Could having a P3 enhance the possibility of continuing the purple line into Tysons, or at least across the Potomac?

If the WMATA operated the line, there would be no problems, but the WMATA might not want a light rail line.

If MTA ended up operating it, it might be difficult for them to build the line into VA and operate in VA as you would have the state of VA paying the state of MD to run a rail line in VA. This could work, but it sounds just a wee bit easier to have MD and VA pay the same company to operate a rail line that crosses the river.

by Richard B on Aug 8, 2013 10:31 am • linkreport

The Toronto Star ran an article today that raises the issue of bundling too big of a project into a P3, which then makes it hard for more than a couple of firms to bid on it:

I guess that's the flip side of getting efficiencies from having a contractor that does it all: there are only a few that can actually do it all. Moreover, some raise the point that when a project gets sufficiently large and complex, all contractors will take build similar amounts of padding into their bids. In theory there should still be incentive to undercut each other, but if you only have one bidder that's obviously not going to be the case.

by Gray on Aug 8, 2013 10:39 am • linkreport

Matt, I want to point out that not all PPPs are equal. There are different structures ranging from design-build (DB) where much of the risk outside construction stays with the public sector to almost complete transfers to the private sector under design-build-finance-operate-maintain (DBFOM) contracts. Like so many things, PPPs exist on a spectrum and cannot be described as a single model.

Denver, which you mention, is a good example of this spectrum. The Eagle P3 is a DBFOM deal with Fluor, Uberior and John Laing, while the I-225 line is just a design-build-finance contract with Kiewit and AECOM. The North Metro line is in procurement and likely to be a DB deal.

It is important to specify this spectrum of possibilities at this point, especially as the MTA clearly does not know exactly what it wants to do.

One of my issues with what O’Malley has said so far is that the MTA is pursuing a design-build-operate-maintain structure – which does not include private financing – but maintains that the private sector will contribute $400-900m to the project. These two statements are contradictory and will need to be cleared up soon.

There are a number of other details that need to be hammered out, especially related to the availability payments, that I am eager to find out more on.

by Ned Russell on Aug 8, 2013 10:57 am • linkreport

While I'm glad to see this project move forward, I still believe that constructing and operating the Purple Line through a PPP is a poor alternative to keeping the project in-house. Of course construction would still be outsourced, but all design and operations tasks would be carried out by the MTA.

With the PPP riders will be at the mercy of the contractor who are trying to minimize costs. At the same time state and local governments often provide little to no oversight of their private contractors, even for high profile projects (case in point: Silver Spring Transit Center). The PPP is likely to cost more over the long run, and of course any immediate savings is totally dependent on the bids of the prospective "concessionaires."

That said, if this is the only possible way to build the Purple Line, Red Line, and CCT (as well as possible So. MD light rail) I'm all for it.

btw the final RFP actually won't be issued until Spring 2014 and winning bidder not selected until Winter 2014-15.

by King Terrapin on Aug 8, 2013 11:00 am • linkreport

"the issue of bundling too big of a project into a P3, which then makes it hard for more than a couple of firms to bid on it"

This is is another issue I've discussed before, but seeing the large number of attendees at the presolicitation industry forum (although most of whom weren't serious candidates or were from other industries) I'm hoping I'm wrong.

As of now I would say that Bombardier and Siemens (both decent companies) have a sizable advantage.

by King Terrapin on Aug 8, 2013 11:05 am • linkreport

@Ned: The PPPP is a DBFOM contract. (DC Streetcar released a RFI for the same.) Details on the availability payments are in the MDOT presolicitation report, although maddeningly a lot of them refer to funding sources that haven't yet been secured (FTA New Starts, local government payments, ongoing state appropriations) in addition to the gas tax revenue stream. They're aware that the $400-900M in private financing will have to be paid back by the public in the future from some unspecified revenue source. Maybe the counties are looking into a Tysons-like value capture mechanism, I don't know.

One thing that's come up in the popularity of PPPs in Canada vs. USA is that their municipal bonds aren't tax-exempt, which reduces the interest rate spread between public and private sector finance.

by Payton on Aug 8, 2013 11:07 am • linkreport

Payton: First, well aware of the tax issues related to private debt (I covered this stuff for two years) but you're forgetting the PABs market. A privately financed project can qualify for an allocation that will bring its cost of borrowing down to muni levels. There is also TIFIA but that could take years.

I thought it was a DBFOM as well but the people I spoke with who were at the press conference on Monday said DBOM. O'Malley may simply have misspoke because a DBOM doesn't make much sense for what they want to achieve with the project.

Finally, while private debt will have to be paid back a private equity investment will not. The private sector calculates all of that into their availability payment stream. Denver Transit Partners kicked in $54m in equity plus a $397m PABs issue for the Eagle P3, neither of which RTD would have gotten if they'd built the project themselves.

by Ned Russell on Aug 8, 2013 11:15 am • linkreport

@Ned Russell:
The Purple Line P3 is a DBFOM model. MTA is very clear about this. See the executive summary in the Presolicitation Report for a citation.

by Matt Johnson on Aug 8, 2013 11:22 am • linkreport

I wonder how much of the expected savings would be directly related to labor costs? How would the unions stand? I assume since it would be a private operator they would be exempt from having a transit union? My understanding is that most private operators are not unionized.

by Alan B. on Aug 8, 2013 11:44 am • linkreport

If energy costs go up or labor costs go up, the contractor is on the hook

I hope not. Since MTA can raise or lower fares if the cost of electricity changes drastically, risk seems reduced if the state keeps that risk, e.g., with the availability payment including a portion that is indexed to the cost of electricity.

Similarly, one would hope that the state assumes the risk of ridership being higher or lower than projected.

I wonder whether the transfer policy will be a function of who has to operate the gates. A thorn in the side of many people is the lack of transfers between MARC and Metro. That could be compounded unless the Purple Line either has a very low minimum fare or has a transfer from MARC and Metro.

by JimT on Aug 8, 2013 11:57 am • linkreport

The purple line isnt going to have gates in all likely hood. It will be proof of payment, and I am not sure how it being private will effect the likely hood of being checked.

One thing that just came into my mind is that the purple line is going to parallel the F4 and F6 from new carrolton to silver spring. Both of those buses are horrendously crowded and I imagine most of the ridership will move from the bus to the train. If WMATA isnt operating the line, I guess they just get to keep the money saved from having to run those buses.

by Richard B on Aug 8, 2013 12:08 pm • linkreport

This sound a lot like the streetcar franchises of old. The big difference being the state will foot some or most of the bill to built the infrastructure and the franchise contract is more complex to comply with various laws and regulations that didn't exist a century ago.

by Sand Box John on Aug 8, 2013 1:50 pm • linkreport

One unfortunate part of the maryland ppp law (depending on your view on labor of couse) is that it still requires Davis Bacon wages. The purple line would be built much quicker if this was not required.

by Matt on Aug 8, 2013 2:07 pm • linkreport

I guess if the stations are all unmanned then a proof of payment aproach may be the only option. I would expect transit police to enforce that, since the power to arrest is essential. Hopefully not with the system of stopping the train while tickets are checked.

by JimT on Aug 8, 2013 2:14 pm • linkreport

The Riverline in NJ uses proof of payment. The one time I ever saw them inspect they kicked people off at the next stop and fined them so it must have been transit police (or they had police waiting at the station after the spot check). Based on the number of people I saw jumping off the train as soon as they saw the inspectors I'd say there was a rather high rate of fare evasion... You'd need to monitor it very closely.

by Alan B. on Aug 8, 2013 2:20 pm • linkreport

One thing I don't like about private companies operating public transit projects is that the company must build profit in to the equation. Shareholders will demand ever-increasing margins as the public subsidy remains fixed. Usually this means the rank and file workers suffer.

@Alan B.

I doubt there is anything precluding the employees from organizing a union. As an aside, I have personally spoken to the manager for the private firm overseeing the DC Streetcar project (RATP) and he told me the employees there will be free to organize should they desire.

by dcmike on Aug 8, 2013 2:28 pm • linkreport

Yeah of course, I wouldn't be surprised if they are strongly encouraged not to unionize or if they do to do so weakly. The current economic situation is not really favoring strong unions either. I'm somewhat agnostic on the whole union issue, definite pros and cons, but I suspect a lot of savings will simply be in the form of paying people lower wages.

by Alan B. on Aug 8, 2013 2:41 pm • linkreport

Sec. 5.2.3 of the pre-solicitation report "anticipate[s] a TIFIA direct loan and/or PABs" and notes that MDOT/MTA submitted a TIFIA LOI. (I worked on tax-exempt multifamily housing revenue bonds for a few years myself, another instance where private companies can access the muni market.)

I don't know about Maryland's bond limitations, but one reason why Chicago and D.C. have recently opted for PPPs over muni issuance is that they've essentially maxed out their credit limits. A PPP (and even the DCU stadium deal could be seen as such) lets them borrow more without actually, y'know, borrowing more.

Sec. 5.2.4 of the pre-solicitation: "MDOT/MTA recognizes a portion of its availability payments [i.e., from gas tax & ] will ultimately be used for borrowed capital repayment."

by Payton on Aug 8, 2013 3:27 pm • linkreport

Haven't seen this yet mentioned ...

At the heart of any P3 agreement is the shifting of operational/maintenance costs from a public body (i.e. the state) to a private entity.

With this type of arrangement, the following is likely to occur:

• the public entity (in this case Maryland) may potentially save a lot of money by not adding employees to it payroll; that is, no future retirement/pension costs, no rising health premiums, etc.
• likely no union representation of workers; no bloated union contracts
• a good number of workers will be contractual, again shifting compensation costs to still yet another company/entity

P3s are all about personnel costs. Wages Health insurance. Pensions. The number crunchers at MDOT probably shudder when figuring out what the Purple Line's employee compensation costs will be 20 or 30 year down the road. Personnel expenses, to large extent, are why Arlington and Alexandria have separate bus systems, as does DC with its Circulator-- to break free from WMATA's enormous and growing union-contractual compensation costs.

by Sage on Aug 8, 2013 3:30 pm • linkreport

Payton: Yes, I see that in the pre-solicitation documents. My point was that if Maryland pursued a DBOM (which has been proven incorrect) it wouldn't be able to use PABs.

I would imagine that Maryland's credit limit has gone up with the new bill but it still may want to use a PPP so it can tap that credit for other projects. One good thing with a PPP is it would take much of the credit risk off Maryland's books.

by Ned Russell on Aug 8, 2013 3:36 pm • linkreport

Is another advantage that the projected (whether accurate or not) costs are lower, so benefit/cost is higher, improving chances for federal funds?

by JimT on Aug 9, 2013 1:44 am • linkreport

Hudson-Bergen Light Rail in New Jersey is also a DBOM.

by Solution Giver on Aug 12, 2013 7:10 pm • linkreport

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