National Mall Underground PPP Project Design
Published on: Mar 3, 2016
Transcripts - National Mall Underground PPP Project Design
National Mall Underground PPP Project Design
Presented By: Felix Li to The National Coalition to Save Our
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
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
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.
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;
-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.
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
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
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.
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 SuccessfulPPP 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
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.
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
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.
Graph 1: Key Constructs for Success in Contracting Professional Services graph
Three Stages ofPPP Development:
The three stages of PPP development are project planning and designing, project bidding,
as well as project construction, monitoring and evaluation.
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,
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
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,
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
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
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).
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
Table 1: The Institutional Structure of PPPs chart
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
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, andPerformanceEvaluation:
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;
-The effectiveness of contract management; the continuing appropriateness of key
-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;
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
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.
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,
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
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.
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
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
where private participants’ profits are lost. Beyond this point, risks are usually borne
solely by the public sector participant.
1. Public-Private Partnerships and Public Governance Challenges; Carsten Greve and
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)