Soldiers pass by Fort Belvoir’s first Starbucks,
located in the town center. |
Kevin L. Ratner, president of Forest City Los Angeles, is no stranger to public/private partnerships (PPPs). Working with federal, state, and local governments and the U.S. military, Forest City has developed communities, mixed-use town centers, and scores of other facilities across the country. What makes a PPP tick? According to Ratner, it’s "a shared vision that produces significant public benefits, capitalizes on private sector capabilities, and respects everyone’s time and money."
Ratner’s observation is borne out by our experience as PPP practitioners and advisers, and our review of nearly 50 widely varied case studies. As shown in four projects highlighted here (see below), the success of PPPs depends on tailoring the procurement process, deal structure, and oversight to the project type and goals.
Procurement
Choose the best-qualified partners first, then collaborate on project design and implementation.
Complex projects involving both public and private uses, such as town centers, work best when the public agency selects its private partner using a request for qualifications (RFQ). In contrast with the traditional request for proposals (RFP), RFQs allow partners to collaborate on the full spectrum of functions and services, including design, financing, construction, operations, and oversight, employing their respective resources to achieve a shared vision.
For instance, the Victoria Gardens town center in Rancho Cucamonga, California, entailed developing 2.5 million square feet (232,000 sq m) of retail, office, residential, and civic uses on 160 acres (65 ha) of public land over a decade or more. A quantitative RFP procurement would not have addressed the city’s desire for genuine innovation; it wanted to create an old-fashioned mixed-use downtown rather than the regional shopping centers then in vogue. Forest City was selected based on qualifications and vision, then, through negotiations, the final deal structure was forged and project design ensued.
At Fort Belvoir, Virginia, near Washington, D.C., the RFQ established "cross-silo" collaboration among the U.S. Army, its private community developer/partner, and a quasi-governmental intermediary. The results: 15 percent lower construction costs with no government funding.
After a PPP solicitation for the Port of Baltimore’s Seagirt Marine Terminal failed in 2005 due to political controversy, the process was successfully revised in 2009 with clear, fair vetting criteria, as well as a transparent selection process based strictly on qualifications.
For the Deukmejian Courthouse project in Long Beach, California, the state used a combination RFQ/RFP to select a Meridiam Infrastructure team for one of the first social-infrastructure PPPs in the United States. The court system had specific space and functional needs. It could make fixed lease payments, but it did not have the front-end capital to build and own the facility. After selecting a short list of developers, it required each to provide detailed cost and design submissions.
The final selection weighed both qualitative and quantitative factors. "The Long Beach Courthouse multiphase procurement required developers to expend significant resources prior to the contract award," notes Stephen Reinstein, CEO of Meridiam’s Long Beach affiliate, Long Beach Judicial Partners. "The state was on a fast track to produce a high-quality project using an integrated design/build/finance/operate/maintain model."
Developers warn about RFPs masquerading as RFQs. Solicitations that seem to invite creative collaborations can sometimes degenerate into costly bidding wars aimed at predetermining the specifications. "We want to know upfront if an RFQ is the beginning of a true qualification-based, shared-vision process or is actually the beginning of a traditional bid proposal," says Ratner. "We may be interested either way, but the answer affects how we assess procurement time, cost, and risk, as well as the project’s ultimate quality and success. We often will do a better job if we aren’t required to prematurely hard-line the scope and design."
Deals
Fort Belvoir Town Center combines ground-floor
retail with two stories of residential above. |
Share rewards and risks through tough, but fair, structures.
PPPs depend on the private partners’ freedom to contribute their best ideas—and to profit from them. Public agencies need assurance that private firms share their goals. Thus, PPP deals must be carefully structured to address both public and private interests, allocating rewards commensurate with the risks.
The optimal deal structure will depend on the asset type, financing, long-term ownership and operation, and other external imperatives. The partnership should also be tailored to best use each partner’s resources and capabilities. In most PPPs, the private partner serves as master developer, with full responsibility for implementing the vision as governed by the partnership agreement.
The Fort Belvoir Town Center’s effort to attract retailers was complicated by participation of the Army and Air Force Exchange Service (AAFES), which controls retail outlets on military bases. To accommodate this situation, the PPP incorporated AAFES as master lessee to recruit and supervise the other retail stores, while the developer, Clark Realty, built the facilities and taps a portion of the rent. Clark’s chief objective, however, was to enhance the on-post residential community that it had developed under a master PPP, which produces its profits. AAFES controls the tenant and retail risk in a structure analogous to a shopping center, in which large anchor stores create demand and provide risk coverage for the entire project.
In contrast, the Victoria Gardens partners decided that the developer would own and manage the project’s private elements while the public agency owns and operates the public facilities.
The Seagirt Terminal PPP provides a complex, traditionally governmental business function for the Maryland Port Authority. The deal requires the private partner to build, equip, operate, and maintain a terminal for new supersized cargo ships, improving the port’s global competitiveness. Portions of the profits are dedicated to improving access and relieving congestion in a nearby highway corridor.
Oversight
A rendering of the Governor George Deukmejian
Courthouse in Long Beach, California. |
Monitor outcomes, protect taxpayers, and preserve partnership.
Government agencies facing enormous fiscal pressures are counting on the cash flow potential of PPPs. But their fiduciary role—ensuring that public resources are protected and wisely spent—challenges even the best-intentioned partnership. Robust performance measures and effective management processes must be in place to protect the public’s economic interests. Most PPPs have terms of 25 to 50 years or more, so oversight mechanics must anticipate changes in circumstances and include efficient, equitable methods for addressing those changes. But oversight cannot be so complex as to impede progress, nor so punitive as to thwart collaboration.
Among many novel approaches, "availability" payments for the Long Beach Courthouse allow the state to amortize capital costs over 35 years and increase its leverage over the private partner’s maintenance and other performance standards throughout the project’s life.
The Fort Belvoir Town Center shows how joint oversight enhances both public and private interests. "Providing mixed-use retail was as much an amenity strategy as it was a smart growth decision," explains Casey Nolan, Clark Realty director. "Military families shop for necessities just like the rest of us. While many stakeholders questioned the complexity of adding retail to an already successful housing PPP, we convinced them that our residents deserve the best communities possible, including walkable retail."
Conclusion
Victoria Gardens in Rancho
Cucamonga, California. |
Ultimately, PPPs depend on strong leadership. Developers experienced with the benefits and pitfalls of PPPs should help shape the partnerships they enter, balancing enthusiasm with hard financial data and keeping a clear-eyed watch on both the public good and the private bottom line. Public officials, in turn, must be positive partners, willing to make tough decisions based on market and economic data, not solely political opinion.
As we proposed in "The P3 Manifesto" (Urban Land, May/June 2012), partnerships present arguably the best opportunity for government to leverage scarce resources in an era of growing needs, massive budget pressures, and intense resistance to tax increases. Worldwide, PPPs have significantly reduced the costs of developing and operating many types of public facilities and infrastructure. Successful PPPs, with collaborative procurement, deal structures, and oversight, are essential to helping fulfill important public goals.
Four Case Studies Governor George Deukmejian Courthouse (Long Beach Courthouse Project)
Public agency: California Administration of the Courts.
Private partners: Meridiam Infrastructure (developer, 100 percent equity), Clark Design/Build of California (contractor), Johnson Controls (operation and maintenance).
Development value: $495 million. Project dates: Started in December 2010; completion expected in September 2013.
Description: Design, construction, operation, and maintenance of courthouse to replace dilapidated, overcrowded facility built in 1959. New facility includes 31 civil and criminal courtrooms, holding cells,
a secure entrance (known as a sally port), and office space. It anchors a larger redevelopment project.
Highlights
Establishes one of the first social-infrastructure
"availability" payment PPP deals in the United States.
Stipulates that the building be owned by the state throughout the development period and the 35-year project term.
Bases payments from the state on availability of courthouse facilities and performance against contract, protecting the public interest and increasing the private partner’s motivation to provide high-quality service and maintenance.
Calls for service fee payments to be made twice a year, paying off the capital cost over 35 years; payments also include operating expenses and amortized lifecycle costs.
Port of Baltimore, Seagirt Marine Terminal
Public agency: Maryland Port Administration.
Private partners: Ports America Chesapeake and Highstar Capital.
Development value: $1.465 billion value to the state. Project dates: Started in August 2010; work is ongoing.
Description: Private partner to construct a new 50-foot (15.2 m) berth, purchase new cranes, and operate and maintain the Seagirt Terminal, including its berths, container cranes, and gantries, under a 50-year lease/concession agreement.
Highlights
Frees up state financial resources for other critical infrastructure needs.
Will create one of several East Coast ports capable of handling the large super post-Panamax container ships that will begin calling at East Coast ports upon completion of the Panama Canal widening project in 2014.
Will use proceeds of the concession payment for improvements to Interstate 95 and U.S. Route 50, the highways that serve the port area.
Honors existing labor agreements, which won support for the project from local unions.
Includes a capital reinvestment payment to be spent on shovel-ready transportation projects along I-95 and the Chesapeake Bay Bridge, among others.
Includes berth IV development, a $54.3 million civil and dredging commitment to purchase four cranes by 2014 for a total of $45.2 million.
Village Commons at Belvoir (Fort Belvoir Town Center)
Public agencies: U.S. Department of the Army, Army and Air Force Exchange Service (AAFES).
Private partner: Clark Realty.
Development value: $17 million.Project dates: Started in 2003; work is ongoing.
Description: 86,000-square-foot (8,000 sq m) retail, office, and residential strip, fulfilling residents’ desire for high-quality, walkable retail space in a military housing privatization project.
Highlights
Creates unique partnership between AAFES—which controls Army and Air Force base retail offerings—and the developer, who is the Army’s partner on the Residential Communities Initiative housing privatization project.
Establishes cooperation on design and development by AAFES and Clark to solve the problem of a project that crosses military "silos." Clark operates apartments, receiving soldiers’ housing allowance for cash flow; AAFES leases the retail spaces from the public/private partnership, then subleases to tenants. Cash flow from AAFES pays for retail development cost. Project involves no equity or costs for the government and lowers construction expenses by 30 percent.
Demonstrates how creative deal structures can break down government silos that often stymie projects.
Results in successful retail strip, which prompts a new, broader-based town center, now in the works.
Victoria Gardens Downtown Master Plan
Public agency: City of Rancho Cucamonga, California.
Private partner: Forest City Enterprises Inc.
Development value: Over $300 million.
Project dates: Phase I opened in October 2004; work is ongoing.
Description: Public/private partnership joint venture for development of mixed-use town center on 160 acres (65 ha) that ultimately will include 2.5 million square feet (232,000 sq m) of retail, office, residential, and civic uses.
Completed to date: all infrastructure, a police substation, a performing arts cultural center, a library, 52 percent of the residential space, and 57 percent of the commercial and office space.
Highlights
Included qualification-based selection and exclusive negotiation agreement (ENA) in November 1999 on 92 acres (37 ha) owned by a public agency, later expanded to 160 acres (65 ha). Planning and entitlements managed by developer in collaboration with public agency during ENA period, and disposition and development agreement entered into during February 2002.
Has a deal structure that involves transfer of the site, other than the public library and cultural center, to the developer, which was responsible for installation of all infrastructure, the police substation, and development of private-use improvements.
Gives a public agency responsibility for development and operation of the library and cultural center and construction of public parking.
Constitutes an award-winning example of a public/private partnership that provided for development of a town center on a grid of new streets. The project incorporates the public-use facilities and the elements of a three-anchor regional shopping center, locating in-line shops on the street grid as storefronts in an old-fashioned downtown configuration with the department stores and residential units on the periphery.
Created a partnership in which the public and private partners are modifying their original vision to accommodate market demand for mixed-use, higher-density residential uses above and adjacent to the downtown retail/office environment.
Michael Burbach contributed to the preparation of these project summaries.