Farella Braun + Martel's Focus on P3 in California.

Scott Douglass and Jeffrey Sykes of Farella Braun + Martel in San Francisco have a useful series looking at public private partnerships.  It's worth a read.  Here are some highlights from Part1:

The amount of private funds available for investment in P3s is difficult to pinpoint, but some estimate that  over $250 billion is currently available and that as much as $2.5 trillion may become available globally by 2030 to support well-implemented P3 programs as investor appetite for infrastructure investment increases.  The number of investment funds dedicated to infrastructure has doubled between 2006 and 2009, and  capital in those funds has increased threefold over the same period.  Further, many large pension funds and institutional investors, including insurance companies, are interested in P3s to tap into long-term revenue streams and to diversify their holdings, thereby increasing the amount of private capital potentially available for P3 projects by another $38 billion. Infrastructure assets are attractive to such private investors because they tend to be countercyclical, they generate quality cash-flows backed by long-term revenue contracts, and they have reasonably stable regulatory environments. 

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Detailed designs for construction work to be undertaken by the private partner are not typically specified in P3 agreements ....  For example, in the context of a wastewater treatment plant, the P3 agreement may require influent to a certain level.  Additionally, it may also require that the plant maintain certain odor controls, meet certain energy efficiencies, and be capable of future expansion. In the longer term, and while the short-term improvements are being designed and built in the case of an existing facility, the private partner would operate and maintain the facility (usually through a private O&M provider hired by the private partner) for the term of the P3 agreement. During a facility’s operation phase, the private partner typically assumes the risk of operating and maintaining the facility, which in the context of a wastewater treatment plant would include the risk that fines could be levied for the unauthorized release of untreated or undertreated wastewater. At the end of a P3 agreement, the infrastructure facility is returned to the public entity in a contractually predetermined condition, and the public entity can then operate and/or maintain the facility itself or outsource this work to the private sector.

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[T]wo primary payment models ... can be used to provide the private partner with a reasonable return on investment. The first is called a “user fee” payment model. Under this model, like its name suggests, the private partner is paid a return on investment through fees paid by users of the particular public infrastructure project. Usually, a rate-setting mechanism or formula is contractually set to establish a rate ceiling to ensure that the private partner does not receive a windfall. Sometimes, the rate-setting mechanism also ensures that the private partner makes a threshold rate of return, but where no floor is established for rates, the private partner assumes the risk that there will be an adequate number of users and that user fees generated by the facility will be sufficient to cover the cost to operate and maintain the facility, the service of debt, and a reasonable return on investment. ...The other payment model is called an “availability” payment scheme. Under this second model, the public entity pays contractually pre-determined amounts to the private partner during the term of the P3 agreement. These payments are similar to lease payments, but are subject to performance-driven deductions if the facility, in whole or in part, is under-performing. For example, if the infrastructure project is not “available” for use or if the facility fails to meet certain performance standards during the P3 agreement’s term, the “availability” payments to the private partner will be reduced.

 Significantly, under either the “user fee” or “availability” payment models, P3 agreements generally do not call for the private partner to receive significant payments until the construction work called for under the particular P3 agreement has been satisfactorily completed and the infrastructure facility has become operational. 

For reasons they explain, Scott and Jeff are pessimistic about the prospects of developing transportation infrastructure in California with P3, but they are hopeful for P3 as a tool for development by local entities:

[S]ince 1996, local government agencies have been able to pursue the following types of “fee-producing” infrastructure projects on a P3 basis: irrigation; drainage; energy or power production; water supply treatment, and distribution; flood control; inland waterways; harbors; municipal improvements; commuter and light rail; highways or bridges; tunnels; airports and runways; purification of water; sewage treatment, disposal, and water recycling; refuse disposal; and structures or buildings, except those that are to be utilized primarily for sporting or entertainment events.  Additionally, these enabling statutes for local government agencies are flexible and allow for many forms of P3s that can last for as long as thirty-five years. They even allow local government agencies to transfer ownership of constructed facilities to private partners, though ownership must revert back to the local government agency at the conclusion of the P3 agreement.  As explained in the enabling statutes: “It is the intent of the Legislature that local governmental agencies have the authority and flexibility to utilize private investment capital to study, plan, design, construct, develop, finance, maintain, rebuild, improve, repair, or  operate, or any combination thereof, fee producing infrastructure facilities.”  [See Cal Gov't Code Section 5956 et seq.]

However, they caution, the California enabling legislation is focused on "fee producing" projects.  In order to have private entities develop projects that ultimately rely on general tax revenues or user fees may require additional tweaks of the enabling legislation.  In addition, the California constitution was amended by voters in 1996 in a manner that makes it difficult for California's nearly 7,000 cities, counties, special districts, schools, community college districts, redevelopment agencies, and regional organizations to raise user fees and taxes that could form the basis of availability payments for a P3 project.