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Availability Payment Structures in Public Private Rail Partnerships
Bob Prieto, Fluor
Public Private Partnerships or PPPs offer three principle benefits to the public sector in the
development, delivery, and operation of major capital intensive services.
The first benefit is the ability to achieve more efficient project execution by achieving a more
comprehensive “risk wrap” than what otherwise may be available to the public sector when
executing a capital construction program with its own resources. Among the risks that are
transferred are “interface risks” between the myriad of players typically involved (a risk typically
retained by the public sector and rarely effectively priced) and post warranty life cycle risks linked
to the performance of delivered assets.
The second benefit typically brought to bear through PPPs is the ability to finance the capital
asset delivery portion of the PPP through very different capital structures than what are
traditionally available to the public sector through the municipal bond markets. These structure
may be either “for profit” or equity based structures or “not for profit” or debt based structures.
Hybrid arrangements may also be possible. The differing financial structures that can be
accommodated under PPPs opens up new sources of capital, with a wide range of quality and
return expectations, different repayment regimes and longer tenors. A range of federal tools may
also be available, although it is a narrower range than what is available for highways.
The third benefit that PPPs bring to bear is the introduction of a service or performance standard
into delivered service and a structured way to ensure that these standards are actually met.
Rail PPPs differ substantially from highway PPPs (tollroads) in that it is rarely possible to cover
more than operating costs out of the fare box. Additionally rail ridership, more so than highway
ridership, is highly susceptible to a wide range of public policy decisions including conscious
efforts to move more of the traveling public to rail in core urban areas. The effective
implementation of public policy objectives are well outside the PPP providers control and
represent a high degree of uncertainty in making financeable ridership projections. Additionally,
public policy objectives rely highly on providing rail transit as a low cost transportation option for a
broad cross section of the public.
To address these different revenue risks (ridership, public policy on fare structures) and the
relatively high capital and operating costs these systems face, rail PPPs have migrated towards a
specific PPP form that relies on what is called an Availability Payment structure. The Availability
Payment simplistically compensates the PPP developer for an achieved level of service as
opposed to the number of individuals availing themselves of the service or at what price farebox
levels may be set at. These two risks and policy driven decisions are fully retained by the public
sector with the private sector compensated for sustaining agreed to service levels.
A simple example is illustrative:
A six car train (the agreed to standard) departs within one minute (the agreed to standard) of
schedule and arrives on time at its terminal location. All six cars have maintained a passenger
comfort level consistent with the targets set for cleanliness, lighting and temperature. The PPP
provider receives the agreed to availability payment whether there were 300 people on the train
or none and whether the fare was set at $5 or it was a ride for free day.
Actual availability structures can be as simple or complex as appropriate to achieve the policy
outcomes desired and the level of service agreed to between the public and private sector.
Undue complexity is priced by the private sector as are unduly difficult to achieve standards.
Under an availability payment structure, outstanding performance results in additional rewards to
the private sector while below target performance brings with it financial pain.