Public-Private Partnerships For Transportation Finance: Some Say Better Mousetrap… Some Say Necessary Evil

Public-Private Partnerships For Transportation Finance: Some Say Better Mousetrap… Some Say Necessary Evil

June 25, 2014  | Carter Templeton

BY JONATHAN GUILFORD
Professor, Director, Center for Transportation Public-Private Partnership Policy, George Mason University

Build a better mousetrap and the world will beat a path to your door, or so the saying goes. Are public-private partnerships (P3s) a better way of financing transportation infrastructure, as is commonly argued? Or are they a necessary evil in an era when the Highway Trust Fund seems to have run out of gas?

George Mason University’s (GMU) Center for Transportation Public-Private Partnership Policy provides a platform for business, industry, government and academia to sort out the claims, capture the realities, study the practices, and shed light on solutions, all with a goal of informing objective decisions that support good policy.

In the case of P3s for transportation, there is a lot to like and interest in P3s has exploded. GMU has its Transportation P3 Policy Center. Eno has a new report on P3s and has launched a training program. Global P3 developers and investors are entering the U.S. market, which some argue will be the biggest in the world in the coming decade. Conferences and meetings focused on P3s are proliferating. Congress has created a P3 Caucus in the House of Representatives and the House Transportation and Infrastructure Committee has convened a special six-month panel to study the issue as it applies to highways, transit, airports, waterways and public buildings.

The greatest appeal of P3s right now is that they bring private investment into transportation system renewal and expansion at a time when our traditional public-only funding sources have stalled and are at risk of failing entirely. Chief among these is the federal Highway Trust Fund, which the Congressional Budget Office currently predicts will run out of funds before the end of summer 2014.

Better risk management is another benefit. P3s for new infrastructure typically use improved and more comprehensive project delivery approaches, integrating the design, construction, operation and maintenance of transportation facilities into a single contract. Such approaches seem to reduce project cost overruns and delays, and may reduce lifecycle project costs for asset owners – typically state or local departments of transportation and transit properties. (P3s for ports and airports, in a slightly different form, have been around for decades.)

An additional benefit of P3s is that they typically require concessionaires to maintain facilities in a good state of repair. Public agencies are subject to the vicissitudes of year-to-year government budgets that often lead to deferred maintenance. From a user perspective, keeping assets in a good state of repair means better pavements, smoother rides, and fewer service disruptions. It is not just a goal, it is a contract requirement, and the concessionaire pays a penalty if it fails to deliver.

So what is not to like? On the funding side, private equity investors and lenders need to receive dividends and payments, of course – P3s are not free money. Those payments typically come from three funding sources: user fees (tolls and fares), dedicated taxes, or ongoing government appropriations. Depending on the situation, lenders may not owe federal or state taxes on the interest, which allows project developers to pay a lower interest rate. When the interest is not deductible, it can raise the cost of capital.

But compared to what? If the public funds are not there, or will not be there for decades, the higher cost of capital may be worth the price if it allows productive facilities be built and used years or decades before they otherwise might be.

There is also the issue that contractually-mandated operations and maintenance standards commit resources far into the future. We all decry the deferred maintenance and “run to break” syndrome so common in public provision of transportation assets and services. But the flip side of that is less attractive: you might not get to build as much stuff that way for a given amount of revenue because public funds can be committed for decades. The build-neglect-rebuild cycle involves more building than the build-maintain-maintain-maintain cycle. The latter may be good from a public policy standpoint, but it also raises the bar for selecting projects that really deliver social and economic value.

Like it or not, strategic neglect as a policy allows governments to move on and disinvest in infrastructure that is not really paying economic dividends. If you have a multi-decade contractual commitment to pay for first class operations and maintenance on a facility, the stakes rise considerably. Does the government of Pennsylvania or New York State or Michigan really want to have a contractual commitment to maintain every bridge in its system in perpetuity? What does that imply for a state’s – or a nation’s – ability to invest in areas that are growing and need new capacity?

Another concern about P3s is that while they may improve risk management, the risk premiums involved can be expensive. In theory (and it seems also in practice), P3s can reduce the risk of construction cost overruns and project delivery delays. P3 developers who take on that risk are loath to pay late penalties.

But P3 developers need to be paid to take on and manage that risk. The difference between the risk premium and actual project outcomes is where they make their profit – or take their losses.

Under traditional procurement, governments self-insure and manage the risks themselves. The risks are not as visible at the outset. Working a project through traditional design-bid-build has many governmental and private costs that are not usually well documented. Unfortunately, there is no shortage of headlines about big overruns and delays on major projects. Indeed, that is why the design-build approach has become more prevalent.

P3 developers will also take on demand risk, that is, the risk that you build it but no one comes. But again, if they take that risk, they want to be compensated for it. Increasingly, states are paying concessionaires from government funds that are paid each year on the basis of a project’s availability – the availability payment or AP model.

A final concern about P3s involves transaction costs. Identifying suitable projects, soliciting qualified concessionaires, and negotiating a multi-decade agreement with a selected concessionaire are all “extra work” compared to traditional government project delivery.

Moreover, it is a new kind of work. Traditional contracting has the advantage of 100 years of experience with contracts, surety bonds, design review, construction oversight, inspections and acceptance procedures. P3s are a big departure from that tradition. Much of the transactional work involved in P3s is being done for the first time. Even if it is a better way of doing business in the long term – and it may well be – those transitional costs have to be paid.

Concessionaires also bring a body of expertise and qualified lawyers to the table, skills a state or locality has to match in order to protect the interests of its citizens and taxpayers.

These are all policy concerns – P3 policy concerns. The Center for Transportation Public-Private Partnership Policy at George Mason University is dedicated to helping states, localities, business, industry, community leaders, and citizens to understand these issues. How might P3s advance renewal and expansion of a community’s transportation facilities and services? What are the pitfalls? How can communities reap the value and avoid the traps? Our Center’s research and education programs are focused on these issues.

The Center welcomes your inquiries, suggestions and support for its programs. Visit p3policy.gmu.edu for more information and a host of resources, including a library of transportation P3 research. Follow the Center on Twitter at #p3policy. And visit the Center at the Arlington campus of George Mason University.

We stand today at an important crossroads in the history of American infrastructure. Eno and George Mason University are helping to lead thought and practice at this critical juncture, resulting in better transportation P3 project outcomes and policy based on shared vision, responsibility and investment in mobility.

About the Author
Jonathan L. Gifford is a Professor in the School of Public Policy at George Mason University, and the director of the Center for Transportation Public-Private Partnership Policy. Professor Gifford’s primary area of expertise is transportation and public policy, with a particular focus on transportation and land use. His recent research investigates transportation finance and the role of public private partnerships.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of The Eno Center for Transportation.

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