Two Things to Remember About Transportation Public-Private Partnerships

Following up on last week’s Wall Street Journal (subscription only) piece on the recent travails of private toll road operators in the United States (Turns out people are driving less. Who knew?), Aaron Renn at Urbanophile has a terrific rundown of the challenges of transportation public-private partnerships (or PPPs).

This is well-trod turf for us. In 2009, we produced (with U.S. PIRG Education Fund) Private Roads, Public Costs, which reviewed the problems with private toll roads. Then, in 2011, we produced a white paper on the prospects of PPPs in the construction of high-speed rail in the United States.

I don’t want to rehash Renn’s excellent piece or the WSJ article, but it seemed like a good time to focus attention on the two most important things you need to know about transportation PPPs:

1) Not all PPPs are created equal.

The details of a PPP arrangement matter – a lot. PPPs are often extremely complex and no two are the same. The implications of a PPP in which the builder/operator of a toll road or rail line is compensated through tolls or traffic-based fees are fundamentally different from the implications of an “availability payment” arrangement in which the government makes a set payment to a private firm regardless of how many customers show up. Tiny, seemingly inconsequential provisions of contracts can rear their heads years or decades later to force the government to pay compensation to the operator of a private transportation facility.

PPPs, in and of themselves, are not good or bad. Each proposal needs to be evaluated in detail in advance – ideally by people who are at least as savvy as the lawyers and consultants working for the Wall Street firms and international consortia that often front PPP proposals. When evaluating those proposals, decision-makers and the public need to remember …

2) Private investment is not free money.

In an era in which falling gasoline tax revenues have stanched the flow of dollars into transportation projects, PPPs seem to be a ready way to get the bulldozers moving again – just let private industry build, finance and charge for the use of the roads, bridges and transit lines. No public dollars, no ugly fights over raising taxes, no muss, no fuss – simple!

A recent story by Ryan Holeywell in Governing magazine describes the temptation that PPPs hold for public officials seeking a quick fix to chronic public works budget crunches, quoting New York state Comptroller Thomas DiNapoli as suggesting that PPPs can represent a form of “backdoor borrowing” that enables government to evade legal or other restrictions on the amount it can borrow for public projects. There are cautionary tales from elsewhere in the world – Portugal being the prime example – of PPPs being used to fuel poorly considered infrastructure investments with little fiscal accountability. In Portugal’s case, overuse of PPPs was a contributing factor to the nation’s debt crisis.

Even purely “private” infrastructure proposals have implications for the public interest. What the public gains in reduced need for tax dollars it loses in control over what gets built. Want to make sure that access to the highway is provided free of charge for emergency evacuations? Want to keep tolls reasonable so as to expand access rather than maximize the private owner’s revenue? Want to make sure that new infrastructure is well-integrated into the remainder of the transportation system? If you’re a citizen or a government agency, you need to be prepared to negotiate these items with the private builder and, usually, to pay compensation for whatever concessions are made.

In addition, very few “private” infrastructure proposals remain fully private for long. Our 2011 survey of high-speed rail PPPs around the world found not a single project – even among those initially billed as fully private – that did not eventually require a substantial public sector stake. In every PPP arrangement, there need to be provisions to ensure that the public is reaping benefits commensurate with its investment. Public officials also need to avoid “lock-in” – a situation in which the government’s ability to deliver needed public infrastructure is tied inextricably to the welfare of a single private firm, giving the private-sector actor virtually unlimited leverage to demand concessions from the government in exchange for completing the project.

Are there situations in which PPPs make sense? Sure. When a private entity can deliver a service or piece of infrastructure more effectively or less expensively than the public sector can – even after taking into account the higher financing costs usually facing private firms, transaction costs, and the cost to the public of monitoring the PPP – then a well-structured PPP may make sense. But in most cases, as Holeywell’s article in Governing notes, the supposed advantages of PPPs are less than crystal clear once one digs deep into the details.

As the WSJ article details, today it is private investors that are taking it on the chin for their PPP mistakes. But as Renn concludes, and as our work on toll roads and high-speed rail PPPs finds, there are just as many opportunities for the public to lose out in PPP arrangements.

Renn’s piece ends by saying that “this is emerging area clearly needs much more public scrutiny than it has gotten to date.” We couldn’t agree more.