Future Prospects for Public-Private Partnerships
February 28, 2018
The state of American infrastructure figures prominently in current national policy discussion, prompted by poor report cards, energized political campaigns, and recent executive initiatives. Severe underfunding of needed infrastructure projects has prompted proposals from both sides of the political aisle, with public-private partnerships (P3s) featuring prominently. This article evaluates and offers perspective on different types of P3s, examining their benefits and costs and the Trump administration’s plans.
There is a salient need for increased infrastructure spending in the United States. The American Society of Civil Engineers rated American infrastructure a “D+” this year, and estimates that over the next decade, it will cost approximately $4.6 trillion to repair and modernize aging bridges, roads, pipelines, railroads, schools, and ports . Arguments for increasing infrastructure spending in the years to come include low interest rates, an increased need for trade labor employment for less educated people, and the potential to raise wages in construction and related industries .
Both Republicans and Democrats have expressed support for increased infrastructure spending: the Obama administration embarked on private partnerships at the EPA, USDA, and DOT with the goal of increasing middle class employment, repairing infrastructure, and modernizing water and sewer systems . Secretary Clinton’s campaign involved a $275 billion proposal with similar goals: investing in federal infrastructure and increasing middle-class employment, namely in construction and manufacturing . President Trump’s campaign proposed increased infrastructure spending and a $1 trillion joint public-private plan with $200 billion from the federal government. Since taking office, he signed executive orders aimed at hastening infrastructure permit processes, following precedents from Obama and Bush .
At the center of the current Administration’s proposal are public-private partnerships (P3s). P3s can assume a number of forms, but as the World Bank explains, typically involve “a long-term contract between a private party and a government entity, for providing a public asset or service, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance” .
Public-private partnerships can assume several forms, with each including a different level of involvement and risk by the private entity. As will be discussed below, types of P3s can include management contracts, leases and affermages, concessions, build-operate-transfers, design-build-operates, and joint ventures.
Management contracts typically involve a government awarding a private operator a fixed fee in exchange for performing specific tasks (typically operations & maintenance) and are normally shorter engagements (2-5 years) than government projects. These projects are common in the water and energy sectors; due to the low level of private involvement, they are both low-risk for the private entity involved and are less politically sensitive .
Leases and affermages are typically longer (8-15 years) and involve the private operator of the project charging a fee to consumers for the service; the private operator must manage and maintain the assets in exchange for revenue, to which the government is entitled a share. In this model (commonly water supply, airports, and sanitation projects), the operator bears downside risk  .
In concessions, the government grants a private entity the right to use an asset over a longer period of time (25-30 years), and they are responsible for maintenance, operations, and some investment; the general public is typically the main revenue source. Two types of concessions exist, build-operate-transfer projects and design-build-operate projects. Build-operate-transfer projects involve the financing of a new project by the private sector, in which they assume a large amount of risk to develop a new facility or system in exchange for a government fee . Design-build-operate projects involve an arrangement in which the government finances the construction of new assets by paying a private entity a fee (payable in installments, with the expectation that the private entity reaches certain milestones and completes the project to the government’s expectations) .
Finally, joint ventures are a contractual structure where the public authority desires an equity stake in the private company operating the asset, or when the public sector divests shares of an existing public utility to the private sector .
Typical benefits of P3s cited are decreased costs as compared to traditional contract bidding models, increased efficiency (often due to either private sector expertise or imposition of late penalties), risk-sharing by the private contractor to reduce taxpayer liability, and increased oversight with regard to project maintenance and quality . One of the most significant arguments is that they have potential to reduce pressure on public budgets. Currently, states face large debts, such as unfunded pension obligations for retirement and healthcare costs, which preclude them from spending more on infrastructure . With P3s, states and local governments can face lower cost burdens and can avoid risks that come with infrastructure projects, such as construction, financing, and taxation. When the public sector builds and operates infrastructure, taxpayers bear responsibility when costs are higher or revenue is lower than expected.
P3s can help reduce costs and by extension reduce the burden on taxpayers. With its expertise, the contractor can predict costs and make appropriate decisions at the outset regarding construction and operation of the infrastructure project, avoiding budget overruns that often occur with large capital projects . An example of this expertise is the Northampton County bridge rehabilitation project: this project aims to repair 28 bridges in Pennsylvania, and is utilizing a P3 approach expected to reduce total construction costs by up to 30% . This expectation is reasonable: one study found private companies can achieve construction cost savings of 15-30%, due chiefly to more efficient project management, shorter build times, and fewer administrative costs (found on pg. 10) .
P3s can also offer schedule certainty; one notable example is the Long Beach Courthouse in California. The P3 sped up construction on the George Deukmejian Courthouse in Long Beach, California, an outdated facility. California gave the project to Clark Construction for a 35-year agreement, which was completed in 2013 on time and within budget. It opened in May 2014 – Clark gained cash, and California now occupies the courthouse, which has improved facilities and amenities . The ability of P3s to provide schedule certainty is also supported in the literature: a Syracuse University paper showed that in Australia, P3s delivered at an average of 3.4% ahead of schedule, and in the UK, reduced the number of infrastructure projects behind schedule from 70% to 24% (pg. 14-15) . P3 projects don’t always finish on time, but are likelier to.
Besides these advantages, the knowledge that private firms who specialize in a type of infrastructures brings to the partnership helps ameliorate many structural and operational problems . An example of this is the South Fraser Perimeter Road Project located in British Columbia, Canada – The Fraser Transportation Group (private sector) provided the design for the project .
P3s can be risky for the public, so a cost-benefit analysis without political influence is essential to this approach. Since governments will fundamentally be accountable for delivering public services and infrastructure, risks can never be completely shifted to the private sector in private-public partnerships. If problems arise or expected returns are not achieved, the public sector is left with the responsibility to manage the fallout. An example of this is Metronet’s 30-year P3 deal. Metronet is a private company that won a £30 billion P3 contract to upgrade and maintain London’s Tube network, but it failed and had to be taken over by London’s transport authority last year. Metronet’s failure has already cost the financial backers of the P3 an extra £2 billion and left Londoners with 500 unfinished subway stations. Costs are expected to grow by an additional £1 billion .
Generally, other problems with the P3 model include information and expertise asymmetry between the public and private sectors (i.e. private firms may have better knowledge of project timelines and costs, allowing them to negotiate unfairly beneficial deals), the long-term commitment needed from political and planning perspectives, and capacity (and thus construction cost) issues if P3 demand becomes too high .
P3s are also limited in scope, and may not be applicable as solutions to every infrastructure project. One case is Amtrak, whose critics claim the federal government’s expenditures and current obligations for the program are understated, and cite instances in which Amtrak misreported capital subsidies . A joint venture arrangement in the case of Amtrak would be difficult to execute for a number of reasons, primarily because its common stocks are considered worthless by the US railroad companies and would fail to sell in an initial public offering by the federal government. Since Amtrak has never operated at a profit, has never paid a dividend, holds $1.4 billion in long-term debt, and has a number of unfunded labor expenses, the divestiture of Amtrak is very unlikely  and thus shows a limit in private-public partnerships.
Another weakness of the P3 model is the transaction costs that make it difficult to achieve a competitive market . In 2006, an investment group led by Macquarie and Cintra (a Spanish infrastructure firm) decided to lease an aging toll road in Indiana for $3.8 billion, and provided a big upfront cash payment for the state in return for the consortium’s right to collect toll revenue. The project to upgrade the 157-mile roadway ran into trouble partly as ridership on the highway decreased during the recession, when fewer people were driving to and from work . In 2015, the company filed for bankruptcy; this is an example of a deal in which neither party benefitted.
Moving Forward with P3s
The Trump Administration recently released a report containing proposals for detailed public private partnerships/infrastructure plans, including the expansion of the Transportation Infrastructure Finance and Innovation Act, which extends loans for surface transportation projects; lifting the cap on Private Activity Bonds, (financing tools issued by the DOT); and incentivizing innovation via competitive grants . The plan pledges up to $200 billion in federal funding toward projects, with a goal of $1 trillion in infrastructure investment, the rest coming from the private sector via generous tax credits .
Current proponents of the P3 approach, such as Assistant to the President Peter Navarro, describe the plan as a beneficial alternative to the US’s current methods for infrastructure spending, which rely heavily on government bonds and are less efficient . Additionally, President Trump has newly expressed ambivalence about the plan, in contrast to past enthusiasm .
These advantages and criticisms of public-private partnerships show that the P3 approach is not uniformly applicable – while the model can deliver several benefits when implemented thoughtfully, a poorly designed project can put governments (and taxpayers) at risk. As the viability of a P3 is highly context-dependent, policymakers must carefully weigh these considerations .
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