The traditional method of funding major infrastructure projects in the U.S. has been with an 80 percent contribution from the federal government and a 20 percent local match. However, that amount of contribution from the federal government simply does not exist anymore. The revenue collected from fuel taxes is in decline due to high oil prices and the government has an ever-growing deficit. Thus, we must come up with innovative ways to accomplish major projects that will sustain and enhance our region’s economy and vitality.
One alternative that has become popular in the United States and Europe is a public-private partnership (P3). A public-private partnership is a contract between a government or public agency (say, the State of Ohio or the Ohio Department of Transportation) and a private sector company to plan, finance, construct and/or operate a road, bridge or facility.
A P3 involves private sector design, construction, financing, maintenance and delivery of services for a specific period. The public agency contributes land and capital, shares risk, allocates revenue and distributes payments to the private company.
This type of contract is desirable because it is cost effective, quicker, splits the risk between the public entity and the private company, reduces the initial public capital investment and provides an array of alternative sources for funding and financing a project.
Some notable major projects that are being completed across the country using a P3 method are:
- Port of Miami Tunnel, Florida
- Cooper River Bridge Replacement Project, South Carolina
- Virginia Megaprojects
- The Ohio River Bridges, Kentucky & Indiana (the Indiana portion)
- The Banks, Cincinnati, Ohio
The Buckeye Institute for Public Policy Solutions and the Reason Foundation recently released a joint report examining Ten Myths and Facts on Transportation Public-Private Partnerships.
Here are some of the common myths the report explores:
1. P3s involve the “sale” of roads to private interests.
P3s do not involve the sale of any facilities by governments to private sector interests. Some partnerships involve short-term contracts to design, build and possibly finance a road or a bridge. Others involves leasing existing government-run tolls roads to private investor-operators. The most robust form – the long-term toll concession – still involves only a long-term lease, not a sale.
In typical P3 arrangements, the government remains the owner at all times, with the private sector partner carrying out only the tasks spelled out within the concession agreements and according to the terms set by the state.
2. Private toll road operators can charge unlimited tolls in P3 deals.
In the event that a toll is a component of a P3, rates are a policy decision and are determined by state officials upfront before a concession agreement is signed. In fact, those pre-determined toll rate caps are generally established very early in the procurement process, as they are a critical input to potential bidders’ financial models.
3. Government loses control of public assets in P3 deals.
P3s are fundamentally performance-based contracts that spell out all of the responsibilities and performance expectations that the government partner will require of the contractor. And the failure to meet any of thousands of performance standards specified in the contract exposes the contractor to financial penalties, and in the worst-case scenario, termination of the contract.
The public interest is protected by incorporating enforceable provisions and requirements into the contract to cover things such as:
- who pays for repair & maintenance,
- how decisions on scope and timing of those projects will be reaches
- what performance is required of the private company
- how the contract can be amended without unfairness to either party
- how to deal with failures to comply with the agreement
- provisions for early termination of the agreement
- what limits on user fees or company rate of return there will be, etc.
In fact, in well-craft P3 arrangements, government can gain more control of outcomes because the public entity can require higher standards of performance from the private concessionaire that is financially responsible for its performance.
4. Government ends up holding the bag if a P3 project goes bankrupt.
In the event of a corporate bankruptcy on the part of a private sector investor-operator, the asset would revert to the project lenders (public entity) who, with permission from the state, would select a new operator. The lenders have strong financial incentives to continue to properly operate and maintain the road, lest they risk losing the value of their investment. It should also be noted that if the concessionaire needs to sell, get our of, or modify the contract for any reason during the lease term, final approval would rest with the state.
5. P3s involve selling our roads to foreign companies.
Foreign investment in our nation’s infrastructure represents the reverse of outsourcing. It could more properly be viewed as “insourcing;” where significant amounts of foreign investment are spent here in the U.S.
Foreign companies often win bids to complete P3 projects because they have the most experience with P3s. Countries like Australia, New Zealand, the United Kingdom, France, Italy and Spain have utilized transportation P3s for decades. Because of this, their services are more developed and mature than those in the U.S., since we have traditionally used only public-sector agencies to build and operate major infrastructure projects.