REASON FOUNDATION
What are PPPs?
Public-Private Partnerships (PPPs) for infrastructure are contracts between public and private entities for the provision of facilities in areas such as power, water, transportation, education and health. Well-written PPP agreements specify the allocation of risk, which should create incentives for the private provider to deliver more efficiently and in a timelier manner than would be the case if the project were undertaken by a state-controlled entity.
States are increasingly using PPPs to deliver new transportation capacity, thereby improving road access without unduly increasing the burden on taxpayers. PPPs come in many forms, including both development of new infrastructure (“greenfield” projects) and maintenance and improvement of existing infrastructure.
Why PPPs?
PPP projects offer governments a way to address problems such as aging infrastructure, increasing demand and constrained budgets. PPPs should provide incentives to reduce cost overruns and delays compared with traditional projects. PPP projects have five significant advantages:
1. Delivery of needed additional transportation infrastructure: PPPs offer a way to fund the construction of highways that otherwise would not be built. Many states are facing a “perfect storm” of growing demand for road transportation and declining funding from conventional sources. As a result, maintenance and renovation of existing systems are using up available resources and congestion is getting worse. With long-term PPPs, the private sector takes on much or all of the responsibility for financing new highways, enabling governments to use the funds generated through upfront concession fees or revenue-sharing agreements to invest in the maintenance of existing roads.
2. Ability to raise large, new sources of capital for toll projects: Rebuilding and modernizing our freeways and Interstates will be very costly. The long-term concession model can raise significant investment capital for new and reconstructed transportation infrastructure because it is attractive to many different types of investors, including private investors, pension funds, banks and other lenders.
3. Shifting risk from taxpayers to investors: PPPs involve parceling out duties and risks to the parties best able to handle them. The state remains responsible for public rights-of-way and environmental permitting. Private companies typically assume the risks associated with construction cost overruns and possible traffic and revenue shortfalls. Shifting these risks to parties that have strong financial incentives to contain costs increases the likelihood that the project will be completed on time and costs will be kept down.
4. Providing a more business-like approach: Compared with government-run toll agencies, private toll road companies are less susceptible to pressure from narrow political interests and tend to be more customer-service oriented. They are quicker to adopt cost-saving and customer-service oriented technology, products and services.
5. Enabling major innovations: Another important advantage is the motivation to innovate to solve difficult problems or improve service. Today, we know that variable pricing (also known as value pricing) works very well to eliminate traffic congestion during peak periods, maximizing throughput while maintaining high speeds. It was a private toll company in California that took the initiative to introduce and perfect value pricing, and the latest generation of PPP projects is using this technology in Florida, Texas and Virginia.
Download full version (PDF): Risks and Rewards of Public-Private Partnerships for Highways
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