Anticipation that the Trump Administration’s trillion-dollar infrastructure plan will be based largely on long-term public-private partnerships (P3s) has led to a number of attacks on the P3 concept, most of which either fail to understand what it is or deliberately misrepresent it.
One of the cheapest shots is being presented as the work of Congress’s respected Joint Economic Committee (JEC). You can download a six-page summary on what appears to be a JEC letterhead, titled “Risks of Relying on Private Sector to Address America’s Infrastructure Needs.” But down at the bottom of each page, in small type, are the words “Prepared by the Democratic Staff of the Joint Economic Committee.” The report is largely an attack on the 10-page proposal from last fall’s presidential campaign, by Trump advisors Wilbur Ross and Peter Navarro.
Two of its criticisms are against the proposal’s call for federal tax credits for the equity investors—which I have argued are totally unnecessary, because there is no shortage of equity wanting to invest in US infrastructure: the shortage is of enough projects because most states don’t yet have workable P3 enabling legislation. Another is that the plan only deals with projects with bondable user-fee revenue streams, and therefore doesn’t address every infrastructure need. That’s true, and nobody ever claimed that it did. But there is a huge array of aging and inadequate airports, highways, and water systems that have or could have bondable user-fee revenue streams that would be good candidates. Would those fees be higher than what people pay today? Well, yes—things cost more to build today than 40 or 50 years ago, and current user fees aren’t enough; that’s why we have a large infrastructure backlog.
A more serious critique of P3 infrastructure is “No Free Bridge: Why public-private partnerships or other ‘innovative’ financing of infrastructure will not save taxpayers money,” by Hunter Blair, released by the Economic Policy Institute on March 21, 2017. Blair explains the difference between funding and financing, allegedly to debunk the notion that P3 concessions offer some kind of free lunch, which they obviously do not. He also seems to think P3s are being proposed because there is a shortage of financing, which he counters by defending traditional municipal bonding. But no serious advocate of P3s makes that argument. Instead, the case for P3s is based on advantages such as shifting (in particular) mega-project risks—cost overruns, late completion, inadequate user-fee revenue—from taxpayers to investors; tapping new pools of capital, including private equity and equity from pension funds; and guaranteed long-term maintenance, via enforceable performance requirements built into the long-term concession agreements. Blair never gets into those attributes of P3 concessions.
Blair does admit that boondoggle projects (with benefits far less than costs) “could be filtered out through the use of a P3.” He also concedes that, in principle, ongoing maintenance could be assured via a well-structured concession agreement, but then argues that most states don’t have the capability to craft or enforce such agreements. It is to address such needs that the U.S DOT has an office devoted to providing guidance on doing exactly that, including recommending that agencies such as state DOTs pay for high-caliber outside legal and financial expertise to be on their side of the table negotiating concession agreements.
But the worst part of Blair’s report is the section titled “Do P3s Yield Efficiency Gains?” Here he relies largely on a generally sound book by academic researchers Engel, Fischer, and Galetovic to make two of what he considers devastating critiques. The first is that “most of the lower costs for P3s come from sidestepping Davis-Bacon provisions that require the payment of prevailing [union] wages to construction workers.” I got in touch with Prof. Engel about this, and he expressed surprise, but in the book chapter that he emailed to me was the following sentence: “In general, PPPs often lead to efficiency gains because they allow firms to circumvent the provisions of the Davis-Bacon Act.”
In fact, the large majority of U.S. transportation P3 projects have received part of their financing from the TIFIA loan program and/or the issuance of federally tax-exempt Private Activity Bonds. A 2016 list from U.S. DOT’s TIFIA office listed 19 such projects. And because of the federal dollars involved in their financing, they are by definition subject to Davis-Bacon, Buy America, and other federal provisions. A larger table in Public Works Financing includes 32 such projects; besides the above 19, it includes three leases of existing toll roads, three totally private projects, two that were financed via all-debt 63-20 corporations and several others. I have no details on whether any of those used non-union contractors, but even if they all did, at most that would be 11 out of 32 projects—hardly what Blair claims are “most” such projects.
Blair’s second claim is that governments are taken advantage of by “opportunistic renegotiation” of concession agreements. This is a serious problem in parts of Europe and much of Latin America, where most of the concessions are not financed by toll revenues, and where government-business relationships are often, shall we say, cozy. I took part in a conference on this very subject at George Mason University several years ago, and was shocked to learn how common this practice is, especially in Latin America. But here again, Engel, Fischer, and Galetovic’s book’s section on U.S. P3s includes a table of 20 P3 concessions, and identifies eight of them (40%) as having been subject to “renegotiation”—a point Blair gleefully cites.
I have followed all eight of those projects, and none of them experienced the kind of “renegotiation” that is common in Latin America. Here is the list:
- Port of Miami Tunnel—completed on budget, a few months late, at substantial cost savings compared with FDOT’s initial estimates.
- I-495 Beltway Express Lanes—to maintain debt service after a low-traffic first year, Transurban, on its own, made a significant additional equity investment.
- Pocahontas Parkway—defaulted on its debt service, changed hands several times, but no taxpayer bail-out.
- Indiana Toll Road—filed bankruptcy due to over-leveraged initial financing and recession-induced traffic decreases; was repurchased by pension funds at a large premium over initial price. No taxpayer loss or bailout.
- South Bay Expressway—bankrupt due to low traffic from Great Recession; equity wiped out, debt restructured; TIFIA office says no net loss; SANDAG bought toll road out of bankruptcy at half price, a great deal for them.
- Las Vegas monorail—bankrupt due to low revenue; no taxpayer bailout.
- Dulles Greenway—had to be refinanced due to early revenue shortfalls; the concession term was extended by the State of Virginia, but there was no taxpayer bailout.
- SR 91 Express Lanes—profitable and successful, but bought out by OCTA to void a stringent non-compete clause.
As part of my email discussions with Prof. Engel, I sent him this list, and the only two points he made to justify any of them as having been “renegotiated” concerned the Indiana Toll Road and SR 91. In both cases, he pointed to taxpayers’ money benefiting the company involved. Because the State wanted to shield Indiana motorists from the increased toll rates for several years, it made a deal with the company to charge residents lower tolls initially, and compensated the company with shadow tolls. But that was the state’s initiative, not the company’s. As for SR 91, the company had no intention of selling what was moving forward as a profitable concession. When the County insisted on buying out the contract, the company rightly insisted on a market-based purchase price, which was calculated by a neutral third party based on the expected net revenues over the remaining years of the concession.
Prof. Engel and his co-authors have concluded, and say so in their book, that P3s are “the best option for transportation infrastructure,” and have devoted several books and many articles to this subject. But in this case, I think their definition of “renegotiation” has been shaped largely by their greater familiarity with the Latin American experience than that of the United States.
(The article first ran in Surface Transportation Innovation’s April issue)