The Case for Public-Private Partnerships
California is the world's 10th largest economy. The mansions of Beverly Hills, tech giants of Silicon Valley, and stars of Hollywood all evoke thoughts of wealth and success. Simply put, California is a giant.
In the wake of the sub-prime mortgage crisis however, this giant is being brought to its knees -- straddled with a mind-blowing 23.4 billion dollar budget shortfall and no relief within sight. Its cities are declaring bankruptcy, the most recent being the city of Vallejo, located in the affluent San Francisco Bay area. State and local governments are desperate for capital -- a shrinking tax base and the lack of credit has resulted in an inability to meet budgetary needs and has forced cash constrained governments to look for new ways to raise cash.
Simultaneously, it has become increasingly obvious at the Federal, State and local levels, that aging infrastructure in our country cannot continue to be properly serviced. Maintenance costs are prohibitively high while replacement is financially unthinkable. The American Society of Civil Engineers has estimated the un-met need for such maintenance costs to be $2.2 trillion over the next five years. Political infighting in many states makes decisive action impossible, leaving most constituencies with outdated, underfunded and overused infrastructure.
Given these realities, many governments are looking to privatize their infrastructure, including tolls roads and parking systems, to provide capital and eliminate costly maintenance and operational burdens. The privatization of public infrastructure is not a novel concept; however the recent economic downturn may well be the accelerant which takes this process from an orderly transition to a needs-based avalanche.
In today's world, private investors and local and state governments, through public-private partnerships (P3's), have the unique opportunity to satisfy each other's needs. Through this arrangement, the skills and assets of each are shared to affect a joint undertaking to provide facilities or services to the general public. In New York State alone, over $51 billion of infrastructure assets are being reviewed for possible infrastructure P3's.
There are some who challenge this idea and suggest that private entities should not operate or profit from public infrastructure. Yet the facts are compelling in pointing towards such public-private partnerships. In the first instance the assets typically remain owned by the government, and are only leased to the private entity. Moreover, the asset continues to be available to all the same users who previously benefited from that asset.
While many governments seek to operate their infrastructure efficiently, when they face crippling cash constraints, they simply don't have the money available to improve and enhance those assets. This creates a catch-22 in that the government doesn't have the money to improve the system in a fashion where additional revenue can be generated over time. Private enterprise does -- and by virtue of the private sector's willingness to invest in these assets, the public benefits from improved operations and services, not to mention the allocation of all current and future maintenance, repair, and replacement obligations to the private entity. Obviously, the private investor seeks to make a return on its investment, and generally does so with increased user fees. As a result, private investors are usually able to pay large up-front payments to the governmental entity for the right to collect revenues over a long-term lease, usually in excess of 50 years.
Even if the government had the capital necessary to make these improvements, the government does not hire entrepreneurial people who get paid to take risks. Typically, caretakers of infrastructure assets are risk adverse and preserve the assets without "rocking the boat". Individuals running Departments of Transportation or parking systems are not paid bonuses or increased revenue for taking risks. They are in fact incentivized to avoid risk and keep things going just as they are, especially in these difficult economic times.
Though private enterprise is in a position to bring about necessary and positive changes, it is also able to preserve the status quo where such maintenance benefits the community. Some private investors (including this author) believe that a successful private-public partnership demands the participation of organized labor. Public infrastructure, such as parking systems and toll roads are frequently staffed and maintained by union employees. These workers have invaluable experience in their respective positions and offer any private-public partnership the opportunity for a seamless transition of operations. Private investors have shown that a labor-friendly business model benefits both the private investor- by offering an experienced and capable workforce, and the general public-by providing high-paying local jobs.
Public-private partnerships should be embraced rather than feared. The recent economic downturn has left our economy reeling and forced state and local governments to rethink the way they do business. Fortunately, a unique opportunity has emerged in the form of public-private partnerships, an alliance which stands to benefit all parties involved. In these trying economic times, a government's success may well depend on its ability to explore non-traditional sources of revenue. California can be a giant again, but only if it maximizes its resources and harnesses the drive and ingenuity of America's entrepreneurs.
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It’s not a question of whether private capital should be attracted to the public sector, but whether public bond offerings are cheaper than “public-private partnership” deals from infrastructure funds. They are. Those interested in actual analyses of the multiple shortcomings and failures of P3s rather than ideological hot air can read:
USPIRG’s “Private Roads, Public Costs”
[at http://www
and Ellen Dannin’s just-published piece, “Infrastructure Privatization Contracts and Their Effect on Governance
[ http://pap
Let’s get some solid facts into the discussion.
Lee,
The links you posted were definitely pretty damning of the PPP approaches. At least in roads, and at least in the USA right now.
But it can be done better and far more effectively and efficiently. I worked under a P3 arrangement in the UK, as well as several alternative arrangements for funding public infrastructure. My findings were:
Decision making becomes more diverse. With more players in the game there are more decision makers, hence more decisions made.
A variety of strategies and activities spring up as each looks for the leading practice to try to shine brighter than others in the field.
The imposition of harsh regulations and penalties, (As per the Severn Trent Water fiasco) means that a lot more work goes into accountability, and getting it right.
New techniques and focus emerges in asset cost management generally, and in CAPEX justification specifically. (E.g. the PAS-55 work)
And... it is far more efficient. Period.
Less Government bungling and far more private industry initiative to get things done and make a profit. If it is well regulated and controlled the private sector - capitalism at work - tends to make things work.
Unhealthy view right now, but true.
Daryl...
Let’s see. PPPs because our state is “desperate” to find some capital? Hello?
Grow up, LeeCoco. We’re broke. Thank God we’re in a capitalistic system that allows us to attract more capital to the public sector. All we need is well-structured agreements that are fair and provide proper controls.
There are far more successes with PPPs than problems. The PPP has proven viable all over the world. Too much public employee union hogwash, benjismith. Their interest is in creating more publicly employed union members to pay more dues to maintain control of this state’s legislature. Do some of your own research.
Real world examples, FatJoe? Know how to use Google? Travel some time. You’ll see the improvements everywhere – everywhere but here in the good old USA. Our infrastructure grows more dog-eared by the day. Myopic thinking and an unwillingness to look elsewhere for lessons learned. We’re doomed.
You all still don’t get it. Someone has to be making money to pay the taxes that support all of these wonderful social programs, and keep the lid on the size of the bureaucracy. PPS are an effective way to do both.
Leftright: you ARE left right out of the picture, right now. The cuts that should have been made weren’t. The bureaucracy can’t make tough and fair decisions. Private capital brings discipline. Right now, it is the only thing standing between California leading the way or becoming a third world country. So what’s it going to be?
Isn't the rebuilding of New Orleans a PPP? Let's ask the people of the lower ninth ward how that is working, shall we?
Mr Frydman makes good points The involvement of private expertise and money makes complete sense. There is clearly no way to pay as a state for all the infrastructure we need. Nor should the public sector take all the risk. We couldn't publicly finance everything we needed when times were good; we certainly can't now. Heck, we can't even afford to pay the pension obligations of the state's public bureaucracy!
The Texas Transportation Institute report on worst commutes in the country put San Diego, Los Angeles, San Jose, San Francisco-Oakland all in the top 10. Perhaps we have some of the worst roads in the country only because Sacramento was missing from that list?
The Economist ran a special report this week which my fellow commentators should read: http://www
Ultimately, what do P3 programs create, other than vital infrastructure? Jobs. Public jobs. Private jobs. Union jobs. And all of those are getting to be in short supply in CA right now....
With all due respect, Mr. Frydman doesn’t make the case for “public-private partnerships” at all. All he does is point to the desperation of government to finance needed infrastructure improvements. Desperation is hardly a proper basis for sound public policy. He completely ignores the well documented problems with P3’s involving the shifting of private risk to the public, lack of accountability and transparency, inability of governments to adequately assess, monitor and oversee the long term contracts involved, loss of public control over transportation planning, and the greater cost of privately-raised funding as compared to funding raised through government bonds.
I think we can all recall the societal benefits from the privatization of the electric utilities, and the wondrous bounty brought upon by companies like Enron, who use nondisclosure agreements, anticompetetive measures, fraudulent trading practices, and blatant market manipulation to squeeze extra profits from the system.
One of California's biggest financial problems is that it is STILL suffering under the weight of the increased energy costs brought upon by the utility privatization. Even if Enron itself no longer exists, the havoc it played on the energy market has never been corrected, and the private-sector energy companies are still sucking money out of the system.
Privatization of public assets is almost always a disaster.
"The public benefits from improved operations and services," says the corporate shill, without pointing to any concrete, real-world examples.
So I'll do it for him: Chicago's privatized parking meters have broken down repeatedly, had their updating and renovation schedules repeatedly set back, and generally been a disaster. So fees have skyrocketed and service has DECLINED. Which is what happens in most concrete, real-world instances of the privatization of public assets. The "entrepreneurs" (more accurately called "profiteers") don't exist to "take risks," or "improve services," they squeeze every penny out of the system they can.
Good example!! I used the Skyway, cause I use that, but not the parking meters!
I think California's problems have more to do with Jarvis' Prop 13 gutting the ability of the state to support itself while continuing to add burdens to the system with further propositions, and the unwillingness of the citizens to change that. The extreme problems they have are self inflicted. California has been playing games with their budget for years to hide the looming mess that is now manifest.
A public-private partnership will only change the money going from state coffers to lining the pockets of investors-the money still comes out of the pockets of the citizens/consumers. If you can demonstrate that over the long term this profit based partnership would be cheaper and more efficient, then more power to the concept. Otherwise, I'm not buying into the sacrosanct capitalistic solution.
Great, we can become the Northern United States of Chile
Yeah, and in the meantime we'll be left with prohibitively expensive PUBLIC infrastructure with MORE unmet maintenance needs due to cost cutting on the part of the private owners of such ventures.
Look, for example, at the Chicago Skyway. It costs $3 to cross the bridge from Chicago to Indiana, and while the potholes so far aren't any worse than they are elsewhere in the city, they also aren't any BETTER than they are elsewhere. Additionally, every other tollway in the state of IL has been upgraded to the new open road tolling system, where you can go at highway speeds through the tollbooth if you have purchased the IPass transponder. Not on the Skyway. There you have to come to a stop whether you have the transponder or not. AND elsewhere in the system tolls cost half as much if you use the transponder. If you are using it on the Skyway, it's the same price.
I read the Shock Doctrine ... no thanks.
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