04/10/2010 05:12 am ET Updated May 25, 2011

P3s: The Problem With Tolls

Cash-strapped elected officials around the country are being forced to find innovative ways to pay for expensive desperately-needed new water systems, roads, and other public works. Increasingly, across the political spectrum, public-private-partnerships (P3s) are being touted as a solution.

A P3 basically means turning to a private investor to finance a public works project. That investor, say Goldman Sachs, provides upfront the amount needed to build a new road. In return, Goldman expects to be repaid not by the government. Instead, the idea is that drivers of the road will pay tolls. These toll payments will then make their way back into Goldman's pockets until the investor has recouped its sunk costs and turned an agreed upon tidy profit. Once this happens, Goldman goes on its way and hands over the road to the government.

If, however, the road is substandard and drivers choose to take another route, then Goldman will be out of pocket. Goldman takes this risk in return for the opportunity for profit-making. In fact, this risk is supposed to create an incentive on the part of the investor to make sure the road is high quality and thus well-traveled.

However, we are getting into the habit of shouldering too much of the risk of P3 investors. For instance, the people of Texas are providing heavily subsidized bonds in order to make the $2.02 billion North Tarrant Express attractive to investors. North Tarrant boosters are already treating this deal as indicative of the strength of the private market. This is misleading.

Of course, lending the private sector a hand in a time of financial crisis so that it can carry out a public purpose is not necessarily a problem.

A well-crafted subsidy benefits the public.

However, we should extend our fellow-citizens the same courtesy.

Poor and working class citizens should not pay more of their take-home pay to drive a road or turn on their tap than wealthy folks. But, when we charge a uniform toll to all of our travelers and water drinkers, we are doing just that.

The cost to our economy of unemployed and under-employed productive workers is high. It's also expensive to be poor. Anyone who has experienced hard financial times knows that the cost of getting to work is higher when the job doesn't pay so much. A high toll on top of expensive gasoline can eat into the morning's wages. Also, when a private investor makes it cheaper to use an electronic payment scheme to pay a road toll, those of us without a checking account or sufficient funds will pay more than better-off commuters.

The purpose of P3s is to invest in the public infrastructure which is a precondition to our national recovery. The aim is to bolster our competitiveness and ensure equal opportunity. We must do this one project at a time. So, just as we lend our risk-adverse private investors a helping hand, we should do the same for our family and friends who are struggling to make ends meet through this rough patch. For thirty years, countries around the world have experimented with ways of ensuring that the poor aren't asked to pay their way out of poverty.

We should adopt best international P3 practices.