In my last column, I discussed why American political leaders at all levels of government need to stop fretting that we can’t afford to invest in our infrastructure and start finding ways to pay for the building we need. One idea that is often suggested, given budget concerns, is greater use of public-private partnerships (P3s). I am currently enrolled in a seminar course on P3 policy in the Master’s program in Transportation Policy, Operations and Logistics at George Mason University in Arlington, VA. Based on what I have learned so far, I would like to dispel a few myths about what P3s can and cannot do.
Under a P3, once the agency has decided on the scope and general form of the project, it undertakes a single competitive procurement for one firm, or team of firms, that will handle design, construction, operations and maintenance, along with putting together the financing — usually a combination of the partner firms’ own equity and bonds that the concessionaire sells.
This is often compared to mortgaging a house, with the private partner’s equity being the down payment and the bonds being the mortgage — with the bondholders expecting to be repaid with interest over the life of the project. Like a mortgage allows you to have a house now and pay for it later, P3s allow governments to have new infrastructure assets built quickly, with private concessionaires assuming many of the risks associated with them, but pay for them over a period of generally anywhere from 25 to 60 years.
But if you want to get a mortgage, the bank will want to see your income and assets so that it is confident that you will be able to repay the loan with interest. Likewise, investors won’t invest in a project if they are not confident that sufficient returns will be generated. Therefore, P3s are only really useful for projects that will generate a revenue stream through some sort of direct charge to users, such as toll roads and bridges and transit systems that charge fares and generate other revenue by means such as selling advertising. As every expert on project financing will tell you, P3s are no substitute for adequate government outlays for infrastructure.
Luckily, passenger rail projects are, at least in theory, good candidates for P3s because they generate revenue streams. Denver’s Eagle P3 regional rail project (consisting of three new electrified commuter lines radiating west, north and east from Denver Union Station) stands as a successful model, in part because the Regional Transportation District guaranteed the concessionaire regular annual payments based on its meeting specified criteria for operational performance, rather than based on the system’s ridership and passenger revenue levels.
By contrast, while the California High Speed Rail Authority has sought to use a P3-like model to deliver the initial 130-mile San Joaquin Valley segment of a high-speed line that will eventually link the Los Angeles and San Francisco areas, it has had trouble getting investors to buy bonds. Potential investors are worried that ridership won’t come close to projections, and that the state and federal funding sources that CHSRA is relying on won’t materialize in the needed time frame.
This is all a very boilerplate overview of the issues associated with utilizing private financing to help get new and improved rail lines built more quickly. If approached in a committed and realistic manner by a knowledgable agency staff, public-private partnerships can help lower overall project costs and minimize the risk to taxpayers of things like cost overruns, design flaws, change orders and finger pointing between agencies and different contractors. But P3s cannot replace government funding, especially for projects with uncertain future revenue generation—they are a financing mechanism, not a funding source. They cannot be seen as a way to avoid raising and spending the money necessary to acquire high-quality, long-lasting rail infrastructure and equipment.
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