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No free lunch: The pros and cons of public-private partnerships for infrastructure financing

February 9, 2017

These days there are few policy issues around which broad consensus exists. However, the need to improve our nation’s infrastructure is an issue on which many policy makers, at all levels of government and across the political aisle, can agree. Given the many aspects of our infrastructure currently suffering from decades of deferred maintenance, it is difficult to contest that significant opportunities remain to improve America’s roads, bridges, ports, water systems and more.

Regrettably, the consensus essentially begins and ends with the need to address our nation’s infrastructure. When it comes to how to fund, finance, and prioritize infrastructure investments, the considerations become far more complex. The interests of a variety of stakeholders in both the public and private sector can further complicate the issue, often making it difficult to find a consensus. In response, an innovative concept for funding and financing infrastructure investment has gained traction in recent years: public-private partnerships (PPPs).

The Hamilton Project explores the pros and cons of this approach in a recently released framing paper, “If You Build It: A Guide to the Economics of Infrastructure.” In the paper, the authors examine several considerations policy makers should address, including why infrastructure investment is necessary, what sorts of projects should be implemented, who should make decisions about infrastructure policy, and how to responsibly fund and finance projects. In addition to public-private partnerships, the paper explores the merits of infrastructure funding mechanisms ranging from deficit finance to repatriation to user fees.

Public-private partnerships are unique because of the ongoing collaboration between governments and private contractors, as well as the wide range of options that exist for structuring PPPs. In one type of PPP, a single firm may take responsibility for all phases of an infrastructure project (including design, construction, finance, operation, and maintenance). In other cases, a firm may only take on the two phases of design and construction. Regardless, the firm will receive revenues from user fees or “availability payments” paid by the government.

It is important to note that there is no “free lunch” when it comes to PPPs: the cost of an infrastructure project must eventually be paid, either by the taxpayer or the consumer. When firms are offering to pay the upfront costs of infrastructure investments, it can be easy to lose sight of this reality.

That is not to say that PPPs are without merit. A firm that is responsible for later phases of an infrastructure project will be more inclined to make appropriate decisions at the outset of the project regarding design and construction. Furthermore, firms engaged in PPPs will generally have less incentive to cut corners on construction costs, since the PPPs give the firms more “skin in the game,” encouraging better decision making.

Historically, PPPs have been relatively rare in the United States. Though governments routinely employ private contractors for infrastructure projects in the United States, PPPs are less used. Outside of the U.S., however, the situation has been different: the United Kingdom financed $50 billion of PPP projects from 1990 to 2006, compared to only $10 billion in the United States over the same period (Engel, Fischer, and Galetovic 2011). However, in recent years, PPPs have become more common in the United States, perhaps reflecting a greater appreciation of their advantages.

When it is important to coordinate design, construction, financing, operation, and maintenance of a project, PPPs stand out as a viable alternative for implementing infrastructure projects. In some instances, PPPs could even function as a bridge to building consensus around the complicated political and policy questions concerning infrastructure investments. As long as their costs and benefits are evaluated realistically, PPPs are a useful tool for promoting infrastructure investment.


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