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No Simple Calculation in Comparing Public, Private Investment
Posted at 9:01 a.m. on June 17, 2014
When members of the House Transportation and Infrastructure Committee conferred with investment bankers in New York on Monday, one question they wrestled with was how to compare the cost-effectiveness of traditional infrastructure investment (states or other government entities issuing bonds to pay for projects) with public-private partnerships — PPPs or P3s — that give private investors stakes in toll roads and other projects.
Rep. Scott Perry, R-Pa., asked a panel of investment bankers and one academic urban planner “how public infrastructure projects and facilities are evaluated for efficiency and, if there is such a model, do you folks have it?” He wondered, “Are we just now starting to figure that out” and “is there any metric” that determines cost, risk, and efficiency for public projects compared to private ones.
Tom Osborne, executive director of infrastructure for IFM Investors, said the model is “value for money” which means whether a PPP — when compared to a public project — is going to deliver, operate & maintain a public asset (such as a bridge) at lower cost over its whole life.
Osborne argued that P3s can cut project costs. Under the pressure of needing to satisfy investors in a given project, the private sector “has to innovate, has to create opportunities to bring costs down while delivering quality service.” He said wrapping the risks together in design-build-finance-operate-maintain contracts “will put the burden on the concessionaire, in the case of a public-private partnership, to ensure that they aren’t putting too little concrete or too little asphalt on a road for it to operate over its life. Because they’re going to be the ones charged with having to to put additional asphalt or concrete on that road if it doesn’t perform according to the service standards that are specified.”
But Rep. Michael E. Capuano, D- Mass., pointed to the need to account for all the costs and tax breaks when trying to assess investment. “If we give you depreciation on your road, that’s taxpayer dollars,” and if tolls are being by truckers paid on privately owned roads, that’s deductible for them – hence more money lost to the Treasury. “I’m not saying it’s bad. I’m saying I need a complete picture, not a partial picture.”
One reason why government officials and investors are looking at public-private partnerships is the high cost and long lead time of traditional infrastructure – Boston’s Big Dig being the notorious example.
But the public infrastructure process is complex and rule-bound because of built-in checks against theft and corruption, suggested Capuano. “We got where we are because for a hundred years public and private people stole money repeatedly on massive public projects and, little by little, we threw laws in the way… to make it a little harder to steal money,” he explained, but “we end up with this crazy system” under which “we Balkanize every single step of the way.”
It’s also necessary to assess whether revenues coming from the public paying tolls or fees are being used to improve public transportation — or merely to plug short-term budget holes.
As an example of the kind of public-private transaction to avoid, Capuano cited the lesson of the Chicago’s 2008 long-term lease to private investors of its parking meters. “The real potential problem here for most infrastructure projects is really it’s just a cash grab by the current government,” he said.
He warned about “current mayors, current governors. Current Congresses, current presidents who just want to get it (revenue) now fix up our books, today and couldn’t care less what happens in 30 years.”
Osborne told Capuano that he’d touched on “one of the biggest impediments to greater acceptance by the public of public-private partnerships: there is great concern that the tax-paying public does not understand the use of proceeds for many of these transactions.” Chicago “unfortunately didn’t necessarily have transparency” about the use of money gained from “asset monetization that they undertook,” he said.