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A Route to Better Roads: The Case for Public-Private Partnerships

Wednesday, June 12, 2013

As governments across the United States wrestle with the challenge of providing high-quality transportation infrastructure, they should increasingly consider public-private partnerships.

It’s easy to take public infrastructure for granted, but events like the recent Skagit River Bridge collapse in Washington State are a sharp reminder of how important infrastructure is to our daily lives and the wider economy. After all, roads and bridges allow us to get to and from work and move commercial products over great distances.

As governments across the United States wrestle with the challenge of providing high-quality transportation infrastructure, they should increasingly consider public-private partnerships. The record shows that such partnerships are more likely to be built on time and on budget, and that they offer greater value than conventional infrastructure projects.

In the conventional way of providing infrastructure, the government manages and procures each phase of the project separately. Typically, the government hires a firm to build the infrastructure based on a prescriptive design and then assumes responsibility for operating and maintaining the infrastructure, perhaps outsourcing some aspects of care to private companies.

Public-private partnerships are a way for governments to cooperate with the private sector to share the risks and rewards of providing public infrastructure. The government agency involved in the project establishes the project goals and desired outcomes (without being prescriptive about the means) while a consortium of private companies takes on the task of achieving them. A single private partner assumes stewardship of the project and responsibility for multiple tasks.

Consider a hypothetical example wherein a state government wants to partner with the private sector to build a highway. The government would decide on strategic matters such as the route, traffic flow, and measurable safety outcomes. The private partner would then design, build, and usually operate and maintain, the highway according to the government’s requirements. The private partner gets paid directly by the government or through tolls paid by drivers.

The state government still owns the highway and is ultimately responsible for ensuring adequate services. The point of a public-private partnership is to harness the innovative capacity, efficiency, and expertise of the private sector for achieving the public sector’s ends.

That the private partner wants to make a profit is fundamental to the success of these partnerships. The contract is structured so that the private partner’s profit depends on whether it achieves government-established objectives like finishing the project on schedule and meeting technical requirements. While payment on delivery helps keep the private partner on track, other features of public-private partnerships also help drive improved performance, including risk-sharing.

Risk-sharing occurs when the private partner takes on some project risks that would otherwise be borne by taxpayers. Delays and cost overruns are common risks in constructing public infrastructure. In a conventional project, taxpayers pay these extra costs; in a public-private partnership, the private partner does. Being responsible for poor performance encourages the private partner to avoid delays and cost overruns.

The profit motive and other unique features of public-private partnerships are why the evidence points to such partnerships as having a strong record in the construction phase, with projects generally completed on time and on budget.

That the private partner wants to make a profit is fundamental to the success of these partnerships.

Comprehensive evidence from the United States is limited, but a study examining a small group of 12 North American public-private partnerships found that 92 percent finished early or on time, while 83 percent were built on budget. The same study found that the sample of partnerships outperformed a group of four conventional projects. On average, partnerships finished 0.30 percent ahead of schedule while conventional projects finished 4.34 percent behind schedule. In terms of costs, public-private partnerships had overruns averaging 0.81 percent, compared to 12.71 percent for conventional projects.

The results of this small-scale study are reinforced by the experience with partnerships in the United Kingdom and Australia. A UK study of 11 public-private partnerships and 39 conventional projects found partnerships typically finished 1 percent earlier than scheduled, while conventional projects finished 17 percent behind schedule. Cost overruns averaged virtually zero in partnerships, compared to 47 percent in conventional projects.

Similarly, an Australian study of 21 public-private partnerships and 33 conventional projects found that partnerships were delivered 3.4 percent ahead of schedule, while conventional projects were delivered 23.5 percent behind schedule.

Finally, a recent analysis of 19 Canadian public-private partnerships from 2004 to 2009 found that an impressive 90 percent of them finished on time or ahead of schedule. The international evidence clearly shows that public-private partnerships have a tendency to perform relatively well in the construction stage, to the benefit of taxpayers.

Public-private partnerships can involve the private partner in operating and/or maintaining the infrastructure after construction is completed. The long-term involvement of the private partner fosters operational efficiency and higher-quality outcomes, and independent value-for-money assessments consistently show that such partnerships can produce additional benefits over several decades. One key reason is that the private partner — again, motivated by profit — has an incentive to develop innovative infrastructure designs that are more cost effective to operate and maintain over time.

Despite the clear benefits of public-private partnerships, opponents often attempt to discredit this model by pointing to particular cases where a project had problems. The overall pattern of public-private partnerships, however, shows they are superior in terms of predictable costs, delivery time, and operational efficiency.

Some projects are better suited for the public-private model than others. Those most likely to succeed as a public-private partnership have certain characteristics like potential risk-sharing benefits and measurable performance outcomes. Moreover, to truly capture the benefits of this model, governments must develop the proper framework and capacity to both engage in and continuously monitor such projects.

Developing such a framework is a key challenge for state governments. A recent OECD report noted that the public-private partnership market has been slow to develop in the United States. The lack of supporting legislation at the state level partly explains this slow development.

Thankfully, no one was seriously hurt when the Skagit River Bridge collapsed, but the incident should remind us of the importance of maintaining existing infrastructure and investing in new projects. As long as governments are in the business of infrastructure, public-private partnerships are an important option that can help improve the quality and provision of our roads, bridges, and railways. 

Charles Lammam and Hugh MacIntyre are co-authors of “Using Public-Private Partnerships to Improve Transportation Infrastructure in Canada.”

FURTHER READING: R. Richard Geddes supports “Private Investment for Infrastructure.” James Pethokoukis blogs “Is the U.S. Trying Very Hard to Attract Institutional Investors to Pay for an Infrastructure Upgrade?” Evan Sparks asks “Should We Privatize Airports?” Stephen Goldsmith wonders “What’s Left for Government to Do?

Image Credit: Dianna Ingram/Bergman Group

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