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Remember: Public-Private Partnerships Aren't Free

Roads, bridges, and trains jump-started by investor dollars always come looking for public ones, eventually.

Ruff ride. (Robert F. Bukaty/AP Photo)

Everyone wants sparkling new roads, bridges, airports, and transit systems. But most Americans aren’t willing to crank up tax rates to pay for those projects, and many politicians aren’t eager to try and convince them. That’s why a growing chorus of elected officials, both liberal and conservative, are singing the praises of public-private partnerships.

There are many ways to define this term, but the most common understanding is an arrangement where a private investor—think Morgan Stanley or TIAA-CREF—plunks down a big chunk of a project’s upfront cost. Theoretically, with all that upfront private capital on hand, a highway, water system, or transit line can be built much more quickly than it would be if it were relying on a slow trickle of public funds or government bond sales. The project may also cost less, since, theoretically, companies have a bigger incentive to build efficiently. A local government can also build price/quality assurance check-points into the contracts they write. If the project fails, the Monopoly men are theoretically the ones who’ve taken on most of the risk, rather than the public.

To politicians sensitive to shrinking budgets and hoping for a short-term ratings boost, it all sounds awesome. But the promises can be pretty misleading. “In theory, [public-private partnerships] can be effective—but they provide no free lunches,” writes Hunter Blair, a budget analyst at the Economic Policy Institute, a left-leaning think-tank, in a new report on the pitfalls of these strategies.

The thing about investment firms, see, is that they make investments; they expect to see their money back. Indeed, they want even more money. One way or another, the bucks are going to come out of the public’s pockets, whether through local or state taxes, a toll on the new road, or rates paid on that upgraded water or power grid.

That basic fact of these arrangements—that we the people pay for them eventually—often gets left out of the conversation, says Blair, probably because politicians, builders, and financiers have little incentive to advertise it. It may come down to the murky difference between “funding” and “financing.” Working with a private investor to cover high initial costs of a project, with some built-in mechanism to provide returns over time, is a way of financing a project. Another way—the traditional and very much still predominant route—is for a government to take on debt through the sale of bonds, paid back at low interest over time. But neither of these speak to funding a project, which is how the cash for construction, operation, and maintenance is actually gathered.

These distinctions may be obvious to infrastructure wonks but are often lost on the broader public. Though they probably grasp the basics, local officials may lack the acumen to negotiate contracts that align the public interest with the profit motives of their private partners. Examples abound of infrastructure privatization gone awry: Chicago is still paying spiraling costs for its sold-off parking meters; Indiana’s bankrupted toll road is another. Virginia, an early pioneer in public-private highway projects, is taking a harder look at the model, after assuming too much risk on a toll road plan that failed to pass environmental muster and wound up nearly $290 million in the hole.

While public-private partnerships do seem to lower construction costs, Blair cites research that finds that most of those savings come from private construction managers sidestepping Davis-Beacon wage requirements. “The savings to taxpayers thus come at the expense of workers, suggesting simple redistribution, not efficiency,” Blair writes.

In other words, public-private partnerships are sort of like credit cards: You get the shiny thing you want now, and put off the pain of paying for it. But sooner or later, the statement comes around. Local governments sometimes find that the bill is bigger than expected—if, for example, not as many riders, drivers, or ratepayers used the train, road, or hook-up as investors promised. Citizens may also be irritated, to say the least, to wake up and find a new toll on a previously “free” road, or their water prices tripled, thanks to their town’s new private monopoly.

Public-private partnerships have been slower to catch on in the U.S. than in other developed countries, like Canada and the U.K., and they still make up a tiny fraction of all infrastructure projects. But Moody’s predicts that the market is ripe for growth, and at least 35 states have enacted legislation enabling such partnerships to date. Some city leaders have adopted a certain evangelism for them; Phil Washington, CEO of the L.A. County Metropolitan Transportation Authority, and Chicago Mayor Rahm Emanuel are two well-known proselytizers. President Obama took steps to expand the market by launching assistance programs within federal agencies, and proposing a more flexible type of bond to entice private investors. Former Transportation Secretary Anthony Foxx went to great lengths to drum up interest in the model; the inclusion of private partners in the $50 million, federally sponsored Smart Cities Challenge is one example.

Then, of course, there is President Donald Trump, with his famous promise of a $1 trillion infrastructure bill. This has taken a back seat to other priorities, such as deporting immigrants and repealing the ACA.

But Trump has held that an infrastructure bill is coming, and private investment would clearly be at its heart. Trump’s blueprint budget took an axe to virtually every federal agency that could be responsible for using public dollars to upgrade the country’s dangerous bridges and embarrassing airports. Earlier this month, the White House convened Transportation Secretary Elaine Chao, Energy Secretary Rick Perry, and a handful of business and finance leaders to discuss the outline of an infrastructure package. “I think we're looking at a … public-private partnership as a funding mechanism,” White House Press Secretary Sean Spicer told reporters. “There is a lot of work being done behind the scenes.”

It is nigh impossible to imagine Trump proposing, let alone Congress allowing, a new tax to fund infrastructure. It is much easier to see Trump offering a package that “pays for itself.” This claim was made by the widely-guffawed “infrastructure plan” released by the Trump campaign in October, which called for $137 billion in tax credits to would-be infrastructure investors and developers, money that would supposedly be balanced out by increased tax revenue from project construction. This was plainly wishful math.

Similarly, the rhetoric of other leaders seems to misunderstand how private dollars weigh against public. “A great agency … has public-private partnerships. For every $1 of federal dollars, there's $40 of private sector spending,” House Speaker Paul Ryan said in January. “We want to leverage as much private-sector dollars as possible to maximize the fixing of our infrastructure.” It is as if that $40 comes out of thin air, conjured through the magnanimity of America’s corporate friends. But short of actual philanthropy, projects designed for the public are always paid for by the public, one way or another.

Are public-private partnerships inherently bad ideas? No, and maybe something like a federal infrastructure bank could assist public servants in negotiating contracts so that they don’t get screwed over by the top-hat-and-monocle crowd. But as Blair points out, “no tricky financing scheme can obviate the need for user fees and taxes. And it is calling for new tolls and taxes that often deters policymakers from calling for new infrastructure projects.” Public-private partnerships have potential for good, but people should know what they often really are: the same un-tasty food, just a different way of spreading it on the plate.

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