Ten years ago, anything less than $200 million had little hope of connecting the public and private sectors in the U.S. Now public-private partnerships are driving modernization for many cities—and sometimes controversy.
Next summer, cities across the U.S. have a birthday to celebrate. In August 2018, the nation’s very first experiment in bikeshare turns 10 years old. While the network itself, SmartBike D.C., didn’t last that long, it led promptly to the launch of the most robust bikeshare network in the country, Capital Bikeshare. Scores of similar systems soon followed.
When bikeshare in the U.S. celebrates its anniversary next year, it will also mark an important mile-marker for public–private partnerships. Ten years ago, these vehicles for government partnerships with the private sector were virtually unheard of outside the realm of massive infrastructure projects like highways. But those early bikeshare rollouts in Minneapolis, Boston, Denver, and other cities—most of them public–private partnerships—proved that cities could be fertile ground for these collaborative enterprises.
Schools, hospitals, prisons—public entities work with the private sector to provide all kinds of services. Before President Donald Trump soured on the idea, public–private partnerships were key to rebuilding ports, bridges, and highways under his proposed $1 trillion infrastructure plan. For many Americans, “public–private partnerships” may summon to mind gloomy visions of concrete mixmasters or the social good sacrificed to corporate masters. Toll roads were the most prominent example of public–private partnerships across the country for many years. Today, though, they are more nimble and easier to find, especially at the local level.
Critics see the perils of privatization, particularly for some core government services. But for small cities in particular, the partnerships provide new opportunities to achieve goals that otherwise seem out of reach.
“The U.S. market [for public–private partnerships] developed much like the markets outside the U.S. in this area. We started with large-scale transportation infrastructure projects,” says Peter Raymond, global advisory leader for capital projects and infrastructure at PricewaterhouseCoopers. “This concept is now starting to catch on in very interesting ways at the city level in the U.S.”
Room to grow
The U.S. market was slow to cotton on to public–private partnerships (or PPPs, or P3s) made popular in Europe. Ten years ago, anything less than $200 million had little hope of connecting the public and private sectors. That’s starting to change. Today, a market that Moody’s has described as “slow and fragmented” is poised to become “one of the world’s largest.”
The amount of capital raised but not yet invested (or “dry powder”) for infrastructure is much higher than the amount of available opportunities for this investment. At the end of the first half of 2017, there was some $100 billion in dry powder for infrastructure deals, according to PwC. The value of actual deals over the same period was $22.5 billion. There’s room for growth.
In some arenas, public–private partnerships have served as the quiet engines of longstanding and popular government programs for decades. Consider housing: Most programs at the U.S. Department of Housing and Urban Development, from housing vouchers to mortgage insurance, are structured as public–private partnerships. Housing Choice (or Section 8) vouchers are a form of PPP that has served low-income households for 80 years. HUD’s Rental Assistance Demonstration program, an Obama-era federal program that is popular under the Trump administration, has given voucher property owners opportunities to find the capital to upgrade and maintain those affordable properties, mostly through tax credits. In turn, those credits—Low Income Housing Tax Credits, which are responsible for creating most of the new affordable housing in the country—are still another kind of public–private partnership.
Many officials now view these partnerships as key to unlocking change at the state and even the city level. In Los Angeles, transit officials said that public–private partnerships would mean delivering new public transit initiatives years head of schedule. In the Twin Cities, it means thinking past traditional bikeshare to dock-less bikeshare or whatever comes next.
For small cities in particular, private companies can provide opportunities to adopt solutions that they could not necessarily design on their own. Contrary to popular belief, private firms aren’t necessarily more efficient than state-owned enterprises. But the private sector can marshal new technology in research and development that is intended improve and modernize cities. Consider Alphabet’s work to create a ”living laboratory” on Toronto’s waterfront or overseeing transit in Columbus, Ohio—both ventures that are still in the very early phases and fielding at least some push-back.
“You get a lot more creativity and innovation in the U.S. in many cases because of the distinct government jurisdictions and authorities developing distinct approaches to doing things,” Raymond says. “I think that’s one of the great reservoirs of strength that we see in the U.S.”
Street lamps are one example of hard infrastructure that affords an opportunity for new thinking through public–private partnerships. Here’s a straightforward example: Two years ago, the Michigan Department of Transportation entered into a 15-year contract with a private company for new and existing highway and tunnel lighting systems around the Detroit metro area—a design-build-finance-operate-maintain (or DBFOM) privatization deal to replace some 15,000 antiquated lights. The deal is predicated on the notion that Freeway Lighting Partners can deliver economies of scale that result in taxpayer savings. Again, a straightforward deal.
In Dallas, however, a public–private partnership envisions turning old street lights into energy-efficient lamps that also monitor pollution and noise. In New York, LinkNYC aims to replace some 7,500 pay phones with interfaces called “Links” that will provide free public WiFi, device charging, and access to various services.
On paper, the match-up between the private sector and local government can shift the balance of expectations in taxpayers’ favor. Consider a convention center: In a traditional set-up, a government contracts with firms for the design and construction of the building. The architects or contractor may bring down costs by building cheaper (at the expense of future maintenance). When a government bundles the operation and maintenance of a convention center with its design and construction, then private firms have a greater incentive to ensure the lifecycle costs of the project—to build with the future in mind. This goes not just for school buildings or highways but wastewater treatment plants, broadband initiatives, or the energy grid.
That’s if everything goes according to plan. One problem with public–private partnerships is how often the plan changes. According to the Hamilton Project, an economic policy think tank at the Brookings Institution, 8 of 20 public–private partnerships for major transit initiatives since 1991 were subject to renegotiation. Sometimes to devastating effect: The Las Vegas Monorail Company has asked Clark County to guarantee the company with $4.5 million a year over the next 30 years in order for the P3 to build an extension a little longer than a mile. (“I’ve never seen such creative financing,” Clark County Commissioner Marilyn Kirkpatrick said, according to the Las Vegas Review-Journal.) This latest wrinkle follows a brutal bankruptcy, one whose exit terms a court rejected in 2011 because they would have sunk the monorail and left creditors adrift.
The dark side of public–private partnerships entails bailouts and bad deals. Infrastructure is in part defined by natural monopolistic tendencies, and without an effective public regulatory monitoring mechanism, private actors who take on public services might raise prices to an inefficient level or degrade service quality to an inefficient degree, says Hunter Blair, budget analyst for the Economic Policy Institute. Governments run the risk of mistaking the financing that public–private partnerships can leverage for the funding of projects themselves—of missing the forest for the trees.
“A lot of people in the government, when they talk about [public–private partnerships], they see it as this free lunch,” Blair says. “We’re going to bring in private money, so that means, somehow, it’s going to cost us less to pay for the infrastructure. Funding at the end of the day still has to come from taxes or user fees. There is no free lunch here.”
There can, however, be increased efficiency if done right, Raymond says. “Many people think that public–private partnerships are a financing mechanism, and financing is an important part of it,” Raymond says. “But really, the value of a public–private partnership is the ability to bundle together the design, build, financing, operations, and maintenance of an infrastructure asset in a more cost-effective way than the public sector can do it.”
There are other risks, critics say, to the entry of private companies into basic government services: insufficient government oversight, bad contracts, and companies cutting corners for profit.
And when the municipal services in question are largely invisible to most citizens—managing a city’s water supply, for example, or running prisons—the risk for abuse can be severe. Critics say for any government service where monitoring quality is difficult or costly, it’s all the more important that contracts with private partners include detailed parameters for outcomes. That’s typically more true of “soft” infrastructure (emergency response or public education, for example) than of “hard” infrastructure (such as levees or rail).
The policy questions become far more fraught when governments engage private companies for soft infrastructure—to not just build schools and jails but provide education and criminal justice. These relationships have raised grave concerns that private entities do not always share the same motivation to protect the public interest. Governments may be opportunistic, too: The Hamilton Project report finds that, “in many cases governments choose PPPs because they allow them to make public investments while keeping future obligations off the balance sheet and beyond legislative control.”
In public–private partnerships, both sides need to share a vision of what success looks like (and failure, too).
“On a road, it’s fairly easy to see and to know there’s a lot of potholes,” says Blair. “If you’re talking about a prison or a school, it can be harder to tell that service quality is being degraded.”
The challenges of local partnerships
Public–private partnerships face some natural challenges at the local level. One is scale: A giant investment firm or a global engineering company isn’t going to see much incentive to build county bridges in Pennsyltucky. That’s why the Pennsylvania Department of Transportation packaged together some 558 aging bridges as a single contract for a public–private partnership to design, build, finance, and maintain their replacements. The winning team proposed an $899 million proposal—which, over the course of 28 years, would bring down the average cost from $2 million per bridge to $1.6 million. The Rapid Bridge Replacement Project is step one in the state’s effort to replace thousands of structurally deficient bridges (and one of the top 10 biggest infrastructure deals of 2015).
Another challenge is experience. Bureaucracies are creatures of habit; leaders tend to favor established methods for selecting infrastructure projects or contracting out work. Political interests can be a hurdle to public–private partnerships. Also, city governments subdivide into any number of smaller agencies that might make natural partners for the private sector but don’t necessarily know it. In addition to multiplying the political interests, most departments within a bureaucracy do not necessarily have much experience contracting with private companies.
Hence the Office of Public–Private Partnerships (OP3), a meta-office in Washington, D.C., tasked with enabling other city agencies to build public–private partnerships. OP3 recently announced that it received 11 potential private-sector bids for the city’s first P3 procurement: a joint program by the District Department of Transportation and Office of the Chief Technology Officer to modernize more than 75,000 streetlights. Fairfax County, Virginia, is setting up its own OP3 to bring opportunity to the D.C. suburbs.
Sometimes deep-seated myths drive government decisions to privatize public institutions. One myth is that private companies can relieve government budgets or build infrastructure without raising taxes. Another is that the private sector is always better at cutting out waste. Cynicism drives some of the decision-making around public–private partnerships, unfortunately. Governments at the local, state, and federal levels are turning increasingly to public–private partnerships because they are so strapped for cash—which means that some leaders may be putting a lien on the future.
At the same time, some of the nation’s most important accomplishments were the work of public–private partnerships. Both the Erie Canal and the Transcontinental Railroad, transformative infrastructure projects that changed the course of American history, were built by public–private partnerships. A New Space Race is taking shape as a result of public–private partnerships.
Congress and the Trump administration have yet to signal whether infrastructure will play a pivotal role in U.S. growth for the foreseeable future. But the next big thing might not come from the federal government at all. Whether or not the federal government matches the audacity of its predecessors, local governments are getting things done, and in new ways.
Funding from Mastercard was provided to support our project "City Capital."