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Public-Private Partnerships

Public-Private Partnerships

(Bloomberg) -- Boston’s Big Dig, rerouting its central highway underground. New York City’s Second Avenue subway extension. The Denver International Airport. Landmark American public works, paid for the traditional American way: the government borrows money, usually before the first shovel goes into the ground. Other places do infrastructure differently, turning to consortiums of private companies that raise money and design, build and operate projects for terms that generally run 30 years. In return, they get yearly payments or a share of a revenue stream, such as tolls. At their best, these public-private partnerships, also known as P3s, get infrastructure work done faster and cheaper. But when things go wrong, there’s no shortage of anger directed at the for-profit motive at the heart of the approach. Ask Chicago about its parking meters, for instance.

The Situation 

Public-private partnerships are common in Canada, Australia and much of western Europe. New questions about such arrangements were raised after a bridge collapsed in Genoa, Italy, in August, killing 43 people. Italian officials spoke of stripping Autostrade per l’Italia, the company that managed it, of its concessions to operate highways, while some government ministers suggested nationalizing all the country’s toll roads. Autostrade is a unit of Atlantia SpA, a company controlled by the Benetton family. Fallout from the disaster briefly erased about $2 billion from the fortune the family made through its eponymous clothing line. In the U.K., 125 hospitals reported that they were suffering under a combined 13 billion pound ($17 billion) debt from complex financial transactions they entered into as part of public-private partnerships. India's government seized one of the country's biggest P3 operators in September after the group ran out of cash, raising the prospect that taxpayers will end up bearing the cost of any bailout. In the U.S., asset managers raised billions of dollars for P3 projects after President Donald Trump floated the approach as the core of a $1.5 trillion infrastructure proposal. But infrastructure spending was shunted aside after Trump focused on tax cuts. Total global assets under management in such funds soared to $450 billion at the end of 2017, from just $7 billion in 2000. During the second quarter of 2018, global infrastructure deals fell to $49 billion, the lowest quarterly level in five years, according to data provider Preqin. While public-private partnerships are still new to many U.S. states, Governor Andrew Cuomo of New York has said that 90 percent of the $13 billion needed to revamp John F. Kennedy International Airport will come from private investors.

Public-Private Partnerships

The Background

Some scholars trace the P3 concept back to the Roman Empire, which gave investors contracts to build and operate postal stations and highways. The U.S. chose a different path: New York State sold bonds to build the Erie Canal in the early 19th century after the federal government refused to provide funds. Other states and municipalities followed suit. In the 1970s, Spain and France began experimenting with inviting developers to construct and operate highways in return for tolls. Their initial appeal was as a way to avoid the big upfront costs of the traditional public project. Countries that used the strategy often found projects could be delivered faster and cheaper. Governments now rely on what’s known as a value-for-money analysis to evaluate such deals, which goes beyond construction costs to consider operations, maintenance and the profit investors demand. For projects that don’t deliver a built-in revenue stream like tolls, governments can make what are known as availability payments that are akin to rent-to-own arrangements. These can include “shadow tolls” — per-car fees paid by the government rather than drivers. In such deals, details can make all the difference: The South Bay Expressway in San Diego is one of several U.S. P3s operating tolls that filed for bankruptcy after revenue came in lower than projected. In 2008, Chicago leased 36,000 parking meters for 75 years to an investor group led by Morgan Stanley in return for $1.1 billion. The city’s inspector general later concluded that in its rush to plug a short-term budget gap, the city undersold the rights by almost $1 billion, infuriating residents

The Argument

Supporters often argue that P3s can make projects possible that wouldn’t otherwise win approval. Critics respond that the way the partnerships let governments avoid upfront costs is a drawback. Howard Davies, chairman of Royal Bank of Scotland Group Plc, which has financed health-care projects, said that a common method of private financing of public projects used in the U.K. increased costs to the taxpayer, calling it a “fraud on the people.” Economist Paul Krugman was one of many critics who described Trump’s proposal as potential corporate giveaway, since it would have paid developers to take on projects that would have been profitable without the tax breaks the president had in mind. Kenneth Clarke, who championed the U.K. hospital deals as chancellor of the exchequer in the 1990s, now says that some P3 deals may have been too complex. Health officials “were innocents abroad when negotiating procurement contracts,” he said.

Reference Shelf

  • A white paper on refurbishing U.S. infrastructure by Trump campaign advisers Peter Navarro and Wilbur Ross. 
  • A report on public-private partnerships by PwC, the accounting firm. 
  • A Bloomberg News article on Trump's Labor Secretary nominee, Elaine Chao, testifying on infrastructure plans. 
  • A Bloomberg Pursuits article on the plans to remake John F. Kennedy Airport. 
  • The Trump campaign’s summary of his plans, including infrastructure spending. 

To contact the editor responsible for this QuickTake: John O'Neil at joneil18@bloomberg.net

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