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Should government work more with private sector to build roads and bridges?

Dec 1, 2017

Roads, bridges, and other infrastructure in Michigan are in pretty bad shape. Michigan does not have the money to tackle some of the biggest projects.

Increasingly, transportation officials are turning to the private sector for help. These public-private partnerships (P3s) are seen as a way to make improvements more efficiently. The real question, though, is whether they really are more efficient or whether they end up costing taxpayers more?

Robert Puentes​, president and CEO of the Eno Center for Transportation, joined Stateside today to bring context to that question.

Listen to the full interview with host Lester Graham above, or read a transcript of the beginning of the conversation below.

LESTER GRAHAM: These public-private partnerships that come to mind, sucha as the Gordie Howe Bridge that’s to span the Detroit River, linking Canada and the U.S. and several sections of I-75 in Oakland County.

How do these P3s generally work?

ROBERT PUENTES: The idea is for the public and the private sector to work together to develop a contract that is mutually agreeable to both the public and the private sectors to improve, build, or otherwise address a particular piece of infrastructure.

They’re often not cheaper. They’re almost always going to be more expensive to go with the private partner, but the reason a public sector entity might go with a private partner is for several different reasons: they’re trying to inject new kinds of innovation that the public sector may not have, they’re trying to figure out ways to leverage additional funding that they may not have – lots of different reasons.

But the main thing is that you’re trying to balance between the risks that these infrastructure projects may take and then the rewards that are generated from it. So mostly these P3 projects will have some kind of revenue-raising mechanism, such as a toll, that the private sector partner can take advantage of and actually make money from, and the public sector would get the benefit of having a new and improved piece of infrastructure.

GRAHAM: Which is much like the international bridge we’re talking about. Let’s take a highway, for example. I mean, traditionally, government has sat down, they’ve designed, they’ve hired contractors, put bids out, they build it and then the state or county maintains it. Exactly how is this different from that?

PUENTES: So for a new piece of infrastructure, and if you go with a public-private partnership or a P3 deal, the private sector absorbing the risk that goes along with it – some of the risk – that goes along with it, such as construction delays, or some kind of technological issues or –"

GRAHAM: But isn’t that the case already, though, because contractors who don’t get the job finished on time are docked some of the money that the government was going to pay them for the job. So I’m having a hard time getting my head around exactly what the difference is and why the private partnership is picking up some of this risk. How does that happen?

PUENTES: That’s not always the case where that risk is transferred to the private partner. A lot of times you’ll see the public partner have to absorb those kinds of cost overruns and things like that, and so this is really about how the contracts get structured up front. And in exchange for the private partner taking on more of that risk, they want some greater rewards. In many cases, it’s the tolls or some kind of revenue that’s generated from the traveling public.

GRAHAM: With the private sector designing, building, maintaining, financing these projects, in some of these cases, it seems that all that’s left for the government to do is oversee and pay for them. One part of that, though, is the financing. I mean, generally speaking, government can get loans at a cheaper rate through issuing bonds. How can private sector keep the cost down if borrowing millions, or tens of millions, or more for a project costs more in interest?

PUENTES: In almost every case it’s going to be more expensive for the private sector because they’re not able to take advantage of the cheaper financing that the public sector can take advantage of.

And we’ve just gone through a period where public sector financing was at historic lows – almost down to zero percent for some time. And so, the challenge though, what we didn’t see, even though rates were so low, we didn’t see the public sector increase their borrowing in order to invest in infrastructure.

There are a couple reasons for that: some places, you know we just went through the recession, which hit a lot of states and localities very hard. They were still trying to replenish rainy day funds and things like that. They were loath to take on more debt. Some places actually, during the recession, hit up against their debt caps. Either they were self-imposed or legislatively imposed, and so they just didn’t have the capacity to borrow anymore.

And so, we don’t really know why it didn’t happen, but people started to turn then to private partnerships as ways for alternative financing.

Now, it’s important to understand that this is not free money. It’s always going to be more expensive. The public sector is giving something away, but in no case is this selling off of assets, right? The public sector always will retain ownership, it’s really just the tools that are used to design, finance, build, and maintain the infrastructure over the long term.

For the rest of the conversation, listen above.

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