Risks and Rewards of Public-Private Partnerships for Highways

December 29, 2011

Public-private partnerships (PPPs) for infrastructure are contracts between public and private entities for the provision of facilities in areas such as power, water, transportation, education and health.  One of their primary benefits over traditional, state-run construction projects is that they deliver more efficient results in a timelier manner.  States are increasingly using PPPs to deliver new transportation capacity, thereby improving road access without unduly increasing the burden on taxpayers.  By restructuring the standard model of construction projects for the public, PPPs bring several benefits to all involved parties, says Baruch Feigenbaum, a policy analyst at the Reason Foundation.

  • PPPs offer a means to construct needed infrastructure during these times of tight state budgets, thereby allowing states to continue to modernize with little additional budget liability.
  • This new form of construction allows private companies to pull into the market new kinds of financing and sources of capital that otherwise have little involvement in the public sector.
  • PPPs allow state governments to shift the risks of a given project away from the taxpayer toward investors and lenders, thereby optimizing risk allocation for those who desire it.
  • Free market efficiencies and competitive pressures are more prevalent in PPP projects because the private sector is faster to react to customer needs and technological shortcomings.
  • PPPs will encourage greater experimentation and innovation because private sector entities are more likely to deviate from standard protocol.

PPPs are extremely adaptable to a given situation, making them useful for state governments that have a multitude of differing construction needs.  Three factors remain crucial in maximizing efficiency gains from PPPs:

  • The state should offer a well-defined and clear legal environment in which the private entity may operate.
  • States should maintain oversight over PPPs, perhaps by allocating responsibility to a given state committee.
  • PPPs should be employed primarily for large projects (more than $1 billion in cost), as this creates the greatest room for efficiency gains from the private market.

If a state is able to implement policies that address these three factors, it will see the aforementioned benefits that PPPs have to offer.

Source: Baruch Feigenbaum, "Risks and Rewards of Public-Private Partnerships for Highways," Reason Foundation, December 2011.

For text:

http://reason.org/files/public_private_partnerships_for_highways.pdf

 

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