WASHINGTON — Though they can often deliver infrastructure projects faster and at lower long-term cost than traditional procurement, P3s are not a silver bullet and not always the right way to go, according to a new white paper released by the National Council for Public-Private Partnerships.
Many municipalities, facing increasing infrastructure needs and declining revenues, have chosen to attempt to increase revenues rather than turn to alternative ways of financing roads, bridges, water infrastructure, and other public necessities, NCPPP research associate Kimberly S. Meyer writes in the paper. That approach, however, leaves the project’s future funding needs for operations and maintenance open to the appropriations process and subject to possible cuts. Even worse, she continues, is the possibility of deferring the project until the uncertain economy improves.
“With this in mind, decision makers should seek out other options for project delivery, including the use of [P3s],” the paper argues. “However, this option is sometimes discounted because private financing is often preconceived as being more ‘expensive’ than the use of general revenues or municipal bonds.”
Also, it is true that there can be some added costs of utilizing private funding for public projects, depending on the structure of the P3 agreement, according to the paper. Tax-exempt muni borrowing can generally be done at lower interest rates than private borrowing, meaning that both procurement and financing costs for P3s can be higher than for traditional procurement.
But P3 proponents, including the non-profit council, argue that this additional cost is offset by long-term savings on the operation and maintenance of the infrastructure and on the transfer of risk from the public to the private sector. A 2008 Government Accountability Office study “confirmed that although these financing costs are higher under [P3s] and there is money lost due to the lack of tax exemption for private sector financing, there are other reasons — financial and otherwise — to use [P3s], which benefit parties in both sectors,” the paper argues.
P3s also can prevent delays by providing financing as soon as the contract is inked, the paper states.
“Particularly for large-scale, high-value projects, the use of private funds for capital expenses can mean that [P3]-based projects achieve faster ground-breaking and more rapid construction once negotiations are complete, rather than waiting to secure public financing,” it reads. “Such was the case with New York’s ($1.5 billion) JFK Airport international terminal, where thePort Authority [of New York and New Jersey] would not have been able to afford the necessary infrastructure improvements without use of a [P3].”
But P3s are not always appropriate, and a careful value-for-money (VFM) analysis and other considerations are necessary to make that call, the paper concludes. Public perception of the project is one such component, as is the prerequisite legality of a P3 in that particular state and locality.
A project also has to be economically viable, though determining this has been problematic in the real world with many revenue estimates proving to be wildly off the mark.
“Again, [P3s] can be advantageous in many cases; however, these arrangements are not “free money” or miraculous solutions to public budget problems,” the paper concludes. “Decision makers must consider the long-term consequences of investment upon taxpayers, economies, and the environment.”