Tag Archives: P3s

The Infrastructure Scam

Leave it to the current mis-administration to get an infrastructure development and renovation program exactly backwards.

The premise: The federal government will chip in 20% (of something) and the states will be responsible for the other 80% of the funding.  And now we can ask — in what Universe do the states have the funding to contract for these projects?   Case in point — for those wishing to download and review the Nevada budget for 2017-2019 (pdf) you will note that there are some infrastructure projects and some funding for deferred maintenance. Now we can ask — where in that budget might a person find “extra” money for the Oval Office Occupant’s Grand Infrastructure scheme?

Public Private Partnerships?  PPP (P3s) is a popular suggestion these days for funding capital improvement projects.  However, there’s a catch for state and local governments.  Let’s go back to basics for the moment,  if Nevada wants to build a new bridge the legislature can fund the project from existing appropriations, or it might fund the bridge by allowing a private source to construct and collect revenue, or it might offer a Triple P form of funding in which state funds are augmented by private money.  Option 1 isn’t in the stars given the current Nevada budget. Option 2 means toll roads and bridges, not necessarily a good idea especially for those offering public transportation or those businesses which rely on employees commuting to work.  Option 3 is often presented as a compromise measure. It has some of the same problems as Option 2.

Problem One:  Private investment tends to drive the priority given to infrastructure projects.  If private expectations for a profitable investment align with priority needs all the better, but there is always the prospect those priorities will not be in alignment.  One classic example of this problem is the 63rd Street area of Chicago, a depopulated area of the central city, devoid of population, and therefore of services, retail areas, and housing.   Affordable housing would be the logical investment to repopulate and thereby rebuild the area, but this is hardly the plan to create the profits demanded by private investment.   Cities like St. Louis, MO demonstrate another issue in this category — what to do with brownfield areas, land/parcels contaminated by previous industrial use and in need of extensive clean up before redevelopment can take place?  It isn’t too hard to imagine that finding funds for a toll bridge or road would be much easier than locating investors for affordable housing and brownfield restoration.

Problem Two:  Private investment, like so many other human activities, too often tends toward our herd mentality. There may be great enthusiasm for certain projects (Roads!) at one point, which fades out into the next enthusiasm (Bridges!) only to fade into yet another popular type of project.  This is an extension of the Problem One alignment issue, and an opportunity for good old fashioned pork-barrel initiatives should a sufficient number of investors be enticed by the latest P3s fad.  P3s are generally associated with new construction, and rarely desirable for renewal or renovation projects even though these latter projects may be of greater urgency.

Problem Three:  The devil is in the details.  The City of Chicago adopted some P3 projects a decade ago, only to discover that it had bargained away long term revenues for short term developments.  Not to put too fine a point to it, the city entered into some projects at the expense of its long term fiscal responsibility.  (Chicago Skyway)  Similar issues arose in North Carolina, and of course in the notorious Indiana Toll Road which filed for bankruptcy in 2015. [AmProsp]

There are some other pitfalls often included in P3 agreements, such as the problems observed in California when the state wanted to expand parts of SR 91 in Orange County, only to discover that the P3 in place for the construction of express lanes forbid the state from “competing” by expanding the roadway to relieve traffic congestion.  Another tale from the Indiana Toll Road comes from the 2008 flooding when the state waived tolls in order to allow people to evacuate, and was then hit with a $447,000 bill from the operators.  Virginia used a P3 to install high occupancy vehicle lanes, but if too many car-poolers use the lanes the state loses money to the private operators.  [Gov]

Problem Four: Fuzzy Math. P3s are nearly always sold as ways to save taxpayers money.  This is not always the case.  First, the funding for a P3 may actually end up costing taxpayers more than if the city or state had gone the old fashioned way and voted to issue municipal or state bonds to secure the financing for the project.   At this point we need to return to that hoary concern for all investors: Risk.

“The decision to use a P3 approach must rest on the partnership’s ability to efficiently transfer project development, revenue, or other risk. Moreover, the estimated monetary value of the transferred risk should exceed the additional financing charges that accompany P3 equity capital. In short, the policy conversation to date has almost exclusively and wrongly promoted P3 deals as a mechanism for raising project capital, when in reality the true advantage of a P3 approach is the ability to transfer risk.” [CAP]

And this note of caution leads to a common conclusion:

Julie Roin, a University of Chicago law professor, also questions whether the “risk transfer” argument carries any weight. Ostensibly, for the private sector to turn a profit, a deal only makes sense if the government overestimates its risk and underestimates the project’s revenue potential. “It’s not as if any investor is going to accept risk without demanding compensation,” Roin says. “You’re just paying for the risk in a different way.”

Thus we end up with the Re-negotiation problem all too commonly associated with P3 projects:

“…then there’s the issue of renegotiation. Private companies have incentives to engage in opportunistic renegotiation. Such renegotiations reverse all of the benefits of ever engaging the private sector in infrastructure provision and financing. Take, for example, the case where a P3 toll-road is built, but traffic is lighter than forecast, so revenue disappoints. The private operator might try to renegotiate higher tolls or even minimum revenue guarantees from a public provider.” [EPI]

Indeed, this has been a problem in too may P3 financed projects to date.  For those wishing to get further into the weeds on the topic of P3 financing, I’d recommend the following sources:

Spending on Infrastructure Investment, CBO March 1, 2017, links to blog posts and other information.   No Free Bridge, EPI March 21, 2017. Public Private Partnerships, CAP, December 8, 2014.  Public Private Partnerships are Popular but are they Practical? Governing, November, 2013.  Public Private Partnerships in Transportation, CRS, November 7, 2017.  Federal Real Property, Limited Role of P3s, GAO (pdf) August 30, 2016.  The Perils of P3s, American Prospect, November 2013.

Problem Five: Location, Location, Location.  The administration is touting its plan for meeting the infrastructure needs of rural America, a topic of interest to those in northern Nevada.  However,  remember the admonishments and cautions listed above.  Rural America isn’t exactly a revenue driver for investment in infrastructure — toll roads can go through it, but collecting tolls on those roads isn’t likely to help those in the transportation industry — see truckers, hay haulers, etc. Other infrastructure projects are practically nowhere on the economies of scale.

Problem Six:  Privatization.  Few suggestions ar.  e more likely to raise the ire of rural Nevadans than the prospect of the privatization of water systems, and yet these would be the kind of investment most attractive to outside private investment.  Investment in rural water systems could “fix” mineral contamination problems, aging pipes and equipment, and related system fixtures — at a price — giving up control of the water rights.  Not exactly a popular proposal in the Silver State outback.

One of the problems with almost all the proposals emanating from the current Oval Office Occupant is that the details are not adequately.  The money will come from “partnerships” without specifying who and what is to be partnered, and will be driven by state and local resources — good luck finding state and local governments which can afford the initial capital investment.   Unfortunately, I’m guessing this will be the last post on the subject of infrastructure for quite some time as the administration hauls out its glitzy proposals without offering the substance necessary for thorough analysis.  And then Infrastructure Week fades into the mists of distance memory.


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