To be sure, plenty of P3 projects are seen as successes. For example, Virginia's High Occupancy Toll lanes, which opened last year just outside Washington, D.C., were financed, designed and built by private firms, which will now operate them and collect tolls from drivers. Working with private partners allowed the state to complete the project far more quickly than it could have on its own, say advocates. Similarly, the $1 billion Port of Miami tunnel project, set to open next year, has been viewed as a largely successful public-private deal.
Still, there's a long list of P3s that turned out to be very bad for governments, cases in which public leaders failed to ask the right questions to ensure they were getting a good deal. These instances, in which governments ended up losing tens or hundreds of millions of dollars, provide a cautionary tale for anyone considering a P3. Given that history, and given the current enthusiasm for public-private partnerships, there's a basic question that states and localities ought to be asking: Are the deals accomplishing all they claim to?
When governments want to build a road, they typically use a process called design-bid-build: Engineers, working for the government or on a contract, design a project, and then construction firms bid for the right to build different pieces of it. Governments sell municipal bonds that allow them to borrow money cheaply to pay for the work. The system_at least theoretically_is intended to ensure that governments get the lowest price for building infrastructure.
With a P3, the design, financing, construction, operations and maintenance of a project can be rolled into one transaction. The deals are therefore incredibly complex. They are most common on major highway projects that cost hundreds of millions of dollars. Bidders are typically consortiums made up of major construction and financial firms.
Advocates for P3s say they make sense for four reasons. First, the contractors are involved in the engineering stage of a project, which means they can design features that will promote savings over a project's lifetime. Second, investors have their own money in the game, so they have a major incentive to come in on budget since every overrun eats into their profits. Third, because the deals include long-term maintenance components, they remove the temptation of governments to defer upkeep when times get tough. Fourth_and perhaps most important_governments can transfer risks to the private sector, such as the possibility that construction costs are higher or toll revenue is lower than expected.
The deals gained traction in Europe and Australia before they became prominent here, largely because their citizens are used to higher taxes in general and toll roads specifically. Moreover, the deals are easier to pursue in other parts of the world, where governments have more central authority. And finally, the U.S. is somewhat unique in that it allows municipalities to borrow money extremely cheaply on their own.
But the big firms involved in P3s abroad have been gaining a foothold in the United States. A few projects emerged here in the early 1990s. But the deals really got attention in the mid-2000s, when Indiana and Chicago took upfront payments in exchange for long-term concessions that gave private-sector firms the ability to collect tolls for decades. Today, those types of deals are less in vogue. It's now considered by many to be fiscally imprudent to sacrifice stable, long-term revenue for a one-time payment used to fund short-term needs. Instead P3s are typically used to build new roads or lanes, generally through arrangements where private companies pay for construction and maintenance, and in exchange collect toll revenue.
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