Brendan Schlauch was a contributor for GOVERNING.E-mail: email@example.com
Public-private partnerships aren't dead. They're just changing.
In April, when Chicago tried--but failed--to lease Midway Airport to private investors, the obituaries for public-private partnerships--PPPs--began appearing. Weak economic conditions and the bankruptcy of key investment banks--banks that had been at the center of the PPP movement--had Barron's Senior Editor Andrew Bary writing in May that "the credit-market collapse and political opposition have all but killed the U.S. highway-privatization trend."
The collapse of the Midway deal was not the only harbinger of mortality. In 2008, an effort to lease the Pennsylvania Turnpike to the private sector was torpedoed because the state legislature balked at what it viewed as an unacceptably low winning bid of $12.8 billion. Despite a push from the governor, New Jersey legislators showed an unwillingness to part ways with the New Jersey Turnpike. And earlier this year in Chicago, public discord erupted over private management of public facilities: After the city leased its parking meter system to a private consortium, the private managers quadrupled parking meter fees, triggering a high-volume backlash from city drivers.
But reluctant politicians and cash-short bankers don't stay that way forever. Five months after the Midway failure and the toll-road vetoes, the bleak fortunes of PPPs are giving way to measured optimism. Although no one expects a flurry of new deals to be struck anytime soon, many public and private players anticipate that PPPs will return in the near future as a viable model for infrastructure investment. As the economy stabilizes, some of the big-bank players will be back in the privatization business. And political qualms may also be tempered. The reason is more practical than philosophical. "There are," says Scott Pattison, executive director of the National Association of State Budget Officers, "huge limitations going forward on states' ability to fund future infrastructure projects."
State and local revenues are not likely to bounce back to former high points anytime soon. While stimulus money is helping shovel-ready projects get off the ground, the federal government isn't expected to provide a new infusion of cash for another round of financing. Moreover, with Congress' postponement of a new surface transportation bill until at least 2011, non-stimulus federal support for transportation projects will remain at current levels for the foreseeable future. Meanwhile, the cost of maintaining and improving transportation networks is staggering: $930 billion over the next five years, according to a recent study by the American Society of Civil Engineers.
"The need for private capital to supplement governmental funds is very, very clear," says Dana Levenson, who, as Chicago's chief financial officer, helped broker the 2005 privatization of the Chicago Skyway toll road and set in motion plans to lease the city's parking meters and Midway Airport. With federal and state resources tight, Levenson, who is currently with the Royal Bank of Scotland, expects that the private sector will be needed to step in to fill the funding void.
But future PPP deals are likely to differ from those of the recent past. Where states once signed lucrative long-term leases that ceded significant control over public assets to the private sector, tomorrow's deals are likely to be structured in a way that more clearly has the state's and citizens' interests in mind. Part of that will be tougher management standards aimed at avoiding the problems Chicago experienced after leasing its parking meters.
One way to do this is by using the emerging PPP model known as "availability payments." Popular in Europe, this model already is being tested in the United States for the expansion of Florida's I-595 Expressway to include express toll lanes. Under this financing scheme, the private sector designs, constructs and manages a public asset. The government continues to own the asset--in the case of Florida, the roadway--but compensates its private partner for the risks and responsibilities it undertakes. The payments are based on specific performance standards and ensure that investors make money only if they are keeping their end of the bargain. According to the American Association of State Highway Transportation Officials, availability payments often are used for toll facilities that are not expected to generate adequate revenues to pay for their own construction and operation. The public sponsor of the project retains the underlying revenue risk associated with the toll facility rather than the private partner.
Although PPPs have the potential to be highly profitable for government, this form of privatization may not provide states with the cash they are hoping to raise to build and maintain infrastructure. "It's just one of many tools in the tool box," says Joung Lee, associate director for finance and business development at AASHTO. "It's not a panacea, by any means, to solving funding shortfalls." He suggests it will take an "a la carte funding approach based on political feasibility." The menu could include, say, a gas-tax increase or vehicle-miles-traveled fees, in addition to PPPs.
Not only are public-private deals likely to remain an attractive revenue source for cash-strapped states, but there are plans to expand PPPs beyond transportation infrastructure. Public assets such as schools, hospitals and prisons are seen as the next wave in the evolution of the expanding market in the United States. "Ultimately," Levenson insists, "the future of PPPs is bright."
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