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Making transportation public-private partnerships available in rural America

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The notion of private investors closing the U.S. infrastructure deficit through public-private partnerships (P3s or PPPs) appears to be in vogue.  As a policy matter infrastructure P3s are certainly gaining traction as a point of discussion (Google searches of the phrase “infrastructure PPP” accelerated following the presidential election)

There are plenty of myths surrounding P3s as well as debunking of the misconceptions. Public-private partnership “myths vs. realities” is a favorite subject of policy analysts. My intent is to not repeat the litany. You can go to your own personal Google machine and look those up yourself.

{mosads}There is, however, one misunderstanding that needs clearing up, viz., that transportation P3s must generate revenue through user fees or what we understand all too well – tolls. 

The Senate Environment and Public Works Committee recently listened to transportation leaders from rural regions (“Rural Republican question using private cash to fix infrastructure,” The Hill, Feb. 8, 2017). Committee Chairman John Barrasso (R-Wyo.) and various witnesses understandably expressed concern that P3 transportation projects that rely on tolls might favor urban areas, which have the traffic to make the projects bankable.

Anyone familiar with Washington’s notorious Beltway can understand how traffic can support a tolled P3 on the Virginia side of the Potomac. However, large metropolitan areas are not the only ones with infrastructure needs. Bridges and roads are disintegrating in the country-side as well. Does it make any sense to slap a toll on a two-lane bridge in rural Wyoming or Pennsylvania? Of course not. Does that mean that they are not P3 candidates? Not necessarily.

P3 investors need revenue to pay for operations, service the debt and of course make a return on investment. Transportation P3s generate revenue one of two ways – user fees or availability payments. Motorists recognize the former; but what the heck are availability payments?

Many P3s do not generate revenue from users. Governments develop schools, courthouses and prisons through public-private partnerships. Grade school students, plaintiffs and convicts do not pay for use of those facilities as they walk into the buildings. Instead, the developer receives a payment from the government for performance; literally for having the facility fully available for use by the public.

An availability payment (AP) is a regular payment from the government to the P3 developer, conditioned on the availability of the asset at a contractually specified quality. For instance, in a school availability P3, if the air conditioning is on the fritz, the contract will specify that repairs must be made within a certain period of time. If not, the P3 developer does not receive their full payment. In transportation availability P3s, if the road is not maintained to specified standards (e.g., pothole repairs, road kill pick-up, snow removal, mowing of the median grass, etc.) or is not open for a period of time, the payment to the private party is reduced.

Governments must budget long-term for availability payments. They should also do so if the road is delivered through traditional public financing. APs are binding obligations, subject to budget appropriations. In deciding on whether to pursue P3 delivery or traditional public financing, the public agency should determine if the higher private financing cost of a P3 can be offset by lower exposure for the public owner to construction and operating risks and overall efficiency gains (referred to as Value-for-Money analysis).

Pennsylvania is demonstrating the viability of utilizing APs for rural transportation P3s. The $1.8 billion Rapid Bridge Replacement Project P3 is replacing more than 500 geographically dispersed structurally deficient bridges in an accelerated timeframe that includes maintenance for the next 25 years. The bridges are predominantly crossings on smaller state highways, many in rural areas. It is not practical to place tolls on the bridges, and individually the bridges are too small to justify P3 transaction costs.

Availability payments provide the revenue. The bundling of smaller bridges provides a critical mass to justify transaction costs. Pennsylvania’s Department of Transportation projects a 20 percent cost savings over the life of the concession period compared to replacing the bridges itself.

P3s are not a panacea for rural infrastructure. However, they can deliver value-for money by transferring risk, contractually obligating maintenance (mitigating the problem of deferred maintenance), providing budget certainty and supplementing public capital with private investment. Governments are not judged by what they own, but by what they deliver. Public-private partnerships remain a viable alternative for delivering better transportation for rural America.

John Buttarazzi is an Adjunct Professor at Georgetown University’s McCourt School of Public Policy where he teaches a course on public-private partnerships. He is also founder of Liberty Hall Advisors.

The views expressed by this author are their own and are not the views of The Hill.

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