Should You Use Public-Private Partnerships for Infrastructure?

November 2, 2021

By Shar Habibi, Research and Policy Director of In the Public Interest

Whenever the Infrastructure Investment and Jobs Act is actually passed by Congress, a little noticed requirement will become of significant importance to states and localities that are going to use some of the billions of dollars made available to them.

The legislation would require many of the applicants for funding for transportation projects with costs over $750 million to conduct what’s called a “value for money” analysis as part of their application process. A value for money analysis attempts to calculate the lifecycle costs of designing, building, financing, operating, and maintaining an asset, a critical piece of information in determining whether to use a public-private partnership (a P3), compared with moving forward on the project in the traditional way, relying on the public sector to do the necessary planning, building, and maintenance.

The problem is that value for money analyses are often not the objective tool that many state and local governments believe them to be. They tend to be biased towards the private sector and can be chock-full of unfounded assumptions. In other words, they rarely provide an accurate comparison between private and public financing.

For example, the Canadian province of Ontario went on a P3 frenzy starting in 2001. They conducted value for money analyses, signed P3 contracts, and built transit lines, school buildings, and other infrastructure. In 2014, an audit by the Office of the Auditor General of Ontario revealed the flaws in their decision-making. A whopping 74 out of 75 projects ended up being more expensive than their initial value for money analyses had estimated—a total of $8 billion more.

Here are five tips for doing better value for money analyses (which are explored in further detail in a memo we produced in October):

1. Be very specific about what procurement methods you want to compare: Some value for money analyses compare a P3 with only one other procurement method using public financing, such as design-bid-build (DBB). However, it may make sense to also compare the P3 route with other ways to shift construction risk to the private sector, like design-build (DB) or Construction-Manager-at-Risk (CMAR).

2. Fully understand the assumptions underlying various cost comparisons: A value for money analysis is based on a set of assumptions that impact the bottom-line comparison. Some assumptions seem straightforward, but others may be speculative or inaccurate. For example, an analysis might assume that labor costs will be lower for the P3 option compared to making the public sector responsible for operations and maintenance. But does this assume that there will be fewer workers in the P3 option? Does it assume that workers will be paid less or provided with fewer or less costly benefits? Are these assumptions in line with the plan and requirements for the project?

3. Consider how risk levels are allocated in each delivery method: Quantifying risk transfer is more an art than a science. Always ask: Are these risk allocations reasonable, justified, and supported by evidence? An analysis may assume that undertaking a project with public sector employees and oversight will be riskier than a P3 option, like having a higher probability of construction delays, equipment failures, or operating cost overruns. But it’s critical to understand how risks were calculated for each delivery method. The Ontario audit mentioned above found that "there is no empirical data supporting the key assumptions used ... to assign costs to specific risks,” meaning that in many cases the calculation and allocation of risk was unsubstantiated. Additionally, some risks can never actually be transferred. If something critical goes wrong in a large project, the public’s health and safety may be compromised, which isn’t typically taken into consideration in these types of calculations.

4. Incorporate non-financial public interest criteria in the analysis. While value for money analyses consider financial variables, as they are currently practiced, they don’t consider other factors, such as: regional economic impacts; affordability and accessibility for low-income communities; the number of high-quality jobs the project will create and access to these jobs by disadvantaged communities; environmental impacts; and accountability and transparency measures.

5. Hire staff with expertise to oversee the value for money analysis and review it after completion: When  Indianapolis, Indiana, and Marion County considered a P3 for building a criminal justice complex, the local officials carefully reviewed the consultant’s value for money analysis, which recommended a P3. They found numerous flaws in the analysis, including the use of “unsubstantiated and yet highly-unfavorable assumptions” about the city’s ability to finance the project and the allocation of unnecessary risks related to the city’s ability to operate the facility. Their careful review concluded that a P3 would actually not be the most cost-effective approach.

It’s tempting to focus on the bottom-line recommendation of a value for money analysis without understanding how that recommendation was derived. As always when it comes to procurement, the devil is in the details.

With substantial federal infrastructure funding likely on the way, this is a historic opportunity for state or local governments to improve the lives of residents. Knowing how to accurately evaluate whether private financing is truly worth the expense will help make sure that every dollar counts.