Public-Private Partnerships For Funding Infrastructure
May 3, 2022
By John R. Bartle, University of Nebraska at Omaha and Can Chen, Georgia State University
It’s long been understood that the success of cities depends to a large extent on the health of their infrastructure. Well-maintained roads and bridges are critical elements of cities that draw new businesses and residents. High functioning water systems are a cornerstone of public health. Broadband is becoming a necessity, not just a luxury.
But the demands society is placing on infrastructure are growing, and people are demanding more than just good maintenance.
As we dive into the second decade of the 21st century there’s a growing emphasis on infrastructure systems that are sustainably designed and incorporate new technology such as smart city technologies, autonomous and electric vehicles.
These projects don’t come free of charge. But even the geyser of federal money from the infrastructure bill, is just one-time money, and won’t continue to pour into state and local coffers into the future. What’s more, local matches are required to access some of these dollars.
That leaves us with the need for a long-term connection between revenues available for infrastructure and investments that can be made in it. Financing approaches that link the benefits from the projects with revenues can provide a long-term, stable, sustainable source of funding that can be a permanent solution to the vexing challenges we have faced in this area.
In our new book, Innovative Infrastructure Financing, we attempt to demystify some of these approaches and explain where individual techniques can best be used.
One such tool is public-private partnerships (PPPs or P3s). Public infrastructure has traditionally been funded with public dollars. However, in recent years, due to the increasing gap between infrastructure demands and available public funding, there has been a growing interest in tapping into the private funds for infrastructure investment. P3s are not new to the U.S., though they are more widely used in many other countries such as the UK and Australia.
Though P3s are a powerful tool, they do not come into being without challenges. We’ll highlight some of the most significant pros and cons of P3s at the end of this blog post.
As of August 2018, 36 states had authorized P3-enabling legislation. In general, P3 refers to a contractual arrangement in which a government forms a partnership with a private firm to do one or more of the five core functions of capital development: design, finance, build, operate, and maintain. The organization that can best deliver the function does so to best use the resources, assets, skills, and capacities of the organizations. Further, each sector divides the risks and rewards to optimize the delivery and financing of the infrastructure services.
Many different types of P3s exist, including design-build (DB, where the private firm designs and builds the facility and then sells it to the government), design-build-operate-maintain (DBOM), design-build-finance-operate-maintain (DBFOM), and long-term lease concession where the firm makes an up-front payment and operates and maintains the facility for the term of the lease. It is worth noting that P3s are different from privatization: the key distinction is that in privatization the private partner assumes partial or full ownership of the facility.
P3s have been used to build US infrastructure including highways, water treatment systems, courthouses, and arenas. The Port Miami Tunnel project is a prime example of a P3 success story that used the DBFOM approach. It opened on August 3, 2014. Under a 35-year concession agreement, the Florida Department of Transportation (DOT), in partnership with Miami-Dade County and the City of Miami, made milestone payments to the concessionaire (MAT Concessionaire LLC) during the construction period.
After construction was completed, the Florida DOT made availability payments (capped at $32.5 million per year) to the concessionaire; these payments are contingent on service quality. The tunnel will be returned to the DOT in 2044. The total cost of design and construction was $668.5 million. Florida DOT shared half of the capital design and construction costs and assumed all the operations and maintenance costs. The remaining half of the project capital cost is paid by Miami-Dade County and the City of Miami.
The advantages of P3 are:
- Shifting project risk and operations and maintenance responsibilities to the party best able to bear it,
- Leveraging private funding and expertise, and
- Avoidance of debt by the government which may be constitutionally or statutorily limited.
- Complex contracts and negotiations,
- The need for a high level of expertise either in-house or hiring consultants,
- Vigilance in monitoring and enforcing contracts, and
- Loss of control and flexibility for a long term.
Used properly, P3s can leverage private funds and expertise, and shift some of the costs for projects to private sector beneficiaries. They can also deliver projects faster. With new federal funding available, and investment firms looking for new opportunities, P3s are an option that can better match public needs for new and improved infrastructure with private capacity.
The contents of this blog post reflect those of the author, and not necessarily those of the GFRC.