Saturday, April 23, 2011

Let the "evil" private sector provides public goods

Public-Private Partnerships (PPP) as a financing tool for transportation is getting more and more attention from legislatures and politicians in different states. As we have learned from class, the US is lagging behind many other countries in considering and implementing PPPs in public infrastructure. Minnesota Department of Transportation published “the state wide 20 year Highway Investment Plan 2009-2028”, which identifies $50 billion unmet needs in state-wide transportation investment. PPP could be an alternative way to satisfy our unmet needs, but needs comprehensive researches and understandings. Professor Jerry Zhao has posted a blog series about what is Public-Private Partnership in Transportation, the Pros and Cons of PPPs, and PPPs project updates conducted by the National Conference of State Legislature (NCSL), which contains many useful resources to investigate into this issue.

Public-private partnership is definitely not a brand new idea. Minnesota was once a leading state to consider PPP options. Noticing the state Transportation Department’s limited resources in maintaining its existing network of roads and highways, the state passed legislation allowing private operators to finance, build, operate and maintain toll roads to complete the system. However, unfortunately, the option that “ a high-profile new toll road that was to jut out from the southwestern edge of the Twin Cities” didn’t win the public approval, and the whole costly experience blocked the state to step forward on transportation public-private partnerships. From the

following graph, Minnesota is among the states with both PPP legislation and Design-build(DB) authority.

Why people are so concern about adopting PPPs? It seems like people in public affairs are highly cautious whenever there is any involvement with the private sector. Some critics warn that PPP agreements—especially for brownfield concessions with a non-compete clause may lose public control and flexibility, which means constraining government’s ability to make further policy decisions that affect the whole transportation system design. Other concerns have been expressed that private companies carrying their profit-driven rationale may seek a profit even at the public’s expense.

Partnership between private and public never has an easy answer, advancing public interest and allowing private companies to earn money seem like a dilemma cannot be solved. However, there must exist a win-win solution for both sectors, which really depends which pro

ject to select as PPP option, how to negotiate the contract and how to better manage and monitor the process. NCSL has a great report named Public-Private Partnerships for Transportation: A Toolkit for Legislators, which is also a great beginning resource to explore this issue.

Because PPP is so complex that different projects with different delivery options and contract options can generate completely different scenarios, many misleading perceptions exist about PPP agreements. Especially, as we discussed in the class, we have to notice that PPP does not equal privatization, concession or asset-monetization. Therefore, the most famous cases of PPP are Chicago Skyway and Indiana Toll Road , but they are actually not good examples to present the whole picture of PPP.

As Minnesotan, we may not need to drive through the Chicago Skyway to Chicago. But it is the primary highway facility approaching downtown Chicago from points south and east. Chicago Skyway is a 7.8 mile elevated toll road connecting Chicago, Illinois and suburban northwestern Indiana. It is The city leased the Chicago Skyway to Cintra-Macquaries consortium with a 99-year lease agreement and the city received a 1.83 billion dollar upfront payment. Although there is no non-compete clause, the company can increase the annual toll after 2017. The toll is capped at 2 percent of the annual toll, Consumer Price Index or per capita GDP increase. The ability to increase the toll makes the Chicago Skyway a profitable investment for the private company. And the city used a significant portion of the proceeds from the Skyway operating lease to reduce its debt, thereby increasing its credit rating and lowering its cost of future borrowing. One researcher said that there are good reasons for Chicago to lease the Skyway. First, Chicago hasno other options as the skyway is the only toll road. Most important, the users of the toll are mostly coming from other states. It is a good way to export the cost to other states’ citizens.

There is no clear conclusion that the lease is a loss of public asset, but the lease of tolls is just one option of PPP agreements and we should consider more. In 2007, Federal Highway Administration of US. Department of Transportation has a report “Case Studies of Transportation Public-Private Partnerships in the United States”, which analyzed different options of PPP.

Yes, PPP is a complex issue, but it has a promising future. There are many questions can be examined. Can PPPs be a way to satisfy our unmet needs in transportation investment? Can part of public goods be provided by the private sector? Are private companies always evil? How can the public and private sectors achieve a win-win cooperation/deal? As future policy leaders, PPP is absolutely an exciting greenfield to probe.

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