January 9, 2012
Currently, the federal government and state and local governments face calls for more and better highways but confront budgetary constraints in providing them. Some analysts have suggested that public-private partnerships might supply at least a portion of that capacity by providing additional financing for road projects and improving the efficiency of a highway’s construction and operation over the life of the road.
A CBO study, which was prepared at the request of the Chairman of the Senate Budget Committee, focuses on the following questions:
- What are public-private partnerships and how often are they used?
- Does private financing increase the resources available to build, operate, and maintain roads?
- Do public-private partnerships build roads more quickly or at a lower cost?
What are public-private partnerships and how often are they used?
The term “public-private partnership” refers to a variety of arrangements for highway projects that transfer some of the risk associated with a project and some of the control of a project to a private partner. That transfer is achieved in part by bundling some of the elements of providing a highway. Among the most extensive public-private partnerships are those in which a private firm provides financing for a highway project, designs and builds it, and then, in exchange for the right to charge tolls, operates and maintains it over its useful life.
The most common type of public-private partnership, however, is a more limited agreement in which one contractor agrees to both design and build a highway rather than having a government agency manage each of those steps separately. Under such a partnership, the contractor assumes greater risks than it would under the traditional approach (in which a state or local government assumes most of the responsibility for carrying out a project and bears most of its risks) because the terms of the partnership’s contract generally limit the private firm’s ability to renegotiate the contract.
The use of such partnerships for providing highway infrastructure is limited in the United States. Between 1989 and 2011, the value of highway projects financed through such partnerships represents a little more than 1 percent of the approximately $3 trillion (in 2010 dollars) that was spent on highways during that period by all levels of government. The use of public-private partnerships is increasing, however especially for limited-access highways in urban areas.
Does private financing increase the resources available to build, operate, and maintain roads?
Private financing will increase the availability of funds for highway construction only in cases in which states or localities have chosen to restrict their spending by imposing legal constraints or budgetary limits on themselves. The sources of revenues available to pay for the cost of a highway project—whether it is financed by a government or a public-private partnership—are the same: specifically, tolls paid by users or taxes collected by either the federal government or by state and local governments. Therefore, absent restrictions on governments’ ability to borrow, there is no difference between the amount those governments could raise themselves and the sums that public-private partnerships could raise because the same resources are available to remunerate investors in either case. Private financing can provide the necessary capital, but it comes with the expectation of a future return, the ultimate source of which is either taxes or tolls.
The total cost of the capital for a highway project, whether that capital is obtained through a government or through a public-private partnership, tends to be similar once all relevant costs are taken into account—including the cost of the risk of losses associated with the project. A construction project is never without such risk, even when a government guarantees repayment of any debts incurred to finance construction. Someone always bears that risk: That is, some form of explicit or implicit equity investment is necessary to absorb potential cost overruns or revenue shortfalls. For highways that are financed by public debt, taxpayers play the role of equity investors, bearing the risk that revenues might be less than the payments that have been promised on the debt. A comprehensive measure of financing costs takes into account the cost of such equity financing, even when it is provided indirectly by taxpayers. That cost is equivalent to the return that a private investor would require to finance such a project.
Do such partnerships build roads more quickly or at a lower cost?
Evidence from a small number of studies indicates that public-private partnerships have built highways slightly less expensively and slightly more quickly, compared with the traditional public-sector approach. Those results, however, are highly uncertain.
Only a few studies have focused on the private provision of a highway project—that is, on design and construction as well as on operations and maintenance. The studies typically estimated that the cost of building roads through design-build partnerships was a few percentage points lower than it would have been for comparable roads provided in the traditional way. Moreover, private provision was relatively more effective in reducing cost and the time required to complete the road for larger projects than for smaller projects.
In some cases, the time required to design and build the road declined—in part because the public-private partnership bundled the design and construction contracts and so eliminated a second, separate bidding process for the additional tasks. Information about using public-private partnerships to operate and maintain roads is more limited; there is some evidence of reductions in operations and maintenance costs under private control.
This study was prepared by Alan van der Hilst of CBO’s Microeconomic Studies Division.