Taxpayers vs. Private Investors: Shifting the Risk of Funding Public Projects – Next City
The Works

Taxpayers vs. Private Investors: Shifting the Risk of Funding Public Projects

A Denver rail project will use the trending “availability payment” model of public-private partnership, which some say are riskier for the government. (AP Photo/David Zalubowski)

To reiterate what seems to be the political talking point of the season: Our infrastructure is crumbling. And while that might be bad news for commuters crossing a bridge, the national crisis has a capitalistic upside — for the private sector. According to a report released by Moody’s in September, the U.S. could potentially become the largest market for public-private partnerships in the world “given the sheer size of its infrastructure.”

Public-private partnerships, often referred to as P3s, are exactly what they sound like. A government agency joins with a private company to fund and operate a project. Toll roads, light rail and even parking meters have been built or maintained through this arrangement, characterized by some as innovation, and others as neoliberalism at its worst. It’s a structure that has room for both.

Examining global trends among these partnerships, Moody’s concludes that one kind of P3 is gaining national popularity. Called the availability-payment model, this kind of partnership differs from the variety that has been used most commonly in the U.S., called demand-risk.

But though availability P3s are on the rise stateside, they tend to carry more financial risk for public agencies.

In a demand-risk model, the report states “the government grants the private developer the right to collect fees from the public for the use of a road, a bridge, a subway, an airport.” This kind of partnership carries more risk for the private contractor because they rely on tolls and fees to “pay for operations and to pay back debt.” But if, say, traffic forecasts are overly optimistic, the private partner is on the hook. A much-cited example is the Indiana Toll Road — the private contractor faces possible bankruptcy in the wake of decreased driving.

With availability model P3s, however, the public entity pays the private party a set amount, called an availability payment. With a project like the Indiana Toll Road, the state would have had to pay its private partner a set amount regardless of how much money came in through tolls and fees. And because traffic projections turned out to be off, the taxpayer-funded state agency would have been responsible for that loss.

Which means that while the rise of availability payments in the U.S. might look great to potential investors, there’s less clarity as to whether they benefit everyone else.

Ellen Dannin, a professor at Penn State Dickinson School of Law who studies privatization, says she’s wary of the availability structure because of how it constricts public agencies.

“It’s a long-term deal that freezes you [the public agency] into a contract,” she says. “You’re not just looking at the possibility of lost autonomy, you’re looking at real autonomy lost.”

“It’s a massive offloading of risk onto the public,” agrees Lee Cokorinos, a former research director for the left-leaning Institute for Democracy Studies who also studies P3s.

Moody’s report lists several availability P3s in the works in the U.S. One is a 21-mile reconstruction of Florida’s I-4 that would have toll revenue from express lanes go to the public agency (Florida Department of Transportation), which would in turn pay the private agency (I-4 Mobility Partners).

Jessica Keane, a spokesperson for FDOT, explains how the structure was chosen, adding that not all “risks” are toll-related.

“Availability payments take the toll revenue risk and reward off the private sector, but require the private sector to meet performance requirements for the facility in order to earn the availability payments from FDOT,” she says in an email.

She adds that the private sector retains several risks in the case of I-4, including “construction cost overruns and schedule delays, as well as fluctuations in long-term operations, maintenance and lifecycle costs of the facility during the concession.”

In the case of Denver’s “Eagle P3 Project,” the two parties joining hands are Denver’s Regional Transportation District (RTD) and a group called Denver Transit Partners. Their joint product will be 36 miles of commuter rail track through the Denver area.

According to the terms of this contract, the public agency owns the system while entering into a “long-term lease” with DTP giving them “the right to use the property and improvements to operate the rail system,” says Eagle P3 Project Director Brian Middleton in an email. The public agency owns all revenues, fare box, advertising and naming rights. Meanwhile, the private group is responsible for costs of operation and maintenance including repairs, replacements and updates.

“I would suggest that [demand risk] is riskier for the private sector, but availability payments are not inherently risky for the public owner,” he writes.

Dannin, however, is also cautious about the uncharted nature of the availability structure, particularly its impact on public information.

Freedom-of-information laws are supposed to mandate accountability for government agencies in the absence of free-market competition, she says. But private entities can block so-called sunshine laws if trade secrets are at stake. This is a concern for all P3s, but if a tax-funded agency is indeed absorbing more financial risk under an availability P3, surely that should be clearly outlined to taxpayers.

Cokorinos agrees, citing an example from Indianapolis. A public-private partnership is responsible for a new criminal justice center, but in August, the city refused to release certain financial details of the deal to the Indianapolis Business Journal. According to the Moody’s report, this project will also rely on availability payments.

Which begs the question again: innovation or neoliberalism at its worst? Ultimately, we’ll find out — according to Moody’s, the market is only going to expand.

The Works is made possible with the support of the Surdna Foundation.

Rachel Dovey is an award-winning freelance writer and former USC Annenberg fellow living at the northern tip of California’s Bay Area. She writes about infrastructure, water and climate change and has been published by Bust, Wired, Paste, SF Weekly, the East Bay Express and the North Bay Bohemian.

Follow Rachel .(JavaScript must be enabled to view this email address)

Tags: transportation spendingpublic-private partnerships