The case of the Capital Beltway: the use of federal innovative finance techniques in public-private partnerships.

• Author: Luby, Martin J.

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Compared with the rest of the world, the United States has been relatively slow to use public-private partnership arrangements (P3s) in building, financing, and operating infrastructure assets. One reason is U.S. tax policy--unlike many countries, the United States allows state and local governments to issue tax-exempt municipal bonds to finance the building of infrastructure assets. This tax exemption enables state and local governments to procure financing at a much lower cost than can be achieved by the private sector, which often uses a more expensive debt and equity financing mix. Because of this financing advantage, state and local governments have a long history of financing, building, and operating infrastructure in the United States, which, some would argue, has provided these governments with a level of operational expertise that is similar to that of the private sector. The question, then, is whether the public sector's seemingly inherent financing cost advantage is enough to offset whatever capital and operational cost efficiencies the private sector brings to the building and managing of infrastructure assets.

One way to analyze this question is by comparing the amount of funds the private sector is willing to pay the public sector for the right to finance, construct, and operate toll roads in the United States with the amount that can be raised through conventional municipal bond financing. How much is the future cash flow stream of the asset worth under private versus public provision and financing?

QUANTITATIVE, QUALITATIVE; GREENFIELD, BROWNFIELD

A number of recent studies--mainly covering U.S. surface transportation assets--address this type of explicit quantitative analysis. In reality, of course, the policy decision to use a P3 arrangement must also take into account more qualitative factors including control of the asset being lost, appropriate level of consumer surplus for toll users (i.e., the difference between the maximum toll a citizen would be willing to pay versus the actual toll rate), future regional transportation needs, diversion of traffic, and environmental impacts. However, while these qualitative considerations are clearly important, they will likely be considered only if a government can make a case from a quantitative standpoint that private rather than public financing, construction, and provision of an infrastructure asset is more effective.

Second, within types of P3 arrangements, one must distinguish between the construction of new roads, often referred to as greenfield projects, and privatization of existing roads, called brownfield projects. In many contemplated greenfield P3s, the private sector designs, finances, constructs, operates, and maintains the new road. In return for a one-time, upfront payment to the government, the private entity receives the right to collect and keep all revenues from the asset over a specified term. In a brownfield project, the road is already built, so the private sector entity only operates and maintains the asset, although maintenance might include significant future capital costs. Like in a greenfield project, the private entity receives the right to collect and keep all revenues from the asset over a specified term in return for a one-time, upfront payment to the government.

The level of value the private sector offers, as it relates to risk sharing and cost containment, may be much different for greenfield and brownfield projects. Construction, revenue, operational, and environmental risks are much higher for new roads, and for this reason, P3s can be a better arrangement in greenfield projects (even if the quantitative analysis favors the public sector) because the risk-sharing arrangement between the public and private sectors is more appropriate. It is not surprising, therefore, that most of the debate (and, thus, most of the written studies) on...