Public-private partnerships for promotion of cross-border trade and transportation.

Author:Lick, David
 
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  1. INTRODUCTION

    Although a simple concept at its core, implementing public-private partnerships ("P3s") can be complex legally, financially, and organizationally. While expertise, power, and financial capabilities on each side complement one another, the cultural differences between public participants and private participants are great. (1) Now, more than ever, cross-border trade between Canada and the United States and between Mexico and the United States is imperative for North America to compete in the global marketplace. (2) Use of public-private partnerships holds out great promise for promoting the creation of the infrastructure and facilities needed to promote cross-border trade. (3) Yet this approach adds a new layer of complexity due to the interfacing of differing business cultures and public approaches. (4) This is really the first time in history that Canada and the United States are jointly pursuing the implementation of public-private partnerships for this purpose. (5) This endeavor will require a rich blend of innovative thinking and diligence. Some old approaches to promoting trade may need to be set aside.

    Some recent experiences suggest that the great possibility of public-private partnerships can be realized for the benefit of both countries, albeit with many lessons learned along the way. The broad purpose of this paper is to organize knowledge about this subject so as to offer guidance, promotion, and prudence to all who might benefit from the use of public-private partnerships for the promotion of United States-Canadian and United States-Mexican cross-border trade through infrastructure and facility development.

    1. Public-Private Partnerships: The General Concept

      The concept of public-private partnership is a simple one with a long history. (6) It has been used in nearly every realm of community activity, from business promotion (7) to health care to public service privatization (8) to infrastructure development. (9)

      At its core, the concept simply means public entities and private entities working together for mutual benefit. (10) The mutual benefit on the public side is defining and achieving public goals. (11) On the private side, rewards may include public relations, financial, and ego benefits. A desire to find win-win situations is the most important motivator of public-private partnerships, and, therefore, a zero-sum-game mentality is one of the greatest enemies of public-private partnership success. (12) Perhaps the two most important aspects of successful public-private partnerships are: (1) the sharing of complementary powers and expertise and (2) the sharing of risks and rewards. (13)

      In essence the public sector must define the goals of the community and look for ways in which partnering with one or more private entities might promote those goals. (14) Often this means creating inducements for private entities to behave in ways that promote the public interest while achieving their own ends. (15) P3s are often seen as the carrot side of a government's "carrot and stick role." Inducements are not always financial and do not necessarily have to cost the general public anything. (16) But on the financial side, the best inducement is the promise of a revenue stream. A revenue stream enables the private entity to either benefit over time, or to capitalize and sell to others in the present. This facilitates a way of raising revenues for the project. (17) Ultimately, the revenue stream is the source for paying back both private debt and equity capitalists for providing financing. (18)

      All activities carry some risk. (19) At the same time, investors, developers, and private business operators are always looking for opportunities. These private entrepreneurs are naturally attracted to activities where the potential revenue stream, or rate of return on investment, is sufficient for the amount of perceived risk. (20) Therefore, capital will flow to activities where the perceived reward-to-risk ratio is best. Since: (a) the flow of capital around the entire globe is very fast and liquid; (21) (b) substantial capital is currently available world-wide, but is often pinned down by a risk averse global posture; (22) (c) many excellent and important projects, programs, and business ventures are in need of capital; (23) and (d) implementing these projects is critical to infusing new life into a sluggish North American economy, (24) successful implementation of public-private partnerships is more important now than ever before. Public-private partnerships provide an innovative way of engaging multiple stakeholders in the creation of new wealth while also achieving public goals.

      The origination of a public-private partnership can result from the government identifying a need and selecting a public-private partnership as a methodology of design, construction, finance, and operation of that facility or parts thereof. (25) The financing of public-private partnerships is a means for governmental agencies to capture the value of non-liquid assets. (26) Other public-private partnerships originate from the private sector via proposals to governmental agencies for the provision of services or the construction of public facilities or structures. Once these proposals are received, most governmental agencies require that it be subjected to some degree of public scrutiny. If and when these proposals are approved, they must also be subject to a competitive process where other potential concessionaires have the opportunity to make a proposal. (27)

    2. Purpose and Organization of this Paper

      This paper attempts to add to the growing and maturing knowledge base about the effective use of public-private partnerships. While application of the public-private partnership concept can be very broad, this paper looks at a one fairly limited but important slice of that broad scope, public-private partnerships for infrastructure development. Even more specifically, we want to examine infrastructure for Canadian-United States cross-border trade. The theory and practical knowledge concerning public-private partnerships has been maturing for thirty or forty years, while the use of public-private partnerships for infrastructure has only gained intensity in the last fifteen. (28) Much of the broad knowledge base has relevance to the narrow but important subject of this paper. This paper attempts to add to that knowledge and bring it up to date by discussing current cases, examples, and critiques specific to infrastructure and facilities related to cross-board trade and transportation.

  2. PUBLIC-PRIVATE PARTNERSHIPS FOR INFRASTRUCTURE DEVELOPMENT

    The National Council of State Legislatures P3 Toolkit provides a definition of public-private partnerships for infrastructure development. It says:

    A public-private partnership is a contractual agreement formed between public and private sector partners, which allows more private sector participation than is traditional. The agreements usually involve a government agency contracting with a private company to renovate, construct, operate, maintain, and/or manage a facility or system. While the public sector usually retains ownership in the facility or system, the private party will be given additional decision rights in determining how the project or task will be completed. (29) Some key points from the definition have to do with ownership and motivation. While using public-private partnerships for industrial development or central business district renovation usually results in private ownership of the project, using public-private partnership for infrastructure development usually results in public ownership of the facility. (30) But the private participant's reward for the risk taken can be structured in a variety of ways.

    In comparison to other types of public-private partnership endeavors, infrastructure-focused P3s are often about larger and more expensive projects. 31 When cross-border trade is involved, the focus expands into multibillion dollar highway projects, bridges, rail facilities, and border terminal facilities. (32) In fact, some suggest that only very large infrastructure projects can easily attract private capital. (33) Often these infrastructure projects have a wide regional impact and the users of a bridge or highway may come from or serve a multi-state area. (34)

    The economics of infrastructure projects are clearly different from many other types of businesses. Infrastructure tends to experience large economies of scale and economies of contiguity. (35) Economies of scale result as onetime fixed costs, such as building a water treatment plant, and are efficiently spread over a large number of customers, up to capacity. (36) Economies of contiguity are efficiencies that result from overcoming the cost of the friction of space; costs associated with distance. (37) A water line, for example, is expensive to build and maintain, creating a large fixed cost per linear foot. Linear fixed costs may also be a high percentage of total costs. A water enterprise will experience economies of contiguity because increased customers along the already-built, linear route, increases revenues relative to those linear fixed costs. (38) When economies of contiguity are high, competition between multiple supplies may be difficult because the cost of building multiple lines down the same street would be exorbitant and would dilute the economies of contiguity. (39)

    The broad impact that these projects have on the public and their economies of scale and contiguity mean that such projects exhibit high levels of externalities. (40) In the parlance of the public choice, infrastructure projects are close to the public-good end on the public-to-private scale. (41) This makes structuring a deal more difficult and more critical. It places the "public interest" front and center.

    Public-private partnerships can assist governments in managing their assets so that efficient progress...

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