Rethinking Engel et al.'s Critique of Highway P3s.

• Author: Poole, Robert W., Jr.

In "Public-Private Partnerships: Some Lessons After 30 Years" (Fall 2020), Eduardo Engel, Ronald Fischer, and Alexander Galetovic offer several conclusions from their considerable research on this subject. I have been researching public-private partnerships (P3s) in the highway sector since 1987, including publishing the Reason Foundation Policy Study "Availability Payments or Revenue-Risk P3 Concessions? Pros and Cons for Highway Infrastructure" in 2017. I believe that while Engel, Fischer, and Galetovic's critique is valid for many P3s in Latin America and Europe, it has little to do with how highway P3s are structured in the United States.

Here are the main critiques Engel, Fischer, and Galetovic set forth in their Regulation article, drawn from their National Bureau of Economic Research working paper "When and How to Use Public-Private Partnerships in Infrastructure: Lessons from the International Experience":

* P3s "are routinely renegotiated" after the winner has been selected, suggesting a kind of crony capitalism.

* The only real benefit of P3s is lower maintenance cost, not greater value for taxpayers via transferring risks to investors.

* The cost to the government is the same whether the project uses availability payments (explained below) or tolls (assuming the government would have chosen to use tolls in the first place).

* Revenue risk is too great for the market to bear, so if a project is financed based on revenue risk borne by the company, it will not be financeable without government revenue guarantees (which Engel, Fischer, and Galetovic say are common).

Many of those points do apply to Latin America and to some countries in Europe, such as Germany and the United Kingdom. But they are not problems in either Australia or the United States, where highway P3s are generally toll-financed, with major risks transferred from the state (i.e., taxpayers) to the P3 investors.

Outsourcing risk/ It is important to understand that two different models are used worldwide for large-scale highway P3 projects. In Canada, Germany, much of Latin America, and the UK, these projects are generally financed based on the government agreeing to provide annual "availability payments" (APs) over the life of the long-term P3 agreement (typically 30-35 years). Bond buyers finance the deals based on the government's commitment to making those payments every year. Some of the projects do include tolls, but the tolls are paid directly to the government, which can then use the revenue to cover some of the cost of making the annual APs.

By contrast, most U.S. and Australian toll P3 projects are financed by toll revenues paid directly to the P3 companies by their customers. This means the risk of insufficient traffic and revenue is borne by the company, not the state (as in AP-financed P3s). Other risks transferred include construction cost overruns and late completion. At the outset of the project, the value of these risk transfers, as well as hidden state costs such as insurance (and the P3 company paying taxes to the extent it is profitable), are compared with traditional government procurement in a detailed Value-for-Money analysis to determine if the project is...