Public–Private Partnerships

Proposed restrictions on federal funding for surface transportation projects are forcing state and local governments to consider alternative funding and financing mechanisms. The Transportation Investment Generating Economic Recovery and Transportation Infrastructure Finance and Innovation Act and other programs have successfully leveraged private dollars, but other programs are still needed to fund the surface transportation infrastructure gap. The U.S. Department of Transportation has been exploring new programs for innovative financing; one is public–private partnerships (P3s). P3s allow private firms to participate in the financing of an infrastructure project and take either part or all of the business risks and earn a market return on their investment as compensation. Conclusions from this analysis are the following. First, although accurate revenue forecasts are essential if a project is to be a success, making accurate estimates of revenues has proved difficult. Second, the success of any P3 depends on accurate measurement and sharing of risk. Deals that place all risk on the private sector are likely to fail. Projects in which the public sector takes more of the business risk are more likely to succeed. Third, public outreach, explanation, and strategic communication are essential, especially if the privatization will result in significant pricing changes for users. Fourth, due diligence and a thorough cost–benefit analysis are essential for public and private parties. Private firms typically have more experience in P3s and project financing. The public sector must have similar information and may need to contract out the cost analysis procedures. Fifth, if a project generates a revenue stream, then a private firm is more likely to embrace a P3 agreement.