Earlier this month, the Congressional Budget Office published a study entitled Using Public Private Partnerships to Carry Out Highway Projects. http://www.cbo.gov/doc.cfm?index=12647 The study addresses two issues: 1) can design-build and PPP models provide additional funding for highway projects? and 2) does design-build provide a faster and more cost effective model for delivering highway projects? See Preface.
A post on the CBO Director’s blog summarizes the study’s findings:
“Does private financing increase the resources available to build, operate, and maintain roads?
Private financing will increase the availability of funds for highway construction only in cases in which states or localities have chosen to restrict their spending by imposing legal constraints or budgetary limits on themselves. The sources of revenues available to pay for the cost of a highway project—whether it is financed by a government or a public-private partnership—are the same: specifically, tolls paid by users or taxes collected by either the federal government or by state and local governments. Therefore, absent restrictions on governments’ ability to borrow, there is no difference between the amount those governments could raise themselves and the sums that public-private partnerships could raise because the same resources are available to remunerate investors in either case. Private financing can provide the necessary capital, but it comes with the expectation of a future return, the ultimate source of which is either taxes or tolls.
The total cost of the capital for a highway project, whether that capital is obtained through a government or through a public-private partnership, tends to be similar once all relevant costs are taken into account—including the cost of the risk of losses associated with the project. A construction project is never without such risk, even when a government guarantees repayment of any debts incurred to finance construction. Someone always bears that risk: That is, some form of explicit or implicit equity investment is necessary to absorb potential cost overruns or revenue shortfalls. For highways that are financed by public debt, taxpayers play the role of equity investors, bearing the risk that revenues might be less than the payments that have been promised on the debt. A comprehensive measure of financing costs takes into account the cost of such equity financing, even when it is provided indirectly by taxpayers. That cost is equivalent to the return that a private investor would require to finance such a project.
Do such partnerships build roads more quickly or at a lower cost?
Evidence from a small number of studies indicates that public-private partnerships have built highways slightly less expensively and slightly more quickly, compared with the traditional public-sector approach. Those results, however, are highly uncertain.
Only a few studies have focused on the private provision of a highway project—that is, on design and construction as well as on operations and maintenance. The studies typically estimated that the cost of building roads through design-build partnerships was a few percentage points lower than it would have been for comparable roads provided in the traditional way. Moreover, private provision was relatively more effective in reducing cost and the time required to complete the road for larger projects than for smaller projects.
In some cases, the time required to design and build the road declined—in part because the public-private partnership bundled the design and construction contracts and so eliminated a second, separate bidding process for the additional tasks. Information about using public-private partnerships to operate and maintain roads is more limited; there is some evidence of reductions in operations and maintenance costs under private control.” http://cboblog.cbo.gov/?p=3120
