Are Public-Private Partnerships a Good Choice for U.S. Highways? A Review of the Literature

In light of chronic funding shortfalls and waxing highway construction and maintenance demands, public private partnerships (PPPs) (often though not always in conjunction with road pricing) have been garnering increasing attention from government officials in the U.S. and abroad. Despite many strongly-held opinions on PPPs – both pro and con – systematic evaluations of their efficiency, effectiveness, equity, and feasibility are all too rare. This paper is the first part of a research project that aims to rectify this shortage of careful, evenhanded, and rigorous analyses of PPPs by drawing on the research literature to develop a comprehensive PPP evaluation framework. Drawing on a careful and extensive review of the research literature, we (1) present the often misunderstood economic properties of highway and road infrastructure, (2) outline the rationales governments cite for engaging in PPPs, (3) review the various types of applicable PPP arrangements, and (4) describe the conditions and factors that influence the success of PPPs. In the final section, we emphasize the differences between financial and socio-economic evaluations of PPP in describing our proposed PPP evaluation framework for highway projects. These differences in focus – between shorter-term financial considerations and longer-term economic considerations – lead to an important point that PPPs are not revenue sources per se. Rather they are means by which projects can be financed, delivered, and operated, but may or may not do so more cheaply than through more traditional finance, delivery, and operation. To the extent that tolling may be implemented to generate a revenue stream for a private contractor, PPPs may allow governments to tap into new sources of funding. But in such cases it is the tolls that generate funding, not the PPPs. Despite this, and despite the potential efficiencies of private sector development and operation, PPPs appear to public officials as a way to generate “free money” for highway projects. But, of course, neither lunches nor highway projects are free. In attracting private capital, PPPs often redistribute costs and risks between the public and private sectors in ways that are not always clear to all involved. When project responsibility and authority is explicitly allocated to either the public sector or the private actor with the most relevant expertise and experience, significant efficiencies can be realized. Despite the desperate need for upgrades to California’s highway network, officials must approach the PPPs carefully to ensure that projects will generate public benefits that exceed public costs. Whether or not a PPP is a good deal for the public very much depends on the project specifics. When properly structured and managed, PPPs can bring significant public benefit, but poorly conceived projects may entail far more risk than enthusiastic public officials may realize. When it comes to PPPs for highway projects, the devil is indeed in the details.