Most transportation infrastructure in most countries is funded by government. But in a public-private partnership, a private company puts up at least some the money to build the project in exchange for being able to earn a return from that project in the future--typically through some combination of tolls or other charges to those using the infrastructure. For cash-strapped governments, a public-private partnership can sound enticing. Reduced need for public spending up front! Those who pay in the future will be users of the system after it is built! But unsurprisingly, whether a PPP is a good deal for the public turns out to depend on the details of the contractual arrangement. Eduardo Engel, Ronald Fischer, and Alexander Galetovic provide a readable overview of what we know in in
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Many governments do not perform regular, continuous maintenance because building new infrastructure or repairing severely deteriorated projects is politically more attractive. ... Moreover, the annual logic of public budgets makes it difficult to set aside funds for future maintenance at the time the project is built. Indeed, a study suggests that one-third of expenditures on new infrastructure should be allocated to maintaining existing projects. The cost of poor maintenance under traditional provision can be high. Not only is the quality of service poor, but the cost of intermittent maintenance, which often involves costly rehabilitation, has been estimated to lie between 1.5 and 3 times the cost of continuous maintenance. We estimate that maintenance savings are somewhere between 10% and 16% of initial investment.
incurred costs of more than $13 billion following renegotiation of the initial contracts. In Chile, 47 out of 50 PPP concessions awarded by the Ministry of Public Works between 1992 and 2005 had been renegotiated by 2006, and one of every four dollars invested had been obtained through renegotiation." However, contractual terms can be redrawn to reduce this risk. As the authors write:
To do so, the contract should limit the present value of a concessionaire’s compensation during the life of the contract to the amount determined by the original bid (the so-called “sanctity of the bid” principle). Moreover, any works added to the original project should be auctioned off to the lowest bidder and the concessionaire should be excluded from bidding. To ensure the sanctity of the bid, renegotiations should be reviewed by an independent panel and all contract modifications should be easily accessible to the public via the internet so that an informed public can question the reasons for renegotiations and the amounts involved.Another issue arises when a private company is going to be allowed to impose tolls or user charges in the future. It has been a common practice that the right to charge is granted for fixed time period (and if the firm doesn't collect as much as expected, it then tries to renegotiate). This can lock in large payments to the private firm over a long period. The authors note:
Portugal received €20 billion in PPP investments in roads, hospitals,and other projects between 1995 and 2014. Of this amount, 94% was spent in highways that used “shadow tolls” that the government paid to the concessionaire per user. Government-guaranteed minimum revenue from the tolls amounted to 1% of the country’s gross domestic product annually over the period 2014–2020, though it will fall to an estimated 0.5% of GDP by 2030.