Congressional Budget Office Publishes Testimony Regarding Economics of Transportation P3s

On March 5, Joseph Kile, Assistant Director for Microeconomic Studies for the Congressional Budget Office (CBO), testified before the U.S. House of Representatives Panel on Public-Private Partnerships (part of the Committee on Transportation and Infrastructure).  A copy of the testimony can be found here.  The main topics of the testimony were (1) private financing of P3 projects and (2) private provision of design, operation, and maintenance for P3 projects. I include an overview of the testimony and key takeaways below.

The CBO testimony adds to a prior report from the CBO in January 2012 called "Using Public-Private Partnerships to Carry Out Highway Projects."  CBO notes that vehicle miles traveled in the United States continues to rise and outpace the addition of miles of public roads.  Among the 4 million miles of public roads in the United States, federal, state, and local government expenditures totaled $155 billion in 2012 for building, operation, and maintenance.  CBO points out that the vast majority of these expenditures are performed using a traditional public procurement model of design-bid-build.  While public-private partnerships (or P3) are becoming a popular topic of discussion in the construction industry and appear to be growing in terms of actual use for procuring transportation projects, CBO states that a mere 1.5% of all projects from 1989 to 2013 exceeding $50 million were P3--across just 29 projects (not including 69 design-build projects).

Regardless of the limited history to analyze, the CBO testimony suggests P3 presents significant opportunities for transportation projects.  The benefits, risks, and structures of P3 have shifted in recent years, with the CBO testimony highlighting the following points:

• The overall cost of privately financing a highway project is roughly equal to the cost of financing using traditional public mechanisms (e.g., bonds, revenues, grants)
• The availability of incentives (such as having private entities hold equity in the project or contracting for payments or penalties based on contingent milestones) may encourage reduction of project costs and/or schedule
• Current P3 transportation projects are relying less on toll revenue to repay project debt (based on several early failures such as the South Bay Expressway in San Diego) and more on compensation during the concession period from state general revenue
• Recent P3 projects have less private partner debt service and more state or local financing utilizing the TIFIA program and municipal tax-exempt private activity bonds
• Compared to traditional design-bid-build, P3 transportation projects have delivered new assets with a "slightly" reduced time for design and construction and a "small amount" of cost savings
• A concession contract that consolidates design, construction, operations, and maintenance may better align contractor incentives with long-term project goals
• Loss of public control over a P3 project can raise overall public costs--most notably, private authority to set tolls and projected costs to renegotiate contract terms in the future

The biggest takeaway from the CBO testimony is that the current slate of P3 projects (both completed and ongoing) simply provide too small of a sample size to adequately conclude the cost and time benefits of P3 procurement models for highway projects.  Even so, where state and local governments have chosen to restrict transportation spending based on legal or budgetary constraints, the private financing options of P3 provide additional funding availability.  This reality suggests continued exploration of P3 for U.S. transportation projects.