Disclaimer: This blog post was prepared by Cynthia Mog. The opinions expressed in this article do not reflect the views of Squire Patton Boggs (US) LLP. In fact, they do not reflect the opinions of the author either. Rather, this is a summary of information available on the omniscient Internet.
As you may know, a budget released earlier this year by the White House included a provision that would expand the availability of tax-exempt financing in public-private-partnerships (“P3s”) by creating Qualified Public Infrastructure Bonds (“QPIBs”). The limited availability of tax-exempt financing in P3 structures has often been cited as one reason why P3s have not taken off in the United States (“U.S.”). P3s are much more common in Europe and Asia. My curiosity as to what other obstacles P3s may face prompted me to search on the Internet (the fount of all knowledge) for the pros and cons of P3s. Below is a summary of what I discovered.
The use of P3s causes very strong reactions from both those who favor them and those who are opposed to them. There are a few items both sides probably agree on:
- The “public” in P3 is generally a governmental entity. The “private” is a nongovernmental, usually for-profit, entity. The “partnership” is a joint venture between the governmental and nongovernmental entities.
- Most people appreciate having access to roads, bridges and hospitals. (Since safety-net hospitals are often governmental hospitals, they are relevant to this discussion).
- Nobody really likes paying taxes or tolls.
- Since nobody really likes paying taxes or tolls, it is a good idea to build and operate the governmentally owned roads, bridges and hospitals as efficiently as possible.
That is likely where the consensus ends.
There are two very broad categories of P3s. The first type is a “design-build” P3, whereby the private party agrees to design and build the project for a fixed price. Accordingly, the risk that the project will have cost overruns is borne by the private party. On the flipside, the private party also keeps the profit if the project ends up costing less than projected. This type of P3 does not seem to cause as much controversy as the second category of P3s.
The second type of P3 is called a “design-build-finance-operate” P3. Under this structure, the private party will, in addition to designing and building the project, finance it and manage it for a significant period of years after it is built. Not surprisingly, the private party receives compensation for its management services. With respect to roads and bridges, the private party oftentimes is permitted to charge tolls in exchange for its management services. The management of a governmentally owned hospital would more likely result in a fixed management fee for the private party.
Supporters of P3s make the following points with respect to “design-build-finance-operate” P3s. First, it is easier to line up private sector financing, and therefore P3 projects are built more quickly than governmental projects. Second, private parties are more likely to control costs, as such entities are concerned about their bottom line. In addition, P3 supporters argue that a private party is more likely to be innovative when designing a project that it knows it will be managing for the long term. Finally, P3 supporters point out that a private party that engages in a significant number of P3 projects will have more experience than a high-level government official that may only work on one or two large infrastructure projects in his or her career.
In contrast, opponents of “design-build-finance-operate” P3s argue that, due to its size and ability to tax, government can almost always borrow money at lower rates than private parties, and that it therefore makes more economic sense for the governmental entity to finance public projects. In addition, the opponents argue that the agreements between the parties are often so complicated that it is impossible for the taxpaying public to understand exactly what the arrangement is between the governmental entity and private party. Moreover, opponents of P3s argue that allowing a private party to charge tolls on a governmentally owned road or bridge results in double taxation. Finally, industry experts believe that many people in the U.S. are uncomfortable with foreign investors operating U.S. infrastructure for an extended period of time. (Perhaps they are envisioning a massive Bridgegate when the treaty talks break down.)
The above listed pros and cons for P3s are the more rationale arguments. With a little effort, one can find some more personal and political (and much more amusing) back-and-forth on the subject via the Internet, which is why this blog post is entitled “The P3 Wars”.