A Desperate Customer? The Growing Trend of PPPs in American Government

“Desperate government is our best customer,” said the head of a leading finance company to the National Council for Public Private Partnerships in 2008. Statements like this one contribute to raising questions about whether the benefits of Public Private Partnerships (PPPs) are fairly distributed between private investors and taxpayers. PPPs are arrangements through which government entities turn over the maintenance, operation, and finance of public infrastructure to private investors, who in turn receive a return on their investment in the form of user fees or direct government payments. PPPs are typically presented as possible solutions to cities’ seemingly insurmountable budget shortfalls as municipal governments struggle to keep up with the maintenance and expansion of transportation infrastructure, especially highways, in the face of increasing traffic congestion, deteriorating roads, and consumer demand.

Here in Chicago, Mayor Richard M. Daley’s parking meter deal continues to be accused of benefiting private investors at the expense of taxpayers by allowing the meter company to hike rates and bill the city whenever new free disabled parking is designated. This history played a role in Mayor Rahm Emanuel’s decision to cut off negotiations for the privatization of Midway Airport. In their paper “Why do U.S. states adopt public private partnership enabling legislation?,” R. Richard Geddes and Benjamin L. Wagner acknowledge the controversy associated with PPPs and explore the broader factors behind the growing trend of state laws that lay out the welcome mat for PPPs, which as of late 2012 have already been enacted in 32 states and Puerto Rico.

Given the uncertainty around the benefits to taxpayers from PPPs, it is crucial to better understand states’ motivations in facilitating them. Geddes and Wagner examine two principal questions in this regard – first, why do some states, and not others, pass legislation that invites private investment in public infrastructure, in particular transportation infrastructure? Second, why are some of these laws more favorable to Public Private Partnerships than laws in other states? On the demand side, Geddes and Wagner find that increases in driving rates and resulting traffic congestion significantly increase both the probability of PPP-enabling laws passing and their favorability to private investment. Partisan agreement, especially if Republicans control the state legislature, between the executive and legislative branches of state government also increases likelihood of passage. Notably, Geddes and Wagner find scant evidence that states pass these laws in response to decreased funding from traditional sources, such as federal highway aid.

The authors use the Federal Highway Administration website to track which states have passed and implemented PPP-enabling laws. To measure how favorable any given law is to attracting PPPs, the authors compile an index of 13 elements ranging from “Very Discouraging of Private Investment,” which would exclude roads and highways from PPP arrangements, easily allowing state legislatures to vote down PPP arrangements, to “Very Encouraging of Private Investment,” which would allow a broad range of transportation facilities to qualify for PPPs, enabling states to make direct payments to PPPs rather than relying exclusively on user fees and allowing public and private money to be combined to finance projects.

Using their understanding of favorability of various state laws toward PPPs, Geddes and Wagner then test three theories as to the factors underlying the probability and favorability of PPP-enabling laws. First, they measure the impact of demand for improvements in transportation infrastructure in creating PPPs. To do so, they use measures of growth in motor vehicle registration and the Travel Time Index, a measure of traffic congestion calculated by the Texas Transportation Institute. In terms of the probability of passing PPP-enabling laws because of transportation needs, Geddes and Wagner find that a one percent increase in the Travel Time Index creates a 3 percent chance that the state would adopt a PPP law. This could be either because states seek out PPPs as strategies to address congestion or because private companies focus their lobbying efforts on areas where high traffic could translate into higher profits.

Second, the authors explore whether PPP laws are a result of tighter budgets that leave state and local governments little choice but to look to the private sector. To test this theory, the authors look at access to federal highway aid, the proportion of states’ budgets spent on highways, and the states’ financial stability through measuring their debt per capita and bond ratings. Despite the common belief that tight budgets lead to PPPs, Geddes and Wagner find little evidence that these types of fiscal constraints impact the overall odds that states will pass PPP-enabling laws.

Lastly, Geddes and Wagner examine how political factors lead to the creation of PPPs. The two use severable variables to do so, including the level of union membership, whether a single party controlled both the executive and legislative branches of state government, and the proportion of Republicans in the state legislature. Geddes and Wagner find that Republican control of both branches of government increased probability of passage of PPP laws and that the favorability of PPP-enabling laws increased with the percentage of Republicans in a state’s House of Representatives. Democratic control had a negative impact on the likelihood of passing PPP laws.

The increasing prominence of PPP-enabling laws and agreements raise important questions about how public services and assets will be managed, to whom they will be accountable, and where their benefits will be directed. Geddes and Wagner suggest that further research is needed to explore whether laws facilitating PPPs are truly in the interests of the public. All the more crucial given that, in addition to transportation infrastructure, the authors note that PPPs are used in key urban sectors such as drinking water and sewage, schools, prisons, and courthouses. According to their research, the laws investors dislike most include those that give state legislatures authority over PPP projects and allow states to provide cheaper alternatives to PPP projects without having to compensate private investors. Laws that private parties like best include maximum confidentiality for investors’ proprietary information and exemptions from state regulations on awarding contracts. It is unsurprising that this combination would provide private investors with maximum flexibility, higher profits, and less accountability. Whether this is in the public interest is an important topic for further research.

Feature Photo: cc/(torbakhopper)