One of the main tasks of government is to provide public infrastructure-bridges, highways, streets, jails, and airports-that serves the requirements of society at a reasonable cost.
Because these projects are usually large sunk investments, it is critical to make good decisions about what is to be built, both in terms of which projects are built and in terms of those projects' design and characteristics. Furthermore, once built, facilities require resources for maintenance and operation.
Traditionally, these infrastructure projects have been publicly provided; a PWA would award the construction of a project designed by the PWA to a private firm. The private firm would build the project; after receiving the agreed payment, its contractual link with the project would end.
One concern with the traditional arrangement was that, in most cases, the separation between construction and operation gave the builder little incentive to account for life-cycle costs, such as future maintenance and operations costs, beyond what was specified in general construction standards for infrastructure projects. Combined with the fact that governments have tended to allocate financing to new projects rather than to maintaining existing infrastructure, this has contributed to a stop-go approach to project maintenance, resulting in higher costs and lower quality standards. Years of neglect and suboptimal service have generated concern and demand for better maintenance of U.S. infrastructure.3 Forgone investment opportunities and design choices during the building phase, as a result of the separation between construction and operation, could have lowered costs.
Responding to these problems, a number of infrastructure projects have been constructed using PPPs, an arrangement by which the government's PWA contracts with a private firm. The services provided by the private firm include building an infrastructure facility and maintaining and operating that facility for an extended period. In exchange, the firm receives user fee revenues for the duration or other periodic payments. (In another variation, an existing facility is "sold" to the private partner, who then maintains and operates the facility in exchange for user fee revenues. We refer to these cases as "leases.")
In our terminology, the characteristic feature of a PPP is a heavy initial investment that must be recovered in a long-term contract. The private partner builds, operates, and maintains a project, and internalizes the life-cycle costs of the project. Since the firm is rewarded for the provision of infrastructure services, it is in its interest to provide adequate maintenance while reducing life-cycle costs. The infrastructure eventually reverts to government control. PPPs are used for various types of infrastructure provision: in schools, jails, and hospitals, as well as in the transport sector, which is the main focus of this paper.
PPPs can improve the efficiency of infrastructure provision by bundling maintenance and operations with construction of the infrastructure project. Because the private partner builds, operates, and maintains the project, the incentives for durable construction and efficient maintenance and operation are aligned.
The academic literature has emphasized the importance of bundling construction and maintenance as a source of efficiency gains. With public provision, a construction firm minimizes building costs subject to design characteristics. In a PPP, by contrast, the private firm minimizes life-cycle costs, which include building, operations, and maintenance costs. A strong argument for the PPP over traditional provision is that the concessionaire internalizes life-cycle costs during the building phase. To the extent that investments during the building phase can lower maintenance and operations costs, efficiency gains should result.
We are not aware of studies illustrating the quantitative importance of bundling. Yet once we consider the interaction of bundling with the political economy of infrastructure provision, the efficiency gains from bundling are probably large. Most governments spend too little on routine maintenance and too much on new projects or on major reconstruction of existing projects, since it is more attractive for politicians to inaugurate new projects than to do routine maintenance on existing facilities. By contrast, under a PPP that specifies and enforces quality standards, maintaining the infrastructure adequately is usually optimized.
There is also anecdotal evidence that PPPs can lower construction and operation costs. For example, the private concessionaire that built express lanes on the Riverside Freeway (State Route 91, SR91) in Orange County, California reduced construction time substantially by improving traffic management during construction (see Small 2010; also, we describe this project below). In addition, the consortium that proposed the I-495 Capital Beltway HOT (high occupancy/ toll) lanes in Fairfax County, Virginia, built HOT lanes for one-third of the cost of the high occupancy vehicle (HOV) lanes then planned by the Virginia Department of Transportation (Poole 2006).
Another example of efficiency gains is the Chicago Skyway. During the first four years under a PPP, operating costs decreased by 11 percent, in real terms, compared with the previous four years under city management (average traffic was similar in both four-year periods). A large part of this decrease in operating costs was due to lower labor costs: the private firm replaced city workers that had been paid at least $20 per hour with those paid at market rates of $12 to $15 per hour (TOLLROADSnews 2005).4
Public - private partnerships can improve the efficiency of infrastructure provision by bundling maintenance and operations with construction of the infrastructure project
PPPs offer strong incentives to finish the project early, since profits increase when users can be charged at an earlier date. Incentives of this sort are usually absent (or weaker) under traditional public provision.