Some states have considered public-public models of procurement in an attempt to capture the benefits of a leveraged toll facility without the potential risks of a private concession. In Texas, for example, after selecting a private concessionaire for the SH-121 toll road project, Texas cancelled the procurement and awarded the project to the North Texas Tollway Authority, a political subdivision of the State (this procurement is described in Section IV). In New Jersey, in early 2008, the State suggested leveraging the value of its major toll roads, the New Jersey Turnpike, the Garden State Parkway and the Atlantic City Expressway, through a public-public partnership, rather than a PPP.135 The plan would grant a concession for the toll roads to a public benefit corporation created specifically for this purpose. The corporation would borrow money to make a significant upfront payment and would be entitled to collect tolls. Tolls would be increased in accordance with an open and predictable schedule agreed to in the concession agreement. While the debt would be public debt, New Jersey taxpayers would arguably not be responsible for this debt.
Supporters argue that public-public transactions are less expensive than PPPs because they can be fully financed with tax-exempt debt, which is cheaper than taxable debt raised by the private sector (this argument is not applicable in the context of private activity bonds), and because public benefit corporations do not make equity investments which are repaid at a higher rate of return than debt. In addition, they argue that the other risks created by PPPs, such as monopolistic pricing, are avoided. While it is true that a given amount of tax-exempt debt may be cheaper than an identical amount of private debt and equity, the comparison is not so simple.
Preliminarily, it is important to note that public entities do not have unlimited authority to issue debt for all projects. Even if public debt is cheaper than private financing, the choice is often between private financing and not doing the project because public debt is unavailable. PPPs allow the public sector to advance projects without running up against the same debt limitations that make it difficult for the public sector to borrow large amounts of money. States can avoid this problem for some projects by creating non-profit, public benefit corporations, but these types of structures come with additional risks because they are fully leveraged and do not include an equity investment.
Equity is important for at least two primary reasons. First, including equity in the financing package increases the proceeds available for a given project by adding another level of investment on top of the project's debt capacity. Because equity investors can take a more optimistic approach to valuing growth than debt providers this equity investment cannot simply be replaced with more tax-exempt debt. An optimistic approach increases the risk in the investment, but this risk is borne by the private investors in a PPP, not the public sector. The opportunity cost of foregoing an equity investment can be significant. While the opportunity cost may be especially apparent in greenfield projects for which the anticipated toll revenues are uncertain and the debt capacity is commensurately constrained, the opportunity cost is also significant in brownfield projects which rely on valuations of growth in traffic and toll revenue to be generated by the project.
Second, much of the success of PPPs can be attributed to the incentives that are created for the private sector to innovate and provide superior service and accountability for its customers. These incentives are powerful because the private sector's equity investment affords it the opportunity to earn a reward for its innovation. There are no similar incentives in a public-public partnership where there are no equity investments. In these types of deals, the public has incentive to perform at the level required to make necessary payments and may have no incentive to perform any better. In contrast, private operators in PPPs have direct financial incentives to implement additional innovations throughout the term of the concession to attract new customers and enhance speed and throughput.
Private bidders for PPPs must also incorporate cost and service innovations in their proposals if they hope to win the project. A well-crafted, competitive bidding process forces multiple bidders to compete with one another to provide the best deal for the procuring agency. In contrast, in a public-public partnership where there is no competition, a procuring agency has no assurances that the public received the best deal that it could get. While the procuring agency could rely on independent valuations of what a concession is worth, the true value of a concession cannot be ascertained without opening up the process to competitive bids.
Recognizing the benefits that come with private sector equity investments, Congress enacted the PABs program in SAFETEA-LU to help level the playing the field between public and private sector debt. As described in Section IV, PABs permit the issuance by the private sector of tax-exempt bonds to finance highway and freight transfer facilities that are developed, designed, constructed, operated and maintained by the private sector, while maintaining the tax-exempt status of the bonds. By providing the private sector with access to tax-exempt interest rates, PABs make it less expensive for the public sector to access the benefits provided by private sector equity investments.
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135 Save Our State: Financial Restructuring and Debt Reduction, Town Hall Presentation, February 2008, available at: http://www.state.nj.us/frdr/facts/index.html (last visited July 7, 2008)