Additional Costs of PPP

The use of PPP for transportation infrastructure brings some additional costs compared with traditional procurement (GAO 2008). The valuation and decision-making process to pursue a PPP should account for these to estimate the real costs of PPPs. These additional costs include:

•  Higher cost of borrowing (for private debt), although there are ways that the private sector can lower this, for example, with private activity bonds;

•  Foregone tax revenue, when tax-exempt debt is used, although this is revenue that may not have materialized in any case;

•  Cost of reviewing unsolicited proposals;

•  Cost of contracting financial and legal advisors, and/or developing PPP expertise in-house; and

•  Cost of performance monitoring.

The first two items are related to the financing of the PPP project. The borrowing costs of private debt are higher than public tax-exempt debt; therefore, those higher costs are passed onto the public, either through a lower up-front payment (compared with the public sector issuing debt to raise money) or through higher toll rates than under public ownership-assuming tolls are part of the finance plan (Baxandall 2007). And, as discussed by Foote et al. on their Pennsylvania Turnpike monetization analysis, the cost of borrowing is expected to rise in the near term, with the current  credit crunch that is causing interest rates to increase, along with increases in the cost of bond insurance (although the latter affects both public and private debt). Foote's evaluation concluded that because of the higher borrowing costs of the private monetization, toll rates under Act 44 (i.e., public monetization through the existing Turnpike Commission) were estimated at 71.5% the private toll rate. However, the use of public debt to support transportation infrastructure may be restricted by a state's or toll authority's debt capacity and statutory debt limits, and the unwillingness on the part of decision makers to regularly raise tolls to meet debt requirements (Buxbaum and Ortiz 2007). In addition, some financial experts indicated that some tax benefits available to private investors (e.g., interest deductions and accelerated depreciation) can help bridge the gap between tax-exempt and private debt (Florian et al. 2007). Furthermore, these federal tax provisions, combined with availability of other finance tools (e.g., Private Activity Bonds and TIFIA), may substantially reduce the cost difference between private and public debt (Goldman Sachs 2008).

The financing package for some PPP projects included the use of tax-exempt debt, such as debt issued by 63-20 corporations in the 1990s (e.g., Pocahontas Parkway) and, in more recent deals, the use of TIFIA and/or private activity bonds for toll road projects (e.g., I-495 Capital Beltway HOT lanes). GAO (2004) estimated federal foregone tax revenues of between $25 and $35 million in 2003 from outstanding debt for the Pocahontas Parkway, Southern Connector, and Las Vegas Monorail projects.

The last three items on the list are related to the additional procurement and performance monitoring costs incurred by the public sector when deciding to have a PPP program. For example, unsolicited proposals require the state to devote time and resources for review (Buxbaum and Ortiz 2007). Although some PPP legislation allows states to charge a proposal fee, it may be insufficient to cover the actual costs of reviewing the proposal. Having a PPP program also requires the state DOT to either develop in-house expertise to evaluate and execute these deals or contract with legal and financial experts, both resulting in additional costs to the agency, compared with the status quo (i.e., using only traditional procurement). Beyond procurement, the agency will also incur monitoring costs, especially if the contract specifies performance measures to be met by the concessionaire.