PPPs can be an opportunity to provide improved infrastructure at lower cost; however, PPPs are not a panacea for the infrastructure needs of New York. PPPs should be pursued selectively for initiatives that will have the greatest benefits, and they should be designed to avoid the pitfalls, summarized below, that have characterized some experiences.
1. PPPs should not be look upon as "new" money for infrastructure. In other countries, PPPs have been used to circumvent legal limits on the amount of public sector debt. The arrangements provide initial private financing for projects that otherwise would be financed by public sector borrowing. This objective is not relevant for many entities in the United States, and particularly for New York State and its localities, because legal limits are not a major constraint on infrastructure investments. New York can use revenue bonds issued by authorities and other financing mechanisms to raise capital; the tax exempt status of interest payments on these bonds makes this form of borrowing economically efficient. The private investment in a PPP can supplement tax exempt bonds, but it is desirable primarily as an incentive for innovation and efficiency from the private partner.
2. User fee revenue streams should not be tapped inappropriately as part of a PPP arrangement. While offering great potential, user fee supported PPPs also pose two dangers. First, public officials' desire and ability to obtain large, up-front payments from the private partner in exchange for the right to the future revenue can lead to both a heavily discounted value for the future revenue that shortchanges future generations. Second, use of these up-front payments may be diverted from infrastructure enhancement to other budgetary purposes with more short-run political attractiveness. In addition, public officials may use the mechanism to diffuse accountability for substantial increases in the tolls or fees. Toll increases are typically necessary, but the public should be informed that they are the result of public policy decisions.
3. The public sector must enhance its management capacity in order for PPPs to be successful. PPPs are not an abdication of public responsibility. The public sector must develop an enhanced capacity for contract design, performance measurement and monitoring. The public partner should also foster transparency in the partnership and enforce contract provisions regarding penalties and termination, if necessary. Enhanced capacity for public administrators requires adequate resources, and these costs should be recognized as part of the PPP arrangement and taken into account in deciding whether a PPP is appropriate.
4. PPPs are prone to failure when integral responsibilities are divided. PPPs do not work well when multiple, private partners are involved in PPP contracts for the same service, or when the infrastructure elements subject to a PPP are integrally related to and require close coordination with a public agency that retains the service delivery responsibility. The failure of two of the three PPP contracts for the London Underground illustrates this problem as well as others.
5. Labor concerns can be addressed. Representatives of unionized public servants often raise concerns about PPPs on grounds that they threaten the job security of current employees and may worsen wages and working conditions for those selected to work on the project. The private partner's latitude to achieve efficiencies through substitutions of capital and technology for labor and through reforms of work rules may be important to the viability of the project. In fact, this may mean that public employees are replaced or rehired by the private partner under different terms. Public officials should decide the extent to which they share these concerns. If they are willing to sacrifice some of the benefits of PPPs, then they can provide protections. Public officials can act unilaterally by guaranteeing the hiring of displaced workers in other public sector jobs that become available; alternatively, they can negotiate with the private partner to establish contractually compensation or work conditions similar to that provided to public employees.