Recent United States experience suggests that toll-financed PPPs can be misused in two ways. First, if public officials seek to convert future revenue streams into a large up-front payment, future taxpayers and highway users may be shortchanged. In order for a private partner to make a large "up-front" payment, that partner must rely on future revenue to cover the cost of investing in the initial payment. To make such a payment the private partner must take a risk that the future revenue will be sufficient and apply a suitable discount rate to the future revenue. In PPPs with large up-front payments- usually long-term (such as 75 years) PPPs- the revenue uncertainties are great, and the discount rates applied to future revenue may be high. As a result, the current officials are provided with funds they can use in the short-run, but future generations may be deprived of the full value of the revenue paid out.
There is some evidence that this happened in the concession for the Indiana Toll Road, which involved a $3.85 billion up-front payment. A study from the Government Accountability Office (GAO) found that a state-hired consultant placed the net present value of the toll revenues at just $2 billion, but independent consultants placed the value at nearly $11 billion. The GAO did not make a judgment about the validity of the different assumptions used, but the reported assumptions behind the higher estimate were closer to the terms of the concession. The GAO warned, "It is possible that the net present value of the future stream of toll revenues (less operating and capital costs) given up can be much larger than the concession payment received."73
A second potential misstep is for public officials to use the up-front payment for short-run operating budget relief rather than infrastructure investment. The experiences with the Chicago Skyway Bridge and the Indiana Toll Road illustrate this problem. In Chicago, the up-front payment was allocated within the context of one budget cycle: Some of it was used for some virtuous purposes, like paying down the old city-issued Skyway bonds, but none of the funds were directed toward transportation initiatives and approximately $100 million was used to fund neighborhood services and programs.74 As a result, Chicago's asset base was reduced without providing for any long-term capital improvements.75 Indiana also used some of the payment to fund immediate needs, although the bulk of it went into a reserve fund for transportation improvements; however, this capital program is only ten years in length, compared to the toll revenue stream that was relinquished for 75 years. In general, PPPs with large up-front payments are not good public policy.
Another risk associated with PPPs for self-financing projects is that arrangement may anticipate significant new user fees in order to attract the private investment; however, the future rate increases permitted under the contract may eventually prove to be politically repulsive and not sustainable. This has been a problem in arrangements for water system investments in low income countries. Two deals in Tucuman, Argentina and Cochabamba, Bolivia were both terminated after prices were doubled and tripled, respectively, by the private partners, prompting organized opposition in Argentina and social unrest in Bolivia.76
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73 Government Accountability Office. "Highway Public-Private Partnerships: More Rigorous Up-front Analysis Could Secure Better Potential Benefits and Protect the Public Interest." GAO-08-44. February 2008.
74 Federal Highway Administration. Case Studies of Transportation Public-Private Partnerships in the United States. Final Report Work Order 05-002. Prepared for the Office of Policy and Governmental Affairs by AECOM Consult Team.
75 Federal Highway Administration. User Guidebook on Implementing Public-Private Partnerships for Transportation Infrastructure Projects in the United States. Final Report Work Order 05-002. July 7, 2007. Available online at http://www.fhwa.dot.gov/ppp/ppp_user_guidebook_final_7-7-07.pdf.
76 Norma Giarracca. " The Social Protest for Water in Tucuman, Argentina. " Public Citizen. Accessed 16 September 2008. Available online at http://www.tradewatch.org/cmep/Water/cmep_Water/reports/argentina/articles.cfm?ID=7638 .
Also Emanuele Lobina. "Cochabamba - water war." June 2000. Public Services International Research Unit, University of Greenwich. Available online at www.psiru.org/reports/Cochabamba.doc .