The Case For Long-Term Concessions

Long-term contractual arrangements between a state DOT and a consortium of companies to design, build, finance, operate, and maintain a highway, bridge, or tunnel represent a major paradigm shift in how such projects are procured, operated, and maintained. So it’s not surprising that there is resistance to this dramatically different model. Frequently, resistance to a paradigm shift comes from the incumbents in the field in question, which in this case would be contractors and DOTs. But this time the strongest resistance is not from insiders but from outside groups.

I’ve written before about right-wing, populist groups that equate tolls with taxes and make all sorts of misleading or outright false claims about long-term public-private partnerships (P3s). But progressive left-wing groups that are anti-car and anti-highway have also stepped up their efforts to bad-mouth concessions. Most recently, Streetsblog USA ran a three-part series that presented the bankruptcy of the Indiana Toll Road concession company as illustrating “the dark side of privately financed highways.”

On the basis that you can’t fight “something” with “nothing,” I want to commend to you two new overviews of the case for long-term concessions. The first is “The Role of Performance-Based Infrastructure,” by my friend and colleague Bill Reinhardt, editor and publisher of Public Works Financing. It appeared as the lead article in PWF‘s November issue, and is available online at http://pwfinance.net/pwf-blog. Bill begins by illustrating how the politicization of large-scale infrastructure projects distorts resource allocation, leading not just to selecting low-value projects over those that deliver far greater value, but also leading to large-scale deferred maintenance, as politicians prefer to spend limited transportation funds on projects with to ribbon-cutting opportunities rather than ensuring adequate funding of ongoing maintenance—a policy that is far more costly in the long run.

Building on that background, he then explains how profoundly different the incentives are when the same commercial entity that designs and builds the project is also responsible for its operation and maintenance—in effect, acting as its owner/operator. (This is a point that Peter Samuel and I explained in a bit more detail in our 2011 Reason policy brief, “Transportation Megaprojects and Risk.”) Bill concludes with a table from a recent Value for Money analysis showing construction cost savings from projects done as long-term concessions, compared with the Public Sector Comparator –the estimated cost of procuring the project conventionally.

The other new report is “Toll Concession PPPs: Frequently Asked Questions,” which I wrote this fall and has just been released by Reason Foundation. (http://reason.org/studies/show/toll-concession-ppps-frequently-ask) I developed this report by analyzing arguments made against long-term P3s and tolling by an array of mostly right-wing, populist groups active in states where tolling and concessions are increasingly being used, such as Colorado, Florida, North Carolina, Texas, and Virginia. It explains why a toll is not a tax, why long-term P3s are not crony capitalism, why it is not the case that “most of the funding comes from government,” why taxpayers do not bail out the investors in case a P3 project goes bankrupt, etc. Altogether, the paper answers 17 such questions.

In my forthcoming book on 21st Century Highways, I am devoting a whole chapter to the subject of opposition to toll concessions. In that chapter, I note some striking parallels between arguments made by left-wing progressives and right-wing populists. I also discuss the more traditional resistance to this paradigm shift by incumbent players (some construction firms, some state DOTs and their unions, and even some state toll agencies). That traditional resistance seems to be decreasing, as the transportation

community itself gains more experience with long-term concessions. That’s why I conclude that the much larger problem is ideological opposition by groups on both the Right and the Left.

(This first ran in the December 2014 issue of Surface Transportation Innovations)

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