Not All Public-Private Partnerships Are Created Equal

Not All Public-Private Partnerships Are Created Equal

January 19, 2011
Originally published in Multi-Housing News

In recent years, policymakers have taken to promoting public-private partnerships (PPPs) as somewhat of a silver bullet to various problems. They typically tout them as innovative improvements over the status quo, especially in the surface transportation and real estate sectors. Unfortunately, political opportunism has undermined the positive role PPPs can play.

Successful PPPs are those created in sectors previously dominated by government monopolies. Unsuccessful ones, on the other hand, are those that expand the role of government in the market. Around the world over the past few decades, tens of billions of dollars have been spent on financing and managing infrastructure projects that were once the sole province of government.

In America’s surface transportation sector, turnpike management agreements between government and concessionaire firms, such as Australia’s Transurban and Spain’s Cintra, have saved taxpayers billions of dollars while improving infrastructure and service delivery.

In contrast, PPPs in the real estate sector have fared quite poorly. In northern New Jersey, the Meadowlands, a $2.3 billion megamall project previously known as Xanadu, was in part responsible for driving the original developer out of business. The project was recently foreclosed on by its senior lenders and now faces imminent collapse.

Across the state line in Brooklyn, N.Y., Atlantic Yards—a large, controversial, mixed-use development—is currently underway. The developer, Forest City Ratner, used the power of eminent domain granted by the local development agency, or the threat of it, extensively in order to assemble the parcels needed for the project. The city also offered Forest City Ratner hundreds of millions of dollars in tax breaks. Exposing taxpayers to additional risk is bad enough, but the sheer size of projects like these results in significant market distortions and wasted resources.

The real danger facing PPPs is diluting the term to cover agreements beyond those that finance and manage infrastructure projects that were previously—and often erroneously—conceived to be public goods. Particularly in the southeastern United States, form-based codes have been gradually replacing exclusionary zoning regimes. Touted as improvements by many smart-growth developers, these are in reality far more dangerous. They tend to incentivize large-scale comprehensive redevelopment at the expense of dispersed, organic development. This opens doors for rent-seeking major developers like Forest City Ratner.

Urban renewal efforts in the 1950s and 1960s were disastrous, for both cities and for the people who live in them. Regulatory price controls on airlines, trucking and freight rail drove prices higher, diminished mobility and retarded industry innovation. Policymakers were guilty then of what Nobel laureate economist F.A. Hayek termed “the fatal conceit”—that they possessed information sufficient to design the world in which they wished to live.

In recent decades, American policymakers’ post-war flirtation with grand central planning schemes has fallen out of favor, gradually being replaced by more market-oriented tools and concepts. Yet while many planners now recognize the coordination problems inherent in attempting to direct entire industries, they still have yet to fully appreciate their own limitations when it comes to real estate.

In an open market, it would be practically impossible for the Meadowlands and Atlantic Yards scenarios to play out the way they did. It is important to remember that, absent government and interest group cheerleading, there is little evidence suggesting that either of these projects are meeting some sort of unmet consumer demand.

The risk of tarnishing public-private partnerships in the eyes of the public looms large. Policymakers should avoid injecting harmful political forces into competitive markets such as real estate development and appreciate the harm their well-intentioned meddling can cause.