The Limitations of Public-Private Partnerships

Recent Lessons from the Surface Transportation and Real Estate Sectors

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Executive Summary

Government at all levels in the United States has been slowly moving away from grand central planning schemes and toward markets. One result has been the rise of public-private partnerships (PPPs). Proponents of these arrangements argue that many of the information and transaction cost problems inherent in government institutions can be mitigated by sharing construction, maintenance, and operational responsibilities with profit-motivated private firms. When the status quo is a government monopoly, PPPs should be viewed as preferable in nearly every case.

Unfortunately, PPPs can also drive rent-seeking behavior, and create significant risk of improper collusion between political actors and politically preferred firms and industries. This harms not only taxpayers, but the economy at large, as critical investment decisions are distorted by political considerations. Such shady dealings also serve to delegitimize and discourage privatization efforts and commercial infrastructure investment in general. Worse still, the errors of the public sector component are often blamed on private parties.

This paper examines public-private partnerships and their relation to surface transportation and real estate development, two areas where their use has grown substantially in recent years. These sectors also tend to be intertwined, with investment in transportation infrastructure often coinciding with real estate development or redevelopment. This relationship tends to grow stronger as project size increases, as large-scale developments such as shopping centers and stadiums significantly alter local land-use patterns and demand for transportation.

But these sectors are hardly similar, as the paper’s case studies bear out: One has long been dominated by government monopolies and the other has been largely free of political forces. In the case of surface transportation infrastructure, innovative new private-sector financing, management, and ownership regimes have much to offer in terms of minimizing taxpayer exposure to risk, capturing user revenues, and creating an efficient transport network. In contrast, government’s recently expanded role in real estate development has increased taxpayer exposure to risk, socialized costs, and concentrated the benefits into the hands of select private developers and special interests.

The popularity of PPPs should not blind policy makers to the fact that these sectors suffer from problems that are markedly different. Outside of limited instances such as the Department of Defense’s Base Realignment and Closure (BRAC) program, PPPs in the real estate sector offer very little in terms of social benefits. These arrangements should be avoided.

A responsible path forward would be to utilize PPPs in surface transportation infrastructure development and management, while cutting bureaucratic impediments such as land-use regulations and business licensing to promote redevelopment. In essence, both require reducing political intervention and expanding market opportunities. Only when policy makers realize their own limitations will these sectors be free to maximize wealth creation that could potentially bring about a new era of American prosperity.