Public-Private Partnerships Don’t Generate Revenue! (mostly)

Post date: Jan 19, 2012 10:56:54 PM

The Heritage Foundation has just published a report advocating greater use of public-private partnerships in transportation finance (“Can Public-Private Partnerships Fill the Transportation Funding Gap?”), the latest in a long string of reports in this vein from various groups. Without getting into the merits of P3s in general (most people agree that they have their place, although disagree about what that place is), I think it is critically important to realize that public-private partnerships, in general, don’t generate revenue.

In the simplest terms, highway revenue comes from only three sources: taxes, tolls, and other people’s money (OPM). From the perspective of a transportation agency, OPM is always the best source, but also the rarest. Occasionally developers can be required or induced to build a piece of public infrastructure, although this usually is only what is needed to mitigate the costs they are imposing on the system.

P3s don’t normally involve contributions from the private sector. They are typically large and complex debt instruments, which must be paid back from new or increased tolls. Using P3s to “fill the transportation funding gap” doesn’t mean getting free money from private sources. It means shifting the overall mix of transportation funding away from taxation and toward tolling.

The Heritage paper, in its talking points, refers to the search for “non-tax sources of revenues” in one place, at another place states that “P3s…have raised hundreds of millions of dollars”, and at another place states that they can “be a promising approach for generating additional funds.” There is no talking point making it clear that the “additional funds” which are generated are borrowed funds and that the “non-tax sources of revenues” are new and higher tolls paid by the traveling public to pay off those debts.

In fairness, anyone who reads the whole paper carefully will understand that tolling is what they are advocating, but the top level presentation doesn’t say it, reinforcing the confusion on this issue.