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Private Public Partnerships: A Failed Magic Bullet

August 30, 2014

Private Public Partnerships, or P3s, are one of the recent “silver bullets” proposed by those who want to “run government like a business”. But, as reported in the Pittsburg Post Gazette, these P3s are not quite as effective as advertised. First, some background on the P3s taken from the Gazette’s article:

President Ronald Reagan‘‍s plea to “get government off our backs” inspired a mistrust of government’‍s ability to efficiently provide roads, schools and other vital services at a cost taxpayers can afford. Mr. Reagan encouraged the belief that the private sector can do a better job. The result was replacing government workers with private sector workers who mow lawns around government buildings, collect trash, operate school cafeterias and buses, and provide other services under government contracts.

P3s are more far-reaching undertakings than hiring private companies as contractors. They involve turning over infrastructure to private investors who can design it, finance it, build it, operate it, and maintain it.

The ventures are attractive to cash-starved governments, which sometimes get hefty upfront payments. Even when they don‘‍t, investor funds enable governments to take on projects they might not otherwise be able to afford. The deals also fit many taxpayers’‍ notions about cutting waste, eliminating bureaucracy, and running government more like a business.

The article describes one of the celebrated P3 failures, Chicago’s decision to privatize parking meter collections that ultimately resulted in the city receiving “…$974 million less from the 75-year lease than it would have received by keeping the meters and operating them under the same terms it gave to the investors” but DID result in Morgan Stanley, who operates the system, receiving $61,000,000 reimbursement for “lost opportunities” when streets were closed for festivals and over $43,000,000 in profits. So, the Morgan Stanley shareholders got over $100,000,000 in profit while taxpayers lost the chance to save $974,000,000 on their bill. THIS is a good deal?

The four part series describes other adverse consequences of P3s that result primarily from overly optimistic revenue forecasts. For example, when a highway is built based on a long-range forecast based on a baseline of, say, 8 million fee-paying customers and only 7 million drivers participate, it results in the need to charge higher fees which, in turn, reduces the customer base even further. And what happens if the loan payments cannot be paid? No problem: the loans are backed by the federal government!

So… to recount: taxpayers don’t trust the government to build highways so they support having the government turn over the operation to the private sector who, in turn, earns profits or gets bailed out by the taxpayers if their revenue estimates are too high. Oh… and by charging fees they limit the use of these highways to those who can afford fees! Oh again… and because they are PRIVATE corporations their construction methods are not subject to public review or scrutiny.

Bottom line: P3s are an anti-democratic example of profiteering at its worst. They are a lose-lose proposition for taxpayers and a win-win proposition for shareholders.



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