Private investment in infrastructure has been popular with Republicans since the Reagan presidency. A commission created by Reagan concluded that public-private partnerships (“P3s”) could substantially enhance the efficiency, speed and volume of highway, aviation and water projects while lowering the cost to taxpayers and facility users. In the years since, infrastructure P3s have become an increasingly bipartisan cause, with elected officials, including President Obama, touting the many benefits of private investment. There is even a Congressional Public-Private Partnership Caucus co-chaired by a Republican and a Democrat. Ronald Reagan must be smiling.
Back in the 1980’s, many policy wonks, we among them, were certain that private equity and ambitious constructors would finally bring free market dynamism to the notoriously moribund business of municipal bricks and mortar.
It never happened that way.
It was not until 2006 when Chicago leased a highway segment to a private investor for $1.8 billion that politicians began to take P3s more seriously. While former Chicago Mayor Daley’s monetization of a roadway was certainly shrewd, it is not what President Obama had in mind when he praised P3s in his State of the Union address. The president was talking about new projects and major upgrades to existing facilities, not large cash-for-control transactions.
P3s are less common in America than in other countries mostly because the federal tax subsidy of state and local government debt is not available to projects in which a private developer has long-term construction and operating responsibility. The interest earned by buyers of municipal bonds is exempt from federal – and often state and local – taxation, while earnings on private purpose bonds are taxed. In most other countries, interest on private and government debt is taxed equally. This puts the private delivery of infrastructure at a disadvantage in financing cost.
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