With Michigan battling economic and financial woes, state legislators introduced a bill to authorize public-private partnerships for transportation projects in order to address Michigan's deteriorating roads. House Bill 4961 would allow the state to enter into agreements with private entities to finance and operate highways and expansion lanes in Michigan.
A public-private partnership, or PPP, is a comprehensive agreement by which a government contracts with a private entity to finance an infrastructure project through risk-sharing. PPPs take a variety of forms. In one such arrangement, a private entity may design, build and operate the project for a specified period of years, earning a return on its investment through user fees or a contractual payment, and then transfer the project back to the government.
The Michigan Department of Transportation has already concluded two agreements with private construction contractors; under these agreements, the contractors put up the money for projects themselves, and the state repays them with interest over time. Public-private partnerships would further tap private-sector financing, specialization and business acumen to improve such traditionally governmental projects as highways and sewers. PPPs may also attract more capital, as private equity funds, banks and other investors are more likely to invest in a private firm, which will bring its own expertise to the project, than to give funds to the government for the same transportation project.
Should the Legislature pass the bill, Michigan would join the approximately 25 states in the U.S. that have passed similar legislation. Virginia, Indiana and Texas, for instance, have used PPPs specifically for road projects, and Virginia saved its taxpayers $2 billion on an expressway expansion. In fact, countries around the world have long used such partnerships in transportation projects, such as London's Underground, a transcontinental railroad in Australia and many of the freeway systems of Spain, Italy and France.
Governments generally view PPPs as a way to deal not only with funding shortfalls, but also with congestion, aging roads and antiquated technology. A 2007 Mackinac Center report found that Michigan has a $13.8 billion backlog in transportation needs, including reconstruction, resurfacing and lane expansion. Moreover, PPPs can enable the government to better serve the public interest by building roads more quickly and providing increased transparency as the public is privy to the terms of the contracts. Finally, residents can benefit from the private sector's expertise in technology, pricing and customer service.
Despite their many advantages, however, PPPs can fail without responsible fiscal policy, as evidenced by high-profile PPP failures in other states. Though the Michigan bill would permit unsolicited bids, the state should take care to observe good competitive-bid solicitation habits, particularly to hold the private sector accountable and to counteract the formation of monopolies. It will also be key to have well-negotiated agreements underlying the PPP to ensure smooth and efficient provision of transportation infrastructure.
The Michigan bill would authorize the director of the Department of Transportation to enter into PPPs on behalf of the state. A public entity would retain all ownership over any public transportation assets. Unlike some states' legislation, the Michigan bill does not contain specific road projects. Tolls would be set by the terms of the contract rather than by the state. The bill also requires all revenues to be used for additional transportation projects, which prevents the Legislature from turning road tolls into taxes for general spending, but does not prevent road tolls from being used to finance transit projects elsewhere in the state.
The bill does not go as far as it might toward tapping the benefits of PPPs: It does not permit tolls or other charges on existing highway lanes, though it would permit tolling or congestion-based pricing for newly constructed lanes. This means the money generated by PPP projects may not be available to maintain, reconstruct or expand Michigan's other aging transportation infrastructure.
While the Legislature will need to observe good contracting practices in order for PPPs to be successful, House Bill 4961 is a good step toward addressing Michigan's growing transportation woes.
Laura J. Davis is an adjunct scholar with the Mackinac Center for Public Policy.