PPP Myth Busters: NMA E-Newsletter #375

Back in 2012 Texas State Highway 130, a 41-mile stretch of toll road between Austin and San Antonio, made headlines for posting the highest speed limit in the country—a whopping 85 mph.

Today, SH 130 is making headlines for a different reason. The company that runs it just declared bankruptcy. Even with the high speed limit, toll collections haven’t been sufficient to cover the interest on the $493 million federal loan or the $686 million in bond debt.

The SH 130 scheme follows the classic Public Private Partnership (PPP) model, which is essentially a contractual arrangement between public and private sector partners designed to finance and deliver public services. In many cases the private company puts up little of its own capital and assumes little of the risk. This makes it easy to bail out and leave taxpayers on the hook. One editor of Thinking Highways magazine described the process this way:

The [private companies] put up tiny bits of equity, though they imply more because they borrow dollars from Uncle Sam that they likely will not pay back and they sell bonds that Uncle Sam guarantees and which will cost taxpayers when the P3 goes bankrupt—as they almost inevitably do—about 15 years down the road.

In the case of SH 130 it only took four years, but that’s not surprising since initial financial projections were unrealistically optimistic, and motorists simply weren’t willing to pay for the privilege of driving on the fastest road in the country. The 85 mph speed limit was a key marketing strategy intended to drive demand for the road, but it also illustrates how money and influence push through projects that ultimately don’t serve the public interest.

The tolling company lobbied hard for the higher limit. However, the state determined that such a high speed limit would require special consideration, specifically a $100 million payment to the state. To be fair, the state said it could do an 80 mph limit for only $67 million.

The Texas Department of Transportation conducted the required speed studies to determine that 85 mph was safe, but the fact remains that the speed limit was bought and paid for as part of a questionable tolling scheme. Jim Baxter put it this way in this 2012 blog:

Of course this transaction has been promoted as being all about safety (after all TX DOT did conduct the requisite studies to determine an appropriate safe speed limit), but most mere mortals haven’t been able to figure out why a $100 million dollar bribe makes an 85 mph speed limit safe, or why $33 million fewer dollars require a “safer” 80 mph speed limit.

Many other high-profile PPPs have failed as well, including the Indiana Toll Road which went bankrupt in 2014 and the Greenville Southern Connector in South Carolina which failed in 2010.

A different, but no less onerous, take on the PPP comes from the City of Chicago and its parking meter program. In 2009 Chicago leased the rights to its entire parking meter operation—36,000 parking meters—to a private company controlled by overseas interests for an upfront payment of $1.6 billion. The procurement process was rushed and lacked transparency, according to the city’s inspector general. Within months, parking rates soared and many meters were either mislabeled or malfunctioning.

In addition, the contract requires the City of Chicago to pay the private contractor millions in additional fees annually. According to TheExpiredMeter.com, by the time the contract is up in 2084, the city will have paid back the entire $1.6 billion. It will have also lost out on the ongoing revenue stream from the meters themselves. And Chicago-area drivers will have paid 75 years of ever-increasing parking rates to a private monopoly.

Supporters of PPPs would have us believe that these arrangements save the public money, that private companies always outperform public agencies and that the public still maintains control over the privatized asset or service.

These examples, and many others, bust those myths.

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