Public Transport Infrastructure, PPPs, and the Elephant in the Room

Apr. 7, 2021  |    Economy and Sustainable Transportation

Out of the financial constraints faced by governments emerges the idea that public-private partnerships can solve the problem of the high cost of extensive public transportation infrastructure projects. However, the idea that PPPs are the magic solution that will minimize recourse to taxpayer money is, let’s just say it, misleading. Why not acknowledge the elephant in the room? The real source of the astronomical cost of large projects is the choice authorities make when they decide which mode of transport to favour.

The Illusion of PPPs

The idea going around to the effect that PPPs are a solution that will reduce reliance on public funds should be better framed and understood. Let’s take the example of a 10-billion-dollar investment project. It is true that under PPP development, the government would pay less initially since a private partner would assume a potentially significant part of the costs. However, this would in no way reduce the total cost of the project. The private sector will not magically make expenses disappear. Moreover, since its mission is to make profits, it will add the price of a return on its investment to the total cost of the project. This type of PPP tries to monetize a public service that is not necessarily meant to generate profits. Is this bad? Not necessarily, but it is important to understand the actual long-term impact on users and taxpayers. Contrary to what some would have us believe, it is hardly the bargain of the century!

The inconvenient thing about PPPs is that taxpayers pay for an indefinite period of time. The bill can get pretty hefty when the business model is usage-based and a constant increase in use can be expected. It’s a bit like choosing between buying or renting. Both models have their place and meet certain needs, but no one can claim that renting is best because of its lower short-term cost.

The desirability of PPPs as a financing model is based on making them attractive solely through the lower cost of the initial investment. When it comes to large infrastructure projects, this can become like a drug for the political class. Like “buy now, pay later” schemes, it can lead to bad purchasing choices.

Designing, building and running services isn’t cheaper under PPPs. It is also illusory to claim that PPPs are better at managing risk or that they result in fewer cost overruns or schedule delays. The management quality of a project has nothing to do with how it is financed. There certainly are advantages, but those are not free. There simply is no magic in PPPs.

The Elephant in the Room

The real problem with big public transport projects lies in choosing rail systems and, by extension, the infrastructure costs they entail. Can we please admit that those costs are increasingly exorbitant and also lead to social acceptability issues?

PPPs are not a solution to the problem of higher costs. We need to work and develop PPPs in a way that promotes cost reductions. A real PPP, “profitable” for taxpayers, would be one in which the State supports an innovative private-sector approach to address the cost issue. We need to make the elephant in the room disappear and stop ignoring it.

The True Winning Approach

Note that the public transportation sector faces a considerable challenge that diminishes the interest of many private investors: it is a public market, often highly politicized, in which governments are the final decision makers and payers. Thus, in the face of the State’s lack of commitment toward promoting innovation, private companies also prove reticent.

Let’s continue with our example of an expected 10-billion-dollar investment. Imagine a PPP that no longer focuses on building and running a solution but instead relies on innovation to solve the issue of unaffordability. We could surmise the government contributes the equivalent of 0.5% to 1% of the expected costs of the infrastructure project (this would amount to 50 to 100 million dollars in our example) to foster innovation. The partnership’s goal would be to develop new technologies that offer a high-level mobility solution able to completely meet the expected transportation infrastructure’s needs, but without using expensive and limiting rail infrastructure. This approach could potentially reduce the total cost of infrastructure by a factor of 3, which would take it from 10 billion dollars to around 3.5 billion dollars. We are talking about a public-private partnership that would share the risk of innovation to save over 6 billion dollars—and this relates to only one public transportation project. You will tell me that risk factors related to innovation and cost overruns should be added here. Even if we doubled or tripled this development cost, the resulting savings to the State (and to taxpayers) would be incomparable.

Utopic? When some are talking about developing a means of transportation to send people to Mars, we surely can be ingenious enough to find innovative solutions to more efficiently move people within the confines of our cities. If the example seems a bit rudimentary, the scenario is very realistic and is, in fact, precisely what Pantero proposes with its Road Tram concept. We need to look at PPPs differently and remember the governments’ economic role in these matters.

Toward an Economy of Innovation

The fact that governments are prepared to make massive investments in public transportation presents a unique opportunity to promote true risk-sharing through investing in innovation to solve the real problem. In its role of contract giver, the State has a not-to-be-missed opportunity to bolster innovation with a view of reducing the cost of its projects while also helping to strengthen the competitiveness of its industrial clusters. It is with this in mind that we should consider public transportation PPPs.

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