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
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
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
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
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.