In the United States, we are confronted with government failure and corruption on a daily basis. Infrastructure may be the most glaring example. You can’t leave your home without being confronted with bad roads in appalling repair, and government buildings are shoddy and poorly maintained. US airports? Don’t even go there.
The cost to repair and upgrade an entire nation in shambles is simply astronomical. The government does not have the money to do the job at all, let alone do it right. Which is how we landed in this situation in the first place.
In this exclusive Bold Interview, Bold Business sits down with the eminent scholar Bob Poole, founder of Reason, perhaps the leading free-market think tank in the world. Mr. Poole offers an effective solution to the failure of government funded infrastructure. Public-Private Partnerships, also known as PPP or P3, can unlock a torrent of funds to rebuild, repair, and expand our failing infrastructure.
Mr. Poole claims that P3 overcomes problems in government funded projects in a number of critical ways. But, before we discuss his solutions, let us take a moment to see how we got into this mess.
The Folly of Government Infrastructure Funding
Failure is written into government’s DNA. That may be a strong statement, but it is a defensible position. The basic problem is simple, private ownership tends to create a strong sense of duty and care.
P3 brings private equity into play, along with the accountability and efficiency demanded by modern business practices.
The virtuous obligations of ownership are apparent in the planning stages of a project or product and continue throughout the life cycle. In the planning stages, care is devoted to getting the best product possible, at the most reasonable price. That product is likely to be maintained throughout its lifetime of use with the same kind of diligence.
Contrast this to a government project. In government, by law in most jurisdictions, projects go to the lowest bidder. This sounds like a great idea that prevents government awarding contracts on the basis of favoritism. In fact, it leads to a very unhealthy system of rigging bids. First of all, in order to achieve the low bid, corners are cut and substitutions are made that affect the quality of the product.
This is inherent in the nature of the beast. Take the building of a school for example. Under government rules, no one is actually responsible for the final product. The team who are given the contract to build the school will never have to use it, own it, or even set foot in it after the celebratory ribbon cutting cocktail party. So they suggest numerous design changes which affect the quality and functionality of the school and also cut costs. Any one of these changes may be acceptable on their own, but under the relentless pressure of low bid contracts, cost cutting often wins out over quality, particularly when it comes to the long-term. Materials that last for 3 to 5 years will be substituted for materials that last 10 or 20. The system encourages wasteful short-term thinking that creates horrific maintenance and refurbishing costs in the long run.
In addition, it is hardly a secret that many government contractors submit low bids with full knowledge that the project cannot be completed for the stated cost. In private business, this is known as fraud, in government contracting it is known as a cost overrun. In private business, with privately accountable funds, the practice is completely unacceptable. In government, the cost overrun fraud is just business as usual.
This practice insults the public three times over. First, the project is designed to be cheap and shoddy, hampered by the requirement to be the lowest bid. Then the public is forced to pay a premium to complete a project, for which the price was an actual fraud at the time it was agreed upon. Third, the public is stuck with the bill for maintaining badly designed and sub-par facilities.
Clearly, this is a no-win situation and a bad way to finance and build infrastructure. And the results are apparent everywhere you look. When is the last time you entered a government building and marveled at its beautiful design, beauty, functionality, and quality? Right, never happens. Government buildings encompass a world of crummy plastic chairs, bathroom faucets that don’t work, peeling paint and nasty lighting.
Public-Private Partnerships: Poole’s Solution for Infrastructure Funding
Fortunately, there is a solution, P3 brings private equity into play, along with the accountability and efficiency demanded by modern business practices. This isn’t a new idea, all around the world major projects are being financed and built through P3.
As a matter of fact, the World Bank requires P3 for most projects these days. The World Bank contributes seed money, setting boundaries and guidelines, and private equity provides the bulk of the funding as well as the services. The system produces astonishing results, from a better selection of projects to better quality facilities. These projects often provide much-needed government revenue over the long run, without costing the public treasuries a dime to implement. It’s a win-win all the way around.
Yet, while the concept of P3 originated in the United States, we have been the most laggard nation to embrace P3 as the best solution to infrastructure funding. P3 built the Tokyo subway system, Jordan Airport, and projects from Brazil to Britain. The rest of the world has grabbed onto P3 for infrastructure funding.
In the US, not so much.
This is unfortunate, as Mr. Poole points out that P3 leads to better projects at a tiny fraction of the cost. One of the most important areas of efficiency and cost savings is in the selection of projects.
Private equity does not fund boondoggles. There are no “Bridges to Nowhere” in P3. Private equity selects those projects that offer the greatest public benefit, simply by paying attention to market forces. How can you know if a new road is truly needed? If people will pay to use it.
The discipline of the market ensures that the most necessary and viable projects are those which get built first. The market allows for prioritization and funding of the most necessary projects. Contrast this to typical highway and transportation funding, which divides the pie amongst congressional districts and quid pro quo all around the room, rather than public benefit and need.
Also, when long-term ownership is part of the mix, all parties tend to be a lot more conscientious about life cycle costs. This is very important for large long-term capital intensive projects, like bridges, roads, airports, and schools. Construction is just part of the cost, maintenance often dwarfs the building cost by orders of magnitude.
If a private entity is responsible not only for the building but also for the maintenance of a project, it goes without saying that they will be far more cognizant of the long-term costs of their decisions. Faced with a choice between the cheapest plumbing materials today, or the least expensive over 20 years, they will take the long-term view. This results in better quality construction and planning.
What Are We Waiting For?
P3 isn’t a pie in the sky, untested idea. It has been used for infrastructure development successfully all over the world. The US is one of the last countries on the planet to embrace this bold idea. Mr. Poole has spent years developing and promoting this concept which has provided benefits to first word and third world countries alike.
It is high time that the US shed our 19th-century attachment to government as the solution. To build infrastructure fit for the 21st century, we need to embrace the bold idea of P3.
Bob Poole is the founder of the Reason Foundation, one of the most influential free-market think tanks in the world. He specializes in traffic and infrastructure issues and is a strong advocate for the benefits of Public Private Partnerships.