1
DO PUBLIC-PRIVATE PARTNERSHIP ENABLING LAWS INCREASE PRIVATE
INVESTMENT IN
TRANSPORTATION INFRASTRUCTURE?
(Forthcoming in Journal of Law & Economics)
Daniel Albalate
Department of Econometrics, Statistics and Applied Economics
University of Barcelona
John Keynes 1-11, 08034 Barcelona
Tel: 34.93.4031131 Fax: 34.93.4024573 E-mail: albalate@ub.edu
Germà Bel
Department of Econometrics, Statistics and Applied Economics
University of Barcelona
John Keynes 1-11, 08034 Barcelona
Tel: 34.93.4021946 Fax: 34.93.4024573 E-mail: gbel@ub.edu
R. Richard Geddes
a
Department of Policy Analysis and Management
Cornell University
434 Kennedy Hall
Ithaca, NY 14853
Phone: (607) 255-8391
rrg24@cornell.edu
August 1, 2019
a
corresponding author.
Keywords: Transportation infrastructure; public-private partnerships; private infrastructure
investment; state public-private partnership enabling laws; innovative infrastructure delivery.
JEL Codes: L14; L33; L51; L92, L98.
Acknowledgments: This work was supported by the Spanish Government under the project
ECO2016-76866-R and the Catalan Government under project SGR2017-644. We are grateful to
Matthew Barnett, Andre Gardiner, Priya Mukherjee, and Ben Wagner for research assistance,
and to Ed Glaeser, Robert Poole and Werner Troesken for helpful comments and suggestions.
We have benefited from suggestions during presentations at Stanford University, the Université
Paris I – Panthéon Sorbonne (EPPP Chair), at the First Catalan Economics Society Conference
and the University of Pittsburgh.
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ABSTRACT
The use of public-private partnerships, or PPPs, is an important development in U.S.
infrastructure delivery. PPPs are contracts between a public-sector project sponsor and a private-
sector provider that bundle together key delivery services. PPPs represent an important middle
ground between pure-public project delivery and privatization. As of 2016, thirty-five U.S. states
had enacted PPP enabling laws. Those laws define the broad institutional framework surrounding
a PPP agreement. They address such questions as the mixing of public- and private-sector funds,
the treatment of unsolicited PPP proposals, and the need for prior legislative approval of PPP
contracts. We provide the first comprehensive empirical assessment of the impact of those laws
on a state’s utilization of private investment. We analyze the overall effect of a state having a
PPP enabling law while controlling for a variety of factors. A law’s average impact represents an
almost six-fold increase relative to the average percentage of PPP investment prior to enactment
in treated states. We then assess the impact of PPP enabling-law provisions. We find that PPP
provisions that empower PPPs, such as exemptions from property taxes and from extant
procurement laws, as well as confidentiality protections, attract PPP investment.
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1. Introduction
The problem of inadequate infrastructure investment in road infrastructure, and generally
across economic sectors, is often decried (Fischer, 2005; Furchtgott-Roth, 2010; Woetzel et al.
2016). By one estimate, the global infrastructure gap – the difference between current investment
rates and investment needs – is $350 billion annually (Woetzel et al 2016). Public-private
partnerships, or PPPs, are sometimes offered as a solution to bridging the infrastructure gap.
PPPs are relational, long-term contracts between a public-project sponsor and a private partner.
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They are relied upon to deliver critical infrastructure projects across a range of economic sectors.
Although PPPs do not generate infrastructure funding per se, when properly structured
they can enhance on-time and on-cost project delivery, stimulate innovation in project delivery,
better allocate risks, and improve project performance.
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In the United States, PPPs contrast with
“traditional delivery.” Traditional project delivery refers to the use of design-bid-build (DBB)
contracts, under which project design is placed out for bid. The construction of that design is bid
separately, usually to the lowest bidder. The public sector typically finances the project using
tax-exempt municipal bonds. It also operates and maintains the project over its life span.
Traditional U.S. infrastructure delivery is unbundled in the sense that the main tasks are
conducted separately. Traditional delivery also features relatively rigid state and local
procurement laws. Under a PPP approach, tasks such as facility design, construction, financing,
operation and maintenance, are bundled together in various combinations depending on the
project to be delivered.
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This facilitates exploitation of synergies between those functions
(Bennett and Iossa, 2006; Martimort and Pouyet, 2008).
PPP laws are important prerequisites for the political and regulatory stability necessary to
attract active private participation (World Economic Forum, 2015, p. 11). Commentators stress
that this is particularly important for the United States (Fishman, 2009), while others suggest that
1
See Albalate, Bel and Geddes (2017: 26) for broad definitions of PPPs in different scholarly fields. With
respect to transportation projects, which are our focus, the U.S. Federal Highway Administration states
that, “Public-Private Partnerships (PPPs) are contractual agreements formed between a public agency and
private sector entity that allow for greater private sector participation in the delivery and financing of
transportation projects.” See U.S. Department of Transportation, Federal Highway Administration, P3
Defined, http://www.fhwa.dot.gov/ipd/p3/defined/index.htm (accessed May 21, 2015).
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For summaries of PPP benefits, see e.g. Geddes (2011) and the National Surface Transportation
Infrastructure Financing Commission (2009).
3
See U.S. Department of Transportation (2007, pp. 11-17) for a discussion of PPP contract types.
4
PPPs in the United States are hindered by a lack of adequate state-level enabling legislation (e.g.
Reinhardt, 2011).
4
Indeed, many legislatures state that their goal in enacting such laws is to
attract private infrastructure investment.
PPP enabling laws clarify such key contractual issues as the treatment of unsolicited PPP
proposals,
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whether a PPP can be used on existing (known as “brownfields”) as well as new
(known as “greenfields”) transportation facilities, whether agreements can include the sharing of
revenue with public sponsors, and whether the agreement may include non-compete clauses,
among others.
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From a potential private partner’s perspective, it is risky to expend time and
money developing infrastructure projects that may ultimately fail to receive the necessary
authorization. Enabling legislation provides a framework for contracting that helps reduce risk
while clarifying its allocation between the public sponsor and the private partner (Iseki et al,
2009). Properly structured PPP enabling laws can mitigate the substantial transaction costs
associated with private infrastructure investment.
Despite extensive popular commentary, there has been little empirical examination of
PPP enabling laws’ effects. We provide the first empirical exploration of the impact of state-
level PPP enabling laws and their provisions on private infrastructure investment. After
controlling for numerous exogenous factors, we find that PPP enabling laws facilitate private
investment in infrastructure. Although rising, private investment in U.S. transportation
infrastructure remains low by international standards. Controversy surrounding the use of PPPs
to finance and operate transportation infrastructure remains.
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A better understanding of PPP
laws’ actual effect is useful.
4
Istrate and Puentes (2011) stress PPP enabling laws as one of their three key recommendations for
attracting private investment into U.S. infrastructure.
5
International standards for managing unsolicited proposals do not yet exist. See Hodges and Dellacha
(2017) for an analysis on the introduction of competition and transparency in unsolicited proposals.
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A list of key provisions is provided in Table 1 below.
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Regarding relatively low reliance on private infrastructure investment in the United States, see Istrate
and Puentes (2011, p. 4, Figure 1). Critics argue that PPPs do not create net social value, merely hide debt
from the government’s balance sheet, raise the social cost of capital, and help protect the interests of
private parties who are likely to exploit market power and superior bargaining skills relative to the public
sector (e.g. Quiggin 2004, Dannin 2011, Roin 2011). Others argue that PPPs generate net social value
through improved incentives to innovate, additional sources of capital, greater contractual transparency,
and better linking of project returns to performance (e.g. Gilroy 2009, Poole 1993, National Surface
Transportation Infrastructure Financing Commission 2009). Our analysis instead focuses on PPP enabling
laws’ impact on private investment, and why states may pass laws explicitly inviting private investment
in transportation infrastructure.
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We assess the impact of a state having a law as well as the effect of varying degrees of
legal favorability to private investment. To do so, we develop an enabling-law favorability index
that includes thirteen key provisions of each law. Rather than weighting each provision equally,
we surveyed U.S. PPP experts to assign meaningful weights to various provisions.
We analyze data on 177 U.S. transportation PPP projects completed between 1988 and
2016 using information gleaned from the Public Works Financing monthly newsletter. Public
Works Financing reports information on all North American PPP projects, allowing a
comprehensive analysis of PPP enabling laws’ effect on private investment. We consider the
1988 to 2016 period to examine how varying exposure to PPP enabling laws across time – and to
their differing elements – impacts the number of PPPs as well as overall private investment in a
state. We focus on the proportion of PPP investment relative to total investment in a state’s roads
and highways in a cross-sectional setting.
We find that enabling laws increase the number of PPPs undertaken in a state and that
specific empowering provisions in laws result in more PPP contracts. We find a similar effect on
PPP investment per capita and on the proportion of private investment relative to total
investment in roads and highways.
We proceed as follows. We next discuss the basic structure of PPP enabling laws in the
U.S. transportation sector. We describe our dataset, variables and main predictions regarding the
role of PPP enabling laws in facilitating PPP contracts and private investment in Section 3. We
discuss empirical methods used, reports estimates, and offer a discussion in Section 4. Section 5
summarizes and concludes.
2. Public-Private Partnerships in Transportation
Private participation via PPP includes the management, operation, and renovation of an existing
transportation facility, as well as the design, construction, financing and operation of a new
facility. In the transportation sector (where PPPs are used mainly for roads), Iossa (2015)
considers the array of motorway contracts, depending on their design.
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Iossa (2015) emphasizes analysis of user tolls, and funding mechanisms generally, because there is a
high correlation between user fees retained by the concessionaire and demand-risk transfer. Even within
user-fees schemes, however, effective transfer of demand risk to the concessionaire depends heavily on
guarantees the public sector eventually provides in the contract or via general regulations (Bel, Bel-
Piñana and Rosell, 2017). Because of this, the European Union’s Directive 2014/23 mandates that
