Prospects for Private Infrastructure in the United States

Another way to finance public goods is to invite the private sector to construct and maintain the facilities directly. José A. Gómez-Ibáñez argues that private participation in the provision of road and highway services in the United States has not been very successful. He provides three explanations in this paper. First, concessions are hard to obtain in this country. Greenfield concessions to build and operate a new expressway are rare because of the existence of the extensive interstate highway network. Brownfield concessions to maintain and operate an existing road are also uncommon because existing roads were financed by federal motor fuel taxes under the condition that motorists could use them toll-free.

Second, the transaction costs of contracting road services to private entities are so high that they outweigh the benefits of concessions. It takes time and resources to design, award, and monitor a concession contract. The government could rely on a single contract that may help to improve accountability and coordination of separate activities. However, a single big contract also requires more careful design and scrutiny, thereby complicating the negotiation and enforcement of the contract.

Third, concessions have sometimes been employed not to enhance service efficiency but to obtain private capital for easing immediate fiscal deficits. Although Gómez-Ibáñez believes that the intention in these cases was misplaced, the approach was attractive to politicians who wanted to keep the cost of tapping private capital off the books. Gómez-Ibáñez proposes minimizing the transaction costs of concessions by shortening the duration of the agreements from 99 years to 15 or 25 years. In granting concessions to private entities, the government should shift from demanding large up-front payments to some provision for profit sharing. This may create an incentive for concessionaires to improve efficiency and lower tolls.

This paper was presented at the Lincoln Institute’s Land Policy Conference of 2009 and is Chapter 14 of the book Municipal Revenues and Land Policies.