Terry Gerton We’re gonna talk about some new guidance from the government on how to value and consider options in public-private financing. But before we start that, I’d love for you to kind of back up and tell us, maybe by example, maybe by story, what are the differences here between privatizing public assets and actually building a public- private partnership?

Shar Habibi Yeah. So let’s just kind of think about, what are the activities when we’re building a piece of public infrastructure, like a highway, a bridge, a water system — what are the activities that are involved? And there’s kind of five major activities. The design of the piece of infrastructure, the actual building of it, the financing of it. The operations and the maintenance. And under a more conventional project delivery approach, those are mostly done by the public sector. So you have an agency that figures out what they need and they design the project. They figure out how it’s going to be funded and financed and they’re typically using public financing that’s available to them. And then they are hiring, typically hiring a private construction firm or firms to help them build it, but then the long-term operations and maintenance of that asset is done by public sector staff. In a P3 model, a public-private partnership model, you know, this kind of exists on a spectrum. But there is more private involvement. And in some cases, all five of those functions, all five those activities are done by a private entity or a consortium of private entities. And so you have a private entity that will design the piece of infrastructure. They will figure out how to finance it, including private financing. Private financing is typically involved in P3s. And then they’re going to have a private construction firm that’s building it, but then also they are going to have a private team that is operating and maintaining that piece of infrastructure for the life of the contract. And I think one of the cautions that we have is that when there is greater private control over a public infrastructure project, there are decisions that might be made that are not the same as when there’s public control. So this is public infrastructure, there’s a public purpose, a public mission, we want this piece of infrastructure to serve the public. Those types of decisions may be more easily made when there is public control over the asset. One concern that we have is that the considerations like private investors rate of return may be something that is more considered over that public mission of the infrastructure. So there is this loss of control that happens.

Terry Gerton So for folks who are perhaps in the decision making seat about which way to go on a project around public infrastructure, the new guidance from the government talks about a value for money analysis, and I kind of think about it as life cycle cost analysis. How are folks supposed to use this guidance and what does it tell them about the different approaches to the project?

Shar Habibi Yeah, so that’s exactly what a value for money analysis is. It compares the lifecycle costs of different project delivery methods. And what this guidance does, that was issued several months ago from the Federal Highway Administration and its Build America Bureau, is it really provides some clarification of how and when to use that value for money analysis. So this is done at the very beginning to kind of figure out, hey, which route should we go if we’re considering a P3 approach? What this guidance says, I mean, it says a lot of things, but there’s several provisions that I think are really helpful. One of the first one is that the guidance directs public agencies to establish delivery goals. So what are our goals in delivering this piece of infrastructure? So kind of looking a little outside that just financial lens, and they give some examples like maximizing the use of innovative approaches and technologies, preserving flexibility for future improvements. Promoting economic wellbeing, creating high quality jobs. So these are all good things that kind of go beyond just the really dry dollars and cents of how much the project costs. So I think that’s really good. The other thing that this guidance does is that it places an emphasis on what types of data are the best types of to use. And specifically what this guidance says is that Agencies should use actual verifiable data. And when that’s not available, they need to provide a basis for any predictions or assumptions that are used. And so this is incredibly important. We have analyzed some value for money analyzes that have been done by various jurisdictions. And one of the things that we have found is that sometimes the data or the assumptions that are used are just kind of taken as fact. And they’re not really, the kind of the methodology that’s used to get to these assumptions, where this data came from or where these predictions came from, how the person who did this analysis or firm that did this kind of came to those assumptions. They’re not always explained. And as we know in any model, it’s a little bit of a black box. And so kind of the inputs that you put in, highly, highly determine what the output is. And so, you know, what we really have encouraged is, you know you want to do a really robust analysis that has very sound methodology. And I think what the guidance does is it, It says that, it says, look, you gotta make sure that your data that you’re using or the assumptions and predictions that you are using, you can back them up. And I think that’s really important in getting a valid response from this model. And then lastly, I’ll just note one other thing is the guidance does highlight the importance of transparency and the ability of the public to be able to access the analysis. And I think this is incredibly important because the devil is in the details and having stakeholders and community members allowing them to have the ability to actually look at this and ask the hard questions is only going to make for a stronger decision-making process in the long run.

Terry Gerton Shar Habibi is research and policy director of In the Public Interest. So Shar, if a governor or a mayor or even the transportation secretary is evaluating a major project and they’re using VFM, what’s the single most important question they should ask before accepting that VFN tells them that it’s a public-private partnership and that’s a better option?

Shar Habibi One thing that we really recommend and, again, going to, I think there’s probably, let me actually say two things to answer your question. Again, one is you wanna make sure that you have a model that is, you know robust and sound and the methodology is sound and that you’re using sound inputs. That is probably in terms of the actual analysis, one of the most important things that you can do. One important part of this analysis is that it quantifies risk, and it is based on this idea of risk transfer. And there is a notion, there’s kind of this idea that if the private sector is doing more of these activities, then that transfers risk from the public sector onto the private sector, and we can actually quantify those risks. What is interesting is that it doesn’t always actually work out that way. There’s an assumption that the private sector is doing it, then they’re going to have an incentive not to have cost overruns or not to delays. And those are priced into the model. Unfortunately, what we have seen in some examples of P3s, you know, such as there was an airport in Denver that, you know, tried to do some expansions and improvements via a P3 model. There were a lot of cost overruns and delays. The contract was eventually canceled. You know, even in the D.C. area, you know there’s been a lot of reporting on the issues with the Purple Line and the kind of delays and cost overruns and eventual contract, you know, renegotiation on that P3 project. So just, you know, really understanding that data and how you are assigning those risks. But then the other thing is like really kind of moving outside of just this financial model, what are the things that your community really values? If you want a piece of infrastructure that is accessible and affordable to the public, how does that differ between the models? Who is getting these jobs? What are environmental impacts? … Or, what are the impacts on the regional economy? And so just really kind of even being able to move outside, go a little broader than what the VFM currently calls for and really understanding what is it that, what is the public mission of this piece of infrastructure? What does the community value? And understanding how these models either deliver or hinder those public goals.

Terry Gerton And I think that’s so important. Some of those public goods are very difficult to quantify. So when you’re looking at a math model and trying to make a decision here, how do you value or acknowledge the difficulty in quantifying those public good and how do they factor into the decision-making process?

Shar Habibi I mean, some of the things that I mentioned may not be able to be quantified. You know, it may be very difficult to quantify them… But right now, some of those things are not even being discussed as part of the decision-making process. And so our recommendation is do a really good sound, methodologically sound VFM, but also get community input. Understand what the community needs. And there can be another piece of this that may not look like hard numbers, but that’s being taken into consideration when you’re deciding whether to go with a model that has more public control or a more privatized model.