If PPP fails it could have a major backlash on the government and negative political and economic affects.

The United States has major transportation infrastructure needs. According to the American Society of Civil Engineers, the surface transportation sector—defined as highway, public transportation, and rail facilities—will face an investment shortfall of approximately $1 trillion over the next decade.Public-private partnerships (P3s) are often mentioned as a solution to this shortfall.1 This idea is simply wrong. State and local government project sponsors do not lack access to financing but rather have insufficient tax revenues to repay new project debts. As the U.S. Treasury Department notes, “All infrastructure investments ultimately depend on either user fees, government tax revenues, or a combination of both.”2 Government project sponsors can access low-cost financing through the municipal bond market and the Transportation Infrastructure Finance and Innovation Act (TIFIA) loan program at the U.S. Department of Transportation.3 Private financing in the form of private activity bonds (PABs) and equity capital are still project obligations that must be repaid. Simply changing the source of project debts through a P3 does not resolve the two most common restraints on government revenues: economic hardship and insufficient political support.Public-private partnerships offer state and local governments the ability to shift project risks to a private concessionaire in ways that are not possible through traditional design-bid-build procurement. When structured properly, P3 agreements allow project sponsors to offload three categories of risk: delivery, finance, and operations.4 The private concessionaire charges a premium price for taking on project risks. A key challenge for project sponsors is determining the appropriate risk-adjusted price to ensure that the procurement is cost-beneficial. Given the nation’s major need for expanded and improved surface transportation infrastructure, it is crucial that policymakers understand that risk transference through P3s is not guaranteedP3 failuresProponents of P3s often present risk transference as effectively carried out once the project sponsor and the concessionaire have both signed a contract. This basic description of P3s is accurate but incomplete. Under this conception, the P3 contract is sufficient to ensure that failure will negatively affect the private concessionaire, equity investors, and other creditors—but not the state.Yet this transactional description of risk transference neglects the fact that the government always remains the ultimate guarantor of project delivery. When a concessionaire fails to fulfill their contractual obligations, the state is forced to take over project delivery—even when this involves substantial delays and cost overruns. The reason the state cannot escape its position of responsibility is essentially political—not in the sense of partisan gamesmanship but because the state is held accountable through public elections.When a state or local elected official announces a major transportation project, they create a government commitment to the public. The specific details regarding the method of procurement are irrelevant to this political contract between voters and their elected representatives. When the government makes a pledge, the public expects the state to follow through and build what it has committed to build. Elected officials know this. After all, the ballot box holds politicians accountable, not construction subcontractors.On a practical level, failure to complete a project can have two negative consequences. First, if a promised facility remains unbuilt, residents and businesses must continue to deal with the inadequacies of the existing system that gave rise to the project in the first place. Second, a P3 failure that results in significant losses for bondholders could have harmful long-term effects on future project financing—even if the losses occur on a PAB that does not carry a full faith and credit pledge from the government.Interest rates on debt principally reflect investor expectations about inflation over time and risk. When the market perceives a particular investment or borrower as risky, interest rates on debt rise. If bondholders lose a significant portion of their investment due to the nonperformance of contract obligations by a concessionaire, this can produce reputational damage for the state or local government project sponsor. In particular, a P3 contract failure signals to future investors that the government may again make a poor choice when selecting a concessionaire. In response, the market would likely demand a higher interest rate on PABs issued for future P3 contracts.

Additionally, allowing bondholders to suffer significant losses sends a strong signal to the market about the politics of a particular state or local government. Debt issued in relation to public infrastructure projects may carry an implicit guarantee that the government will backstop the debt should problems arise. Even though a PAB may not carry a full faith and credit pledge, the market may assume that the state will take steps to protect investors. If the state chooses to allow investor losses, the market learns that no implicit guarantee exists and prices this fact into future debt offerings.

In southern Indiana, the I-69 Section 5 P3 failure demonstrates that using a P3 procurement approach is not a guarantee of success or full risk transference. Section 5 shows that the state remains the ultimate guarantor of project delivery, including covering cost overruns necessary for completion. Finally, the I-69 project demonstrates how the threat of political backlash from failure, combined with the need to preserve future access to affordable credit through the bond market, pushes project sponsors to take extraordinary steps to protect investors from loss.