Cross-Border Public-Private Partnerships

Dome Magazine

by Rick Haglund

If the proposed New International Trade Crossing bridge connecting Detroit and Windsor gets built, Canada’s contribution to Michigan’s economy could go well beyond the $550 million our northern neighbor has pledged to pay for the state’s costs.

The bridge project could usher in a new era of cross-border, public-private partnerships used to expand transportation systems, Great Lakes environmental clean-ups and border security systems.

“The sky’s the limit. What you can turn into economic development opportunities using public-private partnerships is incredible,” said Lieutenant Governor Brian Calley, the governor’s point man on winning legislative approval for the bridge.

Public-private partnerships, known as P3s, often are mischaracterized as a privatization of government services or simply contracting for goods and services provided by private companies.

A P3 is a contractual agreement between a governmental entity and a private-sector company in which the risks and profits of building and operating public use projects, such as roads, bridges, municipal water systems and wastewater treatment plants, are shared.

As with the New International Trade Crossing plan, a private contractor or developer often finances the entire project and earns a return from the revenue generated by tolls or user fees.

“It’s a methodology using the best attributes of a strong government with the assets of the private sector in being innovative and taking risks, with the opportunity of making a profit,” said David Lick, a P3 legal expert at the Lansing law firm Foster Swift Collins & Smith.

Lick has been involved in structuring P3s since the 1980s, but they are not widely known in Michigan. One such project he worked on recently was a recycling and material recovery plant for the Resource Recovery and Recycling Authority of Southwest Oakland County.

In that project, the authority purchased the land for the plant, which was financed and built by a private contractor. The authority and the contactor share in the profits from the recycled material that’s produced and sold.

“I think we could make more use of P3s than we do now,” Lick said.

In Canada, P3s have been used to build 157 projects since the early 1990s, including hospitals, schools and sports stadiums. Canada is considered one of the world’s leaders in using such partnerships.

“The United States is a little behind the curve in using P3s,” said Sarah Hubbard, president of Acuitas, a Lansing lobbying firm, and former lobbyist for the Detroit Regional Chamber, another champion of the bridge project. “It can be a tough concept to understand.”

Indeed, the National Council for Public-Private Partnerships lists 18 types of P3s and says no two projects are alike.

P3s can be an attractive option for state and local governments that are dealing with aging infrastructures and tight budget.

Last year, the Michigan Department of Transportation rebuilt a section of the I-69 freeway in St. Clair County and a portion of I-75 near Flint using one type of P3 known as design-build-finance, or DBF.

In those projects, the contractor financed the construction and is being repaid over four years. The arrangement provided an acceptable financial return to the contractor and “allowed the project to go from concept to bid-letting much more quickly,” Lick said.

“The main benefit of a design-build project is to allow for innovative ideas to be implemented faster and in a competitive environment,” said state Transportation Director Kirk Steudle. “Once the bids are received and the plans approved, work proceeds quicker.”

P3s have been controversial, in part, because of the amount of power given to private developers, or concessionaires, who often operate the public works projects that they build.

One of the bills in the Michigan Legislature enabling the construction of the New International Trade Crossing specifically establishes it as P3. The legislation is needed, officials say, because it is unclear whether a private company has the legal authority to collect tolls on a bridge that has public involvement.

“There is an outstanding legal question,” Calley said. “I don’t believe there is a prohibition for a private company to collect tolls, but it’s a question that’s open for debate.”

In Canada, questions have also arisen about whether or not P3s save money for taxpayers.

For instance, a 2008 Ontario Auditor General’s report found that $200 million could have been saved in the construction of the Brampton Civic Hospital had the province financed the project itself, rather than letting a private developer finance it.

And public employee unions have criticized P3s, saying they cut jobs for government workers.

Lick said borrowing costs by private companies doing P3s can be higher than for government-financed projects, but they sometimes can qualify for tax-free municipal bond interest rates.

Other advantages of such partnerships make them a viable choice for constructing and operating public works projects, he said.

Cost overruns, common in such projects, usually are minimized when P3s are used.

“I think the issue of cost overruns is mitigated because the private sector does not have an open checkbook,” Lick said. “It has to produce the best value for every dollar spent.”

They keys to successful projects are having competent contractors and savvy government partners, according to Lick.

“Make no mistake — the use of a public-private partnership takes a government that has a strong backbone and knows what it is doing,” he said.

Calley and others say the potential for cross-border P3s between Canada and Michigan lies mostly in areas such as transportation and logistics.

Phil Power, chairman of The Center for Michigan, an Ann Arbor-based “think-and-do tank,” wrote in a recent column that creating a “multi-modal logistical hub” linking southeast Michigan and Ontario could create 200,000 jobs and billions of dollars in economy activity.

Such a hub would link air, water, rail and road transportation and could turn the region into the most efficient freight-moving center in the Midwest.

Gov. Rick Snyder also has said he’d like to see the proposed high-speed rail link between Chicago and Detroit extended to Toronto. A P3 could be used for such a project.

“There are a lot of transportation assets located in this area,” Calley said. “I think it is important to keep in mind the potential of building a continental transportation hub here.”