Infrastructure: Privatization and Innovation

February 27, 2015
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Tomorrow at CPAC, I will discuss some advantages of infrastructure privatization. Perhaps the largest advantage is innovation. Unlike government bureaucracies, private firms in a competitive environment are eager to maximize the net returns of projects, so they find new ways to reduce costs and improve quality.     

The benefits of innovation are obvious in fast-moving industries such as high-technology. But innovation can also be important in long-established, hard-hat industries such as highway building. Numerous countries are ahead of the United States in privatizing and partly privatizing (“public private partnerships” or “P3s”) government assets such as highways, airports, seaports, passenger rail, and air traffic control. Experience around the world shows that much innovation is possible after such industries are liberated from the bureaucratic yoke.

A House hearing last year looked at the international experience with privatization. The head of a provincial P3 agency in Canada said that P3 projects are more likely to be completed on time and on budget than traditional government infrastructure projects. And he said, “Competition and the profit motive can lead to startling results, where the winning proposal provides solutions that the public owner never contemplated. This happens over and over again.” Isn’t that interesting?

In his latest newsletter, Robert Poole provides more evidence of the “innovative effect” of P3s. He discusses $2 billion of cost savings from P3 highway projects in Texas, which are examined in a paper by Fidel Saenz de Ormijana and Nicolas Rubio:

Texas DOT has been gradually increasing the extent of design flexibility it gives project developers, via two methods. One is to encourage P3 developers to submit “alternative technical concepts” (ATCs) as part of their proposals in response to an RFP. The other is to encourage potential developers to present innovative ideas during the industry review meetings that precede issuance of the RFP. In the latter case, those ideas may be included in the RFP as options for all potential bidders to consider.

The largest cost savings discussed in the paper concern the LBJ (I-635) project in Dallas, where TxDOT’s conceptual design called for the express lanes to be constructed in a new tunnel beneath the existing general-purpose lanes, due to severe right of way constraints. During design review, the authors’ companies (Ferrovial and Cintra) suggested the alternative of a depressed center section for the express lanes, with the rebuilt general-purpose lanes partly cantilevered over the express lanes. This was presented in the RFP as an option, and the authors’ consortium’s bid that used this approach came in at substantially lower cost, contributing a large fraction of the resulting $1.3 billion construction cost savings.

The other cases described in the paper deal with several phases of the North Tarrant Express project in Fort Worth. In these cases, the developer-proposed changes were of two types. Some were changes in the design and placement of lanes and ramps, to provide better traffic flow (and generate more toll revenue). Others were changes in phasing, so as not to incur premature construction costs for lanes needed only in the ultimate configuration (10 to 20 years in the future), while designing now to facilitate their later addition within the long term of the concession agreement. These changes saved $480 million in NTE 1 and 2W and another $150 million in NTE 35W.

… By looking at the LBJ and NTE projects as businesses, the team was strongly motivated to come up with alternative designs and more-careful phasing of improvements to make the projects financially feasible. And to its great credit, Texas DOT was willing to accept many of those changes, resulting in projects that will provide very tangible benefits, without putting taxpayers at risk.

For more on infrastructure P3s and privatization, see here.

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