This article originally appeared in RealClearMarkets.
As Congress mulls over a temporary patch for the Highway Trust Fund, President Obama is addressing infrastructure construction with his Build America Investment Initiative. The initiative is not the ordinary big government program. Instead, the Build America Investment Initiative is intended to be a "public-private partnership" or "PPP" for the acronym-loving Washington crowd.
A "public-private partnership" may sound like an oxymoron to individuals who work in the private sector. Partnership is an ancient and venerable institution. For millennia, individuals have formed partnerships to share both the risk and reward of business ventures. Partners in a partnership are equals; one partner does not tax or dictate decisions to another partner. Many successful businesses are, or at one time were, a partnership.
While ordinary partnerships have passed the test of time, "public-private partnerships" have not. In fact, the concept of a "public-private partnership" is decidedly contemporary. Many have been proposed by government officials in speeches; few if any have been proposed by businesses with hard-earned cash to invest.
The very concept of a public-private partnership is a combination of both flattery and naiveté: flattery because government officials envy the success of private businesses, and naiveté because a government and a private business can never be true equal partners. The government always has the power to tax, to regulate, and to dictate to a private business.
Thus we have President Obama's proposed "Build America Investment Initiative." Supposedly, it will encourage private infrastructure development at the state and local level, using federal technical assistance and credit programs.
A transportation investment center, to be housed at the Department of Transportation, would serve as a "one-stop shop for cities and states seeking to use innovative financing and partnerships with the private sector to support transportation infrastructure," according to the White House fact sheet.
Most public-private partnerships involve one government agency proposing to "partner" with private businesses it regulates or taxes. It is a gentle euphemism for a government agency lording over businesses that cannot escape its grasp. But the Build America Investment Initiative is different. President Obama proposes that the federal government will be a "partner" with state and local governments so that private businesses, beholden to the federal government, can "invest" in state and local government projects.
Speaking in Wilmington, Delaware, on July 17, Mr. Obama said, "[L]ots of states and local governments would welcome more private investment, but they need a partner in the federal government to help do some matchmaking and work through some of the complexities of private financing of infrastructure. So my administration is going to help states and cities apply for federal loans, get more public-private partnerships up and running, get more investment flowing into communities like Wilmington."
As with many other executive branch projects, it has been announced without appropriations. The Build America Transportation Investment Center is designed to play the role of a public-private infrastructure bank proposed by Mr. Obama in 2011. The bank was supposed to cost $5 billion in fiscal year 2012 and $30 billion over the next six years.
Congressional legislation was sponsored by then-Senators Kay Bailey Hutchison (R-TX) and John Kerry (D-MA), now Secretary of State. The bank was supported by people as far apart as U.S. Chamber of Commerce president Tom Donohue and AFL-CIO president Richard Trumka. But despite the infrastructure bank's unusual bipartisan support, Congress did not authorize the funds.
So Mr. Obama has decided to put a similar entity in place through executive order. "I'm not going to stand by when politics and inaction are holding us back," he said in Wilmington.
The Build America Investment Initiative would have several components.
Navigator service. This component seeks to advise states and local governments on how to gain access to existing federal credit programs and design successful public-private partnerships. It sounds like Obamacare navigators, except these navigators will "help" state and local government.
Improved Access to Transportation Department Credit Programs. The program would encourage the use by state and local governments of existing infrastructure credit programs at the Department of Transportation, particularly the Transportation Infrastructure Finance and Innovation Act (TIFIA) program. The TIFIA program finances infrastructure projects with federal credit and is designed to encourage additional investment from the private sector.
Technical assistance. This assistance is intended to "help remove barriers to ensure the public and private sector can come together to complete projects that make sense." Of course, state and local governments have issued contracts for transportation projects for more than two centuries without this federal technical assistance program.
The cost of the new transportation center depends on how much state and local governments and investors use TIFIA funding. Some projects could default on TIFIA loans, leading the government to lose money. For instance, a TIFIA-financed highway extension in Texas ($430 million in financing from TIFIA and $896 million from private sources) has seen lower than expected traffic, and as a result missed a debt payment last month.
Denver, Colorado, is using a partnership to build two commuter rail lines, at a cost of $2.2 billion, which are unlikely to cover their costs. If spending money at taxpayer expense is a virtue, these new partnerships may have few rivals.
Outside of speeches by government officials, public-private partnerships have problems. Government agencies and private companies are uneasy partners. Money passing between the two gives the appearance if not the fact of impropriety.
Ultimately, the power and the leverage in the relationship are entirely with the government agency, which can tax and regulate the private business out of existence. A government agency can use its regulatory power to reward or to punish a business partner or a state. Regulations may include payment of above-market wages such as the living wage, and environmental impact statements.
With the Highway Trust Fund running low and grants due to stop on August 1, the president should seek a new flow of funding for infrastructure, such as the gas tax proposed by Senators Bob Corker (R-TN) or Chris Murphy (D-CT) or the miles travelled fee suggested by Representative Earl Blumenauer (D-OR). Private-public partnerships are no substitute for serious transportation policy.
Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute. You can follow her on Twitter here.
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