A bridge over the River P3
The news that the state is considering a public-private partnership for the replacement of hundreds of bridges is a mix of the unusual and the not-so-unexpected.
The fondness of the Corbett administration and its allies in the legislature for P3s as a fix-all for the state's public projects financing means the idea to use one for bridges isn't a shock.
But when we start talking about "hundreds" of bridge replacements, that raises an eyebrow.
I'm starting to think the administration may have found an end-run around the legislature for funding to fix bridges. If the legislature is so ineffectual in providing more money for bridges, then why not ask the private sector if it has interest in bridge investment?
Realistically, that's wishful thinking. Pennsylvania has thousands of structurally deficient and unsafe bridges. Cumberland County closed one this week. So this P3 obviously isn't meant to replace infrastructure finance reform.
But I have this funny caricature in my head of a river with a crumbling bridge span in the background as Gov. Tom Corbett and PennDOT Secretary Barry Schoch (complete with oversize heads, stereotypical 1920s bathing suits and rubber ducky tubes) dip their toes in the P3 River.
In all seriousness, the idea sounds interesting, so I guess we have to see what Mr. Schoch's proposal is at the P3 board later today.
In any P3, there needs to be a mechanism for the private sector to gain a return on its investment. In this case, PennDOT said bidding companies would front the money to replace the bridges, then the state would pay interest on what is essentially a loan.
One question I have about such a proposal is what interest rate range PennDOT thinks companies will bid on the project. Arguably, if it's any more than 3 or 4 percent, then the state's taxpayers could be getting a raw deal.
In April, the state issued $950 million worth of general obligation bonds, a common form of debt financing used by governments. The average interest rate the state will pay on those is 4.45 percent, but most of the bonds carry interest rates of 5 percent, according to the budget office's official statement on the issue.
I'm sure there are many nuances and options for the state in both the bond and P3 markets. But what might be of concern in the P3 market is that there are far fewer bridge-building companies with enough capital to front the money needed to build hundreds of bridges, compared to the number of investors willing to buy bonds.
That smaller pool of investors could mean higher interest rates for the state because the companies are picking up all the risk on the P3.
And, as the legislature has illustrated over the past couple years, there really isn't much stomach for increasing debt. If the attitude is different just because the borrowing falls under the title P3, then really that reflects political marketing over fiscal objectivity.
Borrowing is still debt, whether it's done from a small pool of investors or on an open bond market. The main concern would be where the state gets a better deal to achieve its goals.
At the moment, we'll have to wait and see what proposals come in from the potential partners.