Three examples of public-private partnerships screwing up urban transit are on my mind. The Canada Line in Vancouver is not new to me – I was poking around a few years ago. But the other two in this post are. The Maryland Purple Line in the suburbs of Washington was supposed to be the smooth PPP offering low-risk orbital light rail connecting suburbs to other suburbs without having to go through Downtown Washington, and now it is in shambles because the contractor walked away. Milan is not a new example either, but it is new to me, as we’ve discovered it during the construction costs project comparing high American (and British) costs to low Southern European ones; even there, the PPP bug bit, leading not so much to high capital costs but to high future operating charges. In no case is such a PPP program good government; the bulk of construction and risk must always lie in the public sector, and if your public sector is too incompetent to build things itself, as in the United States, then it’s equally incompetent at overseeing a PPP, as we’re seeing in Maryland. Don’t do this.
Washington: the Purple Line
Maryland planned on building two major urban rail projects last decade, stretching into the current one: the Red Line and the Purple Line. The Red Line was to be a conventional public project to build a subway in Baltimore, mostly serving low-income West Baltimore neighborhoods. The Purple Line, a light rail project in the DC suburbs acting as an orbital for Metro, was designed as a PPP. Governor Larry Hogan canceled the Red Line, most likely for racist reasons. The physical construction costs per rider were higher on the Red Line, but the overall disbursement including very high operating charges made the Purple Line more expensive, and yet Hogan kept the more expensive system and tossed the cheaper one.
One might expect that the PPP structure of the Maryland Purple Line would allow it to at least resist cost escalation – the risk was put entirely on the private contractor. And yet, the opposite happened. Costs turned out to be higher than expected, so the contractor just quit. Once the contract is signed, no matter what it says, the risk is in practice public, and this is no exception. The contractor stopped all work and left the region with a linear swath of ripped up roads; eventually the concessionaire and the state came into a settlement in which the state would pay $250 million extra and the concessionaire would hire a new contractor. The cost overrun was $800 million and the state said that the deal was going to save taxpayers $500 million, but what it signals is that even with very high public-sector payouts over decades that intend to put the entirety of the risk on the private concession, the public sector shares a high proportion of the risk, and the private bidders know this. This is a lose-lose situation and under no circumstances should countries put themselves in it.
Vancouver provides another good example of PPPs and operating costs. SkyTrain operates driverless equipment throughout the system, which means that operating costs should be low, and, moreover, should not depend on train size much. The Expo and Millennium Lines, built and operated publicly, cost C$3.20 to run per car-km, cheaper than on any system for which I have data (mostly very large ones plus Oslo) and less than half as expensive as the major European systems. But the Canada Line, operated by a concessionaire as part of a PPP scheme, costs $17.90/car-km, which is considerably worse than any system for which I have data except PATH. Even taking into account that the Canada Line cars are somewhat bigger, this is a difference of a factor of more than 3.
This is not a matter of economies of scale. The Canada Line’s trunk runs every 3.5 minutes most of the day, which is better than the vast majority of non-driverless systems I am familiar with off-peak, so the high costs there cannot be ascribed to poor utilization. In fact, before the Evergreen extension of the Millennium Line opened in 2016, the two systems’ total operating costs were almost identical but the operating costs per car-km were about 3.5 times worse on the Canada Line – economies of scale predict that unit costs should be degressive, not almost flat.
Marco Chitti is busy collecting information and conducting interviews regarding subway construction in Italy as part of our construction costs report. Italian costs are low, which makes it feasible to build metros even in very small cities like Brescia, where per Wikipedia the cost of the metro was around €65 million per km and €15,000 per weekday rider. However, the use of PPPs has not been good in the places where it happened, due to fiscal austerity following the Great Recession.
- What is the impact on the cost of the PPP? The impact on costs of the potential transfer of risk from the Public to the Private is hard to calculate, but it appears to have an impact more on higher gross operational costs (the fee that the Municipality will pay in the 26 years of the concession for the operation and pay back a return to the private operators) than on the actual construction cost. But that is unclear yet. A bit of detail: the municipality will pay to the concessionaire a 1.09 €/passenger as a minimum granted fee up to 84 million passengers/year, 0.45€/passenger for each additional user up to a maximum determined as an increase of the IRR of 2 percentage points more than the “base IRR” of 5.93%. That means that this is basically the rate at which the private investors are de facto borrowing the money to the municipality, with most of the risk from low ridership transferred to the municipality. What makes calculations complicate is that the city is directly a majority stakeholder of the concessionaire Metro M4 S.p.A. and also, indirectly, as the owner of ATM, which will be the “private” operator. It’s very blurred compared to other PPP schemes where the concessionaire is 100% private (like M5).
- PPP emerges as a stratagem to finance the project without increasing the municipal public debt. The PPP schemes is used to compensate for the lack of local public funds matching the national ones, limited due to the debt cap imposed by the so-called “internal Stability Compact”, an austerity measure implemented after the 2011 debt crisis, which strongly limits the capacity of local governments to borrow money for infrastructure projects. It was suspended in 2016.
Note that contra the plan to build the system without public debt, the PPP does in fact include borrowing. It’s opaque, but the payment per rider is a form of borrowing. Driverless metro operating costs are lower than €1.09 per unlinked trip. The Expo and Millennium Lines cost C$1.55, which in PPP terms is about €0.90, and feature much longer trips, as the Expo Line is 36 km long and one-tailed, which means many people ride end-to-end, whereas Milan M4 is to be 15 km and two-tailed, which means few trips are longer than half the total. In effect, this is high-interest borrowing, kept off the books in an atmosphere of strict budgetary austerity
Don’t do this
PPP-built lines do not have to have high construction costs. The Canada Line was cheap to build – it was Canada’s last reasonable-cost subway, and since then costs have exploded around the country. M4 in Milan is inexpensive as well, around €110 million per kilometer at current estimates even while going underneath older subways in city center. The current annual ridership projection of M4, 87 million, means that the current projected cost per weekday trip is €6,000, which represents an enormous social surplus in a region that builds up to around €30,000-40,000 before even pro-transit activists demand cancellation.
But in those cases, the structure of the contract keeps the operating costs artificially high, privatizing what should be public-sector profit from building a very inexpensive-to-operate system. This is especially bad if it is bundled into construction costs as an up-front payment, as in Maryland. In Maryland, the extra operating costs raised the construction cost well above the maximum level that is acceptable to the public transportation community over here, and in the United States too, such lines tend to be under threat of cancellation from fiscally conservative governors if they are not portrayed as pro-market PPPs. But those PPPs then have higher costs and, through poor risk allocation, lead to the worst of both worlds: the private concessionaire increases costs in order to deal with the risk of escalation, but if the risk exceeds prior estimates, then the state remains on the hook.
Don’t do this. One can to some extent understand why Italy was forced into this position at the bottom of the financial crisis. This isn’t such a situation – all countries in Europe are engaging in large discretionary deficit spending nowadays, as the market appears to believe that not only will corona pass, but also the new vaccines developed will help prevent the common cold and the flu in the near future, increasing future health outcomes and improving productivity through less lost sick time. In the United States, a $2 trillion stimulus is sold as just the first of two steps, because there’s fiscal room. You, even as a state or local government, can find money in the budget for more spending – raise taxes or sell bonds, and do so transparently. Don’t take opaque high-interest loans just to tell the public that you haven’t borrowed on the open market. It’s not worth it.