Public/Private Funding of a Road Project

Previously I talked about the widening of I-35E from I-635 to US-380. The Texas Department of Transportation (TXDOT) has schematics drawn of the proposed 12 lane highway project. They propose 4 managed/toll lanes and 8 unmanaged/free lanes. The toll lanes are supposed to provide the method to pay for the project in what is known as a public/private partnership.

The public/private partnership as envisioned for this project is a private company providing the funding (capital) to build the highway in return for revenue available from operating the managed toll lanes. Public entities such as TXDOT, Denton County, and possibly one or more Federal agencies will also contribute funding to the contruction of the highway. The private company will manage the entire construction process. In fact they will be responsible for the construction from start to finish.

As explained to me, the private company will have to demonstrate a financial ability to complete the entire project. That means they will also have to put up performance bonds that guarantee they will finish the project. Of course, any time a company performs work of this type (even just building a city street), performance guarantees are required. I believe the part of this that is in the front of most peoples' minds is that there will be toll lanes.

After looking at this for a while, you start to realize that all infrastructure projects undertaken by state and local government are a public/private venture of some sort. It's just a lot less obvious. Let's look at how a street gets built in the City of Corinth.

The City builds both new roads, and rebuilds existing roads that have worn out. Sometimes the City will expand a road during the reconstruction if it makes sense to do so. Either way, the city really only oversees the project. The City determines what the road should be built of (what standard it should be built to) and generally where they want it and what it should look like. Then, the City hires a private engineering firm to design the roadway and create construction planning documents. Next, the city will let the project out for bids, where private construction firms will place a bid to perform the construction. Once the City awards the contract to a private construction firm, that firm then builds the road. The City will oversee and inspect the work, however, all the actual construction is done by the private company. The contract is for a fixed price typically. You can bet that the private company performing the work is going to make a profit off of the job. If they don't they won't be in business very long. So, here is a private company making a profit on a public job, paid for with public money.

Well maybe not paid for with public money up front, come to think of it. Usually a City has to sell bonds to pay for major construction projects (as does the state from time to time). The bonds are bought by private investors, in return for interest (profit) on the money invested. Then the taxpayer has to pay, over time, for the the principle and the interest (profit) on those bonds. So there are several places that private companies make a profit on a public project like building a city street. There are some good reasons for building streets and other infrastructure this way; we can talk about them later.

The main difference between the public/private partnership proposed for I-35E and what is normally done, is in how the funding is raised. While normally either bonds are sold by the government entity to raise money, or money from taxes is in a fund maintained by the government entity. Then those funds are used to pay for the construction, done by a private entity. In the I-35E project, funding will be from a private firm in conjunction with funding from the public. Then the private firm will have an opportunity to recover the money they invested, and a profit, from the operation of the highway.