Estimating the Costs of Public/Private Infrastructure Deals in Municipal Government

Abstract

City governments in the U.S. enter into agreements with private developers to provide infrastructure such as roads, drainage systems, and utilities. From a normative perspective, public managers should calculate the costs to city government to execute these public/private deals before they agree to participate. Four cost categories deserve attention: (1) initial expenses required for project approval by city officials (approval spending); (2) spending for changes during project construction (momentum spending); (3) public spending to entice private investment (incentive spending); and (4) city government spending to maintain and operate the new infrastructure (operations spending). This paper calculates spending categories in a case study of Alliance Airport, a major public/private development in Fort Worth, Texas, requiring $63 million of direct and indirect public expenditures. Officials estimated less than 25 percent of total spending before project approval. Two-thirds of the public costs are foregone revenues associated with incentive spending by city government. The findings suggest city administrators and legislators should focus more closely on a precise calculation of these four types of costs before agreeing to public/private economic development deals.