Patrick McSweeney


The Public-Private Trap

Virginia tried funding transportation projects through "public-private partnerships" in the 19th century. Advocates of that approach today might think twice if they knew their history.


There is at least one good reason for requiring the teaching of Virginia history. It might allow Virginians to learn from the painful lessons of the past instead of experiencing the same pain over and over again.


Our elected officials should be the first to study state history. They might not be as quick to go off blindly in pursuit of new programs without understanding the risks involved. As a matter of fact, they might come to realize that many of these “new” programs aren’t really new at all.


Take the area of transportation as an example. Whitt Clement, the Secretary of Transportation, recently touted the Warner Administration’s 2005 transportation public-private partnership initiative as an innovative approach. He insists that the proposed approach has never been tried before.


Clement ignores at least a century of Virginia history in making that erroneous claim. Virginia’s early “public-private” approach to building works of internal improvement, including canals, railroads and roads, had a profound impact on state history.


The Commonwealth initially allowed private investors, most notably George Washington, to risk their own money on works of internal improvement. In the 1780s, Washington and others formed the James River Company (later becoming the James River and Kanawha Canal Company) and the Dismal Swamp Company to construct canals to stimulate economic development. There also would be an Appomattox Company and a Rappahannock Company for a similar purpose. Roads often were built by private investors, who charged tolls to finance the projects or justified the investment on the promise of greatly increased economic activity generated by new roads.


In most other states, taxpayer funding for internal improvements soon displaced private investment. Virginia, more than any other state, resisted financing works of internal improvement exclusively with public funding in favor of a system of “mixed enterprise.”  This public-private approach was a compromise between the two traditional approaches — one entirely public, the other entirely private. Public funding was necessary at that time because the means were not readily available to raise private capital in the huge sums required for these projects.


Under Virginia’s “mixed enterprise” system, a Board of Public Works controlled a single fund for virtually all works of internal improvement. This program was justified as a way to create incentive for private investment, but private risk was displaced by a pledge of the Commonwealth’s credit as security for the debt used to finance most of the projects.


The discipline of the marketplace gave way over time to constant political pressures to expand the program of internal improvements. Taxpayers ultimately were left holding the bag.


The reaction to this profligacy was a movement to add provisions to the Virginia Constitution barring the Commonwealth from constructing or investing in works of internal improvement and from lending its credit to private companies. Almost immediately after those constitutional restrictions were approved, legislators, judges and crafty investment lawyers and bankers began to develop techniques to circumvent them.


Suffering from collective amnesia or denial, our elected officials are once again ignoring these constitutional restrictions and the history that prompted them as they rush to finance more works of internal improvement. The old “mixed enterprise” approach has been recycled as a “public-private partnership” initiative, forgetting that in such a mix public financial risk inevitably displaces private risk.


Don’t hold your breath until our leaders take stock of history. Just tuck this warning away and pull it out in a few years.


-- February 14, 2005

















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McSweeney & Crump

11 South Twelfth Street
Richmond, VA 23219
(804) 783-6802