US Infrastructure Development: A Case for Public Private Partnerships

June 13, 2015
Astrid F. Kowlessar

Exploring Financial Strategies and Economic Insights

The blog focuses on the critical need for and the ongoing efforts in infrastructure development in the United States. It examines the economic and social benefits of modernizing transportation, utilities, and communication systems. The author advocates for substantial investments and policy reforms to address the aging infrastructure, arguing that such initiatives are vital for ensuring long-term economic growth and public safety.

A nation is nothing without infrastructure. It is the literal blueprint which allows education, healthcare, commerce and trade to expand and progress within rural and urban areas alike. A country is identified and remembered by its most outstanding infrastructure, from longstanding historic monuments to major highways. Thus, it goes without saying that it must be primary business of federal, state and municipal governments to maintain replenish and expand physical infrastructure to ensure continued growth and communications.

Physical infrastructure within the US has historically been built on thorough, systematic urban and rural planning. As with most countries, new infrastructure projects tend to burgeon in the form of government centers, parks and recreation facilities and monuments based on the promises of newly incumbent regimes. However, basic infrastructure maintenance, specifically maintenance of roads, highways, commercial maritime ports, public schools, and public hospitals, are in need of redress. The maintenance of basic infrastructure, while not as glamorous as a new monument, is vastly essential. However, US fiscal policy towards infrastructure has fallen well over the past twenty years. While certain states and municipalities have an airtight dedication to capital improvements, overall less public investment has gone towards a basic infrastructure need. This is mindboggling. Basic infrastructure growth and maintenance is what differentiates developed nations from emerging counterparts.

The federal government has time and again stated that public funds are not adequate and forthcoming to manage the vast gamut of capital improvement needed. Yet, infrastructure maintenance is a must. Therefore we turn to the most viable alternative for capital improvement, the public private partnership (PPP). A PPP in its traditional sense represents a working, project-based agreement by which private firms partner with governments on public projects, providing either or both the building expertise, private capital investment and operating cost coverage for the project with the expectation of project revenue until a definite date. Past the aforementioned date, the finished, fully operating project is then returned to the public entity, and is then placed on public books as an asset/liability.

The PPP in the traditional sense has worked extremely well for new, short term infrastructure projects. Governments tend to be very flexible in funding allowance when it comes to new projects. However, in longer term transportation maintenance projects, even PPP built projects can lead to excessive costs to both the government and the private firms involved. PPPs used for new projects need to be structured differently from PPPs used for building retrofit or highway capital improvements in terms of project dictates and contract stipulations. It is very important to note that a PPP does not immediately guard against wasteful fiscal policy on the part of government. All PPP projects need cost-benefit analysis from the planning phase of the project, with input from both private and public sector teams. Taxpayer funds are too often mismanaged under the guise of capital improvements, and an effective PPP should seek to avoid such wastage of public funds.

Eduardo Engel, Ronald Fischer, and Alexander Galetovic of The Brookings Institution’s Hamilton Project have conducted an extensive study on PPPs’ effectiveness in both project and policy effectiveness on an international basis, with specific recommendations geared to US public policymakers. They found that the US has by and large developed policy to depend mainly on public funds for capital improvements in transportation. They also found that PPPs to date have been less successful than hoped for due to post-bid contract renegotiations. Post-bid renegotiations may allow for insider fund allocation, and may leave room for political lobbying and even kickbacks. Capital improvements are sunk costs, yet necessary and crucial. Therefore, we must develop our PPP structures to grow and maintain infrastructure in the most efficient ways possible. The Brookings Institution proposes many viable recommendations and suggestions to ensure effective PPP utilization.

The most pertinent, that in our opinion may yield the highest return on effort and investment, are as follows:

The projects [must all be] treated in the government balance sheet as if they were public investments. – This point allows for transparent tax use policy, even if the project future value is included in accounting footnotes during the leasing period of a PPP.
The internal structure of the public works authority (PWA) of state and local governments should be split between a unit responsible for planning, project selection, and awarding projects, and an independent unit responsible for contract enforcement and the supervision of contract renegotiations.
A strong argument for the PPP over traditional [build-only] provision is that the concessionaire internalizes life-cycle costs during the building phase. To the extent that investments during the building phase can lower maintenance and operations costs, efficiency gains should result.
Encouraging the private sector to generate innovative ideas can have merit…This requires the development of mechanisms for compensating the private parties for their ideas without affecting the transparency and efficiency of existing PPP awards.
PPPs often have beneficial distributional impact when they involve new infrastructure or a major improvement of existing infrastructure, as long as they are financed with user fees [e.g. toll roads], since those who do not use the project do not pay for it but may benefit from less congestion on free alternatives.
Some states, including Florida and Indiana, require legislative approval of PPP projects after the concessionaire has been selected [causing renegotiation conflicts of interest]. Award the project to the firm that asks for the smallest accumulated user fee revenue in discounted value, or the Present-Value-of-Revenue (PVR). This type of contract would compensate for the risk—and risk premium—by tying the length of the concession to [user] demand for the project.
PPPs will not filter [economically unprofitable] projects out if they are financed with subsidies or if there is an implicit guarantee that the government will bail out a troubled concessionaire. – In this instance it is pivotal to utilize cost-benefit analyses for all projects undertaken from the inception to planning stages.

The Brookings Institution points out that many traditional build-only and hybrid private sector infrastructure partnerships do not work effectively due to reactionary bureaucratic red tape. It is highly recommended to have public private partnership dictates be encapsulated in local and state ordinances. Legal enforcement on the local level for infrastructure undertakings may be the best remedy to combat bureaucratic hurdles.

The United States has lagged behind the United Kingdom and Canada both in terms of the development of and the effectiveness of public private partnerships, which is surprising, since the US private sector is stalwart. Again, PPPs refer not only to contract-build-release, which consists of the public sector employing private firms; this is common practice. Authentic PPP development is based on build-operate-release on the part of the private concessionaire. Canada has the most positive trend in successfully managing public private partnerships. Indeed, British Colombia has such a high success rate of infrastructure capital improvement completion, they have to date encountered the problem of completing project timeline in record early time. We personally are pleasantly astounded by the thought of having policy and practicality working so harmoniously!

Apparently, British Columbia and the Canadian Government in general have followed The Brookings Institution’s recommendation above concerning having a separate, business driven department within the public works authority (PWA) solely responsible for contract development, enforcement, supervision and completion of PPPs, or P3s as they are known in industry-speak. This internal separation of duties within public works is akin to a project management office or PMO, with added policy authority. It is refreshing to see tax utilization be so efficient, thus bolstering proper fiscal policy. The US has over the past decade created the Build America Transportation Center to foster and encourage PPPs within transportation infrastructure development, which is a step towards capital improvement. However, on the state and local level the US has yet to employ dedicated offices that deal with PPP development and monitoring on the ground level. We need to address this.

The US Government to date is struggling to find funding for capital improvement and development, and it shows. Urban centers, major highways in states without strong fiscal backing and without strong private investment are showing significant signs of overuse and under care. More important than the visual, is the utilization. Commerce, education, and healthcare are strongly affected by infrastructure incapacity. In a climate which is calling for expanded expertise and increased domestic and international trade, can we really afford to have our infrastructure crumble? We hope that from a federal to local level, the US may employ effective use of public private partnerships in capital improvement to support continued economic development and progress.

Sources:

Engel et al. 2011. “Public-Private Partnerships to Revamp U.S. Infrastructure.” The Hamilton Project. The Brookings Institution. Pgs. 11 – 22.

Governing The States And Localities. 2013. “Why Isn’t the U.S. Better at Public-Private Partnerships?” http://www.governing.com/topics/finance/gov-public-private-partnerships-in-america.html

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