Costs, Uncertainty, and the Hard Road to Public-Private Partnerships
For the past 60 years, a major portion of our public infrastructure has been financed using federal funds, but the present Republican majority in Congress has expressed little appetite for spending that requires new or increased taxes. Meanwhile, state and local governments are strapped for resources. And infrastructure projects can be breathtakingly expensive. At one extreme, the first two miles of New York City’s Second Avenue Subway line – and three stations – which opened Jan. 1, 2017, cost $4.5 billion. But even more typical projects strain public coffers. The Hampton Roads Bridge-Tunnel expansion, which would upgrade Interstate 64 in Norfolk and Hampton, Va., is projected to cost $3.3 to $4 billion.
In fact, a 2016 study by the U.S. Department of the Treasury concluded that “a lack of public funding is by far the most common factor hindering the completion of transportation and water infrastructure projects.” Public-private partnerships (P3s) could help to fill this gap by injecting billions of dollars in private-sector investment. Current P3 projects, such as the $6.5 billion Denver Eagle commuter rail and the $5.6 billion Maryland Purple Line in suburban Washington, D.C., illustrate the growing interest among federal, state, and local officials in tapping private financing for transportation infrastructure.
However, the broad use of P3s in the United States faces numerous and complex obstacles, despite the success of the model in other countries. U.S. investors are deterred by myriad limitations on the use of federal funds for privately financed projects. Furthermore, complex, multi-agency approval processes add costs and uncertainty – presenting high hurdles for private contractors and investors. For example, the Southern California International Gateway, an effort by BNSF to build a freight yard outside the Port of Los Angeles, in Long Beach, (which would eliminate much of the truck traffic on the chronically jammed I-710) stalled after more than eight years of planning when a judge ruled in March 2016 that the environmental impact had not been adequately assessed.
P3s frequently face political opposition, as well. Under partnership agreements, private investors may be granted the right to operate a road or railway and earn revenue from it for decades, but elected officials dislike ceding control of public infrastructure. And the voting public reliably objects to the tolls they believe P3s inevitably generate, further diminishing the political will to pursue them. Jurisdictional conflicts between states when projects cross state lines also complicate planning and approvals.
On top of these barriers, there is no long-range pipeline of projects that officials in any U.S. jurisdiction – federal, state, or local – have identified as good candidates for P3 development. And without projects in the pipeline, “there is no certainty of a long-term diversified portfolio for interested investors,” according to the Bipartisan Policy Center Executive Council on Infrastructure.
All these obstacles make P3s risky compared with traditional infrastructure financing methods, which make public officials and private investors loathe to engage with them.
There are many creative, innovative, and proven ways to address these issues. However, they have been difficult to scale beyond a specific project, program, or jurisdiction. Expanding the use of P3s nationally will require more comprehensive action, ideally by the federal government. Because states need federal funds, the federal government essentially makes the rules for financing infrastructure projects. By establishing a clear policy in support of P3s as a financing option, federal transportation officials could break the logjam that is preventing wider participation by private investors.
For example, the federal government could require states to evaluate the use of private financing as a condition of getting federal money. That’s how other nations, including Australia, Canada, and the United Kingdom, have encouraged P3s. A federal requirement would give local public officials an incentive not to reject P3s out-of-hand due to worry about getting stuck with a decades-long deal or a reluctance to disrupt existing relationships. It could also eliminate elected officials’ fear of popular blame as they could point to the requirement. In addition, such a policy would let private investors know that pursuing these types of deals is realistic and that the federal government wants to see them implemented.
The current focus on infrastructure investment provides an ideal opportunity to make P3s an attractive choice for financing the nation’s critical infrastructure needs. But it will take creativity and hard work, both in terms of developing workable policies and eliminating regulatory barriers.
The Case for P3s
Although public financing is the main way U.S. transportation infrastructure is built today, it wasn’t always that way. One could argue that the United States was the first country to build large-scale, privately financed public-use infrastructure, with projects such as the Philadelphia and Lancaster Turnpike (now known as the Pennsylvania Turnpike). This road opened in 1794, built by a private company and financed through stock sales. Private financing was used to construct more than 10,000 miles of new roadways, mostly in New England and the Middle Atlantic states, in the early 19th century.
The creation of the Interstate Highway System in 1956 effectively ended private investment in and ownership of roads. But public financing has not been able to match the pent-up demand for transportation projects. President Trump has called for $1 trillion in infrastructure investment, but, in fact, this amounts to a fraction of the need. In February 2017, for example, the National Governor’s Association submitted a wish list of 428 “shovel-ready” infrastructure projects to the administration, including (but not limited to) the restoration of aging roads, construction of new interstate express lanes, and solutions to separate highway truck and automobile traffic.
Even if public coffers were overflowing and elected officials were willing to spend the funds, there wouldn’t be enough taxpayer money to finance even a fraction of needed projects. The Interstate Highway System of the 1950s was authorized during a period of unprecedented political consensus; it cost $129 billion and the federal government covered as much as 90 percent of the cost. But today, with a $20 trillion national debt and a Congress that has made cutting domestic spending a priority, there is neither enough money nor the political will to make big public investments.
In this environment, P3s offer key advantages. Private investors have access to larger pools of capital than do governments. For instance, according to a 2016 Institutional Investor report, the top 300 U.S. investment firms had over $45 trillion in assets under management. Private entities also have more flexibility than public agencies, enabling them to spread their investments over decades; agencies must stockpile funding before breaking ground or purchasing assets. Projects that are put off often end up costing more and delaying benefits.
As a result, privately financed infrastructure can be operated more efficiently while mitigating risk. The President, in his budget proposal, clearly accepts this proposition, stating, “The private sector can provide valuable benefits for the delivery of infrastructure, through better procurement methods, market discipline, and a long-term focus on maintaining assets.”
A Web of Obstacles
Despite global success stories that support the potential for P3s to address the demand for infrastructure financing, U.S. laws and practices have not been modified to promote their greater use. The country’s complex web of laws, regulations, and procedures – which vary from state to state – combined with political inertia have thwarted efforts by both public officials and private investors to apply the model more widely.
Laws and regulations governing public bonds restrict the use of funds in ways that limit the ability to involve private investors – for instance, by requiring public ownership of assets or by limiting how much money private investors can receive. Also, if a project is canceled or delayed, federal funds cannot be used to reimburse investors for what they’ve spent on planning and permitting. Obviously that increases the investors’ risk. Permitting reimbursement would offer investors a safety net.
Furthermore, as the Bipartisan Policy Center has observed, without a long-range project pipeline, investors are reluctant to enter the marketplace. The costs of researching opportunities, understanding state and local regulations and procurement rules, and developing bids are too great without a reasonable expectation that investors will be able to bid on future projects.
Complex, multi-agency approval processes add to the risk and raise project costs. The $4 billion effort to rebuild New York’s Tappan Zee Bridge used an expedited process for environmental review that saved three years and $600 million. But this was atypical. Most projects are subject to more expensive procedures. When permits are denied after years of investment, projects may be killed rather than revised to address deficiencies. If multiple jurisdictions are involved, as is the case for projects that cross state lines, a lack of coordination on planning and approvals can also impede projects.
Viewpoints vary as to the sources of these risks. The Federal Highway Administration has observed that consensus about the urgency of a project may clear-cut a forest of political opposition and motivate agencies to reduce bureaucracy. Common Good, a non-partisan group that advocates for simplifying government, argues that permitting delays (and the resulting cost increases) stem from a “balkanized” approval process, without “clear lines of authority to make needed decisions… [and] no overarching agency which can balance the demands of different regulators so a project can move forward.”
Regardless of the merits of a project, many taxpayers equate private investment with tolls they don’t want to pay. According to a January 2017 Washington Post-ABC poll, 66 percent of people surveyed opposed a plan floated by advisors to President Trump to grant nearly $140 billion in tax credits to investors in roads, bridges, and transit in return for the right to impose tolls. Even when tolls aren’t on the table, costs to the public can increase. In Chicago, fees for privately operated parking meters in the Loop more than doubled to $6.50 an hour between 2008 and 2013. Even though city officials set the rates, the arrangement has been criticized because investors, rather than the city, pocket the revenue.
All the uncertainties about public funding, political support, and legal approval increase investor risk. Investors also are deterred by a lack of consistency in establishing P3s across jurisdictions. Currently, 34 states, Puerto Rico, and the District of Columbia have laws authorizing P3s, but the provisions of these statutes vary. For example, some states do not allow private funds to be used for transportation projects, or they restrict how revenues from P3 projects can be used. And even in states where P3s are authorized, state and local agencies may not have the necessary expertise to negotiate agreements. According to the American Road and Transportation Builder Association, state departments of transportation “must re-build their in-house capability to manage big projects.”
These impediments to building public infrastructure only add to the usual risks and costs investors face when deciding whether to take on a project.
The Paths to Partnership
In a less discouraging vein, there are numerous ways to create a more hospitable environment for P3s.
The federal government could authorize new mechanisms for financing P3s, as well as reducing investors’ borrowing costs. And agencies involved with permitting could streamline and improve the coordination of processes and decision-making (including environmental reviews) to establish greater certainty and accelerate approvals. Common Good proposes a two-year approval process for soliciting public comment, conducting environmental reviews, limiting litigation, and ensuring one agency is in charge of coordinating all necessary permits. While some of these practices have been introduced at the federal level for some projects, there are no comprehensive, nationwide policies to reduce the typical timeline for project approval and funding.
Greater transparency could also reduce opposition and create broader political support. A JD Power survey of consumers’ attitudes towards P3s found public perceptions about P3s improved with greater communication about their benefits. And vocal public displeasure has led to process improvements. The much-maligned Chicago parking meter agreement was approved with very little public debate. Subsequently, the City of Chicago Municipal Code was amended to mandate review periods, public disclosure, and independent assessments of the sale or lease of city assets in P3s, with requirements varying depending on the dollar value of the transactions.
Any of these tactics could help clear obstacles for P3s or mitigate their impact. But a comprehensive federal approach is required to expand the use of P3s nationally.
Evidence from around the world suggests that if the federal government requires state and local agencies to consider P3s to be eligible for federal funding, there will be a compelling incentive to do so. In Canada in 2011, the Conservative government mandated that any federally funded infrastructure projects worth $74.6 million or more go through P3 screening. By November 2015, when the new Liberal government removed the requirement, Canada had some 220 P3 projects worth more than $70 billion in process or planned, including the replacement, for as much as $3.7 billion, of Montreal’s Champlain Bridge.
Australia has gone further, increasing the use of P3 financing by offering an asset recycling program, promoting the transition of public infrastructure to private sector ownership or operation, as well as providing incentives for state and territorial governments to sell public assets to generate funds for new infrastructure investment. In 2014, P3s accounted for 10.9 percent of Australia’s transportation, power, water, sewer, and communications investments, a proportion second only to the United Kingdom. The United Kingdom invested 15 percent of its infrastructure spending in P3s, continuing a privatization process it began in the 1980s. In countries as diverse as Mexico, China, and Brazil, national governments have also taken steps to prioritize public-private partnerships.
The New Federal Role
As is the case with any government policy, clarity is the key to successful implementation. But the U.S. government’s current policy on private infrastructure financing is unclear at best and downright hostile in some instances.
The complexity of infrastructure projects – and the additional complexity of financing them privately – is partly to blame for the state of current policies. But if Congress and the White House took a clear position in favor of using private financing for all federally assisted infrastructure projects wherever possible, state and local officials, as well as private investors, would be encouraged to identify the benefits of P3s, including improved risk management, cost efficiency, and more rapid delivery. But even if none of that were true, a policy promoting private investment to the maximum extent feasible is imperative because traditional public-sector methods of finance are no longer sufficient.
Twenty-five years of declining public infrastructure investment is proof enough of that.
To support a federal mandate for private financing, the federal government should:
- Offer training and advice about infrastructure financing to state and local officials developing infrastructure plans and programs;
- Assist officials with project development and delivery, as well as provide standards for ongoing operations and maintenance;
- Help officials evaluate P3 proposals to ensure value for money;
- Provide advice about crafting concession agreements and other contracts to ensure transparency, strong oversight, and protection for public investment;
- Evaluate the benefits and costs of privately financed infrastructure to determine if there is continued value for money and measurable benefits to transferring risk to the private sector, and
- Create an accessible, updated data repository for worldwide information about privately financed infrastructure to allow an objective review of successes and failures.
Direct federal financial assistance through grants and low-cost financing will continue to be necessary. State and local officials can’t be left to fend for themselves as they tackle the burgeoning need for greater infrastructure investment. The consequences to the economy, and to the citizenry’s mobility and quality of life, are too great for the federal government simply to turn away. Furthermore, there are and will continue to be projects that do not lend themselves to private financing but are too important to the nation’s economy, the efficient movement of interstate commerce, and the national defense to wait for state and local agencies to overcome their financing challenges.
However, a new federal partnership for infrastructure finance would return the federal government to its leading role assisting state and local officials with their efforts. Only then will we be able to address our nation’s ever-expanding need for infrastructure investment.