Public-Private Partnerships: America’s Infrastructure Solution

By Anirban Basu

The lack of public resources available to finance infrastructure is hardly new. Cities and states have been scrambling for years to access private capital. For instance, in 2005, private investors from Australia and Spain paid $1.8 billion to the state of Illinois to lease Interstate 90, also known as the Chicago Skyway. It was one of the most visible public-private partnerships (P3s) in the United States at that time, and an example of how partnerships like this can mitigate or scatter the risks involved in massive infrastructure projects.

Public-private partnerships are long-term contracts whereby private firms provide assets or services for a traditionally public project. While the Chicago Skyway represents an example of private investors managing an already built public road, plenty of P3s have helped design, construct and manage large construction projects for governments at all levels.

These partnerships are becoming more popular in the U.S. in part because they can mitigate risk for both public entities and private investors. State and federal governments are typically in a better position to handle unforeseen issues or problems that typically come with large construction projects. In many cases, these risks are substantial enough to drive away private investors. A successful P3 can help distribute risks such that all parties feel comfortable participating.

But the rationale behind and increasing popularity of P3s may not be associated with risk management as much as the fact that the public sector is running out of resources. The most obvious example may be the federal government. As of this writing, the national debt is in excess of $18.4 trillion, which translates to more than $57,000 per citizen and $154,500 per taxpayer.

States around the nation have been hit by a host of budgetary constraints, including rising outlays for Medicaid. Many suffer from underfunded public pensions and electorates that are wary of tax increases. Municipalities generally have less borrowing power and financial flexibility, and Detroit’s bankruptcy likely caused many urban policymakers to adopt a more conservative approach to managing finances. Yet the need to maintain and augment infrastructure remains.

At the same time, the private sector is awash in capital. With interest rates still so low, investors are searching for opportunities to generate yield. Investing in infrastructure has emerged as a popular option. However, these deals are often complex and associated with long-term contractual obligations for both the public and private sectors.

Necessity is thus the mother of invention. Accordingly, recent evidence indicates that P3s are becoming more widespread in America. In 2012, three state governments and a province in Canada formed a new partnership to promote P3s on the West Coast. California, Oregon, Washington and Canada’s British Columbia formed the West Coast Infrastructure Exchange (WCX), which seeks to attract private investment to address public need. Specifically, managers of the exchange hope to utilize the expertise of business leaders in finance and government to develop innovative methods to absorb private capital into future projects, enhance efficiency and produce cost savings. The city of Seattle has already formed partnerships with IT providers to expand high-speed fiber connections to both residential and commercial customers.

One benefit of public-private partnerships is difficult to quantify, but is apparent. The private sector appears to be much better at reimaging the use of existing assets. As an example, there are instances of students attending classes in a former grocery store in Mesa, Ariz., and two schools relocated to a former shopping mall in Phoenix. This adaptive reuse can save money and bring life to antiquated commercial properties. With their experience in risk management and financial analysis, banks play critical roles in the success of P3s.

Here’s the bottom line. America’s public finances are, generally speaking, in horrid shape. This has produced a deficit in infrastructure investment, which may help explain why labor productivity growth in the U.S. remains frustratingly slow. The emergence of P3s suggests that America has the capacity and creativity to reinvest in itself.

Anirban Basu is chairman and CEO of Sage Policy Group in Baltimore.