How private investment is saving America’s infrastructure

Public-private partnerships ("P3s") are an increasingly attractive way for cash-strapped state and local governments to fund needed infrastructure.

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New partnerships with the private sector could be key to solving America’s infrastructure crisis.
On August 3, 2014, the first cars drove the new and much-needed Port of Miami Tunnel. The project broke ground in 2010 and was intended to ease congestion in downtown Miami.

What set this project apart from others is the way it was financed – through a so-called “public-private partnership” (P3) –  in which a consortium of private investors provide financing for projects and are repaid by a state or local government over time.

Traditionally, infrastructure projects have been largely funded by the federal government through grants to states, which in turn pass funding on to localities. Until recently, P3s have largely stayed in the background, accounting for just a small fraction of total infrastructure financing.

But projects like the Port of Miami Tunnel are likely to be more commonplace as cash-strapped governments look for other resources to replace crumbling infrastructure.

Increasingly, federal funding for infrastructure has not kept pace with demand. Although few disagree maintaining our nation’s roads, bridges, and highways is important, over the last decade, public spending on America’s infrastructure has fallen significantly. For example, PPI research shows spending by state and local governments on roads and highways fell by 20 percent since 2005, adjusting for inflation. Meanwhile, the private sector accounted for less than 1 percent of total highway and street spending in 2013.

The lack of available federal funding, particularly for highways and roads, came to a head in July. After a long and fruitless battle, over funding resources and raising the gas tax, it looked as though the Highway Trust Fund would go broke. Ongoing major highway projects, for example in Ohio, threatened to cut jobs or get put on ice. It was only a 10-month stop-gap funding fix, funded by expected future corporate tax revenue, that ultimately spared the long-running federal program – for now.

The Obama Administration has also made it known in recent months that state and local governments need to look elsewhere for infrastructure financing. The Obama Administration’s recent Build America Investment Initiative, launched in July, emphasizes greater private sector engagement in infrastructure finance as the path forward.

All of this funding uncertainty makes it difficult, if not impossible, for states to plan long-term infrastructure projects. At the same time, the need for infrastructure investment has never been greater: the American Society for Civil Engineers projects a funding deficit of almost $1 trillion for needed infrastructure projects by 2020.

These pressures, together with recent innovations in the P3 model, make P3s an increasingly attractive model. While the promise of P3s to finance infrastructure is not new – the Department of Transportation’s Transportation Infrastructure Finance and Innovation Act (TIFIA) program has been a great success in spurring P3s for roads and highways since 1998 – recent years have seen an emergence of long-term private sector participation in P3s.

For example, Virginia, Texas, Ohio, and Florida have all used the P3 model successfully, with additional projects in the pipeline. Moreover, regional partnerships like the West Coast Infrastructure Exchange, and newly proposed Mid-Atlantic Infrastructure Exchange, provide a promising model for other regions to follow.

The long-term private risk-sharing evolution of the P3 model promotes efficiencies and cost-saving in each project phase, and instills a market discipline on projects that makes them more likely to succeed. Public confidence for public infrastructure spending will be boosted by successful projects that come in on budget, in a time where all public spending is under intense scrutiny.

Still, P3 financing remains small relative to annual infrastructure spending, even after being expanded during the Great Recession.

Realizing the full potential of P3s as a successful viable alternative to traditional infrastructure finance requires having the right policies in place to encourage the continued development and adoption of P3s, with a particular focus on what works.

On the federal level, this means ensuring the long-term certainty of public financing component. If the idea of an independent “Infrastructure Bank” is out of the question for Congress, then Congress should expand TIFIA within the Department of Transportation. States should also have the ability to issue tax-exempt private activity bonds as needed, and existing tax barriers to potential foreign investment in U.S. infrastructure should be reduced.

On the state level, the first step is to ensure there is support for P3s by state legislators. Seventeen states still do not have enabling legislation for P3-financed projects, and even more states that do don’t use P3s. States must also have access to the expertise they need to become comfortable using the P3 model, which includes creating the “knowledge centers” or “centers of expertise” as proposed by President Obama, be it at the federal, regional, or state level. Finally, states need to use success stories to learn best practices in project and contract design, standardize documents to ease private sector participation, and ensure complete transparency for public buy-in.

To date, P3s have mostly been used for surface transport and power systems. But with the right policy framework in place, the use of P3s could easily grow and even expand to water and social infrastructure. That will solidify the rise of P3s as the model for infrastructure finance in the 21st century – and in a very positive way.

Diana G. Carew is an Economist and Director of the Young American Prosperity Project at the Progressive Policy Institute.