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A Path to Public Private Partnerships for Infrastructure

Mulholland Drive bridge being demolished

Often when making the case for U.S. infrastructure investment, someone will point overseas to Europe or Asia and wonder aloud why other countries have world-class, economy-shaping infrastructure and the United States doesn’t. There are obviously many reasons but a key problem is that, unlike other nations, the United States is still over-reliant on the public sector for delivering infrastructure projects.

Today, those public resources are strained, especially for transportation projects. On the federal level, the Congressional Budget Office estimates that the highway trust fund will be unable to meet obligations sometime next summer, if not sooner. And while money from the American Recovery and Reinvestment Act provided roughly $335 billion to support the physical infrastructure, those funds are largely spent with little prospect for additional dollars anytime soon.

State funding sources are also shrinking. In addition to the 21 states that saw transportation program cuts in fiscal year 2010, more are proposed for the next fiscal year. While states have spent billions on energy efficiency and renewable energy programs over the decade, these programs are also under budgetary microscopes and short term prospects for funding are strained. Other state sources--such as revenue from sales taxes--that are earmarked for infrastructure projects are also in decline due to the recession.

So what to do? To paraphrase the physicist Ernest Rutherford, “We’ve run out of money; it’s time to start thinking.” The kind of economy shaping next generation infrastructure we need will require a new way to deliver projects.

In an ideal world, the federal government would set a strong platform for transformative investments by establishing new vehicles for infrastructure finance and by radically overhauling the regulatory and administrative barriers that stifle innovation and execution. But the likelihood of meaningful federal action in today’s environment of polarized partisanship is slim. So we must create a new norm and practice of transformative investments the hard way--from the ground up, despite political odds and fiscal obstacles.

For one, the United States needs to take better advantage of and facilitate the use of public/private partnerships (PPPs) for investments. A poll by the financial advisory firm Lazard shows strong willingness for public entities to consider private investment in infrastructure. However, our recent Brookings report shows that the United States lags in this area. In the quarter-century from 1985 and 2011, there were 377 PPPs in the U.S., a scant 9 percent of total amount of infrastructure PPPs around the world.

The problem is not just the unwillingness to consider these arrangements. Increasingly, it seems to be an institutional challenge as public entities are ill-equipped to execute such deals while at the same time fully protecting the public interest. As a result, nothing gets done.

Today the private sector is seeking more legislative certainty prior to bidding on projects and has little appetite for negotiating transactions that are subject to legislative or other major political approvals. While 31 states have PPP enabling legislation for highways, roads and bridges, and 21 for transit projects, the wide differences between them makes it time-consuming and costly for private partners wishing to engage in PPPs in multiple states to handle the different procurement and management processes.

The United States should learn from the experiences of the 31 other countries that have established specialized units throughout various governmental agencies to assist with the expanding opportunities for PPPs. These so‐called PPP Units fulfill different functions such as quality control, policy coordination, and promotion. In the U.S., the primary purpose would be to provide technical, non‐binding information, assistance and advice to states and metropolitan governments.

But while the federal government can certainly be helpful, the real action is going to come from the states. Today three states (Virginia, California, and Michigan) have established dedicated PPP units. While too early to tell if they are successful, states are rapidly learning that they need to build capacity for development of PPP projects. We learned at a recent Brookings event that private sector firms and investors focus on what they call “can-do” states. Those are not just the ones where they can work unfettered, but those where they know the public policy risk is minimized by a fruitful legislative and institutional environment. They need to know they’ll get a fair shake and deals won’t be scuttled at the last moment.

Without a doubt, public/private partnerships are not a silver bullet that will solve all our infrastructure finance and delivery woes. Yes, we understand that PPPs do not represent free money and someone always pays. And certainly there is potential for deals to go wrong and for American taxpayers to be left holding the bag.

But these problems are solvable. During this sluggish economic recovery we need new ways to deliver the right kinds of projects. Inaction is no longer an option. The hope is that more states, cities, and metro areas will act and, ideally, the federal government will follow.