Rebuilding Failing Infrastructure through Public-Private Partnerships

A recent report from the American Society of Civil Engineers states nearly $2.75 trillion will need to be invested in U.S. infrastructure by 2020. With only 60 percent of that amount expected to be funded, federal and state agencies are tasked with finding ways to bridge the $1.1 trillion gap. Public-Private Partnerships (P3s) could be one answer to covering the expected shortfall.

800px-RX-700In construction, a Public-Private Partnership is a project delivery method that involves a contractual agreement between a public agency and private sector entities. When executed properly P3s benefit all parties involved because all risks and responsibilities are identified beforehand and appropriately assigned to those best suited to manage them. A P3 can be as basic as a Design-Build project where the private partner is responsible for design and construction of a project and the public entity provides the funding as well as operation and maintenance once construction is complete. On the far end of the spectrum is the Design-Build-Finance-Operate-Maintain (DBFOM) where the private partner is responsible for all aspects of project delivery while the public entity maintains ownership of the project.

Widely used throughout Europe, Australia and Canada, P3s have been gaining popularity over the past several years as a viable project delivery method. There are 33 states with legislation enabling the use of P3s on certain projects. Pennsylvania became the most recent addition to this number by passing a law last summer to allow P3s on transportation projects. This is an 18 percent increase since the end of 2010. Of the states with enabling legislation, 23 allow unsolicited proposals to be submitted from private entities. This allows the private sector to identify projects that meet public needs and would also provide a favorable return on investment.

A number of factors have led to an increased interest in the use of P3s as an effective alternative to the basic design-bid-build method of contracting. The recent recession has left many public agencies with increased debt that makes it harder to sell bonds to fund infrastructure projects. Lawmakers are hesitant to raise taxes to pay for such projects due to fears of angering the public during tough financial times. Voters are also less likely to approve ballot measures aimed at funding projects through tax increases. Just last year in Georgia residents in 9 out of the 12 economic development regions voted down a one-cent sales tax to fund transportation improvements. Private financing is readily available. A 2011 survey by Sphere Consulting indicates there is more than $250 billion in funding available from private global investments funds. Add to that the $38 billion available from 49 pension funds interested in investing in infrastructure projects.

800px-George_Washington_Bridge_from_New_Jersey_2The two-year authorization bill that was signed into law in July 2012 entitled Moving Ahead for Progress in the 21st Century Act (MAP-21) includes provisions that require the U.S. Department of Transportation to assist state and local agencies that choose to use P3s for highway projects. This includes developing standard P3 transaction model contracts and encouraging their use, compiling best practices for using P3s that protects the interests of the public and state and local agencies and provide technical assistance on proposed P3 projects. MAP-21 also ended the Express Lane Demonstration Pilot Program which required P3 projects to obtain permission from the U.S. DOT to receive Federal funding to construct new Interstate toll lanes.

For every project completed using the P3 delivery method more data is being compiled highlighting the benefits of its implementation. These benefits include faster project completion times, reduction of government costs and smarter allocation of assumed risks. A great example of this is the 95 Express Lanes project currently under construction. The $925 million project was made possible through the Virginia Public-Private Transportation Act of 1995. The Virginia DOT and 95 Express Lanes LLC, a joint venture between Transurban DRIVe and Fluor Virginia, Inc. are the partners on the project. The private partners are responsible for financing, building, operating and maintaining the project for a 76-year concession period. VDOT is only responsible for providing $71 million in funding. The remaining 92 percent of the project cost is being privately funded. The project will cover 29 miles of new lanes and includes the construction of seven new bridges. The total construction time is expected to take 30 months. By comparison the Route 460 Grundy – Phase III project also under construction in Virginia includes widening of a 1.18-mile section of highway and is expected to take 36 months to complete with no private funding involved. Not only is the P3 project, which is much larger, being completed in less time it will also be maintained at no additional cost to the state for the next three-quarters of a century. Not to mention the hundreds of millions of public funding it frees up to be spent on other projects.

As more and more P3 construction projects are successfully completed, interest and implementation will continue to grow. Already this year New Mexico has introduced legislation that would enable P3 projects on the state and local level. In Maryland a new bill that will expand their current legislation enabling P3s to cover roads and public buildings as well as allow unsolicited proposals for P3 projects. The next step in the process of making P3 projects commonplace is getting the rest of the states on board as well as establishing dedicated P3 units in all the states and on a national level to better design, implement and encourage wider adoption of the P3 project delivery method.

 

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