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Local Political Uncertainty Hampers Infrastructure Development

By Nikki Rudnick,

Tuesday, November 3, 2015

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Against the sometimes acrimonious backdrop of the congressional debate over transportation funding, one fact has bipartisan agreement: the United States is decades behind the rest of the developed world in the use of public-private partnerships (P3s) to deliver infrastructure projects. Australia, Canada, the United Kingdom, and the European Union, among others, are building roads, rail, water treatment plants, hospitals, and other critical infrastructure with the financial support and project management expertise of the private sector. According to the House Transportation and Infrastructure Committee’s Special Panel on Public-Private Partnerships, governments around the world entered into 158 infrastructure-related P3s between 2008 and October 2013—of which only 15 were in the U.S.

Understanding why private capital has not flowed into infrastructure in the U.S. as it has elsewhere and recommending ways to increase that flow are the goals of the Bipartisan Policy Center’s Executive Council on Infrastructure, a working group of CEOs from the financial, logistics, and services sectors. Over the last several months, the council has dug deeply into the barriers to P3s. While many factors are at play, one issue is consistently highlighted by experts: the high level of political uncertainty surrounding U.S. P3 projects.

At first glance, this may seem counter-intuitive. The U.S. has one of the most stable governmental structures in the world, with democratic processes at work from the federal level to the smallest town. How is it, then, that the U.S. is considered risky business by private investors when it comes to infrastructure projects?

The fact is that virtually every potential P3 project will be affected by a political election sometime during its development. If local or state leadership changes as a result, the entire project could be sent back to the drawing board—or into the trash bin. Two recent P3 projects illustrate this risk: the Purple Line in Maryland, and the Indianapolis justice center.

The Purple Line is a proposed 16-mile light rail line connecting job centers in the Maryland suburbs of Washington, D.C. First proposed in the late 1980s, planning for the new line started and stopped every few years, as new leaders were elected in the state and the county who alternately supported and opposed the project. Finally, in 2006, the state completed the required environmental review, and in February 2014, the project was recommended for $900 million in federal funding—more than 25 years after the Purple Line was first proposed.

As a complex construction project in a congested area, the project seemed well-suited for a P3 approach. The state decided to solicit bids on a design-build-finance-operate-maintain contract, and issued a request for qualifications in fall 2013. Four qualified teams were invited to submit full proposals in July 2014. But in November 2014, newly-elected Governor Larry Hogan announced that the state was delaying a decision on the project, which he considered too expensive. The four bidders waited anxiously for eight months while the governor considered whether to stop the project. Finally, in June 2015, he announced that the project would go forward, but only if $500 million in savings could be found. As a result, the four short-listed teams are now spending more time and money revising their proposals for building and operating the Purple Line. After numerous stops and starts, the Purple Line now appears poised to become a reality.

The Indianapolis justice center was not so lucky. As proposed, the new center would consolidate county jails, courts, and administrative offices into a modern campus with in-house medical facilities. The project was designed to reduce costs for the city by more efficiently housing prisoners and providing centralized food, laundry, medical, and other services.

The procurement process was run by the city under the leadership of Mayor Greg Ballard. In December 2014, after an 18-month procurement process, the city selected a team led by Meridiam Infrastructure* to design, build, finance, operate, and maintain the justice center in exchange for a fixed annual payment from the city. All that was needed to move forward was sign-off from the city council, assumed by many to be a pro forma step. After all, the team had been selected, the project was to be paid for through cost savings rather than new taxes, and everyone agreed that the existing jails and courts needed an upgrade. But in a stunning move last April, a committee of the council voted 6-2 against the project, raising questions about the financial package, effectively killing the project for the foreseeable future. The fact that Ballard had already announced he would not be seeking re-election didn’t isolate the project from local politics. Some observers felt that the fate of the project had less to do with its financial details than with the state of the relationships among the mayor, the council members, and potential mayoral candidates due to face off in November 2015.

In both cases, teams of private companies had spent months preparing bids and millions of their own dollars, only to be sent back to the drawing board (in the case of the Purple Line) or sent packing (in the case of the Indianapolis justice center). This is not an attractive environment for private investors. In other countries, once a request for proposals is published, the underlying project is highly likely to happen—but not so in the United States. No wonder potential investors are shying away.

The checks and balances of our governmental processes are one of the fundamental strengths of the U.S. democratic system. But there are steps that can be taken to reduce political risk without undermining our core values. First and foremost, we need a more thoughtful public dialogue about P3s, particularly at the state and local levels. Opinions about P3s tend toward extremes, from the positive—”P3s provide free money”—to the negative—”P3s give private companies a windfall at taxpayer expense.” The fact is that the costs and benefits of P3s are much more nuanced; they need to be carefully evaluated and explained to all stakeholders early in the project development process.

Another promising approach is the creation of P3 offices at the state or regional levels that can serve as centers of expertise, trusted advisors on proposed projects. An independent entity staffed by technical experts can help by analyzing proposed P3s based on their merits, taking them—at least to some extent—out of the political realm. Virginia’s Office of P3s and the West Coast Infrastructure Exchange, supported by California, Oregon, Washington, and the Canadian province of British Columbia, are designed to serve that role.

Finally, greater standardization in project development—whether P3 or traditional—can help to reduce the time it takes to prepare a bid, and therefore the money at risk should the project fail. Importantly, that also reduces the likelihood that a project will linger for years, battered by the political winds in each election cycle. A more rigorous and transparent process for determining which projects to advance—for example, one that includes an analysis of economic return—would advance only those projects with clear benefits for the region, making it less likely that future political leaders would cancel them.

The bottom line is that the U.S. faces an infrastructure investment need far greater than government can meet on its own. Private capital is available to help. While not appropriate for every project, P3s are one approach for bringing both capital and technical expertise to the table. It’s time for this country to get serious about its infrastructure needs. Reducing the political risk of U.S. P3 projects would be an important step in the right direction.

*Meridiam Infrastructure’s North America chairman, Jane Garvey, serves as a member of BPC’s Executive Council on Infrastructure.