With a clear rule of law, a stable regulatory environment, and transparent democratic processes, the United States would appear to be an ideal market for private investment to help address our well-documented infrastructure needs. So why have public-private partnerships (P3s) been so slow to develop here? In part, the answer lies in our liquid and robust tax-exempt debt market, which has financed trillions of dollars of infrastructure at very low cost. Tax-exempt debt has been so widely available, in fact, that for many years it virtually eliminated any incentive for state and local governments to explore other options for delivering infrastructure. However, since the recession of 2008, states and cities have become more cautious about taking on debt in part due to the slow recovery of sales, property, and income tax revenues by which they would pay off the bonds. Further, state and local partners are much more aware of the daunting scope of their infrastructure needs. Bridge failures, broken dams, and contaminated water have highlighted the urgent need for a new approach. As a result, more communities are looking to the private sector for answers.
For P3s to reach their full potential in the United States, funding shortfalls must be addressed at both the federal and state levels, and broad changes must be made to the way infrastructure projects are developed.
The new PortMiami Tunnel, Seattle’s Tolt Water Treatment Facility, and Long Beach’s new courthouse, for example, were all completed using a P3 approach. In Pennsylvania, 558 structurally deficient bridges are being rebuilt faster and at less cost than the state could have done in a traditional procurement. Seeing the benefits of these approaches and facing their own fiscal constraints, numerous other states and localities are now exploring P3s of their own.
But decades of institutional culture cannot be changed overnight. Even as P3s are attracting increasing interest – including from the new administration – there are several key barriers that must be addressed before they can be widely used:
- Funding: Like conventional projects, P3s require revenue to pay back financing, which may come from a project-related source like tolls or user fees, or from public sources like sales or property taxes. Neither approach is politically popular, and lack of sufficient funding can be a major barrier for infrastructure projects, P3s included.
- Political uncertainty: Concern about public opposition and lack of understanding reduce the likelihood that P3s will receive the political support necessary to advance, dissuading private investors from committing funds. Many states and localities lack the legal authority to even consider P3s.
- Permitting risk: The fear that a project will face months or years of delay due to an uncertain and inefficient permitting process is a significant barrier for investors.
- Lack of a project pipeline: P3s have long been considered one-offs, outside the mainstream of infrastructure programs. Private investors are reluctant to spend the time and money to work in a state or city unless there will be long-term opportunities.
For P3s to reach their full potential in the United States, funding shortfalls must be addressed at both the federal and state levels, and broad changes must be made to the way infrastructure projects are developed. Risks, costs, and benefits must be accounted for across a project’s full life-cycle; otherwise, long-term costs may be masked by short-term savings, leading to inefficient procurement and lower-quality projects. Permitting processes should be simplified and accelerated. Unlike in other countries, the American public is skeptical of private ownership or management of public infrastructure; therefore, frequent public communication about project benefits is a must. Federal and state infrastructure programs should incentivize these changes with technical support and targeted grants. Ultimately, this approach will help the United States open its infrastructure market for private investment while ensuring that the public receives long-lasting, high-performing infrastructure.