Wednesday, September 13, 2017

The nation’s approach to managing public infrastructure is often inefficient. Best practices, such as life-cycle asset management and preventive maintenance, are rarely a priority. We can, however, unlock billions of dollars of infrastructure funding capacity now trapped in existing assets by improving how we build, operate and finance infrastructure.

While experts discuss the size and urgency of our infrastructure needs, the debates focus on how to pay for new infrastructure.

The Trump administration has identified public-private partnerships (P3) as a primary strategy. A majority of states and D.C. have statutes allowing P3s. Other countries have also adopted P3s as a strategy to develop and replace infrastructure. When implemented properly, the P3 model lowers construction costs, accelerates project delivery, efficiently transfers risk and minimizes life-cycle costs.

Many government officials have experience deploying P3 strategies to lower the cost of existing government operations — and then using those savings to fund new infrastructure. Savings are possible because a large, highly focused manager of roads, airports, harbors, utilities and parking systems has more access to capital, technology and best practices than many public agencies. Using the P3 process for existing government operations can create annually recurring savings to fund new infrastructure projects. These savings streams can support significant new infrastructure when leveraged.

Producing future infrastructure funding streams from P3-generated operating expense savings offers additional benefits. Well-managed P3 projects can deliver improved levels of service and ensure that assets are maintained more effectively. Given the enormous pension liabilities governments face, operating savings are a source of infrastructure funding we cannot ignore.

One example of how to unlock value from a public asset involved the Indiana Toll Road lease. In 2005, Indiana leased its toll road for $3.8 billion. The state then launched Major Moves, a project to restore Indiana’s transportation infrastructure. Ten years later, Indiana had invested $10.8 billion in construction, preserved about 50 percent of its road miles, and repaired a quarter of its 1,400 bridges without additional debt. While Indiana’s toll road project went through bankruptcy, Indiana negotiated numerous protections in its P3 contract and received the lease payment upfront. Thus, the state shielded itself from the bankruptcy process, and toll road operations continued under new private management.

Less well known is the Indianapolis parking meter P3. In that project, the City’s P3-generated net revenue increased by over 1,000 percent — overwhelmingly driven by technology enhancements and operational improvements as contrasted with rate hikes.

P3s have also enjoyed some bipartisan support. In 2016, Scranton, Pennsylvania, sold its sewer utility for $195 million. The sale, to the City’s existing water services provider, generated savings through consolidation and improved management practices.

Opponents cite myriad concerns regarding P3s. A few objections merit discussion.

P3s harm incumbent employees. Well-managed P3 transactions commit to no-layoff policies for incumbent employees, comparable wages and benefits, and ongoing union recognition. It’s possible to capture the benefit of P3s without penalizing staff or unions.

P3s don’t work in small cities. Smaller cities have numerous opportunities to convert P3-generated operational savings into new infrastructure. For example, there are 50,000 public water systems in the U.S. serving small cities. In 2012, Westfield, Indiana, (population 32,066) sold its utility assets to Citizens Energy, a local nonprofit public charitable trust serving as the regional gas utility. The transaction helped pay off Westfield Utilities’ $45 million debt, reduced utility rates from anticipated levels, and generated a $46 million sum that the city invested in new infrastructure. The acquirer offered all employees jobs.

Private capital is more expensive than public debt. The cost of capital is just one factor in determining whether P3s are a viable alternative. Even with higher capital costs, P3s are often more cost-effective because private partners have operating advantages that even the most committed public managers cannot duplicate, including economies of scale, abundant capital and advanced technology.

Many infrastructure projects don’t generate revenue. While local governments can’t deploy P3s for all infrastructure projects, P3s can be an important part of the solution. And, when P3s for current operations generate savings, existing resources can be directed towards infrastructure projects without a revenue stream. Indiana’s Major Moves provides one example.

Finally, the Trump administration should consider whether some elements of Australia’s National Asset Recycling Initiative apply to the U.S. That program provided incentives to jurisdictions that sold or leased assets and reinvested the proceeds to fund infrastructure.

The strategies described above can help cities and states unlock billions of dollars of value trapped in existing operations to help fund new infrastructure.

Charles “Skip” Stitt is a Senior Director at D.C.-based Faegre Baker Daniels where he works with local governments to convert P3-generated operating savings into tomorrow’s infrastructure funding streams. This article was adapted from the longer version of the author’s March 3, 2017, Hudson Institute report, “Infrastructure Spending and Public-Private Partnerships.”

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