By: R. Richard Geddes, Carter B. Casady
October 26, 2016 | American Enterprise Institute

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Key Points:

  • The United States suffers from an array of endemic infrastructure problems.  When properly executed, public-private partnerships (PPPs) can help address those problems.
  • The United States lags behind other industrialized countries in PPP use.  This may stem from traditional project delivery in the United States, which does not bundle various deliver elements, such as project design, construction, financing, operations and maintenance, together.
  • We recommend creating seven regional PPP units in the United States based on emerging economic megaregions, which will generate a range of benefits, including lowering the costs of completing PPPs, and the wrapping and marketing of similar projects across state lines.

Executive Summary

The use of public-private partnerships (PPPs) is expanding globally. PPP contracts have become the main vehicle to incorporate private-sector skills, resources, and risk management into the delivery of critical infrastructure facilities. PPPs include two key elements: bundling together, in some combination, facility design, construction, operation, maintenance, and financing, along with the meaningful transfer of infrastructure-related risks to private partners. PPPs have been used to deliver network infrastructure such as roads, bridges, tunnels, and water systems, as well as social infrastructure such as schools, hospitals, prisons, and courthouses. Properly designed, executed, and enforced PPPs can create substantial social value. Poorly designed PPPs, however, can generate social costs. Therefore, ensuring careful end-to-end management of the PPP process is crucial to their success.

Countries around the world are addressing those challenges by creating PPP units. PPP units are quasi-governmental entities that assist the public sector with pre-project screening, project prioritization, education, and expert advice. PPP units have been established in Australia, Canada, China, Israel, Japan, Egypt, the United Kingdom, and India, among many other countries. They strive to ensure that infrastructure projects attract private participation while promoting the public interest. Despite their global popularity, PPP units remain relatively understudied and underused in the United States.

PPP units have effectively supported private participation in infrastructure around the world. Because the US lags behind other developed countries in PPP use, the benefits of such units would likely be large if implemented here. In this report, we consider how the United States can effectively use PPP units. Fifty such units would emerge if undertaken at the state level. This would result in many relatively small units with minimal PPP deal flow that fail to capture economies in size and scope. Alternatively, a single large federal PPP unit could create problems of its own. We explore a middle ground: creating seven regional PPP units in conjunction with a federal unit. Modeled roughly on the West Coast Infrastructure Exchange (WCX), these regional PPP units mirror the seven emerging US economic megaregions. Their formation would occur in concert with evolving federal PPP unit efforts.

We then review the set of benefits generated by our proposed regional PPP units. Benefits include greater public-sector understanding of and expertise in PPP project delivery, discovering and implementing global best practices, improved project screening and prioritization, lower transaction costs associated with PPPs, and the allocation of capital to higher-valued projects. Greater reliance on PPP units would refocus US infrastructure investment on asset performance, rigorous project evaluation, and enhanced public-sector procurement capacity. PPP units would also allow state and local governments to improve their infrastructure project development and delivery while effectively managing risk and addressing a set of well-recognized US infrastructure problems.

Introduction

Public-private partnerships (PPPs) are used globally to incorporate private-sector skills, resources, and risk management expertise into various aspects of infrastructure project delivery. PPP has become an expansive term to describe bundling together basic project-delivery functions, including facility design, construction, operation, maintenance, and financing, along with the transfer of significant infrastructure-delivery-related risks to private partners. When properly designed, executed, and enforced, PPPs can create social value through on-time and on-cost delivery, synergies between various bundled project components, innovation in project design, incorporation of global expertise, access to new sources of capital, increased technological adoption, and reliance on life-cycle costing and life-cycle asset maintenance, among other important benefits.1 Conversely, poorly negotiated and executed PPPs can generate substantial social costs. They are frequently renegotiated2 and may be undertaken for political expedience rather than net social benefit.3 Therefore, ensuring careful end-to-end management of the PPP process is crucial.

Credit: Twenty20

Globally, PPPs have emerged as the main contractual vehicle to facilitate private participation in infrastructure. The United States lags behind other developed countries that have successfully used them for decades.4 This includes neighboring North American countries. For example, Canada has attracted about six times the amount of private investment in infrastructure in recent decades via PPPs per dollar of gross domestic product, relative to the United States.

PPPs are an important tool for addressing numerous endemic US infrastructure problems. Although the United States has benefitted from well-designed and well-developed infrastructure systems across sectors for decades, many facilities now suffer from years of deferred maintenance.5 Some systems, including many roads, local streets, bridges, tunnels, airports, and water and wastewater systems, require major renovation and fresh investment. In addition to simply restoring those facilities to a state of good repair, reconstruction today would benefit from an array of innovative technologies, new materials and new designs not available at original construction.

There is widespread agreement that PPPs can add value, and policies have been adopted at both the state and federal levels to encourage their use. Thirty-four US states have adopted PPP-enabling laws designed to create the stable legal and institutional framework necessary to attract the long-term, irreversible investment required to deliver many infrastructure services.6 Moreover, financial instruments, such as private activity bonds (PABs) and Transportation Infrastructure Financing and Innovation Act (TIFIA) loans, were created to encourage private investment in infrastructure. In January 2015, the Obama administration expanded the PAB concept to urge the creation of Qualified Public Infrastructure Bonds (QPIBs). It emphasized those instruments’ value in promoting PPPs, stating that “QPIBs will extend the benefits of municipal bonds to public private partnerships, like partnerships that involve long-term leasing and management contracts, lowering the cost of borrowing and attracting new capital.”7 Additionally, in July 2016, Transportation Secretary Anthony Foxx announced the creation of the Build America Bureau within the US Department of Transportation (USDOT). The new bureau will combine several major PPP-related programs, including TIFIA, the Railroad Rehabilitation & Improvement Financing (RRIF), the PAB program, the Build America Transportation Investment Center, and the new $800 million FASTLANE grant program under one large umbrella.8

Many countries worldwide have also turned to PPP units to facilitate private participation in infrastructure. Although their precise structure varies, PPP units are typically independent governmental or quasi-governmental entities. They usually provide pre-project screening, prioritization, education, support, and expert advice to public-sector project sponsors wishing to use PPPs. In addition to providing education and training to public officials, these units universally strive to ensure that PPP contracts promote the public interest. Dedicated, specialized PPP units are a policy tool that remains relatively understudied and underused in the United States, however.9

PPP units have been used globally to facilitate PPPs and successfully attract risk capital into infrastructure investment. Countries with established units include Australia, Canada, China, Ghana, India, Indonesia, Israel, Japan, Kenya, Malawi, New Zealand, Philippines, Singapore, and the United Kingdom, among many others. More recently, Albania, Egypt, Mozambique, Nigeria, Tanzania, and Turkey have created such units.

To our knowledge, we are the first to explore regional PPP units as a tool to facilitate greater private participation in infrastructure delivery in the United States. We next review the definition and structure of PPP units and consider reasons why many countries—and some US states—have created them. We briefly discuss the benefits of such units and how they might operate more broadly in the United States. We then describe our proposal. We urge the creation of regional PPP units along with a national PPP unit, which may emerge out of the nascent Build America Bureau. We stress that each US state—along with the District of Columbia, Puerto Rico, and perhaps large municipalities—creating its own unit could result in a large number of small PPP units relative to the number of PPPs likely to be concluded in the state. Such small units would not benefit from economies of scale or scope (such as across economic sectors) in PPP unit structure. We instead suggest building on the concept of the multistate WCX.

Each of our proposed regional PPP units includes several economically linked states. States are grouped based on emerging economic megaregions. This is appealing because demand for the large infrastructure projects, that is, where PPP units are most helpful, reflects megaregion economic activity rather than state boundaries. Under our proposal, PPP unit structure reflects the large-scale economic activity that propels demand for major infrastructure projects. Moreover, infrastructure needs would likely vary substantially across US megaregions. For example, the renovation and maintenance of existing facilities may be more important than new design and construction, depending on economic region. PPP unit mission should vary accordingly.

Notes

  1. William Reinhardt, “The Case for Public-Private Partnerships in the US,” Public Works Financing 265 (November 2011), http://www.mcmillan.ca/Files/TMurphy_caseforP3_Infrastructure_0508.pdf; US Department of the Treasury, “Expanding Our Nation’s Infrastructure through Innovative Financing,” September 2014, https://www.treasury.gov/resource-center/economic-policy/Documents/3_Expanding%20our%20Nation’s%20Infrastructure%20through%20Innovative%20Financing.pdf; and US Department of the Treasury, “Expanding the Market for Infrastructure Public-Private Partnerships,” April 22, 2015, https://www.treasury.gov/connect/blog/Pages/Expanding-the-Market-for-Infrastructure-Public-Private-Partnerships-.aspx.
  2. J. Luis Guasch, Granting and Renegotiating Infrastructure Concessions: Doing it Right(Washington, DC: World Bank Publications, 2004).
  3. Eduard Engel, Ronald D. Fischer, and Alexander Galetovic, The Economics of Public-Private Partnerships: A Basic Guide (New York: Cambridge University Press, 2014).
  4. Istrate and Puentes also state that “by any measure, the United States is a laggard in terms of PPP projects. Between 1985 and 2011, there were 377 PPP infrastructure projects funded in the United States, only 9 percent of total nominal costs of infrastructure PPPs around the world.” Emilia Istrate and Robert Puentes, “Moving Forward on Public Private Partnerships: US and International Experience with PPP Units,” Brookings Institution and Rockefeller Foundation, December 2011, 3, https://www.brookings.edu/wp-content/uploads/2016/06/1208_transportation_istrate_puentes.pdf.
  5. We use the term facility here to include network infrastructure such as roads, bridges, and tunnels. While transportation PPPs have attracted substantial attention, we view the PPP approach as broadly applicable. PPPs can be applied to the delivery of water and wastewater treatment systems, airports, and seaports and social infrastructure such as schools, hospitals, prisons, and courthouses. We view PPP units as playing an important role in infrastructure provision across sectors.
  6. R. Richard Geddes and Benjamin L. Wagner, “Why Do US States Adopt Public-Private Partnership Enabling Legislation?” Journal of Urban Economics 78 (November 2013): 30–41.
  7. Brian Chappatta, “Obama Proposes New Muni Bonds for Public-Private Investments,” Bloomberg News, January 16, 2015, http://www.bloomberg.com/news/articles/2015-01-16/obama-proposes-new-muni-bonds-for-public-private-infrastructure.
  8. The Build America Bureau states that “The Bureau serves as the single point of contact and
    coordination for states, municipalities, and project sponsors looking to utilize federal transportation expertise, apply for federal transportation credit programs and explore ways to access private capital in public private partnerships.” See US Department of Transportation, “About the Build American Bureau,” August 30, 2016, https://cms.dot.gov/policy-initiatives/build-america/about.
  9. Studies have focused on PPP units internationally, see World Bank, “Public-Private Partnership Units: Lessons for Their Design and Use in Infrastructure,” World Bank and Public-Private Infrastructure Advisory Facility, 2007, http://documents.worldbank.org/curated/en/220171468332941865/pdf/431390REPLACEM0te0partnership0units.pdf.

AEI.  (2016).  Private participation in US infrastructure: The role of PPP units.  Retrieved from https://www.aei.org/publication/private-participation-in-us-infrastructure-the-role-of-ppp-units/

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