How Public-Private Partnerships Can Get America Moving Again

By / 5.29.2014

Nowhere is America’s chronic underinvestment in infrastructure more visible than in the nation’s transportation systems, which present a sorry picture of crumbling bridges, congested freeways, shabby airports, crammed transit and slow freight and passenger trains. We strive to be a first-class economy, but we cannot achieve that status with second-rate infrastructure. To put America back on a high-growth path, we must invest in repairing and upgrading our nation’s transport systems.

Today’s political landscape presents an opportune moment for Democrats and Republicans to act on addressing our deficient infrastructure. The Federal Highway Trust Fund, the main funding program for highways, is set to go broke at the end of this fiscal year without Congressional intervention. The Department of Transportation is also up for reauthorization with the expiration of the Moving Ahead for Progress in the 21st Century Act (MAP-21), which accounts for most federal transportation infrastructure financing programs. Providing financing certainty through long-term legislative commitments today means fewer project delays or cancellations tomorrow.

By making investment in infrastructure a priority now, and not letting partisan politics dictate the conversation, we can sieze this opportunity to enhance our future competitiveness. Over the last decade, public funding for transport infrastructure has been falling at all levels of government. This is true in recent years, even though interest rates are at historic lows.

The question, then, is how to get the biggest bang for the federal buck. Given the reality of continued fiscal constraints, it is increasingly clear that we cannot rely solely on more government spending. Instead, policymakers must also embrace a new model of infrastructure finance, one that creatively engages private resources to meet our infrastructure investment needs.
This report shows how public-private partnerships (PPPs) already have begun to break the traditional government monopoly on infrastructure spending. PPPs, also known as “P3s” and, increasingly as “performance-based contracting,” are a form of project finance that combines long-term public and private financing. Over the last few years, cities and states across the country have embarked on ambitious PPP projects to get America moving again, from the Port of Miami tunnel project, to modernizing Gary airport in Indiana, to creating the West Coast Infrastructure Exchange. While this report focuses on transportation infrastructure, the proposals put forward certainly apply to other forms of infrastructure, including water, energy, telecommunications, and social infrastructure such as schools, hospitals, and courthouses.

PPPs have several key advantages over traditional public funding. First, using public dollars to leverage private investment means lower burdens on taxpayers and less borrowing to maintain and improve infrastructure. Second, private businesses, who need to be assured a decent rate of return on their investment, bring market discipline to bear on both the selection and the management of projects. Risk-sharing with the private sector encourages innovation in project design, and cost-saving techniques in project construction and operation. Third, depoliticizing decisions about where to invest scarce infrastructure dollars can boost public confidence that their tax dollars aren’t being wasted on pork-barrel projects.

For all these reasons, PPPs have been growing, but their potential is still much greater. Skepticism among private investors about governments’ grasp of basic principles of project finance are limiting widespread use, as is the fact that appropriators often are reluctant to give up the power to steer public infrastructure spending toward favored interests and communities. Further, some political activists object in principle to private sector involvement in providing what they see as ineluctably “public goods,” whether they are roads, prisons, water systems or schools.

Perhaps more important, however, is the lack of understanding, especially at the state and local level, of how PPPs work and how to structure deals that generate market returns while also serving public needs. Only a handful of states make extensive use of PPPs, and 26 states have no experience at all with them.  And 17 states have yet to pass laws enabling public-private projects.

This report argues for policies that educate decision-makers about project finance, encourage the standardization of processes and documents, and promote regional collaboration. Washington, as the main provider of infrastructure funding, has an especially critical role to play. As such, this report also underscores three urgent priorities for federal policymakers:

  • First, Congress should pass legislation that enables states to issue more tax-exempt private activity bonds for PPP infrastructure projects, and expand their scope beyond surface transportation. The transportation infrastructure carve-out for private activity bonds in the tax code was authorized by Congress in 2006, but the $15 billion ceiling is expected to be reached in the near future.
  • Second, Congress should encourage foreign investors to join in projects aimed at rebuilding America’s economically vital infrastructure. This will require reforms to the Foreign Investment in Real Property Tax Act that currently sets the tax rate for the majority foreign of owners at 35 percent on all capital gains, much higher than the rate for domestic investors. President Obama has previously advocated such reforms, explicitly for the purpose of increasing foreign investment in America’s infrastructure.
  • Third, Congress should set up a national financing facility or fund to provide money and project finance expertise to infrastructure projects of national significance. Both the House and Senate currently have proposals to create an American Infrastructure Fund. But if partisan paralysis prevents Congress from acting on such proposals, PPI proposes a fallback—to expand and work within the Transportation Infrastructure Finance and Innovation Act (TIFIA) program, a de facto infrastructure facility within the Department of Transportation.

Download the entire memo.