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Tapping Private Investment For Public Infrastructure

Aerial view of Watson Island
Such transportation projects as the Port of Miami Tunnel, which will provide a direct connection from the port to major highways via Watson Island, have a successful history of being delivered through public-private partnerships. But a new report suggests that many other civic projects—including water and wastewater treatment facilities, schools, and jails—could take advantage of the PPP method if certain barriers are removed. Courtesy of the Port of Miami

A white paper presented recently to leaders in the U.S. Senate identifies the barriers to private investment in public infrastructure and suggests changes.

September 10, 2013—State and local government budgets for infrastructure projects have been severely constrained for years and a sluggish economic recovery makes substantial increases in revenue unlikely in the near future. This has brought the issue of private investment in public infrastructure projects to the forefront.

Public-private partnerships (PPP) are already common in highway projects because state departments of transportation are well versed in the complex cost-benefit analysis needed to discern the benefits of a financing option that often carries higher initial finance costs that are more than offset by risk transfer and greater efficiency in project delivery. Options to combine federal loans with private activity bonds (PAB) also make funding PPP projects attractive to private investors.

Private investment has been slower to enter the fields of water and wastewater treatment, as well as such public buildings as schools, jails, and courthouses. AECOM, with headquarters in Los Angeles, recently released a white paper examining the barriers to entry for greater private investment in public infrastructure projects.

Fostering a Larger Private Sector Role in United States Infrastructure” was presented to the Senate Democratic Steering and Outreach Committee this summer by John M. Dionisio, P.E., Dist.M.ASCE, AECOM’s chairman and chief executive officer. The paper contains a synopsis of the state of PPPs within the transportation, water and wastewater, and public building sectors, and presents legislative changes that would facilitate more private sector investment.

“I think there is that continuing debate within water authorities, within cities—should we pay more in terms of the cost of capital and do a PPP? What are the true benefits that will accrue if we do this? Can we really pay more in terms of financing and get a better value?” says Samara Barend, AECOM’s vice president/North America and strategic development director for public-private partnerships.

“Understanding how to undertake a value-for-money analysis is critical,” says Barend. “Many DOTs have really figured it out. If they are going to move forward with a PPP, they do a value-for-money analysis. The other sectors are just starting to understand how to undertake this and how a value-for-money analysis works. You can’t just undertake a value-for-money analysis by comparing the cost of financing. You must have a competent technical advisor who understands how to price all the risks.”

Barend explains that because school districts, city governments, and water authorities can be less experienced in large infrastructure projects than state DOTs, they need to carefully examine their ability to deliver complex projects and their track record of doing so in the past.

“Major infrastructure building projects for a school district, or a new jail, come along once every 10 or 20 years,” Barend says. “I think the value proposition could be even greater than on the transportation side because there is such a need to have a better handle on risk transfer.”

The paper identifies four myths of PPP for public infrastructure projects: that they diminish public control of assets, lead to job losses, are more expensive, and result in escalating user fees. A well-constructed PPP can avoid all of these concerns, beginning with a carefully constructed concession agreement.

“That is fundamental. What it comes down to is making sure that when you’re on the public side, you have the right advisors,” Barend says. “Hire a really competent technical advisor, legal advisor, and a financial advisor. You need to have firms on board who have actually done this before—firms that understand PPPs: design, build, finance, operate, and maintain. These are complicated structures, and the public sector needs to be just as prepared to enter into a negotiation as the private sector. Otherwise, the project should not go forward.”

The white paper recommends that Congress extend the Transportation Infrastructure Finance and Innovation Act (TIFIA) and PAB programs for transportation. For water infrastructure, the paper urges Congress to create the Water Infrastructure Finance and Innovation Authority (WIFIA) and allow loans from that program to be coupled with PABs.



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