President Obama’s budget proposal this week includes $478 billion for infrastructure over the next six years, a one-third increase over current levels.
Most of the media attention has focused on the political tug-of-war over taxes and spending, but the bigger story here is the untapped opportunity for a new investment alliance between private business and the public sector.
Public-private infrastructure partnerships have soared in Europe over the past 20 years, but they are still scarce in the United States. In the United Kingdom, according to the Brookings Institution’s Hamilton Project, PPP’s accounted for 32 percent of infrastructure investment between 2001 and 2006. By contrast, PPP’s have accounted for only 2 percent of US infrastructure investment since 2007.Embed from Getty Images
President Obama’s new budget plan, released this week, calls for a Qualified Public Infrastructure Bond that would give public-private partnerships access to the low interest rates and federal tax benefits enjoyed by municipal bonds.
The idea is similar to an existing program, the Private Activity Bond, that has been used to finance more than $10 billion in roads, tunnels, and bridges. But the new bond wouldn’t have a dollar cap (the PAB is limited to $15 billion) and it would be available for a wider array of public projects – from airports and mass transit to solid waste disposal and water-treatment facilities.
By all accounts, US public infrastructure is sorely in need of fresh investment. As Laura Tyson argued last August, US investment in highways, bridges, mass transit and other public infrastructure has fallen to less than 2 percent of GDP – the lowest level in at least 20 years. The American Society of Civil Engineers gives a grade of D+ to US infrastructure, and it estimates that it would take $1.7 trillion in spending through 2020 to reach a passing grade.
Public-private partnerships in infrastructure come in many variants, but they usually entail a bargain between government agencies and private investors. The government identifies the project, based on a rigorous analysis of projected costs and revenues in the decades to come. Private investors provide much of the funding for construction and maintenance, in return for a stream of revenue from user fees or future taxes over a specified number of years. Ideally, PPP’s can tap into the same low-cost financing available to state and local governments.
Public-private partnerships hold an obvious allure for cash-strapped governments. But as the Hamilton Project cautioned in a 2011 report, PPP’s are not free. They can still involve wasteful spending, especially if the investors are to be paid back through future taxes rather than through user fees. The Hamilton report outlines a list of best practices, gleaned from the experiences in other nations, for selecting projects, structuring the deals and properly over-seeing them to completion.
One crucial element of success is a coherent legal framework that is uniform across states. In a report last August, President Obama’s Infrastructure Finance Working Group cautioned that one of the major obstacles to PPP’s in the United States is “a patchwork of legal environments and procurement practices across states…[that] increases uncertainty and transaction costs.”
Eighteen states currently have broad enabling legislation that allows public agencies to enter into PPP’s, but that leaves two-thirds of the states with either no enabling laws or very limited ones. And because the rules vary widely, investors can’t transfer knowledge from one state to another.
That said, the untapped financial opportunity is substantial. The Bank of International Settlements, based in Basel, argued in a recent paper that there is substantial pent-up appetite for PPP’s among global institutional investors, from pension funds and insurance companies to sovereign wealth funds. In fact, the California Public Employee Retirement System, or CALPERS, recently committed $485 million to a global infrastructure investment partnership.
Supporters argue that PPP’s offer more than just a source of capital. Because private investors are putting their own money on the line, they have a big incentive to make sure their projects come in on budget and actually deliver the kind of value that ultimately produces a return on investment.
All in all, PPP’s offer a unique juncture between business and social impact. In principle, they could easily appeal to Republicans in Congress. Could this be an opportunity for bipartisan collaboration?