Amid the chronic uncertainty surrounding federal funding of highway and bridge projects across the country, contractors and government officials are forging a “next chapter” in the financing of transportation infrastructure: public-private partnerships.
Known in the industry as P3s, ventures that match public construction with private dollars are legal in 34 states and Puerto Rico, according to the Federal Highway Administration, which encourages the model.
“Early involvement of the private sector [in transportation improvements] can bring creativity, efficiency and capital to address complex transportation problems facing state and local governments,” the agency noted on its website.
Alternative to Washington
For cash-strapped state and local governments — and for contractors specializing in road, bridge and transit construction — the arrangement has become a way to skirt lasting delays of sorely needed repairs and expansion caused by political bottlenecks in Washington.
"We're learning across the country at the state and local level that in order to get more infrastructure built, there needs to be different ways to finance and operate projects," Mike Puelle, CEO of Associated General Contractors of New Mexico, told Albuquerque Business First.
Puelle said each public-private partnership is structured differently and may require more transparency, flexibility and competition than an all-private deal.
In a common P3 arrangement, the federal, state or local government may retain ownership of the road or property under construction, while the private contractor invests its own resources in designing and developing the properties. As construction finishes up and the project begins to generate income, the government and the contractor often share the spoils.
Under that model, the P3 transportation deal would involve roads that eventually will produce revenue in the form of tolls or taxes that the private contractor can tap as a source of repayment for its capital investment during construction. Still, the degree of risk and reward varies from project to project, depending on the contract the public and private entities agree to.
The P3 model has also been used for public buildings, water systems and other non-transportation projects — and even for non-construction projects. For example, the Ubly, MI, school system “leases” cooks, janitors and bus drivers from a private company. The system has estimated it saves 9.3% on the cost of each worker it doesn’t employ itself.
Benefits on both sides
A widely cited 2010 study by Deloitte pointed to the benefits that governments can reap from P3s: In the case of construction, the arrangements allow the agency or city to spread the cost of a major project out over the lifetime of a road or bridge, rather than requiring the government to pay for the work at the time of construction. And governments using the system can parse out some of the risks to their private-sector partners instead of taking it all on themselves.
The nonpartisan Mackinac Center for Public Policy noted some additional benefits: The arrangement brings private-sector expertise and management talent to public infrastructure jobs. And in some cases, it can save money.
For contractors, a P3 plan can create jobs and income. AGC Chief Economist Ken Simonson, in analyzing rapid job growth in the construction sector over the past couple of years, has pointed to the “political gridlock” that is holding up permanent federal transportation funding and curtailing spending on infrastructure projects.
The U.S. Senate this week is considering a complicated measure for a multiple-year, multi-billion-dollar infusion of cash into the Highway Trust Fund, which heavily relies on the dwindling revenue collected from the gasoline tax. As cars become more fuel-efficient, however, that income source has become unreliable, leaving the highway fund dry or nearly so on a regular basis.
Richard Cavallaro, CEO of the construction company Skanska USA, has said America’s crumbling infrastructure “is in really sad shape,” but that several of his firm’s large projects, in Florida and Virginia, “would not have happened” without what he calls “the triple-p model.”
Still, the use of P3 has been slow to catch on in the U.S., despite greater successes with the model in Europe, Canada and Australia. Partly in an effort to encourage its use, the U.S. Department of Transportation last year created the Build America Transportation Investment Center to provide government advice on how to use and finance P3 deals for transportation projects.
The effort to jointly fund and build transportation infrastructure has gained steam over the past few years, but public-private collaborations over highway construction are not new.
In 1992, several highway industry organizations and the Federal Highway Administration created a National Policy on the Quality of Highways to encourage public transportation agencies and the private highway industry to collaborate on identifying best practices for quality and continuous improvement. The group delivered its final report in 2011.
The national AGC organization hosts an annual Public-Private Partnership Conference, and the American Road & Transportation Builders Association last week focused its annual meeting on “P3s in Transition: The Next Chapter.”