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Bridging the infrastructure gap needs more than a $1 trillion

One trillion dollars is a good start, but it will take more than that to fix the U.S. infrastructure problem. Public-Private Partnerships hold part of the solution.

The current administration’s promise of a one-trillion dollar investment in renewing and rebuilding America’s infrastructure is encouraging, but it may fall short of what’s needed.

According to the American Society of Civil Engineers, the United States needs to spend $1 trillion on transportation, $177 billion on electricity, $105 billion on water and wastewater, $42 billion on airports and $15 billion on waterways. That is a grand total of $1.3 trillion.

A shortfall of $339 billion that does not take into account the tens of billions needed for other types of infrastructure such as, public services facilities and government buildings.

The federal gas tax used to be able to fund transportation infrastructure spending, but the last time that tax rate increased was in 1993. Construction costs – and the number of vehicles on the road – have risen considerably over the past 25 years. Debates about increasing the gas tax come and go, but it still stands at 18.4%, notwithstanding recent news stories about another potential increase. Drivers in some states are paying more as states have raised gas taxes; in at least four of these states, the increased revenue was earmarked for infrastructure improvements.[1]

As of January 2017, 37 states have found another way to increase funding for infrastructure. They have passed some form of enabling legislation for Public-Private Partnerships, or P3s.[2] The breakdown is as follows:

24 states have approved P3s for horizontal (transportation) and vertical (social) infrastructure to some degree); 11 (and Puerto Rico) for vertical only to some degree, and 2 for horizontal to some degree.

 

HOW P3s HELP INCREASE FUNDING FOR INFRASTRUCTURE

In a P3, private sector funders provide the bulk of investment in a project, with consortia of contractors and operations and maintenance companies bidding for the work. These consortia, which can put up several billion dollars for a large road or airport project, have to recover their investment and make a profit. They do this by charging for the use of the infrastructure through tolls for roads or bridges, or through having the infrastructure available for use and being paid by the authority that is responsible for it.

A consortium typically signs an agreement to maintain and operate the infrastructure for anywhere between 30 and 50 years. At the end of the term, the facility/asset is returned to the authority in a well-maintained condition. While the consortium makes money, the infrastructure is maintained for the full term of the agreement, therefore the particular infrastructure asset isn’t a drain on federal or state resources.

This, in turn, means that the money the authority would have otherwise spent to build and maintain that asset, is now available to invest in other infrastructure or building new assets.

 

CANADA’S EXPERIENCE WITH P3s BODES WELL FOR THE UNITED STATES

Canada has also faced a substantial challenge in renewing its infrastructure. With strong Canadian federal government support, its provinces embraced the use of private capital to improve public infrastructure, with each province establishing its own form of P3. Over the past 25 years, Canada has become the world’s most prolific P3 market, with 200 deals that have reached financial close – and total agreement costs valued at $110 billion.[3]

Most of the deals – 166 – have been since 2004. By contrast, from 2005 to 2014, there were 48 P3 deals valued at US$60.7 billion in the United States.[4] In 2015 alone, Canada closed 28 P3 deals valued at more than CA$15 billion. The snowballing of deal flow in Canada has much to do with the steady evolution of innovations in the Canadian P3 market in planning, risk transfer and a focus on whole life treatment of the asset.

One of the most significant benefits of the Canadian P3 model is that it has been shown to reduce procurement times by up to 50%.[5]

The success of P3s in Canada has led the Canadian federal government to make the model a key part of the strategy for funding the country’s total infrastructure investments, which will reach an estimated CA$180 billion between 2016 and 2028. While Canada had early success with social infrastructure projects before expanding into transportation, the U.S. experience has been the opposite, with an initial focus on roads, highways and bridges, and a steady momentum that now includes airports, transit, civic buildings and major academic institutions.

 

HARNESSING OUR LEARNED LESSONS FOR THE BENEFIT OF THE UNITED STATES

BTY has been a part of the Canadian P3 market’s evolution since 2004, and helped develop the best practices for the Technical Advisory and Independent Certification roles in the model. The firm has worked on some 170 P3 projects over the past 13 years in every sector: transit, highway and bridge, justice, emergency services, telecommunications, energy, healthcare, education, water and wastewater, and security.

Our expertise in advising on P3s was recognized in Q1 2017, when BTY was ranked the #1 Technical Advisor in North America, and ranked #3 globally.[6]

BTY’s current P3 mandates include the CA$5.3 billion Eglinton Crosstown LRT, the largest transit P3 on the continent, the US$4 billion LaGuardia Airport Terminal B Project, the largest aviation P3 in the market, and the $1.59 billion University of California Merced Campus Expansion, the first deal of its kind for social infrastructure in the U.S. education sector.

The P3 model has proven its value is channeling private capital into improving public infrastructure – and reducing reliance on government funding. The question is can the U.S. use it effectively to reduce the infrastructure gap, which will continue to grow as the population increases – and along with its demand to renew – and build new – infrastructure.

 

Sources:

[1] Forbes, Trump Considers Gas Tax to Pay For Infrastructure

[2] The National Council for Public-Private Partnerships, State Legislation

[3] The Canadian Council for Public-Private Partnerships, Evaluations of Canadian P3 Projects Have Missed a Significant Value 

[4] Kennedy School Review, US Infrastructure Public-Private Partnerships: Ready for Takeoff?

[5] The Conference Board of Canada, Canada as a Global Leader: Delivering Value through Public-Private Partnerships at Home and Abroad

[6] InfraDeals League Tables Q1 2017