In a recently published new perspective, “Public Equity to Match Private Investment in Infrastructure,” the Mineta Transportation Institute (MTI) pitched a unique means of uniting both public and private resources to advance infrastructure: a federal grant program to match private investment.
This collaborative effort could enable critical projects by allowing public sponsors to set minimum construction and operating standards, while allowing developers to evaluate proposals purely on the costs of private investment. In the end, it would be American infrastructure that wins with such an arrangement, as solo efforts are doomed to fail, argued author Karen Hedlund, former Deputy Administrator of the U.S. Department of Transportation’s Federal Railroad Administration and a lawyer with years invested in transportation matters.
“Instead, together they can build new and modern infrastructure and revive America’s old highways, ports, rail, and transit to bring the nation’s transportation systems into the 21st century,” Hedlund said.
The matter is easier said than done. While such public-private partnerships, or P3s, have been around for decades, the clash between private and public advocates remains. Private sector advocates often point to the funds such partnerships make possible, while their opponents argue against the potential for high costs and profit-over-quality models.
In an interview with Transportation Today, Hedlund admitted to some frustration with these views. Over the course of her work, she has cooperated with Republicans and Democrats from multiple administrations. What she has learned is that, like anything, P3s can go wrong – but if they’re handled right, they allow for designs to be pursued at prices unattainable with standard contracting.
“I’m very frustrated today by those people who sometimes get up and say, ‘Let the private sector do it,’ Hedlund said. “That, for a lot of big projects, simply isn’t possible. So I wrote this piece to try and address both sides and suggest a way to bring both private money and public money to the table in the same project. It’s got to be done carefully, the contracts have to be written very carefully, the procurements should be competitive, and one way of doing this – as has been done in Europe – is you make the parties bid. Whoever has the best ideas and qualifications and is asking for the least public investment wins out.”
To work, competition needs to be at the front end of discussions, Hedlund said. In early P3s this wasn’t always the case, and it didn’t work particularly well for making a truly competitive process. At the same time, by getting the public sector involved, public values must be taken into consideration – and enforced – and contracts put into place that assure things like equity, job access, and projects that don’t bulldoze low-income neighborhoods.
Hedlund also noted that the limitation of private investment is that equity and debt financings require a reliable source of repayment, which usually means raised user fees and related real estate development.
“The harsh reality is that, with a few exceptions…the largest, most critical projects costing in the billions of dollars, cannot rely on project revenues alone to support the entire capital cost,” Hedlund wrote. “There is always a point at which tolls, fares or other user fees cannot be increased without reducing overall returns.”
Take rail projects, for example. They tend to be high-tech efforts, and those who will benefit from them want to see efficient designs and operations on display. With very few exceptions, Hedlund said, the revenues that could foreseeably be produced by such projects might not be sufficient to fund the entire capital cost, and the private sector wants to see returns. If revenue isn’t going to make it alone, but public money is there to offset capital costs, a match of public and private money is more likely.
Furthermore, “The public sector may not design it, but they have to set performance standards and penalties for failure to meet them,” Hedlund said. Finding ways for the parties to work together to reduce risks is also important, she added.
Perhaps this could take the form of operating subsidies provided by the public sector to allow greater use by low-income users. Perhaps cooperation could lead to progress on a slew of projects such as the California High-Speed Rail Project now under construction or the advancement of express rail connectors from city centers to international airports. Hedlund thinks it’s possible, and that the results could be more efficient than ever – but many issues remain to be addressed.