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A Way Forward for American Infrastructure

July 09, 2013 J

By Steven Russell

Earlier this year, the American Society of Civil Engineers released its annual Report Card for America’s Infrastructure. America’s grade: D+. The report suggests that a whopping $3.6 trillion in investment is needed just to keep the system functional by 2020. With ballooning debts and budget battles raging in governments across the country, it’s hard to imagine America ever achieving that target. One step the country could take to solve this problem is to harness the resources and expertise of the private sector for public projects—a method which has been successful in places like Canada, England, and Australia. Public-private partnerships, as these relationships are called, cut costs and improve the efficiency of public projects, making investment in infrastructure more attractive to taxpayers and governments alike.

Public-private partnerships (PPPs) are defined as any kind of contractual agreement between a government agency and a private company for a medium-to-long period of time. For example, a PPP could involve a state government and a private company jointly financing the construction of a highway. In return for its investment, the private company is then allowed to collect tolls from cars that use the road. While the number of PPP projects around the world has increased dramatically, the United States still lags behind other countries in harnessing their potential. Currently, PPPs only account for one percent of American public spending on infrastructure. For comparison, the figure is closer to 20% in Canada. Despite America’s limited relationship with PPPs, the partnerships are growing more popular every year. Since the Great Recession, America’s use of PPPs has increased fivefold. Even President Obama highlighted PPPs as a useful way to combat America’s infrastructure woes.

What’s so great about PPPs? First, PPPs tend to be more efficient than conventional government projects. For example, a study of 12 North American PPPs found that the partnerships on average finished projects ahead of schedule and only 0.81% over-budget. Conventional government projects, on the other hand, were generally four percent behind schedule and 13% over-budget. In the UK and Australia, which have more experience with PPPs, the contrast was even more dramatic. PPPs, on average, were one percent ahead of schedule without going over budget at all. Conventional projects, on the other hand, were 17% behind schedule and a staggering 47% over budget. Seeking a profit, the private partners in PPPs tend to make projects more efficient than if the government handled them on its own.

PPPs also help governments reduce spending. In the United Kingdom, PPPs account for over 30% of government financing on public projects. Every dollar (or pound) provided by the private sector is one less dollar that has to be spent by the government, and thus, the taxpayer. If the project fails, the private company also bears some of the loss, preventing the government from losing as much money. Certain types of “leasing” PPPs have also help governments fix short-term debt issues. For example, Indiana leased the Indiana Toll Road to a private company for 75 years in exchange $3.8 billion. Although Indiana no longer receives toll revenue from the road, it was able to reverse its transportation budget deficit and make significant infrastructure investments elsewhere.

A common criticism of PPPs is that they raise the price of using infrastructure, like roads, for everyone. Indeed, after the Indiana Toll Road was leased to a private company, tolls nearly doubled (they hadn’t been raised in nearly 20 years) and were tied to inflation. However, experts have pointed out a number of ways that PPP projects benefit low-income users even in the face of higher tolls. For one, new roads constructed by PPPs reduce congestion on other routes to the same destination. Second, roads managed by PPPs are generally much safer and better maintained than those purely managed by the government. And third, the use of PPPs frees up money for the government to use on other infrastructure projects, benefitting everyone in the process. Despite the increased rates, PPPs ultimately give Americans more transportation options and better quality infrastructure.

PPPs won’t completely solve America’s infrastructure woes on their own. Nor do PPPs function as perfectly in reality as they do in theory. But as governments around the world continue to work more closely with the private sector in these partnerships, PPPs should become more effective over time. Either way, for American governments strapped for cash, PPPs provide a good place to start attacking America’s daunting infrastructure problems.

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