American infrastructure is in crisis. Many of America’s highways, ports, airports, bridges, and rail lines have become outdated or are in a state of disrepair. Estimates suggest trillions of dollars are needed to modernize American infrastructure in order for the US to remain competitive. Last year’s American Recovery and Reinvestment Act addressed the lack of resources for infrastructure redevelopment by allotting $126 billion to it. Though a good start, that investment is far from sufficient to overcome the fiscal constraints at the state and local government levels and to address the country’s critical infrastructure gaps. And that is why, in part, governments are turning to public-private partnership (PPP) models as one alternative approach for the funding of the redevelopment of infrastructure.1
Infrastructure is ripe for private investment, and government officials are giving the green light for such funding. Two years ago, Governors Edward Rendell of Pennsylvania and Arnold Schwarzenegger of California along with New York Mayor Michael Bloomberg formed a coalition called Building America’s Future, whose aim is to serve as an advocacy group for rebuilding America’s infrastructure via alternative methods. In addition, some 25 US states have enacted PPP-enabling legislation. For example, Delaware enacted legislation that allows local, state, or federal funds to be combined with private-sector funds.
The benefits of PPPs can be compelling. Public-private partnerships don’t simply provide much-needed capital for projects; they can also serve as models of efficiency and reliability and be champions of high levels of accountability and transparency. In addition, PPPs can be cost-effective and time efficient. For example, the preferred bidder’s proposal for the Denver Regional Transportation District’s Eagle PPP Project was approximately $300 million lower than the district’s budget estimate, and it also proposed to open the rail lines 11 months earlier than anticipated.
But public-private partnerships aren’t applicable to all capital projects. PPPs are suited for large, complex projects that have the capacity for meaningful risk allocation to the private sector as well as the potential for the private sector to earn a fair return on its investment. PPPs enable the public- and private-sector partners to develop a unique contracting structure that best fits the project as well as the skills and objectives of each partner.
Ultimately, PPPs, when structured correctly, can produce win-win situations that benefit both the public sector and private sector through a combination of public-sector governance and private-sector capital and efficiency. Getting this combination right is crucial to realizing the benefits of the PPP model.