It’s generally agreed that public-private partnerships when used with the right projects can help the United States fund its underfunded transportation infrastructure. But one of the model’s greatest values — bringing transparency to the process of infrastructure development and maintenance — also is an Achilles heel.
The costs the public sector incurs to design and build transportation infrastructure are generally known, but the capital needed to operate and maintain that infrastructure after it is built is difficult, or nearly impossible, to know. That is not the case with P3s, which account for all of these costs over the lifetime of an asset.
According to Integrity in State Budgeting — What is the reality?, a report by the Volker Alliance, only two states — California and Alaska — have actually determined their deferred maintenance for infrastructure.
This lack of transparency can lead to the budget for operating and maintaining infrastructure becoming entangled in political decisions rather than what’s best for that infrastructure.
For example, in a recession when budgets are tight, any increase in public spending will be highly scrutinized, and so the cost of maintaining highways is often kicked down the road for a time that’s more accepting of those investments.
But that spending has been pushed back so often in California, according to the Integrity in state budgeting report, the state now has a deferred maintenance backlog of $67 billion for its infrastructure, approaching its underfunded pension and retirement benefits liabilities, which stand at $91 billion.
The public finance model accounts for the cost of designing and building the infrastructure, but the operations and maintenance funding and scheduling comes from the general fund, and that is generally decided year by year. That opaqueness leads to flexibility in the public budget, as California shows, but also little discipline or accountability.
Standard & Poor’s notes in its report, Between a budget and a hard place: The risks of deferring maintenance for U.S. infrastructure, “Because there is no consistent approach to measure and report deferred maintenance, no one can easily determine which governments are doing a good job as stewards of their infrastructure and which ones have a concerning amount of work to do.”
The irony of the P3 model is that it reveals all costs — design, build, operate and maintain — and how and when those will be paid for in the contract.
It might be logical to assume that public-private partnerships would be a natural fit for such a situation — governments overwhelmed by the costs of maintaining and operating infrastructure — but adoption of the model has been slow. Part of the reason for this is government officials at the state and local levels, where much of the infrastructure is budgeted, are unfamiliar with the P3 model. Citizens also are more familiar with government financing of these projects rather than private investors. But perhaps the biggest hurdle P3s have to clear is ironically what can make them an attractive choice — transparency.
Because the entire bill for P3 infrastructure projects is printed in black and white, elected officials can become hesitant to attach their name to such proposals. That kind of truth in advertising can lead to bouts of sticker shock, especially with constituents who are unfamiliar with P3s. And with the municipal bond market offering low interest rates for development and construction costs by comparison, choosing the P3 model can be fraught with risks that come with use of public money.
But something has to give. Either voters will decide to raise their taxes to pay for infrastructure, or keep taxes where they are and hand over more of the infrastructure funding to the private sector.
Standard & Poor’s concludes, “Ultimately, if funding infrastructure obligations occurs amidst lackluster revenue growth and these obligations become more mandatory, state and local government may need to consider infrastructure privatization or offering long-term public-private partnership concessions as an option to reduce their obligations.”
