Publications

- April 1, 2017; Vol. 4, Number 4

Betting on Catastrophe: As U.S. infrastructure fails, the next disaster is expected to open the investment floodgates

by Drew Campbell

Northern California is experiencing what should be an oddity, but tragically it is becoming all too familiar in the United States — the Lake Oroville dam, which is a key part of California’s water infrastructure system and supports one of the world’s leading agricultural regions, is near failure due to torrential rains and deferred maintenance.

In the United States, many people are baffled as to why the state of the country’s infrastructure continues to decline and little is done. A running assumption has been that as the list of catastrophic infrastructure failures grows, the public’s demand for infrastructure spending would provide a needed push. But in the United States, a more than 30-year campaign to lower taxes and keep them low has strained public budgets, and the funds for infrastructure are hard to come by.

One of the key promises of private infrastructure investment in the form of public-private partnerships is that these contracts cover maintenance and operations over the life of the asset; these costs are built into the budget and are scheduled. The more traditional source of financing infrastructure in the United States — the municipal bond market — on the other hand, largely leaves the maintenance to public budgeting that can get caught in the politics of the moment with spending kicked down the road if it is inconvenient.

The Oroville Dam has had such fights over money for maintenance, and here we are.

Private investors assume that, sooner or later, the tax-averse public via their legislators will have to get on board with more private infrastructure investment with private ownership and management. The Trump administration has rolled out a $1 trillion infrastructure plan that leans heavily on private investment. Now seems to be the moment that private infrastructure investment in the United States might finally get moving the way many expected it would.

Hopefully, the Trump administration can work with Democrats in Congress — who have their own $1 trillion infrastructure plan using public financing — and can strike a deal that satisfies all sides.

Large new-build projects such as a dam with power generation capacity seems like a good fit for private investors who want to allocate large sums of capital.

P3s and private investment in infrastructure are not a panacea and they are not right for every project, but it is true that, among other benefits, they can bring accountability and transparency to the process of maintaining and operating infrastructure over its lifecycle. Perhaps if the Oroville dam had originally been built as a P3 project, it would not be in the state of disrepair it is today.

Drew Campbell (d.campbell@irei.com) is senior editor of Institutional Investing in Infrastructure.

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