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America Needs New Infrastructure.
Who should build it?
A white paper from Mark Jamison and David Richardson
Our water, roads, bridges, and airports are at stake. According to the American Society of Civil Engineers (ASCE), as a country we wasted $160 billion in time and fuel in 2014 because of inadequate roads. In 2016 we made 188 million trips across bridges that were structurally deficient. Soon we will experience at least weekly the kinds of airport congestion that used to be reserved for Thanksgiving holidays.
One thing that unites Americans across the political divide is that our declining infrastructure is unacceptable. Fixing it was important for George W. Bush, a priority for Barack Obama, and a major campaign issue for Donald Trump. And yet we continue to decline: ASCE gives US infrastructure a grade of D+, down from a grade of C just 20 years ago.
Is Infrastructure worth the cost?
What would be the benefit of fixing the problem? ASCE says our poor infrastructure costs each person $3400 per year on average in disposable income. If these costs had been eliminated during the Obama Administration, the annual growth rate in per capita disposable income would have been over 2% instead of the 0.98% we actually experienced.
We need to rebuild. But how can we pay for it? Actually, it pays for itself. According to ASCE’s numbers, if we were to spread the costs over the 8 years of the Trump presidency, the annual cost would be less than $1100 per person. This is less than a third of the $3400 annual waste.
What holds us back from making an $1100 annual investment that would return $3400 in annual benefits? One thing is probably the price tag is concrete and large, while the benefits feel nebulous. We need $4.6 trillion to finance the improvements. That eclipses the budget of our federal government by more than 20%. Making up the investment backlog for bridges and roads alone would cost $7622 per household.
Looked at this way, the political challenge appears huge. Perhaps this reality contributed to President Trump reported declining enthusiasm for private financing of infrastructure, reportedly saying that there is no “silver bullet”.
He was right about the political reality: If paying for infrastructure was easy, we would not be in the state we now are. But he would be wrong to give up on private sector involvement. According to research and to international experiences, private sector financing of infrastructure, and in particular public private partnerships (P3), lowers costs and improves effectiveness.
Why P3? Lower costs
The body of research and international experience have found that, in general, government enterprises have higher costs than privately-owned companies, resulting from differences in principal-agent problems, political opportunism, ease of constructing economic incentives, and management expertise.
Principal-agent programs are greater because problems with political accountability compound the problems of management accountability. Political opportunism is more difficult to manage with government ownership because election cycles adversely impact budget commitments, sometimes punish long-term planning, and prioritize the urgent over the important. Also the private sector has clear profit motives, making it easier to provide economic incentives. And if they develop several projects across multiple jurisdictions, private companies can develop greater expertise for managing complex projects than can governmental entities.
How much does the private sector lower costs? The amounts vary depending on the types of infrastructure, the quality of the public private partnership, and other features. In earlier research we examined studies comparing government ownership and private ownership of telecommunications networks and estimated that, on average, government-owned networks are about 10% less efficient than private networks.
Following its move from public to private financing of infrastructure in the 1990s the United Kingdom estimated the cost savings and found them to be from 10% to 20%. It also found that P3 decreased the number of project cost overruns by 29%. An Australian study found that P3 lowered project costs by nearly 20% and improved cost predictability.
What would these estimates mean for the US? Well-done P3s could lower our infrastructure bill from $4.6 trillion to $4.14 trillion ($460 billion or 10% savings) or $3.68 trillion ($920 billion or 20% savings). This could mean:
- The higher savings would almost pay for the bridge and road backlog of $959 billion.
- If the investments were to begin on January 1, 2018, the entire cost could be covered by March 2025 with the lower savings or by May 2024 with the higher savings.
Why P3? Faster deliveryThe profit incentive for the private sector leads to speedier delivery of the projects. The reason is that, with a properly designed P3 project, revenues do not begin until the project is complete. The old adage that “time is money” leads private providers to deliver fast.
How much faster is a good P3 than a government-run project? The UK study mentioned above found that 73% of government projects experienced delays where only 24% of P3 projects did, an improvement of 28% in the number of projects experiencing delays. The Australian study found that the number of projects completed on time improved by 5% with P3s.
How to do P3 well
P3s have been around since at least 1782 when a concession was granted to Perrier in France for the distribution of water. Many lessons have been learned over the years through practical experience and careful studies. APMG International and its international partners have condensed these lessons into keys for success in six phases of P3 projects (APMG is now offering certifications in P3 management.):
Phase 1: Project identification and P3 screening. Identify the best technical solution that meets the public need most economically, clearly determine whether P3 is the best approach (P3 is generally more effective than government when projects are large and complex, include substantial risk (for revenue, costs and schedule), and whose full utilization is needed for project success.
Phase 2: Appraisal and preparation. Develop a P3 contract that mitigates the risk of failure and ensures that the project is commercially feasible. Develop a public sector comparator to ensure that the P3 provides value for money.
Phase 3: Structuring and drafting. Define the financial, risk, and payment structures of the contract, clear and measurable technical requirements and performance specifications.
Phase 4: Tender phase. Plan and over communicate the process of offering, reviewing, evaluating, and selecting the proposal. Conduct practice runs if the process is new or complex.
Phase 5: Contract management (construction). Closely manage the contract during the construction period, carefully documenting changes, claims, and disputes. Ensure the construction technical requirements and performance specifications.
Phase 6: Contract management (operation, maintenance, and hand-back). This can last decades, so government personnel should be devoted to monitoring, making performance-based payments or monitoring user-based payments, and managing the inevitable changes, claims, and disputes.
A structured and well-defined P3 process as outlined above increases the likelihood of effective public infrastructure. Three recent examples illustrate this.
Pennsylvania Rapid Bridge Replacement. More than 4000 structurally deficient bridges were identified in Pennsylvania. And of these, 558 small bridges were bundled into one P3 contract. Initial construction began in 2015 and the private consortium committed to completing all of the bridges within 42 months. The cost of each bridge should average $1.6 million per bridge for construction and 25 years of maintenance. By contrast, PennDOT estimated that their cost of constructing and maintaining the bridges would have been $2 million per bridge and construction would span 10-15 years. So at least at the outset, P3 is reducing costs by 20%, construction is accelerated by 6 to 11 years, and the private consortium bears the construction and maintenance risks.
Port of Miami Tunnel. This port is a complex construction project with significant risk for cost over runs and construction delays. The P3 consortium began construction in 2011, which was completed in 2014. The 55-month design and construction period was exceeded by 11 weeks, for which the private consortium paid a penalty of $9 million and has delayed the annual payments by 11 weeks for the P3 contract term through 2044. While it is not known if the project would have been completed on time if constructed using traditional public construction methods, the public consortium assumed all design and construction risk and the limited construction delay was monetized to the public’s benefit.
Dulles Greenway. Originally constructed in 1995, private partners provided financing at a time when public agencies were unable to provide the needed capital. Through the P3 contract, revenue risk associated with usage was transferred to the private partners. Early on, usage was almost 70% below projections, presenting challenges the private consortium and its successors have met. This project would likely not have been constructed without private participation.
Well-managed P3s can provide the public with faster and more economical solutions to our infrastructure deficit. Unfortunately, there are reports that our president is wavering on this important feature of our way forward. While P3s may not be a “silver bullet” that makes everything easy, they are cost effective and timely methods of developing public infrastructure and should be used in cases where they provide a clear public benefit.