Public-Private Partnerships Solid Basis for Infrastructure Plans

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By KURT RAMEY

Gov. Arnold Schwarzenegger, during a recent appearance on a national news program, again called attention to California’s infrastructure needs, and the vital link between sound highways, bridges and other public structures, and the success of the state’s economy.

The federal Recovery Act contains funds for “shovel-ready” infrastructure projects with lawmakers knowing that the forthcoming reauthorization of federal aid transportation programs later this year will pose an opportunity to look to address longer-term issues. Schwarzenegger is making the case for additional federal spending in this arena and, in so doing, is noting that government funding isn’t the only means of financing infrastructure projects. He points to public-private partnerships as possible alternatives.

As all governors know, once the states spend Recovery Act dollars, the challenge of financing infrastructure projects in the long term remains front and center. States and municipalities are already under tight financial constraints to fund basic services and operating expenses, let alone long-term infrastructure requirements.

According to the American Society of Civil Engineers, 66 percent of California’s major roads are in poor or mediocre condition, while 68 percent of the state’s urban interstates are considered congested. The engineers society concluded that California spends $2 billion less each year on highway maintenance and rehabilitation than is needed. Similar deficits exist for other types of infrastructure.

Raising revenue through additional taxation, such as a gas tax, or issuing bonds is one approach but these traditional methods have limits.


Drawing in businesses

Sound infrastructure is critically important to any region’s economic success, as affirmed by a survey that found 84 percent of U.S. business leaders polled said infrastructure influences where they locate their businesses.

California has begun to consider how the private sector might help. As part of the state budget negotiations completed in late February, Schwarzenegger signed legislation that enables local, regional, and state governments and agencies to pursue partnerships with the private sector in select areas. The city of Los Angeles, transportation agencies and other local governments are evaluating where these new approaches can help extend what government can do while protecting the needs of the public.

There is widespread agreement that government leadership is crucial in this area. It is critically important that we continue on this path to address short-term needs, such as priority road projects, and to develop a viable long-term plan to finance infrastructure projects. In fact, in the aforementioned survey, 75 percent of U.S. respondents said that governments should work more closely with the private sector to help finance infrastructure projects.

While public-private partnerships have gained traction in other countries over many years, they only recently have moved from state and local experiments and pilot programs in the U.S. to more programmatic use in states like Texas, Virginia, Florida, Illinois and Nevada.

The essence of a public-private partnership is the transfer of risks (financing, construction cost, project timing, and operation and maintenance costs) from the public to the private sector in exchange for a return on investment. Specific legal requirements and binding contracts can be designed to protect the public interest.

With the new state law opening the door to new financing options in California, the L.A. region has another tool to help governments finance infrastructure improvements over the long term.

Infrastructure investment decisions made today will affect living standards and business competitiveness of future generations. It’s not about a new bridge here or a road there, but a structured approach to support the economic health of our communities and our competitiveness.


Kurt Ramey is a partner in KPMG’s infrastructure advisory practice in Los Angeles.

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