While Democratic and Republican lawmakers in California remain divided on most issues, they generally agree on one stark physical and fiscal reality: California's transportation system is rapidly approaching a tipping point.

Los Angeles residents live with chronic congestion and loss of mobility every day, and while there is endless room for debate about how we arrived here, there is little argument that increased investment in our transportation system is desperately needed. But increased investment translates into a bigger question: Where will the money to fund all the needed improvements come from?

The answer may be to let the private sector take a major role in financing, building, and operating these facilities through arrangements known as public-private partnerships, or P3.

Faced with the reality that traditional sources such as the gas tax and federal aid have failed to keep up with rapidly rising costs, Gov. Arnold Schwarzenegger recently called upon the private sector to leverage the $20 billion transportation bond initiative approved by the voters in November. The infrastructure world is buzzing with the potential for P3 to play a major role in addressing California's transportation problem.

The good news is that there are tens of billions of dollars of private equity capital poised to leverage public investment in the U.S. transportation network. How to tap it, and put it to good use is another issue.

Private involvement in the provision of critical services is neither novel nor new.

So what is stopping California policymakers from fully embracing P3?

Fear of embarrassment

Simply put, California lawmakers fear that the state will be taken advantage of and embarrassed by investors looking to maximize profit on a safe investment. With the infamous SR-91 "non-compete clause," which prohibited expanded capacity on the first public/private project in Southern California still lingering in the minds of policymakers, until now it has been easier for state officials to do nothing and avoid public scorn for apparently placing the interests of private companies before that of their constituents.

The sticking point on private investment in highways is tolls an alien concept to California. Private investors require a reasonable rate of return on their invested capital to build, operate and maintain the roadway, and they can only realize this return if tolls are charged. So the challenge is to balance this basic economic reality with a California mindset that looks upon highways as a free public good.


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