No one needs to tell Angelenos that this winter's storms dropped a record amount of rainfall. They know by the resulting increase in potholes that's added time to their already slow commutes.
Rains also have increased the risk of mudslides in Malibu, where last fall's firestorms were sparked by power lines lines that should have been buried years ago but for the cost. Meanwhile, Mayor Antonio Villaraigosa asks us to conserve our dwindling water resources. These are just a few local examples of California's vast and growing infrastructure needs.
But let's focus on our most intransigent infrastructure issue: transportation. A national report says we need to invest at least $225 billion every year for the next 50 years to bring our transportation system to an acceptable state of repair. Our country is spending less than 40 percent of this amount today. How does California's spending stack up? We're not even close to investing what we need. Why?
Californians don't want to pay.
Just as it will take a cultural shift to get us out of our cars and into public transit, it will take a cultural shift for us to accept tax increases for infrastructure spending. Case in point: Even after the devastating 2003 fires, San Diego residents voted down a tax increase to improve its fire safety system.
It is true that voters approved $20 billion in transportation bonds last year, but that's only a fraction of the $100 billion-plus required across California over the next decade, according to California's director of transportation. What's more, billions in revenue from the state's gasoline tax have been diverted to the state's General Fund to balance the state budget and pay for other needs (principally education) not to repair and replace roads.
However, the private sector has the money to invest. Investment banks, private equity funds, pension funds, construction contractors and other investors have poured billions of dollars into transportation and other infrastructure globally, and reportedly have up to $150 billion to invest worldwide. These public-private partnerships ("P3," as they are referred to by Gov. Arnold Schwarzenegger) work because they are relatively low risk for investors, generate steady, long-term cash flows (from tolls or user fees), and offer inflation protection (fee increases can be tied to an inflation benchmark). It's such a good investment that even Calpers has announced plans to put up to $2.5 billion into roads, bridges, airports, utilities and water systems.
Encouraging more public-private partnerships is reportedly one of Schwarzenegger's top goals. While we don't have any P3 transportation examples we can point to in Los Angeles, the 10-mile South Bay Expressway SR-125, which links south San Diego County with Mexico, can be used as a case study for future projects here because the majority of funds for the $800 million project came from an investment bank, the rest from a federal loan.
Like most P3s, private investors in the South Bay Expressway are sharing the risk by entering into a concession agreement with the state to finance, build and operate the toll road. In this case, the partnership lease runs for 35 years; 20 to 50-plus years is typical. The investors recover the original investment and earn a profit from tolls and user fees.
The real question is whether Californians who are unwilling to fund improvements through taxes are willing to pay tolls or other fees to private operators. Experience tells us that if there are transparent benefits for example, if the government's share of revenue from concession agreements is reinvested in state transportation projects and not diverted to other purposes or if toll payment were easy and convenient, they might.
An electronic collection system that enables motorists to be charged for tolls while driving at highway speeds is a key component of the South Bay Expressway. As one of the first public-private partnerships in California, it can be a case study for the rest of the state.
I've been involved in many facets of P3 projects for 15 years, which include four state routes that today make traffic bearable in Orange County. If not for these investments by P3s over the last 15 years, traffic during rush hour in O.C. could take an extra hour in the morning and evening for many commuters.
While they are not a panacea for Los Angeles' infrastructure problems, they can become an important part of the solution.
Michael Lucki heads Ernst & Young LLP's
construction/infrastructure practice in the Americas. He works in Los Angeles.
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