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Are P3s the Answer to U.S. Infrastructure Funding Woes?

With a trillion-dollar infrastructure program on the table from the administration, it has many wondering where all that money is coming from. President Trump has been touting less government and more private sector innovation in infrastructure since the campaign trail. Public-private partnerships (P3s) or Public-public-private partnerships (P4s) have also been an important focus in the restructuring of water resources projects and authorization through both of the last two water resource legislations. Can the two come together to advance much needed dredging projects across the country? What still needs to be done in order to advance P3s across the board for infrastructure?

Our major infrastructure problem remains our backlog of maintenance, long-term structures that are reaching the end of their life cycles, and not enough federal funding to meet the needs. P3s can be a way to meet that funding shortage.

A task force sponsored by the technical committee on waterways of the Coasts, Oceans, Ports and Rivers Institute (COPRI) of the American Society of Civil Engineers (ASCE) published some of its findings on Alternative Financing and Delivery of Waterways Infrastructure. The task force was formed in 2015 after the passage of the Water Resources Reform and Development Act (WRRDA) 2014 to investigate P3s, how they can aid water resources infrastructure and what the federal government can do to facilitate their development. Section 5014 of the Water Resources Reform and Development Act of 2014 authorized a P3 pilot project, which is championed as leveraging alternative financing but delivering projects more quickly and effectively, without excessive downstream tax or public debt consequences.

The task force held workshops to educate, facilitate and advocate for alternative financing, including identifying prospective projects, as ASCE thinks engineers should impact the technical and public policy aspects of alternative financing.

The ASCE report explains that P3s and P4s refer to types of contracting structures. The figure on page 11 illustrates the spectrum of different public infrastructure contract models, with varying degrees of public ownership and delivery of project capability. “For P3/P4 arrangements to succeed, good risk management is a key factor,” the report said. “It is also critical that there is a clear path for covering the private partner’s upfront costs, sharing its risks, and recouping its investment.”

ASCE outlines the different contract modalities and allocations of rights and responsibilities as follows:

•             Design‐Build‐Finance (DBF) contract – the private operator assumes responsibility for the short‐term financing of works during the design and construction phase of the contract, which is typically repaid by the owner of the asset upon completion and delivery of works. Under a DBF, responsibility for the maintenance and operation of the asset remains with the public owner. 

•             Design‐Build‐Finance‐Operate‐Maintain (DBFOM) – the private party will be responsible for the long‐term financing of all required infrastructure, as well as the life‐cycle maintenance and operation of the asset (including the provision of working capital. 

•             In other cases, the private party may agree to design, build, finance, operate and maintain an infrastructure facility, but the extent of maintenance is limited only to routine repairs and does not include major maintenance or asset rehabilitation.

“Each contract needs to be designed in the manner that best meets the specific needs and objectives of the project at hand. P3 is definitely not about applying cookie‐cutter formulas to individual projects, but instead involves careful structuring of each project to ensure the optimal allocation of rights, responsibilities and risks,” the report said.

So far, P3s have generally worked well for large public infrastructure projects. ASCE said they are especially viable for toll road and metered water treatment plants that generate user fees with a well-defined revenue stream for the private investor. But with federal water resource projects, P3s face significant challenges – namely the project evaluation, prioritization and authorization process.

The Corps has traditionally used the benefit cost ratio (BCR) to evaluate project costs and priorities. The ASCE task force said BCR calculations often fail to reflect the full value that can be derived from P3/P4 financing, including shared risk, private industry innovation, and lower life cycle costs.

A key function of alternative finance and P3s are long-term contracting methods, which provide cost savings and risk mitigation. Instead, many federal dredging projects face future uncertainty as they wait year after year for annual appropriations.

Another problem with applying P3s to water resource projects, ASCE said, is that many do not generate direct user fees or provide a clearly defined revenue stream.

“The Harbor Maintenance Trust Fund and the Inland Waterway Trust Fund are prohibited from being used as direct revenue generation tools. If the legislation governing these funds was amended they could be used as a capital fund to address revenue generation issues,” the report said.

Congressional Oversight and Advancement of P3s

Earlier this year in May, the Senate Committee on Environment and Public Works (EPW) Subcommittee on Transportation and Infrastructure held a hearing entitled, “Leveraging Federal Funding; Innovation Solutions for Infrastructure.”

Senator Jim Inhofe (OK-R), EPW Transportation and Infrastructure Committee chair, has spent much of his time on the committee vying for P3s. At the most recent hearing, he said, “Whatever action we take on infrastructure, our state and local partners have to be a part of the solution and prioritize transportation.” He continued, “We also need to find responsible and meaningful ways to attract and leverage additional private investment to help close the gap.” Federal funding dollars at their current level are not enough to meet the country’s infrastructure needs, and not everyone thinks P3s are the ultimate solution.

Senator Tom Carper from Delaware said that his state is approaching its first transportation related P3s. Others had been bid as P3s but never proceeded. “I suspect because the investor figured out they could not make the kind of return on investment they wanted to make,” he said. While Sen. Carper praised Congress’ work in supporting agencies interested in partnering with private firms to transfer project risks and potentially to build projects more quickly and other financing tools, he also said that P3s are not the complete solution to our funding shortage, “even though sometimes we imply they would be.”

He said P3s alone could not fix the funding insolvency and maintenance backlog for the highway transportation system. He also said a total of a third of all states do not allow the use of P3s.

Eric Garcetti, the mayor of Los Angeles, and the chair of the U.S. Conference of Mayors Infrastructure Task Force, is a believer in P3s He testified in front of the committee about how his city has used them successfully and what Congress can do to make them work better overall or apply to more projects.

Speaking on behalf of U.S. Conference of Mayors in laying out its advice for how to bring about success in the policy making for P3s, he introduces the idea of I-3. “You have heard of P3; this is the Infrastructure Incentives Initiative,” Carper said.

One is leveraging local money by rewardingthose that step up. He said it’s also important to let people know that if you do have local money for a project, you have a better chance of getting federal money.

Two is thinking about the life of the projects, the maintenance and the long term.

And the third, he said, is innovation and technology – a place where the dredging industry certainly excels.

Kevin DeGood, director of Infrastructure Policy at the Center for American Progress, has a less optimistic view of the potential for maximizing local leverage through P3s.

“The binding constraint facing state and local governments is insufficient tax revenue, not a lack of access to financing. Let me say that again. The binding constraint facing state and local governments is insufficient tax revenue. Public-private partnerships and tax credits do not solve this problem,” DeGood said.

He said that outside of urban mega projects, public-private partnerships have little value. “In  rural communities, small towns and economically struggling urban areas, an infrastructure plan based on tax credits is the same as no plan at all,” DeGood said.

P3s can only go so far. The federal government also needs to provide direct funding to state and local project sponsors, DeGood said. “These funds should be targeted to those communities facing the greatest need and the highest level of economic hardship,” he said.

No one financing tool or round of budget negotiations will solve our infrastructure woes for water resources. It will most likely be a combination of increased federal spending, additional dependence on P3s, and fully utilizing the Harbor Maintenance Trust Fund for its intended purpose.

Congress has made significant progress through WRRDA 2014 and WRDA 2016 to advance P3s and improve the project delivery process, but much work still remains. The $1 trillion infrastructure program is still only a six-page fact sheet, but it clearly looks to revamp not only our infrastructure but also the federal government’s role in funding and construction. P3s could likely be a big part of that.

In the next issue, we’ll look in more detail at the president’s trillion-dollar infrastructure program and what changes it promises, as well as the president’s executive order on establishing discipline and accountability in the environmental review and permitting process for infrastructure projects. Both may have a significant impact on how P3s function in the future.

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