Public-private partnerships aren't all that new, only the laws allowing them are

Sunday, January 28, 2007

In public finance circles, P3s are all the buzz.

That's shorthand for public-private partnerships, wherein government agencies sell or lease infrastructure to private consortiums, which is what Pennsylvania is thinking about doing with the turnpike. The government hopes to take in a short-term windfall and cut down on immediate expenses, while the investors want to tap a stable, long-term revenue flow.

Public-private partnerships aren't new. For decades, governments at all levels have raised money for major capital projects -- arenas, roadways, new high school buildings, sewer systems -- by attracting investors through the private bond market.

The government floats a bond, investors provide the instant cash, then the government pays the money back over time at a low interest rate. Sometimes, the partners team up outside of the bond market -- the Steelers and the Pirates, two private organizations, contributed some of their own money toward the construction of new public stadiums.

But these deals for roadways are a different breed of P3. The partnerships don't result in new stadiums or schools but the leasing of the heart of the American infrastructure. And this breed of investment is suddenly hot in the United States.

Only it's not so sudden. The interest that has manifested itself on the front pages of U.S. newspapers the last two years has been brewing for decades, primed by foreign investors, free-market economic think tanks and American investment firms such as Goldman Sachs. Collectively, they've spent years visiting capitol buildings and organizing conventions, trying to woo skeptical lawmakers and governors.

The reality is that "there's been a movement to bring investment dollars into transportation for years now," said Cherian George, the managing director of the transportation division at the bond rating agency Fitch IBCA.

Airports, for example, are usually publicly owned, but they often outsource the operation of the airport to private contractors, including airlines. Same goes for America's seaports, which are generally owned by a public commission, which acts as a landlord to various private shipping companies.

In Europe and Canada, privately owned and operated highways are more common, and even in the United States, some highway commissions -- Florida's, for example -- have experimented with private toll road operation.

The roots of the movement in the United States can be traced to the Carter administration and its push for deregulation. President Ronald Reagan picked up the charge, shedding Conrail. President Bill Clinton sold off petroleum reserves.

So the private sector has been nibbling at the edges for some time. But America's vast network of interstate highways and lucrative toll roads, a half-century in the making, is the main course.

Australia's Macquarie Bank Ltd. and Spain's Cintra Concesiones are leading the charge, followed by Goldman Sachs, which announced in December that it had raised $6.5 billion toward its GS Infrastructure Partners fund. Macquarie's infrastructure fund, meanwhile, reported a 2006 return of 15.2 percent, besting the Standard & Poor's 500-stock index return of 13.6 percent.

"It's an attractive asset," said Dennis Enright, founder of New Jersey-based NW Financial Group. "It's a revenue-producing [asset] that doesn't have the same types of risks as office space, which has vacancy rates and obsolescence."

So if the P3 transportation movement has been seeded for years, then why are the fruits being harvested just now when it comes to U.S. roadways?

There are a number of factors; one is that states are finally writing legislation that allows for the partnerships to gel -- California got the ball rolling more than a decade ago, followed by Virginia in 1995.

Second, and perhaps more importantly, is that the 2005 highway bill included a welcoming change to the tax code, allowing private companies to raise funds without paying taxes, as long as that money goes toward the financing of road projects.

At the same time, states are confronting supply-and-demand crisis. Demand for new infrastructure, coupled with improvements to aging roads, is outstripping the supply of money that will pay for of these upgrades.

What happened to the money? For one, as federal gas tax subsidies from the Highway Trust Fund dwindle, states find themselves running out of money that they had historically counted on to maintain and improve their roads.

Sometimes, the money doesn't disappear, but it's spent elsewhere. Older states such as Pennsylvania have a lot of other debts coming due -- the state must update its wastewater sewer system, for instance. A 2002 survey said Southwestern Pennsylvania alone would need to spend $10 billion to bring its sewerage up to code.

"You have all of these claims on the capital budget," said Paul Seidenstat, an economics professor at Temple University who, with two colleagues, wrote a book about the privatization of formerly public networks. "It's harder and harder to set priorities so that everybody's going to be happy.

The combination of growing resistance to tax increases and growing demand for more transportation infrastructure maintenance and improvements also is a big driver of privatization, said Geoffrey Segal of the Reason Foundation magazine, one of the primary supporters of highway privatization. The pressure "to come up with boatloads of money ...signaled to the capital markets that the United States was ready for the opportunity," he said.

The opportunity is huge -- Reason magazine estimated that, as of last year, $25 billion in private highway investment was either on the table or already agreed upon. That private money might be too much for cash-strapped states to ignore.

Pennsylvania -- with its many thousands of miles of paved roads, its failing bridges and transit systems, its unrealized projects such as the Mon-Fayette Expressway -- would see an immediate payoff from a lease deal. A cash infusion of $30 billion could earn Pennsylvania $2 billion annually in interest alone.

That beats mustering the political courage to raise gas taxes and turnpike tolls. "These are big numbers that generate a lot of attention," said Robert Puentes, a Brookings Institution fellow who studies transportation policy.

"It's obvious why policymakers are interested."