The Hurdle Yet to Clear: The Other P3s of Infrastructure P3s

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As pointed out Chris Hamel's insightful opinion recently published in The Bond Buyer (U.S. Needs Hybrid Infrastructure Financing Approach, May 7) perhaps the time has come, or the time may be near, for greater public acceptance and use of the various public-private partnership models for major infrastructure procurements.

Many public infrastructure market participants (including me) have been heralding the advent of the dawn of the P3 era for many years. The siren call of P3s has sounded sweet, only to find some advocates crashing on the rocks because of the slow pace of the P3 market's development. But that may be changing. As pointed out by Roddy Devlin and Greg Johnson in another opinion recently published in The Bond Buyer (P3 Opportunities Continue to Grow, March 12), public sector interest in the use of P3s appears to be robust.

If a new dawn of a P3 boom is to be sustained, it'll need a long pipeline of P3 procurements. For that to happen, it'll need more than overcoming or incorporating the relative value-for-money advantage of tax-exempt and other tax-advantaged financing available to state and local governmental units as public infrastructure project sponsors. It'll need to manifest legislative, operational and attitudinal changes driven by the so-called other P3s of infrastructure P3s: politics, public policy and the public interest. Those fundamental building blocks in the foundation for P3s can't be overlooked.

One immediate impediment is definitional: defining P3s. The term or phrase P3s is the darling term or phrase du jour, often identified to be the elixir for all that ails the sickly state of public infrastructure improvements, replacements and construction across the United States. For hard (bricks and mortar) and soft (programs) infrastructure alike, it seems like almost everything can be characterized as a P3.

For example, in the municipal finance market, many leasing and management agreement structures involving private sector participants in public infrastructure can be called P3s. Further, any qualified private activity bond, by its very nature, involves private sector participation. Voilà P3s!

But as a new market class, the term infrastructure P3s means something narrower. It's a method of risk allocation between public and private sector participants through which a public sector project sponsor can optimize investment value-for-money over the construction period or whole-life of an infrastructure asset, or something in-between depending on the P3 model used and its term.

Quantifying the value-for-money analysis is difficult. The combination of articulating the qualitative benefits of P3s and justifying their use compared with typical or current design-bid-build procurement with tax-exempt financing is, and will be, as much of a challenge -- maybe considerably more. And as a matter of general public policy and for each project, it is and will be much more than simply a public relations challenge.

That's where P3s enter the thorny bramble thicket of politics.

For the P3 market to make great strides forward, the reasons why P3s in protect, serve and advance the public interest need to be clarified, amplified and refined for the public. A first step, often overlooked, is defining - in an understandable, acceptable way for the public in general - what the public interest is. Beware: the meaning of the "public interest" slides across a spectrum of political ideologies and project stakeholder interests and it's subject to political pandering.

Identifying the public interest advanced and served by P3s is more than a numbers crunching VfM exercise. At the heart of the P3 public interest debate is the notion that P3s are redefining what public infrastructure is. Likewise, P3s go to the very nature of the role of government in the execution, delivery and operation of hard economic infrastructure (highways, roads, bridges and the like that facilitate commerce) and social infrastructure (schools, hospitals, water and wastewater plants, civic buildings and the like that advance public health and welfare).

Some proponents proclaim P3s because they're "privatization lite." Some opponents decry them as privatization and a selling-out to private interests. Some proponents proclaim P3s for their efficiency in the execution and operation of public infrastructure, sometimes on the questionable assumption that a priori the private sector is always more efficient than the public sector. But some P3 opponents cite the participation of the public sector as inherently corrupt and inefficient and attack P3s because they corrupt the free market allocation of resources by conferring private monopolies. Other P3 opponents complain about the distributional inequities P3s cause, sometimes maintaining that private sector involvement and conferring a private monopoly unleash inherently corrupting and inefficient forces.

Some P3 proponents simply maintain that the public has little or no choice but to turn to P3s in light of public sector budget crises. To some opponents and skeptics, forcing a party to enter into a contract while under duress is not a satisfactory basis for its validity, let alone a rationale for defining the public interest and establishing public policy.

While use of P3s in the U.S. public infrastructure sector continues to grow, its growth nevertheless can be characterized as uneven and in fits and starts. Meantime, resolution of the public interest rationale for P3s often lingers, ripe for attack in the acrimoniously partisan battleground of politics nowadays. Lack of that resolution remains an obstacle to wider use - and public acceptance - of P3s, and failure to see this hurdle is a trap for the unwary.

While clearing this hurdle won't just happen and shouldn't be assumed, this hurdle isn't insurmountable. It'll need political will and public advocacy to muster support among the diverse and divergent political ideologies evident in the political theater. And it'll need political will and public advocacy to advance P3s through legislation, policies and practice.

First steps first. By carefully articulating how P3s are consistent with our traditions of affirmative government manifest across a wide spectrum of political ideologies, and recognizing not all opponents will be won over, this hurdle can be cleared.

Once the public interest hurdle is cleared, legislation and policies to facilitate P3s should follow.

One such reform should be how public works projects are procured. This reform must be more than simply enabling legislation to permit implementation of P3s outside design-bid-build procurements. Optimal efficiency is a measure of P3 success, but P3 efficiency is hampered by the thousands of decentralized government procurement protocols that apply to infrastructure procurement. Somehow there needs to be a streamlined, consistently applied, centralized approach for P3 procurement, perhaps (but not necessarily) on a state level akin to provincial P3 procurement models successfully utilized in Canada.

Another reform should be how we define and implement government's infrastructure role. Continued growth of P3s should redefine that role in order to optimize government's efficiency. Depending on their extent, P3s shift government's role from the execution of infrastructure design, construction and operations to monitoring compliance with the terms of P3 contracts (that is, leases, management agreements and other long-term concession agreements). Retaining redundant government delivery capacity will detract from governmental and P3 efficiencies by duplicating costs, and that will undermine the very value-for-money precepts underlying why P3s make sense.

Finally and most immediately, as Chris Hamel points out, blending the uniquely U.S. tax-exempt and other tax-advantaged financing approaches with P3 structures is needed. Enacting legislation to permit use of Qualified Public Infrastructure Bonds, Move America Bonds or America Fast Forward Bonds, perhaps in tandem with a National Infrastructure Bank, surely would help to facilitate the use of P3s.

But the continued growth of the P3 market in the United States requires more than a retrofit of existing U.S. tax-exempt and tax-advantaged financing legislation and methods and procurement laws and policies. It'll require widespread public acceptance of P3s. And one necessary antecedent for widespread public acceptance of P3s is clear articulation of how P3s will advance and serve the public interest. For many in the public, that's a hurdle that hasn't yet been cleared.

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