Advancing America’s Infrastructure
State, local and federal agencies must continue to explore innovative financing methods such as public-private partnerships if the nation is to improve the quality and resilience of its infrastructure.
By Jack Norris, M.SAME
As the United States struggles to sustain, let alone improve, its aging infrastructure the use of public-private partnerships, also called “P3s” or “PPPs,” may provide a path to completion for a number of endeavors.
It is no secret many of America’s bridges, water systems and other infrastructure needs updating or outright replacement. Unfortunately, such efforts are so often derailed by a lack of funding. Last year, the American Society of Civil Engineers (ASCE) Report Card for America’s Infrastructure very publicly gave the country a “D+”—up slightly from a “D” in 2009. The World Economic Forum 2012-2013 Global Competitive Report ranked the United States 14th in infrastructure among its global counterparts.
Making matters worse, the path to improvement is littered with financial potholes. According to ASCE, the estimated infrastructure investment needed nationally by 2020 totals $3.6 trillion, leaving an estimated funding gap of $1.6 trillion. That amount is only slightly higher than the entire GDP of Australia.
BRIDGING THE GAP
The public sector often bears total responsibility for construction and design costs, material costs and project delivery. In a public-private partnership, however, government can gain certainty that a project will not exceed a set price as a private consortium accepts a lump-sum fixed price construction contract. P3s make the contractor responsible for ensuring that a project is delivered on time, with no payments until substantial completion is reached, and all parties are satisfied that the finished product is fit for its purpose.
Through the transfer of risk over the lifecycle of the project, the private sector will bear the burden of these risks and provide savings and budget certainty to the public. Because industry bears the burden of most cost overruns caused by delays, it has a strong incentive to finish on time, or early.
Already a well-established funding vehicle in many parts of the world, particularly in Europe, P3s have begun to catch on in the U.S. transportation market, most notably at the state and city levels.
In the federal transportation sector, funding from Transportation Infrastructure Finance and Innovation Act (TIFIA) loans and Private Activity Bonds (PABs) has been used to kick-start dozens of projects. By mid-2013, TIFIA had used $9.2 billion in funding to leverage more than $36.4 billion in private and other capital to help build 27 major transportation projects. Additionally, PABs have facilitated more than $10 billion in innovative projects in the sector.
A TIFIA loan or loan guarantee becomes a predictable revenue source that enables financing on attractive terms, unlocking funding for large-scale transportation projects. PABs, meanwhile, allow tax-exempt financing for certain transportation projects, thus greatly improving the appetite for private participation in eligible projects.
There are several reasons why P3s have not caught on more widely for federal projects, including misconceptions about how the model works and how federal funding and tax legislation can be instrumental in spurring P3s that open the doors to infrastructure investment and job creation. The largest culprit for the small amount of federal P3s, however, is the fact that projects procured at the national level must adhere to strict scoring rules, dictated by the Congressional Budget Office. These rules have made it difficult to enter into long-term contracts unless the full amount of funding has been budgeted.
One successful example of a federal P3 model has been the use of Energy Savings Performance Contracts (ESPC) and Utility Energy Savings Contract (UESC). These are designed to save energy and water in federal facilities and use the associated energy savings to pay back the investment. ESPC/UESC P3s are permanently authorized and encouraged under the Energy Independence and Security Act of 2007.
Several other federal entities, notably the Army Energy Initiatives Task Force, the Federal Highway Administration and Federal Emergency Management Agency also have taken steps to actively promote P3s. Perhaps the biggest game-changer is that the U.S. Army Corps of Engineers is now closely examining how P3s can help restore the nation’s aging and underfunded inland waterway infrastructure, a system that is critical to the economy of the United States and its international competitiveness.
EMERGING P3 ARENAS
Following is a sampling of P3 projects supported by AECOM Technology Corp. at the federal and local levels (outside of the transportation realm, which already has seen significant success with P3s).
NASA AMES Research Center. Through an agreement with the Western Power Administration, the National Aeronautic and Space Administration’s (NASA) AMES Research Center in Moffett Field, Calif., receives energy at a very low cost. AECOM partnered with Pacific Gas & Electric through a UESC and is creating an energy-efficiency and renewable energy master plan that will result in an annual cost reduction. UESCs offer federal agencies a way to implement energy-efficiency, renewable-energy and water-efficiency projects. A utility arranges financing to cover a project’s capital costs, which are repaid over the contract term from cost savings generated by the energy efficiency measures. The agency saves time and resources by using one-stop shopping provided by the utility.
AECOM has completed many projects for the 220-acre NASA campus since 1995. Most recently the company was architect-of-record, engineer-of-record and landscape architect-of-record for the new LEED Platinum N232 Collaborative Support Facility; it completed a Capital Investment Planning Assessment for long-term facility and infrastructure asset development; and designed and developed a pioneering air traffic controller/flight simulator facility.
USACE MATOC Work. A partnership between AECOM, Siemens and Bechtel has won initial awards from USACE for all four indefinite-delivery/indefinite-quantity multiple award task order contracts (MATOCs) for geothermal, solar, wind and biomass technologies to support renewable energy on Department of Defense installations. The MATOCs will be used to procure reliable, locally generated, renewable and alternative energy through Power Purchase Agreements that benefit the environment while lowering energy costs. A Power Purchase Agreement is a long-term contract to buy power from an energy provider that uses its own source of funds to build an energy facility on government land, then owns, maintains and operates it for up to 30-plus years.
Gov. George Deukmejian Courthouse. The new Gov. George Deukmejian Courthouse, located in the redevelopment area of downtown Long Beach, Calif., opened its doors in September 2013. It is the first U.S. social infrastructure project to be completed through an availability-payment-based P3 model.
The 530,000-ft² facility was constructed for a total cost of $495 million, including financing. It was completed 11 days ahead of schedule and was under budget.
THE REALITY OF P3s
While P3s are continuing to gain popularity, there is still some resistance to the idea, usually owing to one of several misconceptions, identified below.
- Higher cost of capital: P3s, in reality, often cost less than traditional project-finance models, since the private partner assumes the risk of cost overruns during the construction and operating phase and is often better able to leverage third-party development and revenue opportunities to reduce net cost to the public.
- Quality of service: The private partner actually faces financial penalties if its services do not meet performance standards specified by the public partner.
- P3s equal privatization: In most cases, the public partner retains ownership and control of the public assets. Services can be provided by public-sector employees, existing service contractors, a performance-based contract with the P3 consortium, or a mixture of all three.
While P3 agreements may seem complex, the model continues to gain momentum for a reason. The United States cannot expect to compete on a global scale at the best of its ability while ranked 14th in infrastructure. Simply put, P3s can provide a much-needed alternative for funding federal, state and local projects.