Finance

Why Isn't the U.S. Better at Public-Private Partnerships?

Few states have offices dedicated to examining increasingly popular P3 deals. Experts say it's time to copy Canada and change that.
by | February 2013
The recently opened High Occupancy Toll lanes in Virginia are one example of a P3 project in the U.S. (Photo: wikipedia.org/Mario Robero Duran Ortiz)

Officials in British Columbia have encountered a unique problem in recent years that most jurisdictions would be thrilled to have: Infrastructure projects are being completed not just on time, but early. Way too early. Builders have been finishing hospitals, for example, so far ahead of schedule that they haven’t even been allocated operating funds. “We had to limit how early they could be built,” says Sarah Clark, president and CEO of Partnerships British Columbia.

Clark’s office is charged with helping the province navigate the world of public-private partnerships, to make sure deals are structured properly so the public gets the best return on its investment in infrastructure. So far, it appears to be doing just that, racking up a record number of projects that are finished on schedule and at significant savings to taxpayers.

Worldwide, Clark’s office is just one of more than 85 similar offices in at least 31 countries tasked with reviewing proposed public-private partnerships, or P3s, to assess whether they’re a good deal for taxpayers and governments, and to look at the long-term fiscal impact of the deals. It’s a model American officials may want to consider. While P3s are already becoming an increasingly popular option among U.S. policymakers as a tool for financing infrastructure projects, only a handful of states have set up dedicated offices charged with examining how those deals are structured. And now a growing cohort of infrastructure experts say U.S. states should have more such dedicated offices -- following in the footsteps of their foreign neighbors, where permanent, robust offices are staffed by experts who can navigate the legal, financial and technical complexities of public-private deals.

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Historically, these kinds of offices have flourished abroad because other nations began exploring P3s before American states did, says Robert Puentes, a senior fellow with the Brookings Institution’s Metropolitan Policy Program. According to Brookings, from 1985 to 2011, U.S. spending on P3 infrastructure projects accounted for only 9 percent of the global total. That slower pace is largely due to the municipal bond market in the U.S., which traditionally has been the source of financing for public infrastructure projects.

Still, public financing strategies in the U.S. are starting to change, and a growing number of states are passing legislation that enables them to tap into the P3 market. Puentes touts the newly opened High Occupancy Toll lanes in Virginia, surrounding the Washington, D.C.-region’s beltway, as a prime example of a P3 success story. Private-sector firms financed, designed and built new premium lanes and will now operate them, collecting toll revenue from Virginia drivers. “Fifteen years ago, a traditional approach would have been to widen the road; it would have cost billions of dollars and taken 10 years,” Puentes says. Instead, the private partners absorbed most of the project’s upfront costs. “It’s a completely different approach.”

The deal was largely possible, Puentes says, because Virginia is one of just a sliver of states -- including California and Michigan -- that has a dedicated P3 unit. Entities on the private-sector side maintain personnel devoted to these kinds of deals; states could find themselves at a disadvantage if they don’t have similar in-house chops. Indeed, a recent report by the National Conference of State Legislatures (NCSL) warned of a “knowledge and experience gap” in the U.S., citing a 2009 McGraw-Hill survey that found 61 percent of state and local officials had no experience dealing with P3s and did not fully understand them. “In the United States,” Puentes wrote in a recent paper, “many states lack the technical capacity and expertise to consider such deals and fully protect the public interest.”

The federal government doesn’t provide much help. The Federal Highway Administration’s Office of Innovative Program Delivery can give states some guidance on P3s, but it’s mostly only available on deals that have a significant federal role. A 2008 report from the Government Accountability Office warned that while the Department of Transportation has been promoting P3s for highways, it’s done little in the way of helping states evaluate the potential costs and benefits of those deals.

A state P3 office could take various forms. Some foreign P3 units are housed within transportation departments, some are stand-alone entities, and still others are quasi-public corporations. But what’s more important than their exact structure is that they provide governments with the capacity to handle P3 proposals that come their way, says Jaime Rall, a senior policy specialist at NCSL.

The British Columbia model in particular has been touted by many Americans who advocate for stateside P3 units. The genesis for Partnerships British Columbia developed in the 1990s, when the province was short on capital but saw an increasing need for facilities like hospitals, schools and correctional facilities. Policymakers took an increased interest in P3s to help finance that infrastructure, and they made a conscious choice to look abroad at places like the United Kingdom that already had dedicated P3 offices as they sought to develop one of their own. “When they government looked around,” Clark says, “it saw the more successful jurisdictions had their own focused centers of expertise.”

Launched in May 2002, Partnerships BC has an unusual structure. It’s not a government agency; rather, it’s a company that’s wholly owned by the province and reports to its lone shareholder, the minister of finance. It’s also governed by a seven-member board with representatives from both the public and private sectors. A World Bank report notes that the entity’s unique structure allows it to offer salaries outside the normal range for civil servants, which helps attract financial experts from the private sector.

Partnerships BC functions like a consulting firm. The province, as well as municipal governments, must pay the entity in order to utilize the services provided by its 40-old employees, who hail from backgrounds in finance, engineering, project management and other fields. The company performs procurement analysis, structures contracts, selects bidders and helps implement P3 proposals under consideration by various public entities. The office is very active. Last month, for instance, the staff was handling nine projects in procurement and another eight that were under construction.

Interestingly, the office not only provides British Columbia and its cities with the know-how to structure and manage these deals, but the very existence of Partnerships BC acts as a sort of promotional tool that helps spur interest from the private sector in P3s. “When you’re looking at valuable business development dollars, you want to look at a place where the projects will actually happen,” Clark says. “[The office] shows support for the approach, and the projects and track record began to grow very quickly.” A typical request for project quotes garners eight to 11 private-sector responses.

Prior to the creation of Partnerships BC, Clark says, many of the province’s projects weren’t adequately planned. Budgets didn’t really consider every cost, she says, and the expertise wasn’t in place to properly analyze the life cycle of infrastructure like roads and hospitals. “It was definitely due to a lack of experience,” Clark says. One publicly financed project -- a convention center in Vancouver -- ended up costing nearly double its original budget. Today, Clark says, “we wouldn’t have done that. We would have done a performance-based contract.”

In a typical performance-based deal, a private contractor would be charged with designing, building, financing and maintaining the facility, and it would receive a flat fee from the province for doing so. If its costs came in higher than expected, the private-sector company -- not taxpayers -- would be on the hook. Take the Abbotsford Regional Hospital and Cancer Centre, a 300-bed facility just east of Vancouver that opened in 2008 to replace an older facility. Under the terms of that arrangement, the private partner agreed to meet certain standards over the duration of the 30-year, $424 million contract. It can earn more if it exceeds those standards, and it will earn less if it falls short. Partnership BC officials estimate that by transferring risks associated with the cost of construction, maintenance and operation to a private entity, they’ve saved $39 million over the course of the contract.

One of the P3 unit’s most important roles, it turns out, is steering overeager governments away from projects that could have long-term pitfalls for taxpayers. “A lot of jurisdictions want to put a shovel in the ground,” Clark says. “We’ve worked on being disciplined about upfront planning, what’s the need, and how should it be procured.” The office provides a reality check to public officials, what Clark calls “expectation management.”

To date, Partnerships BC has actually completed more healthcare projects than highway projects. That’s a marked difference from U.S. states, which have primarily focused their P3 efforts on transportation infrastructure. Another difference: The British Columbia office isn’t involved in monetizing existing infrastructure, like the high-profile Indiana Toll Road deal in which the state offered future toll revenues to a company in exchange for a lump-sum payment. When it does become involved with highways, Partnerships BC typically utilizes availability payments, a P3 model in which a private entity finances, operates, maintains and sometimes builds and designs a road in exchange for periodic payments from the government based on performance.

Already, some U.S. states are paying close attention to Partnerships BC. One recently announced effort: the West Coast Infrastructure Exchange, in which California, Oregon, Washington and British Columbia will partner to find ways to finance projects. Dan Carol, Oregon’s director of multistate initiatives, likens the effort to a dating website, matching up the right investors with the right public projects, such as broadband and water infrastructure. (The effort is in its early stages and no projects have been selected.)

Brookings’ Puentes says one of the biggest problems resulting from the lack of many U.S. P3 offices is the absence of an understanding of how P3s fit into long-term plans. He says Partnerships BC -- like other international P3 offices -- plays a valuable role in linking financing strategies to policy goals. “That’s the beauty of this,” Puentes says. “It’s not just a transactional thing. It’s linked to a national policy on freight, on infrastructure, on everything.”

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