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The Untapped Potential of P3s

We should be looking at public-private partnerships for the full range of infrastructure, not just mega-projects.

Over the last several years, the public-private partnership (P3) market has started to take off. More projects than ever before are planned or underway, and many communities are benefiting.

However, even P3-active cities such as Chicago and Los Angeles find themselves with enormous needs still unmet. Huge sums of capital sit on the sidelines in the accounts of global investors. That money could be put to work, but most of these projects, given current market trends, will go undone. Communities will continue to suffer for lack of the basic infrastructure that ensures health, competitiveness and growth.

What is holding up the market? Why are critical needs going unmet?

The answer is that the market is preoccupied with financing only mega-projects, $800-million-plus ones. Investors and other P3 firms will grab a road here, a bridge there, a civic center over there. At the end of the day, not many projects are getting done this way.

When a public official raises questions about whether a medium-sized project can be done down the block, it is simply deemed not bankable -- not big enough, complex enough, revenue-generating enough. As a result, vital water, transportation and other infrastructure needs go unmet.

This preference for financing only the most lucrative standalone projects is a fundamental feature of the marketplace. P3s could be used much more broadly on a wider range of public assets. But while entire constituencies could benefit from public-private partnerships, rather than simply wealthy communities and business districts, investor-led consortia want to cherry-pick assets. We are not putting together the initiatives, institutions, programs, transactional structures and groupings of projects that could make smaller-scale P3s work for our communities.

A path to successfully financing an entire capital plan through P3s exists, and it can be done in an accelerated way. P3s can reshape entire landscapes. They have done so in many other parts of the world. In Asia during the 1980s and 1990s, P3s remade entire cities and even created new ones. Many countries in Africa are now undergoing the most transformative partnership-based, infrastructure-driven change of the century so far.

These kinds of projects are not unknown in the United States. In the 1980s, New York City's deteriorating Central Park was remade through a public-private partnership. Today, however, the P3 market is timid. Its financial and engineering models operate with tunnel vision.

Some public officials are starting to push back at the market. Chicago Mayor Rahm Emanuel, for example, is among the most committed in the nation to putting private capital to work to build infrastructure. Several years ago, Emanuel created the Chicago Infrastructure Trust (CIT). It was not structured simply to facilitate investment into marquee projects but to fund projects of all shapes and sizes. To that end, Emanuel has re-equipped the CIT with the financial prowess to reshape the P3 financing profile.

Los Angeles Mayor Eric Garcetti is thinking along the same lines with the ambitious effort to revitalize the 51-mile Los Angeles River corridor, aiming to turn a gargantuan eyesore into a collection of amenities to enhance the life of the city. The nonprofit LA River Corp.'s mission is, in its words, to "act as a hub to bring together public, private and philanthropic partners." Given the city's overburdened balance sheet, P3s will be a big part of the solution.

As these efforts in two major cities illustrate, P3s today are most exciting not for what they have done but what they could do. We've hardly begun to tap the power of this powerful infrastructure-building tool.

Leader of the infrastructure practice at 32 Advisors
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