There is no disputing that the U.S. must modernize its aging infrastructure. Anyone who travels globally can attest to how little our country has done versus other nations during the past couple of decades. That’s why the idea of building new infrastructure — and modernizing what we already have — enjoys strong bipartisan support, when little else does.
Government funding and oversight have created what we have, as little has come from private initiatives. The money spent in the past ranks as some of the best investments this country ever made, engineering triumphs that literally moved mountains and tamed raging waters — but there was failure mixed in, too. It may not have been perfect, but our great American infrastructure buildup generated lasting economic benefits.
All levels of government — federal, state and local — say they want more infrastructure, but there is a clear lack of political will for producing billions and trillions of dollars in new government spending. If any significant progress is going to be made soon, it will require private sector participation. However, it also will require finding solutions that address concerns of all stakeholders, including both investors and citizens.
There is a huge base of global investors craving less risky investments with good yields and potential for capital appreciation. With fixed income rates rising slowly off historic lows — the U.S. federal funds rate is now at 1.25 percent — investors cannot get those yields from Treasury bonds and other traditional harbors. Infrastructure-related investments such as municipal bonds, private debt and equity funds can offer the income and potential capital appreciation investors seek.
When structured well, infrastructure managers can build and maintain the big, complex projects our local, state and federal governments want — and need — while offering investors the potential for solid income from the revenues generated, along with potential capital appreciation.
The mechanism that will be used is the public-private partnerships, or P3s. These legal structures offer some of the best framework for designing, building, maintaining and operating successful projects. Some states have yet to pass legislation authorizing the use of P3s, so governmental action is required to open doors to private sector infrastructure investment.
It must be admitted that several P3 projects have failed, for a variety of reasons. Yet the lessons learned are essential to creating best practices for future structures and agreements across the country, for projects of all types.
To make private infrastructure work, we must make three large changes in the status quo. First, we need to reduce red tape and streamline regulatory frameworks. The many filings and approval networks at all levels of government can — and must — be cut back to reasonable levels, while still protecting the public good.
Second, we must match incentives to interests of all parties. Coordination at all levels and stages of infrastructure investment is key. Private entities seek to maximize profit, but if care is taken to structure transparent agreements that account for the needs of all parties, everyone can win.
Third, we must recognize and rein in possible abuses of monopoly power. When they are well crafted, oversight frameworks can provide effective checks and balances. Government entities should insist upon detailed emergency situation and performance-based clauses, with penalties for breach including extra payments or repayments and, potentially, loss of ownership.
To manage these issues, public-private partnerships can provide excellent vehicles. Government can solicit private sector funds, which are ready to be invested. Private sector managers, motivated by investor pressure to deliver on time and under budget, can offer efficiencies and cost savings. By working together, the public and private sectors can create good jobs, complete new infrastructure projects this country needs, and provide solid investment opportunities.
Robert Amodeo, CFA, is head of municipal investments and portfolio manager at Western Asset Management, a California-based subsidiary of Legg Mason. His opinions are not meant to be viewed as investment advice or a solicitation for investment.
The views expressed by contributors are their own and are not the views of The Hill.