In his first State of the Union address, President Donald TrumpDonald TrumpGraham says he hopes that Trump runs again Trump says Stacey Abrams 'might be better than existing governor' Kemp Executive privilege fight poses hurdles for Trump MORE called on Congress to develop legislation that would fund upward of $1.5 trillion for new infrastructure projects in the United States.
But rather than place the entire financial burden on the American people to reduce what he called our “infrastructure deficit" or revert back to inherently flawed programs like the perennially insolvent Transportation Trust Fund, the Trump administration appears to want infrastructure to be paid for by a combination of federally subsidized financing programs, partnerships with state and local governments and private-sector investment.
While the president’s proposal was met with roaring applause from most Republicans in the House chamber, details were absent. Much of what we think we know about the Trump administration’s plans come from leaked information, presumably from within the president’s infrastructure team.
If the leaked information becomes policy, both the administration and its allies on Capitol Hill will have a lot of convincing to do before the $1.5-trillion Trump infrastructure plan ever becomes a reality, especially regarding the use of private-sector investment.
But what many politicians on both sides of the aisle and most of the public fail to understand is that private-sector investment in infrastructure in the form of public-private partnerships (P3s) has been an incredibly successful vehicle for incentivizing infrastructure investment and development around the world. There is even a nascent, albeit slowly developing, wave of P3 deals in the U.S.
It’s time for the U.S. to embrace P3s and unleash what this country is best at: private-sector innovation and financing.
Yet despite all the evidence that P3 works, it continues to be misunderstood, or worse, mischaracterized for political objectives by many of our elected representatives. Here are the three biggest myths I’ve heard in my 20-plus years of advising investors on P3 projects.
1. The government is selling away the family jewels.
A common P3 structure is so-called “asset recycling," where existing transportation or utility assets in public control are leased to the private sector for an up-front payment, the proceeds of which are used to invest in new infrastructure.
A frequent criticism of this approach is that local governments are getting ripped off by private investors. For example, Trump recently criticized the Indiana Toll Road transaction, where the state of Indiana leased the road to private investors in 2006 for $3.8 billion.
Eventually, the project ended up filing for bankruptcy in 2014. What Trump failed to mention is that the road was sold to another group of private investors for over $5 billion, with no interruption or degradation of service and no cost to the state. And the state kept the $3.8 billion.
There are countless examples of successful P3 deals, from the Ausgrid power grid deal in Australia, where the government of New South Wales raised over A$16 billion, to the 407 toll road in Canada, to the RTD Fastracks commuter rail system in Denver, Colorado (I represented Denver RTD on that deal).
Granted, not every P3 deal has been a resounding success. But we must highlight and learn from the successful transactions.
2. The private sector is going to gouge consumers by raising user fees.
Although private investors do rely on fees to recoup their investment, and they have a clear profit motive for their investment, they can’t raise user fees unless a government agency or regulatory authority approves the proposed increases, just like with investor-owned gas and electrical utilities.
P3 contracts contain a schedule of pre-set rates, with increases linked to inflation indices. The investors in these projects take the risk that the pre-set rates are not sufficient to make a profit. They also take the risk that usage of the asset is less than they forecast: lower usage results in lower revenues.
And if investors try to renege on the deal by raising rates anyway? The government can terminate the deal and take back the asset.
3. The quality of an infrastructure asset will decline under private ownership.
The flipside of the "raising fees" myth is that if a private investor can’t find a way to generate more revenue, they will instead try to reduce operating costs regardless of the effect on service or safety.
The argument is simple: Investors want to maximize profits, and letting an infrastructure asset fall into disrepair is seemingly an easy way to cut corners.
This argument ignores the fact that detailed operating and maintenance standards are built into each P3 deal, so investors are required to maintain the highest industry-wide standards. If they don’t, the government can terminate the deal and take back the asset.
In fact, government agencies are notorious for deferring maintenance and capital investment to balance the public accounts. That’s far from being a reality right now.
In fact, the American Society of Civil Engineers graded U.S. infrastructure as a “D+” in their 2017 report card. By contrast, P3s actually ensure that maintenance and upgrades cannot be deferred.
Skepticism can be healthy, but where’s the skepticism for continuing the government’s near monopoly on transportation infrastructure financing and operation? The U.S. abandoned that approach decades ago for energy infrastructure, which today is run almost entirely by the private sector.
How many times does the government have to fail before we try something else?
The country deserves better. Private-sector investors deserve an opportunity to contribute a solution to the decades-old problem of under-investment by government in our nation’s infrastructure. It’s time the U.S. government gives them that opportunity.
Kent Rowey represents investors, credit providers, public-sector entities, contractors and other participants in infrastructure and natural resources transactions as a New York partner of international law firm, Allen & Overy.