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Real Clear Markets

States and Cities Going Private With Infrastructure Investment

Leonard Gilroy and Harris Kenny
May 24, 2012

States and municipalities across the U.S. continue to grapple with the lingering effects of the Great Recession. City leaders continue to struggle with depressed revenues, and 30 states are expected to close budget deficits totaling $49 billion this year, according to the Center on Budget and Policy Priorities. Further, many government bodies are struggling to maintain their credit ratings in an uncertain economy.

As public debts grow, cities and states simultaneously face pressing needs to repair and modernize critical infrastructure assets that can't wait if citizens hope to keep goods and services moving in the economy. For example, many interstate highways, which are owned and maintained by states, are reaching the end of their useful lives and will cost tens of billions of dollars to reconstruct. Yet, projected federal and state fuel tax revenues will come nowhere close to covering the bills.

When factoring in similarly large investment needs in water, aviation, schools and other public infrastructure facilities, it becomes abundantly clear that new infrastructure financing models and sources of capital will be the only viable option to support and sustain growth.

Enter the private sector, where investors are demonstrating a willingness and capability to partner with governments to modernize and expand infrastructure, according to Reason Foundation's recent Annual Privatization Report 2011. The report finds that the amount of capital available in private infrastructure equity investment funds reached a new all-time high last year. And since 2006, the 30 largest global infrastructure investment funds have raised a total of $183.1 billion dedicated to financing infrastructure projects; the bulk coming from U.S., Australian and Canadian inventors. In fact, eight major privately financed transportation projects were under construction in the U.S. in 2011 totaling over $13 billion.

For a preview of the future, just look to Puerto Rico, where innovative infrastructure financing has been a priority of Governor Luis Fortuño's administration. Prior to his tenure, massive budget deficits and weak credit ratings left the territory with a limited ability to finance infrastructure. In fact, public infrastructure investment (as a share of GDP) had been on a steep decline in Puerto Rico since 2000.

Put simply, if Puerto Rico was going to maintain-much less expand and modernize-its infrastructure, it was going to need outside help. Policymakers proactively adopted a 2009 law authorizing government agencies to partner with private firms for the design, construction, financing, maintenance and/or operation of public facilities across a wide spectrum that includes transportation, ports, schools and other asset classes. The law also established a Public Private Partnership Authority (PPPA), a new unit of the Government Development Bank, to conduct due diligence on these infrastructure partnerships and take worthy projects to market in competitive procurements.

So far it's been a smashing success. Last fall the PPPA finalized its first major highway deal, closing on a 40-year, $1.5 billion lease of two toll highways to a private concessionaire now responsible for operating the facilities and making major capital investments in pavement, signage, lighting and other safety enhancements.

Lawmakers are also poised to privatize operations of San Juan's Luis Muñoz Marin International Airport this summer. Two weeks ago PPPA officials selected two consortia eligible to compete for a $1 billion, 50-year lease expected next month. The deal pays off $900 million in public debt, and results in a virtual reconstruction of the entire airport, pursuant to officials' goal of turning the airport into the preeminent gateway to the Caribbean.

PPPA is also in the middle of a new K-12 school modernization program whereby officials are contracting with private developers to design, build and maintain a package of approximately 100 schools in 78 municipalities across the territory. This effort will address a severe need to upgrade aging, deteriorating schools and tackle chronic deferred maintenance.

Puerto Rico isn't alone though. For example, Chicago Mayor and former Obama chief of staff Rahm Emanuel stood with former President Bill Clinton last month to propose an ambitious $7.2 billion infrastructure program that will rely heavily on public-private partnerships and private financing for a broad spectrum of projects including roads, water, transit and more. To implement this program, city policymakers recently created a new Chicago Infrastructure Trust, a nonprofit infrastructure bank that can package deals and blend public and private financing to advance projects. Early pledges of up to $1 billion in private capital from several financial institutions, including Citibank, Macquarie and JPMorgan suggest the model may be viable.

Elsewhere, both Texas and Connecticut enacted broad-ranging laws to authorize private sector financing for state and local assets in 2011. In New York, The Yonkers Public Schools recently hired a team of financial, legal and technical consultants to evaluate the potential to tap private financing to help deliver a $2 billion K-12 school modernization program. Like Puerto Rico, Yonkers has a number of aging facilities over 70 years old that need reconstruction, yet lacks the ability to undertake large-scale renovation through traditional taxes and bonds given current fiscal and financial constraints.

Ultimately, policymakers are beginning to realize that the status quo of financing infrastructure through taxes and municipal debt is broken. Fortunately the private sector is poised and ready to invest in infrastructure, with hundreds of billions of dollars in privately sourced capital sitting on the sidelines looking for worthy public infrastructure projects in which to invest.

While governments continue to struggle even with the basics of balancing budgets, much less long-term crises like entitlement spending and underfunded public pensions, the question is not if, but when, will more policymakers like Fortuño and Emanuel step up and embrace the private sector? Infrastructure represents the arteries and capillaries of our economy, and if we let those deteriorate, the heart itself will soon follow.

Leonard Gilroy is the director of government reform and Harris Kenny is a policy analyst at Reason Foundation, a Los Angeles-based think tank. Gilroy and Kenny are both editors of Reason's Annual Privatization Report 2011, available at www.reason.org/apr2011. This article originally appeared here on Real Clear Markets on May 17, 2012.


Leonard Gilroy is Director of Government Reform

Harris Kenny is Policy Analyst


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