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Will California See an Infrastructure Rush?

Leonard Gilroy
July 24, 2009, 4:03pm

Cezary Podkul at Infrastructure Investor weighs in on challenges and opportunities for infrastructure privatization and public-private partnerships in California:

True, California is in dire financial shape and asset monetisations could be one attractive option to pursue in shoring up state finances. In May, Governor Schwarzenegger reiterated his support for selling seven state-owned properties, some of which, like the San Quentin Prison, could afford investors access to infrastructure-like cashflows.

But whatever asset sales eventually end up making their way into the budget compromise, California’s ballot proposition initiative is likely to complicate the process. The state has a long history of outsourcing decision-making to its citizens in the form of propositions. Californians have been asked to vote on over 1,000 ballot measures in the last 100 years, according to a proposition database run by University of California’s Hastings College of Law. So proposals to monetise state assets could face huge political risk. [...]

Plus, as some local investors are quick to point out, even in a budget crisis, asset sales aren’t the state’s top priority. “While the state loves to talk about PPP activities, they are interested in PPPs for upgrades and new projects, rather than selling brownfield assets.
The assets which are more sellable assets are at the country and municipal level,” says Bob Hellman, chief executive officer of California-based American Infrastructure MLP Funds. “Cities and counties own a lot of assets which could be candidates for divestitures or PPPs – a lot of assets”, Hellman adds.

Catalysing an asset sale on the municipal level may also be a lot easier. California is one of a handful of states that permits its municipalities to opt for broad home rule, meaning that they do not have to ask permission from the legislators in Sacramento for everything they do – including PPPs. [...]
[Los Angeles'] parking lots in particular were outlined as “ideal candidates” for a PPP opportunity and Mike Keeley, advisor to Mayor Antonio Villaraigosa, is said to be moving full-steam ahead toward issuing a request for proposals sometime soon.

“What’s driving the mayor's administration, pure and simple, is lack of money. So as long as California stays in a bad financial shape, the opportunities for PPP investors will only increase,” says [McKenna, Long & Aldridge attorney Penny] Cobey.
The third pillar of opportunity for infrastructure investors is the state’s newly-enacted PPP law, which has created a Public Infrastructure Advisory Commission (PIAC) to shepherd projects along.

So far, there is reason to be optimistic. The first big PPP project under the law, a replacement of the southern access road to the Golden Gate bridge, known as Doyle Drive, is already in the planning stages.

And the state, under the leadership of Business, Transportation and Housing Secretary Dale Bonner, is so far doing a good job of listening to the market. Bonner has scheduled a feedback session on what role the PIAC can play in delivering PPPs for next Wednesday, 29 July.

All signs that, despite the talk of meltdown, breakdown, failure and crisis, there is a bright future for investors in the state. In which case, like the gold miners of the 1850s, infrastructure investors may want to go prospecting in the Golden State.

Read the whole thing. California definitely appears to be waking up from a decades-long anti-privatization funk, so the next 12 to 18 months should be interesting to watch.

» Reason Foundation's Privatization Research and Commentary
» Reason Foundation's California Research and Commentary


Leonard Gilroy is Director of Government Reform


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