Private Solution to California’s Infrastructure Problems

Schwarzenegger says state needs $500 billion

It is no secret that California’s infrastructure has deteriorated dramatically over the years and not kept up with population growth. We have arrived at our current state because of a perceived lack of money (even though state revenues have doubled over the last 10 years) and decades of legislative apathy. Yet, despite a soaring budget deficit and a legislature that seems intent on enacting more regulations and boondoggle health care and environmental programs rather than funding needed infrastructure projects, there is still a simple solution that may provide some much-needed relief: allow the private sector to succeed where the public sector has not.

Gov. Arnold Schwarzenegger estimates that the state needs $500 billion worth of public projects over the next 20 years to address the infrastructure problem. This is far too much money for the state government to absorb without massive tax increases or cuts to other programs that politicians are unwilling to make. Moreover, the state already faces an impending budget deficit of at least $10 billion, and, according to various media reports, money from the $42 billion bond package that was passed in November 2006 is already being squandered.

To his credit, Schwarzenegger is seeking to address the state’s infrastructure problems by soliciting proposals from private-sector firms to design, build, and/or operate public projects such as roads, schools, wastewater treatment plants, ports, levees, and hospitals. Such arrangements are often called public-private partnerships, or PPPs. In the case of a road, for example, a private company might agree to build a new stretch of highway and pay a fee or long-term lease to the government in exchange for the right to operate and collect tolls on the road. This is the model on which the new South Bay Expressway in San Diego was built.

In addition to providing a much-needed funding source for projects, public-private partnerships transfer risk to the private sector by allowing the government to structure contracts such that the burdens of liability issues and cost overruns are shifted to the contractor. Furthermore, private contractors typically provide the same or better service at lower cost. This is because of the different incentives faced by the public and private sectors.

In the absence of contracting, the government is a monopoly and faces no competition. Agencies get as much money as they can through political lobbying and don’t have to worry about going out of business. In the private sector, however, businesses succeed only by providing lower prices and/or better quality goods and services than their competitors. If a private company does not perform well, it loses its business to someone else.

In short, private businesses have much stronger incentives to innovate and keep their customers happy. If a customer has a problem with a private business, chances are he can go to the proprietor or store manager to fix the problem. By contrast, if the pavement on the freeway is deteriorating or a disabled vehicle takes too long to clear, who is the taxpayer to call, and how likely is it that the problem will be quickly remedied?

California does have some experience with public-private partnerships. For example, the use of contracts with incentive clauses successfully sped repair of roads and bridges after the 1994 Northridge earthquake, and again following a gasoline truck accident that destroyed interchanges at the MacArthur Maze in the Bay area earlier this year. But the state has generally taken a piecemeal approach to these partnerships and ignored many opportunities to utilize them.

While the United States likes to tout its free market credentials and the prosperity derived from its spirit of entrepreneurship and faith in the private sector, it is actually rather behind the curve when it comes to infrastructure. Even many socialist countries in Europe and elsewhere recognized long ago that using the private sector is a winning strategy to providing quality infrastructure.

It is time that California catches up by simply getting the government out of the way and rediscovering the virtues of private enterprise. As Thomas Jefferson, demonstrating his grasp of economics, once said, “It is better for the public to procure at the common market whatever the market can supply; because there it is by competition kept up in its quality, and reduced to its minimum price.”

If private companies can do at least as good a job as government employees for cheaper, or can provide needed services that otherwise could not or would not be funded, why shouldn’t they be encouraged to do so?