After years of tax cuts and ideological pressure to cut public expenses, national, regional, state and local governments are desperate for money. Every sort of publicly funded entity from the wireless spectrum, to government laboratories, to national and state parks, to schools has suffered. But the transportation infrastructure is a particularly egregious example of what happens when maintenance is deferred. The system has been deemed woefully - and some engineering reports say dangerously - in need of an upgrade.
The challenge, where to find the money to do it, has increasingly led government entities to the private sector. In return for control of maintenance and revenue sources, everyone from global construction firms to investment banks wants a piece of the action. Which is precisely why some experienced observers are concerned.
The problem is that these investors are looking for increasing returns. Which means that they anticipate being able to raise rates over time. But the law of large numbers instructs us that to meet their projections, rates will all too soon make access to these ostensibly public byways unaffordable to those who most need to use them but can least afford to pay.
This raises both an organizational and ethical dilemma. Improvements can not be made without private funding - or a change in public attitudes with regard to public finances. But those who stand to benefit from the privatization of public services lobby hard against the change in tax and financing policy. This would appear to be an obvious conflict of interest but the laws are vague. In addition, the exclusionary nature of the financing model raises serious questions about whether the public really supports such alternatives - to the extent it is even informed of them. Earlier attempts to turn over traffic light management to private firms resulted in the speeding up of light times so that more motorists would be caught and fined. When the scheme was exposed, the resulting uproar caused contracts to be revised or cancelled.
There is certainly room for creative means to provide private financing for public projects. But the returns and the outcomes must fair to both citizens and investors. Whether the financial services industry will accept such a deal remains to be seen. JL
Steve Hargreaves reports in CNN/Money:
State and local governments are in desperate need of cash for all manner of road, building and bridge repair, and are increasingly turning to private money for funding.
But the involvement of private investors is raising concerns over how much control the public may lose over its roadways Companies putting up the money include construction and engineering firms like Bechtel and Samsung, and big banks like Goldman Sachs (GS, Fortune 500) and Merrill Lynch that aim to attract money from pension funds and insurance companies.
In exchange for the funding, the firms are getting an ownership stake in the projects. That means they'll get a cut of the tolls, and also be responsible for the maintenance.
The arrangement has some people nervous.
There is a fear that governments are losing some control of the roadways. If the maintenance doesn't get done, what recourse do they have to force the private firms to act?
Some have also questioned whether using private money is more expensive for the public than resorting to traditional means of funding: namely, the gasoline tax or municipal bonds.
"There has been some discussion on the cost," said Joung Lee, assistant director for finance at the American Association of State Highway and Transportation Officials. "Why would you opt for private [funding] at a higher cost of capital?"
Still, with proper contracts, Lee said the hope is the efficiencies gained from private construction, operations and technological innovation is enough to outweigh the concerns.
Case in point: the new high occupancy express lanes on the Washington D.C. beltway.
Opened just a few weeks ago, the new lanes allow cars with just one occupant to use the carpool lane, if they're willing to pay a fee.
The idea was pitched by construction companies Fluor (FLR, Fortune 500) and Transurban (TRAUF), using a mix of public money, bonds and private financing.
The aim is that the public will get less congested roads, several bridges repaired and a commitment from the construction firms to maintain the lanes for the next 70 years, while the construction companies and their financial backers get a cut of the tolls.
"It's a win-win," said Robert Puentes, a senior fellow with the Brookings Institution's Metropolitan Policy Project.
Nationwide, there have been 12 such public-private projects proposed in 2012 with a value of around $20 billion, according to the industry newsletter Public Works Financing. If they all move forward, it would be the most active year on record.
There have already been 10 projects either built or announced since 2008, including a tunnel linking the port of Miami to a major interstate, several other toll highway expansions, and a courthouse in Long Beach, Calif.
According to one estimate, there are now over 100 funds set up by private investors looking to get in on the action.
But the number of suitable projects is fairly limited. They mostly need to be in high-use, high-population areas where the toll revenue can exceed construction and operating costs.
But where it can work, experts see expanded opportunities, provided the deals are done correctly.
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