Public-private partnerships: The US perspective

To rebuild its crumbling infrastructure, America may at last be ready to fully embrace public-private partnerships (PPPs)-out of necessity, convenience, or a combination of the two. Indeed, it may have little choice if it hopes to retain its competitive position in the world economy.

Many of the country's highways, bridges, rail lines, ports, and airports have either deteriorated to a state of disrepair or have become increasingly outdated. Public officials are obliged to consider timely, cost-effective alternative approaches to financing, building, operating, and maintaining infrastructure. Long-ignored structurally deficient infrastructure must first be repaired or replaced. Equally important is the pressing need to replace infrastructure that no longer serves its original purpose.

An important concern is identifying sources of short- and long-term funding. One viable option, widely used in Europe and other parts of the world to address infrastructure crises, is the use of public-private partnerships. Funding, of course, will be key to shoring up America's infrastructure. The Brookings Institution estimates that the American Recovery and Reinvestment Act of 2009 authorizes an estimated $126 billion for infrastructure.1 That's a good start, but the money can be stretched much further if government agencies partner with the private sector for additional financing. By some estimates, available private capital totals more than $180 billion.2 "This number could be significantly higher if the government is forthcoming in its desire to forge true strategic long-term alliances with the private sector and is not just looking for a quick fix to monetize desperately needed projects," says Dr. Sotiris Pagdadis of the Capital Projects and Infrastructure Practice at PricewaterhouseCoopers and founder of Lambousa Infrastructures Consultancy Group.

In the last 18 to 24 months, "there have been deep losses in public pension funds, Taft-Hartley funds, endowments, and other managed funds. Many are, in fact, dramatically underfunded," says Leonard Shaykin, a managing partner at LambdaStar Infrastructure Partners, a US labor-committed, middle-market fund investing in transportation, energy distribution, and waste and waste-water assets. "Many pension funds seem to be searching for safer, inflation-linked assets to place a portion of their assets," he says. "What better asset in an economic downturn and unclear future than hard real-estate assets generating current cash flow and providing some measure of inflation protection."

Public pension funds have begun allocating between 1 percent and 10 percent of their portfolios to public-private partnership projects, says Shaykin, adding, "More are committing every day. In five years this will be an established new asset class for pension fund managers." Pension funds currently view PPP investments in a variety of ways-as bond-like, as a real-estate-related asset, as simply a private equity alternative investment, or as a new class of inflation-protected assets.3

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1  The Brookings Institution, Metro Potential in ARRA: An Early Assessment of the American Recovery and Reinvestment Act, March 2009.
2  Kearsarge Global Advisors et al., Benefits of private investment in infrastructure, 2009.
3  Interview with Leonard Shaykin, managing partner at LambdaStar Infrastructure Partners, October 12, 2009.