America's economic strength is built upon a foundation of private infrastructure investment going back centuries. Some of the names are familiar: the Lancaster Turnpike, the Transcontinental Rail Road and the Golden Gate Bridge. These impressive domestic undertakings, financed with private equity, were the nation's norm when forging its vital transportation infrastructure: ports, inland waterways, canals, rail lines, power grids and toll ways. As America's economy grew, so too did the federal government. Ambitious federal programs such as the Eisenhower Interstate Highway System became the model for the latter half of the 1900s. Today however, severe economic downturn, taxpayer anger and a lack of political will have eroded support for large scale federal projects. Increasingly, state governments are responsible for financing the maintenance and expansion of their infrastructure. Therefore, states are returning to a traditional form of infrastructure delivery: private investment.
The tectonic plates necessary to recreate a robust, sustainable, market for public-private partnerships (P3s) are beginning to shift into place. Dilapidated infrastructure, significant budgetary shortcomings and growing political will among elected officials have created an emerging P3 market inside the United States. As communities attempt to confront current economic challenges, P3s are steadily becoming a viable delivery mechanism in the financing of civic projects, especially large, complex undertakings in the transportation sector. But this brings new challenges along with new opportunities.
Thomas Grandmaison, Executive Vice President of Construction Casualty and Executive Sponsor for AIG's Construction Industry Practice Group, drives the need for enhanced risk management inside a P3: "The 'value for money' predicate for the P3 model depends upon significant risk transfer from the public to private sector. All private sector participants will be challenged to accept risk beyond their comfort zone and what had traditionally been the regime in other project delivery methods; and a significant portion of that risk, will not be transferrable to conventional insurance coverages. As such, the development of a proactive and effective risk management plan and implementation of a manuscripted project-specific insurance program are essential to successful and profitable P3 participation."
David Hatem, a founding partner of the Boston-based law firm Donovan Hatem LLP, further drives the need for upstream thinking in the private sector: "We are at an early and formative stage in P3 risk allocation thinking. There are many ranges of opportunities to achieve prudent and sensible risk allocation and, as many, if not more, opportunities to achieve the opposite result."
"The market is coming-the tools need to be manufactured," explains Grandmaison. "In anticipation of a potential paradigm shift in the construction procurement modeling process in the United States, AIG is designing a product to address contractual insurance liability issues. Because of the U.S. litigation landscape, compared with other parts of the world, we expect P3 contracts to be even more voluminous here. There will be lessons learned for all stakeholders in years to come. We at AIG remain ready to engage these projects with the proper mindset to provide comprehensive insurance solutions to assist in successful P3 delivery across the United States and Canada."
| P3 initiatives are not totally foreign territory here; several states have already begun aggressively pursuing private investment. In order of relevance, Virginia, Texas and Florida are the leading states in the rise of a national acceptance of P3s. Sun Belt states are most challenged by increasing populations and the demands of growing economies. Exploring previously unconventional solutions to financing has been a necessity. In particular, these states and Sun Belt states in general, are accustomed to building expensive, long-term public projects. And for the past few decades, these southern states have successfully launched several complex P3s. | ||||||||||||||||
| New York, Pennsylvania and Massachusetts stand to be the next states to follow their pioneering southern counterparts. Once these and other northern states embrace the P3 model, their own successes are likely to create an even stronger market in the region. Over the past several decades, the project engineers possessing the institutional know-how of managing ambitious construction endeavors have retired. Given the lack of large projects occurring there, young engineers haven't come along to take their places. Having less wherewithal in the management of ambitious projects, northern states have been slow-even unable-to adapt to the complexities of P3s. Additionally, organized labor and elected officials in northern states previously resisted adopting P3s as a viable delivery mechanism. Under recent pressures to foster development, union leaders and politicians are steadily embracing P3s as a legitimate way of launching construction projects to replace outdated infrastructure. | ||||||||||||||||||
Recently, the U.S. has shown the willingness to embrace large-scale projects again, making it a ripe P3 market. The U.S. Census Bureau announced late in 2012 that projected construction spending for the year is estimated to be $851.6. billion, up 7.8% from the previous year. Today, private financing of public projects in the world's largest emerging P3 market is nearly nonexistent. Some experts estimate that U.S. private investments could reach 10% of the nation's total spend in construction.1 Regardless of the percentage, industry experts and the public agree that P3s must be considered as an additional facilitator to transportation projects.
The Rockefeller Foundation's recent Infrastructure Survey revealed that, "with overwhelming support for transportation and infrastructure improvements, Americans are open to several funding streams. Seventy-eight percent encourage more private investment and 72% of voters support imposing penalties on projects that go over budget or exceed their deadline. Sixty percent of voters support establishing a National Infrastructure Bank, [and] 59% support issuing new transportation bonds." Interestingly, in the same survey, only 27% of voters support increasing the gas tax. With a reluctance to increase the federal gas tax, the main driver of transportation tax revenue, private investments in public transportation projects become a near necessity."2
Long-term forecasts for low interest rates have another boosting effect on the emerging market for P3s. Chris Hogg, Managing Director of Macquarie Capital makes the case: "We're in something of a perfect storm in terms of fixed income investor appetite. That's well-evidenced by the fact that we have been in a rally environment in both the investment grade and non investment grade fixed income markets for most of 2012. Investors are now more prepared to look at structured products to gain enhanced yields in what looks to be a sustained low yield environment."
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1 US Census Bureau News, US Department of Commerce, Washington, DC, 1 November 2012.
2 Rockfeller Foundation ase, "Rockefeller Foundation Infrastructure Survey Reveals Bipartisan Support for Transportation and Infrastructure Investments and Reform," released 14 February 2011.