Three forces are driving the emerging P3 market in the United States: the rapid deterioration of nearly all types of infrastructure in every state, investment shortfalls for building and rebuilding vital public systems, and a growing population's increasing burden upon existing systems. Three years ago the U.S. ranked ninth in infrastructure quality on a global level. In 36 months the U.S. has plummeted to 24th worldwide.4 As U.S. infrastructure systems break down and tax revenues diminish, while the nation's population grows, a robust P3 market moves from being possible to being probable.
Case in point: broken sewage pipes contaminate U.S. population centers with 900 billion gallons of wastewater each year. The U.S. Environmental Protection Agency (EPA) estimates that funding needed for the nation's water infrastructure is approximately $335 billion.5 Another $298 billion is needed for wastewater infrastructure.6 Systemic neglect in water infrastructure, as in nearly all categories of infrastructure, threatens public safety.
Private partnerships in the municipal water market are sure to grow. A 2002 report shows that 98% of the nation's public water treatment facilities are owned by municipalities. This is at a time when the public is taking notice of the nation's decrepit water systems. Good water treatment facilities are attracting homebuyers as strongly as good school systems.7
The American Society of Civil Engineers (ASCE), the country's oldest national civil engineering organization, issues a regular report tracking the grade point average of the nation's infrastructure across 15 categories, from airports to solid waste facilities. In 1988, the first year the ASCE Report Card was released, the U.S. infrastructure's cumulative grade point average (GPA) was a C. And since then, that GPA has been on a steady downward trend. Today, America's infrastructure grade mark is a D+, a modest improvement over the D- in the 2009 report. Still, significant shortfalls are as alarming as the investment requirements. Over the next five years, an estimated $1.723 trillion is needed for surface transportation, $100 billion for rail and $134 billion for the aviation sector, according to ASCE.
"The 2013 Report Card demonstrates that we can improve the current condition of our nation's infrastructure - when investments are made and projects move forward, the grades rise," ASCE reports. "For example, greater private investment for efficiency and connectivity brought improvements in the rail category; renewed efforts in cities and states helped address some of the nation's most vulnerable bridges; and, several categories benefited from short-term boosts in federal funding.
"We know that investing in infrastructure is essential to support healthy, vibrant communities. Infrastructure is also critical for long-term economic growth, increasing GDP, employment, household income, and exports. The reverse is also true - without prioritizing our nation's infrastructure needs, deteriorating conditions can become a drag on the economy."
The report card estimates that an investment of $3.6 trillion is needed between now and 2020 to bring the nation's infrastructure up to a good condition-an increase of nearly $1.5 trillion since the 2009 Report Card.8 To address the shortfall, ASCE stresses the need for more private-sector involvement, increased federal investment and the leveraging of state and local government revenues.
Over the last half century, the federal government has been the driving force behind large civic projects. Its role, however, has been diminishing steadily over the past several years along with the roles of state and local governments. P3s are never going to be enough to supplant government spending, but government expenditure is no longer enough if the breakdown of vital public facilities is to be reversed.
As declining public investment in infrastructure remains unabated, the public is becoming aware that alternative forms of delivery are needed. According to the 2012 McGraw-Hill Construction Dodge Report, "public works construction in 2011 dropped 14% to $103.2 billion. For 2012, public works is forecast to drop another 6% to $96.7 billion, reflecting diminished funding at the federal level from fiscal 2012 appropriations, combined with cutbacks in public works spending by state and local governments."
| In response, state officials are showing the will to seek out private investment. The Dodge Report points out: "States have already begun to adapt to flat-to-declining federal support. Individual large projects particularly bridges and limited access roads, are being funded through a combination of debt financing, public-private enterprises and tolls." The crisis has begun to change the public perception of P3s. Decaying systems have opened the door to a new willingness by the public and elected officials in deploying P3s as an alternative delivery method for infrastructure projects.9 | ||||||||||||||||
Dorian Grey, Head of Construction Insurance for Latin America & Caribbean Region for AIG, began training to be an underwriter in 1965 in London. "Since then, one of the main classes of insurance in which I've been engaged in is construction. I've had the privilege to work with AIG in Asia [and] Latin America. Currently I insure all kinds of construction. Right now I'm insuring construction [of a] few roadways in Panama, and the construction [of] several pipelines across the Andes between Chile and Argentina, as well as ones in Peru, Bolivia, and Brazil. And, a lot of power plants in Chile, Argentina, Brazil, [and] Colombia."
"When I moved to Houston, Texas in 2000 it came as a shock to me that pipelines in the U.S. were in much poorer conditions than in Indonesia or Chile. The reason of course is self-evident; the U.S. has had its infrastructure for decades longer than Indonesia or Malaysia."
"Some of these pipelines are toll pipelines," continues Grey. "A lot of the pipelines are just in the ownership of one or a consortium of gas companies. There are a couple that run between Louisiana and New York. We used to insure them. It's purely a tolling function. The government doesn't have too much interest in pipelines because it's not something they're required to supply. But the infrastructure is so aged that the governments now have a liability on their hands. They're now vested in efforts to avoid another major pipeline disaster. If regulation requires it, replacement of the tolled facilitates could become an impressive P3 opportunity." |
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4 World Economic Forum: Global Competitiveness Report, 2011-2012: US ranks 24th globally
5 EPA, Drinking Water Infrastructure Needs Survey and Assessment: Fourth Report to Congress, February 2009.
6 EPA, Clean Watersheds Needs Survey 2008.
7 Failure to Act: Economic Impact of Current Investment Trends in Water and Waste Water Treatment Infrastructure, 2011, p.V
8 American Society of Civil Engineers, 2013 Report Card for America's Infrastructure, http://www.infrastructurereportcard.org/, accessed 29 March 2013.
9 McGraw-Hill Construction 2012 Dodge Construction Outlook Midyear Update, http://www.construction.com/about-us/press/new-construction-starts-to-rise-2-percent-in-2012.asp, accessed 29 March 2013.