Fixing U.S. Infrastructure: New Model P3 Law a Good Start
If you have ever been involved in a public-private partnership (P3) project, or are just familiar with the players and processes of this type of venture, you know that the old saying "it takes a village to raise a child" is an appropriate analogy. Private developers, elected officials, governmental agencies, lawyers, accountants, analysts, engineers, financiers and others all play vital roles in the development and success of a P3. Of these, perhaps the most critical role belongs to the government. Without a federal, state or local agency backing the project from start to finish, it has no hope of succeeding. In turn, it is P3-enabling legislation that permits and defines the scope of governmental participation in a P3 project.
Currently, 33 states (as well as Washington, D.C. and Puerto Rico) have enacted some sort of public-private partnership legislation. This current patchwork of laws has met with varying degrees of success and public support. Some states, such as Virginia and Florida, have reaped the benefits of their respective legislation, recognizing that predictability and transparency are critical hallmarks to attract private sector investors. In other locales, such as Kentucky, the lack of comprehensive P3 legislation has contributed to the failure of projects before the procurement process is complete.
With that in mind, the P3 industry received a holiday present last year from the Bipartisan Policy Center (BPC), a nonprofit organization located in Washington, D.C. On Dec. 17, 2015, the BPC released a model law that would authorize state agencies and local governments to enter into P3s for infrastructure projects.[1] According to the BPC, the comprehensive model is based on an examination of P3 "best practices" nationwide and thus, given the relative successes of P3 projects in Virginia, it incorporates many of the provisions of Virginia's P3 legislation. BPC's goal was to create a template that would provide state and local governments with broad authority to enter into P3s for all types of infrastructure improvements through a process that would encourage private sector involvement, while protecting the public's interests.
The utility of the BPC's model is boundless. There is no question that the United States is decades behind its peers in the use of P3 projects and financing to deliver much-needed infrastructure improvements.[2] State legislators who wish to pass laws authorizing the use of P3 for these projects can now use the BPC model as a tool to craft the legislation. In addition, the template may be used by states that have already enacted P3 legislation to improve, expand or update their existing laws.
The idea of model legislation is not new to this country. As lawyers, we rely and regularly utilize laws and regulations promulgated from model legislation proposed by private organizations. As finance lawyers, the foremost example for us is the Uniform Commercial Code (UCC), which is perhaps the longest and most elaborate of all uniform acts. The UCC began as a joint project of the National Conference of Commissioners on Uniform State Laws and the American Law Institute. It has now been enacted, in one form or another, in all fifty states and Puerto Rico, and is the backbone of commercial transactions jurisprudence in the US.
The need for comprehensive P3-enabling legislation in this country right now is a paramount concern. One of the main reasons private capital has not flowed into infrastructure in the United States (as it has elsewhere) is the high degree of political uncertainty surrounding P3 projects. Virtually every P3 project in the United States will be affected by a political election at least once during its development and then again during its implementation. If local or state leadership changes as a result, under the present legislative regime, there is often a risk that an entire project could be revamped, or worse, completely scuttled.
One only has to look at the development of the Purple Line in Maryland (more than 25 years in the making, in large part due to changes in leadership) or the Indianapolis Justice Center (recently voted down ahead of a contentious mayoral election) to see the project risk created by political upheaval or the prospect thereof. In those cases, the private companies and their advisors invested millions of dollars and countless hours researching, planning and developing bids before being sent packing (the Indianapolis Justice Center) or back to the drawing board (the Purple Line).
Investors do not like playing in politically uncertain arenas and given their rate of return on some P3 projects in the United States to date, it is hard to blame them. In other countries, a request for P3 proposals is an indication that a project is likely to happen. Here, it is often just a signal that the political winds have once again shifted. P3-enabling legislation would help reduce the risk these private investors face when bidding on new infrastructure projects.
The case for modern, high-capacity infrastructure is an easy one to make in any political environment. Transportation infrastructure is a critical component of any competitive, efficient and successful economy. Interrelated infrastructure systems facilitate the efficient movement of people and goods, promote commerce, connect supply chains and reduce operating costs. For our $17 trillion economy,[3] modern and reliable infrastructure transportation is not an option; it is a necessity.
That being said, our current transportation system is underperforming. The highways, railroads, bridges, airports, mass transit centers and ports that once represented the best of American ingenuity and engineering have deteriorated into overused, unreliable and in some cases, dangerous relics. Bridges are weakening, ports are too shallow, roads are congested and airport runways are too short. Political acrimony, the uncertainty of elections, budget shortfalls and government spending cuts only add to our infrastructure woes.
In 2014, the World Economic Forum's Global Competitiveness Index ranked the United States sixteenth in the world in terms of the "quality of overall infrastructure," placing us well below our peer nations.[4] The American Society of Civil Engineers gave the United States a bleak D+ rating in its 2013 assessment of American infrastructure.[5] This dismal outlook is not just limited to nongovernmental organizations and professional societies. According to a 2013 survey, 65 percent of U.S. manufacturers believe that American infrastructure will be unable to meet the demands of a growing economy over the next 10 to 15 years.[6]
Beginning with the New Deal, this country was the beneficiary of a strong public commitment to world-class physical infrastructure. Unfortunately, public investment has tapered off or flat lined in recent decades, while the demand for modern, high-capacity systems has grown. In 2014, public spending on all U.S. infrastructure systems was just 2.4 percent of gross domestic product (GDP) and of this, only 1.6 percent was attributable to public investment.[7] These figures are down from their peaks in the 1960s[8] and significantly lower than those of our peers.[9]
According to the American Society of Civil Engineers, the cumulative impact of this underinvestment, coupled with natural aging and increased demand, has created a massive gap between projected investment needs and projected investment levels over the next several years to the tune of $1 trillion by 2020.[10] Public dollars alone cannot fill this gap. Private sector investment is the key to providing the additional money needed for building and maintaining our infrastructure. Although our government has been slow to accept this eventuality, the tides are turning in favor of P3s.
In a recent interview, Jim Boxold, Florida's Secretary of Transportation, highlighted the need for private dollars in the form of private-public partnerships: "P3s are a way for us to get larger projects done sooner without having a negative effect on our regular work program. We got to the point where in order for us to keep the rest of our program on track, we had to explore the P3 opportunity. They really are the next level."[11]
Boxold stressed the need for a cognizable process, noting that private sector investors appreciate a predictable structure and measure of transparency: "There's a lot of internal work that goes on in terms of identifying the next project. Once that is done there is a transparent process that gives predictability to our partners." He further explained, "[w]e get the governor's approval and the Legislature reviews the projects before we can start procurement. That helps to give some comfort to the industry that we're going to see a project through." The success of Florida's P3 legislation is evident. The Florida Department of Transportation is currently involved in eight different P3 infrastructure projects with another two under consideration.
The BPC's model law could not have come at a better time. As Doug Peterson, president and CEO of McGraw Hill Financial and co-chairman of the BPC Executive Council on Infrastructure, noted: "The next decade will be a critical time for infrastructure investment, laying the groundwork for future economic success. Fortunately, the states do not have to take on this challenge alone. The private sector can help, bringing innovative ideas and long-term capital support."[12]
That being said, many states are legally prohibited from fully partnering with private entities and those agencies that do have the requisite authority do not necessarily make good business partners. The goal of BPC's model law is to "untie the hands of [the] infrastructure agencies and allow them to benefit from public-private partnerships"[13] by providing transparency and accountability.
Key components of the model law include: (i) the creation of state offices dedicated to providing P3 expertise and guidance, (ii) a broad mandate allowing government agencies at all levels to pursue P3 projects for a variety of transportation, stormwater, broadband, courthouses and other projects, (iii) the creation of a task force consisting of members from all levels of state government along with public and private stakeholders to recommend guidelines governing the solicitation, evaluation, award and delivery of P3 projects; and (iv) a process by which agencies can educate the public about and seek their input on potential P3s. The model law also requires an evaluation of each P3’s life cycle costs and benefits before an agreement is finalized, a finding of public interest and a determination that the P3 is compatible with regional plans, all of which must be publicly disclosed.[14]
We do not pretend to know the future of the BPC model law and in particular, whether any state will actually adopt all or part of it and if so, whether it will be successful. This article is not intended to speak to the merits of the model law. Rather, as lawyer members of the village tasked with raising the P3 child, we applaud the BPC's efforts for pushing the dialogue forward.
The bottom line is that the United States is facing an infrastructure crisis and our needs are far greater than the government can provide on its own. Private capital and innovation are available to help. While P3s are not appropriate for every infrastructure project, they are a proven, viable alternative. Reducing the political risks associated with P3s by enacting legislation that seeks to bring transparency and predictability to the forefront of the process is an important step in the right direction.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] [BPC press release, 12/17/2015].
[2] Australia, Canada, the United Kingdom and the European Union, among others, are using P3 financing to build roads, railways, water treatment plants, hospitals and other critical infrastructure. According to the House Transportation and Infrastructure Committee's Special Panel on Public-Private Partnerships, governments around the world entered into 158 infrastructure-related P3 projects between 2008 and October 2013. Of these, only fifteen were located in the United States. [BPC article 11/3/2015].
[3] "National Income and Product Accounts." Bureau of Economic Analysis. U.S. Department of Commerce. Sept. 25, 2015.
[4] World Economic Forum, 2015, "Global Competitiveness Report 2014-2015"
[5] American Society of Civil Engineers, 2013, "2013 Report Card for American Infrastructure"
[6] National Association of Manufacturers and Building America's Future Educational Fund (March 2013) "Infrastructure: Essential to Manufacturing Competitiveness"
[7] "Road to Growth: The Case for Investing in America's Transportation Infrastructure", Business Roundtable, September 2015.
[8] Congressional Budget Office, 2014, "Public Spending on Transportation and Water Infrastructure: 1956 to 2014."
[9] By way of comparison, Europe's public sector spends approximately 5 percent of GDP on public infrastructure. See R. Haskins, Jan. 27, 2015, "Our Crisis is One of Infrastructure, So Let's Roll Out the Gas Tax," The Brookings Institution.
[10] Specifically, the estimated gap between capital investment needs and projected funding is $481 billion for surface transportation and $258 billion for the aviation sector, ports and inland waterways. American Society of Civil Engineers (2013) "Failure to Act: the Impact of Current Infrastructure Investment on America's Economic Future."
[11] InfraAmericas, "How the FDOT Blueprint is Building P3 Dealflow" June 17, 2015.
[12] Richmond Times, "Cantor and Peterson: America's Infrastructure Needs Private Investment," Dec. 16, 2015.
[13] Id.
[14] The full text of the BPC's model law is available on its website.
This article is reprinted with permission from Law360.
