The windfall in US infrastructure spending won’t be coming from the government alone

New York City’s Hudson Yards were the result of a public-private partnership.
New York City’s Hudson Yards were the result of a public-private partnership.
Image: REUTERS/Brendan McDermid
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The recently-passed US infrastructure bill is poised to give $1.2 trillion to cities and states. Business and municipal leaders hope to funnel some of those dollars into a relatively new model for building America’s infrastructure: the public-private partnership (P3).

In these partnerships, public agencies and private investors share responsibility for financing, building, and maintaining infrastructure projects. P3s have been used to build US infrastructure including highways, water treatment systems, courthouses, and arenas. They were behind New York City’s Hudson Yards and the renovation of St. Louis’ Gateway Arch

But the model is still a relatively unconventional way to fund infrastructure development projects in the US. There were 186 such projects under development in 2020, up from 94 in two years earlier, according to a study by the legal firm Husch Blackwell (pdf). Far more are on the way.

The Infrastructure Investment and Jobs Act (IIJA) gives city leaders a once-in-a-generation infusion of cash to build new infrastructure, and private investors are lining up to match this money for building (and profiting from) projects. “It’s going to change everything,” says Toby Rittner, president of the Council of Development Finance Agencies, a non-profit that supports US state and local finance authorities. “In the next 10 years, the number of projects that are going to be financed using P3 models is going to be amazing.”

Proponents of the model tout it as a way for local governments to efficiently build infrastructure in less time while lowering construction and management risks. But skeptics counter that many P3s give too much control of public assets to unaccountable private businesses, ultimately squandering public trust and funds. The new infrastructure bill will put that to the test as it ushers in a new wave of partnerships between cities and businesses.

How the US pays for its infrastructure

Public infrastructure has traditionally been funded with public dollars. City and state authorities in the US built and managed their roads, bridges, hospitals, and wastewater systems. “Government has historically wanted to own and control our assets in this country, so communities were reluctant to spin off their wastewater treatment facility or parking garages to a private enterprise,” says Rittner.

Private companies have expanded their role over the last 15 years through P3s.  In these partnerships, private investors generally finance upfront costs and manage aspects of design, construction, and maintenance in return for income from the government partner, or individual users (in the case of a toll road, for example).

The model has become more popular as state legislation has changed to allow more private actors to take part in building public infrastructure: 33 US states and the District of Columbia have passed legislation allowing P3s. The IIJA paves the way for more public-private partnerships by expanding how states and localities may use private activity bonds, a tax-exempt government-issued bond to help finance projects such as carbon capture and broadband access that also involve private investment. At least three such broadband projects (pdf) have already started in underserved areas of North Carolina, Iowa, and California.

The shortcomings of public-private partnerships

One of the P3 model’s strengths—the ability to share a project’s construction risks such as schedule delays, engineering issues—can also become a liability. If the private partner doesn’t hold up their end of the bargain, the government is ultimately on the hook to deliver the project, benefiting investors at the expense of taxpayers say critics of P3s.

That’s something Indiana’s state finance authority faced in a 2017 project to reconstruct a section of interstate highway. When the private partner failed to meet their contractual obligations, the state finance authority had no choice but to take over the project, dissolve the partnership, and reach a settlement. The project finished $187 million over budget and two years behind schedule. A retrospective analysis found that the project cost $137 million more than it would have if it had been funded through traditional public channels.

P3s often claim to be a more efficient use of public money, making infrastructure quicker to build and operate. But A 2018 EU audit found that P3 highways projects in Greece and Spain cost taxpayers €1.5 billion in budget overruns due to delays and construction inefficiencies. A 2005 World Bank study also found the operations of public and private utilities (electricity, gas, water, sanitation) were equally efficient.

Supporters of the P3 model attribute failures to poor management rather than inherent flaws. “We’ve done partnerships before, but it’s the details that matter,” says Jeff Merritt, head of urban transformation at the World Economic Forum. “We have to ask: Who is actually benefiting from these collaborations? Left on their own, these partnerships repeat the mistakes of the past and continue to create greater inequality.”

With the right deal, partnerships can achieve both financial and societal benefits for everyone, argues Merritt. The World Economic Forum has supported successful P3s that have created water sanitation systems in Singapore and India as examples of how the model can generate social benefit.  

Merritt argues that clear goals, transparency, and legal accountability for all parties are essential components to making these partnerships work. With these safeguards in place, he says, these partnerships are an ideal vehicle to solve immense challenges like climate adaptation and urban inequality. “We don’t have a choice; the challenges that we face today are of such enormous magnitude that our only answer is collaboration,” said Merritt. “These partnerships are not about giving carte blanche to the private sector to do work of the government or vice versa, they’re about us working in collaboration to solve challenges.”

American city leaders, too, are looking to seize this moment to usher in a new wave of partnerships. At a November event hosted by the World Economic Forum to inaugurate a new global hub dedicated to promoting public-private partnerships in cities, several mayors gathered with private sector representatives to discuss ways to stretch the new infrastructure funding as far as possible.

Detroit mayor Mike Duggan was on hand. The city has turned to public-private partnerships to improve roads and sidewalks, develop business districts, and reduce residential blight as part of its recovery efforts after the largest municipal bankruptcy in US history in 2013.

“There is so much that government can’t do by itself,” said Duggan. “We don’t need any more think tanks, we don’t need any more papers. We need public-private partnerships.”

Correction (Jan. 7): An earlier version of this post misidentified the past number P3 projects under development identified in the Husch Blackwell study. It identified 94 projects as of 2018, not five projects as of 2007.