Reporting

September 25, 2012 by Justin Ewers

Fixing California’s $765B problem: New ways to pay for infrastructure


Viaduct construction from the Presidio Parkway project, a example of public-private partnership financing.
(Photo credit:
Presidio Parkway)

Call it the California paradox: The same state that leads the nation in innovation, venture capital investment, and industrial production—which together make California the ninth-largest economy in the world—is also home to some of the country’s most neglected public infrastructure. From decades-old bridges and pothole-filled streets to crumbling schools and other public buildings, experts estimate California has a $765 billion infrastructure deficit over the next 10 years.

California’s financially-strapped government lacks the resources to fill this gap—and the state continues to fall farther and farther behind countries like China, particularly when it comes to transportation infrastructure, which accounts for more than $500 billion of the state’s shortfall.

"Anyone who flies from Shanghai to the Los Angeles Airport or JFK knows you’re really flying from The Jetsons to The Flintstones," author Thomas Friedman pointed out at the California Economic Summit in May.

Experts believe there are ways to close this gap, however, and Summit participants have created an Infrastructure Action Team devoted to finding new ways to support the critical infrastructure upgrades California desperately needs.

At a hearing today before the Little Hoover Commission in Sacramento, Sean Randolph, the Action Team’s co-chair and the President and CEO of the Bay Area Council Economic Institute, outlined the team’s solution: An expansion of the state’s use of public-private partnerships to solve California’s infrastructure problems.

"California clearly does not have the resources in its public budgets [to take on these projects]," Randolph told the commission. "And even if it did, the state still needs to consider how to finance, build and operate its infrastructure with maximum efficiency—and maximize its return on investment of taxpayer dollars."

Randolph stressed at the outset that the Action Team is not proposing privatization.

Instead, in a detailed action plan, the Team outlines how other states and countries have found ways to allow the public sector to set performance requirements for a facility—a bridge, say—and then tapped the financial resources of a private party to finance, build, and operate the asset for a fixed period, usually 30 years. After that, it returns to public ownership.

"If the asset is not delivered or maintained to specification," Randolph points out, "the agreement can be terminated."

This approach has been used successfully in the United Kingdom, Australia, and Canada—as well as in states like Virginia and cities like Chicago, where public-private partnerships typically cost between 15-30 percent less than conventional procurement.

This approach is only appropriate for about a third of infrastructure projects, Randolph acknowledges, but when used properly, it works: Publicly-financed infrastructure projects are often neglected during tough economic times due to a lack of resources—which leads to voter frustration at crumbling bridges or poorly-maintained streets.

With private financing partners, the vicious cycle is avoided: Private parties are contractually obligated to operate and maintain the asset to an agreed standard. If they don’t, they lose the contract.

"Due in part to this superior performance, [these] projects tend to deliver better service and achieve high levels of customer satisfaction," says Randolph.

So how close is California to mainstreaming this approach? The state has enjoyed some success with large public-private projects like the Presidio Parkway in San Francisco, where private investors were able to reduce costs from an estimated $625 million through public financing to $358 million with a public-private partnership. Beyond that, there are very few large public-private projects in the pipeline beyond a handful of courthouse upgrades and UC campus building developments.

For Randolph, this is a missed opportunity, and his goal is to make the public-private approach a more accessible tool in the state’s financing toolkit. Randolph and the Summit Action Team have developed a step-by-step roadmap for accomplishing this. They started by pushing to reconvene the state’s Public Infrastructure Advisory Committee, a state-level commission that advises state bodies on financing options. The PIAC has not met since 2010.

Randolph also supports creating a state infrastructure "center of expertise" that can advise public officials on project selection, establish performance metrics for tracking progress, support the public sector in their negotiations with private parties, and make sure deals are reached.                                    

"It is difficult to see how California can accelerate its infrastructure development and compete for private investment without a visible commitment to this course," Randolph said today. "Even though this is comparatively new territory for the state, it is not a novel idea. Other jurisdictions have done this for decades – we’re just behind the curve." 

Categories: Capital, Infrastructure, Public-private

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