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— Judgment Call —
The 2010 administration budget provides for a National Infrastructure Bank to expand public-private sector spending, including through PPPs. This entity will not only provide direct federal investment but also help foster coordination through state, municipal and private co-investment in priority infrastructure projects of significant national or regional economic benefit. Initial funding would be $5 billion, with more than $25 billion expected through 2019.
-- See related infrastructure stories -- This anticipated PPP expansion continues a trend that began in the 1990s, when the private sector's role in providing public infrastructure and services increased, including through concession-based operating structures. Massive U.S. and international funds were raised, representing hundreds of billions of dollars, in search of viable infrastructure deals. Such U.S. investments included the City of Chicago's leasing of the Chicago Skyway and Indiana's 75-year, $3.8 billion lease of the Indiana Toll Road. But a lack of political support has significantly constrained the growth of PPPs. This opposition, in the face of a shrinking tax base and increasing competition for tax dollars, has all but blocked state and local governments from accessing the private capital available to invest in what many believe are desperately needed infrastructure projects. The Pennsylvania Turnpike lease, strongly advocated by Gov. Ed Rendell, received a $12.8 billion winning bid; but the Pennsylvania legislature in 2008 effectively killed it. Similarly, in 2007, the North Texas Tollway Authority exercised a right of first refusal to trump Cintra Concesiones de Infraestructuras de Transporte SA's winning bid for a new toll road north of Dallas, and the Texas legislature enacted new restrictions on toll-road PPPs. Influential U.S. congressmen Peter DeFazio, D-Ore., and James Oberstar, D-Minn., have both spoken out strongly against PPPs. Despite these hurdles, changing attitudes toward private investment may be on the horizon. With a collective state budget deficit of roughly $100 billion, according to a recent report by the National Conference of State Legislatures, and with the administration making stimulus funds available, the states could rethink their concerns over the use of PPPs. A major criticism leveled at PPPs is that tax-exempt government financing of public sector projects may be less costly than private financing. This, however, has not been consistently the case. Generally, the higher a project's internal rate of return, the more desirable it is for private investors. Moreover, the use of private capital in appropriate cases can free up a state's borrowing capacity for uses where private investment is impractical. Another concern is that the PPP structures can increase public sector exposure to project liabilities incurred by private entities that lack sovereign immunity. While this may be valid in some instances, there are other risks that private sector participants can accept and manage more efficiently than a government entity, which on balance benefits taxpayers. Credit market difficulties should not change this dynamic, particularly when infrastructure investment is seen as a stable, long-term proposition for both public and private investors. For example, the winning bid for Chicago's Midway Airport, chosen in September as the downturn was well under way, netted $2.5 billion, considerably more than expected. Heightened interest in infrastructure PPPs from cash-starved state and local governments, the continued appeal to the private sector of stable, long-term infrastructure investments and an anticipated infusion of federal infrastructure funds make it likely that large-scale investment of private capital in public infrastructure projects will proceed apace in 2009, downturn notwithstanding. Former Massachusetts Governor William F. Weld is a partner in the New York office of McDermott Will & Emery LLP. |
The Obama administration's 2010 budget, combined with the American Recovery and Reinvestment Act that was signed into law on Feb. 17, calls for spending almost $150 billion on public works and infrastructure. Targets include not only transportation (highways, mass transit, airport and port facilities) but also energy, water treatment and Internet infrastructure. This expanded infrastructure spending could increase the use of 
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