Public-Private Partnerships Fund Progress

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With credit harder than ever to get and Congress casting a sometimes critical eye toward public-private partnerships (PPPs), some say combining public and private resources for the public good has become outdated, if not obsolete. In truth, the use of PPPs and private sector resources to address our nation's public infrastructure needs continues to be strong and growing.

SHARING RISKS AND REWARDS

In a public-private partnership, a contractual relationship combines the two sectors' resources to meet specific public needs. This is not the same as privatization because the public sector retains a substantial level of ownership and control over the project. PPP members share both the risks and rewards of any given project.

Take a look at the supply side of the equation. In the current environment of concern about putting capital at risk, private investment in public infrastructure represents one of the safest investments available. The return on investment is more predictable than many other types of investments—while the return may be lower, so are the risks. This is why retirement and pension funds are significantly increasing their investment in infrastructure projects. Recent articles in both the Wall Street Journal and The Bond Buyer note a marked increase in investing in infrastructure projects through PPPs.

Granted, investors are more cautious than in previous years. They are taking a closer look at the underlying economics of each project, but despite this hurdle, investments are continuing.

Another shift in the investment pattern is an increasing move to equity positions instead of debt. The bottom line: the best estimates now available show sufficient funds in private investment portfolios to support $200 billion in infrastructure projects.

WHERE THE HELP GOES

On the demand side of the equation, there is obviously no shortage of needs. The problem is compounded by the diminishing resources available from the public sector. All levels of government—federal, state, and local—are experiencing significant budget shortfalls.

At the same time, the demand to address aging water/wastewater systems, traffic congestion, and new energy projects continues to mount. The backlog of infrastructure maintenance and capacity expansion needs totals more than $1 trillion. While governments can and should answer part of this problem, PPPs provide a way of stretching the public's limited resources to meet a broader range of public needs.

PARTNERSHIPS AT WORK

The successes of some recent, major PPPs illustrate how well this approach can work. The Indiana Toll Road lease deal, for example, provides for 75 years of investment returns for its private sector partner. At the same time, the state of Indiana now has $3.8 billion (plus an additional $500,000 per day in earned interest) to bring its ailing infrastructure up to a good state of repair. In fact, Indiana is the only state with a fully funded transportation investment program.

Even though lenders now scrutinize each PPP project far more closely than in the past, adequate funding is available for many infrastructure projects. With the growing number of positive results, it will be no surprise to find PPPs funding public infrastructure projects in the years to come.

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