The state of infrastructure in the US is in decline. This presentation outlines a proposal for private sector partnership as the solution.

1. Alex Sproveri
10/7/2015
Issue Debate
Public-Private Partnerships
A proposition for funding infrastructure projects in
the US

2. 1
Infrastructure funding has violated the long-term budget constraint
by promising services above revenue collection levels
Transportation Funding Shortfalls
 Current funding of highway
infrastructure is inadequate
 Intent was to fund with taxes
earmarked to the Highway Trust Fund
– Excise taxes (87%)
– Certain vehicle sales
 $65 Billion has been transferred from
the US Treasury’s general fund since
2008
 Less than 1% privately-funded
Source: Joseph Kile Testimony
(1) Combined highway and mass transit
ComplicationSituation Question Answer
2014 Transportation Spending
Federal
State & Local$165B Highway
$65B Transit
-80
-60
-40
-20
0
20
2014 2015 2016 2017 2018 2019 2020
CBO Baseline Projections1
Year
Balance(inbillionsofdollars)

3. 2
The “best” solution is to increase revenues to fund transportation
and capture costs by internalizing externalities
ComplicationSituation Question Answer
Increase Fuel
Tax
New Carbon
Tax
New
Congestion
Tax
Other Tax
Revenue Sources
Increased fuel surcharge to
cover shortfall
Capture the cost of pollution
externality
Capture cost of congestion
while lowering demand
Raise non-related tax to
cover revenue (e.g., sin
taxes)
BUT: Taxpayers and
elected officials are
unwilling to pay more

4. 3
The “next best” solution is to capture revenues in other ways that
are more politically tenable
What does the next best solution look like?
 Provide the same services in other ways
 Find more acceptable ways to raise revenues (e.g., fees)
Public Private Partnership (PPP or P3)
ComplicationSituation Question Answer

5. 4
Public-Private Partnership is a broad term which must be defined
for the scope of this analysis
“ Arrangements between the public and
private sectors whereby some of the
service obligations of the public sector
are provided by the private sector
World Bank Website
http://ppp.worldbank.org/public-private-partnership/overview/what-are-
public-private-partnerships
”
P3s Defined “The Devil is in the Details”
How are they
treated in the
budget?
ComplicationSituation Question Answer
How should
they treated in
the budget?
What do these
arrangements
consist of?

6. 5
P3s will allow private entities to build and operate toll roads with
equity requirements and debt guarantees
Create a federal model whereby DOT enters into agreements with private
firms to build and operate toll roads
– Shifts financing from pure public
debt to user fees
Identify areas where demand is high and congestion is likely a problem (e.g.,
adding lanes to the beltway where there is an additional charge)
Firms can finance with private equity OR borrow money from the federal
government (at a cost)
Component Key Implications
Solution
1
2
4
Guarantee the debt of firms, but firms will cover administrative / operating
costs and cost of debt service
3
– Ensures adequate demand and
revenues
– Firms are being paid to operate
the day-to-day
– Budget treatment may differ
ComplicationSituation Question Answer

7. 6
The federal government will take a nominal equity stake in each
project to ensure budget transparency
ComplicationSituation Question Answer
Budget Treatment
Capture on
Budget
 This ensures the budget is
comprehensive of cash
flows resulting from
government action
Provide Detail
 Budget will show the
collection of tolls and the
payment of
administrative expensive
as 100% offsets
Infrastructure
Project
Outcome:
Transparency
Appropriate an
Equity Stake
 Appropriating $1
requires each
project to be on
budget
 Only zero
appropriation
amounts can be off
budget

8. 7
We will adopt a SWOT analysis framework to evaluate the
proposed solution
Strengths
 Reduce new federal borrowing
relative to current policy
 New source of revenue – tolls
which would otherwise be not
collected
 Efficiency of private sector
Opportunities
 US positioned to become the
largest P3 market in the world
 Reduced Demand for highways
 Environmental benefits
Weaknesses (Limitations)
 Solution is not universally
applicable
 Costs of contracting and litigation
Threats
 Small sample set
 Inability to repay private financing
if revenues are less than
expected
 Poor project selection
 Cost of guaranteeing the debt

9. 8
STRENGTHS
SWOT Analysis

10. 9
P3s would help the government to fund transportation through new
revenues and reduced borrowing costs
(1) 2012 CBO study: https://www.cbo.gov/publication/42685
ExplanationStrength
Reduce Borrowing Costs
Capture new Revenue
Efficiency of private sector
Reduce Borrowing Costs
Capture New Revenue
Efficiency of the Private
Sector
 Current solution is to borrow money to fund
infrastructure projects
 Funding provided by private entities
 User fees are captured in the form of tolls
 More politically tenable than increased taxes
 Private entities could finish projects quicker and at a
lower cost1

11. 10
WEAKNESSES
SWOT Analysis

12. 11
The limitations of Public-Private partnerships are overshadowed by
the upside potential
(1) 2012 CBO study: https://www.cbo.gov/publication/42685
ExplanationWeakness / Limitation
Reduce Borrowing Costs
Capture new Revenue
Solution is not universally
applicable
Costs of contracting and
litigation
 Solution applies to high demand / high congestion
areas where users would pay for service
 New contract vehicles will be expensive to create
 Operational costs of procurement
 Litigation costs for debt dispute and contract dispute

13. 12
OPPORTUNITIES
SWOT Analysis

14. 13
P3s present additional opportunities to decrease congestion and
lower the environmental footprint of US transportation
ExplanationOpportunity
Reduce Borrowing Costs
Capture new Revenue
Efficiency of private sector
Environmental
Considerations
Decreased Congestion
US could become the world’s
largest P3 market
 Costs could capture externalities of environmental
damage of vehicles using highways
 Tolls could reduce demand for roads and bridges and
encourage public transportation
 Tolls could reduce demand for roads and bridges
 Additional lanes could decrease congestion
 Moody’s Investor Services (see next slide)

15. 14
The US has the potential to become the largest PPP market in the
world
Moody’s Report
 US late to the game, but
“has the potential to become
the largest P3 market in the
world, given the sheer size of
its infrastructure”
 US is classified as an
“Expanding” availability-
payment P3 Market
Attribute Current State
Regulatory
Framework
Authorizing legislation is in place and
enforceable but yet to be fully tested
Project History Projects are mostly in the
construction and procurement phases
Project Pipeline and
Type
The pipeline is growing, with projects
primarily in the transportation sector
at first, expanding to social
infrastructure
Project Contracts Project contracts are modeled after
others and are not standardized;
long-term enforceability may be
uncertain
Investor Base and
Capital Market
Local P3 investor base is growing
Source: Moody’s report on PPP: http://tollroadsnews.com/files/global_p3_report_-_u_s__poised_to_become_largest_p3_market.pdf

16. 15
THREATS
SWOT Analysis

17. 16
As with any project, a variety of “unknowns” will pose threats to
successful delivery
ExplanationThreat
Reduce Borrowing Costs
Capture new Revenue
Efficiency of private sector
Small sample set
Inability to repay private
financing
Government could guess
wrong on where to allocate
the project
 US has been late to the game
 Only 40 transactions completed in previous decade1
 Private firms could fail to repay loans
 The government could select a non-ideal or
unprofitable project for the partnership
Efficiency of private sectorCost of guaranteeing the debt  The cost of guaranteeing the debt for the project
could be greater than what was estimated
(1) 2012 CBO study: https://www.cbo.gov/publication/42685

18. 17
Public-Private Partnerships represent a viable solution for
addressing transportation funding shortfalls
Summary
 A crumbling infrastructure and under-funded Highway Trust Fund create the need
for new funding sources for transportation
 Americans have violated the long-term budgetary constraint and are unwilling to
fund services that they demand
 Public-Private Partnerships present an opportunity to reduce new federal
borrowing and provide new revenue through user fees