America’s infrastructure is in disrepair. Decades of deferred maintenance, complex and sometimes contradictory regulations across various agencies and levels of government, and a combination of wasteful spending and a refusal to raise taxes have all lead us to where we are now.
The American Society of Civil Engineers gives America’s bridges a C+, and overall infrastructure a grade of D+.
The Society's 2013 report noted: “The Federal Highway Administration (FHWA) estimates that to eliminate the nation’s bridge deficient backlog by 2028, we would need to invest $20.5 billion annually, while only $12.8 billion is being spent currently. The challenge for federal, state, and local governments is to increase bridge investments by $8 billion annually to address the identified $76 billion in needs for deficient bridges across the United States.”
Here in Puget Sound it seems the only time we can replace a bridge is when it falls into a river. CBS News recently highlighted how cumbersome regulations coupled with never-ending environmental review processes are actually compromising our safety.
We don't have to put up with this, as Canada's more intelligent approaches to taking care of infrastructure illustrate. In fact, there are many answers to how to solve this and invest in a transportation system that works and also, a key point, has maintenance and operation built into the financing. It will still require raising taxes — probably a combination of gas tax increases over the short term and vehicle miles traveled taxes over the long term. And while we still need to change the way we permit and review projects, we can start to bolster public confidence that the government can actually build things.
Former Treasury Secretary Lawrence Summers writes about this problem in a recent article in the Washington Post, where he points out that the failure to build and maintain even the most simple of facilities helps to further cynicism and fuel a belief that government can’t do anything right. He gives an extreme example of a broken escalator at La Guardia Airport that will take almost half as long to repair as it “did to build the Empire State Building 85 years ago.”
But instead of lamenting the end of civilization as we know it, why not look at some systems that work and try to learn from how they do things?
This is what brings us to Canada.
A group of Canadians were in Seattle recently to talk about how they deal with some of these challenges. Specifically, they wanted to tell us about how they invest in infrastructure up north, infrastructure that in the case of their ports’ Asia Pacific Gateway Strategy is eating our lunch in Puget Sound. (The Wall Street Journal details the Canadian advantage and the U.S. disadvantage here.)
Of course, folks at the ports of Seattle and Tacoma were interested in learning more and to talk up their own efforts to align with each other to compete against the Canadians. There were no shots fired and nobody’s pig died. In fact, they all got along quite well.
So why do the Canadians seem to do a better job of investing in infrastructure than we do? Whether it’s ports, heavy or light rail, hospitals, or roads and bridges, they seem to get things done quickly and efficiently. And they are able to align their public and private investment strategies to create extra benefit to the public.
One way in which they accomplish this is through something called a Public Private Partnership, or P3. The idea of a P3 is to leverage private investment and expertise to build a public project and transfer the long- and short-term risk, maintenance and operations, from the public sector to the private sector. The public gets a guarantee that the project will be delivered on time within budget and the private investors get a stable long-term investment vehicle with guaranteed payments — provided the project is delivered, operated and maintained to the requirements of the contract.
Under the P3 process, the incentives are weighted for performance because the financing model drives it. Under a conventional Washington state design-bid-build model, the incentives are all around cost-saving. The bidder is always looking to cut costs even if the long-term benefit could be compromised. So-called "value engineering" is common place in this model where performance is held secondary to cost. There is no punishment for lack of performance in this model, particularly in the long term. In a P3, 30- or 40-year performance and maintenance contract, private equity is at risk if the project does not perform to the contract. The public withholds payments for the project until performance and/or maintenance improves.
There are some great examples and side by side comparisons between the P3 model and our more standard and, to some, outdated model.
Consider the Tale of Two Canadian Facilities: One, the Abbottsford Hospital and Cancer Centre, the other, the Vancouver Convention Centre. The hospital was a P3 project, while the Convention Centre was a more, ahem, conventional project. Both started construction in 2004. Both were large, complex projects. The difference? The hospital was on time and under budget, and the Convention Centre came in 55 percent over budget — and operations started six months late.
Other examples can be found around the United States and closer to home. Everyone knows the example of Boston’s Big Dig, which was a standard construction management model. The cost of the project escalated from $6 billion to $15 billion and the construction period doubled. We all know of the problems: leaks, substandard materials, ceiling collapse, guardrail issues, lighting fixtures, etc.
Now consider the Port of Miami Tunnel, a P3 project. The budgeted financing cost was $68 million a year. The actual was $33 million a year. There were three bids of $33 million, $40 million and $63 million. Like most tunnels, there were several construction issues; including unexpected need for grouting limestone, and concessionaire costs. Even so, the project was on budget and only two months late.
The $1.8 billion Windsor Parkway project in Ontario Canada, a P3, was also on budget and only two months late. It was also $300 million less than the alternative, more conventional bid.
Closer to home, we can soon evaluate the performance of the 520 Bridge project and the Alaskan Way Viaduct Replacement Project. Would these be improved if we were able to take a P3 approach? It would be hard to argue otherwise.
To be clear, P3s are not about privatizing public resources or a way to get around prevailing wages or even union contracts. In Canada, most projects have been completed with union contracts with prevailing wages. The public owns the infrastructure and obviously benefits from its operation.
But the real benefit for Washington state would be that the P3 process provides a solution to the maintenance and repair problems we are seeing now with aging infrastructure. We all know that building new projects is more exciting than maintaining the old. Politicians know it’s easier to get the public to support something new than taking care of existing infrastructure. Well, look what that has wrought. We now have billions annually in maintenance and repair backlogs on our roads and bridges. Those projects never had long-term maintenance and repair budgets built in. In other words, the chickens have come home to roost. And for many taxpayers, the roads don’t look too bad — not bad enough to want a gas tax increase anyway!
But what if we could leverage private equity, coupled with a long-term contract with a private firm to build, maintain and operate a bridge or a tunnel, or even a redeveloped Waterfront in Seattle? Built into the 30- or 40-year contract would be certain guarantees of performance that must be met in order for the loan to be paid back to the equity firm. The firm operating the facility would then face pressure from the equity investors and the public entity to perform.
This is not a new idea. In 2005, the Transportation Commission and the Legislature worked to move toward this kind of a process, passing a new public-private partnerships law. The law required any debt issued to pay for the project to be issued by the state treasurer. This effectively made state-issued debt the default financing method for all projects. Under these restrictions, the Canadian model would not be possible.
In 2011, then-Transportation Secretary Paula Hammond presented many of these ideas to the state House Transportation Committee. In their presentation, officials outlined many of the benefits of the Canadian model as well as some of the challenges for Washington state to implement something like it. You will not be surprised to hear that one of our challenges is that our state law and administrative rules create an overly complex, slow and costly approval process for projects. This, coupled with the aforementioned rules limiting private equity participation, has essentially foreclosed any opportunity to achieve the gains we see in the Canadian model.
The Canadian experience with the P3 process has been remarkable. They are finding an overall average of 16 percent savings over the old way of contracting with much better maintenance and performance. In transportation, that savings is well over 20 percent. (See chart below). They have created an entity, PPP Canada, which helps fund projects, up to 25 percent, and provides expertise to governments hoping to use the model. And although P3s are not right for every project, every project is screened to find the most suitable financing and maintenance model. Sometimes it is a P3, sometimes it’s a more standard design-bid-build.
Having the ability to use the P3 model is not a panacea. We still have to pay for these projects with public money and they still need to be maintained. And yes, we need to pay for them with taxes. All this model does is create incentives for better projects and better long term performance, and shifts more of the risk of the project to the private firms away from the public. The public still owns the infrastructure. And who knows, there may come a time when the general public can buy into the project as well. It might be like Green Bay, where local people own the football team. And the team seems to be managed pretty well.
