Linking to a new report by Stephen Goldsmith, Harvard Kennedy School, and Jill Jamieson, Jones Lang LaSalle, titled Tapping Private Financing and Delivery to Modernize America’s Federal Water Resources. The report looks at a host of water infrastructure, including navigation, flood management, hydropower, irrigation, drinking water and wastewater treatment.
Decades of inadequate funding have resulted in deferred maintenance and system unreliability that damage our economy. America’s “fix-as-fails” approach to asset management is both inefficient and costly, threatening U.S. global competitiveness. Moreover, funding shortfalls coupled with protracted appropriations thwart our ability to deliver much needed new and expanded infrastructure, as evidenced by the current $60 billion backlog in congressionally authorized but unfunded projects.
The solution, according to this report, is enabling alternative financing and delivery strategies to address the growing backlog of needed work and modernizing infrastructure to meet 21st Century challenges.
• Speedier implementation of infrastructure projects, which accelerates public benefits and reduces capital costs: Under the current structure for water resources delivery, protracted appropriations significantly increase costs by unnecessarily delaying project completion, even when Federal funding is available. This rise in costs reflects not only inflationary adjustments, but also real growth attributable to additional overhead, mobilization/demobilization, asset maintenance, insurance, and other factors. When project completion is delayed, Federal and local taxpayers pay interest on debt associated with unfinished projects while they provide no public benefit. This is a bad deal for taxpayers and the public. Under P3, full funding is made available at a project’s outset with the help of private financing. Equally important, P3 transfers schedule and cost risk to the private partner, putting private capital at risk, thereby incentivizing performance. Compensation to the private partner begins only after the work is completed so that the public payment is concurrent with the delivery of public benefits.
• Life-cycle focus of service delivery/life-cycle cost efficiencies: Under a P3 arrangement, the private partner is typically in charge of the financing and delivery of capital improvements, as well as the operation and/or maintenance of the infrastructure asset over the term of the contract. Linking long-term asset performance to design and construction creates powerful incentives for delivering a high quality facility, which optimizes operating performance and minimizes life-cycle costs. Likewise, P3 addresses life-cycle asset maintenance, locking-in funding and ensuring through performance-based payments that assets are maintained at prescribed levels over the term of the contract.
• Risk transfer: With the traditional funding and delivery approach to water resources, the public sector retains almost all risks associated with the construction, operation, and maintenance of public infrastructure. Under a P3, much of this risk can be transferred to the private partner, who assumes fiduciary responsibility for the delivery and performance of the asset. This risk transfer creates real value for taxpayers, limiting cost overruns, schedule delays, performance shortfalls, and deferred maintenance. While not all risks can be fully transferred in all instances, there is real and quantifiable value to the taxpayer in reducing public sector risk exposure by allocating risk to private partners that are better positioned to manage those risks.
• Improved service levels and reliability: Given their use of performance-based incentives and compensation structures, P3s have a proven track record of improving the quality and service levels of public infrastructure. Specialist service providers offer access to expertise and innovation in order to meet or exceed contractually prescribed output-based performance levels for which they are held accountable.
• Improved efficiency and innovation: Linking long-term asset performance to design and construction creates powerful incentives for efficiency and innovation. Much of the value of P3 derives from allowing the private sector to leverage innovative approaches to meet the output standards prescribed by the public contracting authority.
• Monetization: Innovation, in addition to profit motive and expertise, can incentivize the private partner to identify and develop new, creative sources of revenue from public infrastructure. These new sources of income can be used to offset core infrastructure costs, or alternately, may be shared with the public sector, creating additional sources of revenue for other priorities. Asset monetization is typically not a core competency of public agencies, and thus these opportunities to extract value from existing assets often go unexplored under traditional delivery structures.
• Heightened accountability: Detailed contracts between the public authority and private partner regulate P3s. The public authority sets service levels and then verifies and regulates the quality of the service through financial incentives for exceeding targets or punishment for under-performance. This arrangement provides the public with greater insight into targeted performance levels, something that is not always readily available under traditional delivery