Academic journal article ABA Banking Journal

Public-Private Partnerships: America's Infrastructure Solution

Academic journal article ABA Banking Journal

Public-Private Partnerships: America's Infrastructure Solution

Article excerpt

THE LACK OF public resources available to finance infrastructure is hardly new. Cities and states have been scrambling for years to access private capital. For instance, in 2005, private investors from Australia and Spain paid $1.8 billion to the state of Illinois to lease Interstate 90, also known as the Chicago Skyway. It was one of the most visible public-private partnerships (P3s) in the United States at that time, and an example of how partnerships like this can mitigate or scatter the risks involved in massive infrastructure projects.

Public-private partnerships are long-term contracts whereby private firms provide assets or services for a traditionally public project. While the Chicago Skyway represents an example of private investors managing an already built public road, plenty of P3s have helped design, construct and manage large construction projects for governments at all levels.

These partnerships are becoming more popular in the U.S. in part because they can mitigate risk for both public entities and private investors. State and federal governments are typically in a better position to handle unforeseen issues or problems that typically come with large construction projects. In many cases, these risks are substantial enough to drive away private investors. A successful P3 can help distribute risks such that all parties feel comfortable participating.

But the rationale behind and increasing popularity of P3s may not be associated with risk management as much as the fact that the public sector is running out of resources. The most obvious example may be the federal government. As of this writing, the national debt is in excess of $18.4 trillion, which translates to more than $57,000 per citizen and $154,500 per taxpayer.

States around the nation have been hit by a host of budgetary constraints, including rising outlays for Medicaid. Many suffer from underfunded public pensions and electorates that are wary of tax increases. Municipalities generally have less borrowing power and financial flexibility, and Detroit's bankruptcy likely caused many urban policymakers to adopt a more conservative approach to managing finances. Yet the need to maintain and augment infrastructure remains. …

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