Introduction Rebuilding America’s crumbling infrastructure
Back in the 1960s, California was known for Business leaders echo the public’s concern about 4 more than just Hollywood, The Beach Boys and the widening gap between infrastructure needs beautiful scenery. The state was also famous and current spending. Among surveyed senior for its unparalleled infrastructure. California had business executives, 77 percent believe that the one of the world’s most extensive transportation current level of public infrastructure is inadequate to infrastructure programs in the late 1950s and support their companies’ long-term growth. These early 1960s, which paved the way for much of executives believe that over the next few years, the state’s subsequent economic prosperity. infrastructure will become a more important factor in determining where they locate their operations.65 Those times seem like ancient history in California and throughout America. Today, crowded schools, While there is widespread agreement on the traffic-choked roads, deteriorating bridges, and need to address the growing public infrastructure aged and overused water and sewer treatment deficit, both to create jobs in the short term and facilities undercut the economy’s efficiency and as a prerequisite for enhancing economic develop- erode the quality of American life (see figure 4-1). ment and competitiveness in the longer term, The American Society of Civil Engineers (ASCE) states find themselves in a difficult and precarious estimates that the United States currently only position with respect to how to pay for it. invests about half of what is needed to bring the nation’s infrastructure up to a good condition. At the federal level, infrastructure is largely funded out of general revenues and diminishing highway The consequences of neglected roads, bridges, trust funds. While the 2009 American Recovery and public transit, electricity grid and other social Reinvestment Act (ARRA) provided an infusion of infrastructure (such as hospitals and schools) have federal funds for infrastructure to the tune of $113 not gone unnoticed by the public. An overwhelming billion, the stimulus funds fall far short of what is majority of Americans — 94 percent — are required to align public infrastructure with the overall concerned about the condition of the nation’s demand, which the American Society of Civil Engineers infrastructure. Remarkably, 81 percent say they pegs at $2.2 trillion over the next five years.66 With are willing to pay 1 percent more on their federal insufficient political will to increase the gas tax and income tax to improve America’s infrastructure.64 renewed pressure to reduce the federal deficit, it seems unlikely that states will see a significant near-term increase in federal funds to help close the gap.
Leveraging public-private partnerships 64 closing state gaps infrastructure closing state infrastructure gaps 4-1. www.uschambermagazine.com/article/fixing-americas-crumbling-infrastructure>. pewresearch.org/pubs/699/look-out-below>; America’s “Fixing CrumblingInfrastructure,” U.S. ChamberofCommerce, July2008,
of untreated sewageeverysingle Railroads are projected toneed estimated 1.26 trillion gallons gallons estimated 1.26trillion Aging sewer systems spill an Aging sewersystemsspill accommodate freight increases. $50 billion incleanupcosts. $50 billion ment overthenext20yearsto ininvest- nearly $200billion year, resulting inanestimated 62 infrastructure hoursof waste4billion A decayingtransportation systemcosts 3 billion commuters’ timeandnearly3billion our economymore than$78billion in losttimeandfueleachyear. Traffic jamscausedbyinsufficient are insubstandard condition Costs attributedtoairlinedelays ofgasolineeachyear.gallons America’s majorroadways billion frombillion 2000to2015. are expectedtotriple$30 43,000 traffic fatalitiesin the UnitedStates each year. — asignificantfactorin Approximately athird of third more ofthe than 63 from big ideas from to big results 9 You’re never going to be able to raise the gas tax high enough“ to provide the necessary funds. Meanwhile, there’s
tons of private money ready to come in and participate innovation state all over the world. The United States is a laggard in this 8 respect, which is ironic. Here in the land of innovation, we are absolutely backwards in this respect. I still believe, technology reboot however, that plain business sense, coupled with the 7 severity of the need, will finally make private investment in public infrastructure a much more common improving human improving services
phenomenon in our country. 6 ~~ Mitch Daniels, Governor of Indiana” responding to health care reform care 5
At the state and local levels, the majority of to secure new revenue in the current economic infrastructure is funded through state and local climate, a viable option for states is to engage budgets (taxes and user fees) and financed in the private sector in transforming existing assets the municipal bond market. Increased federal and/or service provision and developing new infrastructure gaps infrastructure closing state
mandates for social spending, balanced budget capacity across the infrastructure landscape. 4 requirements and increased competition among states to keep taxes low have put the brakes on If infrastructure gaps are to be narrowed, the spending at the state and local levels, while debt public sector must respond with solutions that can evolve with the changing environment. limitations have constrained borrowing. As a result, century education st
state leaders find themselves with insufficient The old delivery models must give way to new, 21 3 resources to meet the challenges they face. innovative models and a portfolio of hybrid approaches — from modifications in traditional Closing the current gaps will require raising procurement through to public-private partnerships. additional revenue, reducing costs and finding new sources of finance with higher risk appetite. generating jobs generating
Given government restrictions on tax-exempt 2 bonds and the political difficulty of raising taxes the journey to fiscally sustainable government 1 62 63 closing state infrastructure gaps 4-2. Source: Deloitte Research needs andthepublicsector’s capacitytoaddress some cases,closeagapbetweeninfrastructure are utilizingtoimprove project deliveryand,in an importantalternativemodelthatgovernments public-private partnerships(PPPs)haveemerged as andinfrastructure sectors,these of jurisdictions figure 4-2).Once rare andlimitedtoahandful operation, ongoingmaintenanceandfinance(see infrastructure projects: design,construction,service of,for some,orall thefivebasicelementsof United States) are turningtotheprivatesector stateandlocalgovernmentsinthe (including Increasingly, governments around the world close theinfrastructure gap Engaging theprivatesectortohelp private partnerships Leveraging public- capital requirements. Finance. This component generally includes financing for the capital costs of construction as well as working life-cycleorcapital maintenance. often called refurbishment, major and maintenance) operation (or maintenance regular ongoing project: infrastructure any in considered be to maintenance of types principal two are Generally,there maintenance. Ongoing partner’s compensationisdependentontheachievementofperformance standards. construction, uponagreement thattheconstruction hasbeensatisfactory. InPPPs,theprivate with anasset,suchaslaundryserviceswithinahospital.Operation begins attheendof typically of serviceprovision andrevenue toperformingsoft(ornon-core) collection servicesassociated Service operation. Operating theassetmayincludevariousactivitiesfrom general management impact ofconstructioncostoverrunsandtimedelaysmustbeconsidered. a prescribed periodoftime,generally ataprescribed cost. Whichpartyassumesthe componentincludesthe constructionofthephysical asset(s) over Construction. This broader planningandenvironmental guidelinesresults inasignificantdegree ofpublicsectordesign. limitthe specifications will range ofdesignoptions.Inmanyprojects, theneedtoensure compliancewith in partnershipstructures withhighdegrees ofprivateresponsibility, thepublicsector’s articulationofperformance Design. Under virtually any partnership structure, the responsibility for design will be shared. For instance, even The fivecomponentsofaninfrastructureThe project 64 because thedestination,notpath,becomes improve theefficiencyoftheirorganizations.First, ments tryingtoaddress infrastructure shortagesor characteristics, theyofferseveral benefitstogovern- infrastructure, but,forcertainprojects withtheright financinganddevelopmentof replace traditional Public-private partnershipsare unlikelytofully and FloridaparticularlyactiveinusingPPPs. legislation ontheirbooks,withstateslikeVirginia More thanhalfthestatesnowhavePPP-enabling to adoptthistrend, thisisrapidly changing. them. WhiletheUnitedStates hasbeenslower 65 To provide the kind of infrastructure that Americans need and deserve, we must find innovative ways of paying for it. “ big ideas from to big results One tool — private investment — must play a larger role in 9 delivering projects. We must embrace the private sector to help leverage scarce federal and state dollars. innovation state ~~Ed Rendell, Governor Of Pennsylvania ” 8
organizing theme around which a project is built, leaders worldwide suggest several strategies that
public-private partnerships enable the public sector foster success. First, governments need a clear technology reboot to focus on the outcome-based public value they framework for partnerships that confers adequate 7 are trying to create. Second, PPPs transfer certain attention on all phases of a life-cycle approach and risks to the private sector and provide incentives ensures a steady stream of potential projects. This for assets to be delivered on time and on budget, can help avoid problems of a poor PPP framework, and to be properly maintained over time. Third, lack of clarity about outcomes, inadequate improving human improving services
public-private partnerships can lower the cost of government capacity to manage the process and 6 infrastructure by reducing both construction costs an overly narrow transaction focus. Second, a and overall lifecycle costs. Fourth, because the strong understanding of the innovative PPP models private sector is often willing to take on higher developed to address more complex issues can levels of debt and to provide upfront equity capital, help governments achieve the proper allocation of responding to health public-private partnerships can allow infrastructure risk — even in conditions of pronounced uncertainty reform care 5 project delivery to be accelerated by years compared about future needs. This allows governments to to traditional municipal bond financings. Finally, in tailor PPP approaches to particular situations and addition to providing higher-quality infrastructure needs. Third, a clear PPP procurement process at lower cost, governments can use PPP transac- and apportionment of final decision-making infrastructure gaps infrastructure tions to unlock the value from undervalued and authority is necessary to ensure that private sector closing state
underutilized assets, such as land and buildings, and participants feel confident that the significant 4 use those funds to help pay for new infrastructure. investment in preparing a bid will not be wasted by a broken procurement process. Last, an open, Despite current challenges in the credit markets, honest, direct and timely communication program century education
private equity capital has continued to flow in the with all affected stakeholders can be of critical st direction of infrastructure. Over the past several importance, as PPPs can be politically controversial 21 3 years, an estimated $190 billion has migrated to and difficult to execute in certain circumstances. infrastructure funds globally, which could theoreti- cally translate to more than $950 billion of leveraged It is important to note that PPPs, while they may purchasing power.67 It behooves government incorporate many of the tools of traditional public
leaders to look closely at how to make limited finance and procurement, are a new way of doing jobs generating
public dollars go further by using private resources business, with the public and private sectors 2 to narrow such bedeviling infrastructure deficits. sharing and apporting project risks over the life of the project. Without seeing these PPPs as true While PPPs offer significant benefits, formidable partnerships — not simply a different type of challenges abound. Lessons learned from PPP transaction — and adopting a tailored approach the journey to fiscally sustainable government 1 64 65 closing state infrastructure gaps 4-3. time-consuming toproduce —canmakepublic structure —namely, thatitisexpensive and Politically, thecommon characteristics of infra- infrastructure investmenttovoters Articulate theimportanceof of abalancedprogram toincorporate PPPs: strategies following formthefoundation The asforcefulas well leadershipfrom governors. models tion inservicedeliveryandfunding/financing Closing stateinfrastructure require gapswill innova- leveraging PPPs A ofmeetingitsinfrastructure objectives. the likelihood retreating from it—thepublicsectorcanmaximize to innovate—learningfrom failure insteadof delivery modelsthatare availableandcontinuing the sameoldmistakes.By range usingthefull of project athand,governmentsare likelytomake that suitstherelative uncertaintyandscaleofeach Source: Deloitte ction plan for Private sector sector Public costs costs Year Year • Monitors compliancewith • Makes regularly scheduled • Designs outputspecification • Owns andretains strategic • The “availabilityThe payment”model ongoing basis concession agreement onan payments forperformance and payment/penaltyregime concessionaire control ofassetsleasedto 0 0 Public sectorgrantor Milestone payments, Construction costs if any 66 Concession agreement 5 5 efforts toengage privatefirmsinplannedPPPs. lative andstatutory environment stymieastate’s will competing toattract investmentcapital, apoorlegis- transactions. governments worldwide With decision-making criteriaandauthority toexecute a successfulPPPprogram, withclearprocesses, legislative andregulatory framework tosupport infrastructure projects istoestablishthenecessary A keyrequirement forattracting privatecapitalto Create afavorable legalclimateforPPPs for competinginanincreasingly flatworld. infrastructureof well-maintained is table stakes pace withforeign competitors.Anamplesupply the U.S. economyandtohelpthecountrykeep time are neededtomodernizethefoundationof particular, aseriesoflarge-scale investmentsover of whatisatstakefortheU.S. economy. In need tobearticulatedconstituentsbecause reasonscompelling toinvestininfrastructure that programs are beingeliminated.Yet, there are when budgetsare beingslashedandpopular particularlyatatime sell, investment adifficult Long-term maintenance • Designs, builds,operates and • Raises capitalagainst • Holds concessionagreement • Private sectorconcessionaire and operation costs Performance-based subcontracts competitively tendered maintains facilitiesthrough payment system performance-based in aspecialpurposevehicle payments 40 40 Debt Equity 67 “We traditionally have looked at PPPs for the large projects with
high price tags, where the state has a limited amount of money we’re big ideas from to big results “ 9 looking to leverage. But we think there are also some great opportunities for PPPs among the smaller projects. And along with road projects, we
think opportunities exist in our port, aviation and rail projects. innovation state 8 ~~Sean Connaughton, Secretary of Transportation for the Commonwealth of V”irginia
The Commonwealth of Virginia has one of the department level units would be fluent in all the country’s best PPP-enabling laws. Legislation has best approaches for procuring and financing technology reboot 7 given the Virginia Department of Transportation infrastructure — from traditional procurement authority to form contractual relationships by to public-private partnerships. Additionally, entering into partnerships with private sector firms because the unit would be housed at the depart- and units of government and removed barriers to the ment level, staff would have the relevant sector improving human improving formation of PPPs. The program also allows for fast- expertise needed to account for the risks that are services
track study, design, funding and construction of state unique to each class of infrastructure (e.g. roads, 6 highway projects that are independent of the normal prisons, wastewater facilities, schools, etc.). state procurement process. All in all, Virginia’s law creates a platform for constructing new transporta- Make full use of the wide range of delivery tion infrastructure projects that might otherwise be responding to health and funding/financing options available reform care decades away or might not be constructed at all. Choosing an appropriate model requires understanding 5 the broad range of delivery options available, including Create a strategic procurement and new, innovative PPP models developed to address finance unit in each department with more complex issues such as proper risk allocation. a significant capital program Any procurement decision should be derived from a infrastructure gaps infrastructure closing state
In contrast to the development of a single robust appraisal of all the options, based on the specific 4 cross-government unit with expertise specific to circumstances in which a project is being developed. In a particular procurement approach, these new addition, since the financial markets began undergoing century education st 21
What works: Florida Department of Transportation‘s 3 “availability payment” model
In early 2009, the Florida Department of Transportation (FDOT) entered into a $1.8 billion 35-year concession with a private consortium headed by ACS Infrastructure Development to build and operate
high-occupancy toll lanes near Fort Lauderdale. In this PPP, the FDOT will set toll rates, retain all jobs generating
revenues and make annual “availability payments” to the private concessionaire out of all of its revenues 2 (including state appropriations, tax revenues and tolls). This structure is designed to retain as much public sector control over rate-setting as possible while also ensuring that the private concessionaire is incentivized to operate and maintain the road efficiently at the desired standard. The project represents the first U.S. toll road PPP structured with performance-based availability payments (see figure 4-3). the journey to fiscally sustainable government 1 66 67 closing state infrastructure gaps with a fully funded transportationwith afully investmentprogram. isoneofthe onlystatesinthecountry As aresult, Indiana in thestate’s 10-year“MajorMoves”transportation plan. the next 35 years — a windfall of cash that’s being reinvested Toll Road, paying the state $3.8 billion to lease the toll road over Cintra-Macquarie venture to operate and maintain the Indiana The Indiana Department of Transportation partnered with the road toll lease What works:Indiana to managingtheconcession(seefigure 4-4). and planningtothetransaction phase,andthen, phasesoftheprojectattention toall —from policy infrastructure partnershipsthatconfersadequate life-cycle approach (e.g.,aclearframework) for into newpartnerships.Governmentsneedafull a recipe fordisaster. sameistrueofentering The ofwhatyou’re understanding gettingintoisusually Diving head-firstintoanythingwithoutaproper life-cycleperspective Adopt afull create more opportunitiestodeliverinfrastructure. can provide lower costs of capital to a project and and financing tools available to state and local issuers by pensionfunds.Flexibleandcreative useoffunding sionaires, infrastructure funds and direct investment state grants, ARRAmoneyandequityfrom conces- Activity Bond allocations, TIFIA loans, federal and andfinancingfrom Private have includedfunding and project financemarkets, recent transactions capital andfinancingsexecutedinthebankloan a marketprimarilycharacterized byscarce equity PPPs hasseensignificantevolution.Movingfrom radical changes in 2008, the financing market for an unlimitednumberofPPPsthrough2017. transportation agenciesandCaltranstoenterinto The Californialegislaturehasauthorizedregional 68 other pressing transportation needs. that wouldhaveraised tomeet $12.8billion agreement forthePennsylvania Turnpike legislative supporttoenterintoaconcession Pennsylvania wasunabletogarnersufficient For instance,theCommonwealthof or nature ofprivatesectorinvolvement. Political factorsoftendeterminetheextent Politics toovercomeRoadblocks that itisbettersuitedtoretain (seefigure 4-6). public sector does not “overpay” to transfer risk benefits of robust competition and that the are enough high-quality bidders to reap the sector. Optimalrisktransfer ensures thatthere too much risk being transferred to the private or total project costs, sometimes resulting in sponsors often look to PPPs to save upfront risk to the private sector. For example, public structures to transfer either too much or too little There can be a tendency in partnership syndrome Goldilocks 68 69 4-4. Infrastructure project life cycle from big ideas from to big results
Planning 9
Financing innovation state end 8
Concession Infrastructure asset
Service
delivery technology reboot 7 Construction
Deloitte infrastructure life cycle Concession end / Planning Transaction Construction Service delivery improving human improving divestment services 6
Deloitte “model” PPP program Step 1: PPP Step 2: Project Step 3: Step 4: Step 5: framework screening and Strategic Business case Procurement development prioritization assessment development responding to health care reform care Description: Develop and Develop and Develop Develop detailed Execute
• • • • • 5 publish a PPP implement preliminary business cases procurement framework specific commercial / for projects that process document that: screening and financial present the - Commercial / prioritization structures for highest risk- - Lays out financial criteria for each high priority adjusted organizational structure type of asset projects expected value and project finalization and infrastructure gaps infrastructure in the Strategic closing state objectives for - Should be able - Costing preparation of Assessment PPPs to be analysis suite of project 4 implemented Full Public documents - Identifies key - Risk analysis - with available Sector PPP constraints and preliminary - Tender or easily Comparator / (legal, political, allocation document collectible Value for financial, preparation high-level data PPP Money practical) - and process century education partnership analysis, st
execution 21 - Articulates structure including
expected PPP analysis detailed risk - Bid evaluation 3 costs and - Market modeling - Conclusion of benefits soundings - Procurement partnership - Establishes a agreement - Financing strategy risk allocation options development philosophy analysis
- Establishes jobs generating - Financial principles for a 2 modeling screening and prioritization methodology
Source: Deloitte the journey to fiscally sustainable government 1 68 69 closing state infrastructure gaps financing anddelivery private involvementininfrastructure Determining therightmixofpublicand Partnering forvalue: ment ininfrastructure financinganddelivery 4-5. Source: DeloitteResearch sibility mustbeassigned:design,construction, are composedoffiveelementsforwhich respon- for everysituation.Mostinfrastructure projects public value?There’s answer noone-size-fits-all participation inanygivenproject tomaximize is theoptimalmixture ofpublicandprivatesector sector ininfrastructure projects, butrather: What objectives isnotwhethertoinvolvetheprivate issues associatedwithpursuingtheirinfrastructure to answerinorder toaddress thelonger-term central questiongovernmentleadershave The procurements andpublic-privatepartnershipsalike. resulted inless-than-idealoutcomesfrom traditional has delivery modelsfortheircapitalprojects. This erations involvedinselectingthemostappropriate the myriadavailablealternativesorofconsid- toooften,publicsectorentitiesareAll unaware of Design Determining the rightmixofpublicandprivateinvolve- Determining the Build Determine publicauthority Define project needs project component “owner” foreach Determine best and objectives Partnership Structure Operate Desired 70 Maintain following thesethreefollowing steps(seefigure 4-5): resources foragiveninfrastructure project by can determinethebestmixofpublicandprivate better offshiftingtotheprivatesector?Jurisdictions they are bestsuitedtoretain, andwhichtheyare sector entitiesdecidewhichproject responsibilities andlostvalue.How,allocation then,canpublic cutting thisprocess couldresult insuboptimal careful qualitativeandquantitativeanalysis.Short- way foranygivenproject isnoteasy. Itrequires uptheseresponsibilities inthebestpossible Dividing determines thestructure ofthepartnership. the privatesector. shapeofthatallocation The toeitherthepublicsectoror can beallocated any oftheseelementsandtheirrelated risks Theoretically,operation, maintenance,andfinance. • - - - Who canandshoulddowhat? - - - Capabilities Risk transfer Financial Finance • • - - What are myobjectives? What doIwanttodo? - - Efficiency Speed • - - What am I allowed todo? What amIallowed - - Legal framework Political realities Project Components - - - - Innovation Degree ofcertainty 71 4-6. OptimizingOptimizing riskrisk transfertransfer toto maximizemaximize ValueValue forfor MoneyMoney
Optimal riskOptimal risk ValueValue forfor money money transfer transfer
Significant benefit of risk transfer big ideas from How to make your to big results ideas a reality Significant benefit of risk transfer as private sector discipline 9 ensuresas privateeffective sectorperformance discipline ensures effective performance 4-6. Optimizing risk transfer to maximize Value for Money Value declines as costs of risk transfer outweigh benefits Optimal risk Value declines as costs of Value for money transfer risk transfer outweigh benefits Significant benefit of risk transfer innovation state Innovation as private sector discipline 8 ensures effective performance
Value declines as costs of risk transfer outweigh benefits Leveraging technology technology reboot Leveraging 7 Cumulative risk transfer Source: Deloitte
Source: Deloitte Cumulative risk transfer improving human improving Step #1: Determine public authority By applying a bottom-up approach to the development human Improving services
ExploringStep the #1: laws Determine and policies public that exist authority regarding the of a partnership structure, the public sector can deliver 6 involvementExploring of the privatelaws and sector policies in the that financing exist regarding and theprojects involvement in a way of that the mostprivate closely sector approximates in the the delivery of public infrastructure allows for the narrowing optimal solution for any given jurisdiction. Careful, financing and delivery of public infrastructure allows for the narrowing of the Cumulativepool of potential risk transfer Source: Deloitte Research of thepartners. pool of potentialFurthermore, partners. it ensures Furthermore, that the it partnership informed won’t stumble analysis on at politicalthe outset constraints of a project further will help ensures that the partnership won’t stumble on political to ensure that limited resources are put to their best down the road. constraints further down the road. possible use, while putting government organizations in responding to health State healthcare reform healthcare State reform care
Step #1: Determine public authority the best position to achieve their infrastructure objec- 5 ExploringStep Step#2: theDefine #2: laws Define andproject policies project needs that needs andexist objectivesregarding and objectives the involvement tives in today’s of the privatechallenging sector climate. in the financing and deliveryOnceOnce a publicof publica public sector infrastructure sectorentity hasentity determinedallows has determinedfor the what narrowing it iswhat ofit isthe permitted pool of potential to do, the partners. next step Furthermore, is to define it ensures thatpermitted thethe partnership project to do, thegoals. won’tnext First, step stumble define is to defineon the political need.the constraintsproject Then, define further the down service the solutionroad. to meet that need. Lastly, goals.policymakers First, define themust need. determine Then, definethe asset(s) the service required to support the solution. Stepsolution #2: to Define meet that project need. Lastly,needs policymakersand objectives must Infrastructure renewal Infrastructure gaps infrastructure Oncedetermine a public the sectorasset(s) entity required has determinedto support the what solution. it is permitted to do, the next step is to define the project goals. closing state Step #3: Determine the best “owner” for each project component 4 First, define the need. Then, define the service solution to meet that need. Lastly, policymakers must determine the Determining what you have authority to do and what you want to do will begin to narrow the asset(s)Step #3: required Determine to support the best the solution. “owner” for each projectoptions component for structuring the relationship between the public and private sector. Then, sort out who StepDetermining can#3: andDetermine what should you do thehave what, best authority using“owner” tothree do for and basic each what criteria: project 1) componentthe in-house capabilities to deliver and/or
Determiningyou want to dowhat will you begin have to authority narrow the to dooptions and whatfor you want to do will begin to narrow the options for struc- century education
manage, 2) the best financial options, and 3) how risks should be allocated between the public and st Education reform turingstructuringprivate the relationship the sector relationship to betweenmaximize between the public public the valuepublic and (seeprivateand figure sector. 4-5). Then, sort out who can and should do what, using 21 threeprivate basic sector. criteria: Then, 1) sort the out in-house who can capabilities and should to deliver do and/or manage, 2) the best financial options, and 3) how 3 riskswhat, should using bethree allocated basic criteria: between 1) the publicin-house and capa private- sector to maximize public value (see figure 4-6). bilities to deliver and/or manage, 2) the best financial Byoptions, applying and a 3) bottom-up how risks approachshould be to allocated the development between of a partnership structure, the public sector can deliver projectsthe public in anda way private that mostsector closely to maximize approximates public value the optimal solution for any given jurisdiction. Careful, informed (see figure 4-6). generating jobs generating Enhancing economic Byanalysis applying at the a outsetbottom-up of a project approach will tohelp the to develop ensure that- limitedwill help resources to ensure are put that to limitedtheir best resources possible are use, put while competitiveness
mentputting of government a partnership organizations structure, thein the public best sectorposition can to achieveto their their best infrastructure possible use, objectives while putting in today’s govern chal-- 2 lenging climate. deliver projects in a way that most closely approxi- ment organizations in the best position to achieve mates the optimal solution for any given jurisdiction. their infrastructure objectives in today’s challenging Careful, informed analysis at the outset of a project climate. the journey to fiscallyThe journey to fiscally sustainable government 1 70 71 closing state infrastructure gaps a PPPmakessense andthensolicitprivatepartners. the projects. And then, we identify where we think ming, where we identify revenue streams to fund to incorporate thePPPsinourplanningandprogram- of these projects. We’re refocusing our whole effort scoping, or even thought about how to fund some orpreliminary engineeringor and otherstudies, often, we have not done the necessary environmental PPPs. That has slowed down the process, because tifying PPP projects, we started relying on unsolicited Over time,insteadofactivelyandaggressively iden- from itstransactions thathaven’tgonesowell? separated Virginia’s successes in the PPP space Q to get the private sector involved in our projects. is a pro-business state. We welcome the chance take on debt and do projects on their own. Virginia maximize revenues and look for private partners to revenues. That makes state agencies look for ways to limits publicdebttoabout5percent ofgeneral to look for ways to be innovative. Second, the state balanced budget every year. That requires the state Virginia has a constitutional mandate that it have a todothis? What hasenabledVirginia the years in administrations of both parties. with public-privatepartnerships(PPPs)over Q Q Q What are some of the key factors that have Virginia has achieved considerable success Interview with Sean Connaughton Secretary ofTransportation for the CommonwealthofVirginia 72 get better utilization out of our existing free lanes. get betterutilization outofourexistingfree lanes. the HOT becomeatestbed for howto laneswill is putting in place in Northern Virginia to manage believe thatthenewoperations centerthatTransurban to look for ways to manage the current capacity. We commonwealth. Even on the free lanes, we would like are a lot of other places where we can do this in the on transportation assets.We alsobelievethatthere urban areas thatwishtobringmarketforces tobear to carpools.We beamodelforother thinkthiswill to manage traffic flows as well as provide free service This will be the first HOT lanes project that attempts lessons does it provide for other states? stake by sharing the upside. What broader also had the public sector take a real equity Virginia, you’re using private activity bonds and Q ties exist in our port, aviation and rail projects. And alongwithroad projects, wethinkopportuni- opportunities for PPPs among the smaller projects. leverage. Butwethinkthere are alsosomegreat has a limited amount of money we’re looking to projects with high price tags, where the state We traditionally have looked at PPPs for the large in procuring underaPPPparadigm? transactions where you see the most benefit Q Q Q For your HOT lanes projects in Northern Are there any specific types of assets and 73 QQAre you considering in the future moving QQWhat other innovative things is Virginia doing? away from the gas tax toward, say, the use of We’re establishing a standalone PPP office to deal more dynamic, GPS-based, per-mile pricing? with PPPs in road, rail, transit, aviation and ports.
Even though we have more cars being registered We’re making it easier for our research programs big ideas from to big results
in the state, and we have more vehicle miles being to get the products of their research into our 9 traveled, our gas tax revenues are going down. We procurement system and our daily practices, setting think that’s due to the better fuel efficiency of newer aside $10 million to $20 million a year to provide vehicles, changes in driving habits and the impact incentives for using the results of our studies. of alternative fuels and electric and natural gas cars. We’re also looking into how to make sure that our These vehicles have the same impact on our transpor- Metropolitan Planning Organizations, which get innovation state 8 tation infrastructure as a gasoline-driven car, but they federal funding, and the state are spending their pay no taxes to support the system. We are looking money cooperatively, not in isolation from each other. at all the different options because in the long term,
the gasoline tax is not a sustainable revenue source. QQHave you found innovative ways to
I’m interested in how I can use technology to control reduce costs or enhance revenues? technology reboot traffic and get the most out of the current capacity. 7 We did an aggressive operational and performance audit, which found more than $1.5 billion in unused QQYou have proposed a state infrastructure federal obligation authority, federal toll credits and bank initially funded via sale of state liquor cash buildups in our construction programs. We will improving human improving stores. Why do you believe the bank is needed? services put out on the street in the next six months $614 We currently have a small, federally qualified state million more than we had originally planned, thanks 6 infrastructure bank, but we would like to establish a to the money we found in this audit. In addition, $1 billion infrastructure bank that does not use federal we’re pursuing a transportation reform package dollars and is not restricted by federal rules. It would be in our general assembly that will update archaic patterned on the TIFIA (Transportation Infrastructure regulations and policies. We’re proposing that our responding to health care reform care
Finance and Innovation Act) program at the U.S. general assembly clean up these things to give us 5 Department of Transportation, but it also would more flexibility to spend the money we have. enable us to lend money out and use the principal and
interest payments to multiply into other projects. Then, QQLooking at transportation issues three we could lend out even more money and potentially or four years into the future, do you see infrastructure gaps infrastructure provide guarantees or other techniques to leverage the closing state
any big game-changers on the horizon? 4 first billion dollars three to five times. We think this is a The first big issue is where the federal program great way for the government to multiply limited funds goes. The second is how the ever-increasing effi- to get projects done and to provide credit during a ciency of vehicles and the use of alternative fuels period when it’s difficult for the private sector to do so. century education
is going to impact the basic funding mechanism st 21 for the entire U.S. transportation program. QQWhat are the advantages of doing 3 this without federal dollars? When the economy improves and trade increases, it will have a major impact on the transporta- It would allow us to move faster. And we could utilize tion network around large ports in Virginia and it for projects that are not strictly highway projects. elsewhere. I think the environmental issues are Also, an infrastructure bank without federal dollars jobs generating
going to come storming back when the economy 2 would allow us to establish our own credit facilities improves, so the ability to expand transportation based on what we think are the market needs. Maybe facilities will become a major issue. And we’ll need in certain instances, we’re going to do direct loans; to grow the intercity passenger rail systems that can in other instances, we may be a guarantor; in other move people into very heavily urbanized areas. instances, we may be backing certain credit facilities. the journey to fiscally sustainable government 1 72 73