Infrastructure: Public/Private Partnerships as a Solution
February 13, 2018
By Michael Torhan, CPA
On January 31, 2018, Urban Land Institute New York held its annual Real Estate Outlook conference.
The state of infrastructure in the country was a hot topic throughout the conference. Scott Rechler, CEO and chairman at RXR Realty as well as the chairman of the Regional Plan Association, mentioned that there have been generations of significant under-investment in infrastructure. He noted, in particular, two challenges have been funding for improvements as well as the logistics and coordination of investing in infrastructure -- specifically, how and what investments in infrastructure should be undertaken. Naturally, the politics involved with infrastructure was also discussed as a challenge to improvements and modernization.
One solution noted was public/private partnerships. However, private industry is reticent to accept risks that are unable to be underwritten. The negative notion of private investment in infrastructure may be overcome in projects with revenue streams which are seen as more viable opportunities for private investment participation. The panel discussed the example of how improvements or repairs to water delivery pipes are not associated with any additional revenue streams, unless the cost of water is increased, and therefore private underwriting for this investment would be challenging. However, improvements to LaGuardia Airport, which inherently includes multiple streams of revenue, was discussed as the ideal situation for a public/private partnership by Rick Cotton, executive director at The Port Authority of New York & New Jersey. In fact, Mr. Cotton mentioned that the current redevelopment of LaGuardia consists of funding which was two-thirds provided by private investment. Therefore, those projects that have associated revenue streams such as tolls, fees, and other income may be successful in attracting private capital.
The accountability and risks in public/private partnerships were also discussed as a benefit to getting projects completed timely and within budgets. The comparative example of the Bayonne Bridge and Goethals Bridge was provided. The Goethals Bridge replacement included a public/private partnership and was discussed as being completed on a timely basis. This is in contrast to the public project for the Bayonne Bridge which the panel discussed as being plagued with delays and budget overruns. A public/private partnership shifts significant accountability and risks to the private sector. Budget overruns and delays can directly impact profits for the private party, and therefore efficiency and effectiveness are vital for projects with private investments. As a result, these partnerships can provide timely and cost-effective improvements and modernization to infrastructure.
Clearly, there are viable solutions to move forward with modernizing infrastructure in the country which can benefit the current and future generations. It will be interesting to track the various public/private partnerships and learn from their successes and obstacles.