GOP Should Put Infrastructure Back On US Agenda

By Henry Teitelbaum, Editor, P3 Planet

Over the past six years, Republicans have become very adept at blocking US President Barack Obama from achieving anything in Washington, often through tactics that could have done lasting damage to the nation’s credit standing in the world.

Now that the Republicans have control over both houses of Congress, it’s time for them to grow up. The 114th Congress  brings with it just about enough time before the  2016 Presidential election campaign for the Republicans to craft a meaningful federal agenda that will prove it is more than just the party that says “no”.

While there is already talk of working together on a tax reform or immigration agenda over the next six months, it’s hard to imagine a breakthrough on issues of such long-standing disagreement between the two parties.

Continue reading GOP Should Put Infrastructure Back On US Agenda

US Assails China’s Infrastructure Bank Plan Amid Muddled Policy At Home

by Henry Teitelbaum, Editor, P3Planet.com

In war, the way is to avoid what is strong, and strike at what is weak. Sun Tzu, The Art of War

SouthChinaSea

US opposition to China’s plan for a new pan-Asian infrastructure bank might some day be a case study for explaining why US efforts to contain China’s reach for regional power and influence failed.

The US and China have been locked in conflict on a range of issues for years. On the trade side, long-standing disputes simmer over access to markets, competition for resources, tariffs and the like. There is also conflict bordering on convert war over copyright theft and cyber-espionage, and in most instances the US is not winning. Continue reading US Assails China’s Infrastructure Bank Plan Amid Muddled Policy At Home

Mexico’s Infrastructure Plan Makes Compelling Case For Foreign Investment

by Henry Teitelbaum, Editor, P3 Planet

It probably comes as no surprise to investors that great diversity exists among the countries that make up the world’s emerging markets. Yet, when a financial crisis strikes them, it’s often because the foreign portfolio managers that run giant global investment funds indiscriminately dump their holdings of emerging market debt and equity at more or less the same time.

This behavior has often been triggered by country-specific credit issues or by changes in interest rate expectations in the US or elsewhere. But the impact on many of these countries is both immediate and far-reaching, often dramatically raising the cost of financing for governments and businesses in those countries that rely on foreign borrowings to service their debt. Typically, this leads to liquidity shortages as buyers disappear, steep losses for investors, bank runs, government and private sector defaults, and catastrophic job losses.

It doesn’t end there either. The contagion that follows reaches across borders to engulf whole economic regions. Of course, this domino effect is rarely justified by the underlying economic reality, and many western institutional investors have become adept at exploiting such short-term selloffs to pick up stocks for their portfolios on the cheap or to lock-in high yields on bonds that have been beaten down by panic selling.

Correlations In Emerging Markets Declining

Lately, this pattern has started to break down. Individual country performances seem to be reflecting a more diverse range of economic and business conditions across emerging markets better than they have in the last 20 years, and investors appear to be standing by their convictions. This is a good thing, and the surest evidence yet that emerging markets have grown up in a very short period of time. Emerging markets have not only grown dramatically just in the past five years, they now offer more ways to diversify risk across credit and equity markets.

Naturally, investors will look at broader macro-economic factors affecting individual economies such as external debt, current account, domestic deposits and foreign currency reserves. But they are also looking more closely at the policy priorities within individual countries that affect long-term stability, including progress in political and economic reform, and at the choices governments make when investing for the long-term prosperity of their people.

The selloff in January 2014 was a case in point. Emerging market countries where reforms have been implemented, where governments have limited their borrowing and where domestic savings are growing, proved resilient to the selloff. Many of these mostly Asian and Southeast Asian markets have more than recovered the steep losses that followed the change in dollar interest rate expectations.

Investors are also drawing distinctions among emerging market countries based on major programs and policy initiatives. One good example of how this is playing out can be found in Mexico. The country, which has historically been a target for foreign investment due to its oil and gas resources and proximity to the US, has lately been garnering attention for its open, progressive and highly credible approach to developing public infrastructure.

Making Mexico Investment-Friendly

And it should be. Mexico’s 2014-2018 national infrastructure plan outlined earlier this year by President Enrique Peña Nieto is an excellent example of how to structure a large-scale investment program to make it attractive to private investors. Not only  has the government incentivized domestic institutions such as pension funds to invest in early stage Public-Private Partnership projects, it has created the structures that will ensure that financing is available to get them off the ground.

The plan is nothing if not ambitious, envisioning some 7.75 trillion pesos ($590 billion) in public and private investment in infrastructure. There are 743 projects outlined for investment, and these focus heavily on energy, communications and transport. But the plan also includes new projects in housing and urban development, health and tourism.

To support investment, Mexico’s government-run infrastructure bank and fund trustee, Banobras (Banco Nacional de Obras y Servicios Publicos) has been given the capacity and the legal and structural mechanisms to make public private partnerships (PPP) “bankable” for a broad range of long-term investors, including foreign institutions.

What that means is that Banobras and Fonadin, the infrastructure trust fund that it runs, may help to catalyze private investment in infrastructure investment by taking the financial risks that private investors are unwilling to take. This is especially important in the early stages of construction, when risks are at their highest. They are also willing to provide long-term financing for projects, including PPPs that have low yields but high social impact.

Mexico, which has the world’s 14th largest economy, could really benefit from the investment, as its infrastructure places it only 64th of 148 countries in the World Economic Forum’s global competitiveness index. This was recognized as a key driver in the government’s decision to dramatically boost infrastructure investment. It also provides any and all potential investors with clarity on the value that the government places on the success of these projects.

A Helping Hand For The Poor 

Mexico’s government has gone further than most in trying to ensure that the investment capital is channeled to infrastructure development in parts of the country where it can make a big difference. Finance Minister Luis Videgaray indicated early this year that the plan places special emphasis on Mexico’s poorest states in the south and southeastern regions of the country.

By targeting these regions for infrastructure investment, there’s a good chance the investment will do “double duty”, and have an outsized impact on the economy of these regions. That’s because in addition to creating public assets that boost local productivity and competitiveness over the long-term, the investment will bring a near-term boost to regional economies through the jobs it creates.  Taken as a whole,  the program amounts to a powerful instrument for  addressing income inequality and increasing social stability throughout the country.

Foreign investors seem to have taken notice. The country’s equity market has been a strong performer in 2014, and currently stands out for both its emerging market-leading forward price/earnings ratio, and for its performance in relation to historical averages.

Could Mexico’s model for infrastructure development also be giving the country a leg up on the other emerging market countries with which it competes for  stable, long-term foreign investment?

I wouldn’t want to generalize about individual investment decisions. But for any investor comparing long-term prospects in emerging markets around the world, Mexico’s PPP-driven infrastructure push sure seems to tick a lot of boxes.

full disclosure: the author holds listed shares in the iShares MSCI Mexico Capped ETF

This article has also been published in The Conde Report on U.S.-Mexico Relations

 

European infrastructure investment still stuck in neutral

By Henry Teitelbaum, Editor, P3 Planet.com

One would have thought that improving capital market conditions in Europe along with new  project finance models and multilateral facilities would quickly unlock  private investment in capital projects.

But that hope, like so much else in Europe, seems forlorn. Five years after the crisis began, even modest public spending to spur job creation and recovery in the region is being trumped by pressure to cut budget deficits and implement structural reform. This leaves virtually no scope to invest without decimating the benefits of the unemployed and inviting explosive social unrest.

It is a fatal policy error that is unnecessarily prolonging the economic slump and the time it will take to put government finances on a sustainable path. Continue reading European infrastructure investment still stuck in neutral

Obama should strive to make infrastructure his second term legacy

By Henry Teitelbaum, Editor, P3 Planet.com

With the election and fiscal cliff behind him, and Republicans showing  flexibility over raising the debt ceiling, President Obama may want to consider what else he can reasonably expect to accomplish in his second term.

Second terms are rarely successful in the US, either because of over-ambitious agendas, scandals and other political distractions, or as in the current case, a sharply divided Congress.

The president will need to choose his battles carefully, being sure not to squander political capital pursuing reforms that would face certain failure. Given the current state of politics and the sorry state of the federal government’s finances, this all but excludes partisan issues such as tax reform, climate change, or immigration reform.

But there is reason to be optimistic that a second term agenda prioritising the rebuilding of America’s physical infrastructure through well-designed public-private partnerships could attract the bi-partisan support needed to mobilise the nation. Continue reading Obama should strive to make infrastructure his second term legacy

Lack of infrastructure investment planning dims UK growth outlook

By Henry Teitelbaum

It would be unfair to place all of the blame for the collapsed state of investment in the UK’s economic infrastructure with the Tory-Lib-Dem coalition.

But then, we are now five years into the worst financial crisis in 80 years, three years into George Osborne’s public sector austerity program, and the UK is now mired in an entirely predictable second recession. So one could be forgiven for posing a few awkward questions of a Chancellor who appears far too hesitant to put a growth and investment plan in place and is instead pursuing an agenda that will surely make matters worse.

Here are a few of mine: Why has it taken so long to establish the government guarantees that were going to trigger private sector investment to the tune of £170 billion by 2015?  How soon will it be before these guarantees actually unlock the additional investment of £20 billion from pension funds that is sought to support the National Infrastructure Plan? And where are the promised funding models that will reduce the country’s reliance on banks for long-term infrastructure investment while delivering better value for money?

The crisis on the ground demands a response after the government reported a 20%-plus year-on-year decline in infrastructure spending in the first half. This came alongside a revised 0.5% contraction in second quarter GDP. We’ve  now seen nine consecutive months of economic contraction.

Admittedly, the future for infrastructure investment was bleak even before the government decided to make deficit cutting its priority. The pipeline of large new projects had been running dry well before the current coalition came into power. Now the Olympics are over, and the banks most associated with funding PFI and other infrastructure projects are themselves on taxpayer funded life-support. Meanwhile, the mono-line insurance industry that previously provided the credit enhancement needed to make large infrastructure projects investable is also out of the game.

But it has also been clear for some time that the current City-driven idea of relying on private sector enterprise to substitute for public investment without the government playing an major enabling role was not going to work.

Continue reading Lack of infrastructure investment planning dims UK growth outlook

Tsunami Disaster Should Put PFI At Top of Japan’s Rebuilding Agenda

By Henry Teitelbaum, Editor, P3Planet.com

As the focus of relief efforts turns from rescue to reconstruction in northeastern Honshu, attention is also starting to turn towards how Japan plans to pay for rebuilding the region’s shattered public infrastructure.

Unfortunately, the backdrop isn’t promising. Japan’s government, which will have overwhelming responsibility for covering insured losses from the disaster, is in no financial position to shoulder these costs.

Japan’s government debt, at over 225% of GDP at the end of 2010, was already the world’s highest before the earthquake, tsunami and nuclear disaster hit one month ago. While that debt is 90% owned domestically and financed by Japan’s high savings rate, it will constrain what the government is able to spend on reconstruction.

It seems inevitable, given the circumstances, that an unprecedented level of sustained long-term private sector financial support will also be needed. Continue reading Tsunami Disaster Should Put PFI At Top of Japan’s Rebuilding Agenda

Global Fraud Alert: PPP Model Boosts Fight Against Corruption

fraudBy Henry Teitelbaum
Editor, P3 Planet.com

A priority issue for governments around the world as they contemplate large scale infrastructure programs should be the ruinous cost of corruption. For one thing, it exists nearly  nearly everywhere, even in countries regarded as well-governed. And its effect  on development can be as catastrophic as it is insidious.

While there is no substitute for vigilance, the transparent processes and incentives that go into Public-Private Partnerships can do much to prevent corruption from disrupting large-scale public development programs. When executed with clear policy objectives and consistent political support backed by a robust legal framework, PPP can also go a long way towards rooting out the fraud that is too often accepted as the cost of doing business.

PPPs, unlike traditional Design and Build projects, require private sector companies and their financial backers to bid not only for the right to deliver a public asset, but to provide up front funding as part of a long-term design, build, operate and maintenance agreement. They have a record of not only providing better value-for-money over the life of a public asset, but better resistance to corrupt influences. They accomplish both of these goals by locking in private sector partners to a system of performance measurements that come with mandatory financial penalties for failing to meet them.

Nicholas Jennett, head of the European Public-Private Partnership Expertise Centre (EPEC) at the EIB, says PPPs are a vast improvement over standard procurement models because “they tie down contractually what is happening,” and uphold the principle of “competition at every level.” This principle is put in place through the course of project tendering, when financing is arranged, and throughout the delivery, operational and maintenance phases. On top of this, says Mr. Jennett, “scrutiny is brought by third party funders” so that performance is monitored by parties who are incentivized to deliver the best results.  It is on this basis that the EIB and EBRD are providing a majority of their financial support to pan-European development projects, including the Trans-European Transport Network (TEN-T) program for multi-modal freight and passenger transportation.

The superior level of third party scrutiny that PPP, or as it’s known in the UK, PFI (Private Finance Initiative) encourages was recently evidenced in the UK Ministry of Defence’s decision early this year to abandon the £6 billion SAR-H rescue helicopter PFI project. The decision followed revelations regarding improper access to confidential information by one member company in a bidding consortium, that helped the consortium, Soteria, to win preferred bidder status for the project’s delivery.  What is interesting is not that the irregularities were found out, but rather that the consortium itself brought the information to the attention of the MoD. What’s even more interesting is that even before the MoD had decided what to do in response, the consortium’s banker, RBS, pulled its funding rather than continue associating itself with a tainted project.

PPPs in North America are known as P3s, while in the UK and other countries they are either PFIs (Private Finance Initiatives) or just PPPs. The model in its various forms in the developed world has a generally good record of delivering value for money, but is becoming especially popular in emerging countries. This is because many of these countries lack either the public infrastructure – whether it’s highways, bridges, schools or hospitals – or the means to pay for one. Civil servants in many of these countries, moreover, often lack the skills needed to manage large scale projects, and are handicapped by entrenched practices that discourage a fair competitive environment.

Richard Clegg, partner at Wolf Theiss, a leading law firm in Central, Eastern and Southeastern Europe, says problems with standard procurement practices in these countries begin with the fact that public money is tapped upfront. “This leaves decision making in the hands of officials who are likely to be either directly influenced by price without consideration for quality, or when long-standing business relationships built on one form or another of corrupt influences causes decisions to be made in favor of particular contractors.”

There’s also a large gray area of decision-making where local tenders for projects, particularly in developing countries, can be made to look artificially attractive on cost, Mr. Clegg says. This is because vertically integrated local companies can offer cost advantages by sourcing raw materials internally or through their own long-standing relationships, based on kickbacks to local materials producers.

At least as troubling is how corruption prevents the private sector from playing its crucial role in development. It discourages honestly run businesses from competing for public projects because it undermines faith in the tendering process.

“Corruption stops development because it turns away the long-term investment that is most desperately needed in developing countries” says Mr. Clegg.

In last year’s annual Global Fraud Survey, commissioned by Kroll and carried out by the Economist Intelligence Unit, 48% of respondents indicated that fraud deterred them from engaging in business in at least one foreign country. Of those that have entered new markets, 21% believed that their exposure to fraud has increased because of the move.

Corrupt practices are by no means limited to developing countries.  In the euro zone, development in both large and small economies, typified by Italy and Greece respectively, suffers due to long-standing and deeply entrenched corrupt practices. A recent study found, for example, that in Italy, where contracting decisions follow long-standing closed procedures that overwhelmingly favor local players, highways cost on average seven times as much per kilometer as in Portugal, where PPP is the norm.

The added costs, it is worth noting, can be measured in lower productivity and higher government deficits. Italy, which in 2010 had a debt to GDP ratio of 118 per cent, was exceeded  in Europe only by Greece, with a ratio of 144 per cent.

The US is also far from immune from corruption. The Global Fraud Survey showed that a troubling 7% of respondents indicated that fraud had deterred them from operating in North America.

Of particular concern is that criminals are attracted to precisely the kinds of large scale public works programs that are now being undertaken in the US.  During the 1930s, corruption thrived during the implementation of President Franklin D. Roosevelt’s Public Works Administration and other programs, with spending and hiring decisions becoming hostage to political patronage while newly empowered labor unions brought large scale abuse, much of it against union members themselves. Many historians now point to corruption as a key factor in the failure of the Roosevelt administration’s main economic policy initiative before the war.

Some have argued that the administration of President Barack Obama may be making the same mistakes with the $787 billion American Recovery and Reinvestment Act of 2009 that was enacted a month after taking office. There are certainly similarities between the two programs, at least in that neither has been able to generate much in the way of private sector job growth and both have been susceptible to fraud. One senior fraud investigator put the level of fraud risk to the current stimulus package at 10% of its value.

What’s more, Mr. Obama is not done with investing in infrastructure: a key initiative for his administration over the next year involves the creation of an Infrastructure Bank with $50 billion of federal funding to help catalyze long-term private infrastructure investment, with much of it funded through P3 initiatives.

The use of PPP as a procurement model is already well established in Europe. Interest in its use in the developing countries of central and eastern Europe has even become a priority for western-supported financial institutions due to deeply established cultures of corruption in many of these countries. The current focus is on scaling up their use in programs aimed at closing the infrastructure deficit that exists between the EU members and candidate countries, primarily through the European Investment Bank and the EBRD.

Blake Coppotelli, a senior managing director for Kroll’s Business Intelligence and Investigations division, says the PPP model holds good potential for fighting corrupt influences in the US as well, but warned there’s “no fail safe mechanism.”  Mr. Coppotelli, who was previously chief of the Labor Racketeering Unit and New York State Construction Industry Strike Force in the Manhattan District Attorney’s office, says the increased transparency and level playing fields that are built into the competitive tendering of a P3 project are helpful measures. But he warns that there’s no substitute for close oversight.

“The P3 format is a step in the right direction,” Mr. Coppotelli says, “but it’s only as good as the integrity of the players.”

He has good reason for skepticism. The value for money proposition in Japan’s PFI program over the past decade was diminished by a tangled bureaucracy, a slow and expensive tendering process, poorly understood goals and a near-absence of cheap long-term private sector funding. In the UK, where the PFI model was first developed during the early 1990s, similar problems have sometimes negatively impacted outcomes.

But in Japan, the cumulative effect of these influences was to discourage competition and leave projects in the hands of a few well-heeled domestic infrastructure delivery companies. Even worse was that projects fell victim to the country’s deeply rooted culture of corruption, where party politics mingles with business interests and organized crime.

Gary Sturgess, executive director of the Serco Institute, said one key lesson from Japan’s experience is that public sector contracting requires “norms and rules that result in more transparency” and encourage healthy competition.

That corruption can impact major policy initiatives in Japan, which ranks among the world’s most transparent and accountable nations, underscores how pervasive the problem remains in developed countries. The Economist Intelligence Unit recently reported that 84% of construction companies in the developed world were hit by fraud, with 18% of this related to corruption and bribery. Mr. Coppotelli says that even though publicly funded projects have better protections against fraud than commercial projects, they remain “unbelievably susceptible.”

And the stakes are growing. In its 2007 report, “Infrastructure to 2030”, the Organisation for Economic Cooperation and Development estimated that the amount of investment that will be needed by 2030 just in roads, rail telecommunications, electricity and water infrastructure will reach $71 trillion. That figure, which doesn’t even take into account social infrastructure such as schools and hospitals, airports or seaports, represents about 3.5% of global GDP over the same time period. With so many new public infrastructure projects entering the procurement pipeline around the world, it’s no surprise that more and more public sector authorities are looking to scale up their use of fraud-resistant procurement models such as PPP.

Some countries, most notably Canada, have adopted the best of the UK PFI model and made it far more efficient and thus better able to resist corruption while delivering greater value for money. The UK’s own experience, while often portrayed as a mixed one at home, has produced a great deal of valuable data, skills and knowledge that are now being made available to other countries through organizations such as the CityUK.

Mr. Jennett says much has been learned from early experiences with PPP and PFI about the building blocks to making programs more effective. For example, he says PPP works best when it has broad popular support. “Consistent political support for PPP is important,” he says, “so it’s important to come to the market with programs rather than individual projects.”

Moreover, says Mr. Jennett, building support for the PPP model across party lines requires the successful implementation of programs over the course of several terms of government. “Consensus can only emerge over the question of value for money, so the more we can focus on circumstances where value for money can be demonstrated, the more political consensus will follow.”

This feature has also been published in Infrastructure Journal

US Infrastructure Redevelopment Won’t Be Derailed By Midterm Vote

By Henry Teitelbaum, editor of P3Planet.com

As the dust settles from the US mid-term elections, it is clear that the Democrats’ jobs and growth agenda will struggle against a newly empowered Republican House majority.

 But even if further stimulus spending is off the table for the time being as the focus turns to deficit reduction, Democrats and Republicans may yet find common ground in supporting infrastructure public-private partnerships (PPP), particularly where a minimum of public capital can be used to leverage huge amounts of long-term private investment.

Indeed, if there is any basis for building a spirit of bipartisanship in Congress and in state legislatures, it should be around precisely these efforts to catalyze private investment in public assets. The reasons are compelling. Firstly, there are powerful grassroots constituencies in both parties and in business that support private investment in public infrastructure. Secondly, investors are cash-rich and need to invest in long-term assets, meaning they can either invest to redevelop America’s infrastructure, creating jobs and economic growth domestically, or they can go elsewhere. Finally, if it needed mentioning, there is financing for projects that can be secured at rates that have never been this low at a time when the need has never  been so great.

There is an estimated $2.2 trillion infrastructure deficit in the U.S., and that’s just to restore the nation’s highways, bridges and railroads to an acceptable standard. Roads and bridges are visibly in need of repair in virtually every city and town and on most of the transportation infrastructure that stretches between them. This is the low-hanging fruit for the many newly elected  local leaders to go for because it is relatively simple to execute quickly, creating jobs and tax revenue along the way so that it quickly pays for itself.

There are also large scale new-build projects, such as high-speed rail, energy efficiency and clean energy that the country will need  to compete in a globalized economy.

President Obama has laid out a  program for catalyzing the private investment that is needed to address America’s infrastructure gap through a national infrastructure bank. The bank would be capitalized initially at $60 billion, but would be able to leverage a further $500 billion from the private sector for infrastructure projects over 10 years. 

The idea has been endorsed by financial and industrial leaders alike. Some states are even assembling similar structures to attract private investment for a range of social and economic projects, with California having already established its own infrastructure bank and New York set to follow. The Rebuild NY Bank is a key program for newly elected governor Andrew Cuomo, who aims for it to help coordinate projects and incentivize private investment in public works. It will do this by levering equity investment from the state or Federal government to create a pool of funds to encourage private capital and risk-sharing in the construction of certain large projects.

Infrastructure banks rely on the expectation that a lot of private capital is out there, and they’re right. U.S. corporations are flush with cash after a strong year of earnings and stock performances. Large engineering firms like to invest in PPP for a number of good reasons, with one of the main ones being the long-term stable cash flows from the  operation and maintenance contracts that run for years after a project is built. These cash flows help to smooth the notorious boom and bust cycle of their other businesses.

But there are even more significant pools of capital available from institutional investors. Much of this money, some $190 billion of which is said to be immediately available, needs to be invested in very long-term projects, and until recently has found it hard to do so directly.

Pension funds, life insurers, university endowments, charity trusts and other institutions with long-term liabilities are anxious to support infrastructure because of the structural shortage of investments that reliably generate the annuity-like payouts that they require. The demand for assets such as those produced through PPP projects is particularly acute now because the Federal Reserve is holding interest rates at or near zero, flooding the banking system with cash, and engaging in “quantitative easing”.  Yields  on 10-year government bonds are now barely over 2.5% and 30-year Treasurys are yielding less than 4%, making it very difficult for pension funds and life insurers to support payouts on guaranteed premiums without adding risk to their portfolios.

PPP-related debt is part of the solution because it allows investors to match long-term liabilities – namely the guaranteed payments that pensioners live on – to steady yielding investments that are attractive, safe and very long term. Besides the cash generated from use of the assets once they are built, the large sizes of the undertakings are well suited to the scale that these investors typically need to make.

To some extent, this explains why pension funds that offer defined benefit plans are taking matters into their own hands and not waiting for the banks. Consider the example of the California Public Employees’ Retirement System, (CalPERS), which has adopted a policy that allows for direct investment in the equity and debt of privately funded infrastructure assets. By helping to finance projects from the inception, CalPERS, with its $204.9 billion of investments, and other public and private pension funds can bypass bank management fees and the associated cost of carried interest that would otherwise be payable to fund managers.

Direct pension fund and institutional investment in infrastructure and PPP projects is in fact a global phenomenon, with superannuation funds in Australia long-standing investors in domestic infrastructure projects through funds that they collectively own. In Canada, the Ontario Municipal Employees Retirement System, which manages some C$44 billion of member funds, aims to increase its infrastructure holdings from 31% to 35% of its total and is targeting North American rail systems for investment. And in the U.S., the Dallas Police and Fire Pension System recently partnered with Cintra on the 13-mile North Tarrant Express toll road.

Government leaders in America will need to think long and hard about how to ensure that deficit cutting measures do not also undercut public and private investment planning. There’s competition for this investment not only with other countries, but between states and cities, and capital tends to flow where it is most welcome. Voters will judge their newly elected politicians in terms of the tangible improvements they deliver, whether it’s the jobs they create, the fiscal revenue they generate or the productivity and environmental improvements that businesses and constituents enjoy. That’s food for thought for anyone looking ahead to 2012.

P3 May Prove Decisive In US State Elections As Cutbacks Get Ugly

By Henry Teitelbaum, Managing Editor, P3Planet.com

The difficult choices facing state governors and legislatures  across the US over how to maintain essential services amid worsening state budget deficits have been set into sharp relief by the July 1 start of the fiscal year.

Every state but one  (Vermont) is required to balance its  budget every year by law, and the strains are being felt across the country, with society’s most vulnerable, as usual, the most affected.

This is because declining stimulus funding from Washington and shortfalls in tax revenue collections due to continued high unemployment and the weak housing market are occurring simultaneously,  leaving governments no choice but to cut public jobs and services, sometimes drastically. The Center on Budget and Policy Priorities, a Washington, D.C. research institution, says 46 out of 50 states face shortfalls for the fiscal year that started July 1, with the bill totaling some $112 billion. Estimates vary somewhat according to which agency you ask, but most agree that the current fiscal year is going to be the worst of the cycle for cutbacks, as all of the easy cuts and accounting tricks have already been largely done.

A browse through local headlines gives you  an idea of how dire the situation has become. New Jersey, my home state, cut $1 billion from education to help close an $11 billion deficit, while Idaho cut aid to low-income elderly people and the disabled. Mississippi cut funds for the only juvenile delinquency training facility in the state, while California, still mired in recession with unemployment at 12.4%, is considering ending welfare for 1.3 million poor families to help close a $19 billion budget gap. Municipal governments there are taking even more drastic action, as shown recently by the city of Maybury, which fired its entire workforce, including the police.

All of this adds up to some very alarming polling figures for anyone unlucky enough to be an incumbent running for re-election in state or local elections this fall. It’s not as if anyone wanting to stay in office didn’t already have an uphill battle ahead of them after a year of  Tea Party anti-tax protests  across the nation. Now incumbents are becoming magnets for voter fury over real cuts in real services. Populist opponents are certain to claim that these cuts were unnecessary and that they could do better – at least until they’re in office and find out for themselves just how empty the coffers are.

What I find interesting about these elections is that incumbent Republicans and Democrats are just about equally vulnerable to the protest vote that we are about to see. There are 14 incumbent gubernatorial races to be contested this November, seven of which are Republican seats, and another 25 state elections for which incumbents are either not eligible to run, or else not seeking re-election, 13 of which are Republican.

With anti-incumbent sentiment running so high, and with so much at stake, it would seem natural for voters to give more than passing consideration to candidates who can demonstrate skill sets that will help them to manage this crisis without shutting everything down.  Of course, anyone running for office will be promising to find ways  to maintain services, create jobs and pave the way for a more productive and prosperous future for their local economy. That’s what politicians do. But most won’t really possess the background experience and the skills to deliver on those promises because few, if any, have ever had to operate within the constraints of the public sector that is so fiscally stressed that reliance on private financing is not so much an option as a requirement for the job.

Which brings me to my point. Public-Private Partnerships, or P3, should be at the forefront of any realistic debate over how state and municipal governments continue to deliver services and fulfill their campaign promises over coming years. P3 is a form of long-term contracting that allows public authorities to substitute private sector investment for increasingly precious public money in projects where its needed most – upfront. The model also creates a transparent and predictable schedule for long-term repayment of the private investment, typically over 20-30 years, that public sector authorities can live with.

Well-structured programs of P3 investments are being used around the world to counter some of the worst effects of recession by maintaining long-term investment spending and creating well-paid private sector jobs. This is being done especially to support investment at times like these, when government priorities have shifted from pump-priming the economy to cutting deficits.

Across the U.S., states have been adopting P3-enabling legislation at an accelerating pace, and states like California, New York, Virginia, Florida, Colorado,  Indiana and Michigan are starting to develop its potential for helping them through the crunch and then beyond. Projects such as the FasTracks municipal rail system in for Denver and the proposed Windsor/Detroit bridge project, both of which are going forward as P3 projects, or Washington State Department of Transportation’s exciting I-5 Alternative Fuels Corridor, which may become one,  are examples of how government can  engage the private sector for investment,  stimulate innovation and boost the economy while developing the transportation infrastructure of the future.

Comprehensive approaches such as the one adopted by Michigan Governor Jennifer Granholm (D), who has established a specialized office for developing expertise in the use of the P3 model in transportation, education, energy, water, corrections, public safety and information technology are clearly pointing the way forward.

But much of the work there builds on the achievements of California Governor Governor Arnold Schwarzenegger (R), who had the courage  to go to British Columbia and adopt the best aspects of Canada’s approach to procurement using the P3 model. At the end of the day, candidates for state or local office need to understand that P3 is not part of some political manifesto of the left or the right. It is simply a tool for advancing public policy objectives that makes use of the full range of resources that are available to the procuring authority.

Neither of these governors is running for re-election this year, but their legacy will be to challenge successive administrations to build on their efforts, whichever party wins.

The ability to call upon P3 for the badly needed infrastructure solutions to  the challenges facing our states and communities, and for political candidates to demonstrate the skills needed to effectively engage the private sector should be at the top of everyone’s agenda for this election.

Public Private Partnerships