(photo credit: David Baron)
This is what worries Chris Taylor about the way California–and every other state in the country–pays for the roads, water, and sewer systems that make modern life, well, modern.
The vast majority of the time, when public projects from retrofitting a bridge to building a school aren’t funded straight out of public budgets, state and local governments raise the money–usually by the tens of millions, but occasionally by the billions–by selling bonds to private investors, who are then paid back over time with a small cut of tax revenues.
When times are good, this system works swimmingly. When things don’t go so well–when tax revenues drop, say, or when a project’s costs go way over budget (See also: the Bay Bridge)–not so much.
That is the position California finds itself in today. After years of deferred maintenance caused by a decade-long fiscal crisis, the state is facing an estimated $765 billion in public works investments it must make over the next ten years to meet the needs of a growing population–but with the money to pay for only about half of it.
And that is where Taylor, the executive director of a new organization called the West Coast Infrastructure Exchange, hopes he can come in. The purpose of the Exchange, a collaboration between elected officials from the states of California, Oregon, Washington, and the Canadian province of British Columbia, is to make vital public works and energy projects more feasible by connecting the governments responsible for them with cutting-edge thinking about how these projects can be designed–and, even more important, how they can be funded.
A path to private dollars?
“The reality is we all depend on infrastructure: Whether it’s sewage treatment, roads, bridges–we all want to be able to flip a switch and have lights go on, flush toilets and send it somewhere safe, and get on our bikes and ride down a well-paved road,” says Taylor, a wind and solar energy entrepreneur who has more than a decade of experience developing renewable energy projects with private equity backing. “And the reality is we need to spend hundreds of millions of dollars a years on these projects to do it. That’s a lot of money.”
Money, though, that states like California simply don’t have. Which drives Taylor’s first goal for the new Exchange, a high-profile effort that has the support of several state treasurers, including California’s Bill Lockyer: “How do we create a market for private investment in public infrastructure that is responsive to protecting the public interest, that addresses concerns about labor issues–but still brings in the private dollars we need?” says Taylor.
While experts have pondered this question for years–proposing solutions that range from creating new state agencies to dramatically changing state tax codes–Taylor’s group adds a new wrinkle: “None of this will happen unless we have a regional market that investors, the relatively small number of large entities like pension funds that could be making these types of investments, can really rely on.”
Private investment in infrastructure is booming in countries like Australia, the UK, and Chile–and parts of Asia–but states like California, strapped for cash, continue to lag far behind.
Taylor has some ideas about how the Exchange could help West Coast states tap into billions of dollars for infrastructure by facilitating investment by public pension funds or by pooling federal dollars and borrowing against them. But the initial challenge may not just be a question of dollars. To lay the groundwork for these investments, the quality of the infrastructure project pipeline in states like California–as well as how those projects are delivered–must be improved.
“I was at a conference recently where some very big infrastructure investors said they view the U.S. as right up there with India in its infrastructure investment climate,” says Taylor. (This was not a compliment.) “Investors are looking for consistency, clarity, and certainty when they make investments. So far, we’re just not giving it to them.”
The old-fashioned way
That’s largely because states like California still do most of their infrastructure spending the old-fashioned way. Take the eastern span of the San Francisco Bay Bridge, a $1.5 billion project funded by bond sales and bridge tolls that was supposed to take ten years–but instead has cost over $6 billion and is a decade overdue, causing hand-wringing across the state about whether government can still do big public works projects.
“The Bay Bridge rebuild is an oversize example of the risks you have to take when you rely solely on the traditional way of doing things,” says Taylor. “It puts huge risks on public sector balance sheets, and if everything doesn’t perform perfectly, the added cost is paid solely by the public, in taxes or tolls”
It doesn’t have to be this way, says Taylor, and there’s at least one good reason: Canada, a country that has earned a reputation for being on the cutting-edge of new methods of designing and paying for public works projects. “They’ve already figured a lot of this stuff out, so in a lot of ways we’re trying to copy their homework,” says Taylor.
One of the keys to Canada’s success (featured in a regularly updated report card on the status of its infrastructure system) has been what Taylor calls “centralized, provincial-level procurement.” This is a new approach to building infrastructure projects that gathers in one place all of the experts needed to assess the risk of building everything from large water systems to municipal light rail. (The 2012 Economic Summit Infrastructure Action Team recommended a similar approach for California–and this year’s Action Team is also considering how this could be done.)
“In the U.S., we have thousands of local jurisdictions responsible for infrastructure investment that don’t do them on a regular basis,” says Taylor. “Once in a decade, or even once in a generation, they have to do a big capital project, so they don’t have adequate capacity to do this kind of work.”
In British Columbia, though, this knowledge gap is being filled by a new advisory group called Partnerships BC, an independent corporation wholly owned by the Province of British Columbia that reports directly to the Minister of Finance. “When they were set up, they got funding from the province and they largely had staff from the ministry. But over time they’ve brought people over from the private sector–engineers and financing experts, attorneys and project management pros. All the expertise you need to run a big infrastructure project.”
The group has the authority to do three things: First, an initial screening of any proposed infrastructure projects over $50 million to see what type of financing models make sense, given the project’s risk profile. That’s followed by a business case analysis evaluating these options and determining a capital and procurement structure that makes sense. Finally, Partnership BC’s experts manage the project on behalf of the local or regional agency responsible for building it.
Spending less for better projects
“They’re aligned with that entity in terms of incentives for getting it built, but they have the expertise to do it right–whether it’s a road, a shipping terminal, or light rail,” says Taylor.
This approach is proving not only to save money–but to result in better projects. Take Canada’s Sea-to-Sky Highway, the 80-mile-long road that connects Vancouver and Whistler. As part of their planning for the 2010 Winter Olympics, Canadian officials decided they needed to improve the safety of the road–which winds from the coast up into high mountains–and allow it to accommodate more traffic. “Initially they had $600 million they were prepared to spend, and the Ministry of Transportation came up with a view of how much they could accomplish with that,” says Taylor.
But that’s where Canada’s growing reliance on private-sector expertise came in handy. “They started getting feedback from the market about what people thought they could do with that much money–and it was mostly just retrofitting bridges,” says Taylor. “What they decided to do instead was ask people what they could do for this money if they were responsible not just for building it–but also for maintaining it.”
This willingness to seek out a longer-term partnership between public and private interests led to a whole new way of thinking about how to update the road. “What private contractors said was, well, if you gave me the whole thing I’d remove the old bridges and rebuild them. Even if you retrofit, they won’t last 30 years. For the same money, I could also build many more miles of dividers, whole new bridges, more passing lanes, and really make the road safer. A lot more value for their money, in other words.”
This deal not only led to the highway upgrades being completed on time–it also brings a new predictability to public spending on the project, with the private contractor getting paid each year only when it meets specific service standards along the road.
“This sort of thing is happening all over British Columbia, from small projects to big ones,” says Taylor. “They’re establishing track records with consistent deal terms, templates and standards so people can really understand what the rules of the game are. And you know what? The private money is starting to flow in. That’s what we’re trying to create–a predictable market that would work all along the West Coast.”
Taylor and the new Infrastructure Exchange have a clear view of the problem states like California face–and a proven set of solutions to help them overcome it. Now, to find a way to get it done.