California is the world's 10th largest economy. The mansions of Beverly Hills, tech giants of Silicon Valley, and stars of Hollywood all evoke thoughts of wealth and success. Simply put, California is a giant.
In the wake of the sub-prime mortgage crisis however, this giant is being brought to its knees -- straddled with a mind-blowing 23.4 billion dollar budget shortfall and no relief within sight. Its cities are declaring bankruptcy, the most recent being the city of Vallejo, located in the affluent San Francisco Bay area. State and local governments are desperate for capital -- a shrinking tax base and the lack of credit has resulted in an inability to meet budgetary needs and has forced cash constrained governments to look for new ways to raise cash.
Simultaneously, it has become increasingly obvious at the Federal, State and local levels, that aging infrastructure in our country cannot continue to be properly serviced. Maintenance costs are prohibitively high while replacement is financially unthinkable. The American Society of Civil Engineers has estimated the un-met need for such maintenance costs to be $2.2 trillion over the next five years. Political infighting in many states makes decisive action impossible, leaving most constituencies with outdated, underfunded and overused infrastructure.
Given these realities, many governments are looking to privatize their infrastructure, including tolls roads and parking systems, to provide capital and eliminate costly maintenance and operational burdens. The privatization of public infrastructure is not a novel concept; however the recent economic downturn may well be the accelerant which takes this process from an orderly transition to a needs-based avalanche.
In today's world, private investors and local and state governments, through public-private partnerships (P3's), have the unique opportunity to satisfy each other's needs. Through this arrangement, the skills and assets of each are shared to affect a joint undertaking to provide facilities or services to the general public. In New York State alone, over $51 billion of infrastructure assets are being reviewed for possible infrastructure P3's.
There are some who challenge this idea and suggest that private entities should not operate or profit from public infrastructure. Yet the facts are compelling in pointing towards such public-private partnerships. In the first instance the assets typically remain owned by the government, and are only leased to the private entity. Moreover, the asset continues to be available to all the same users who previously benefited from that asset.
While many governments seek to operate their infrastructure efficiently, when they face crippling cash constraints, they simply don't have the money available to improve and enhance those assets. This creates a catch-22 in that the government doesn't have the money to improve the system in a fashion where additional revenue can be generated over time. Private enterprise does -- and by virtue of the private sector's willingness to invest in these assets, the public benefits from improved operations and services, not to mention the allocation of all current and future maintenance, repair, and replacement obligations to the private entity. Obviously, the private investor seeks to make a return on its investment, and generally does so with increased user fees. As a result, private investors are usually able to pay large up-front payments to the governmental entity for the right to collect revenues over a long-term lease, usually in excess of 50 years.
Even if the government had the capital necessary to make these improvements, the government does not hire entrepreneurial people who get paid to take risks. Typically, caretakers of infrastructure assets are risk adverse and preserve the assets without "rocking the boat". Individuals running Departments of Transportation or parking systems are not paid bonuses or increased revenue for taking risks. They are in fact incentivized to avoid risk and keep things going just as they are, especially in these difficult economic times.
Though private enterprise is in a position to bring about necessary and positive changes, it is also able to preserve the status quo where such maintenance benefits the community. Some private investors (including this author) believe that a successful private-public partnership demands the participation of organized labor. Public infrastructure, such as parking systems and toll roads are frequently staffed and maintained by union employees. These workers have invaluable experience in their respective positions and offer any private-public partnership the opportunity for a seamless transition of operations. Private investors have shown that a labor-friendly business model benefits both the private investor- by offering an experienced and capable workforce, and the general public-by providing high-paying local jobs.
Public-private partnerships should be embraced rather than feared. The recent economic downturn has left our economy reeling and forced state and local governments to rethink the way they do business. Fortunately, a unique opportunity has emerged in the form of public-private partnerships, an alliance which stands to benefit all parties involved. In these trying economic times, a government's success may well depend on its ability to explore non-traditional sources of revenue. California can be a giant again, but only if it maximizes its resources and harnesses the drive and ingenuity of America's entrepreneurs.