I'm really happy that last Tuesday's blog, on the state's horribly misguided cuts to the Arizona Department of Water Resources, generated a robust (and still ongoing) discussion. It got me thinking: The state has these really critical infrastructure needs (like managing water supply in an arid state with a rapidly growing population, and building and maintaining new roads, and developing a fit-for-purpose telecommunications network) and no clear way to pay for them.
The 2008 report, Preparing for an Arizona of 10 Million People, produced by the W. P. Carey School of Business, suggested that the state's infrastructure needs (including transportation, energy, water and wastewater, telecommunications, health care, education, and public safety) totaled more than $11 billion a year over and above what the state was paying annually at the time. If the state will gut the critical ADWR to save $14 million (0.48% of the budget deficit), how on earth will we meet those $11 billion in annual infrastructure needs?
At the Arizona 2030 conference a year and a half ago, ASU President Michael Crow talked about innovating, "rethinking everything" when it comes to the state's infrastructure needs. "Can we learn to understand the true nature of global competition? Can we learn that Grade-A infrastructure is in fact not an expense but the basis from which we will be able to have economic competitiveness? Can we find a way to de-stigmatize terms like planning, user fees, tolls and market-driven solutions?"
I've always talked about how critical high-quality infrastructure is for the state's competitiveness. Clearly, it's worth paying for. But when there's simply no money in the till, what's the answer?
I don't know that they'll close the book on the question, but some ideas came in an e-mail last week from John Sellers, who now heads Yavapai Regional Capital, which specializes in infrastructure finance. John wrote, "A report published recently by the U.S. Conference of Mayors Water Council quotes a Congressional Budget Office study citing up to 40% cost savings being achieved using private sector techniques."
Public-private partnerships
Public-private partnerships, or PPPs, can take a number of different forms. The most common are "design-build-operate" where a private company designs, builds, operates, and charges for the use of the facilities for a pre-determined number of years; and "design-build-own" where the private company retains ownership of the facilities. In other cases, the private company is responsible only for designing and building the facility, then transfers ownership and operation responsibility to the public sector.
The authors of our 2008 AIC infrastructure study (Infrastructure Needs and Funding Alternatives for Arizona: 2008-2032) cited a number of benefits that PPPs can offer. Among them:
- Public-private partnerships make available new sources of capital available that are not accessible to public agencies.
- PPPs transfer economic risks away from government agencies and taxpayers to private partners.
- They put less strain on public sector funds, so more funds available to be spent in other areas.
According to Sellers, PPPs offer "potentially significant cost savings to upgrade or construct a new treatment plant through design/build (DB) or design/build/operate (DBO) contracting with the private sector. DB and DBO alternatives can save 10-15 percent, or 35-40 percent, respectively, of overall project costs."
Yet while some 1,300 PPPs have been financed globally, only about 20 of those are in the United States.
A 2009 report by the Pew Center on the States seemed to me to suggest that public-private partnership are not only the logical way to fund much-need infrastructure projects when budgets are still in crisis, but are in fact an inevitable outcome of the confluence of deep and wide infrastructure needs and equally deep and wide budget problems.
Applying private sector lessons
But even if the answer isn't a public-private partnership, public enterprises would do well to adopt some of the private sector's modus operandi, including (from John Sellers and the Congressional Budget Office):
- Demand Management, including use-based pricing structures, rebates on use-reduction equipment and voluntary conservation programs coupled with public education (for water and energy providers); as well as marginal-cost pricing to reduce cross-subsidies between different classes of users.
- Labor Productivity: Increase productivity by reducing staffing for off-peak hours while increasing automation for normal operations; and cross-training staff so there is no distinction between operations staff and maintenance staff.
- Consolidation of Systems: Reduce administration, operations and labor costs by physically connecting smaller systems.
- Asset Management Planning: CBO cites a report by Apogee Research/Hagler Bailly and EMA Services (CBO 2002, p. 53) that indicates increased efficiencies and cost-savings/avoidance via "...extending the life of equipment, eliminating redundant equipment, reducing O&M costs by as much as 40 percent, and improving the reliability of the system by roughly 70 percent."
Clearly, something has got to change - we either need to figure out a way to pay for the infrastructure we need or let it crumble (that's certainly not an outcome I want to see).
While I generally agree with Crow that it's time for innovative thinking, we don't need to reinvent the wheel here - public enterprises can generate significant savings just by following the private sector's best practices. And if we accept PPPs the way the rest of the world has, we could do far more with less.
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