Members of ULI’s Public Development and Infrastructure Council discuss ways to make infrastructure improvements, facilitate public development projects, and create synergies in the private sector.
What are some of the key trends affecting the development of public projects and infrastructure?
Michael Francois: Public agencies are focusing more of their attention on public infrastructure, either through direct spending or through a variety of development techniques such as public/private partnerships. Funding resources are somewhat better now than they were during the depths of the recession because there has been a slight uptick in revenues from public agencies. Public and private entities have been able to use historically low interest rates to package financing structures. But there is still a huge unmet need.
Steve Crosby: The railroad industry, which had been shrinking since the advent of the
Interstate Highway System, has been growing in the last ten years, because the Interstate Highway System is built out. Trucking is becoming more difficult because of [increased] traffic congestion, tougher air quality standards, driver shortages, and rising gas prices. So railroads can once again become a profitable, economical, and greener way to move freight. And because the industry is growing, it is buying more property than it is selling at this point.
Lisa Wild: Limited appropriations funding is available to build new or refurbish the outdated, deteriorating GSA [U.S. General Services Administration] inventory. Capital investment needs currently far exceed the resources of the Federal Buildings Fund. Through increased collaboration with government entities at local and state levels and with the community, together we are improving and reviving otherwise [underused] or neglected properties. A prime example of this partnership is the sale in 2007 of approximately 65 acres [26 ha] of vacant federal land at the Denver Federal Center to the city of Lakewood, in Colorado, for the development of a new community hospital and a multimodal transit station. The new development sits adjacent to and serves the Federal Center, which employs more than 6,000 employees and contractors.
In the last several years, public/private partnerships have gotten a bad reputation because cities started entering into concession agreements, turning over public assets to private entities in exchange for money upfront. These agreements were misnamed public/private partnerships and resulted in cities’ giving up future revenues that were needed to create long-term fiscal balance. That model went down in flames in many cities, and people got the idea that public/private partnerships weren’t a good idea. With the concession model, you don’t have open-book accountability to ensure an equitable sharing of revenue and a risk/reward basis. The better model is a true partnership where cities that need capital access private capital and draw on private sector innovation and management to increase asset value and annual income. True public/private partnerships are completely transparent; the partnership agreement specifies who is supplying money and expertise, what responsibilities each party has, and how the money flows when it comes in. The partnership should include an incentive to the private party to optimize net operating income, and the public partners share revenue in excess of the cost of capital and management fees. That way, the public agency has created a more valuable asset that can generate a greater cash flow over the long term.
Sandy Apgar: Infrastructure should be a primary focus of public policy and business activity in the next few years. We have an “infrastructure deficit” of over $2 trillion to replace and repair roads, bridges, rail systems, and other public infrastructure. By undertaking these projects now, we can improve pricing for the taxpayer because excess capacity in both the construction and service industries allows government and business partners to drive better bargains. But Washington Post columnist Neil Irwin projected that given the pace of economic recovery, we have only a couple of years of favorable pricing, so now is the time to move.
How are public/private partnerships helping with public development and infrastructure projects?
Crosby: In the last two decades, the biggest growth in the railroad industry has been transporting shipping containers on
railroad flat cars. We now stack those two high, which gives us the best economic performance and the best ability to deliver high-quality, reliable service. But in order to do that, we need roughly 23 feet [7 m] of clearance between the top of the rail and the top of the equipment. So we have had to lower tracks, raise or rebuild tunnels, have powerlines raised where they cross tracks, and raise highway and roadway bridges that cross railroad lines. CSX’s largest current development project is the National Gateway, an $850 million project to improve connectivity between the upper Midwest and the Mid-Atlantic ports. We are primarily using our own money, but for the first time in my experience, we’re also drawing on some public money. The governments of Ohio, Pennsylvania, Maryland, Virginia, and North Carolina are helping us make this happen much faster than it would otherwise. They recognize the cost advantage for their constituents and the importance of getting long-haul trucks off the highway to allow more capacity for other vehicles.
Francois: Public agencies throughout the country have been using public/private partnerships for a while, but because of the need to do more with less money, there has been a slight but definitive increase in the use of public/private partnerships. Public/private partnerships do two potential things: they provide mechanisms for further leveraging or extending public investment, and they provide mechanisms for expediting the implementation of projects, which is equally important, because time is money.
How can the public sector better support transit-oriented development through partnerships?
Wild: The GSA encourages all federal tenants to be located within a reasonable proximity to public transportation to
support our sustainability goals. For example, requests for offers of space may include specific requirements to be within walkable distances of a commuter-rail, light-rail, or subway station. A prime example is the Regional Transportation District’s development of a multimodal transit station on the 15 acres [6 ha] next to the Denver Federal Center. The new station, with regional and local bus service and new light-rail transit, allows the GSA to better serve its employees and contractors by enhancing access to public transit, and also supports the Denver regional goal of promoting increased use of public transit. The GSA is also excited about the possibility of exploring future options for approximately 60 acres [24 ha] of additional adjoining federal land at the site that could result in more transit-focused development and related uses.
Francois: When federal money [is used] for transportation projects, there are funding eligibility restrictions for acquiring more property than is absolutely essential for the implementation of the project itself. If government funding programs could more effectively be used to acquire additional or excess property that would—as part of the overall project—provide transit-oriented and joint development opportunities, then those future development revenues could help fund infrastructure costs. The revenues that a public agency could derive from leasing this additional land could be extremely beneficial in subsidizing or helping to offset the capital and operating costs of these very expensive transportation projects.
What are some newer approaches to financing or otherwise encouraging public development and infrastructure projects?
Apgar: The emerging policy on infrastructure has two major pillars. First, a national infrastructure bank would provide
critical project financing while insulating decisions from political pressures. It should emulate the military housing program’s “budget multiplier” to leverage taxpayer dollars ten to one. The second innovation is promoting public/private partnerships, or P3s, as a vehicle of choice in federal policy—not just for transportation, which has been the primary thrust so far, but also in other asset-intensive functions, including housing, health care, and education. In the absence of federal policy, leading states and localities have moved ahead. Recently, the Maryland Senate introduced P3 legislation to establish a statewide framework for procurement and operations. Eight or nine other states either have or are developing P3 policies. Along with the enabling legislation, state and local governments need to create the capabilities to initiate and engineer P3s. These partnerships don’t just happen. Following the legislation, it takes enterprising organizations and focused implementation. All involve new policies and practices to make them work.
Francois: The creation of a national infrastructure bank has been discussed, and there is positive movement in that area. There are a variety of bonds, such as [President] Obama’s proposed America Fast Forward bonds, and additional tax-exempt, low-interest bonds should be considered as well. Expanding the Transportation Infrastructure Finance and Innovation Act program, which provides federal credit assistance to finance surface transportation projects, would help. Also, we need a way to provide investment tax credits for private developers, so that when there are complementary public improvements that have to be made in relation to a new development project, such as roads and utilities, the developer could make those public improvements and receive investment tax credits.
Wild: The GSA has more legal authorities provided to us than ever before to develop creative and economically feasible solutions for public projects. We have the ability to receive fair market compensation, either in cash or via in-kind considerations, for [underused] properties that we own. Under this authority, the GSA can apply in-kind consideration to construction, repair, remodeling, maintenance, or provision of office space. Under special authorities, the GSA can retain net proceeds received by the conveyance of real property interests through sale, lease, exchange, leaseback arrangements, or in-kind considerations.
What other trends are you observing?
Canzoneri: I think we will see more use of public/private partnerships to address the great need for schools in this country. School districts are not in the business of building, they’re in the business of educating, so they’re not going to be as effective as the private sector. The traditional way of doing things, where the district manages the project, leads to numerous change orders and cost overruns. A private developer that has its own money at stake can do a better job of managing design, construction, maintenance, and operation. With declining tax revenues, many agencies don’t have enough funds to build schools. If the school district does not have enough capital funds to pay the full cost upfront, it can make payments to the private developer over time, which we call availability payments. The private sector can figure out how to stack the capital to create a financial plan that will work. And if the private entity operates the asset over time, there can be additional savings.
Crosby: Technology is bringing tremendous efficiencies to transportation. In the railroad industry, technology is helping us track freight more effectively, connect bills to shipments more effectively, and send our people more quickly and reliably to areas that need attention. Technology is also offering opportunities to help fund infrastructure that weren’t practical before. For example, I grew up driving up and down the Mid-Atlantic, and I remember dropping quarters every couple of miles on the Garden State Parkway and sitting through a ten- to 15-minute backup at the toll plazas during busy times. Today, with the E-ZPass allowing drivers to pay electronically as they drive through the toll plaza, the amount of road capacity that’s been freed up is incredible.
Apgar: Canada, Australia, and the U.K. have pioneered P3s as major elements of public policy and public infrastructure. In all cases, a private industry has emerged from those initiatives, providing both hard products and soft services. That kind of focus and specialization is emerging here. Canada is a good exemplar because it has developed both national and provincial frameworks, largely transferrable to our federal and state structure. The Canadian Council for Public-Private Partnerships is a national not-for-profit, nonpartisan organization with members in both the public and private sectors. The provinces—particularly Ontario and British Columbia—have moved ahead rapidly to set up public/private partnership organizations, making it easier for private enterprise to participate. The United States is well behind these countries in experience and applications, but we are moving rapidly to apply the theory and practice to our needs.