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By Steve Kelman

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Infrastructure in shambles? Contracting to the rescue?


In looking over my Facebook news feed a few days ago, I noticed that two different American Facebook friends had independently posted disparaging comments about American airports. One showed a dangling wire and frayed carpeting at a gate at Dulles Airport in Washington, the other commented how depressed they were to return from a trip abroad to JFK Airport in New York after having passed through spanking-new airports abroad. Both, independently, used the word “infrastructure” in their posts and made the point that America’s infrastructure is falling behind.

Infrastructure is a good solid second-tier issue in American politics, around all the time but never quite making it to the first level of the political agenda.

Should it be higher on our national agenda? For me – and I consider myself a fairly well-informed citizen, but hardly an expert on the country’s infrastructure needs – the answer is a resounding, “I’m not sure.”

Simply to note the gleaming, ultra-modern airports in places such as Beijing, Singapore, or Dubai hardly makes a case by itself. The rapid rate of economic growth in these countries in recent years means that they are dramatically expanding their infrastructure out of necessity. And, obviously, when a city they builds new, it gets the latest and greatest in a way that New York City, which has had a lot of air travel for a long time, would be less likely to have.

And many touted infrastructure projects do not come cheap, to put it mildly. I was amazed to learn that the (doubtless optimistic) cost estimate for building a Los Angeles to San Francisco high-speed rail being promoted by California government Jerry Brown is an absolutely staggering $70 billion dollars -- an investment that it is absolutely impossible for me to imagine can ever be economically justified.

So what infrastructure projects can be justified? Which investments actually will produce a return on the money, as many suggest that a number of port deepening activities to accommodate larger ships will do? Add to the mix that there are construction companies and construction worker unions that would love to see big spending on infrastructure, and it becomes hard for even an informed citizen to have an opinion on this. To me, though, it’s a big enough question to get higher on the political agenda, so people like me can actually hear the different sides present evidence.

So how does this relate to federal IT? For starters, if infrastructure spending dramatically expands, new procurement techniques are likely to get much-needed attention. And that will require a better-trained acquisition workforce.

Many are promoting the idea of having private companies design, build and operate revenue-generating infrastructure (such as roads or ports) under long-term contracts, with no upfront cost to the government and contractors being paid through project revenues once the project is in use.

These are often called Public-Private Partnerships or PPPs, with capital letters to distinguish them from generic kinds of public-private cooperation in general. PPPs are quite common in parts of Europe, especially the United Kingdom, and in Asia. They are rarer in the United States, perhaps surprisingly given our greater propensity to use the private sector rather than having services built and delivered inside government. An important reason for the less-frequent use of PPPs in the United Sates is the tax-free status of state and local debt, which makes private borrowing for these projects uneconomic compared with government borrowing. However, if PPPs are a good idea, then the law should be changed to allow use of taxi-free local debt for these public purposes.

In theory, and sometimes in practice, PPPs are a good idea. The private sector has an incentive to keep construction costs down and to get the project up and running (thus generating revenue) fast. They may have better management and customer service skills. However, the international experience with PPPs has been very mixed.

These are very long-term contracts, and clearly many changes in scope and cost take place during them, so governance structures for contract changes are necessary. They are also extremely complex contracts, and government has not always had, or hired, the skill to allow it to negotiate on equal terms with private vendors. There also has been a depressing tendencies for PPPs to be one-way bets, with companies doing well when the project does well and getting bailed out if cost or revenue assumptions turn out wrong.

PPPs are yet another example of the increasing demands that are being placed on government’s ability to contract well in situations involving complex contracts. We see this of course in the IT area as well. Yet we still don’t have much evidence that senior political or executive leaders prioritize improving the government’s ability to contract as a key public management skill for the twenty-first century.

Posted by Steve Kelman on Jan 15, 2014 at 6:27 AM

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Reader comments

Thu, Feb 13, 2014 Tyrone S. Pitsis UK

As someone who studies what we like to call 'mega-projects', I think this blog is making some very important points. I actually cannot see how nation defining, economically transforming mega projects can be done without PPPs. That mega-projects are not more central to the debate of nation building is beyond me (not just in the USA, but where I live in the UK and where I am from in Australia). There is, what I like to call a value paradox. PPPs create this hybridized from of value that few know how to make sense of - the problem is that PPPs at the same time seek to produce both public and private value (which don't have to be, but often can be incommensurate). As the State seeks to reduce government involvement in so many different aspects of the provision of 'public goods' (water, health, education etc), these public bodies have no choice but to 'collaborate' with the private sector. As such, these sorts of projects and programs, be they well intended or simply 'pork barreling' are highly politicized arenas of actions making them highly unstable and volatile contexts. Managing and controlling these through contracts becomes an extremely complex endeavor, and traditional forms of contracting surely will fail (in fact, I would argue contracts have conflict written into them), hence innovations in contracting is needed but contracting is a small part of the issue. Before contracting can come to the rescue, we need to rescue contracting because risk has killed big, bold, nation transforming and defining projects. Imagine if it was today that JFK announced that the USA would land men on the moon. It would never happen because of the fear of failure, risk-averse, and managerialist nature of both the state and the private sector. The moon landing makes no sense from an immediate economic point of view, but if you calculate all the hybridized and other forms of value (symbolic, political capital etc) that it produced, and it had immense value.

Thu, Jan 16, 2014 Hubs

To say that PPP's are "rarer" in the US is a subjective observation. One only has to look at the profileration of "HOT" lanes (privately built and operated toll lanes and bridges). But where the US is really going to need investment in infrastructure is the basic needs of water and waste transmission networks (many over a hundred years old), other utilities, and transportation networks, which could include airports and deep water ports. Our economy will depend on investment in our basic infrastructure.

Wed, Jan 15, 2014 Al

You should check out the EconTalk podcast with Cliff Winston of the Brookings Institution dated 10/14/2013. It focuses on the transportation system, and it *very* interesting. That being said, why do we focus on the transportation system so much? Improvements to the electrical grid and to local water/sewer system are easier to justify from a risk-based, right?

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