Analysis: Good things in bad times

The financial impact of the global pandemic may provide an opportunity for US infrastructure – if authorities are bold enough to take the challenge

Covid-19’s impact on the global economy will be felt for years, if not decades to come. However, a growing number of US experts believe the pandemic could provide an opportunity for infrastructure growth.

A report published in September by former White House infrastructure advisor DJ Gribbin called for ‘countercyclical’ investment in the infrastructure sector, arguing that such a move would take advantage of lower cost of labour and materials in the downturn, to provide new infrastructure in time to support the recovery.

Bridge the Dip is the first publication from Gribbin’s new company, Madrus, and suggests that now could be the perfect time for public sector bodies to look to the private sector to get projects off the ground.

“Analysis from the Congressional Budget Office shows that the cost of private capital, when adjusted for project delivery risks, is essentially the same as the cost of government capital,” the report explains. “The value proposition of private participation becomes even greater during recessions when government budgets are tight. This is because governments can shift early development costs to private partners to alleviate the immediate liquidity issues facing state and local governments advancing a critical infrastructure project.”

Speaking at a webinar on the report, hosted by the Association for the Improvement of American Infrastructure (AIAI), Gribbin said: “The best thing we can do is take infrastructure that is critical to a community and bring it forward.”

He added that the pandemic has given governments an opportunity to “think a bit more innovatively and creatively”, and some in the market suggest this could be a chance to rethink how P3s are developed.

Also speaking at the webinar was Hunt’s senior vice president, Rodney Moss, who discussed the potential for ‘progressive’ P3s. By bringing the private sector into project development much earlier, Moss explained that a progressive P3 allows better allocation of the relevant risks and early processes, so that the final development is better able to serve the needs of the public sector client.

He pointed to areas such as permitting issues or utility relocation, which are turned over to the private partner in a progressive P3. “[The developer] is well used to driving all these things in parallel as the design evolves and to ensuring that they are meeting all the requirements for that design,” he explained.

Moss argued that, in his experience, this early collaboration meant that the overall project would often go “twice as fast. Furthermore, such early discussions can help root out issues in the design that might create higher risks for those financing the project, thereby helping to cut the overall cost.

Jay Brown, managing director at Alvarez & Marsal, agreed that progressive P3s could make a significant difference, arguing that they could be used to help tackle the twin problems facing the US of the economic downturn and social unrest.

Gribbin also acknowledged the potential for progressive P3s to transform how projects are delivered across the US. However, he included an important caveat, warning that because such an approach requires competition to take place early in a scheme’s development, there may be less competitive tension on pricing, meaning costs can rise quickly. One of the benefits of P3 has always been its ability to keep a lid on costs by getting developers to compete on price for a clearly identified project, with that price being locked in at the point of agreement with the private partner.

“[Progressive P3s] can be very efficient, but they can result in a misalignment of interests, so that needs to be carefully watched,” concluded Gribbin.

If progressive P3s can be part of the countercyclical investment revolution that Gribbin and others are calling for, what type of projects should they be investing in?

Brown was clear that social infrastructure makes for a good starting point. Not only can it be part of the solution to issues of social unrest, Brown highlighted that social infrastructure broadly “lends itself to faster starts”. He referred to the fact that the lead time to scope projects is generally shorter in social infrastructure.

In the current climate, and in light of the Bridge the Dip report, Brown and others believe schemes that can get off the ground quickly and be ready for use when the recovery comes make social infrastructure is a compelling proposition.

To do so will require bold leadership from the public sector. “Operation and maintenance, finance and capital costs are all going down, [however] one recent poll said 65% of municipalities are pulling back on spending on infrastructure,” revealed Gribbin.

Another of the AIAI’s speakers spoke out against such an approach. “Now is not the time to sit on your hands,” said Michael Morris, director of transportation at the North Central Texas Council of Governments. In a plea to the public sector, he said: “You are going to have to be innovative. Don’t be afraid to put new ideas and projects on the table. Really good things can happen in bad times.”