City of Dreams

P3s can help cities in the US achieve their full potential – Andrew Carman, Head of Americas, Project and Structured Finance, Siemens Financial Services

Against the backdrop of a sluggish economic recovery and budget constraints at all levels of government, American cities continue to grow.

The country’s 10 largest metropolitan areas – New York, Los Angeles, Baltimore-Washington, Chicago, the Bay Area, Houston, Dallas-Fort Worth, Philadelphia, Boston and Atlanta – have seen steady growth between 2009 and 2012. Urban centers in general, and major cities in particular, press above their weight economically. Growth, and even moderate growth, place high demand on governments, local authorities, and planners.

To grow sustainably, these urban centers must continue to make major investments in their infrastructure – across healthcare, transportation, utilities and public services such as government and education. Tax receipts alone are not enough to generate the capital needed to fund such investment. Access to private finance is needed, using financing techniques that offer efficient and competitive solutions for both cities and their taxpayers alike.

As outlined in the 2011 Siemens Financial Services (SFS) white paper The Affordable Metropolis, current estimates peg US urban infrastructure investment to reach $3.6trn by the year 2020. In the near-term, however, the municipal sector faces an estimated shortfall ranging between $50bn and $80bn in 2010-12 alone. In a survey of city finance offices by the National League of Cities in 2011, 69% expected to delay or cancel capital infrastructure projects.

P3s are one important solution to the infrastructure improvement challenge. As depicted in the chart below, these can span from traditional government procurement to totally private ownership, and from involvement in existing to new facilities.

The great attraction of the P3s for city infrastructure investment is that financiers not only provide the required capital at a transparent rate of return over a long period, but financiers also share the project risk by providing a portion of their investment as equity.

Risk transfers to the private sector include cost overruns, construction delays, and, in certain cases, usage risk. This type of investment is likely to encourage careful scrutiny from investors, who leverage their technical expertise to help ensure that projects are completed on time and on budget, and produce the public service outcomes that were originally envisioned.

SFS, for example, fully participates in the project finance market and actively lends into P3 projects in North America. As a financier who can provide both debt and equity, SFS is a good example of a private participant whose range of expertise helps to ensure funds are available to complete essential infrastructure projects for urban centers.

To date, SFS has participated in several P3s in the US, including, for example, a project to upgrade service plazas along major highways in a heavily commuted state. Overall, SFS seeks to support projects where Siemens can provide additional solutions to public sector clients and project developers, which range from light rail to building technologies.

The benefits of passing through certain project risks to the private sector and the need for private capital to fill funding gaps should continue to drive the interest in P3s in the US. The outlook for continued increase in P3 projects is evidenced by a recent 2012 Ernst & Young report.

According to the report, Exploring the top 10 risks and opportunities for global organizations, P3s earned a place in the top 10. The placement came as a result of their high relevance in a few key sectors: P3s were given relatively high priority by the public administration executives surveyed; and in healthcare, P3s ranked as one of the top five opportunities, with the expectation of growth in impact over the next five years.

The same report also found that firms in the US were the most open and confident in exploiting the P3 opportunity.

That is good news for our cities and their growing infrastructure needs.