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Can the private sector solve Metro Detroit's infrastructure woes?


You don't even need to drive Michigan roads to know that they're bad.
 
The poor condition of our state's roadways is common knowledge for Metro Detroiters and other Michiganders, to the point that it's just a fact of life, a bitter and worn-out joke. However, it's also part of a much bigger problem at the state and national level. Investment in infrastructure, from roads to water and sewer systems, is lagging drastically in Michigan and across the country.
 
The American Society of Civil Engineers (ASCE) estimated in 2013 that the nation would require $3.6 trillion in infrastructure investment by 2020. Today, ASCE managing director of government relations and infrastructure initiatives Brian Pallasch estimates the national infrastructure investment deficit at $1.6 trillion – meaning that only $2 trillion of those infrastructure needs have been budgeted for.
 
"State and local governments are struggling to come up with ways to pay for it," Pallasch says. "They can't do any more borrowing."

Photo by Nick Hagen.
 
Michigan is struggling more than most. The state consistently ranks among the lowest in the U.S. for construction expenditures per capita, when it's not dead last.And according to a report released by the governor-appointed 21st Century Infrastructure Commission earlier this month, Michigan will need at least $4 billion to fill in the gaps in coming years.
 
In the face of this rather dire situation, some policymakers and other leaders at the local, state, and national level have increasingly begun to consider the value of public-private partnerships (P3s) to address infrastructure woes. A P3 is an agreement a government entity makes with a private company to build, design, maintain, and/or operate a given element of public infrastructure, with some sort of financial payout guaranteed to the private party.
 
Downtown Detroit Partnership CEO Eric Larson says it will be difficult for many municipalities to deliver infrastructure needs without P3s – particularly in Metro Detroit, as the area continues to struggle back from the hard hit of the Great Recession.

Eric Larsen. Photo by Nick Hagen.
 
"In a place like Detroit I think there is an opportunity that exists with public-private partnerships to build momentum and sort of blaze a bit of a path forward while the city is catching up and going through the healing process," Larson says. "I think it's a very logical and appropriate level of participation from the private sector."
 
Early experiments
 
If you do any nighttime highway driving in metro Detroit, chances are good that a P3 has already lit your way forward. Last year the Michigan Department of Transportation (MDOT) entered into a 15-year P3 contract with the private firm Freeway Lighting Partners (FLP) to replace 15,000 freeway lights with LED bulbs in Wayne, Oakland, and Macomb counties. FLP will also replace antiquated light fixtures in some cases.
 
Energy savings from the more efficient new bulbs will be paid back to FLP, which is required to ensure that 90 percent of the new lights are working within one year and 98 percent working within two years. MDOT Director Kirk Steudle says only about 75 to 80 percent of the lights were operational at the start of the project. Steudle says MDOT settled on a P3 for the project after weighing other options to improve the metro area's freeway lighting.

Photo by Nick Hagen.
 
"With the technology of the lights we had installed, we knew we were going to spend less on energy, but we didn't have the capital costs or the capital funds up front to be able to go through and do that," he says.
 
Elsewhere in Detroit, the private sector has gotten heavily involved in some initiatives that would traditionally have been public infrastructure. One major example is the QLINE streetcar set to open next year along Woodward, connecting downtown and Midtown. In addition to funding from the U.S. Department of Transportation and state of Michigan grants, numerous private-sector entities like Quicken Loans have chipped in significant amounts towards the project.
 
However, those contributors won't receive a financial payout from the project; their investments are purely philanthropic. As such, while the public and private sectors may be partnering to fund the QLINE, it's not a public-private partnership per se.
 
"That's not a traditional P3, but it shows the private sector can lead some investments," says Sandy Baruah, president and CEO of the Detroit Regional Chamber.Kirk Steudle. Photo by Nick Hagen.
 
Baruah says the QLINE project helps establish a precedent for the private sector's usefulness in supporting infrastructure projects that the public sees and uses every day – roads, bridges, perhaps even Coleman A. Young International Airport. Larson goes even further than that.
 
"We'll have (public-private partnership) in our water system," he says. "We'll have it in our sewer system. We'll have it in our power grid. And I'm sure we will see it in a number of  transportation systems and so forth."
 
Legal challenges
 
So why haven't we seen more public-private partnerships in the Metro area yet? Because, at least for now, Michigan law still doesn't provide for one of the most common types of them. Toll roads or bridges are perhaps the quintessential P3. A private party builds, maintains, and/or operates the public infrastructure and collects an easy payback every time someone uses it. Prominent examples of P3s in toll roads include the Indiana Toll Road and Washington, D.C.'s Express Lanes, the latter of which takes the innovative approach of offering drivers the opportunity to pay to use faster high-occupancy vehicle lanes without meeting vehicle occupancy requirements.
 
Thirty-three states currently have some form of legislation allowing private companies to enter into agreements with the government to operate fee-based infrastructure, but Michigan is not among them. There is some momentum to change that; a recently passed bill in the Michigan Senate would authorize public authorities to collect and share user fees on transportation projects.
 
Steudle says the passage of such legislation would strengthen the private sector's confidence in partnering with the public sector. In the case of the Metro Detroit's freeway lighting project, he says FLP accepted a relatively small contract that made its payouts subject to governmental appropriations.
 
"They were willing to take that chance [on a smaller project]," Steudle says. "But if you get a really large project, that risk is bigger for them. Those markets have told us, 'You need to get that straightened out.'"Sandy Baruah.
 
Of course, toll roads are a hard sell in Michigan because of the state's unique geography. Out-of-state drivers don't usually travel through Michigan to reach other destinations, as they do on many of the Midwest's other notable toll roads. Therefore, a toll directly and almost exclusively impacts Michigan drivers.
 
But Baruah notes that a project as large and visible as a toll road is often the kind of catalyst that's needed to test P3s' feasibility for a given area.
 
"This is a very different model, where a private entity would be getting a revenue stream off of a public good," Baruah says. "We do that to some degree with national parks. We have concessions. And certainly when the public government builds a road you pay a contractor to do that. They get a profit off of that. But this is a whole other kind of financial model, and it takes a lot to get used to."
 
A cautious approach
 
Even if enabling legislation passes and P3s begin to catch on more in the metro area, a cautious approach is still required. Michael LaFaive, director of the Morey Fiscal Policy Initiative for the Mackinac Center for Public Policy, says P3s have "very legitimate skeptics."
 
"I think there's been successes and failures in virtually any area you look at," LaFaive says.
 
He points to failures including London's Underground, in which the London government entered into P3s with two private companies to maintain Underground infrastructure, but was forced into the position of buying out massive amounts of debt when both companies failed. The fiasco cost taxpayers over $900 million.
 
Pallasch says that some in the public sector have begun to look at P3s as "free money," which he describes as a dangerous mentality.
 
"P3s are certainly a tool in the toolbox that we need to use to address our infrastructure problems, but that money costs money," he says. "That financing costs money. That's not to say that it's not the right way to do the project, but this idea that there's not a cost to that money is not the right way to go about it."
 
The Indiana Toll Road, on the other hand, marks a successful example of a P3 – at least for taxpayers and their government. When the state of Indiana signed 75 years' worth of toll revenues on the road over to the private partnership ITR Concession Co. in 2006 in exchange for road maintenance and a $3.8-billion lump sum, many critics said the state was falling into the "free money" trap Pallasch describes.
 
But as Governing magazine wrote in a 2011 piece on the Indiana deal, it was "anything but a giveaway." The state plowed $2.8 billion worth of ITR Concession Co.'s money back into other road improvements, while road usage declined and ITR Concession Co. itself wound up filing for bankruptcy in 2014. The deal was structured to protect the state, which lost no money as a result, and a new private partner, IFM Investors, paid $5.7 billion in 2015 to operate the road for the next 66 years.

Photo by Nick Hagen. LaFaive says the Indiana legislators who negotiated the deal should be "justifiably proud" of themselves.
 
"It takes two to tango," he says. "The government simply cannot afford to be out-maneuvered by far more talented negotiators."
 
Here in Michigan, one of the top officials who stands to make calls on future transportation-related P3s is in full agreement with LaFaive. Former governor Jennifer Granholm touted Steudle's "commitment" to P3s when he was appointed to his post in 2006, but Steudle promotes a cautious approach nonetheless. Steudle sings the praises of the freeway lighting P3, but he says future P3s in Metro Detroit – or anywhere in Michigan – will require and receive careful analysis.
 
"You just have to go into these with your eyes wide open," he says. "You have to do your due diligence to know what you're signing on for."

This piece is part of a solutions journalism series on Metro Detroit's regional issues, conducted in partnership with Metro Matters and guided by our Emerging Leaders Board.
 
This work is funded by the Community Foundation for Southeast Michigan. You can view other pieces in this series here.


 
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