Understanding and Mitigating Political Risks of Public-Private Partnerships in U.S. Infrastructure

Abstract

The U.S. has done much to promote the benefits of private sector participation in infrastructure in recent years. However, several major bottlenecks have impeded the implementation of these advances. Most challenging has been the myriad and continuing political oppositions, public controversies, and related political risks associated with private sector participation. It is now generally recognized that the biggest threat to private sector investment in infrastructure is not financial, but political. Relative to emerging economies, private investment communities in the past have generally considered the U.S. and other industrialized economies, with their efficient democratic institutions, as free from political risks. But the challenges related to political risks in infrastructure development through public-private partnerships have been especially problematic in the U.S. in recent years. Many aspects of the unique political culture in the U.S. have contributed to this perception of high political risks. Among others, they have included: (1) a strong tradition of publicly led and publicly subsidized infrastructure, (2) the resulting public unease around putting infrastructure assets in the private hands, (3) the bottom-up and decentralized planning and decision-making approach that leads to fragmentation in infrastructure development processes, (4) the political fragmentation resulting from 50 states having 50 different sets of political culture and rules of engagements, and (5) a legacy of strong collaborative relationships between public sponsors and local contractors motivated in part by the lengthy and costly infrastructure development process. The primary purposes of this study are to identify and better understand the multitude of potential political risks that can surface when the private sector participates in infrastructure development in the U.S., based on lessons learned from both within and outside the U.S., and to develop a broad risk mitigation strategy that can serve as a guideline for policymakers as they begin to undertake public-private partnership efforts. Because many of the political challenges and risks currently facing U.S. private participation efforts occur in the project inception and procurement phases, the discussions in this report focus on public sector responses in the early phases of project development.