Private financing initiatives might lessen agency budget woes

Private finance initiatives are an effective way to relieve budgetary pressure and enable agencies to move forward with infrastructure improvements, writes Stan Soloway.

Stan Soloway is president and chief executive officer of the Professional Services Council.

It is no secret that the federal budget picture is bleak. The administration’s own projections indicate that, for at least the next 10 years, the government faces a period of serious austerity. Even the proposed defense budget, which appears to be protected more than many anticipated, faces enormous out-year strains. Indeed, the budget projects that overseas contingency funding, primarily for Iraq and Afghanistan, will drop from $160 billion this fiscal year to only $50 billion in fiscal 2012. But if events in Iraq or Afghanistan do not play out as anticipated, the fiscal challenges facing the Defense Department and the rest of government will grow accordingly. Likewise, if the administration’s projections for economic growth and tax revenues do not play out as predicted, the fiscal picture will deteriorate even further.

Those facts are neither new nor surprising. Yet even as the administration and Congress search for ways to reduce the deficit and address the dramatic growth in mandatory spending on Social Security, Medicare, Medicaid and interest payments on the national debt, it is surprising that there is little discussion about innovative ways to both relieve some of those budgetary pressures and enable agencies to move forward with needed investments in infrastructure and other capabilities. This is especially true for creative strategies that have been used successfully in the past, such as private finance initiatives.

Under PFIs, private capital helps fund government needs in return for tightly constructed, performance-based arrangements that ensure the government receives the requisite benefit and that the investors receive a fair return. There are several areas where PFIs or similar approaches have been used with great success, including military housing. To overcome a stark lack of resources and the immediate need to renovate or replace dilapidated military housing, the services have taken advantage of private capital to upgrade military housing far faster and more effectively than would otherwise have been the case. In return, long-term management contracts, leases or other types of use agreements were put in place to enable a reasonable return on the private investment. Of course, the biggest winners have been our men and women in uniform and their families, who now have modernized, quality housing.

There are other variations on this theme, including share-in-savings contracts for energy management of federal facilities. Although at times imperfectly implemented, they have also shown the potential for measurable benefits, reducing government’s carbon footprint and improving building operations while saving money. Unfortunately, despite documented evidence in the United States, Great Britain, Australia and elsewhere that, if done right, success is indeed possible, the real or perceived failure of specific projects has too often led some to assume that the technique cannot work. And that is regrettably shortsighted.

Today’s austere budget environment offers the government an opportunity to revisit those proven concepts. As the president has said, the private sector is the key to our economic recovery. As the economy begins to recover but remain insecure, why not address both the government’s need for capital and the economy’s need for job creation by taking advantage of these techniques? Through strategies such as PFI, the government can address some of its own operational and financial shortfalls and provide sustainable benefit to the economy.

It’s not a panacea, nor will it be easy. And there are no guarantees that every project will be successful. But if we think broadly, pay attention to the lessons learned and address some arcane federal budgeting rules that have proven to be a significant barrier to progress, the results could be significant. Given our national economic picture and the government’s acute fiscal pressures, the times require innovation and new thinking, If not now, when?

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