I was recently asked to provide a little more detail about what I mean when I talk about P3 “innovation”.  Fair question — no simple answers.  But answering it even incompletely helps concentrate the mind.  So here’s some quick thoughts.

I think there’s actually two broad paths that are likely to emerge, depending on how the infrastructure asset (or its recapitalization) is being funded:

• For tax-funded social infrastructure where P3s are mainly in form of availability-payment P3s, innovation will occur in the actual contractual and capitalization structure of the transaction. This is necessary so that AP-P3s better dovetail into the actual fiscal constraints that US state and local governments face – and there’s a lot of scope for improvement so innovation can make AP-P3s more useful (hence more uptake). This is really the point of the column I have in Governing on the topic and a one-pager about a “built-in rainy day fund” for AP-P3s.

• For user-fee funded economic infrastructure (e.g. toll roads, ports, airports and similar “active business” operations) I think the necessary innovation is not fundamentally in the transaction itself.  Current forms work well, since they’re really modeled on private-sector business, and there’s less need to dovetail into specific fiscal constraints.  Instead, critical innovation is needed in the way that the public sector measures and communicates the value of monetizing the user-fee income stream. This has to be anchored squarely in the public sector’s general fiscal context, not just project-level cost efficiency or risk transfer. It’s always necessary to do a project-level Value for Money analysis to assess potential cost savings from a P3. But a lot of the current interest in P3s and asset-recycling comes governments facing fiscal constraints. So assessing the cost of those constraints – and the potential benefit of P3s in mitigating them – requires an additional evaluation approach beyond the project level. This is of course the general objective of the Stanford ‘Value for Funding’ initiative for improving measurement of P3 value.

For an example of the second path, revenue volatility and uncertainty in general is a real problem for the public sector now – it causes all sorts of additional (and mainly hidden) costs like deferred maintenance and unfunded pension obligations. When these costs are included, the value of a relatively volatile stream of income (like tolls or airport revenues) is reduced. A private sector investor/operator like a toll road investor doesn’t have these type of public-sector constraints and hence doesn’t incur such costs – so the revenue stream is more valuable. Even if every other cost parameter is equal, and even though the public sector’s cost of capital is generally lower than any private-sector company, it still might increase economic efficiency and social welfare for the public sector to monetize volatile income streams. This type of measurement is the concept behind the “Cyclical Accrual” methodology (though that was mainly done for simple, low-risk social infrastructure the  methodology is pretty much the same).

There should also be “innovation” – more like simple improvement or expansion – in the federal programs and policies like TIFIA, WIFIA, PABs, reprising BABs and federal rules in general. But in general I think federal policy/programs/rule reform don’t lead but follow increased demand for P3s (unless there’s a huge subsidy involved like the 2009 ARRA programs – not likely in current federal budget/political environment). So I think the innovation will be driven by the private sector in the two areas above.