Partnerships will pave way for transportation bond work.

While Democratic and Republican lawmakers in California remain divided on most issues, they generally agree on one stark physical and fiscal reality: California's transportation system is rapidly approaching a tipping point.

Los Angeles residents live with chronic congestion and loss of mobility every day, and while there is endless room for debate about how we arrived here, there is little argument that increased investment in our transportation system is desperately needed. But increased investment translates into a bigger question: Where will the money to fund all the needed improvements come from?

The answer may be to let the private sector take a major role in financing, building, and operating these facilities through arrangements known as public-private partnerships, or P3.

Faced with the reality that traditional sources such as the gas tax and federal aid have failed to keep up with rapidly rising costs, Gov. Arnold Schwarzenegger recently called upon the private sector to leverage the $20 billion transportation bond initiative approved by the voters in November. The infrastructure world is buzzing with the potential for P3 to play a major role in addressing California's transportation problem.

The good news is that there are tens of billions of dollars of private equity capital poised to leverage public investment in the U.S. transportation network. How to tap it, and put it to good use is another issue.

Private involvement in the provision of critical services is neither novel nor new.

So what is stopping California policymakers from fully embracing P37

Fear of embarrassment

Simply put, California lawmakers fear that the state will be taken advantage of and embarrassed by investors looking to maximize profit on a sale investment With the infamous SR-91 "non-compete clause," which prohibited expanded capacity on the first public/private project in Southern California still lingering in the minds of policymakers, until now it has been easier for state officials to do nothing and avoid public scorn for apparently placing the interests of private companies before that of their constituents.

The sticking point on private investment in highways is tolls--an alien concept to California. Private investors require a reasonable rate of return on their invested capital to build. operate and maintain the roadway, and they can only realize this return if tolls are charged. So the challenge is to balance this basic economic reality with a California mindset that looks upon highways as a free public good.

Answering this challenge may lie in how it's presented. If drivers see toll roads as an option for their personal choice if and when they need to use them, it may serve to counter the often-voiced concerns that toll roads are elitist and discriminatory. Moreover, as all drivers realize relief from congestion when they need it most, the deeply rooted concern that they are being unfairly taken advantage of by corporate investors will wane.

However, essential to the success of any P3 agreement is that it be transparent so that limits are put on tolls and how they are indexed to cost increases, and standards of maintenance and environmental safeguards are clearly defined at the outset. If not, voters and their representatives will find little to support in P3.

In 2006, the California Legislature provided limited authorization for new public private partnerships, but it has yet to enact the policies necessary to implement them broadly. It is not surprising that California has chosen to proceed cautiously given that P3 agreements developed to date have been the result of private negotiations, not open competitions. As such, it has been difficult to determine whether the "best deal" was negotiated.

Caution, however, should not preclude action.

California's early reluctance to embrace PPPs actually may pay an unanticipated dividend as much of what we currently know of these agreements has come at the expense of other states that have provided valuable lessons to be learned. In any event, it is likely that no single funding solution will emerge. In addition to traditional funding sources, a successful financial strategy for transportation in California will ultimately have to balance financial, political and social realities and objectives. Given the acute needs of the Los Angeles region and all of California, we need to look carefully at all funding alternatives, not just the politically palatable ones.

Richard G. Little is director of the Keston Institute for Public Finance and Infrastructure Policy at the University of Southern California, a non-partisan research center established to raise the public's awareness of infrustructure and to encourage strategic investment.