California Governor Arnold Schwarzenegger is proceeding with his plan to overhaul the state's infrastructure, through a public-private partnership (PPP) plan that bears the moniker Performance Based Infrastructure (PBI). After some of the setbacks that PPP has experienced in the US, Schwarzenegger's embrace of the concept, in the most populous state in the US, promises frustrated private sector bidders some interesting prospects. But the Governor, and a growing list of his peers, still need to get their plans past recalcitrant legislatures.

Noting that public funding cannot tackle the state's infrastructure requirements unaided, Schwarzenegger proposed that the state pass enabling legislation to involve the private sector in public infrastructure, including design-build transportation and roads packages.

The Governor has also put forward Proposition 1B, for direct approval by California's voters, that would allow some of the proceeds from the state's $42 billion in infrastructure-related bonds to be used for PBI projects. The issuance of these general obligation bonds was approved by voters as another proposition in 2006, under the state's so-called Strategic Growth Plan, to fund highways and roads renovation and expansion, mass transit, schools, courthouses, levees and water supply systems over a twenty-year period.

Schwarzenegger has suggested that the PBI programme could generate between $75 billion and $100 billion in projects, or 15% to 20% of the requisite investment, a proportion gleaned from PPP initiatives in Europe, Australia and Canada. His closest adviser on jobs and economic growth, David Crane, was one of Babcock & Brown's earliest employees.

Schwarzenegger, who explained the process during his State of the State Address in January 2008, has also met with Partnerships British Columbia's Larry Blain, and is fond of citing BC's experience in implementing PPP. "These partnerships can often deliver infrastructure faster, better and cheaper," he has said. "For instance, in British Columbia, public-private partnerships are common for building highways, bridges, rapid transit, water treatment and so on, and everyone is happy. The political leaders are happy, business is happy, the public is happy, the economy is happy, the future is happy."

The California Department of Finance has estimated that the state must spend $500 billion over a 20-year period to address its infrastructure needs. According to a study conducted by the American Society of Civil Engineers (ASCE), 71% of the state's major roads are in need of renovation, and 87% of its schools have one or more unsatisfactory environmental condition.

The ASCE also estimates that the state loses 222 million gallons of water each day as a result of leaking pipes. In his address to the state, Schwarzenegger noted that the "water system was built decades ago for 18 million people. Today we have 37 million people, and in 20 years from now we will have 50 million people."

Schwarzenegger intends to establish a public agency named PBI California, which will operate much like Partnerships BC or Infrastructure Ontario, representing the public sector in determining which projects will be suitable as PBI, and adjudicating on all deals. This agency is intended to complement the Strategic Growth Council, a five-member body established last year to advise on infrastructure planning, which has the authority to award and manage project financings.

One of the state's first projects in the programme may be the construction and repair of California's courthouses. The state intends to issue $2 billion in bonds for the courthouses when the PBI legislation is approved. The Long Beach courthouse is at the top of the list, to be replaced with a facility that can accommodate the needs of an increased population, and the state hopes that this deal will set a precedent for the programme. Ernst & Young is advising the state on the courthouse PBI projects.

Schwarzenegger also has also suggested that he would be proposing energy projects, taking the opportunity to puff the state's record on developing renewables. "We are leading on climate change and low carbon fuels, energy efficiency and on clean, green technology." In this respect, however, the state's two large private utilities – Pacific Gas & Electric and Southern California Edison – and a host of smaller public power authorities, will be the more suitable vehicles for capacity additions.

On a national level, California is also one of fifteen states to form a coalition named Building America's Future, which was established on 19 January 2008. The coalition aims to tackle the US infrastructure problems through federal investment, and was formed as a reaction to recent disasters such as the Minneapolis bridge collapse and the devastation that Hurricane Katrina inflicted on the infrastructure of New Orleans.

Its purpose is to lobby for increased government spending on infrastructure, and it has already targeted the Presidential candidates, testing their policies on infrastructure spending. Proposals from politicians, including the Democratic front-runner Barrack Obama, have included references to a bond-financed national infrastructure bank.
The coalition notes that, as a share of non-defence federal expenditures, federal infrastructure spending has decreased significantly since 1966. In the last two decades, federal spending on infrastructure has averaged between 3.5% and 4%, whereas between 1956 and 1966, annual infrastructure spending was approximately 10% of the non-defence budget. That number includes, however, the bulk of the building of the US Interstate Highway network.

Schwarzenegger launched and co-chairs the group, along with Pennsylvania's Governor, Edward Rendell, and New York City mayor Michael Bloomberg. The remainder of the group consists of governors both republican and Democrat: Charlie Crist (Florida), Eliot Spitzer (New York), Martin O'Malley (Maryland), Janet Napolitano (Arizona), Jon Corzine (New Jersey), Deval Patrick (Massachusetts), John Baldacci (Maine), Donald Carcieri (Rhode Island), Jim Douglas (Vermont), Christine Gregoire (Washington), Jennifer Granholm (Michigan), Tim Kaine (Virginia), Bill Ritter (Colorado).

Of the states included in the coalition, only a few of them (notably Florida, Virginia, and Pennsylvania) have been recently active with PPP-related infrastructure projects, and some governors lead states that have been actively hostile to PPP. Though separate from its involvement with the coalition, California's PBI plan may succeed in bringing the Canadian precedent to a wider US audience.

Schwarzenegger's initiatives are designed, for now, to focus political attention on infrastructure spending rather than create a 2008 bonanza for US project finance bankers. Progress will be slow in California until the Governor's proposition goes before voters, and even then, projects will take time to go up for bid. For the other states' governors, the heavy lifting has barely started.