2008 Political Darwin Award Contender: “Rebid the PA Turnpike”

OK, there’s no such thing as a political Darwin Award, but some ideas in politics are so stupid they deserve it. Following up on my last post, I noticed this commentary by Lowman Henry of the Lincoln Institute outlining a Pollyanna view on Pennsylvania transportation. While I can sympathize with some of the author’s points and his general worldview, I regretfully find this piece to be particularly unhelpful and frustrating, as it relies on misunderstandings, errors and myths to make the case for a mythical, unrealistic “third way” approach. Though I was initially looking forward to fisking this piece, my colleague Peter Samuel beat me to it–his take is well worth a read. Instead, I’ll focus on one particular meme found in Henry’s piece that we’re going to hear a lot more about in the weeks and months ahead–the false belief that PA could get a better deal by rebidding the Turnpike. Henry writes (Peter’s comments are embedded in parenthesis in boldface):

Leasing the turnpike under a private/public partnership is, in and of itself, a good idea. Similar lease agreements in other states, and in many other nations, have proven highly beneficial as private operators, shorn of the shackles of over-unionization and other constraints of government, have been much more cost efficient. (AGREE) But this proposed turnpike lease is a bad for two reasons: first, the revenue Pennsylvania would derive from the plan is far less than initially projected and far less than what the state could get if it were to rebid the contract. (QUESTIONABLE: Who can know that you’d get more on a rebid? If anything financial conditions have deteriorated in the past couple of months – Lehman, Merrill etc. A better argument could probably be made that you’d get less on a rebid.) Second, just like with the I-80 scheme, funds derived from the proposed turnpike lease would be diverted to other roads and bridges and not spent on maintenance and upgrading of the turnpike itself. Given the overwhelming capital needs of the turnpike system, this diversion of funds would be a huge financial blunder. The $12.8 billion high bid by the Spanish consortium Abertis Infraestructuras to lease and operate the turnpike for 75 years falls far short of the lease’s initial projected value which ranged between $15 billion and $20 billion depending upon who was making the estimation. (MEANINGLESS: Henry is making too much of these those initial projections. They were little more than informed guesses by one analyst. Others said at the time he was much too high.) The state received three bids after a process which initially yielded no takers. The bidders, apparently sensing a fire sale, came in low, with Abertis being the best of the bunch. (WRONG: $12.8b was several billion higher than most people expected.)

Intentionally or not, Henry is playing in to the hands of Turnpike concession opponents who want to kick the can down the road and kill the lease with inaction. It seems they’ve latched on to this “we didn’t get a good enough offer the first time, so let’s rebid it” idea as their preferred strategy. Here’s Senate Majority Leader Pileggi’s staffer in the The Patriot-News yesterday, offering an early example of what will likely figure to be an oft-repeated talking point:

“The wiser course is to wait and address it next session,” said Erik Arneson, the policy director for Senate Majority Leader Dominic Pileggi, R-Delaware County. “If that means we need to rebid [the lease deal], chances are pretty good we’ll have more bidders next year.”

This may score political points, but it’s an irresponsible approach and demonstrates a woeful misunderstanding of the way the infrastructure market works. First, this would obviously kill the one viable option left on the table today–the Abertis/Citi Turnpike lease proposal–and leave an inefficient, patronage-ridden agency at the helm of a major state asset. If nothing changes in the status quo, politicians will get a free pass, the PA Turnpike Commission (PTC) will get more power, and taxpayers will be the real losers. And the idea that the private sector would be eager to come back and bid more in a second round after watching Abertis & Citi get burned in the first is just plain ludicrous and disingenuous. Just look at Texas. Last year the state played banana republic, bending to political pressure to give the lucrative $3 billion Highway 121 toll project to a local public toll agency at the last minute, after having already run a competitive procurement process and nearly finalizing a contract with a private road investor-operator team for the same project. This followed immediately on the heels of a legislative moratorium on most privately-financed toll road projects. The message from state legislators and officials was, “Texas is Closed for Business.” And what’s happened since then? While some concessionaires plan to stick it out until the Texas legislature can get its head on straight, others have already left the state, abandoning plans to do business (read: INVEST) there. They’ve deemed the political risk too high. It’s entirely logical for a concessionaire to wonder “why should we invest millions into developing concession proposals when the state legislature seems bent on killing them?” So let’s put our thinking caps on: if you had just watched a PA Turnpike lease bid get pilloried and smothered by a bunch of legislators, would you be eager to jump right back in with an even higher bid the next year? If your answer is “probably not,” you’re just like most investors and operators who would avoid such masochism. I’m with Peter here–chances are you’d have fewer bidders and lower bids. Even those concessionaires willing to take a second bite at the apple would be nuts not to factor political risk into their bid. The math is simple: less competition + political risk = fewer & lower bids. This is also relevant because the Turnpike is not the only public-private partnership (PPP) on the table. The PA legislature seems poised to pass new PPP-enabling legislation to facilitate future privately-financed road projects, and even the Turnpike-concession-hostile PTC is seriously looking to use PPPs for new construction projects on the Southern Beltway and the Mon Fayette Expressway. It’s bad enough to shoot yourself in the foot when you have a $12.8B dollar project on the table. It’s even worse if you jeopardize the prospects for future PPPs at the same time. In the end, I’d like to think that our elected officials are competent enough to understand this simple logic–actions have consequences. The rules of gravity are not suspended because it’s the Pennsylvania Turnpike. Private infrastructure financing will flow to those places that welcome it and facilitate it. This isn’t exactly rocket science. Hence, I have to think that those advocating such a naive and foolish idea as rebidding the Turnpike are either (1) woefully misinformed, or (2) cynical opportunists that will stoop to any depth to keep the patronage train at the PTC rolling along. Hold your nose Commonwealth taxpayers, because this rebidding idea stinks. Reason’s Transportation Research and Commentary

Leonard Gilroy is Senior Managing Director of the Pension Integrity Project at Reason Foundation, a nonprofit think tank advancing free minds and free markets. The Pension Integrity Project assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.