Commentary

New York Report Damns Public-Private Partnerships with Faint Praise

State legislators shouldnâ??t be fooled by the misguided arguments

Those hoping that New York will soon join the ranks of states with workable public-private partnership (P3) legislation, now that the state has embraced Design-Build for the Tappan Zee Bridge replacement, will not be cheered by a new report from State Comptroller Thomas DiNapoli. His June 2013 report, “Private Financing of Public Infrastructure: Risks and Options for New York State,” damns long-term P3 concessions with faint praise. If you read just the executive summary and the recommendations, the report seems innocuous enough. But in between, the report goes to considerable lengths to mislead readers about P3 concessions.

In discussing public-private partnership legislation in other states, the report says that P3 enabling acts “typically” require “explicit legislative approval” of projects, leaving ambiguous exactly what those legislatures get to approve. New York legislators could easily assume this means they would get to approve toll rate schedules and the terms and conditions of an already negotiated P3 deal. The report fails to explain to them that such a provision would create such high political risk that no P3 deals would even be proposed.

In discussing financing, the report repeats the old canard that public-private partnerships only make sense if their “total cost” is less than public-sector procurement, and that since private debt is more costly than tax-exempt public financing, the only way to make a P3 deal less costly is by things like paying substandard wages-exactly the kind of statement that will inflame union-friendly legislators. A bit later, the report does mention in passing that the monetary value of shifting risk to investors must also be factored in, but provides no explanation of which risks can be shifted or how large a difference that can make on megaprojects.

But the worst distortions and misrepresentations appear in the section “P3 Financing Risks.” Inflammatory language is used here to suggest that private financing can be viewed as “a new form of backdoor borrowing,” without refuting the implication that taxpayers would be responsible for such debt if the project runs into trouble. It does correctly point out that an availability-payment concession, represents creation of a large, long-term public-sector liability, but never contrasts this with the toll concession where investors take the revenue risk, insulating the state and its taxpayers.

Additionally, the discussion of the long-term leases of the Chicago Skyway and Indiana Toll Road is false and misleading. First, it claims that the lengthy terms (99 and 75 years, respectively) were needed to “offset unfavorable interest rates . . . and to better capitalize on tax appreciation[sic].” In fact, in order to be able to take depreciation on the long-lived bridge and highway, the lease terms had to be longer than the life of each asset, something a state comptroller ought to know. Even worse, the report says that the billions in up-front lease payments were used for “short-term budget relief.” That is simply false. Both Chicago and Indiana paid off outstanding bonds on the toll facilities. Chicago used most of the rest for debt reduction and a reserve fund, while Indiana fully funded a 10-year highway capital investment program. Neither used the proceeds for short-term operating budgets.

Worst of all are two examples of supposedly risky and poorly justified public-private partnership deals. The first is the privately financed Terminal 4 at JFK International Airport. This deal was essentially a toll concession, in that the consortium financed, rebuilt, and operated the terminal and was entirely at-risk for generating the revenues to cover debt service, operating and maintenance costs, and (they hoped) a profit. The report mistakenly calls this a Design-Build deal, and misrepresents the specifics of the tax-exempt bonds issued by the Port Authority (as landlord) on behalf of the consortium. Since this project was featured as a success in last year’s Transportation Research Board (TRB) Airport Cooperative Research Program report on airport privatization, I asked lead author Sheri Ernico for comments. In addition to refuting specific misstatements in the Comptroller’s report, she reminded me that the Port Authority has been so pleased with this project that it is embarking on a similar process to replace the aging central terminal at LaGuardia Airport. In particular, she points out that the Port Authority was not required to assume any debt on the project. “All the bonds are special project bonds with no contingent liability for the PA,” analogous to toll revenue bonds for a bridge or highway. (The PA did provide a subordinated loan for completion financing, in exchange for a larger portion of shared net revenue.) Likewise, the new bonds issued in 2010, based on a major revision of the lease to expand Terminal 4 to add gates for Delta Airlines, are also special purpose bonds backed by Terminal 4 revenues.

The second example is the Comptroller’s criticism of Value for Money (VfM) studies, which investigate specific government expenditures to assess the degree of value achieved in relation to money spent. In this case, he relies on a report from the California Legislative Analyst’s Office (LAO) about the VfM analyses done for the Presidio Parkway and the Long Beach courthouse availability-payment P3 deals. Since those deals had to be vetted by California’s Public Infrastructure Advisory Committee (PIAC), I asked PIAC member Adrian Moore about this. He replied, “The LAO report cited is the worst-quality analysis I have seen coming out of the normally solid LAO.” He related that when it came out, he received numerous emails from academics upset over its shoddy work. When he talked directly with LAO staffers, they told him they could not find any studies showing cost savings from P3s. And as for valuing risk transfers, “they do not accept that any risk can be transferred.”

Moreover, the PIAC vetted the VfM study extensively before its release, having it reviewed by experts from Stanford and University of Southern California, the CFO of the University of California, and others. “In my opinion, it is one of the best VfM analyses done in advance of a P3 in the United States,” said Moore.

Contrary to statements in the LAO report, the VfM analysis used industry-standard discount rates and tax rates, and it explained in detail why those rates were chosen. Its estimates of possible cost overruns with conventional procurements are prudent, given California’s track record alone, let alone the global megaproject experience.

That long section of the Comptroller’s report concludes with a set of bullet-point red herrings: community issues, labor issues, environmental issues, and eminent domain. These are presented as if they are uniquely problematic in a P3, as opposed to being issues any major project has to address, regardless of the procurement method chosen.

After all that sturm und drang, the concluding section’s recommendations are largely innocuous good-government calls for transparency and staff expertise, like creating a specialized privatization unit, such as exist overseas and in California, Puerto Rico, and Virginia. So the danger this report presents is not in its recommendations. Rather, the danger is that the body of the work reads almost as if its purpose were to create fear, uncertainty, and doubt in the minds of legislators regarding P3 concessions.

And that is why the report must not go unanswered.

Robert Poole is director of transportation at Reason Foundation. This column first appeared in Public Works Financing.

Robert Poole is director of transportation policy and Searle Freedom Trust Transportation Fellow at Reason Foundation. Poole, an MIT-trained engineer, has advised the Ronald Reagan, the George H.W. Bush, the Clinton, and the George W. Bush administrations.

Surface Transportation

In the field of surface transportation, Poole has advised the Federal Highway Administration, the Federal Transit Administration, the White House Office of Policy Development, National Economic Council, Government Accountability Office, and state DOTs in numerous states.

Poole's 1988 policy paper proposing privately financed toll lanes to relieve congestion directly inspired California's landmark private tollway law (AB 680), which authorized four pilot toll projects including the successful 91 Express Lanes in Orange County. More than 20 other states and the federal government have since enacted similar public-private partnership legislation. In 1993, Poole oversaw a study that coined the term HOT (high-occupancy toll) Lanes, a term which has become widely accepted since.

California Gov. Pete Wilson appointed Poole to the California's Commission on Transportation Investment and he also served on the Caltrans Privatization Advisory Steering Committee, where he helped oversee the implementation of AB 680.

From 2003 to 2005, he was a member of the Transportation Research Board's special committee on the long-term viability of the fuel tax for highway finance. In 2008 he served as a member of the Texas Study Committee on Private Participation in Toll Roads, appointed by Gov. Rick Perry. In 2009, he was a member of an Expert Review Panel for Washington State DOT, advising on a $1.5 billion toll mega-project. In 2010, he was a member of the transportation transition team for Florida's Governor-elect Rick Scott. He is a member of two TRB standing committees: Congestion Pricing and Managed Lanes.

Aviation

Poole is a member of the Government Accountability Office's National Aviation Studies Advisory Panel and he has testified before the House and Senate's aviation subcommittees on numerous occasions. Following the terrorist attacks of Sept. 11, 2001, Poole consulted the White House Domestic Policy Council and the leadership of the House Transportation & Infrastructure Committee.

He has also advised the Federal Aviation Administration, Office of the Secretary of Transportation, White House Office of Policy Development, National Performance Review, National Economic Council, and the National Civil Aviation Review Commission on aviation issues. Poole is a member of the Critical Infrastructure Council of the Los Angeles Economic Development Corporation and of the Air Traffic Control Association.

Poole was among the first to propose the commercialization of the U.S. air traffic control system, and his work in this field has helped shape proposals for a U.S. air traffic control corporation. A version of his corporation concept was implemented in Canada in 1996 and was more recently endorsed by several former top FAA administrators.

Poole's studies also launched a national debate on airport privatization in the United States. He advised both the FAA and local officials during the 1989-90 controversy over the proposed privatization of Albany (NY) Airport. His policy research on this issue helped inspire Congress' 1996 enactment of the Airport Privatization Pilot Program and the privatization of Indianapolis' airport management under Mayor Steve Goldsmith.

General Background

Robert Poole co-founded the Reason Foundation with Manny Klausner and Tibor Machan in 1978, and served as its president and CEO from then until the end of 2000. He was a member of the Bush-Cheney transition team in 2000. Over the years, he has advised the Reagan, George H.W. Bush, Clinton, and George W. Bush administrations on privatization and transportation policy.

Poole is credited as the first person to use the term "privatization" to refer to the contracting-out of public services and is the author of the first-ever book on privatization, Cutting Back City Hall, published by Universe Books in 1980. He is also editor of the books Instead of Regulation: Alternatives to Federal Regulatory Agencies (Lexington Books, 1981), Defending a Free Society (Lexington Books, 1984), and Unnatural Monopolies (Lexington Books, 1985). He also co-edited the book Free Minds & Free Markets: 25 Years of Reason (Pacific Research Institute, 1993).

Poole has written hundreds of articles, papers, and policy studies on privatization and transportation issues. His popular writings have appeared in national newspapers, including The New York Times, The Wall Street Journal, USA Today, Forbes, and numerous other publications. He has also been a guest on network television programs such as Good Morning America, NBC's Nightly News, ABC's World News Tonight, and the CBS Evening News. Poole writes a monthly column on transportation issues for Public Works Financing.

Poole earned his B.S. and M.S. in mechanical engineering at Massachusetts Institute of Technology (MIT) and did graduate work in operations research at New York University.