Commentary

NY State Commission, Governor Embrace Privatization for Infrastructure Development

New York’s State Asset Maximization Commission (SAM) released a groundbreaking report yesterday framing a new and positive role for privatization and public-private partnerships (PPPs) in the delivery, upgrade and modernization of state infrastructure assets in New York State.

[Pardon the jargon: PPPs are simply contractual arrangements that increase the private sector’s role in financing and delivering road, education, energy, and other types of public infrastructure projects].

The SAM Commission was established last October by Gov. David Paterson in order to study potential PPP opportunities across a variety of asset classes in the state. The final SAM report released yesterday is well-researched and merits a close read by anyone interested in PPP policy issues. From Gov. Paterson’s press release:

The final report contains 27 major recommendations to help create jobs, generate economic activity and benefit colleges and universities across New York State. Some of the key recommendations include: school construction and renovation in Syracuse and Yonkers; 300 bridge renovations in all corners of the State; wind power on the Great Lakes; and high speed rail.

In addition to outlining specific project ideas that could be effective long-term projects, the report also recommends the creation of a State Asset Maximization Board to screen, oversee and implement PPPs. The State Asset Maximization Board will serve as an entry point for new ideas, provide continuous oversight and transparency, and enable New York State to tap into New York’s best and brightest minds — across the public and private sectors. The Board would be unsalaried.

“In the midst of these economic challenges, we must now, more than ever, make long-term investments to spur economic growth and think creatively about innovative ways to enhance the performance of vital infrastructure assets,” said Governor Paterson. “This report provides us with a series of ideas for asset maximization projects that could accelerate construction, jumpstart job creation, and provide for substantial savings in the years to come.” […]

The Commission recognizes that New York has extensive experience with PPPs across a variety of asset classes including both the creation and operation of new assets and the reallocation of operational responsibility of existing assets. Some of the most effective examples of successful PPPs across the State include reducing the public costs of maintaining Central Park and the construction of new schools in Rensselaer, leveraging human capital at New York State Office of Science, Technology and Academic Research (NYSTAR), and utilizing private investment to complete JFK Terminal 4. These examples highlight the value and importance of successful PPPs and also the need for a more comprehensive and strategic approach to future projects.

Further, at a press conference announcing the report’s release, Gov. Paterson announced that he would be implementing one of the central recommendations by creating a state-level body—the State Asset Maximization Board—to approve and provide guidance and oversight for PPP projects. The new board would play a similar role to organizations like Partnerships UK, Partnerships BC (British Columbia), Infrastructure Ontario, and California’s newly-established Public Infrastructure Advisory Commission—government’s one-stop shop of sorts for PPP project development and implementation.

There are a couple of points worth noting here before looking at specific SAM project recommendations:

  • First with California earlier in the year, and now with New York, I think we’re seeing two bellwether states embracing the idea of a PPP center of excellence as a way to develop a comprehensive, enterprise-wide approach to PPP program development, to develop policies and procedures for ensuring due diligence in project evaluation, and to fundamentally de-politicize privatization by ensuring transparency, accountability and performance in PPP decisionmaking. This has been the experience of similar organizations around the world—Partnerships UK, Partnerships BC, Infrastructure Ontario, etc.—and it’s good to see states moving from the piecemeal, “one-off” project approach to more structured programs. (hint, hint…Texas legislature, are you listening?)
  • Second, New York is clearly focused on delivering new projects through innovative finance and procurement approaches—not selling or leasing state assets. Opponent fears of a “fire sale” of state assets didn’t pan out.
  • Third, SAM is recommending training wheels first as the state learns how to ride the PPP bike. They recommend focusing on some smaller projects first to build experience along the way towards doing larger and more complex projects. I think the “walk before you run” approach makes sense in New York—it certainly couldn’t hurt to have a few PPPs under your belt before tackling a megaproject like the massive $16 billion replacement of the Tappan Zee Bridge, for example. And politically, the rampup would help to build trust in the system, which could certainly be advantageous in historically privatization-averse New York.
  • Last, New York is rewriting the model in the U.S. Typically, states aim to get the PPP enabling legislation in place first, and then work to develop the state’s PPP program around it. New York is basically turning the model on its head, creating the PPP center of excellence first to start defining the parameters of the program, which would then presumably inform the development of PPP enabling legislation later (NY currently does not have PPP enabling legislation). I don’t necessarily think one approach is better than the other in the abstract; however, in a privatization-averse state like New York, this may be a much more politically viable approach if the goal is to ramp up the program.

As far as SAM’s specific PPP recommendations for New York State go, here’s a partial list:

Transportation

  • Implement a PPP bridge improvement program to replace, rehabilitate and maintain New York’s bridges.
  • Establish a PPP to develop the Buffalo Harbor Bridge.
  • Create a partnership between the New York State Department of Transportation (NYSDOT), private railroad companies, and investors to advance the development of highââ?¬speed rail passenger service on up to three designated corridors within the state.
  • Establish a PPP for the maintenance, repair, and operation of the Gowanus Expressway (Iââ?¬278).
  • Encourage the use of PPPs by the Metropolitan Transit Authority (MTA) for transitââ?¬oriented development projects.

Social Infrastructure

  • Establish a pilot program that enables school districts in Syracuse and Yonkers to utilize PPPs for major anticipated capital construction programs.
  • Examine and define the conditions under which private financing could be used to support capital construction programs for health care facilities.

Higher Education

  • Allow the use of alternative construction delivery mechanisms (e.g, construction managerââ?¬atââ?¬risk, designââ?¬build) for SUNY and CUNY facilities.
  • Establish a pilot program for a select number of SUNY schools to lease campus lands to private entities.

Energy

  • Support PPPs in the development of electricity transmission and distribution infrastructure.
  • Assess the potential for new private investment in extracting natural gas in the Marcellus Shale.
  • Assess the potential for siting renewable energy projects, including wind, solar and hydro, on Stateââ?¬owned lands and waterways.

Information Technology

  • Identify and lease state building rooftops and land holdings through PPPs with wireless carriers to expand their commercial network.
  • Establish a PPP for the State’s existing data center assets to help finance new construction and/or to refurbish existing data centers.

Underutilized Property

  • Formalize a PPP with Empire State Development Corporation (ESDC) and OGS to centralize authority in managing the State’s real estate needs.
  • Employ joint ventures, license agreements, ground leases, and other transaction alternatives to unlock revenue from underutilized assets that might be otherwise disposed.
  • Develop a comprehensive database to inventory and report on the State’s real estate assets by leveraging future brokerage agreements with the private sector for lease administration or other services.
  • Establish a brownfield cleanup PPP between the City of New York and the State.

In all, I think this is an valuable report that will really advance the ball forward in New York State, and possibly the nation. Gov. Paterson and the Commissioners deserve a great deal of credit for driving this issue in a really productive direction.

Reason’s Privatization 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.