In last month’s Public Works Financing newsletter, I warned about growing attacks on tolling and P3s from grass-roots, mostly right-wing populist groups. But now comes what may be a more serious threat-attacks from within the transportation industry itself.
One of those leading the charge is Tom Jackson, executive editor of Equipment World. His August 1 column carried the headline “Toll Roads, P3s, and Creative Financing Will Bring Short-Term Gain, Long-Term Disaster for the Road Building Industry.” His anti-toll point was the tired old saw about tolls continuing after the construction bonds are paid off-as if ongoing maintenance and future expansions don’t need a revenue source. His September 1 follow-up column escalated the attack, characterizing P3 concessions as “a giant money grab by the big banks and politically connected mega-construction companies.”
But the real shocker was a five-page cover story in the glossy magazine Thinking Highways (which focuses mostly on intelligent transportation systems and tolling). Titled “A ‘Model’ Scheme?” this “investigative” piece by associate editor Randy Salzman presents P3 concessions as a scam perpetrated on unsuspecting taxpayers and legislators. What’s amazing are the many parallels between Salzman’s arguments and those being offered by grass-roots populists. But you would think Salzman would know more about transportation than they do, and not make so many egregious errors.
To begin with, he attacks design-build as being “in effect, ‘cost plus,’ tailor-made for expensive change orders once construction is under way, when no politician can dare pull the plug on runaway spending.” That’s exactly backwards: traditional design-bid-build contracting does lend itself to that, which is why it’s nearly impossible to finance a toll project (whether P3 or otherwise) unless construction costs are limited by a design-build contract. Salzman repeats this ridiculous claim later on in the piece as part of his attack on P3 concessions, so he clearly believes it.
He very misleadingly cites a Congressional Budget Office (CBO) study on P3 concessions as “finding little, if any, long-term savings for citizens.” What CBO actually found was a positive: the financing costs of P3 concessions end up being no higher than those of a government toll road, after taking into account the value of risk transfer, etc. That refutes numerous assertions by critics that government can always finance such projects at lower cost than the private sector. And as CBO also points out, this claim of no long-term savings ignores the incentives in a long-term concession to design the project so as to minimize life-cycle costs, something that does not happen in traditional lowest-first-cost procurement.
Salzman repeats the populists’ fallacious description of P3 project financing as being nearly all “government money.” In his view, the only private money in a concession is the “tiny” amount of equity, with all the debt viewed as government money, despite the fact that the company is responsible for 100% of the debt service on both private activity bonds (PABs) and the Transportation Infrastructure Finance and Innovation Act (TIFIA) loan. He and other critics equate the fact that Congress enabled PABs to be exempt from federal taxes-just as the bonds of government toll roads are-as making this “government money.”
Salzman also repeats another populist claim: that PABs are guaranteed by the federal government, so that if the P3 project goes bankrupt, federal taxpayers would pay off the bonds. Neither PABs nor TIFIA loans are “guaranteed” by the government, and both are subject to the normal workout procedures in the event of bankruptcy. Salzman cites left-wing law professor Ellen Dannin as his source for the government-guarantee claim. (Dannin’s law journal articles on P3s also claim that compensation provisions in typical P3 concessions grant the company a monopoly.)
But the real payoff in Salzman’s article comes in its last two pages, in which he presents his P3-concessions-as-a-scam-against-the-public argument. It goes like this:
- An international financier and construction company form a “shell company” that wins the bid.
- They use 95% government money to finance this allegedly private finance deal.
- They concoct a 700-page contract that only they can understand.
- They use a design-build construction contract “tailor-made for forcing the state to accept expensive change orders after construction is under way.”
- Due to the deal’s very long term, they “enjoy a hefty depreciation allowance, like homeowners take on a house.”
- After 15 years, with depreciation used up, they declare bankruptcy.
- The bondholders are made whole, due to the federal guarantee.
- Taxpayers have to rebuild a deteriorated road [after 15 years?] “when all the toll income has gone to the shell company backers, now protected by bankruptcy laws.”
- Bankruptcies mean future P3s need junk bond interest rates “due to a ‘risk’ that is primarily accruing to taxpayers.”
You could not make this stuff up! And after presenting that bizarre scenario, Salzman follows up with a vicious attack on the Capital Beltway express lanes project. We all know the Beltway is experiencing a slower than projected ramp-up period, but Transurban seems fully committed to it for the long term, having recently injected $280 million in additional private equity. But Salzman caricatures this as a token “restructuring,” while immediately reminding readers that the company was unable to make a go of its rescue of the failed Pocahontas Parkway, a first-generation P3 done by a nonprofit corporation.
Where do these cockamamie ideas come from, in a sophisticated transportation industry magazine? Besides quoting the misinformed Professor Dannin, Salzman also quotes an anti-P3 candidate for Congress from Virginia and liberal Rep. Eleanor Holmes Norton (D-DC) as raising questions related to some of the arguments that he makes in the article.
It’s ironic that just a month after Salzman’s article appeared, the House Transportation & Infrastructure Committee released a thoughtful report on P3s from the special panel that it created six months ago to make findings and recommendations. This generally positive report was signed by all 11 members of the Panel on Public-Private Partnerships, six Republicans and five Democrats, including former P3 critic Rep. Peter Fazio (D-OR) and Rep. Norton herself.
My bottom-line conclusion is that the P3 community has a lot more educational work to do since at least two transportation industry periodicals are spreading serious misinformation about P3 concessions.
Robert Poole is director of transportation at Reason Foundation. This column first appeared in Public Works Financing.