Unclear just what financiers are talking about, when they refer to Public Private Partnerships (PPPs)? You’re not alone.
Toward learning a little more, local Sen. George Howard Bunting (20th District) has asked colleagues and Gov. Ruth Ann Minner’s office to consider enrolling state policy-makers in a “series of classes” on the topic, as soon as possible.
Bunting admitted he was rather skeptical regarding PPPs, based on what he did know — he suggested a bit of a tutorial might shed brighter light on the aspects most concerning him, and maybe temper the lure of the big cash payout.
Bunting has repeatedly stressed his discomfort at leasing roads to foreign investors for such a long period of time that, in his opinion, it basically amounts to selling the roads.
But his neighbor to the west, Sen. Robert Venables (21st District), looks on the concept more favorably — specifically, a potential lease of Delaware’s I-95 (although Venables prefers the Joint Development Agreement, or JDA, terminology).
According to the Dec. 2004 U.S. Department of Transportation (USDOT) “Report to Congress on Public-Private Partnerships” (www.fhwa.dot.gov/reports/pppdec2004), a PPP is a contractual agreement between partners from the respective sectors “which allows more private sector participation than is traditional.”
The public sector the usually retains ownership, and the private party will gets “additional decision rights in determining how the project or task will be completed.”
This can involve “innovative contracting,” like “A+B,” for instance (finish early, get a bonus, but finish late, pay a penalty). The USDOT report cited a Florida DOT study, and while there were still cost and time overruns with A+B, they were much less severe than those that occurred using traditional low-bid contracting.
At the extreme opposite end of the spectrum, the report continues, are “development agreements that can be very complicated and technical, e.g. design-build-finance-operate-maintain,” and especially notes several other nontraditional arrangements, including “government contracting with a private firm to operate and maintain a roadway that the government has built.”
Venables’ proposal to lease I-95 seems to at least partially fit into this category.
Further from the report, “Data gathered to date indicate that projects built using a public-private partnership almost always save taxpayer dollars,” and in a quote from Federal Highway Administrator Mary Peters, “Limited private sector involvement [in road building] has shielded the industry from market forces and discouraged the type of innovation that brings efficiency and cost savings.”
To recap, Delaware needs new bridges and roads, but if the state intends to complete even the projects already in queue, it needs to come up with some serious money.
Things came to a head in July, as the Delaware Department of Transportation (DelDOT) reported a $280 million difference between estimated costs for proposed fiscal 2006 projects and (A) state budget funding earmarked for DelDOT plus (B) money left in DelDOT’s own piggybank, the Transportation Trust Fund (TTF).
Bunting said he’d heard estimates of $1.6 billion drained from the TTF over the past 10 years (since 1996), gone toward operating costs, rather than capital construction as originally intended (and Venables quoted the same figure). Bunting suggested the shift hurt state road projects twice — first because money wasn’t available, and second because money wasn’t available to leverage federal matching funds.
What to do?
DelDOT quickly announced unspecified delays on all manner of projects around the state, and Gov. Ruth Ann Minner quickly assembled the Governor’s Transportation Development and Funding Options Committee, a taskforce to look at ways to bring in new revenues.
Minner will be asking for an answer or two by Dec.1, but according to Bunting it’s been slow going, and no solution is likely to be popular. Bunting called the taskforce “a thankless place to be.”
He has spoken of increases to vehicle registration fees as a political third rail — “the rail out” — and recalled how majorities became minorities the last time legislators increased those fees.
Even raising tolls (some more), or raising registration and other vehicle documentation fees or, more politically lethal, tacking another few cents onto fuel taxes, or raising other taxes — or even all these at the same time — may do little to rectify the situation, Venables suggested.
“With the rate of development we’ve had, and with the Transportation Trust Fund coming up short, DelDOT needs a big transfusion, just to catch up to where we need to be,” he said. According to Venables, representatives from Goldman Sachs had indicated the state could potentially garner a fat $1.9 billion in exchange for leasing I-95.
Perhaps most importantly for the general public, he said the investors would have to be amenable to state-controlled limits on toll escalation. And there’d doubtless be some considerable wrangling over things like the subcontract with Delaware State Police, ongoing road maintenance and infrastructure improvements further along the 75-year timeline, etc.
However, if the state did manage a deal, Venables suggested an immediate $900 million pay-down on the state’s existing I-95 debt — kind of like looking at a new roadwork PPP in the mirror.
The state could invest another $150 million through the financial managers who handle the $5 billion Employee Pension Trust Fund, toward a more stable TTF of the future, Venables recommended.
With (A) the big infusion, and dividends from subsequent investments, plus (B) a further shift away from DelDOT’s current financial responsibilities, with the General Fund taking some of those obligations back, plus (C) some new revenue generation, from the politically unpopular toll, fee or tax hikes, “we’ll probably be able to get a handle on it,” Venables stated.
The USDOT report references various other documents, and perhaps the 1998 Congressional Budget Office’s “Innovative Financing of Highways: An Analysis of Proposals” explains PPPs best.
“Although firms may also be motivated by the desire to produce goods or services that provide social benefits to the community, they must keep their shareholders happy, generally by earning a reasonable return on investment,” the budget office analysis says. “On the plus side, that focus on returns means private firms will probably scrutinize potential investments carefully and…Private firms are also likely to be quite cost-conscious.
“On the minus side, the focus on making money may cause the interests of private firms and the general public to diverge,” the analysis warns. “Consequently, governments must be on their guard and must structure agreements with private firms to provide incentives to do what is good for the public along with disincentives to waste resources.”