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Friday, May 17, 2013

Paving the way for PPPs

I recently made the comment to the effect that the fundamental problem, from the public's point of view and finances, is that it cannot match wits with the private sector when it comes to complex or big infrastructure acquisitions. See Out gunned and out classed.

The following article shows an example of how a government might respond to that situation. Might. Perhaps. Please consider.

Why You Won’t Own Your Road
Cash-strapped states such as Virginia are turning to the private sector to help finance large infrastructure projects. But it may just be a way of forcing drivers to pay more in the long run.

The Virginia Transportation Department is fighting to keep afloat a $2.1 billion public-private tunnel project in the Hampton Roads region after a Portsmouth judge ruled in May that the accompanying toll hike was unconstitutional. The case will likely wind up at the Virginia Supreme Court, putting at risk the department’s ability to negotiate tolling authority with private investors, a near-essential component of public-private partnerships.

Dusty Holcombe, a 13-year veteran of the Virginia Transportation Department, had never heard of Tony Kinn, the man tapped to head the commonwealth’s newly minted Office of Transportation Public-Private Partnerships. That’s because Kinn had spent most of his career far away from government, honing marketing and business-development strategies for clients such as Macy’s, General Foods, and Procter & Gamble. Kinn’s boisterous personality, his white hair, his overstuffed frame, his mile-a-minute chatter—it all seems to clash with the bureaucratic nothingness of this public office building in downtown Richmond.

The office was the brainchild of the state’s sometimes controversial Republican governor, Bob McDonnell, who has a geek streak when it comes to transportation. McDonnell is one of the few high-level elected officials to openly declare what transportation gurus have been saying for a decade without being heard: The gas tax is an antiquated way to fund roads. Without changes, highway coffers will dwindle over time as cars become lighter and more fuel-efficient. McDonnell was pilloried from both the right and the left for his proposal to replace Virginia’s gas tax with new sales taxes, but he is to be commended for pointing out the elephant in the room. His gas-tax replacement bill became law in March.

Kinn was just the type McDonnell wanted for the job: a business-first operator who isn’t happy unless investment opportunities are moving, moving, moving. Kinn met his team for the first time at an alehouse across the street from their Richmond office. “I talked to these people, and I thought, ‘My goodness, if they just allowed these people to do their jobs, we can do just about anything we want,’ ” he says.

His attitude toward his staffers, whom he says he dearly loves, is an odd mix of contempt for government culture and awe of their individual expertise. It drives him crazy to see their ingenuity squelched in bureaucracy, and he insists they have to rise above it. “If I want the private-sector industry to play with us, then our people have to be held to a higher standard,” he says. “They have to deliver.”

Holcombe, not Kinn, is the one you can picture leafing through back issues of Public Works magazine that lie in his office’s reception area, the ones with profiles of heavy-duty excavator buckets and track-mounted crushers. Holcombe talks like this: “Our goal is to try to mature a project enough before we take it out for procurement. Get the environmental petition in place. Make sure sketch-level traffic and revenue studies are done. Make sure you’ve done your business model to define that it brings value.”

Holcombe and Cromwell, who each have decades of civil-service experience, are critical players in fashioning deals that are attractive to the private sector. They make sure permits are delivered on time and concurrently with construction plans. They navigate the matrix of federal, state, and local rules for the private companies. They schedule public meetings and contact all the stakeholders. They let the private partners in on the construction planning early so they can seek their own contracts in non-bureaucratic ways.

“You’ve got contractors that are not looking so much for change orders or more money or more time out of a traditional contract. They’re looking to deliver on time, on budget for less than what they told you,” Cromwell says. “It’s a completely different way.”

Together, Kinn and Holcombe form the perfect blend of bureaucratic know-how and private-sector competitiveness, a relationship that is increasingly vital as state and federal budgets shrink. Like phosphorus and sulphur on a match, their combined aptitudes are intended to spark new and cheaper ways to allow people to travel about Virginia with less hassle.

Their solution is to woo corporate partners who aren’t shy about boosting their own bottom lines. Such an unvarnished quest for profits can be off-putting to residents who just want the roads to be pothole-free. Why should a Wall Street firm make money from a taxpayer-supported utility? Typical public-private arrangements, such as leased roads or privately tolled tunnels, are often met with grumpy skepticism by drivers, who are just as likely to complain about traffic snarls along the Capital Beltway or I-264 into Norfolk.

Is the United States ready to make the shift from the Eisenhower-era national highway network—in which the public owns the roads and highways it supports with tax dollars—to a partially private, profit-based system that invites partners from Wall Street and even other countries?

The benefits of such a shift are rooted deeply in the tenets of capitalism, if not public works. The disadvantages lie in the public’s potential lack of access to a needed utility. If private companies run the roads, it’s possible that those who are able to pay more would get better access because they could assume the higher cost of tolls.

Former Gov. Mitch Daniels in Indiana succeeded in completing a public-private deal to finance the 157-mile Indiana Toll Road, which secured $3.8 billion for the state. Yet critics still complain that truck tolls could increase more than 3,000 percent over the 75-year deal. Economists say the private dollars were a windfall for the state when the deal closed in 2006, but the agreement will wind up being a net loss for future generations. “It’s almost a kind of confidence game, where you’re continually putting more debt into the future,” says Phineas Baxandall, a federal budget and tax analyst with U.S. PIRG.

Skeptical taxpayers and sketchy economics be damned: Officials such as Kinn and Holcombe are looking for creative ways to attract private investors to develop roads, tunnels, and government land because they see no other options. State budgets are not going to increase anytime soon, and tax increases are politically unpalatable. What’s more, when private investors are looking for places to put their capital, why not take advantage?

Public-private partnerships make sense only for the biggest and most complex infrastructure projects. Simple road paving, for example, needs nothing more than a standard “design-bid-build” process to seek out cost-effective contractors. It doesn’t need a lot of up-front money, and the job can be completed in a few months or years.

Bigger projects that span five, eight, or 10 years—and probably a few electoral cycles—benefit from private-sector partners because the firms can infuse a state with cash at the front end. They can also provide consistency in the design and construction phases even if political administrations change. No matter how sophisticated an infrastructure contract gets, private-sector partners add a tricky new dimension to an already difficult process. Unwieldy projects can run amok for any number of reasons, and that makes some people suspicious of the private partners from the get-go.

The biggest concern the public expresses, although often not in an organized fashion, is lack of accountability. Citizens carry the impression, true or not, that a big project is being turned over to a company that has no roots in the community and no reason to take the public’s preferences into account. The reality tends to be more complex. Municipalities often have dueling political goals. Large projects tend to cross several local jurisdictions, which can make the political talks messier. Even without these local problems, transportation analysts acknowledge that elected bodies will always end up ceding some of their authority to a private entity in the course of these deals (witness the recent dustup over flaws in the Silver Spring Transit Center in suburban Maryland). That doesn’t always sit well with the locals.

There is truly a lot more to this article than I've extracted here, and I strongly urge you to click the link and read it all. It is well researched and covers the controversial ground in classic journalistic style, such as,  "It is ironic that one of the most socialized parts of American society, the national highway system, came about out of fear of being overrun by communism. ... Less well-known is that Eisenhower originally proposed that the national highway system be funded by tolls."

My own take is that all of these public projects, however complex, require some kind of cooperation between government and private actors. But what kind?  How are risks and rewards best shared -- in the public interest?

If politicians had any backbone to put in place these social infrastructures, like the Hoover Dam and Eisenhower's interstate highway system, they could see it through. But they don't because a lot of toes get stepped on and a lot of mistakes get made and many people sometimes die, as with the Hoover Dam project, and pollies just don't stand up to that heat when the time frame of the project extends beyond the election cycle.

So, if you just want to get the job done, don't look to the pollies. Look to the private sector, and be prepared to pay your own way. This stuff ain't free no matter where it comes from.

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