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Senate subcommittee questions value of public-private partnerships
July 31, 2008
Though public-private partnerships have been discussed at both the state and federal level for quite some time, there are still some areas of the controversial plans that have yet to be fully explored.
The Senate Finance Subcommittee on Energy, Natural Resources and Infrastructure examined some of those areas, including taxes and financing, at a hearing Thursday, July 24.
Subcommittee Chairman Jeff Bingaman, D-NM, started off the hearing by saying he has mixed feelings about public-private partnerships.
Bingaman said that, although he’s not necessarily opposed to the idea of private investment in U.S. highways, he’s also not convinced that it is the silver bullet that many of its proponents make it out to be.
“There’s no denying the seriousness of our surface transportation funding challenges, but the question is whether our federal response should be to encourage states to essentially sell off vital components of the Interstate Highway System,” Bingaman said.
“I am personally open to the role of the private sector, but I have real concerns about this rush into public-private partnerships and its adequacy to replace or supplement a strong and vital federal infrastructure program. Before we move away from our long-term state and federal highway partnership, we must better understand the consequences of doing so.”
Bingaman went on to say that he was concerned about the practice of selling longer and longer leases in order to take advantage of subsidies in the tax codes.
JayEtta Hecker, director of physical infrastructure issues for the Government Accountability Office, testified that, in addition to Bingaman’s concerns, there are other pitfalls of public-private partnerships to be on the lookout for. Not the least of which is the very real possibility of increased tolls for those who use the roads.
“There are, however, potential cost tradeoffs. It is a concern that there are views that this is somehow free money,” Hecker said. “The reality is that these techniques are going to result in higher tolls to the users because of the way they’ve been managed relative to a publicly owned toll road.”
Hecker went on to say that the way these deals are typically done in the U.S. is vastly different from the way they are done overseas – something the GAO would like to see change.
“In the deals that we looked at domestically, where this process is just beginning, a lot of the focus is on the contract terms. … it was just kind of a big numbers game and getting the terms right,” Hecker said.
“This contrasts very significantly with the experiences in the rest of the world. They have much more rigorous up-front analyses, varying multiple-staged reviews of public interest, multiple dimensions, they have public-sector comparisons – how it compares to what the public sector could do – and those are very distinct, very well developed and present an opportunity for a lesson learned in the U.S., and that was one of our main recommendations.”
Bingaman came back to Hecker’s criticism of the bidding process later in the hearing when he mentioned testimony from another witness at the hearing – David Enright of the New Jersey-based financial consulting firm Northwest Financial.
Enright testified that if state and local officials in the U.S. had done the kind of analysis that officials in Europe do, there probably wouldn’t have been approval for as many road and bridge lease deals in this country.
“Do you have any views on that?” Bingaman asked Hecker.
Hecker said she didn’t think such reviews would have necessarily meant that U.S. officials wouldn’t have gone along with the transactions, but she did qualify her statement.
“I think that the public management of much infrastructure has not been very efficient and there are opportunities to gain benefits and efficiencies,” Hecker testified.
“I don’t think the full costs were very transparent. I don’t think they were detailed. I don’t think potential impact of transfers from the interstate commerce that would fund this, and transferring that to lower stake roads, was really evaluated.”
The GAO’s Hecker also said that she thought that there were a host of issues that weren’t fully evaluated. She said she would “have to agree that the cost of borrowing for these was more expensive …”
“It’s more expensive for the private sector to borrow or to use equity than it is for the public sector to use municipal debt,” Hecker testified. “But it’s whether you get enough benefits in exchange. There are no deals in Europe or anywhere where they monetize the assets the same way we’ve seen here. We never saw that anywhere.”
Bingaman asked her to explain that statement further.
She explained that the focus of both the mayor and the governor in many of the other deals now is to say to the advisors, “Get me a deal that maximizes the cash that I can take out of this asset.” Hecker added that the bid process used in the U.S. has fallen short.
“They (state and local officials in the U.S.) take pride that their whole bidding was a piece of paper with a single number on it – their whole focus. In Australia, in Europe and other places, the bid (process) is competition for the lowest tolls,” she testified.
Bingaman asked Hecker to confirm that what she was saying was that the competition in other countries is about who can keep the tolls the lowest, rather than who can give the government the biggest up-front payment.
“Right,” Hecker testified.
Later on, Bingaman asked the New Jersey financial consultant, Enright, a question that cut right to the heart of the debate over public-private partnerships. Specifically, Bingaman wanted to know which would ultimately cost the public more money – a publicly run highway or a privately run highway?
“Mr. Enright, maybe I’m reading too much into your testimony, but my impression is that your conclusion that the public sector can finance road infrastructure more cheaply than the private sector can and therefore these so-called public-private partnerships end up costing people more in the long run than if the government just went ahead and maintained the roads,” Bingaman said.
“You’re correct,” Enright said. “The public sector is in a position to deliver a much lower cost of capital and therefore keep the user charges as low as possible.
“The private sector (has the incentive) to make a profit, that’s their job. We did separate analyses for both Chicago and Indiana – very extensive – and concluded in both cases that the public sector could have done just as well and held on to the asset and charged lower tolls and made the same amount of money. The problem in infrastructure in (this) country is not capital, the problem is the willingness to charge people for the infrastructure that they want to use.”
In the end, Bingaman promised to schedule more hearings to further examine who really benefits from public-private partnerships.
– By Terry Scruton, staff writer