Public-Private Partnerships Won’t Solve New York’s Transpo Funding Crisis

Private financing may expedite the replacement of the Tappan Zee Bridge, but it doesn't eliminate the need for infrastructure funding streams. Photo: ##http://en.wikipedia.org/wiki/File:TappanZeeBridgeFromBelow.JPG##Wikimedia##

Governor Andrew Cuomo sent out an “editorial” this weekend putting infrastructure investment at the center of his job creation agenda. In a rough outline, the governor touted public-private partnerships (or PPPs, as they’re known) as a key mechanism to pay for “the repair and development of highways, bridges and major construction projects.”

It also happens that major players in the state’s construction industry were discussing the very question of how to fund infrastructure at a conference last Friday. Since Cuomo revealed the week before that he wants union pension funds to finance the new Tappan Zee Bridge, PPPs were the hot topic. Most speakers agreed that PPPs won’t solve the state’s transportation funding crisis.

New York’s transportation system is essentially broke, with both transit and road networks in precarious condition. PPPs can be politically appealing as a way to pay for transportation projects without directly tapping public budgets. But while certain kinds of PPPs might help speed projects along or reduce costs, the private sector doesn’t provide something for nothing. The public will eventually pay for these projects somehow.

“We need to guarantee those private investors, especially if they’re a pension fund, a rate of return,” explained Denise Richardson, the managing director of the General Contractors Association. “Without a discussion of where the revenue stream to fund those loans is coming from,” she said, “we mislead the public.”

The New York Times, for example, reported that Cuomo plans to fund the new Tappan Zee Bridge with $3 billion in bonds backed by toll revenue and $2.2 billion with loans from union pension funds and the federal government. It is not clear, however, how pension funds would be repaid.

“We try to pretend that the bill will never come due,” said Richardson. “We need to find a way to fund, not finance, these incredibly important projects.”

With the state’s gas tax frozen for years, officials unwilling to implement tolls or other forms of road pricing, and Cuomo shunting the cost of the MTA’s capital plan onto straphangers’ credit cards, both New York’s transit and highway systems are increasingly bankrupt. Revenue of some kind is necessary, whether it pays back traditional bondholders or direct investors.

Though not a panacea, new ways of involving the private sector can benefit transportation projects.

One form of PPP, the “design-build” contract, had the support of every panelist, nearly all of whom work in the private sector. Design-build allows the same company to develop the plans for a project and construct it, hopefully providing more accountability and allowing for a faster and more integrated process. New York is one of only five states that does not allow design-build. According to Gannett’s Albany Bureau, the state’s recently-issued request for qualifications for the Tappan Zee called for a design-build contract, suggesting that the Cuomo administration will push the legislature to change that law shortly.

Some panelists touted private financing highly. Christophe Petit, president of infrastructure investing firm Star America Infrastructure Partners, claimed that in Canada, PPPs of all kinds proved to be on average 30 percent cheaper than traditionally managed projects. The big savings, he argued, come from ensuring that the risk of cost overruns falls on those most able to prevent them and from speeding up the construction timeline, not from private capital per se. “The private sector cost of financing will always be more expensive than the public sector cost of financing,” said Petit. “PPPs are about getting the project done.”

Tawan Davis, the VP for real estate transaction services at the New York City Economic Development Corporation, had a similar assessment. He estimated that private equity costs around five percentage points more than public financing but that it was often worth it, especially for more complicated and risky projects. “If you put in cheap money, you haven’t made the risk go away,” he argued. “It’s more expensive to pay for [cost overruns] than to pay for more expensive debt up front.”

In addition, private financing might make fiscal sense if cheaper bonding isn’t an option. In rebuilding the Goethals Bridge, for example, the Port Authority opted for a partnership in which the private sector will design, build, maintain and finance the new span. The price tag for the bridge actually went up between $30 and $100 million as a result of the partnership, but the Port Authority believes it will save money in the long-term. The PPP allowed the Port to build the bridge sooner — the authority doesn’t have the capacity right now for more bonding — saving money on upkeep in the interim. “The Port Authority can finance it cheaper, that’s always the case, but the Port Authority is constrained,” said Tony Cracchiolo, a senior VP at engineering firm STV.

When successfully applied — not always the case — those benefits are real. As Richardson argued, however, they aren’t a substitute for public funding. “At the end of the day, these monies need to be paid back,” said Ira Levy, an executive with engineering company AECOM. “This is not funding, this is financing.”

Taking a step back, Baruch College professor Jack Nyman urged the state to think as much about long-term goals as about financial mechanisms. “The obvious things are we want to increase mass transit funding,” he said.

Moreover, private financing is primarily of use for projects like toll roads or airport terminals that produce revenue streams. “We don’t have tolls on any of our state highways, so we don’t have revenue generating mechanisms for many of the projects,” said Robert Zerrillo, the acting director of policy and planning for the state Department of Transportation. “PPPs will not be a panacea for the types of projects we are doing at NYS DOT.”

There’s definitely room for new ways to finance infrastructure or contract out projects. But as Cuomo prepares for a major infrastructure push, New Yorkers need to ask, “Where’s the money?”

Friday’s conference also indirectly touched on major questions surrounding the financing of the Tappan Zee Bridge, which Streetsblog will explore in a follow-up post.

  • J_12

    PPP is often unfairly maligned as a means for private investors to “steal” revenues from the municipality.
    The reality is that PPP is similar to revenue bonds, except that the municipality uses a 3rd party (private entity) to raise money based on future revenues, instead of borrowing directly in the bond market.
    Most munis can indeed fund at better rates than private entities, but PPP is a useful strategy when the muni either lacks the political willpower to increase the size of its balance sheet, or lacks willpower/expertise to get projects done on time and on budget.
    However, as this article correctly points out, PPP is not a mechanism to raise funds, merely an alternate way of borrowing against future revenues.  If there are no future revenues, then some other mechanism is required.

  • JK

    There are a broad spectrum of public, private partnerships ranging from a single firm both designing and building new infrastructure to a complete privatization scheme. The discussion around the Tappan Zee has been around private financing via loans from union pension funds. The concern is that borrowing from union pensions is so much more expensive than borrowing via bonds, that it is hard to see how the tax payer comes out ahead. Union pension investments expect a 10% to 12% return vs 5% interest on municipal bonds. As Mr. Petit says above, PPPs can theoretically save the public money by reducing construction costs, not via cheaper borrowing. But this is based on a scheme in which one entity designs, builds and finances the infrastructure. The discussion around the TZ replacement has been for the state to borrow from union pension funds to create a state run “infrastructure fund” which then finances road and bridge construction.  This is alternative financing using expensive borrowing, and does not involve the private lender putting their money directly at risk.

  • hmm

    PPP also have the feature that the company does the building so that they can sometimes get around state/muni union labor rules which is good or bad depending on who you ask.

  • hmm

    PPP also have the feature that the company does the building so that they can sometimes get around state/muni union labor rules which is good or bad depending on who you ask.

  • Casador

    Gentlemen  I have been in P3s for two decades around the world, led and advised on successful infrastructure P3s, and give workshops on this issue.  On that basis, some comments:
    1) Design Build is NOT a P3.  It’s too short term and has almost no risk transfer compared to CP (Conventional Procurement).  
    2) It should not be a method to raise financing as it’s prime purpose.
    3) The only really useful P3 includes operations and maintenance (O&M) by the private sector.  It’s O & M over the project life where the biggest bucks are, and the private sector is hugely more effective, generally, than the public sector in this.  Hence a useful P3 is long term.
    4) Risk transfer is the other big winner, along with innovation, budget certainty for government, avoidance of poltical bell hanging (scope creep), better quality of product and more accountability than public center. 
    5) Cheaper public financing costs are an element in the equation but a small one, as is the profit component.

    If you are interested, e-mail me and I can send you a few items.

     
    John Hunter, P. Eng.
    President & CEO
    J. Hunter & Associates Ltd.
    Energy Sector, Private Public Partnership, and International Business Consultants
    338 Roche Point Drive
    North Vancouver, BC, CANADA  V7G 2M2

     

  • Presten Tok

    Hmmm, let’s see: In the 1980’s, Wall Street firms destroyed unions and left millions of Americans unemployed by engaging in leveraged buyouts. In the 1990s Wall Street firms decimated the US IPO market by fraudulently rating dot-com companies. In 2000, Wall Street firms said, “It’s okay to repeal the Glass-Steagall law, we’re too big to fail – trust us.” As a result, Wall Street firms caused the housing market to collapse and millions of homes to be foreclosed, and nearly bankrupt the country. As a reward for screwing up, they got Congress to give them $700 billion, no questions asked (and Wall Street accuses Democrats of socialism).

    Now, Wall Street wants us to give them control of publicly-owned assets such as the Geothal’s Bridge and the Nerw Jersey Transit Parking System, and they’re saying, “Trust us, we can manage public assets better than you!”

    Does the old adage, “Insanity is doing the same thing over and over again and expecting different results” come to mind?

    Finally, if you want to see how well these so-called public-private partnerships work, try Googling “Parking rates in Chicago”, “Las Vegas Monorail,” or “South Bay Expressway.” Seriously, google those, and read the results.

  • Presten Tok

    Oh, and by the way John, the Tappan Zee Bridge funding is a P3 in disguise. NYS is creating an infrastructure fund that will be funded with assets from union pension plans and private equity firms. Because the fund is being controlled by the state, the state then doesn’t have to say that it is being funded with private sector money. It’s only an accounting trick, folks.

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