PWF Blog

PWF Blog 12/27/16

From Public Works Financing newsletter
December, 2016

Opinion: Stirring Up Fear Of Public-Private Partnerships In California

by William G. Reinhardt, editor 

A Dec. 13 op ed in the Sacramento Bee on public-private partnerships from union leader Bruce Blanning does a disservice to the people of California. They should not be misled by his distortions and half-truths, which were timed to help kill the state’s PPP enabling law this month. If Bruce Blanning is getting his bad information about PPPs from his Professional Engineers in California Government (PECG) union members then you can forget about making improvements in Caltrans from the inside.

PPPs are a proven way to buy infrastructure without blasting through budgets and schedules, without deferring maintenance, and without cheating taxpayers by leaving them with a bridge, road or transit line that has to be rebuilt sooner than it should. Chronic, huge budget overruns and schedule delays are what California has been getting with the old, traditional way Caltrans does business, the way Mr. Blanning and his public union friends would perpetuate. You don’t have to look any further than the budget and schedule fiascos of the SF Bay Bridge and the I-405 Sepulveda Pass widening project to know that there must be a better way to engage the private sector in major transportation infrastructure delivery.

Loads of positive outcomes internationally and now in the U.S. attest to the fact that PPPs can and do work to deliver outcomes that are better than purely public outcomes. Of 10 large bridge, road and rail transit projects completed by private developers in the U.S., all but one were finished on or ahead of the agreed-upon schedule. All but one were within 3% of the original contract price set between the investors and their design-build contractor.

The outlier is the Presidio Parkway, which was completed on schedule but overran its budget by 27%, largely due to risks that Caltrans would have borne anyway under a traditional approach to the project. Even with the overrun, the cost to taxpayers is still $110 million less than the cost estimate made by Caltrans in 2010 for a conventional public project.

PPPs are hardly a threat to PECG. Since 1993, there have been only three PPP highway projects built in California by private developers. No dues-paying PECG union member has ever lost a job due to a PPP. In fact, private engineers involved in building the SR 125 toll road say PECG members intentionally delayed design approvals, significantly prolonging the schedule and protecting their jobs.

So why is Mr. Blanning so hysterical? Because the lack of new state highway projects has left 22,000 Caltrans employees with not enough to do. As a result, the district office in Sacramento threw extra people at the Presidio Parkway PPP project. So much so that Caltrans’s in-house costs for construction oversight on Presidio ran over budget by $30 million. Those are wasted taxpayer dollars.

Mr. Blanning claims: “These so-called public-private partnerships that supposedly save time and money have been a disaster for California. In the real world, they lead to excessive costs, bankruptcies and taxpayer bailouts.”

A grossly misleading overstatement. In fact, excessive costs are the norm for traditional ways of doing large projects but rare for PPPs, and they are absorbed by the private investors and their contractors, not government and not users. The contractors that built SR 125 ate $400 million in unpaid claims. As stated above, Presidio is the outlier.

There have been 10 bankruptcies of new roads and leases of existing roads, mostly due to the steep drop in traffic and toll revenues during the deep recession that began in 2008. In all of them, private equity was wiped out and creditors took a haircut. In most, tolls were set by contract and did not go up for users. And taxpayers were protected under the terms of the PPP contract negotiated by governments.

On SR 125, the San Diego Association of Governments bought the bankrupt road at a good price. It was no taxpayer bailout; the equity investors took a total loss. That let SANDAG lower tolls. The road filled up with new customers, and congestion was reduced on free roads in the region, so much so that plans for an expensive new highway east of Chula Vista are back on the shelf. The federal government took a haircut on its $172-million loan, but it negotiated such a good deal with the other creditors that it expects to make more money now than under the original loan terms. Overall,  the 22 federal loans made to PPPs have turned a profit  for taxpayers.

On SR 91, the Orange County Transportation Authority bought the road from the private operator to resolve a contract restriction on building more toll-free lanes. It was a lesson learned, and this kind of contract restriction has never been used in the U.S. since. It turns out that OCTA did just fine in the transaction. The fair-market value of the project now far exceeds the price OCTA paid, even after it added extra toll-free lanes.

So much for Mr. Blanning’s hyperbole. He claims to tell us about the real world of public-private partnerships. It’s a fiction, perpetuated by a man and his public employee union whose real agenda is killing any idea (mis)perceived as a threat to union jobs. In the real world, PPPs are a proven, smart part of the search for better outcomes. As shown in the rest of the world, they can do a lot of good for California taxpayers without stepping on anybody’s toes.”