William Reinhardt, editor of the Public Works Financing newsletter, generally believes in the promise of the deals, simply because the public sector has a poor record when it comes to on-time, on-budget construction of major projects. But even he says it's hard to prove which method is best for a given project. "All my life I've been looking for the perfect example to compare one to another," Reinhardt says, "and you can't."
The challenge lies in how governments analyze potential P3 deals. To do so, they estimate the cost of traditional procurement compared to a hypothetical P3 offer. But the analysis can include some factors that are subjective, and it may not consider factors that can't be easily quantified. A recent California Legislative Analyst's Office (LAO) study of two P3 deals_one for the Presidio Parkway in San Francisco and one for a new courthouse in Long Beach_found that state officials were making assumptions that favored privatization. By the LAO's own estimates, traditional procurement would have saved $300 million on the two deals.
Julie Roin, a University of Chicago law professor, also questions whether the "risk transfer" argument carries any weight. Ostensibly, for the private sector to turn a profit, a deal only makes sense if the government overestimates its risk and underestimates the project's revenue potential. "It's not as if any investor is going to accept risk without demanding compensation," Roin says. "You're just paying for the risk in a different way."
Watchdogs note that in entering into the deals, governments actually may take on all kinds of new risk they didn't face before_like the implications of entering into long-term deals that can constrain lawmakers' policymaking options for decades. In a famous case, the California Department of Transportation used a P3 to build and operate express lanes that opened in the center of California State Route 91 in Orange County in 1995. When the government wanted to expand parts of the roadway to alleviate congestion, it was blocked by a "non-compete" clause in the 35-year contract. Following litigation, the government ultimately bought out the private partner. Just seven years after the express lanes opened, the county's transportation authority paid $207.5 million for the $130 million project. That's a worst-case scenario, of course. Those who study P3s say governments have learned their lesson about non-compete clauses. But "compensation" or "stabilization" clauses_in which governments owe the contractor money for taking actions that could reduce toll revenue_continue.
Chicago got $1.15 billion when it leased its parking meters for 75 years, but whenever it temporarily closes a street the city must compensate the private partner for the lost revenue. When Indiana faced flooding in 2008, tolls were waived to evacuate people quickly, but the state had to pay the Indiana Toll Road's private concessionaire $447,000 for the lost revenue. Carpooling is generally viewed as a good thing_it reduces pollution and congestion_but Virginia could owe millions of dollars to a contractor if too many carpoolers use its tolled high-occupancy express lanes. "These reimbursements make governments the contractor's insurer and guarantor," says Ellen Dannin, a law professor at Penn State University. Moreover, provisions like those may give states a strong monetary incentive to avoid actions that would ordinarily be considered smart public policy. If governments face fines for doing what they think is best, there could be serious implications for the way they govern.
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