HB 3: Public-Private Partnernship Legislative Position Paper

PA State Legislature

2011-04-05

Dear Legislature:

PennPIRG is writing you today, to express our concerns regarding House Bill 3, relating to public-private transportation partnerships and to suggest changes that would address those concerns.  We recognize that the Commonwealth of Pennsylvania faces record deficits at as much as four billion dollars. We understand the pressure to identify new sources of money for maintenance and construction of essential infrastructure.  However, we want to express our deep concern about the utilization of public-private partnerships without adequate public protections. 

It is our view that, while not all public-private partnerships start out this way, many end as short-term budget gimmicks that appear to fix immediate budget deficits while increasing costs and risks in the long term. Pennsylvania’s roadways and other public infrastructure must be operated for the long-term public interest. Without strong public protections, the contractual stipulations in public-private partnerships can greatly harm the public interest. 

Three goals are of utmost importance in protecting the public from the potential pitfalls of public-private transportation partnerships: (1) The public must not lose control over future transportation planning decisions and decisions about the use of important public assets; (2) That the public must receive full value for any public asset being leased to a private entity, and (3) The entire process from start to finish must be transparent to the public. 

For these reasons it is crucial that the problems with House Bill 3 be corrected by inserting protections for the public interest.  We have included an analysis of the bill below.

Close exemptions from transparency and accountability

The bill establishes a series of “temporary regulations” that would be exempt from other laws of the Commonwealth, and would remain in effect only for three years.  There is no justification for this regulatory free-for-all and the situation invites abuse for short-term purposes. Many of these measures would eliminate important legal safeguards at a critical time. These exemptions should be eliminated.

–       Section 9104, subsection b(1) and b(2) specifically exempts the “temporary regulations” from the Commonwealth Documents Law and the Regulatory Review Act which are supposed to provide greater transparency in important agency decisions and ensure rigorous review of the costs and benefits of these decisions and proposals.

–       Section 9106, subsection d(2) allows the Department of Transportation of the Commonwealth or other public entity to provide compensation to losing bidders.  The Commonwealth should not be in the business of providing payment to bidders that did not provide a good enough bid to win the award.  This is wasteful and would be open to abuse. The Commonwealth does not normally compensate the expenses for losing bids for other kinds of contracts and the higher cost of preparing more complex bids does not warrant this additional spending of tax dollars.

–       Section 9106, subsection h nullifies the “Right to Know” law and should be deleted.

–       Section 9106, subsection h(1), while presuming to provide transparency, only does so after it is too late for information to be useful in shaping public decisions. Under the current wording, access to important documents relating to “Public-Private Transportation Partnership Agreements” would be available for public scrutiny only after the winning bidder had been chosen and the agreement had been executed.  These documents and proposed contract agreements need to be made public long before selection of a winning bidder in order to allow for adequate debate and public scrutiny. The documents should be made public and posted online with at least thirty days notice before agreements are made or a final bidder is selected.

o   Additionally, this section specifically exempts financial information of a bidder (“development entity”) from public inspection.  Without this important information, critical information about the quality of the public-private transportation partnership remains hidden from the public.

–       Section 9106, subsection h(2) is effectively rendered useless for two reasons:

o   The use of the word “may” indicates that transparency is optional.

o   That the approval for the documents in question to be open to public inspection hinges on approval from the private entity (“development entity”). If a private development entity can pick and choose among which documents it wishes to make publicly accessible then it can effectively hide key information from public scrutiny.

–       Section 9106, subsection h(4) effectively exempts all documents relating to these agreements from the “Right to Know” law.  It gives discretion to the government if they think the information in the document would provide “competitive harm” to the private entity.  This is too broad of a definition of when the “Right to Know” law may be ignored and should be deleted. Truly confidential information such as bank account numbers should not be disclosed. If a development entity seeks an injunction from a judge to prevent public scrutiny, it must be for a temporary time and a strong case must be made to overcome a strong burden of proof favoring public transparency.

The bill also allows the Department of Transportation and a would-be newly established board, the “Public-Private Transportation Partnership Board,” to approve public-private transportation partnerships without consent from the legislature.  Neither of these offices would be directly accountable to the public.  The Secretary of the Department of Transportation of the Commonwealth is appointed, as would be the members of the board. Decisions about huge sums of money, tax-like user fees, and multi-decade control of vital public infrastructure are too important to be decided without approval by elected representatives accountable to the people. The final terms of any sizable public-private partnership agreements that are reviewed by either the Department of Transportation of the Commonwealth or the Public-Private Transportation Partnership board should be required to be approved by the General Assembly.

Moreover, Section 9107, subsection b limits the term of a public-private transportation partnership but places the upper bounds of such a deal at 99 years.  The longer a deal the greater the potential risks to the public, and the more difficult to anticipate and place a dollar-value on those risks. Ninety-nine years is far too long.  The limit for public-private transportation partnership terms should be decreased to 30 years, the length of a long housing mortgage and commensurate with typical length in other countries where public-private partnerships are more common.

Ensure fair value and reduce risks for the public

The bill fails to provide procedures that would ensure fair value for the public. Public-private partnerships in Chicago, Texas and other places have been found to provide far too little value to the public compared to the large fees charged over decades to the public by the development entity. The federal General Accountability Office has determined that public-private toll road entities, for instance, will typically charge higher tolls on the same project than would a public entity. Texas’ Department of Transportation has confirmed that tolls will necessarily be higher with a public-private partnership. The Commonwealth must not allow short-term desperation for budgetary funds to be a cause for budget gimmicks that the public will pay too dearly for over decades.

In order to prevent the public from getting a raw deal, any significantly sized public-private partnership should be assessed by an independent auditor that would not directly or indirectly benefit from the public-private partnership. The auditing entity should determine whether the public is clearly gaining additional net value as a result of the entire life of the proposed partnership. Proposals must be shown to exceed the net value that would be provided by a similar purely public project with the same scheduled increases in user fees.

The recent experience with the subprime mortgage meltdown underscores the need to protect the public from potential risks involved with long-term private financing. In the case of mortgages, companies made large profits while selling mortgages to multiple third parties with the result that no private party took responsibility for the soundness of the loans or whether they were successful over time. This could happen with transportation projects if a private development entity sells off its risk in a project and no longer retains a strong interest in investing in good repair or a stake in successful operations. Infrastructure mutual funds are already set up to buy and sell shares of transportation projects. The public, in the form of the Public-Private Transportation Partnership Board, must therefore be required to approve any changes in ownership and should avoid dilution of ownership or transfer to entities that are not considered financially sound or professionally qualified or which have a record of not following public laws.

The public faces major risks in transportation public-private partnerships in case the private development is unable or unwilling to adequately invest in an asset. This can be a particularly serious problem toward the end of a long-term lease because the private investor has little incentive to pay for maintenance, upkeep or improvements. Without adequate public protections, the public may end up at the end of a lease with transportation assets that are in dangerous disrepair and a backlog of expensive construction needs. Private operators should therefore be required to indemnify the public from these risks through use of an insurance policy or an escrow account. Public-private partnership agreements must include a set of joint standards to be adhered to, a system for monitoring and ensuring compliance, and contingencies for early termination of a contract if the private party does not meet its agreed upon goals and standards. The private development entity must establish an escrow account or insurance policy that indemnifies the public against end-of-contract risks and the risks of operator insolvency during the course of a long-term agreement.

Ensure the public retains control over critical infrastructure decisions

In other states, public-private transportation projects have often seriously compromised the public’s ability to conduct normal planning and policy making. Legislation in the Commonwealth must ensure that does not occur. The bill should prohibit “non-compete clauses” which forbid public entities from building or improving capacity that might reduce the user fees collected by the operator.

The bill should also put clear limits on permissible provisions in a public-private transportation partnership that would require the Commonwealth to compensate a private operating entity for policies or events that reduce revenues or increase costs. Public decisions taken for other public purposes should not be treated as events that must be remedied by compensation to a private operator. Any compensation that might be required should not exceed the actual lost revenue for the private operator. The “Public-Private Transportation Partnership Board should be responsible for adjudicating disagreements about compensation claims.