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Tuesday, March 24, 2009

Hey, Private Sector, Wanna Buy a Bridge?

By Dave Demerjian


The Chicago Skyway was privatized in 2005 when the city leased the toll road to an international consortium for 99 years. It was the nation's first such deal, but infrastructure needs may make privatization much more common.
Photo: Ted S. Warren/AP

If Florida transportation officials have their way, the state will soon lease a 78-mile toll road across the Everglades to a private firm for 50 years, in a deal that could make hundreds of millions of dollars for both sides. Advocates hail it as a windfall that the state can invest in other projects, but critics say no good will come from a shortsighted a plan to make a quick buck.

"You’re talking about taking public assets, paid for with public dollars, and selling them off," says Gina Downs, director of the Citizen's Transportation Coalition. The group opposes the plan to lease the stretch of Interstate 75 known as Alligator Alley. "If governments start leasing assets to plug up budget deficits, pretty soon they'll be selling off anything and everything they can get their hands on. It's a slippery slope."

Such debates will grow more common as states increasingly turn public works projects over to the corporate sector, because they can't afford to do the work. President Barack Obama promises to spend more than $100 billion overhauling the nation's dilapidated roads, bridges and other vital infrastructure, but that gigantic sum is only a fraction of what's needed to do the job.

The real cost of modernizing the country's infrastructure, says the American Society of Civil Engineers, exceeds $2.2 trillion — an overwhelming figure. Cities and states increasingly are inviting private firms to manage assets these governments can no longer afford and build projects they can't finance. More than half of the states are considering public-private partnerships to get things done, following an example set by European countries that have turned over airports, highways, waterworks and other critical infrastructure to the corporate sector.

Proponents say such partnerships allow the government to generate cash and free itself from the burden of improving and maintaining expensive and crumbling public assets. Critics argue the trend places profits ahead of safety, service and accountability.

Several high-profile public-private partnerships have been forged in the past year. Chicago privatized the regional Midway Airport. A corporate consortium joined Virginia to design, build and operate $1.9 billion of high-occupancy lanes on a 14-mile stretch of the Capital Beltway. Smaller deals have helped many cities and towns build schools, parking lots and other projects.

The global financial meltdown has slowed things down, some experts say, but such partnerships will almost certainly grow more common. There are too many projects and too few dollars for it to be any other way.

"The needs are enormous, way beyond the ability of federal, state and local governments to cover them," says Richard Norment, executive director of the National Council for Public-Private Partnerships. "PPPs are a way for the government to amplify the impact of the money it plans to spend."

Americans have traditionally been leery of entrusting corporations to do work historically reserved for the government, which is why the United States lags behind the rest of the world in turning to public-private partnerships. London's Heathrow Airport, for example, is privately run, as is Canada’s air-traffic-control system. The corporate sector has built 3,400 miles of highway in France alone.

It’s a growing trend around the world, and institutions like the Carlyle Group, Credit Suisse, Goldman Sachs and other firms reportedly have amassed some $250 billion to invest in infrastructure projects in the United States and elsewhere. If they spent every cent of it here, it still wouldn't be enough.

America's infrastructure shortcomings are simply too staggering. One in every four bridges in the country is deficient or "functionally obsolete," according to the American Association of State Highway Transportation Officials. A study by Deloitte suggests poorly maintained roads contribute to more than one-third of the nation’s auto fatalities. The nation's water-treatment plants leak as much as 10 billion gallons of raw sewage annually, the Environmental Protection Agency reports. The list goes on.

The American Society of Civil Engineers gave the nation's critical networks a D on its most recent Report Card for American Infrastructure. The group's estimate that we need $2.2 trillion over the next five years to bring everything up to snuff is up from its $1.6 trillion estimate in 2005.

It's impossible to say what our crumbling infrastructure costs the economy, but lousy roads cost motorists $67 billion a year in repairs and operating costs. The National Education Association estimates the nation's schools need $322 billion in repairs and upgrades.

"Failing infrastructure cannot support a healthy economy," says D. Wayne Klotz, the society's president. "We have under-invested for decades, and we're getting hit with the hard reality that ignoring a problem doesn’t make it go away. The longer we wait to close the investment gap, the more expensive it will become."

Public-private partnerships attempt to close the gap. Proponents call them mutually beneficial deals that allow the government to get things built with minimal capital or risk. The companies recoup their investments through tolls, fees or leasing the infrastructure back to the government. Such partnerships typically take one of two forms.

Green-field projects bring the public and private sectors together for new projects. A private group that included Carnival Cruises and Royal Caribbean Cruise lines chipped in to build a cruise-ship terminal in Galveston, Texas. The city of Tampa, Florida, paid American Water-Pridesa $29 million in 2004 to finish construction on a monumentally over-budget $158 million desalination plant, with the private partner assuming financial responsibility for the project.

Such deals have lead to projects like a 47-mile toll road in Denver, the Hiawatha Light Rail Transit system in Minneapolis and the Narrows Bridge in Tacoma, Washington. The city of Fredricksburg, Virginia, recently wrapped up $85 million worth of new green-field projects that include two schools and a parking lot. Assistant city manager Bevery Cameron said the deals allowed the projects to be finished in less time, and with fewer hassles, than if the city had gone it alone.

Brown-field projects are more controversial, because they involve turning over existing public assets, such as Alligator Alley, to the private sector. The faltering economy has slowed Florida's plan, but the state transportation department has set a May 8 deadline for bids. It remains to be seen how much the state might get, but similar deals in other states have proven lucrative.

An international consortium led by the Spanish firm Cintra and the Australian company Macquarie Infrastructure Group paid $1.8 billion four years ago to run the Chicago Skyway for 99 years. They struck a $3.8 billion deal in 2006 to lease the Indiana Tollway for 75 years, one year after Macquarie picked up a controlling interest in the company running the Dulles Greenway in Virginia for $533 million. The Macquarie group reportedly has netted $74.7 million in advisory and debt-arrangement fees on the three roads.

Consortium spokesman Matt Pierce says the two firms have widened toll plazas and improved traffic flow on the Indiana and Chicago tollways and says they will spend $4.5 billion on maintenance and upgrades over the course of the leases. Because the lease agreements contain specific limits on toll increases, the private group shoulders the financial burden if traffic fails to meet projections — something that’s entirely likely, given that traffic on the tollways has slumped along with the economy. Macquarie's funding reportedly has dried up, the U.S. roads it purchased are having trouble repaying their debts, and last month the company's stock hit its lowest level since 1999.

Other big brown-field partnerships include a 20-year, $1.5 billion deal between Indianapolis and Veolia Water to run the city’s water system, and Chevron-Texaco's leasing land at Fort Detrick, Maryland, to build a power plant. The city of Tampa pays American Water a monthly fee to operate the desalination plant it helped build, but the company refuses to disclose details of the deal. But they can be very lucrative.

Proponents say such projects bring free-market efficiency and innovation to public works. They provide governments with much needed cash while letting them off the hook for building, maintaining, and improving expensive infrastructure. Freed from such obligations, the argument goes, the government can focus on tasks like national security.

But critics argue that although these projects can bring cities and states a quick jolt of cash, they may do more harm than good in the long run. Nathan Newman, director of policy at the Progressive States Network, says that without a crystal ball, it's impossible for the governments to know the real worth of the assets they are selling off.

"Unless you know what kind of revenue stream an asset will generate in the future, it is tough to know what you're giving up when you turn it over to a private firm for 99 years," he says. He adds that private firms lack accountability when it comes to relations with labor unions and employees.

Mike Joyce, director of legislative affairs for the Owner Operator Drivers Association, a trade group representing truck drivers, is concerned that private firms will place profits above safety.

"What are these private companies doing to ensure they make a profit?" Joyce says. "Are they cutting corners to make sure the numbers work?"

No, says Norment, head of the National Council for Public-Private Partnerships. Private firms have a vested interest in maintaining — and improving — the infrastructure they manage, he says, because "companies competing in a market environment must innovate to survive."

He points to the Chicago Skyway as an example, noting that the consortium drags what is essentially a giant magnet across the road each morning to remove metal debris, reducing the incidence of flat tires and increasing safety. "The public sector never would have come up with this," says Norment. "They’re just not in the business of innovating."

There is still fierce opposition to some PPPs. Florida's proposal has met with resistance among the public and in the state capital, and last year Pennsylvania lawmakers rejected a proposal to privatize a major highway. But with more than half of the states considering such deals, they almost inevitably will gain broader acceptance among policymakers and the public.

"The message is getting out," says Norment. "As misconceptions about these programs are addressed, they'll continue expanding in the U.S."

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