Intersections: A Monthly Go-To for Reliable Facts and Analysis About California's Debt, Investments and Economy

Column: P3s and Transportation Infrastructure: Challenges and Opportunities

By Nancy Eaton

Each of California’s 58 counties and 482 incorporated cities has a backlog of transportation infrastructure projects with limited General Fund revenue or municipal bonding capacity to meet them. In previous decades, funding for roads and transit was supported by gas tax revenue. However, there has been a growing gap between revenue and expenditures since gas tax rates are not indexed to inflation and have not increased since the 1990s. At the same time, the consumption of gas per mile travelled has been reduced by greater numbers of hybrid cars and fuel efficient vehicles on the road. A further challenge is the ever-increasing cost of improving and maintaining transportation infrastructure.

As a result of these trends, P3s (public-private partnerships) are often viewed as a solution to transportation funding. In order for P3s to gain acceptance and to function properly, elected officials and municipal staff must diligently and persistently educate taxpayers about the potential benefits of P3s, as well as to consider their risks. These risks include a private partner that fails to meet the terms of the agreement or an agreement that is based on projections (e.g., usage, ridership, toll revenue, etc.) that prove to be optimistic and expected outcomes do not occur.

Fortunately, a best practices advisory for P3s is available from the 18,000-member Government Finance Officers Association (GFOA) to help local governments avoid unnecessary risks ( GFOA’s P3 advisory makes numerous recommendations for elected officials and municipal staff to consider when determining if a P3 agreement is a viable funding option.

One of the main points of consideration, and a frequent topic of debate, is whether the P3 option is actually superior to a public-sector alternative in terms of the costs and risks of construction and financing. In order to make this assessment, according to GFOA’s advisory, it is essential that local government finance officers are involved from the beginning of the P3 process. In addition, it is vital for the municipality or public agency to engage an arms-length, third-party reviewer to prepare an independent analysis. The main benefit of an independent evaluation is to verify or challenge the cost and revenue assumptions that underlie the agreement. Such a rigorous and independent review demands commitment by stakeholders to a high level of accountability and transparency in the P3 process.

Frequently, however, private partners understandably demand confidentiality in order to protect proprietary information. But problems can arise when confidentiality is improperly asserted to prevent disclosure of crucial provisions in the agreement. In fact, the issue of confidentiality and non-disclosure is a key point of contention among P3 skeptics because of suspicion that confidentiality is used as a pretext for concealing information needed to determine if the public is receiving value for money.

Such lack of transparency was a factor in the failure of the SR-91 toll lane P3 in Orange County. When 10 miles of express toll lanes were constructed for $135 million in 1995 under a 35-year concession agreement, it soon became clear that the toll lanes were not sufficient to relieve congestion. But when state and local officials announced plans to add lanes to nearby highways in order to reduce congestion and improve safety, the SR-91 concessionaire filed a lawsuit to prevent the new improvements. The lawsuit cited previously undisclosed, non-compete provisions in the P3 agreement that prohibited the construction of additional capacity. In effect, commuters and taxpayers in the region were unable to improve their highways because doing so might reduce the profits of the SR-91 private partner. Ultimately, a solution was found in 2003 when the Orange County Transportation Authority purchased the SR-91 toll lanes for $207.5 million.

Similarly, in Vancouver, Canada, it was only after winning the concession to build an underground rapid transit line that the private partner unexpectedly announced it would build the system using the more economical cut-and-cover construction method rather than less disruptive tunnel boring. In both the Orange County and Vancouver cases, inadequate transparency created unwelcome surprises for the public and undermined faith in the ability of public officials to negotiate fair and practical agreements.

However, by bringing awareness of financial issues to decision-makers (elected officials, voters), municipal finance staff can help all the stakeholders in the transaction understand tax, revenue, and budget implications in both the short and long term. By clarifying what the public entity will gain (and forfeit) in a P3 agreement, finance staff can aid in ensuring that a P3 will safeguard the interest of taxpayers and not be detrimental to the local government’s long-term financial health.

In spite of their challenges and complications, P3 agreements that are transparent, practical, and fair can serve as a valuable complement to traditional municipal financing.

Nancy Eaton is a member of the Treasurer’s Council of Economic Advisorsand Vice President of Partners for Economic Solutions (PES). The opinions in this article are presented in the spirit of spurring discussion and reflect those of the author and not necessarily the Treasurer, his office or the State of California.