Infrastructure Summer: In bipartisan bill, states must consider private funding for major transit projects

A provision buried in the new bipartisan infrastructure bill could give private capital a foothold in transit projects.

According to a case summary, which the Senate voted to begin debating on Wednesday, the article requires cities and states seeking federal appropriation for large-scale transportation projects to consider private funding. Lawmakers should commission a “value for money” (VFM) analysis to assess whether taxpayers would be better served by using a public-private partnership (P3), in which a private lender commits upfront capital in exchange for the right to pocketing, for example, revenue from toll roads.

“Assessing the value of the P3 model is an important step that is not always taken,” reads the executive summary on page 55. “A VFM ensures that states and localities give the P3 model a fair chance.”

The requirement would not extend to utilities such as the water, sewer and power sectors, although private equity firms have prowled around these projects ahead of planned expenses. But that would apply to transportation projects over $750 million, potentially opening up the development of highways, airports and mass transit, where cash-strapped localities have recently turned to private financing. .

It’s unclear what functional impact this provision will have, said Isaac Boltansky, director of policy research at Compass Point Research and Trading, which serves large institutional investors. But the inclusion of the VFM requirement, along with a handful of pilot programs to boost P3s, signals that despite the loss of more direct funding for privatization, Republicans still hope to make inroads in public policy. financial-friendly infrastructure that they have been looking for for a long time. .

VALUE FOR MONEY STUDIES assess whether it is worth using private capital for public works.

In most cases, an objective analysis would say no, because tax-exempt public funding for infrastructure is usually cheaper.

Privatizing infrastructure to raise capital is often bad business, economists at MIT and Harvard warned in a Aspen Institute Study released earlier this month. This option is “attractive only when the private sector can obtain funds on more favorable terms than the public sector. But the US Treasury is borrowing at a particularly low rate and most state governments also have excellent bond ratings.

Proponents of P3s point to government inefficiencies, arguing that public projects overrun schedules and private companies operate higher quality assets while cutting costs. They add that public infrastructure spending is plagued by a “feast and famine” cycle, making money unpredictable and subject to political whims. The private market could offer a more steady decline in funds, they say.

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But private ownership does not necessarily translate to greater efficiency. Instead, the privatization of municipal assets often leads to skyrocketing costs and poor maintenance, such as in Chicago, where Mayors Richard M. Daley and Rahm Emanuel flagellated municipal revenue-generating property private managers. Moreover, the cost savings realized by the private market are often at odds with other objectives, such as the use of union labor or the maintenance of public control over public assets.

Proponents of public infrastructure do not always oppose VFM studies—in fact, they have sometimes used the analyzes to resist privatization. Currently, Maryland lawmakers are lobby state transportation officials to produce a VFM study explaining why they chose private sector funding to add toll lanes to the Capital Beltway and I-270.

The Maryland Transit Agency and the private company courting its highway both conduct VFMs. A similar dispute in Indianapolis, where the sides produced dueling reports over whether to privatize, led to a victory for advocates of public stewardship.

But VFMs are often biased to favor the private sector.

“It depends on who pays the consultant,” said Aaron Klein, an infrastructure policy expert at the Brookings Institution. Companies that want to participate in P3s frequently hire accounting and engineering consultants like PricewaterhouseCoopers or KPMG to assess the merits of a proposal. The VFM requirement could represent a big salary for these consultants, known for its high margins for government work.

The California high-speed train, the poster child for management consultant capture, was more than $44 billion over budget and a dozen years behind schedule.

“Comprehensive project appraisal is extremely information-intensive and can be manipulated,” warns the Aspen Institute study.

One way to select the best value-for-money projects would be to use a national infrastructure bank, a proposal President Obama’s infrastructure team championed unsuccessfully. This would allow some national coordination of expenditure policy. But a $20 billion “infrastructure funding authority” meant to earmark federal funds for high-return projects was dropped from the latest deal, leaving states to conduct cost-benefit analysis. (Some proponents have argued that the version of the proposed infrastructure bank, proposed by Democratic Senator Mark Warner of Virginia, would have distorted in favor of PPPs.)

Now management consultants see an opening to insinuate themselves into local governments. “It’s about the consultant assistance program,” said a former Department of Transport official with experience in similar deals, adding that management consulting firms lobbied not just for VFM requirements, like that of the last bipartite agreement, but also for special funding. reserved for consultants.

GREAT CONFIDENCE IN MANAGEMENT consultants explain why risk assessments are often questionable and geared towards private companies, according to a 2015 VFM Audit in Ontario, Canada, a province that has relied heavily on public-private agreements.

VFMs make preliminary assumptions about public and private funding risk. According to the Ontario study, these assumptions are often based on the discretion and personal judgment – ​​not on empirical data – of external consultants who simply assume that public funding carries higher risks.

Studies often assume that the private sector will bear risks that it does not bear once the agreements are signed.

For example, according to the Ontario study, a VFM study of hospital financing assumed that the contractor would bear the risk of future design changes. But in the final agreement, the contractor was not responsible for the design of the project. Instead, the contractor was actually paid $2.3 million after the original hospital design was altered.

The review also found that analysts assumed a higher cost to public procurement, based on the biased assumption that public assets would be mismanaged.

So while the use of VFMs is not inherently bad, critics of privatization say, the wording of the summary of the infrastructure bill is a lure for management consultants and private capital. The summary presents VFMs as a solution to “option P3 underutilization”.

Progressive groups have mobilized against privatization in federal spending, and the absence of larger cash incentives is a win for groups like Food & Water Watch, In the Public Interest and the Sunrise Movement. What’s left for PPPs includes some extensions of tax-free “private activity bonds” for transport, broadband and carbon capture projects, and a modest $100 million in “technical assistance grants.” to help cities engage in privatization programs like “asset recycling”. which consists of selling old assets to buy new ones.

While the Senate voted to open debate on the $550 billion bipartisan bill, the end product could be significantly different. But even without serious incentives for privatization in the bill, P3s could still thrive amid a gap between financial resources and infrastructure needs.

The overall physical infrastructure spending in the bill is low, about $373 billion below President Biden’s original proposal. Some say the president’s insistence on payments — and subsequent refusal to tax at levels consistent with spending needs — gives cities and states no choice but to rely on the private sector.

“America’s inability to have the political courage that our parents and grandparents had, to actually pay for the infrastructure we use, is deeply disheartening. But being politically upset that the public isn’t willing to fund more infrastructure shouldn’t be confused with the need to conduct a thorough analysis,” Klein, the Brookings analyst, told the Perspective.

He pointed out that Biden had refused to pursue certain large payments, such as raise gas tax.

The decision to enter into a bipartisan agreement, Klein said, “makes us more dependent on the private sector to help build public infrastructure. And the private sector is going to want something in return for its contribution.

This article is part of our ongoing series on sustainable mobility, transport and climate.

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