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In Bipartisan Bill, States Must Consider Private Financing for Major
Transit Projects

A provision in the latest deal would require cities and states building
transit to commission a study, usually conducted by management
consultants, giving private finance 'a fair shot.'

 

New express lanes sit empty alongside heavy traffic on the Capital
Beltway near Tysons Corner, Virginia, in November 2012, nearing the
completion of a decade-long highway expansion project. (Cliff Owen/AP
Photo)

 

****

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

According to a summary of the deal
,
which the Senate voted to start debating on Wednesday, the item requires
cities and states that apply for federal credit for large-scale
transportation projects to consider private financing. Lawmakers would
have to commission a "Value for Money" (VFM) analysis to evaluate
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 pocket, for example, toll road revenue.

"Evaluating the value of the P3 model is an important step that is not
always taken," reads the summary on page 55. "A VFM ensures that states
and localities are giving the P3 model a fair shot."

The requirement would not extend to public utilities like the water,
sewage, and power sectors, though private equity firms have prowled
around those projects

ahead of anticipated spending. But it would apply to transportation
projects over $750 million, potentially opening up highway, airport, and
mass transit development, where cash-strapped localities have lately
turned to private financing.

It's unclear how much 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, as well as a handful of pilot programs
to boost P3s, signals that despite losing out on more direct funding for
privatization, Republicans are still hoping to make inroads on the
financier-friendly infrastructure policy they have long sought.

VALUE FOR MONEY STUDIES weigh whether it's worth using private capital
for public works.

In most cases, an objective analysis would say no, as public tax-exempt
financing for infrastructure is typically cheaper.

Privatizing infrastructure to raise capital is often a bad deal, MIT and
Harvard economists warned in an Aspen Institute study

published earlier this month. That option is "only attractive when the
private sector can secure funds on more favorable terms than the public
sector. But the U.S. Treasury borrows at a particularly low rate and
most state governments also have excellent bond ratings."

Proponents of P3s point to inefficiencies in government, arguing that
public projects overrun schedules and private firms operate assets at
higher quality 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 steadier drip of funds, they say.

**Read all of our infrastructure coverage here**

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But private ownership does not necessarily translate into higher
efficiency. Instead, privatization of municipal assets often leads to
soaring costs and poor upkeep, as in Chicago, where mayors Richard M.
Daley and Rahm Emanuel flogged off revenue-generating city property
to private
managers. Moreover, cost savings achieved by the private market are
often at odds with other goals, like relying on union labor, or
maintaining public control over public assets.

Advocates of publicly owned infrastructure don't always oppose VFM
studies-in fact, they have occasionally used the analyses to resist
privatization. Currently, lawmakers in Maryland are pressuring state
transportation officials

to produce a VFM study explaining why they have chosen private-sector
financing to add toll lanes to the Capital Beltway and I-270.

Maryland's transportation agency and the private firm courting its
highway are both conducting VFMs. A similar dispute in Indianapolis,
where parties produced dueling reports on the advisability of
privatization, led to a win for advocates of public stewardship.

But VFMs are often skewed to favor the private sector.

"It depends who's paying the consultant," said Aaron Klein, an
infrastructure policy expert at the Brookings Institution. Firms looking
to enter P3s frequently hire accounting and engineering consultancies
like PricewaterhouseCoopers or KPMG to evaluate the merits of a
proposal. The VFM requirement could represent a big payday for these
consultants, known for steep markups

for government work.

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

"Comprehensive project evaluation is enormously information-intensive
and can be gamed," the Aspen Institute study cautions.

One way to select the best bang-for-buck projects would be with a
national infrastructure bank, a proposal President Obama's
infrastructure team unsuccessfully championed. That would allow for some
national coordination over spending policy. But a $20 billion
"infrastructure financing authority" meant to aim federal cash at
high-benefit projects was cut from the latest deal, leaving it up to
states to conduct cost-benefit analysis. (Some advocates argued that the
version of the infrastructure bank on offer, proposed by Democratic Sen.
Mark Warner of Virginia, would have itself skewed

in favor of P3s.)

Now, management consultants see an opening to insinuate themselves into
local governments. 
"This is the consultants' support package," said
a former Department of Transportation official with experience in
similar transactions, adding that management consulting firms have
pushed not only for VFM requirements, like the one in the latest
bipartisan deal, but also for special funding set aside for consultants.

[link removed]

HEAVY RELIANCE ON MANAGEMENT consultants helps explain why risk
assessments are often dubious and slanted toward private firms,
according to a 2015 audit of VFMs

in Ontario, Canada, a province that has leaned heavily on public-private
agreements.

VFMs make preliminary assumptions about the risk of public and private
financing. According to the Ontario study, those assumptions are
frequently based on the discretion and personal judgment-not empirical
data-of external consultants who simply assume public financing
carries higher risks.

The studies often assume that the private sector will bear risks it does
not end up bearing, once deals are inked.

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

The review also found that analysts assumed a higher cost for public
procurement, on the biased assumption that public assets would be poorly
managed.

So while use of VFMs isn't inherently bad, critics of privatization
say, the language in the infrastructure bill summary is an enticement to
management consultants and private capital. The summary pitches VFMs as
a solution to "underutilization of the P3 option."

Progressive groups have rallied against privatization

in federal spending, and the absence of bigger cash incentives is a win
for groups like Food & Water Watch, In the Public Interest, and the
Sunrise Movement. What's left for P3s includes some expansions of
tax-free "private activity bonds" for transportation, broadband, and
carbon capture projects, and a modest $100 million in "technical
assistance grants" to help cities engage in privatization schemes like
"asset recycling," which involves selling off old assets to pay for new
ones.

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

Overall spending on physical infrastructure in the bill is low, around
$373 billion below President Biden's initial proposal. Some say the
president's insistence on pay-fors-and subsequent refusal to tax at
levels matching spending needs-gives cities and states little 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're
using, is deeply disheartening. But being politically upset that the
public isn't willing to fund more infrastructure should not be
confused with the necessity of conducting thorough analysis," Klein, the
Brookings analyst, told the

**Prospect**.

He pointed out that Biden declined to pursue some major pay-fors, like
raising the gas tax
.

The decision to strike a bipartisan deal, Klein said, "leaves us more
dependent on the private sector to contribute to building public
infrastructure. And the private sector is going to want something in
return for their contribution."

 

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