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Public-Private Partnerships Testimony
Written Testimony of Kara Rumsey,
Advocate for the Public Interest Research Group in Michigan
Submitted to the Michigan House and Senate Transportation Committees
Joint Meeting on Public-Private Partnerships
September 15, 2009
I would like to thank Chairwoman Byrnes and Chairman Gilbert for the opportunity to submit this testimony. My name is Kara Rumsey, and I testify on behalf of PIRGIM, the Public Interest Research Group in Michigan. PIRGIM is a statewide, citizen-based, non-profit, non-partisan public interest advocacy group that works to protect consumers and promote democracy.
It is my understanding that Michigan is looking at public-private partnership legislation and is having a hearing with federal officials on the matter. I would like to submit written testimony regarding public-private partnerships on behalf of my organization as well.
Although PIRGIM recognizes that there is a role for both public and private entities in meeting Michigan’s transportation needs, we believe that public-private partnerships should only be used when they provide the best value, efficiency, and safety for the public. Other states have undertaken public-private partnerships of their highways with mixed results. We at PIRGIM have looked at those agreements and their consequences, and based on that research, we have distilled the following six principles.
In order to protect the public interest, public officials must adhere to six basic principles in all public-private partnership agreements:
1. The public should retain control over decisions about transportation planning and management.
Any driver knows how events that take place on one road affect other connecting and alternative routes. For instance, toll levels, maintenance and safety standards, and congestion on major highways have a substantial impact on the number of cars using alternative routes, including local roads and mass transit. Decisions about how to operate and manage these roadways have the effect of creating traffic policy for the state. Public control of key roads is necessary to ensure coherent statewide transportation planning and policy making.
2. The public must receive fair value so future toll revenues are not be sold off at a discount.
Typically the biggest expense for a private road operator is the cost of borrowing upfront money from lenders and investors. But government agencies have big advantages in this area. Governments pay lower interest rates to borrow money than private companies. And public toll roads need not divert toll dollars to cover shareholders’ profits.
By challenging P3 proposals to financially outperform what the public sector could produce with the same borrowing and toll increases, privatization proposals can be evaluated pragmatically. Similarly, when considering any potential deal, it is important to spell out exactly where privatization would be expected to generate increased value. Once the specific public shortcomings have been identified, it will be possible to consider whether the government might outsource those activities separately or whether it would be cost efficient for the public sector to build those capacities in-house.
3. No deal should last longer than 30 years because of uncertainty over future conditions and because the risks of a bad deal grow exponentially over time.
Public officials cannot ensure that privatization contracts will be fair and effective when leases last
for multiple generations. No army of lawyers and accountants can fully anticipate future public needs. Consider the examples of Chicago and Indiana, which have lease deals that will stretch for multiple generations: 99 years and 75 years respectively. Yet it was only 101 years ago that Henry Ford introduced the Model T, and only 53 years ago that Congress created the interstate highway system.
It’s clear that massive, unforeseeable changes will likely take place for transportation technology, networks, demographics, and the distribution of population over time frames like those in Chicago and Indiana. In the face of such uncertainties, Michigan cannot predict its transportation needs, nor the revenue potential of toll roads, well enough to negotiate a deal that fairly allocates risks, dictates policy, or sets a fair price.
4. Contracts should require state-of-the-art maintenance and safety standards instead of statewide minimums.
Any public-private partnership agreement needs to include provisions to ensure public safety and up-to-date maintenance, and the means to enforce those provisions. Private road contracts require ongoing vigilance. Private operators have a monetary incentive to underinvest if such underinvestment will not affect their bottom line. The federal GAO has determined that most states lack the army of expert lawyers and accountants that is necessary to ensure compliance with a contract on terms that protect the public.
5. There must be complete transparency to ensure proper public vetting of P3 proposals.
Transparency can reduce the risk to the public of agreeing to a long-term private toll road deal. All bid documents and contracts should be made freely available to the public, with a narrow definition of confidential or proprietary information, such as specific account numbers. At a minimum, private entities should be required to demonstrate that keeping such information secret is vital to their proprietary interests; the secrecy should be time-limited; and the claimed needs for secrecy should be balanced against the public need for open government.
6. There must be full accountability in which the legislature must approve the terms of a final deal, not just approve that a deal be negotiated.
Given the profound implications of these deals for the state’s economy and transportation policy, legislators should take responsibility for final approval. This is particularly critical in the case of long-term and/or large dollar value deals.
While public-private partnerships may seem like free money, it is clear that these partnerships hold hidden costs. In designing the parameters for public-private partnerships, we hope the legislature will balance the current needs of Michigan against the importance of maintaining public control and the public benefit of our roads in the near and long term.
I thank the committees for the opportunity to submit this testimony.
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