NCSL 2008 Fall Forum Meeting Summary on PPPs
NCSL Fall Forum
December 11, 2008
Steering Committee Members
- Co-Chair (D): Representative Terri Austin, Indiana
- Co-Chair (R): Representative Linda Harper-Brown, Texas
- Staff Chair: Fred Lewis, West Virginia
- Senator Steven Baddour, Massachusetts
- Senator Scott Dibble, Minnesota
- Senator Pamela Gorman, Arizona
- Senator Mary Margaret Haugen, Washington
- Senator Bruce Starr, Oregon
Legislative Staff Members
- Karl Spock, Texas Sunset Commission
- Kate Wade, Wisconsin Audit Bureau
- Senator Dennis Nolan, Nevada, Chair--NCSL Transportation Committee
- Eric Bugaile, Pennsylvania, Staff Chair--NCSL Transportation Committee
- AAA--Justin McNaull
- American Federation of State, County and Municipal Employees (AFSCME)--Dennis Houlihan
- American Road Transportation and Road Builders Association (ARTBA)--Allan Freedman and Bill Toohey
- American Trucking Association (ATA)--Ted Scott
- Americans for Transportation Mobility Coalition (U.S. Chamber of Commerce)--Janet Kavinoky
- Macquarie Capital--Geoff Segal
- The Reason Foundation--Leonard Gilroy
- Transurban--Kristie Helmick, Bill Berry
- Bob Johns, University of Minnesota, Center for Transportation Studies
- Caroline Carlson, Jim Reed, Nick Farber-- Denver
- Molly Ramsdell, Paul Snow-- Washington, D.C.
The meeting was opened by co-chairs Rep. Terri Austin and Rep. Linda Harper-Brown (TX). The purpose of the PPP Partners Project initiated by NCSL was reiterated by Rep. Austin.
- This project is designed to link legislators, legislative staff, and interested private sector entities in an effort to analyze legislators’ needs and to develop nonpartisan, balanced, and useful materials to aid legislators’ decision-making relative to PPPs, both in their respective states and as they consider state-federal relationships. The PPP steering committee will meet at each scheduled NCSL meeting. The proposed activities of the project include educational sessions on PPPs for the NCSL Transportation Committee.
Introductions were made around the table.
A discussion of project activities and deliverables ensued. Among the items agreed to by the steering committee included the following:
- Use the project web site as a key method of disseminating information. See http://www.ncsl.org/standcomm/sctran/P3Project.htm.
- Consider a survey of state legislators to identify informational needs on this topic.
- Make contact with the American Association of State Highway and Transportation Officials (AASHTO), the American Public Transportation Association (APTA), the Urban Land Institute (ULI), the Federal Transit Administration (FTA), the Federal Highway Administration (FHWA) and others as project resources.
- Assemble a bibliography of resources.
- Examine the soon to be released Transportation Research Board survey of public interest issues on transportation PPPs.
- Create a speaker's bureau of legislators with expertise on PPPs to speak to colleagues on a bipartisan basis in other states.
- Develop a short video outlining the process and practices recommended by this group in evaluating and monitoring PPPs.
- Any toolkit devised by the group should be very robust and consider including a decision matrix and an identification of model programs.
An open discussion followed. Allen Freedman of ARTBA stressed that the work of the group should be clear on what PPPs can and cannot do. He said much of the focus has been on monetization but that there are many other varieties of PPPs. Better leveraging of public dollars is a key benefit of PPPs. Senator Haugen mentioned that a PPP would be used in developing a parking facility for the Washington State ferry system. Senator Baddour said that Massachusetts is examining PPPs and that the support of unions was critical in getting such legislation passed. Dennis Houlihan of AFSCME said unions were concerned about displacement of jobs, but that agreements have been made that satisfy affected unions and he cited the extensive labor agreement that was part of the Midway Airport privatization in Chicago.
Senator Dockery expressed concern that the Florida DOT has not done an adequate job in overseeing PPPs in Florida and she wants the group to develop some oversight guidance. She also stated that better and more precise definitions of the various types of PPPs was needed.
Discussion then centered on the thought that PPPs could help states facing budget shortfalls and that legislatures may be more open to PPPs in a difficult economic climate. The work of this group could be very timely in this regard. Justin McNaull of AAA said that PPPs presented both an opportunity and a concern and that we should be wary of expediency in making PPP decisions. Senator Dibble stated he was an interested skeptic and that he would be cautious about a too-quick solution. He cited information from ULI that billions of dollars could be tapped to fund PPPs. He wants to ensure that this group come out with a dispassionate, objective analysis of the different views along with a realistic assessment of the political upsides and downsides.
Representative Austin agreed that the project should spell out the pros and cons of PPPs. Further, the appropriate legislative role needs to be identified. She requested that some existing lease agreements be examined to gain insight on this question. Looking at international models was mentioned by Len Gilroy of Reason. Representative Harper-Brown expressed that a key element is knowledge of the continuing costs of embarking on a PPP. It could be that assessing a toll could be more costly to consumers than raising the gas tax as an alternative. John Lynch said that ATA believed the fuel tax to be a reasonable way to pays for roads and that they would oppose the leasing of existing assets. However, new construction using PPPs would be ok.
An extensive discussion of the funding situation for transportation followed with mention of the declining value of gas tax revenue and the need to raise it, the problems of diversion of gas tax revenue to other purposes, the uses of motor vehicle sales taxes, tolls, the vehicle miles traveled fee idea and others. Senator Murphy of Minnesota said that more focus needs to be put on mass transit. Len Gilroy recommended the group hear from the Surface Transportation Financing Commission which will be releasing its recommendations in February. Essentially they will say that the current funding system is broken and that new mechanisms are necessary. Representative Austin wrapped up the open discussion by recommending that the group be briefed on the funding situation in general and that the group spend an entire day at the next meeting to get a full overview of the issue and a complete discussion of the issues.
The educational portion of the meeting followed. Steve Cohen of the U.S. Government Accountability Office presented on a recent study by GAO on PPPs.
He said it is a rapidly shifting landscape--the current economic turmoil is changing things. The assumptions made in evaluating a PPP project are vital. In terms of protecting the public interest, he mentioned several techniques:
- Asset performance measures,
- Financial provisions like toll limits and revenue sharing with the state,
- Accountability measures--oversight and monitoring, transparency,
- Flexible non-compete provisions.
In Australia and the United Kingdom, "public interest tests" are employed to protect the public interest. In Harris County, Texas a "value for money" analysis was conducted. Establishing public sector corporations to implement PPPs is another option.
He said federal involvement in PPPs was limited due to no involvement of federal money, but that US DOT has been very supportive of PPPs. SEP-15 is a waiver process that FHWA administers to allow states to waive certain regulations to get PPPs going and Oregon and Texas have used this process.
He concluded by saying that PPPs show promise, but are not panaceas. The benefits are only potential benefits; they are not assured. He believes that there is a need to identify the national interest in PPPs.
Mike Bartolotta of Southwest Financial, an advisor to the Harris County, Texas Toll Authority spoke next on his assessment of the current market climate for PPPs. He said privatization is alive and well particularly with municipal wi-fi and parking to name a couple. Even with the financial disarray deals are still happening. In the case of the Harris County toll road, which was successfully leased, the management knew it had a valuable resource, which was confirmed by an asset value study. He said facilities fall into different classes based on age, location, and electronic v. manual toll collection. He went on to talk of the various factors to be considered in structuring a PPP arrangement such as the "vintage" of the facility, the type of revenues involved (impact fees, tax increment financing, cell tower lease revenue), land acquisition costs, noise abatement, snow removal, etc.
He said the cycles of the capital markets are not predictable now. This impacts on the decision to take money upfront or over time. A key question is: how do you account for risk into the future? A "fair value" study needs to be done to determine this. Measuring the key metrics is vital. In closing, he said that PPPs are an important piece of any sustainable capital improvement program.
Next, David Levy of Goldman Sachs spoke on the forms of the market where funding for transportation projects can be found. Globally, markets are not functioning well and no one knows what is on the other side, he said.
The three forms of the market are:
- Equity--value found in managed funds, pension funds and private equity funds. Possibly $90 billion is currently available.
- Bank--standard loans.
- Capital--funding from bonds.
Deals going forward will be smaller chunks, include a bigger share of equity, and require a broader array of equity sources. For the right deal, lots of equity would be available, but states need to think about the type of projects that are enticing to the private market because equity investors are moving away from funding solely roads.. Recent deals include Midway airport which was all equity and no debt and parking structures in Chicago. He said the failure of the Pennsylvania Turnpike deal opens up opportunities for other roads since PA was so large--$7 billion in bank debt and $5.9 billion in equity. He said equity investors in projects generally want an exit strategy in 10-12 years. Equity investors are trying to diversify, getting away from roads. "Equity always follows leverage."
For the bank market, the credit crunch has pretty much shut down the issuance of new loans, except perhaps through syndicating. There are lots of additional disclosure requirements now. The bailout does not seem to be helping much. With the problems with equity and bank, the capital markets are more attractive. Increasingly important will be private activity bonds and TIFIA. In conclusion, because of the recession, risk is being much more carefully studied in every opportunity that investors are examining and deals are slow to form.
After some Q & A, the meeting closed with agreement to next meet in April 2009 as part of the NCSL Spring Forum. The group will meet for a full day to get a "PPP 101" from a variety of experts on the issues.
Meeting summary prepared by Jim Reed, NCSL staff. Questions or comments can be sent to Jim Reed.