March 16, 2012
On Wednesday, March 14, the Civic Federation co-hosted a conference on public-private partnerships (also known as “P3s”) with the Federal Reserve Bank of Chicago. Nearly 150 business, civic and government leaders convened to hear experts discuss their view of the future of government cooperation with the private sector to deliver government services and to develop major infrastructure projects. Such developments are common in other parts of the world, but have only recently become more widespread in the United States as state and local governments face constrained revenues and increased demand for services.
The conference began with opening remarks by Dr. Charles Wheelan of the Harris School of Public Policy at the University of Chicago. As a participant in the Chicago Council on Global Affairs’ Emerging Leaders program, Dr. Wheelan spent a year examining privatization with the goal of coming to a conclusion on whether it improves government service quality and efficiency. The Program participants concluded that the benefit of a long-term asset lease was contingent upon successful negotiation of the contract, including factors such as selecting appropriate assets to lease, valuing the assets correctly, using the asset lease proceeds wisely, and including provisions for effective contract monitoring. He noted that it is important for both government officials and the public to realize that privatization is never a substitute for bad government. Looking to the future, Dr. Wheelan told the attendees that he believes great improvements in government services and infrastructure development can be made that are linked to new technologies such as GPS. These technologies create an opportunity for deploying user fees in a nearly costless way, such as tying congestion pricing to car GPS systems. It will be very important for governments to be sure that their constituents understand how any privatization deal will create value for them by saving money or improving service.
The first conference panel discussed managed competition. Managed competition, also called competitive service delivery, requires government employees to compete with the private sector to provide services. The competition is intended to drive down costs by awarding the contract to the bidder able to deliver the highest quality services at the lowest price. The city of Phoenix, Arizona is a leader in this area, having started its managed competition program in 1979. Since that time, many other cities have implemented their own managed competition programs.
After introductions by moderator Rick Mattoon of the Federal Reserve Bank, William Abolt, Chicago District Manager for Shaw Environmental & Infrastructure, Inc., discussed the caveats government officials must consider when designing a managed competition program. Foremost, governments must realize that such programs are not a panacea for their fiscal problems. Success requires high quality of monitoring of outcomes as well as clearly defined and transparent service expectations. It is crucial that politicians not overestimate the savings that can flow from competitive service delivery and be prepared for what may happen if an in-house bid does not win the competition.
Alexandra Holt, Budget Director for the City of Chicago, began her presentation with a short overview of the City’s newly-proposed infrastructure bank. She said that Mayor Emanuel planned to introduce legislation to the City Council that day to establish the bank. The infrastructure bank is intended to help the city and other Chicago governments invest in capital at a time when there is less funding available from the federal government and the State of Illinois. Ms. Holt then described the impetus behind the City of Chicago’s recently-implemented managed competition program for recycling collection, launched in the autumn of 2011. She said that the City faces difficult financial problems and must find ways to reduce costs without cutting key services. Additionally, one of Mayor Emanuel’s goals upon being elected was to expand cart recycling services city-wide, so that savings generated in the recycling program would be used to finance such an expansion. She said Chicago needed to generate immediate savings, which is why they chose not to follow the traditional bidding route, but instead implement direct competition between public and private haulers. She then described other services with clear private sector competitors for which the city may explore managed competition in the future, such as curb and gutter work, tree trimming and towing.
Commissioner Thomas Byrne of the Chicago Department of Streets and Sanitation discussed his experience administering a managed competition program. He said that the City studied the experiences of Charlotte, Phoenix and Indianapolis when creating its program. Additionally, his department worked closely with unions as they developed the goals for the process. Commissioner Byrne presented the details of how the competition between Streets and Sanitation providers and two private firms works, with each participant assigned a certain area of the City from which to collect. He additionally described the daily and weekly reporting system all bidders must follow to demonstrate their progress in achieving benchmarks. He reported that thus far results have been good enough to allow the city to expand cart recycling to an additional 20,000 households later in the spring with 31% savings over the previous quarter.
Edward Hogan of Hogan Marren represented the view of organized labor with regard to managed competition, saying that, contrary to public opinion, organized labor welcomes managed competition. He added that he thinks labor often has lower costs relative to the public sector, especially with regard to healthcare, so they can definitely win contracts in a competitive environment. However, he said that some policy issues are important for governments to consider, such as developing contingency plans in case of disasters and possible mistakes in analysis. Mr. Hogan said that organized labor was eager to work closely with the new administration and he looks forward to continuing monthly meetings between management and labor. Mr. Marren stressed evaluation as the most important factor in a successful managed competition program that is fair to all participants and creates savings for taxpayers.
The second panel focused on several different approaches to infrastructure P3s. Much attention in Chicago and around the country has been focused on the long-term lease of government assets that are not core functions of government, such as the Chicago Skyway and parking meters. While the Skyway deal is generally viewed as successful, the public’s view of the parking meter lease is less positive because it imposed substantial rate hikes and concerns over loss of a government asset. However, the lease of government assets is not the only form of infrastructure public-private partnership available to governments. John Schmidt of Mayer Brown, moderator to the second panel, emphasized this fact to start the discussion, telling attendees that P3s can also involve projects such as building and operating new infrastructure or rebuilding old infrastructure.
Phillip Washington, General Manager of the Denver Regional Transportation District (RTD), gave a detailed overview of the nation’s first P3 involving a major transit line, the Eagle P3, which delivers rail service to Denver International Airport. This project is part of the larger FasTracks venture involving new rail lines, bus rapid transit, Park n’ Ride developments and the renovation of Union Station in Denver. He discussed the variety of financing structures the project is using. For the Eagle P3, the RTD is employing federal funding, private equity, local funds and a Transportation Infrastructure Finance Innovation Act (TIFIA) loan. The bidding process to deliver the Eagle P3 resulted in a winning bid that was $300 million under budget. Mr. Washington then described for attendees the lessons the RTD has learned from its experience, including key insights about focusing on adherence to schedule, performance standards and involving the community in planning and in the workforce.
Expanding the discussion beyond transportation infrastructure, Ted Hamer of KPMG discussed how P3s can build and operate social infrastructure. In other countries around the world, using P3s to build social infrastructure such as schools, universities and hospitals is common because it allows a government to make infrastructure investments more quickly and at a lesser cost. Outside of the defense and aerospace industries, P3s to develop non-transportation infrastructure are almost non-existent in the U.S. The first social infrastructure deal in the United States, the Long Beach, California courthouse, was awarded in 2010. In addition to cost savings, Mr. Hamer said governments should consider P3s in order to transfer risk to the private sector and achieve a measure of budget certainty, among other advantages. He concluded with a checklist for successful P3 projects and emphasized that especially small or extremely large and complex projects have not tended to be successful.
Nathan Flynn of William Blair focused on how government assets are valued within the context of P3 transactions for constructing revenue-generating or non-revenue generating infrastructure. Social infrastructure projects generally use an availability payment structure in which a private entity builds and/or operates an asset and receives a payment stream from the government in return. The value to the government in social infrastructure P3s comes from the shift of some risk from the government to the private sector. To find out whether a P3 would produce savings, an analyst compares the present value of project costs to the present value of a P3 procurement of the asset. For revenue-generating assets, a revenue-monetizing structure will generally be used to value an infrastructure project. In such a project, the private entity that designs, builds, finances, operates and maintains an infrastructure asset will be compensated through a payment stream funded by all or part of the revenue the asset generates. The present value of the asset must therefore include the present value of revenue generated by the asset and additional risk adjustments to compensate for revenue risks, according to a number of variables.
John Schmidt gave some summary remarks about the value the United States Commonwealth of Puerto Rico found in creating a government authority to oversee a range of P3 deals from airports to shipping ports. The cumulative skills such as technical and intellectual capacity that the authority developed as it implemented different P3 projects are crucial to a robust P3 program. The Puerto Rican government’s success in P3 deals has been made possible by strong political support from both the executive and legislative branch.
The keynote speaker of the day was Robert Rivkin, General Counsel for the United States Department of Transportation. Mr. Rivkin discussed global trends in transportation infrastructure and provided an overview of federal transportation policy and its local and regional implications.
On behalf of the Federal Reserve Bank of Chicago and the Civic Federation Board of Directors, many thanks to all of our moderators, panelists and attendees. Thanks also to the staff of the Federal Reserve for their assistance. Panelist presentations are available for download at civicfed.org/events.