SF: From my testimony to a Joint meeting of the State House and Senate Transportation Committee December 2013: Senators and Representatives of the Commonwealth; I want to express my gratitude for being allowed to speak with you today. I know that the Commonwealth will be wrestling with very difficult budgetary decisions in the upcoming session of the Legislature. So when someone says, that there is a way to do the good things that government was intended to do such as build large transportation projects such as bridges without huge expenditures or even having to guarantee this with government money; I know that they have your ear. I am Steve Frank, Vice Mayor of the City of Covington KY; the Fifth Largest City in the Commonwealth. We are also the largest city in the Second most Populated area of the Commonwealth, Northern Kentucky. Covington is not a rich city. We may be surrounded by them, but our city has a median family income of only $34,000 if you include transfer payments. Financially, we are about on a par with Pike or Muhlenberg County. Covington is also Ground Zero for one of the largest planned infrastructure projects in the nation, the construction of a second Brent Spence Bridge and a widening of the infamous “Cut in the Hill”. In Ohio there will be a major rework of their “spaghetti junction”, including massive reworking of Ft. Washington Way, the Western Hills Viaduct, and the approach to Cincinnati’s downtown corridor that radically alters Covington’s access to the Interstate Highway System. Most of this work actually occurs on the Ohio side of the Bridge. Frankly, what is going on is that Cincinnati suburbs without having to pay tolls will get easier access to their downtown and goods will flow to their growth area in Warren and Butler Counties while Northern Kentucky hamstrings itself and has to pay for the privilege. Fully 65% of the traffic crossing the Brent Spence originates in Northern Kentucky; much of it because Ohio is where the jobs are. All of this work has been proposed to be combined into a single Public Private Partnership to be operated by an authority created by the State of Ohio and the Commonwealth of Kentucky. To say that Covington does not have a vested interest in the outcome of these hearings would be more than a mild understatement. That said; I am here today to provide useful, unbiased testimony about the nature and pitfalls of Public Private Partnerships and their use in infrastructure build outs. My additional back ground to be able to speak on this topic before you is that as a Day Job; I am a Certified Financial Planner and Investment Banker at Wells Fargo with 28 years of experience where I have helped put together north of a half a billion dollars of Investment Banking transactions . I have also worked to a limited degree in the area of Public Private Partnerships; not enough to in any way call myself an expert on the subject, but current enough with trends in public finance to have more than an educated opinion on this subject. In addition to my professional back ground I am on the Board of Advisors of the Northern Kentucky Chamber of Commerce where I have served on their Infrastructure and Transportation Committee for over eight years. Not everyone associated with the Northern Kentucky Chamber is in favor of utilizing Full Design – Build – Finance – Operate - Maintain Let me begin by quoting a study done by the Brookings Institution and Yale University: cowles.econ.yale.edu/~engel/pubs/efg_revamp.pdf “Public-private partnerships are often touted as a “best-of-both-worlds” alternative to public provision and privatization. But in practice, they have been dogged by contract design problems, waste, and unrealistic expectations. Governments sometimes opt for a public-private partnership, for example, because they mistakenly believe that it offers a way to finance infrastructure without adding to the public debt. In other cases, contract renegotiations have resulted in excessive costs for taxpayers or losses for private firms. This paper proposes a series of best practices that communities can undertake to ensure that public-private partnerships provide public value. These include choosing partnerships for the right reasons; relying on flexible-term Present- Value-of-Revenue (PVR) contracts; including partnerships on government balance sheets; and implementing good governance practices. Enacting these reforms will help maximize taxpayer value and reduce risks for each party involved in a public-private partnership.” My own words now: While there is evidence that Public Private Partnerships can be useful, they are not universally good and come in many flavors. There are times when some aspects of Public Private Partnerships are in the public’s interest and other times when discretion should be exercised. Further, I would make a distinction between the use of P3 legislation for large scale transportation projects and other uses such as in the construction of real estate properties. I will focus my testimony strictly to the use of P3 legislation transportation issues. Whatever your body ultimately decides, I suggest entering into this subject with much caution. I thank you again for taking the time to learn more about what is truly a very deep subject. I will get this out front; we in Northern Kentucky prefer that the Legislature take considerable time before adopting any Public Private Partnership Legislation. In a word, please take time to learn from other’s mistakes. That is approach that the State of New York is taking: osc.state.ny.us/reports/infrastructure/p3_report_2013.pdf Specifically, The Comptroller for the State of New York, Thomas P. DiNapoli, as recently as this June of this year has outlined the case for why it is wise for New York State to tread carefully in this area. In very bold relief, Comptroller DiNapoli states, “Private financing does not alter the fact that the entire cost of public infrastructure will always be borne by the public”. My words again; Public Private Partnerships that are more than simple Design Build models, are nothing more than a derivative contract where risk is divided among a government and private parties for a price. The risks however are never eliminated nor are risks reduced for one party without creating risks for other parties. Many times those risks were never expected at the time contracts are entered into. As the Comptroller further warns; “At its best, private investment can save the public money and improve services in the long run. At worst, it can burden the public with costs that could have been avoided, while degrading the quality of or limiting access to essential services.” As you consider your options in writing any Public Private Partnership Legislation please keep in mind Comptroller DiNapoli’s admonition to keep tight legislative reign on their use requiring strict approval and oversight by the Legislature itself for each type and time when a specific form of Public Private Partnerships is permitted: quoting again, “Yet to date, legislatures in these states (meaning those who have already enacted 3P legislation) have not granted unilateral authority to any agency to pursue P3’s. Typically, P3 authorizations in other states require either explicit legislative approval or oversight by an independent planning board of some type. Nearly all states with P3 programs have also established other limits on the use of P3’s.” Given the risks which I’ll address more fully in a moment, consider this reality. Financing infrastructure through municipal bonds is normally less expensive means of finance than the cost of private equity from private operators of public right of ways. There can be no savings in this area. We also live in a world where because of Davis Bacon and Prevailing Wage laws; Private Partners cannot provide cheaper Labor. If they cannot provide either cheaper Labor or Capital, what can they bring? Perhaps more streamlined project management or other intellectual attributes. However what in this equation justifies an ongoing stream of income? In the private sector this is called hiring a consultant. Cutting a private developer in might be a reasonable proposition if they were more effective operators; but there is scant evidence of that in the operation of public toll roads. Indeed the literature is full of references to operating and maintenance troubles, litigation, corruption and bankruptcy. P3’s do not always do the Design – Build component as well as advertised. In fact the Lead project Manager for the Brent Spence Bridge is none other than Parsons Brinkerhoff, the firm that gave Boston its Big Dig fiasco where the project to bury Boston’s main transportation road came in 12 years and $14 billion dollars over budget. dailykos/story/2009/10/27/797550/-Seattle-Area-Big-Dig-Brought-to-us-by-Parsons-Brinckerhoff# While it is simplistic and perhaps unfair, it is still useful to consider what I’m about to say as a beginning model to think about the value of granting a private entity an agreement to operate and maintain public infrastructure. The length of time used to pay off debt incurred in a straight forward debt financing is 30 years. As principal is paid off each year, the expense of municipal bonding generally drops each year. However this is not always so with Public Private Partnership Finance. First concessions on these projects tend to go from 40 to as long as 99 years. This creates an obvious risk, how do you get rid of a subpar operator if they have the lease to operate for 40 years? Additionally not only do payments rise significantly over time in 3P contracts, especially in the very tricky parts of negotiating these contracts such as Operating and Maintenance agreements; there are financial hazards where fees must rise when sufficient traffic fails to occur as predicted. https://ppiaf.org/sites/ppiaf.org/files/documents/toolkits/highwaystoolkit/6/pdf-version/3-11-3.pdf According to the Public Private Infrastructure Advisory itself, a clearinghouse for information related to Public Private Infrastructure investment industry; predicting traffic levels required to adequately pay for 3P projects is notoriously difficult: “Traffic Volume forecasts are the most fundamental data in the analysis of roads from the planning stage onward. They will influence many fundamental decisions on project feasibility, design and management, and whither the road should be a toll road and which decisions should be made about toll levels and collection periods”. Later, “Some recent surveys show that overoptimistic demand forecasting is common.” Recent references are Inaccuracy of Traffic Forecasts and Cost Estimates on Large Transport Projects, Skamaris and Flyvberg, Transport Policy Volume 4, No. 3, pp. 141 – 146, 1997; Traffic Study Risk Update, Standard and Poors 2005; Sources of Errors and Biases in Traffic Concessions in Toll Concessions, Nunez, A. PhD. Thesis University of Lyon.” academia.edu/3582199/Inaccuracy_in_Traffic_Forecasts To name but a few lessons in overoptimistic projections leading to financial disasters consider the following list: American Toll Road Company which consists for 3 toll roads in Alabama and the Windsor Tunnel connecting Detroit to Canada; bankrupt. The Pocahontas toll road outside Richmond, VA; bankrupt. Dulles Greenway; bankrupt. St Route 91 in California toll road; bankrupt. St. Route 125 in California toll road, Bankrupt. The Foothills-Eastern Orange County toll road, soon to be the second largest municipal bond bankruptcy after Detroit; pending. The Southern Connector outside Greenville South Carolina; bankrupt. Teetering on the edge of bankruptcy, the Indiana Toll Road System and the Sky Loop in Chicago. The Austin Turnpike is also considering bankruptcy as soon as June 2014. Think it is isolated to the USA? Almost every toll road in Spain; bankrupt. The German toll system; bankrupted in 2002, revived and on the brink of insolvency again. Australia, the home of the original movement to begin the modern era of P3 legislation behind the financial legerdemain of Australia’s version of Goldman Sachs, Macquarie; there are multiple bankruptcies. I will list in an appendage web sites that document the financial carnage. Initially, the privatization of toll roads in Indiana and Chicago’s Sky Loop were heralded as great successes which spurred many states to begin emulating their example. This happened because the funds paid were windfalls for Indiana and Chicago providing sorely needed budgetary relief. However the upfront payments they received for their roads ended up being significantly more than what the concession now seems worth. This has had the effect of chilling the market with private operators demanding higher interest rates to invest in new toll road projects, more security in tolling negotiations, and opportunities to recover costs in operating and maintenance agreements. Often these costs of recovery become subject to esoteric clauses tucked into operating and maintenance agreements, availability payments sometimes known as rents or shadow payments, or mandated toll increases. There is no free lunch. Let me take a moment and speak to the example of the Louisville Bridges. The bonds for the project were let this Wednesday of last week (December 11’Th). The sale wasn’t a complete disaster, but the yield required to attract buyers was substantially higher than was originally forecasted and the bond rating agencies who studied the deal most closely rated it one eyelash above junk bond status; BBB-. Moody’s Credit Opinion: https://moodys/research/Moodys-assigns-Baa3-ratings-to-the-Series-2013-first-tier--PR_288241?WT.mc_id=Email_PR_288241_link2 The effective yield on the debt was 6.29% with long dated, convertible zero coupon maturities having to yield as much as 6 7/8% tax free to find buyers, that’s 2 1/4% over the State’s own cost of funds were the State to have kept the debt on its own books. To keep in mind New York State Comptroller DiNapoli’s words, “Private financing does not alter the fact that the entire cost of public infrastructure will always be borne by the public”. Louisville drivers or the State itself will indirectly have to cover an extra $12 million per year in interest costs because of the decision to keep the debt for the Louisville bridges off the State’s balance sheet. If tolls cannot be raised over time to adequately service debt and operational costs; while the debt is legally off the Commonwealth’s balance sheets, its effects are not. hilliard/marketing/POS/KYPublic_Trans01a_POS.pdf Appendix F of the Louisville Bond offering states that under the Bi State Agreement with Indiana that; under clause 5 “At all times, the rates and rate structure shall be set at a level necessary to generate sufficient revenue to meet the toll covenants.” However should they not because not enough traffic materializes to sustain tolls at a level that the market can bear; there is language to the effect that quoting from page 70 and 71 of the Bond prospectus that there is: “The obligation of the Transportation Cabinet under the Lease to make Rent payments sufficient to fund certain deficiencies in the Tolling Operation and Maintenance Reserve Fund, the general Operation and maintenance Reserve Fund, and M&R Reserve Fund in the event Pledged Receipts are insufficient…” Further on page 28 of the Louisville Bond Prospectus under the clause titled “Covenant to Seek Appropriation for Rent and Additional Rent” it is stated; “the Transportation Cabinet will cause to be included in the appropriations proposed to be made for the Transportation Cabinet, an amount sufficient (over and above all other requirements of the Transportation Cabinet), to enable the Transportation Cabinet to pay Rent and Additional Rent…” In other words if tolls and planned contributions by the State are not sufficient to pay debt and operational and reserve requirements; the Transportation Cabinet must make Rent Payments. These payments are called rent payments and not debt payments simply to keep the debt itself off the State’s balance sheets. The debt still exists and we are still obligated to pay it with the exception that a future general assembly could repudiate it; but then that would also produce results that the State probably would not be willing to live with. Where would these Rent payments come from? It would come off the top out of appropriations that might have made road improvements possible throughout your districts. The Louisville bridge area is probably less likely to produce this scenario as options for what is known as traffic diversion are more limited in Louisville than in Northern Kentucky where 3P legislation is being considered to build the Brent Spence Bridge replacement. Quite often the main culprit in traffic diversion is the ease of seeking alternative routes. This is of particular concern to us in Northern Kentucky and especially Covington is the ease of bypassing the proposed use of a Public Private Partnership operated Bridge for the Brent Spence Corridor because we have 4 other downtown bridges including one of interstate quality, the I 471 Big Mac Bridge. We have only to look at the State of Ohio and Kentucky’s own Value for Money Study. If the toll is $2, the most likely toll level. Traffic Count will drop on the Brent Spence Bridge from 194,000 trips per day to 117,000. Those other 77,000 cars shift the clog to our other four bridges, potentially destroying our iconic Roebling Suspension Bridge and turning Covington and Newport into a parking lot so that the well-heeled can have a giant Lexus Lane in the Sky and some direct ship truckers do not have to slow down at rush hour. onlinepubs.trb.org/onlinepubs/ncfrp/ncfrp_w003.pdf But here too all is not what it seems. Despite the push from the trucking industry for the Bridge, an internal study by Parsons Brinkerhoff entitled, “Truck Tolling Understanding Industry Trade Offs When Using or Avoiding Tolls” (link to url provided above) shows that even direct ship trucker will avoid a $10 if it only means saving a 15 minute delay. Owner Operators will avoid tolls like the plague. Senators and Representatives, the only time there is as much as a 15 minute delay is at Rush Hour. At any other time of the day the toll can be diverted by driving I-275 to I 471 to reconnect back to either I-75 or I-71. This adds but 7 miles and 8 minutes of drive time according to Google Map. oecd.org/portugal/48168959.pdf In addition to these known problems in accurately forecasting traffic is the extremely troublesome calculations based on a variable set of assumptions that one can chose to model to basically have any “Value for Money” study say whatever it is required to say. Some of the results from software used in these calculations are highly dependent on predefined initial conditions and value ranges allowed for certain variables. These models may or may not be robust enough to predict the outcomes of complex adaptive behaviors of drivers. Dr. Joaquim Miranda Sarmento has written extensively on the subtleties of the mathematics surrounding Value for Money Studies. In a study prepared for the Organization for Economic Cooperation and Development, he analyzes mathematically at length the proposition, Do Public Private Partnerships Create Value for Money for the Public Sector. His answer is not often. A final piece of warning about Public Private Partners I will leave to New York State Comptroller Thomas P. DiNapoli who wrote of his concerns to New York State’s Legislature when as they are taking up this very question,” Up to this point, New York has not developed a comprehensive or coordinated P3 policy. In fact, even the State’s experience with the more limited form of P3’s – Design / Build – has not been well documented since authorized agencies do not report measures of cost effectiveness or performance. Without a formal, well thought out P3 Policy, New York State may find itself at a disadvantage when negotiating with private sector companies that have experience in other states. Issues worth consideration include: Private Debt (or equity) Can Be Costly Availability and Shadow Payments Can Be Costly Long Term Agreements Can Represent a Gamble Poorly Drafted Agreements Can Be Costly and Difficult to Correct Poor Analysis Can lead to Undervaluing Public Assets Comptroller DiNapoli also adds that there are other considerations outside the scope of a normal Value for Money Study that should be of concern to Legislators: Community Issues – Localities may incur unanticipated resource strains. For example where a highway or a bridge is tolled, users may choose to avoid tolled assets in favor of facilities without tolls, which may impose additional burdens on nearby facilities and the local governments responsible for their maintenance and repair. The State should assess the local impact of P3’s and involve local officials and the public in considering such risks and other community impacts Labor Issues – Some p3 agreements have resulted in the loss of public employee income and benefits. The state should carefully consider and candidly disclose and potential impacts on employees. Environmental Issues – Major infrastructure projects inherently create environmental concerns that may be inadequately considered by private sector partners. Eminent Domain and Other Legal Issues – Complex legal issues will arise as a range of new procurement conflicts find their way into court. These include the tax implications of P3’s and the use of eminent domain for projects designed and managed by the private sector. The lack of legal clarity regarding such issues makes caution all the more essential. Finally from Comptroller DiNapoli: Many P3 contracts around the United States have had to be renegotiated or refinanced due to private partner bankruptcy, costly design changes, or dramatic declines in the number of users. In addition there are other costs are not calculated in the Value for Money studies nor are they compensated for. Covington also has a very real concern of having the loss of our tax revenue not compensated as part of a Public Private Partnership as many Covington based businesses depend on access to customers from Ohio. In addition we have concerns about wear and tear on our side roads as people avoid tolls, disruption of our development plans, increased police costs to deal with traffic snarls rather than their main role to respond or prevent crime, the elimination of our access to Devou Park our largest green space, and a general lack of planning for the actual construction period. Finally, do we really need to build the Brent Spence Bridge Now? No! Northern Kentucky and Greater Cincinnati does not have a serious congestion problem now nor in the near future. Since people cause traffic and congestion, as the 23’rd largest metropolitan region in the USA, if traffic was so bad here you would have to think that Cincinnati would have to be in the top 20 congested areas? No we are 39’Th according to a study performed every year by TomTom, the GPS company and is easy to find at tomtom/en_gb/trafficindex/ . The only larger cities with less congestion than Cincinnati are Detroit, Phoenix, and Cleveland. We have time to get this bridge financed and designed right the first time. What I and other civic leaders of every party and persuasion in Northern Kentucky, including most if not all of our state legislators, counties, and cities are asking is to stop this headlong rush to build this bridge at any price, consequences be damned. Sincerely; Steven L. Frank CFP Senior Vice President, Wells Fargo Board of Advisors, Northern Kentucky Chamber of Commerce Infrastructure and Transportation Vice Mayor, City of Covington Kentucky (Ok Michael.... Mayor pro Tempore...how much Latin do most folks know...it translates as Vice Mayor)
Posted on: Sun, 05 Oct 2014 15:53:16 +0000
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