Public-Private Partnership for Local Public-Goods Provision

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Iliya Atanasov, Rice University

The Problem

States have become increasingly dependent on federal subsidies for financing vital public-policy priorities such as education, redevelopment, transportation and, especially after 2014, health care. Contrary to widely held misconceptions, the main route for federal intervention in these policy areas typically does not take the form of outright mandates and regulations, but of providing financial incentives to encourage states’ compliance with federal goals and standards. This approach to policy implementation successfully inhibits competing local initiatives in the same policy areas, while ensuring that federal policy objectives remain unmet, too. Federal subsidies provide local political elites with easy money without the disciplining effect of having to raise taxes, while inducing little interest in pursuing the spirit of the policy beyond the attainment of some basic benchmarks, necessary to maintain the funding.

Meanwhile, state and local governments are scrambling to make ends meet in the face of mounting debt and deficits. In the process, key public assets, often constituting natural monopolies, are being privatized with blatant incompetence and/or disregard for the public interest. Arizona authorities’ selling government buildings only to rent them back at exorbitant rates; Chicago leasing its parking meters and the Skyway for almost a century with poor oversight of service quality and for pennies on the dollar; the Massachusetts Bay Transit Authority securitizing its parking revenue to finance its operating costs. Nevertheless, there is a very powerful case to be made for the handling of these projects at the state and local level. Public-private partnerships (PPPs) are the only feasible way to finance the provision of certain public goods without substantial increases in public debt. They can help break the addiction of local politicians to federal subsidies and open up the policy debate at the state and local level for competitive and innovative state and local solutions.

Critical Goals of PPPs

• Establish clear and simple contracting criteria and publicize auction documentation, including independent cost/benefit analyses and usage/demand projections.
• Position the policy at the appropriate level of government (state, county, municipal, etc.).
• Allocate separable tasks to specialized providers, preferably in the private or nonprofit sector.
• Reduce conflicts of interest in contracting and implementation; align closely the participants’ interests with the public-policy goal.
• Generate revenue streams for the project’s own long-term sustainability if at all possible.
• Secure cheaper financing to fund critical development goals without burdening the fisc.
• Make even large public investments independent of federal subsidies.
• Improve policy by increasing citizens’ direct engagement and input in the process.

Best Practices in Designing PPPs

While each project carries its own complexity and faces unique challenges, PPP contracting can be done in a systematic way that takes into account the vast global experience from the past two decades. In order to be successful, the proposed PPP framework need be shielded from the whims of local politics using two complementary mechanisms – by securing broad support for it through public debate and by insulating it from tampering by enshrining it into laws and regulations. While minimizing the likelihood of suboptimal PPP outcomes and misallocation of public resources, this approach would provide potential private-sector partners with a clear and stable risk-minimal environment to participate in public projects or utilize publicly owned assets effectively.

The critical benefits of the PPP approach flow from the possibility of allocating different stages/ tasks to actors that are best equipped to perform them and minimize the associated risks. Most projects can be notionally divided into six functional components: strategic evaluation, planning, financing, construction, operation and maintenance, and oversight. These functions do not necessarily proceed linearly in time or have to be performed by different agents. Their efficient allocation can be best determined on the basis of two criteria: (1) the amount of agency slack and transaction costs implied by any given allocation and (2) the relative level of expertise and operational resources of the corresponding providers in any given scenario.

MBTA Parking

The proposed MBTA financing deal that was announced in February 2011 is a prime example of how not to manage publicly owned assets and how the PPP framework can be used to remedy such disastrous decision making. Securitization does not result in any efficiency gains and therefore is not an effective approach to solving structural financial problems of the kind that the MBTA will inevitably encounter very soon. As population density in Greater Boston continues to rise, commuting by train will only grow in importance, so the parking garages at outlying T stations are a long-term asset that can be helpful in servicing the MBTA’s debt if handled properly.

Instead of the myopic securitization scheme, the MBTA can apply the PPP framework in order to design a better strategy for using its parking garages. The garages easily meet the criteria for successful PPP leasing – they are not an overly monopolistic service, risks are clear-cut and there will surely be substantial interest from private companies, which could significantly improve collections. The public-interest concern dictates that the garages should first be leased out on a shorter-term basis for (about 3-5 years) in order to maximize long-term revenues and reduce the risk premium over longer-term usage uncertainty that the lessees would demand. The appropriate course of action would be to survey the utilization of the garages by commuters and ensure that the public does have a vested interest in continuing it; otherwise it would be better to sell the property altogether.

If there is sufficient demand by commuters for the continued existence of the garages, what would the leasing scheme look like? The garages can be leased out individually in staggered auctions in order to ensure maximal competition among bidders (smaller lot size making smaller companies viable participants) as well as competition among the winning parking operators for commuters (by avoiding the Chicago parking-meter situation where the entire market is operated by a monopoly).

The proliferation of contractors will not only help maximize auction bids, but also result in an incubator of best practices of sorts that can inform future decisions about managing the garages or improve the PPP scheme itself. The MBTA can start by auctioning a single garage in order to benchmark bids and improve procedures before contracting out the remaining garages. That would also help gauge the public reaction to the PPP implementation and any unforeseen problems with ensuring proper commuter service, especially in the cold season.

Candidates can bid on the percentage of revenue they are willing to give back to the MBTA, while maintaining pre-specified quality and maintenance criteria required of all participants in the auction. Since the operation of a parking garage is not an overly complex activity, any capital investments should also be the responsibility of the contractor, which would free each leaseholder to choose the optimal mix of improvements, occupancy and fees to maximize profitability, while taking the MBTA completely out of any decision-making responsibility. Thus, administrative overheads will be entirely the responsibility of the private partner and allow the MBTA to eliminate any of its in-house costs associated with maintaining and owning the garages.

Each individual contract auction should pre-specify corresponding fees for not meeting the required operating criteria. A Massachusetts PPP agency, if one existed, would make sure that the contractually specified services are provided and that the MBTA uses its revenues from the PPPs for their intended purpose – debt repayments. Agency staff would monitor lessees’ service quality as stipulated in the contracts and the agency would receive a percentage of the MBTA’s collections from the garages. The agency would be responsible for civil suits and contract termination if such was deemed appropriate. It would also receive a percentage of any settlements obtained from contractors for its own financing needs.

PPPs as Bulwarks of Local Government

The proposed PPP framework provides the twin benefits of (1) improving the transparency and accountability of policy making and (2) weaning public officials off their addiction to unserviceable debt and federal subsidies. It puts substantial hurdles before the pet projects of local politicians and their narrow constituencies, while opening a viable avenue for proactive policy-making without federal help or coercion. In no way is it required that every PPP project be self-sustainable or privately owned. Rather, the framework forces into the spotlight the potential costs and benefits of any policy initiative, giving citizens the opportunity to choose a better-informed balance between fiscal costs and the level of public goods provided – and governments the most effective toolset to realize that balance.

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