The Promise And Pitfalls of PPPs

Each year in his State of the State address, Gov. Andrew Cuomo has touted public-private partnerships as a way to spur economic development and create jobs in a tough fiscal climate.

State officials have echoed the governor, praising the project delivery model as a way to let government agencies harness the private sector’s financing and expertise.

Key state lawmakers have also jumped on the bandwagon for public-private partnerships—also known as PPPs or P3s—as a way to maintain and upgrade the state’s highways and bridges.

“We’re faced with a challenging problem: How do we pay for projects which we can’t afford, but which we also can’t afford to do without?” state Sen. Charles Fuschillo, the chair of the Senate Transportation Committee, said at a hearing last fall. “Challenging problems demand creative solutions, and that’s exactly what P3s can do for New York State.”

But so far the hype hasn’t matched the reality. Few projects in New York have used PPPs, lawmakers have yet to authorize state agencies to use full-fledged public-private partnerships, and experts and officials acknowledge they are only viable in certain cases.

“It can be a good tool for government agencies to use,” said Nicole Gelinas, a scholar at the Manhattan Institute for Policy Research. “But the expectations on both sides are sometimes way too high, which sets them up for expecting too much and not doing very well. There’s this idea that it’s free money.”

State lawmakers took a first step toward PPPs by passing legislation late last year allowing design-build projects. Unlike the standard process, in which a state agency designs a project and bids it out to contractors, the new design-build procurement authorization allows the state to bid out megaprojects with only the general outlines, and award both the design and building to a single contractor.

Supporters say the law, which is being used for the project to replace the Tappan Zee Bridge, brings the state up to speed with modern procurement practices across the country, and cuts costs by having a single entity carry out both roles more efficiently while avoiding costly design changes once projects have already broken ground.

But comprehensive public-private partnerships typically shift even more elements of a project—from collecting tolls to financing to maintaining the completed project—to a private partner.

Samara Barend, who ran a state commission from 2008 to 2010 exploring PPPs, said the project delivery mechanism provides plenty of benefits, but that the state is right to take it slow and move forward with the Tappan Zee Bridge as a simpler design-build project.

“To go beyond design-build would have been tricky, and New York has never utilized P3s at the state agency level, so to try to do that with such a massive project would have been really complicated,” she said. “It would have slowed down the project significantly. They don’t yet have the in-house capability to advance the P3s.”

Barend said that a key P3 benefit is shifting more responsibilities to a private company and then holding it accountable for carrying them out according to a contract.

“I think, really, P3s should be viewed as performance-based infrastructure,” she said. “There can be much more accountability in a P3 than even in a design-build, because the private sector has skin in the game. There’s money at stake.”

Still, questions remain about whether PPPs will be as good as advertised.

One major project moving forward with a PPP is the Port Authority’s Goethals Bridge, which connects New Jersey and Staten Island. As a state authority, the Port Authority is allowed to use PPPs.

When Chris Ward headed the Port Authority, he said using a public-private partnership to replace the bridge would cost tens of millions of dollars more but get it done faster. However, under Pat Foye, the Port Authority has portrayed doing the project as a PPP as both a faster and a cheaper option.

Gelinas said that on the Goethals project the Port Authority will pay an availability payment to the operator and then rent to whoever wins the bid.

“It’s certainly not a new pot of money,” she said. “Instead of paying bonds, the Port Authority will pay money to this P3 operator. For one thing, the private operator might have higher financing costs, not only because of tax-exempt funding but also because they’re perceived to be more risky.”

In other cases, motorists using a bridge would pay a toll to a private operator instead of to the government, Gelinas said. “It’s nothing different; you’re just paying your toll to someone else. You’re getting private sector efficiency? That’s not really true, because there’s no competition.”

Barend said such criticism is “shortsighted” and “wrong” since there is “a lot of competition to bid on P3s.”

“They’re essentially bidding on long-term operations,” Barend said. “It’s all integrated within their bid. If they’re not meeting their performance standards, they’re thrown off the project, and the public sector has the option to replace them. If they don’t meet their standards, there’s specific penalties.”

In any case, the governor has continued to call for PPPs, and portrays them as something of a magic bullet.

“Our challenge for 2012 is this,” Cuomo said in his State of the State address in January. “How does government spur job creation in a down economy while limiting spending and maintaining fiscal discipline? The answer: creative public-private partnerships that leverage state resources to generate billions of dollars in economic growth.”

—With reporting by Laura Nahmias