Public Private Partnerships – A few discussion points

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Dave

Dave is a part-time blogger that writes about whatever suits him at the time.

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14 Responses

  1. Avatar Francis says:

    Reasons for a municipality to sell / lease a public asset:

    a. Competence. Some times a bureaucracy is so entrenched and so incompetent that the only solution is to move the asset to someone else and fire everyone.

    b. Union busting. An old favorite. Private parties may be able to pay their employees so much less that they can operate the asset and still generate revenue.

    c. Cowardice. A city may want to generate more revenue but is afraid of the political opposition. Once the asset is sold city officials can disclaim responsibility for the rate increases.

    d. Corruption. Plenty of these deals find that particular officials are suddenly much wealthier.

    e. Competition. A city may want to challenge its employees (trash collectors, mechanics) to meet a competitive bid. Since the city is (arguably) non-profit, its employees ought to be able to provide equivalent services at comparable prices. This can overlap points a. and b. above.

    f. Access to expertise. If the municipality is doing something complex (eg, building new infrastructure), a partnership may be less expensive than the classic design / build / operate paradigm.

    One major problem is figuring out whether the deal is a good one or corrupt. The mere fact that there appears to be competitive bidding doesn’t necessarily mean that the deal is in the public business. There are goals other than revenue maximization in the provision of public goods.Report

    • Avatar dave in reply to Francis says:

      @francis

      This is a good list and it touches on some of things I discuss in my professional life when the subject of asset monetization comes up with our not-for-profit hospital system clients. I’ll touch on each one.

      a. Competence. Aside from the firing part, I pretty much agree. I’ve seen the incompetence from both a bureaucratic and a regulatory perspective (i.e. not-for-profit hospitals are not in the real estate business and can inadventantly trigger Stark law violations while operating them – happens often).

      b. Union busting. That seems more akin to outsourcing than asset monetization especially if the labor unions come as part of the deal. The Skyway sale never removed the unions for example.

      c. Cowardice. I’m thinking of parking meters in a Midwestern city. Can you guess the city? Yeah, that’s what I thought.

      d. Corruption. I’m not aware of this with the large scale asset monetizations, and if you have any examples, please share them. However, I can see how this can be an issue with outsourcing.

      e. Competition. I’ve never quite seen this one.

      f. Access to expertise. I’d like to see more municipalities do this with non-core real estate (which they don’t need to own); however, since publicly owned real estate properties are tax exempt, by transferring ownership to a third party, the municipalites will not only pay rent costs but also real estate costs they had not previously incurred. This is a roadblock with hospitals.

      The mere fact that there appears to be competitive bidding doesn’t necessarily mean that the deal is in the public business.

      No, but properly executed (and they will be), competitive bidding will reveal best market pricing. The advisors that shop the deals on behalf of the municipalities will see to that.

      There are goals other than revenue maximization in the provision of public goods.

      Of course. There are qualitative considerations that may carry more weight than any quantitative benefits of a transactions. Also, in a monetization like the Skyway, there’s a balance between value to the city and cost to users. Chicago could have considered offers on the Skyway at substantially higher values if it couldn’t have cared less about the costs being passed on to the people using the road. An investor could have submitted a $3 billion value assuming rate increases much higher than what Chicago got, but it didn’t. This is similar to sale-leasebacks. The sale price depends on the rent on leaseback.

      For the record, maximizing revenue in of itself should not be a goal for these transactions.Report

  2. Avatar Damon says:

    “One major problem is figuring out whether the deal is a good one or corrupt. The mere fact that there appears to be competitive bidding doesn’t necessarily mean that the deal is in the public business. ”

    Competitive bidding is just one tool to ensure the process is transparent and reduces the likelihood of corruption.. Good ‘crats can get around or deal with competitive bidding issues if they really want to. As you said, the two issues aren’t related, but I’d submit that any deal not in the public interest is most likely “corrupt”.Report

  3. I realize that Dave is addressing only one aspect of public-private partnerships, so what follows isn’t a criticism, but just some thoughts on additional things to consider (with due admissions that I haven’t read any of the links):

    1. Long leases of 75 years or 99 years or so really tie the city’s hands. The city, of course, can get much less if the term of the lease is only, say, 5 years. But one thing that even shorter term leases can plausibly do is save the city the expense of managing the public service for those years.

    2. The “partnership” is a monopoly in the traditional sense of the word. It’s the state granting a special privilege in exchange for money. That may or may not be a bad thing, and I’m not in principle opposed to such monopolies, but it’s worth noting. [ETA: in part it’s worth noting because that means the “private” part of the partnership will have to act like a government in at least some ways and therefore adopt some of the inefficiencies that such partnerships supposedly are meant to curb.]

    3. I presume the “partnership” often involves the private entity assuming some of the roles of the state and acting as a state. I suppose that the companies that enforce the parking meter deal have ways of recovering the money from parking violators if the latter don’t pay and that the state comes to the companies’ aid. That seems at least a little….”problematic,” to use an overly vague term.

    4. There’s a lot I don’t know about the Chicago parking meter and Skyway deals, but one common criticism of those deals and other deals is that the city spends the money right away and the one-time addition to its coffers doesn’t do much to increase the city’s financial health. Back when the meter deal was going into effect, the $1 billion + was claimed to be dedicated to a “rainy day” fund but was spent right away. And Chicago now has a very poor bond rating. At least that’s what the local press and complainers about the deal say. I imagine the truth is much more complicated. For example, there are a lot of local government entities in Chicago and maybe the money from the deals didn’t go to “Chicago” but to other Chicago-area districts. And I don’t pretend to know the in’s and out’s of Chicago’s or any other city’s finances. But I do suspect there’s something about the way governments work that militate against wise spending of money. Of course, what’s wise for me may not be wise for you, and vice versa.

    5. Another problem with the Chicago parking meter deal is how it was submitted and debated. If the critics of the deal are to be believed, the mayor submitted the deal the council by a very wide margin approved it with little or no debate. This goes to what @francis says about how hard it is to know whether any deal is good or corrupt, except I’d add that it doesn’t have to be corrupt to be a bad deal.

    I’m not against public-private partnerships. And again, I’m not really criticizing Dave’s OP. He’s talking about one aspect, valuation, and I’m talking about other things. But I think public-private partnerships like the ones under discussion need to take place on a case-by-case basis. And I think it’s healthy to start from a presumption that they’re a bad idea unless the advocates for the deal can prove otherwise. That doesn’t mean they’re always a bad idea or that the “otherwise” can’t be proved, just that the burden should be on those arguing for the partnerships. If there’s an institutional way to enforce that burden, say by requiring a supermajority in a city council, then that would probably be a good thing.Report

    • Avatar Kazzy in reply to Gabriel Conroy says:

      #3 worries me. If I don’t pay a private company money absent a signed contract agreeing to do so, why do they have any right to come after me?Report

      • Avatar Gabriel Conroy in reply to Kazzy says:

        It worries me, too, assuming my framing of the issue was correct.

        I will say that I understand the meters were created and put in place by the city and along “public” parking spaces so that if we concede the legitimacy of cities’ establishing metered parking, the actual placement of the meters themselves is legitimate. What’s different–again, if I’m understanding and framing the situation correctly–is that the city is using a private company to enforce the metered parking, and in exchange the company gets to keep the proceeds.Report

      • Avatar Brandon Berg in reply to Kazzy says:

        @kazzy When you go to a restaurant and order food, you don’t sign a contract agreeing to pay for the meal after you’re done. There’s an implicit agreement that you owe the marked price, plus sales tax, and that you’re in trouble if you don’t pay. In what salient way are parking spots with clearly visible meters different?Report

        • Avatar Kazzy in reply to Brandon Berg says:

          @brandon-berg

          Not all meters are clearly marked. Muni-meters confuse the process, even if you know to look for them.

          The question is one of authority. What happens if I stick a parking meter in front of my house. Do I have the authority to do so and use force for those who disobey it? Why or why not? What gives these private entities that authority? I mean, the obvious answer is the government. But does the government have the ability to do so? Maybe… I really don’t know how this works in reality. But I’d argue that government shouldn’t be able to do so.Report

          • Avatar Brandon Berg in reply to Kazzy says:

            I’m not sure I understand your objection. Enforcing private debts is something the state has been doing for a very long time, without much controversy. As is the ability to establish a debt via an implicit agreement (e.g., at a restaurant). This is just putting those two things together.

            I don’t think you can put up a meter on the street in front of your house, because you don’t own that part of the street, but if you wanted to charge for parking on your own private property, and someone stiffed you, I assume you would have legal recourse. Towing cars for unauthorized parking on private lots is fairly standard practice, though I’m not sure if the property owner gets a cut of that.

            I’m fairly certain that this company isn’t actually allowed to use force. They can’t go to your house and break your kneecaps if you don’t pay. Maybe they have some special deal with the state to streamline the process of collecting parking ticket debts…actually, never mind. I just went to look it up and saw that “Proceeds from parking tickets will still go into city coffers.” First link in the first paragraph after the first block quote in the OP.Report

    • Avatar Dave in reply to Gabriel Conroy says:

      @gabriel-conroy

      I’ve been travelling most of this week and am now getting a chance to respond. I’ll go through each of your points.

      1. Interesting point and one brought up in the Inspector General’s criticism of the parking meters transaction. It noted that 93% or so of the value it received was based on the discounted value of cash flows for the first half of the 75-year lease term and then implied that it got very little value for the second half of the lease.

      Given my business, we have recently executed a transaction with a short ground lease term (less than 30 years), and I can tell you that if the IG thought it could still get most of the value from the deal and cut the lease term in half, he is sorely mistaken. If someone buys this, it is bought with the expectation that there’s no residual value at the end and they hold to maturity. With a 99-year lease assuming 80 years left on the term, someone can hold the investment for 10 years, sell it, and possibly get their capital out of the deal.

      2. They may have to assume some of the inefficiencies including responsible for things that it preferred to not have responsibility for, but the private part of the partnership is profit motivated and will do its best to operate that way.

      3. It depends. I think the operators of the Skyway and parking meters can identify violators (I think the private entity operating the meters writes parking tickets); however, unless someone can show me otherwise, enforcing legal obligations is still the role of the City. If I wasn’t lazy, I’d try to read through the agreements I posted to see what they have to say. I’m sure this is addressed in both of them.

      4. Who is to say Chicago’s bond ratings would have been any different had they retained control of the meters? What would the city had done to plug the budget gaps had the money from the parking meters transaction not been there? Had they attempted to raise municipal debt to cover those shortfalls, it would triggered all sorts of alarm bells with the ratings agencies (heck, I don’t know if the city even had access to the muni bond markets in late 2008 given the fallout from the crisis but don’t hold me to that).

      To me, the two most valid criticism are 1) users are going to pay more no matter what; and 2) in some cases, the increases would have never survived a democratic vote.

      5. I think that was a bad deal although it was the best price Chicago could have gotten from the market. It was too essential of a city service to sell, and there are all sorts of issues with flexibility (i.e. making meters unavailable during events) and urban planning that take parking issues into consideration. Had the city retained the meters, it would have only lost revenue when meters couldn’t be used. Now, the city has to pay the private entity for lost revenue. That should not have been part of the deal.

      Case-by-case? Do you mean we have to talk about the specifics of what happens in market transactions? We can’t limit our conversations to free markets vs. regulation? If I read you correctly, you’re suggesting that I’m trying to make people think. Gasp!Report

      • Avatar Gabriel Conroy in reply to Dave says:

        @dave

        Thanks for taking time to reply to my comment, and as usual, your comments are plenty thoughtful. I do have a few comments/replies to your reply:

        but the private part of the partnership is profit motivated and will do its best to operate that way.

        That’s true, but in what way will that serve the public? (I’m assuming, for now, that “serving the public” is a goal the city should seek in such transactions in addition to the immediate revenue it gets from the deal.) It’s hard for me to see how the fact that the company is profit-oriented means it will give better service than the city could provide. I do, however, concede that competition might work on the company’s profit motive and be an incentive to lower rates, or keep them lower than the company is allowed to raise them. (By competition, I mean things like people parking on non-metered streets or taking taxis or mass-transit.)

        To add to your answer to my no. 3, I guess what concerns me is that the company can write tickets, and by writing the tickets, the company is enforcing or executing the law in a way that private entities typically do not, and that the company is therefore acting as a state. That’s not a dispositive argument against the deal or similar deals, but it makes me uncomfortable.

        Here’s what animates my concerns. Tony Judt (a European historian who passed away a few years ago) has called privatization a form of “tax farming” reminiscent of 17th and 18th century France. His argument is more nuanced than that. He doesn’t say all privatization is bad even though he was against what he saw as the general trend to privatization. It seems that his problem with “tax farming” is threefold:

        1. It’s inefficient.
        2. It deligitimizes the state in dangerous ways, so that private entities become like states themselves.
        3. Through no.’s 1 and 2, it creates instability that leads eventually to violent revolution.

        I hope I’m not putting words into his mouth, but if he’s right (and I’m right in the way I’m rendering his argument), then that is one reason why I’m skeptical to privatization.Report

        • Avatar Dave in reply to Gabriel Conroy says:

          @gabriel-conroy

          Ok. I can finally respond to this:

          That’s true, but in what way will that serve the public?

          Properly structured, the operating agreements keep the private entities on a pretty short leash when it comes to maintaining safety, structural integrity and operation of roads, meters, etc. The agreements should be structured in a way that failure to maintain the assets constitutes a material breach of the agreement, a breach that puts the agreement into default. If it’s not cured, the municipality should have the right to resume control of the asset. I haven’t read the agreements I posted to see what is actually in them, but if I’m advising a city on a transaction like this, I would have them insist that the private entity maintain the assets and make it punitive if they don’t. I’m not a lawyer, but that does seem pretty standard to me.

          It’s hard for me to see how the fact that the company is profit-oriented means it will give better service than the city could provide.

          It may operate more efficiently so long as it falls within the acceptable parameters.

          To add to your answer to my no. 3, I guess what concerns me is that the company can write tickets, and by writing the tickets, the company is enforcing or executing the law in a way that private entities typically do not, and that the company is therefore acting as a state.

          I see it differently. I see a situation where Chicago expressly permitted the operators of the meters to write tickets, something it could not do if it was not blessed by the City. Still, enforcing payment of those penalties falls to Chicago (I believe). Had Chicago not agreed to this, the owners of the meters couldn’t write tickets. That would have been up to the city.

          To your last point, privatization has been pretty rare and the kinds of municipal assets that have been targeted for these transactions are limited. I think there’s a lot of political push back against them here to the point where it’ll be hard to get even a good deal done. As much as I hate applying general labels, my take is that liberals lean against these kinds of transactions, libertarians for them and conservatives are a mixed bag.

          I’ll also say that the arrangements are (mostly) structured in a way where the state’s interests are protected. It may make a nice fairy tale to talk about evil investors bearing gifts and ideas and making off with municipal assets at a fraction of their true worth but the reality is that municipalities have Wall Street banks as their advisors and plenty of lawyers that are involved in these processes. I can’t speak to what happened in France, but I have a hard time seeing how Judt’s complaints apply here.Report

          • Avatar Gabriel Conroy in reply to Dave says:

            @dave

            I don’t have a quarrel with your response (or, really, with your OP), but here’s a few “for the record.”

            First, you’re right that Judt is not focused so much on the US context, although he mentions it. But he’s not focused solely on France. His comments are just as much about England.

            Second, I really don’t believe in the “nice fairy tale” that talks “about evil investors bearing gifts and ideas and making off with municipal assets at a fraction of their true worth but the reality is that municipalities have Wall Street banks as their advisors and plenty of lawyers that are involved in these processes.”

            I personally dislike that way of thinking about things, because to me it’s a kind of conspiracy thinking, where the evil cabal that controls the government is replaced by an evil class that controls the economy. I suppose that my mention of Judt’s claim about tax farming implies I see things that way, but all I can say is that I try to avoid such moralism. I prefer to see questions of privatization and whether it’s good or bad more by looking at structures and implications for the longer term.

            Still and as always, thanks for taking the time to engage my comments.Report

  4. Avatar DensityDuck says:

    The fun part about criticism is that it works either way.

    The theoretical future value is higher than the sale price? “omg, they’re getting a bunch of free money that should have gone to the city, public-private partnerships are the worst thing ever”

    The private partner can’t make enough money and goes out of business? “omg, now there’s no way to maintain the roads or operate the systems because the company went out of business, public-private partnerships are the worst thing ever”

    And if everything goes exactly as planned, well, you can still complain that someone’s making a profit off of providing a public service.Report

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