Gov. Schwarzenegger Proposes $500B Infrastructure Plan

Thu February 21, 2008 - West Edition
Don Thompson - ASSOCIATED PRESS



SACRAMENTO (AP) Gov. Arnold Schwarzenegger said California has $500 billion worth of public works needs and wants a fifth of the cost shared by private companies that would be able to profit through long-term operational contracts.

In his State of the State address in January, Schwarzenegger extolled the virtues of so-called public-private partnerships to build highways, bridges, transit systems and water projects in British Columbia.

“The political leaders are happy, business is happy, the public is happy, the economy is happy, the future is happy,” Schwarzenegger said during his Jan. 8 speech.

California taxpayers, he said, will benefit because such partnerships will save money and lead to quicker results.

In reality, the situation in Canada’s far-western province is less rosy than Schwarzenegger portrays it, according to a review by The Associated Press.

In some cases, the partnerships have worked as intended and saved money. Others turned into a sour deal for taxpayers and a headache for government.

Multiple academic studies of Canada’s experience with public-private partnerships have found that the benefits of private participation often are overstated while costs and delays are underestimated.

In general, the Canadian experience has shown “most governments will be doomed to repeat high contracting costs and poor outcomes. … The reality that ’there are no free lunches’ applies to [public private partnerships] as much as it does to anything else,” concluded an extensive survey of such projects published in 2006.

British Columbia’s construction of a rapid transit system in Vancouver and a highway to Whistler, site of the 2010 Winter Olympics, are among the projects generating criticism.

Public-private partnerships differ from traditional government construction or service contracts with private businesses.

They allow private companies a financial stake in the outcome because they are investing their own money. Contracts often include financial incentives to encourage good performance.

In addition to construction costs, the company is generally responsible for maintaining and operating the project for decades in return for a profit.

Schwarzenegger contends that such partnerships can improve services, save taxpayer dollars and combine the strengths of government and the private sector. Projects can be completed “faster, better and cheaper,” he said.

Schwarzenegger said a 12-mi. (19 km), $1.4 billion automated rail line between Vancouver, Richmond and Vancouver International Airport will save Canadian taxpayers $92 million and is ahead of schedule.

But an assessment by the Ottawa-based Canadian Centre for Policy Alternatives found that the project suffers from cost overruns and overly optimistic ridership estimates.

Schwarzenegger also highlighted the Sea-to-Sky Highway, a $600 million project to build a 60-mi. (96 km) highway between Vancouver and Whistler. A private company is paying two-thirds of the cost, a partnership the governor said would produce $131 million in benefits.

Marvin Shaffer, a public policy professor at Simon Fraser University in Vancouver, studied the project and arrived at a different conclusion. He estimated it will cost taxpayers more than $220 million more than a traditionally procured and financed project.

They were among the projects Schwarzenegger cited in a document released by his office during his State of the State address.

A study of 10 Canadian projects by business professors Aiden R. Vining of Simon Fraser University and Anthony E. Boardman of the University of British Columbia found “that the potential benefits of [the public-private partnerships] are often outweighed by high contracting costs and opportunism.”

Far from benefiting from private-sector efficiency, municipal, provincial or federal governments frequently wound up buying out their private partners or renegotiating the contracts, the professors found in a study published in December 2006. In some cases, the contractor went bankrupt.

An updated version of their study, scheduled for publication this spring, reaches the same conclusions, Vining said in a telephone interview.

“The public partner and the private partner have different incentives, and the incentives conflict,” he told The Associated Press. “The conflict costs can be very high.”

For example, politicians want to hold down highway tolls for fear commuters will rebel, while a private operator wants to maximize profits.

Pierre J. Hamel, of the University of Quebec’s National Institute for Scientific Research in Montreal, also studied public-private partnerships that have become common there since the mid-1990s.

Most, he said, have brought scant benefits over traditional public financing.

The projects often are sold as a way to “bring infrastructure almost for free, without any debt,” Hamel said. “That’s kind of an urban legend. Of course there is no debt, because you are engaged in paying a kind of rent.”

Politicians prefer private financing to avoid tax increases and responsibility, Hamel said.

“It is much easier to say ’Just talk to your private company,’” if there is a problem, he said.

Long-term partnerships also can lock governments into current technology, Hamel said. For example, he said, no one knows what libraries or hospitals will look like in 30 years.

For Schwarzenegger, promoting such partnerships as a way to take care of California’s growing backlog of public works needs — from roads to schools to water projects — is natural. He successfully promoted a $37.3 billion package of infrastructure projects in 2006 and has an unswerving faith in the private sector’s ability to work efficiently.

He also praised the partnerships while touring France and British Columbia last spring.

Some of the Canadian projects his office promoted have indeed worked as intended. A $15.5 million water treatment plant built by a private company appears to be a cost-saver for Canadian taxpayers.

Schwarzenegger also wants to create an infrastructure center in California. His aides say he would support public-private partnerships only if that center determined the arrangement would provide benefits beyond those of a traditional government contract.

The governor wants state lawmakers to pass legislation this year setting up the Performance-Based Infrastructure Center for Excellence.

“It’s only an option,” said David Crane, Schwarzenegger’s special adviser for jobs and economic growth. “I don’t know why you wouldn’t want to have this arrow in your quiver. We want the best value and best service — that’s it.”

The administration projects private investment could be used to cover 15 percent to 20 percent of the $500 billion worth of California projects over the next 20 years, a potential infusion of $75 billion to $100 billion.

Schwarzenegger promoted his infrastructure plan Jan. 19 during a news conference in Los Angeles with New York City Mayor Michael Bloomberg and Pennsylvania Gov. Ed Rendell.

Crane said such partnerships have worked well in Australia and the United Kingdom.

In British Columbia, nearly $5 billion worth of projects have been completed with private help the last five years. About 64 percent of that money has come from private sources.

“The ones that have been completed have been completed on schedule and on budget,” said Larry Blain, chief executive of Partnerships British Columbia. “In every case, the PPP project has been cheaper.”

Partnerships British Columbia, formed by the government, does its own cost-benefit analyses. Shaffer, the public policy professor at Simon Fraser University, said the formula is flawed because it underestimates government’s ability to borrow money at low interest. Private investments often will carry a higher rate of interest.

The Canadian Centre for Policy Alternatives, a liberal think tank, and the Canadian Union of Public Employees say the formula also fails to account for delays and cost increases before a formal contract is signed with the private company.

“These things are dressed up to get their foot in the door and really create expectations that can’t be lived up to,” union president Paul Moist said. “In the long run, taxpayers are going to pay more for these things.”