Rebuilding Place in the Urban Space

"A community’s physical form, rather than its land uses, is its most intrinsic and enduring characteristic." [Katz, EPA] This blog focuses on place and placemaking and all that makes it work--historic preservation, urban design, transportation, asset-based community development, arts & cultural development, commercial district revitalization, tourism & destination development, and quality of life advocacy--along with doses of civic engagement and good governance watchdogging.

Wednesday, June 27, 2012

Revisited: Private financing of public infrastructure is good business for business

Below is the reprint of a blog entry from August 2011, about private sector financing of public infrastructure, usually transportation projects.  It's relevant to the announcement that DC has released a "request for information" from companies and other interested parties willing to consider financing, constructing, and operating DC's proposed streetcar system, along with the small city bus system (the Circulator) that operates independently of the WMATA Metrobus system.  See "DC wants input on privatized streetcar system" from the Washington Post and the RFI document from DDOT.

The thing about the project is that I don't see what the advantage is for a company to finance a streetcar system, because it isn't "profitable" from the standpoint of fare revenue being great enough to pay for operations and pay for the cost of capital to build the system.

This isn't the case for parking meters (see "New York to Repeat Chicago’s Parking Meter Catastrophe" from the Rolling Stone), speed and traffic light cameras, and toll roads (mostly, some of the deals are losers from the standpoint of the private sector)--in most cases, especially if the value of the asset is significantly underpriced, as it was in Chicago with regard to the parking meters there (see the blog entry "A lesson to cities that they need to be very careful when leasing assets to public private "partnerships""), the revenues are greater than the cost to build, finance, and operate the system.  That's why the private sector, with capital from other nations usually, is so eager to do these deals.

Most of the involvement of the "private sector", which as Taras Grescoe points out in Straphanger, the companies involved in third party operation of transit systems in North America typically are divisions of European "companies" that are in part, government entities, is in operating transit systems under contract to local and regional governments.

Usually, private companies can do this at a profit because they don't pay as much or offer as good a benefit package compared to "straight-up" government jobs, and they tend to have fewer employees overall to run the system. 

Note that the strike in the Phoenix area bus system was about penalty payments for service failures being "so high" that it prevented the company from giving raises to unionized employees.  So the union struck in order to pressure the City of Phoenix to change the contract with the operator, Veolia Transportation.  See the blog entry "Sunday March 18 is International Bus Driver Appreciation Day."

This can be one of the downsides about "privatization" of transit services.

However, it could be that that the profit stream is high enough to make it worth "buying," through the funding of the construction of the system.  My expertise in financial engineering isn't deep enough to be able to figure that out.

To illustrate the idea of "buying a profit stream," Ohio State University has just done a 50 year lease of its parking operations.  Figuring out what they get upfront, a payment of $483 million, which they intend to invest and reap about $3 billion in total, the amount isn't much different than if they continued to operate the system themselves.  (net present value vs. revenues over 30 years)

The difference is that they get the investment capital upfront and don't have to manage and operate something that clearly is an ancillary activity in the context of their mission as a degree-granting research university.  See "Ohio State University Trustees Approve 50-Year Parking Lease" from the Wall Street Journal.

Reprinted blog entry from August 2011

Face it, the reason that private outfits finance public projects, buy toll roads, fund traffic cameras, etc., is because there is money in it.

But it comes at a cost, because if the projects had been funded with public monies, all of the monies spent would have gone to the projects, rather than to financing, administration, and private profit.

The Financial Times has a big article on the topic, "Public finances: A divisive initiative" and an editorial, "Building debts for the future."

From the article:

“I first really began to worry about the private finance initiative back in 2003,” says Mr Bacon. “I ran into an investment banker who said: ‘I like the PFI [Private Finance Initiative]. It’s good for business. We make a lot of money out of it. But as a taxpayer, it really cheeses me off.’ That rather woke me up. This was not a trade unionist complaining. It was a City fat cat getting fatter on the proceeds.” ...

Why has it proved to be so popular? “For three reasons,” a former Treasury adviser says. “Governments think it transfers risks, and works. Because they don’t have to raise the capital now. And because accounting rules mean it often does not count on the government’s books. You make your own judgment over which is the main driver,” In other words, for at least two of those reasons, governments simply cannot resist it.

After all, private borrowing costs more than government borrowing. And while any government borrowing would be written off if the school or hospital were no longer needed, under PFI the taxpayer would also have to cover the lenders’ anticipated profit. So once a PFI contract is signed, it is almost impossible to get out except at enormous expense.

In theory the transfer of risk, and the efficiencies gained, more than pay for the extra borrowing costs. But these are not small. ... Calculations by the Financial Times suggest that, on the £53bn capital value of current PFI projects, that translates to the taxpayer having to pay £20bn-£25bn above the government borrowing rate – the equivalent of 40 or so big hospitals. “You need an awful lot of risk transfer or efficiency gain to make that worthwhile,” Mr Bacon says.

The editorial closes with this paragraph:

PFI has created an export industry. It is a nice business for the City, employing armies of bankers and consultants. But it is not the taxpayers’ job to provide a living for these people. A new approach is required. Before signing more PFI deals, the government should show that the same project could not have been delivered with better value for money had it been financed directly by the state.

Also from the Financial Times:

-- "Watchdog calls for alternative to PFI"
-- "PFI profits ‘not shared by the taxpayer’"
-- "MPs hear of PFI profit-share potential" (this article suggests that the public sector should get a cut of the appreciation when such public-private assets are sold)

-- UK National Audit Office, section on Private Finance

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