Meeting with MDOT & LD 1168

Letter to STEWC email notification list from Chris Buchanan on 4-9-15

Hi everyone,

As many of you know, our bill to close the loophole in the PPP law, LD 506, was unanimously defeated in the Transportation Committee last week, which is a bummer.  But, we’re not done with advocating for better state policy!

We are now asking for your support on LD 1168.  Below and attached are the talking points that we’ve written up for LD 1168 to help people draft testimony.

The public hearing has not been scheduled yet, but this bill will be heard before the Judiciary Committee.

Now is the time to start calling, emailing, and meeting with members of the Judiciary Committee to earn their support.  Note, the Senate Chair of the Judiciary Committee is Senator David Burns, so folks in Washington County, we hope you’ll make an effort to get in touch with your Senator!  Judiciary Committee contacts are attached and at this link.

As before, it will be very powerful to receive testimony from municipalities, so while we have time, please share a copy of the bill with your selectboard or council and ask for their support!

You may also begin preparing and submitting testimony.  Emailing testimony, we’ve learned, will get to committee members but may not be part of their official packet, or a part of testimony listed online.  So, it’s best to show up in person and give them 20 copies, or to mail 20 copies, if you want your testimony as part of the official packet.  Info on submitting testimony is attached and will be sent out again.

MDOT.  I met with Nina Fisher from MDOT yesterday, to discuss LD 1168 and understand why they killed LD 506.  Nina said that the MDOT is going to try to kill LD 1168 because they don’t feel like the PPP has any legs without eminent domain powers.  She provided an example of a possible train spur project to Limestone that would need eminent domain, and would be a private entity.  However, Nina said she was going to talk to the executive office about advocating for a clause in the PPP that would eliminate an east-west highway from being a project that could be used by the PPP.  She said she wasn’t sure the governor was ready to do that, but he may be.  If he is agreeable, MDOT would use LD 1168 as the vehicle for making that change to the PPP law, as opposed to advocating to completely kill the bill.

Regarding LD 506, Nina said that the clause in the PPP law, subsection 4i which states, “I. The proposal and the transportation facility must comply with all requirements of applicable federal, state and local laws and department rules, policies and procedures,” means that both solicited and unsolicited proposals must follow the Sensible Transportation Policy Act, go through the normal public hearing process, etc.  She believes that providing the unsolicited proposals clause provides a way to encourage private entities to approach the MDOT with ideas that may be good ideas.  I told her it didn’t seem necessary to me, and that the MDOT was asking for trouble with this loophole, as we have seen with the EWC, but she insists that the MDOT wants to maintain the clause.  Instead, as described above, she offered to discuss the possibility of prohibiting the EWC in the PPP law.  She agreed that the EWC would not pass muster under MDOT scrutiny, and she did not think, even if the Commissioner at MDOT changed and was a super pro-East West Corridor person who gave the EWC a green light, that the legislature would agree and pass it.  She said she thought that legislators perceived that supporting the EWC was toxic, thanks to all of the work of all of you, the people of Maine.

I say, congratulations to everyone on that major accomplishment, which is also very apparent to me!

For those who want to discuss my meeting with Nina more, please feel free to call.

Again, attachments are: 1) LD 1168 talking points, 2) Judiciary Committee contact info, 3) How to Submit Testimony to the Judiciary Committee

Here are the talking points on LD 1168:

LD 1168, An Act to Prohibit the Delegation 

of Eminent Domain Power to Private Entities,

sponsored by Sen. Paul Davis (R-Piscataquis)

 

Concept:

 

LD 1168 prevents eminent domain from being used by a private entity, or in certain Public-Private Partnerships (PPP) on behalf of a private entity, by amending the Public-Private-Partnership for Transportation Projects Law[1], and the law that restricts eminent domain use[2].

 

Talking points:

 

  • Eminent domain is an important tool for State and Local Government to have in order to promote the health, safety, and welfare of its residents; however, eminent domain is a serious power that overrides individual property rights in favor of community rights.  Therefore, State and Local Government Entities should use eminent domain only as a last resort, for vetted transportation projects that can be demonstrated to be in the public’s best interest.

 

  • The law must be clear and the law must reflect that the public interest is the priority interest of concern to State and Local Government when exercising eminent domain power for transportation projects.  Although private entities may be subcontracted by the State or Local Government Entity to fulfill a contract, no public entity should use its eminent domain power to act on behalf of a private entity’s transportation development interest, or to further the economic interests of another country that could be the primary beneficiary of the transportation infrastructure.
    • The proposed East-West Corridor, for example, would allow local territory to be used as a pass-through connecting New Brunswick and Quebec, with primary economic benefits accruing to Canada and profits accruing to foreign investors.
    • In general, since foreign investment and/or ownership is sometimes part of a private project, state and local eminent domain power should not be used to further these financial interests.  

 

  • Maine’s farmland and fresh water must be protected.  Everyone needs good food and water to live a healthy life.  The growth rate of Maine’s young farmers is much higher than anywhere else in the country, 40% versus 1.5%.[3]  Maine farmers shouldn’t feel threatened by private entities to give up their livelihoods and future food security.  We need to support multi-generational farms and the next generation of farmers as much as possible.  New transportation infrastructure development increases risks to water quality, and is likely to result in fragmentation of farmland and wildlife habitat.

 

  • Additional protection from eminent domain for transportation projects will help maintain regional stability.  When a private entity can access the power of eminent domain for a private transportation project, or unsolicited public-private-partnership for a transportation project, as we have learned through experience with the East-West Corridor proposal, many members of the public experience needless trauma, declined economic activity and real estate sales (also known as condemnation blight), and even flight from the region.

 

  • This bill closes previously unaddressed loopholes and shortcomings in our law that became apparent when the East-West Corridor proposal came to the table.  These are lessons that stretch well beyond the East-West Corridor proposal.

[1] Maine Revised Statutes Title 23, Part 5, Chapter 410, subchapter 5, subsection 4251. Public-private partnerships; transportation projects

[2] Maine Revised Statutes Title 1, Chapter 21, subsection 816. Limitations on Eminent Domain Authority

[3] In Maine, More Hipsters Choosing Life on the Farm, Jennifer Mitchell, MPBN 12-11-14

TESTIMONY GUIDELINES Judiciary 2015 Judiciary Committee contacts 127th 2015 LD 1168 Talking Points

 

Series of 3rd party reports blast PPP, toll roads, and dishonest investment projections

The following investigative articles by Angie Schmitt and Payton Chung were published between November 19, 2014 and November 25, 2014 on the Steetsblog Network:

The Indiana Toll Road and the Dark Side of Privately Financed Highways

How Macquarie Makes Money By Losing Money on Toll Roads

The Great Traffic Projection Swindle

Toll Roads Increasingly Put Taxpayers at Risk

The Indiana Toll Road and the Dark Side of Privately Financed Highways

Tuesday, November 18, 2014 | by  and  | Streetsblog USA

Link to Original Article.

This is the first post in a three-part series on the Indiana Toll Road and the use of private finance to build and maintain highways. Part two takes a closer look at how Australian firm Macquarie manages its infrastructure assets. Part three examines the incentives for consultants to exaggerate traffic projections, making terrible boondoggles look like financial winners.

 

Who owns the Indiana Toll Road? Well, as of the bankruptcy filing in September, Macquarie Atlas Roads Limited (MQA Australia), which is joined at the hip to Macquarie Atlas Roads International Limited (MQA Bermuda) on the Australian stock exchange, has a 25 percent stake. Macquarie’s investment bank arm brokers the various transactions related to ownership of the road, collecting fees on each one. Welcome to the world of privately financed infrastructure. Graphic: Macquarie prospectus

 

In September, the operator of the Indiana Toll Road filed for bankruptcy, eight years after inking a $3.8 billion, 75-year concession for the road with the administration of Governor Mitch Daniels.

The implications of the bankruptcy for the financial industry were large enough that ratings agency Standard & Poor’s stepped in immediately to calm nerves. In a press release, the company attempted to distinguish the Indiana venture from similar projects, known as public-private partnerships, or P3s: “We do not believe this bankruptcy will slow the growth of current-generation transportation P3 projects, which have different risk characteristics.”

But the similarities between the Indiana Toll Road and other P3s involving private finance can’t be ignored. And as we’ll see, even the differences aren’t all good news for the American public. Once hailed as the model for a new age of U.S. infrastructure, today the Indiana deal looks more like a canary in a coal mine.

At a time when government and Wall Street are raring to team up on privately financed infrastructure, a look at the Indiana Toll Road reveals several of the red flags to beware in all such deals: an opaque agreement based on proprietary information the public cannot access; a profit-making strategy by the private financier that relies on securitization and fees, divorced from the actual infrastructure product or service; and faulty assumptions underpinning the initial investment, which can incur huge public expense down the line. Though made in the name of innovation and efficiency, private finance deals are often more expensive than conventional bonding, threatening to suck money from taxpayers while propping up infrastructure projects that should never get built.

For the parties who put these deals together, however, the marriage of private finance and public roads is incredibly convenient. Investors are increasingly impatient with record-low returns on conventional bonds, and are turning to infrastructure as an asset class that promises stable, inflation-protected returns over the long run.

Meanwhile, governments are eager to fix decaying infrastructure — but without raising taxes or increasing their capacity to borrow. On the occasion of yet another meeting intended to drum up investor interest, Transportation Secretary Anthony Foxx recently wrote on the U.S. Department of Transportation’s blog: “With public investments in our nation’s important transportation assets steadily declining, we need to find better ways to partner with private investors to help rebuild America.”

Those investors are lining up to get in the infrastructure game. According to the Congressional Budget Office, about 40 percent of new urban highways in America were built using the private finance model between 1996 and 2006. Since 2008, that figure has jumped to almost 70 percent.

In an attempt to get even more deals done, the current federal transportation bill ramped up funding for the TIFIA program — which offers subsidized federal loans and other credit assistance, often to projects that also receive private backing — by a factor of eight.

Major private investors have stepped up their lobbying efforts to close more of these lucrative deals. Meridiam North America recently hired Ray LaHood, Foxx’s predecessor as Transportation Secretary, and Macquarie Group — which orchestrated the Indiana fiasco — hired away a White House deputy assistant to “continue strengthening our relationships with key elected officials… while also exploring new investment opportunities.”

 

 

From a PricewaterhouseCoopers report advising readers "how to become a player in the P3 (public-private-partnership infrastructure) market."

 

In the midst of all this excitement about an “emerging market” in privately-financed American road-building comes the big failure of the Indiana Toll Road. In the news cycle following the bankruptcy, pundits praisedformer Indiana governor Mitch Daniels for deftly negotiating the deal. Many experts seem to think that the state of Indiana will almost entirely be shielded from the fallout of this bankruptcy, since it already received its payout and retained the right to set the road’s tolls and enforce its maintenance standards. (That is often not the case in these kinds of deals. Note how Standard and Poor’s says that newer infrastructure deals have “different risk characteristics” — that is, more of the risk falls on the public, something we’ll discuss in the third installment in this series.)

At the time of its sale in 2006, the Indiana Toll Road was the largest infrastructure privatization deal in U.S. history. Investors paid $3.8 billion for the right to operate and collect tolls on the 156-mile road for 75 years. The winning bid raised eyebrows. Sure, the road is heavily traveled by cross-country trucks, but the price was twice what state officials had expected the road to fetch, and $1 billion more than any other group had bid.

But if Indiana did manage to put one over on the financier-owners, Australian firm Macquarie and Spanish firm Ferrovial, as some suggest, those owners don’t seem to be too worried. For Macquarie, an investment bank and financial services firm with almost $400 billion under management, the loss hardly even registered as a blip in its share price:

 

Image via Google

 

Under the terms of the bankruptcy deal approved last month, ITR Concession Co. LLC – the company Macquarie and Ferrovial formed – will either be sold at auction, with proceeds distributed among its creditors, or those creditors will themselves buy a 95.75 percent stake in the restructured company, thanks to a fresh $2.75 billion round of borrowing. ITR began its life as a P3 with $3 billion in bank debt, and ITR’s second incarnation could get up and running with $2.75 billion in debt — not exactly a fresh start.

Bloomberg, The Hill, Reuters and the other outlets covering this story all pinned the downfall of ITR on both a risky financing scheme and on faulty traffic projections. Most sources shrugged off the faulty traffic projections as an artifact of the recession, not as part of a longer-term, more permanent shift in driving behavior that has been widely documented.

Whatever the cause, the Indiana Toll Road’s traffic projections were indeed very, very wrong. Although the actual projections contained in the signed contract are proprietary and shielded from public view, the state of Indiana released an analysis they conducted prior to the sale [PDF] showing expected increases amounting to 22 percent every seven years. What actually occurred after ITR took over the lease in 2006 was closer to the inverse: traffic declined more than 11 percent.

But even if traffic levels had met the projections, that would not have been enough to save ITR. As Toll Roads News pointed out, predicted traffic growth plus profit-maximizing toll rates still couldn’t have balanced the books:

They’d still only have toll revenues of $245m. And with interest payments to be made to borrowers of $268m they’d still be losing money.

So in addition to faulty traffic projections, ITR relied on a risky financing scheme that inflated its costs.

Media outlets also noted that the ITR bankruptcy was just the latest and largest in a crop of privately owned tollway failures that now litter the land. In recent years, other privately financed toll roads that have filed for bankruptcy protection have included San Diego’s South Bay Expressway (also owned by Macquarie and the first project to receive federal TIFIA funds), South Carolina’s Southern Connector, and the Alabama and Detroit roads owned by American Roads. Many more are limping along and may well end up bankrupt, like SH-130 outside Austin or the Northwest Parkway between Denver and Boulder.

Bankruptcy or default won’t necessarily eliminate the risk of a public bailout. The 12-year-old Pocahontas Parkway outside Richmond has now failed twice, largely because projected sprawl in its vicinity just never materialized. (Instead, Richmond’s core is booming, as in other metro areas.) Since TIFIA loans account for one-fourth of Pocahontas’ debt, taxpayers will eventually take a hit if the road continues to miss its payments.

Who is Macquarie, and why did it pay so much to run this Indiana highway? What can we learn about private finance in the infrastructure industry by taking a closer look at how Macquarie handled the Indiana Toll Road?

And then, why were traffic projections so far off base in this case? There’s a lot of evidence that engineering firms like Wilbur Smith (now CDM Smith), which produced the faulty forecasts for the ITR, have incentives to inflate traffic projections.

We’ll dig into these questions in the next posts in this series:

Angie Schmitt is a newspaper reporter-turned planner/advocate who manages the Streetsblog Network from glamorous Cleveland, Ohio. She also writes about urban issues particular to the industrial Midwest at Rustwire.com.

Obama Shifts To Urge Private Investment in Transportation Infrastructure

Obama Shifts to Urge Private Investment in Roads, Bridges

Link to Original Article

July 17, 2014 | Bloomberg Businessweek

Obama Shifts to Urge Private Investment in U.S. Roads, Bridges

President Barack Obama tours the The Federal Highway Administration’s Turner-Fairbank Highway Research Center on July 15, 2014 in Mclean, Virginia. Photographer: Chip Somodevilla/Getty Images

Stymied by Congress in passing a multiyear solution for transportation funding, President Barack Obama is looking to private-sector companies to help fix roads.

Speaking beside a project to repair a closed interstate highway bridge in Wilmington, Delaware, Obama called for making it easier for states and local governments to access private capital for roads, bridges and other infrastructure.

“So far Congress has refused to act,” said Obama, who criticized lawmakers for failing to fully fund federal infrastructure projects through the Highway Trust Fund . “I’m going to do whatever I can to create jobs rebuilding American on my own.”

Obama briefly addressed at the start of his remarks the crash of a Malaysian Airlines plane in eastern Ukraine, calling it a “terrible tragedy” and saying U.S. authorities are in touch with their counterparts in Kiev. He made no mention of reports in Ukraine that the aircraft was shot down by pro-Russian separatists.

The focus on private money for road projects marks a shift for the administration, which had previously resisted efforts to seek commercial resources for highways and other pieces of the country’s transportation system. The result may be more tolls for drivers as companies look to make profits by operating roads and bridges.

Long-Term Investment

“There are lots of investors who want to back infrastructure projects because, when it’s done right, they then get a steady, long-term investment,” Obama said. “They get a steady return.”

States and local governments will benefit by the U.S. government playing “matchmaker” between them and private-sector investors, he said.

“If there isn’t really much hope of getting a significant increase in the fuel taxes at the federal level, the least Congress and the administration can do is give the states more tools with private financing,” said Bob Poole, director of transportation policy at the Reason Foundation, a free-market research group based in Los Angeles.

In the past five years, the 30 largest infrastructure investment firms have raised a combined $148 billion, he said in a March report citing data from “Infrastructure Investor.”

According to the same analysis, last year around the world, investors put $33.6 billion into infrastructure investment funds. That’s down from the 2007 peak of $39.7 billion, before worldwide credit access shrunk and the U.S. economy entered a recession.

Private Money

“We have trillions of dollars on the sidelines internationally that could be put to work,” U.S. Transportation Secretary Anthony Foxx said today on a conference call with reporters.

The president’s trip today coincides with an announcement that the Department of Transportation that open a center to expand public-private partnerships, strengthen relationships between state and local governments and investors, and improve access to federal credit.

Economic conditions are ideal in the U.S. to revive a push for private-sector investment in transportation, said Tyler Duvall, a principal with McKinsey & Co. Inc. who was a U.S. assistant secretary for transportation policy during the George W. Bush administration.

“They’ve probably done a lot of outreach to a lot of investors who say they want to get into the U.S. market,” Duvall said in a phone interview. “It’s exactly what these long-term investors have wanted for years.”

He cited access to credit, the demographics of the U.S. and a stable economy and legal environment.

Earlier Rejection

Obama made today’s announcement less than three years after his administration revoked a $1.5 million grant to Ohio, which wanted to study turning over operations of the Ohio Turnpike to private enterprise.

The initiative mirrors a push by Obama’s predecessor Bush, who, before the recession, advocated for more private investment in transportation. He considered privatizing the air-traffic control system and had his Transportation Department officials travel the country supporting bringing money from companies includingGoldman Sachs Group Inc. (GS:US) to transportation deals.

The Interstate 495 bridge where Obama spoke serves an estimated 90,000 vehicles daily. It was closed on June 2 after state officials found that four columns were tilting. Engineers have blamed the damage on a 50,000-ton pile of soil placed next to key supports.

 

Closed Bridge

A $35 million emergency project is under way to make repairs and officials are aiming to at least partially reopen the bridge by Labor Day.

Earlier this week, the House passed a temporary patch to replenish the Highway Trust Fund through May 2015. The legislation, which now moves to the Senate, cobbled together $10.8 billion to stave off job losses and delays to transportation projects across the country.

While the White House supports the legislation because it will keep projects on track, the administration has spent much of this week pushing Congress to approve his four-year transportation proposal or some other a longer-term funding solution.

The patch is “insufficient” to do the kinds of upgrades the country needs, Foxx said.

“If that’s all congress does we’re going to have the same kind of funding crisis nine months from now,” said Obama. “Congress shouldn’t be so proud.”

Later today, the president will travel to New York City to headline fundraisers for the Democratic National Committee and the House Majority PAC, a super PAC supporting Democratic congressional candidates. The events are closed to media.

Thirty supporters, who contributed $32,400 each, will participate in the roundtable discussion at a private home for the Democratic National Committee, according to a DNC official.

(An earlier version of this story corrected the attribution of remarks to Secretary Foxx.)

To contact the reporters on this story: Lisa Lerer in Washington at llerer@bloomberg.net; Angela Greiling Keane in Washington at agreilingkea@bloomberg.net

To contact the editors responsible for this story: Steven Komarow at skomarow1@bloomberg.net Joe Sobczyk

 

 

Abigail Field: Privatization Is Driven By Private Greed and Public Cowardice (and Public Greed, Too)

Link to Original Article

Posted on May 12, 2014 by Lambert Strether

Lambert here: Apparently, IBGYBG (“I’ll Be Gone, You’ll Be Gone”) applies in government as well as Finance. How cozy.

By Abigail Caplovitz Field, an attorney and a freelance writer. She writes news for Benzinga.com and others, and posts a new blog every Sunday morning at Reality Check.

“Privatization” and “public-private-partnerships” for infrastructure and other public assets are scams driven by private greed and public cowardice. Americans have been burned by these scams. Last month the Atlantic ran a nice piece on the growing privatization backlash.

Unfortunately, as governments at the city, state and federal level continue to lack the political will to raise taxes or cut spending, as our infrastructure continues to deteriorate, and as political leaders such as President Obama and Congress peddle the idea, the pressure to privatize public goods will continue to rise. Indeed, it’s no longer companies like Deloitte offering to do deals; we’ve reached the point where the Motley Fool is pitching retail investors.

The New Jersey Toll Road Privatization Push

It’s a topic I’ve given a lot of thought to, because in my role as Legislative Advocate for NJPIRG, I played a meaningful role in defeating then-New Jersey Governor, nee Goldman Sachs Jon Corzine’s push to privatize New Jersey’s ‘three big roads’–the Turnpike, the Garden State Parkway, and the Atlantic City Expressway.

The policy arguments we made then (2007)–and which USPIRG and others continue to make today–remain true, and provide a good, accessible framework for judging any privatization deal that may affect you.

As you read the NJ story and our cheat sheet for judging proposed deals, consider what’s at stake– the level of traffic congestion and air pollution, the safety and quality of roads, and even the availability of high-quality affordable mass transit alternatives.

When Governor Corzine came into office, there was a political consensus among a sufficiently large and diverse coalition of interests that the best way to fund New Jersey’s transportation needs was to raise its very low gas tax. But rather than gather and lead this political will to pass the tax hike–something that would have taken courage, but not heroism–Governor Corzine pushed the privatization idea. I don’t know if ducked the tax hike because he was a coward, or greedy, or driven by his deep saturation in Wall Street’s greed ethos.

Regardless, Corzine (and his Democratic legislative allies, most notably State Senator Raymond Lesniak) suggested that New Jersey should fix its chronic budget crisis by leasing the New Jersey Turnpike, Garden State Parkway and Atlantic City Expressway to a private operator for 75 years. The private operator would be guaranteed annual toll hikes, given management of the ‘three big roads‘ and would pay the state some $20 billion.

Six Principles For Judging PPP Deals

I published an Op-Ed in the Trenton Times on May 18, 2007 that explained how to judge a deal that we (I worked closely with USPIRG’s Phineas Baxandall) later fully developed in this white paper:

1. Public Control: public policy, not protecting private profit, had to control key management decisions that would not only affect the leased roads, but also the communities all along the roads. Because of the roads at stake in New Jersey, the issue was really statewide transportation policy.

What were we talking about? As the white paper explains:

“…toll levels, maintenance and safety standards, and congestion on the Turnpike and Parkway have a substantial impact on the number of cars using alternative routes, including local roads and mass transit. …

In the wake of the last Turnpike toll hike, for instance, many communities felt the impact of trucks diverted onto local roads…. Public control of key toll roads is necessary to ensure a coherent statewide transportation planning and policy making.

… Three examples illustrate these potential dangers:

● Non-Compete Clauses—Deals in California, Colorado, and to a lesser extent, Indiana, limited the state’s ability to improve or expand “competing” roads. In New Jersey…virtually all major roads compete for cars with the Turnpike and the Parkway.

● Private Toll Decisions = Broad Private Control of Traffic Management—If the rules for increasing toll rates under Chicago toll road deal had applied to the Holland Tunnel since its inception, that roadway could presently charge a one-way toll of more than $180. As a practical matter, an operator would be unlikely to charge that price because drivers would instead take alternate routes. The point is that the Chicago toll-increase schedule effectively allows the private operator to charge whatever maximizes its profits. The toll operator can also offer discounts to particular types of motorists or encourage traffic between certain exits, as will maximize profits. Together these powers enable the operator to control toll policy, and thus dictate who drives on the toll roads, and when…

[Note: although Senator Lesniak said he would require annual toll hikes but limited them to the rate of inflation, even that doesn’t solve the issue; New Jersey would have given up its ability to set toll rates, and thus all its consequences, for 75 years. It’s not just about how high tolls go; it’s about controlling the policy–congestion pricing, HOV discounts, Lexus Lanes, etc.]

● Creates “Tax” on Normal Policy Making—The Indiana deal also requires the state to pay investors compensation for reduced toll revenue when the state performs construction such as when it might add an exit, build a mass transit line down the median, or bring the road up to state-of-the-art safety standards. This compensation would add significant costs, and potentially the state could not afford to do the work it would otherwise perform. As added complication, the exact level of these future payments might be subject to dispute and lawsuits.

2. Fair Value: deals pay the state far less money than its assets were worth, as the Atlantic article notes. In New Jersey, the best public advocate on this point was Peter Humphreys, then head of securization practice at the then 13th largest American law firm (McDermott, Will & Emery).

He testified before the Assembly Transportation Committee and explained the state could itself securitize the existing annual toll revenue of $700 million for a 15-year period and get an upfront payment of about $8.4 billion. Senator Lesniak’s approach imagined getting $20 billion from a 75 year deal. Thus serial securitizations–without changing the existing toll rates–for the same 75-year time frame would produce a nominal $42 billion.

Sure, that serial securization doesn’t account for the time value of money; but it also doesn’t consider the future toll hikes guaranteed to the private lessee. If the hikes contemplated in the Lesniak deal were enacted and also securitized, the serial figure would be much higher. $20 billion was way too little.

And it’s not just New Jersey; as the white paper recaps:

A financial analysis of the Indiana and Chicago deals by NW Financial, a New Jersey investment bank that represents the Turnpike Authority (among others), found that the private investors in those deals would likely recoup their investment in less than 20 years. That analysis is confirmed in at least Indiana’s case by the company that won the bid. Macquarie sent investors a presentation asserting an “Anticipated 15 year payback to equity.” Given that Indiana’s deal is 75 years long, and Chicago’s is 99 years, the analysis suggests that governments in these states received far less for their assets than they are worth.

3. Deals capped at 30 years. As I noted in the Trenton Times Op-Ed:

Sen. Raymond Lesniak (D-Union) has introduced a bill authorizing a 75-
year deal here, in the ballpark of Chicago’s 99 years and Indiana’s 75.
Some perspective: Henry Ford introduced the Model T 99 years ago, and the George Washington Bridge opened 76 years ago. The first section of the New Jersey Turnpike didn’t open until a mere 56 years ago.

Population also shifts dramatically on these timelines. In 1930, New
Jersey’s population was 4 million; 70 years later, it more than doubled
to 8.4 million.

From these markers, it’s clear that massive, unforeseeable changes will likely take place for transportation technology, networks and
demographics over the 75-year time frame being considered here. In the face of such uncertainty, New Jersey cannot predict its future
transportation needs, nor the revenue potential of its toll roads, well
enough to negotiate a deal that fairly allocates risks, dictates policy
or sets a fair price.

To minimize this problem, New Jersey must not enter a deal longer than 30 years.

4. State-of-the-art maintenance and safety standards. As we put it in the white paper:

The New Jersey Turnpike has been innovative throughout its history. Many of its design and safety choices have been replicated throughout the country and world. It is also recognized as having traffic management and danger warning systems that are among the best in the world. Similarly, the Garden State Parkway is consistently one of America’s safest roads.

…Indiana’s deal, for example, would not guarantee this performance. … the state of Indiana can require the operator to meet generally applicable safety standards, but must pay a hefty premium to implement higher quality…. In addition to the cost of construction or performing the maintenance, Indiana would be required to pay compensation to the private operator for any loss of revenues caused by the construction or imposition of new standards.

No deal for the Turnpike and Parkway should be approved that did not guarantee that state-of-the-art innovations would continue to be introduced.

5. Complete Transparency and Accountability. Again from the white paper:

…That requires full disclosure of the deal’s terms, and any related contracts and subcontracts, at least six months before a deal is done, plus public hearings. This commitment to transparency is doubly important given New Jersey’s past struggles with corruption and pay-to-play contracts. The public must have full confidence in the process for considering a potential deal.

Likewise, New Jerseyans need to be able to hold their representatives accountable for their decision to approve (or not approve) a deal. The Legislature must vote on the final terms of any potential deal. True accountability requires that both the Legislative and Executive Branches answer to New Jerseyans

6. No Budget Gimmicks. This one is self-explanatory, but also crucial, as Legislatures typically blow the wad of cash they get from these deals without fixing anything. The Atlantic piece mentions some of that, as does the white paper.

In response to our campaign based on the principles–we demanded the Governor sign a pledge to honor them–he came out with some nice sounding principles that didn’t go nearly far enough, as I discussed in this Op-Ed in the Newark Star Ledger July 10, 2007.

Ultimately the plan cratered. The Assembly Transportation Committee, led by Assemblyman John Wisniewski (also a Democrat) was a major reason why.

While NJPIRGs position always was: privatization is fine if done right–and the principles defined “right”–realize that Wall Street will never do a deal that lives up to the six principles. It’s just not profitable enough for them, and would put too much risk on them.

Extracting “Latent Income” (NOT!)

I began by claiming cowardice and greed are the reason these deals are done. Of course, that’s not the official line. The NJ framing of the advantage of privatization–which was branded as “monetizing” the turnpike, parkway and expressway–was reported in this April 12, 2007 Philadelphia Inquirer article this way:

““Monetizing” assets means squeezing latent income from them by selling or leasing them.”

As I pointed out in this letter to the editor about that article:

The article stated that “‘monetizing’ assets means squeezing latent income from them by selling or leasing them.” The Inquirer’s readers may imagine that this process harnesses additional value or productivity from the roads themselves. That is not the case.

“Monetization” simply means to borrow against a future source of revenue. Instead of receiving toll money at a later date, the government would receive cash up front today. Thus, monetization only “extracts latent income” the way individuals do when they take out a payday loan or a second mortgage.

To be fair, I should have said “in this case Monetization simply means” as monetizing doesn’t have to involve borrowing. But that doesn’t change my point then or now. The myth of privatization is that private companies can magically make things more valuable than government can, without articulating a coherent, stands up to scrutiny reason why it can.

Given that $20 billion was much less than the 75 year toll revenue was worth, where was the latent value extraction in the Lesniak deal?

Cowardice And Greed

Public policy involves tough choices. Privatization deals offer legislatures and governors an easy sounding way out; let stuff happen long after they’re out of office (and hope that’s when the bad consequences hit), and get in return a big wad of cash to blow now. No need to raise taxes or cut services.

Thus often privatization advocates on the government side are simply cowards–they don’t want to raise taxes, and they don’t want to cut spending.

The greed happens on both sides. On the private side, it’s the extraordinary profit potential. On the public side, greed can also shape decisions whether through quid pro quo type corruption or revolving door corruption.

And of course, greed and cowardice are not mutually exclusive motives.