4. Who Will Mind the Store? Oversight and Service Provision

Whether it's running a government-funded mental health program or operating a road, a contract that calls on the private sector to perform a traditional government task does not diminish public responsibility. A strong oversight role for the state is critical. Unfortunately, oversight is where many contracts fall short. Contract oversight practices have been faulted by auditors in recent years in such states as Maryland, Nevada, Texas, Mississippi, California, Kentucky, Missouri and New York. These reports show that inadequate oversight of contractors has led to steep declines in service, noncompliance with contract requirements and lengthy delays in deliverables.80

A long-term lease of an infrastructure asset is just that: a lease, not a sale. The government remains the owner and is still accountable to taxpayers for the condition of the asset. It must ensure the private operator is providing the quality and quantity of services promised, mitigate risks that arise and bring the contract to a healthy close, whether because the contractor defaults or the deal ends as scheduled. The lease agreement should set out a framework for how the state will manage the contract and ensure the private operator adheres to its obligations.

Because a lease may be a completely new type of arrangement, some governments will set up a new and formal mechanism for managing it. For example, as part of Indiana's concession agreement, an Indiana Toll Road Oversight Board was created. Composed of state employees and private citizens, the board reviews the performance and operations of the concessionaire and identifies areas of non-compliance. It meets at least quarterly, discussing issues ranging from traffic incidents and concerns raised by residents to the implementation of electronic tolling.82 In Chicago, the agreement stipulates that independent engineers be hired to oversee all construction projects in which the concessionaire engages. In both the Chicago Skyway and the Indiana Toll Road concessions, the private operator must reimburse the state for oversight and monitoring costs.

The government's oversight ability depends heavily on the kinds of arrangements that were agreed upon during the deal-making process- the performance measures embedded in the contract and stipulations about the way performance will be reported, either to the government or to taxpayers. In general, performance measures in lease agreements are usually based on the Highway Design Manual, which defines levels of service. These focus on traffic flow and the experience of the road user. For example, the Indiana Toll Road agreement says the operator must improve the service level when traffic slows on urban roads or starts to clog traffic on rural roads. Frequently, performance measures are task-specific; in Indiana, for example, a pothole must receive a temporary patch within 24 hours after it has been detected, and permanent repairs are required in a month.83

As governments gain experience overseeing public road leases, they may want to focus more on ensuring ultimate results than controlling how the private operator achieves them. For instance, a periodic check on whether the road is free of debris would be more valuable than a report on how many times it has been swept. But identifying outcomes does not guarantee they will be achieved. A contract also must include benchmarks measuring adequate progress toward those outcomes and an enforcement mechanism, such as financial penalties, if the standards aren't met. Beyond enforcement mechanisms to ensure compliance, governments also can build in incentives to spur private operators to go beyond basic contract obligations. For example, with Italy's Autostrade-the concession of more than 2,000 miles of the country's highways-road quality is a big factor in determining when and by how much a private operator can increase tolls. In fact, the operator has a built-in incentive to go beyond general upkeep: if it improves road quality, it is allowed to increase tolls by an amount greater than the rate of inflation.84 In the United States, the toll-setting regimes adopted thus far have not been designed with the same flexibility or incentives to allow an operator to charge higher tolls in exchange for greater improvements.

Typically, road leases offer numerous opportunities for early termination of the deals. In the most extreme case, a government can declare the private operator in default of the agreement and move to end it. There also may be good reasons that a government would want the opportunity to buy itself out of the agreement. For example, the lease concession for the Pocahontas Parkway in Virginia gives the state Department of Transportation the right to end the agreement "for public convenience,"as long as it makes a fair market-value payment, provides a guaranteed 10.5 percent rate of return to its contractor and pays any outstanding debt.85

If the lease runs its agreed-upon course, future leaders will need to make sure the road is in good condition when it is handed back to the state. These "hand-back" conditions are generally stipulated in the contract, with pre-set standards for the road's physical and financial condition.