State Level

States do not Rigorously Evaluate Privatization Agreements

In order to safeguard the public interest, elected officials must rigorously examine every aspect of a privatization agreement. They must ensure that privatization is the most appropriate means to deliver a particular project, and they must be certain that aspects of the public interest, such as protecting taxpayers and the environment, are not overlooked. Unfortunately, state governments have failed to develop systematic approaches to evaluating these public interest concerns in privatization agreements. Instead, public officials tend to employ an ad hoc approach in which they may consider some aspects of the public interest, such as the impact on regional mobility, but ignore other important aspects, such as equity concerns.103

Governments in other countries, such as Australia and the United Kingdom, have developed systematic approaches to identifying and evaluating the public interest before entering into privatization agreements. Typically, these governments identify important elements of the public interest and develop criteria for how to consider potential deals. In Australia, for example, the state of Victoria requires all privatization agreements to be judged according to eight specific public interest tests, including whether the rights and views of affected communities have been heard and protected, whether community health and safety are ensured, and whether there are sufficient safeguards to ensure public access to the infrastructure.104 These public interest evaluations are conducted often during the negotiations to adequately protect the public.105

Unfortunately, these kinds of safeguards have been used much less frequently in the United States. In a recent report titled, Highway Public-Private Partnerships: More Rigorous Up-front Analysis Could Better Se-cure Potential Benefits and Protect the Public Interest, the U.S. Government Account-ability Office notes that neither Chicago nor Indiana employed public interest tests prior to the leasing of the Chicago Skyway or the Indiana Toll Road, such as ensuring transparency of negotiations and examining effects on regional mobility. They also failed to use comparisons with the public sector to examine the long-term costs of a project and the value of transferring risk to the private sector. In fact, Indiana Governor Mitch Daniels did not even com-mission an independent financial analysis of the concession until the deal was almost complete.106 Similarly, transportation officials in other states, such as New Jersey, Pennsylvania, and Illinois, admit that they have not developed a systematic approach to assessing public interest concerns.107

The failure to use formal public interest tests may result in certain aspects of the public interest being overlooked, such as the value of foregone toll revenue. When states have decided mid-course to conduct thorough analysis, it has often changed their decisions. In Texas, for example, Harris County conducted a study in 2006 to examine the value of a long-term concession compared to retaining public control. The county determined that it would gain little through the concession, and that by implementing more aggressive tolling, it could realize similar or greater financial gains. Thus, Harris County opted to retain control of the toll roads.108 Similarly, when Oregon hired a consultant to compare the estimated costs of private versus public sector financing, the state concluded that the cost of the privately financed project was not justified given the limited value of risk transfer. Unfortunately, the study was not conducted until after the private partners had already done substantial early development work.109

States Lack the Capacity to Independently Assess and Monitor Concession Agreements

Private road contracts require ongoing vigilance. Private operators have a monetary incentive to underinvest if such underinvestment will not affect their bottom line. For this reason, public oversight of transportation projects is essential to en-sure that safety standards are maintained.

But, while the budgets for transportation departments have increased over the past five years, staffing levels have either declined or remained stagnant.110 This has resulted in an unprecedented level of contracting out by state agencies, accompanied by a decline in oversight.

Long-term concession deals are extremely complex, and state DOTs are unlikely to have the in-house expertise needed to appraise, monitor, or oversee privatization agreements. The state must also be ready to litigate when companies demand compensation for public decisions that reduce toll traffic. In Georgia, the DOT's new commissioner put a hold on all privatization agreements due to her staff's lack of experience.111 In order to manage these projects, state DOTs are increasingly outsourcing engineering, inspections and other tasks to private contractors and consultants. In 2006, the Federal Highway Administration found that several state projects had been delayed due to inadequate staff oversight capacity and expertise. Reviews of quality assurance activities have found numerous deficiencies in state oversight of consultants.112 Similarly, the U.S. Government Accountability Office (GAO) finds that the trend toward outsourcing erodes in-house expertise, which will further diminish the ability to oversee projects in the future.113

Increasing reliance on outside con-tractors has also increased the potential for conflicts of interest with private road operators. With the growing interest in privatization among investment banking firms, there is a possibility that a firm may provide financial advice to a state while simultaneously engaging in investment banking for the same deal.114 For example, Goldman Sachs was an advisor to Indiana on the concession of its toll road, but failed to mention that it was also creating a fund whose sole purpose was to invest in infra-structure. In fact, while it was supposedly advising Indiana on how to get the best return, its Australian subsidiary's mutual funds were investing in Macquarie Infra-structure Group (the concessionaire), be-coming de facto investors in the deal. These potential conflicts of interest, coupled with the lack of oversight by state officials, mean that decisions may not be guided by what is best for the public.115