Monday, March 30, 2009

The ABCs of PPPs

The notion that government should even consider leasing public assets to the private sector evokes passionate debate. But whether or not one is disposed ideologically to support that strategy, it is clear that the number of public-private partnership (PPP) proposals will be increasing significantly in the near future - both locally and nationally - in light of the deteriorating condition of most government budgets.

That being the case, those on both sides of this issue would do well to consider a study released last week by the Pew Center for the States, succinctly described here on Pew's nonpartisan online news site.

The Pew study conducts a post-mortem on the largest PPP proposal in U.S. history - Governor Ed Rendell's plan to lease approximately 500 miles of the Pennsylvania Turnpike to a private company that would collect the tolls and manage the turnpike in return for an upfront payment of $12.8 billion. That plan died last fall when the winning bidders withdrew their proposal after continued inaction by the Pennsylvania Legislature.

The Pew researchers conclude the deal may have made sense for Pennsylvania, but it failed because of a series of strategic mistakes by Rendell and his administration. It offers several lessons for other governments contemplating PPPs - lessons that may be relevant for the City of Milwaukee and Milwaukee County, both of which have floated ideas for significant PPPs (the city for a potential lease of its water utility and the county for a potential lease of General Mitchell International Airport). Those lessons include the following:

  1. Don't oversell it. The Rendell administration planned to use $1 billion per year in investment earnings from the upfront lease payment to fund other infrastructure projects. While sound on the surface, the Pew study points out the governor's strategy assumed a highly unrealistic 12% rate of investment return. That cast doubt on the credibility of the entire deal, other aspects of which were accurately projected. Lesson for Milwaukee: don't try to sell a major PPP as the grand solution to the city or county's budget problems unless there are accurate numbers to back up such a claim.

  2. Properly assess and explain the specific need for and use of lease revenues. The Pennsylvania plan generally proposed spending investment proceeds on highway needs, but it did not delineate specific projects nor compare projected annual revenues to projected annual highway expenditure needs. This contrasts with the approach utilized for the Chicago Skyway and Indiana Toll Road PPPs, which carefully laid out plans for spending lease proceeds. Lesson for Milwaukee: be specific about why the lease revenues are needed and how much of a dent they will make in the fiscal problems they are purported to address.

  3. Establish and maintain a spirit of partnership and transparency among different branches of government. The Pew study notes that Pennsylvania legislators did not feel they were equal partners in the deal, the timing and precise details of which were dictated by the governor's office. Lesson for Milwaukee: in order to advance a major PPP proposal, leaders from both branches should be involved from the beginning and proposal details should be formulated and shared by staff and/or outside financial advisors who are trusted by both. Of course, that may be easier said than done in Milwaukee County, where extreme conflict exists between the two branches, but the recent cooperative effort to develop a pension obligation bond proposal provides an excellent model.

  4. Do not couch the debate solely in terms of the impact on the existing financial crisis. Pew researchers explain that in Pennsylvania and most other states where significant PPPs have been debated, the focus has almost exclusively been on the generation and use of large upfront payments to address short-term fiscal needs, while long-term economic and environmental risks and benefits have been downplayed. Lesson for Milwaukee: leasing major public assets to the private sector generates legitimate concerns with regard to future costs for users and future control of decision-making. Rather than being trivialized by proponents of the deal, these concerns must be properly anticipated, laid out and explained to the public and accompanied by analysis detailing how they may be outweighed by perceived benefits.

The lease or sale of public assets may not end up as a viable and appropriate part of the solution to pressing budget problems facing Milwaukee County and the City of Milwaukee. Still, as the Forum argued in a report issued last week as well as earlier commentary, the magnitude of those problems demands that this concept at least be debated. Leaders in both governments would benefit from examining the experiences of other states and municipalities where PPP proposals both have succeeded and failed.

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