Public Private Partnerships have their downsides

traffic_congestion.jpegThe wonders of the Public-Private Partnership (P3) have their skeptics, like columnist Frank DeFilippo here. What seems a handy way to offload expensive state projects (like toll lanes on I-495 and I-270) onto the private sector (wait, just why do they have all the money, again?) may turn out to cost users and leave the public on the hook for boneheaded decisions by private business.



The wonders of the Public-Private Partnership (P3) have their skeptics, like columnist Frank DeFilippo writing in Maryland Matters. What seems a handy way to offload expensive state projects (like toll lanes on I-495 and I-270) onto the private sector (wait, just why do they have all the money, again?) may turn out to cost users and leave the public on the hook for boneheaded decisions by private business, as was recently pointed out in this op-analysis. DeFilippo recounts the bad experiences some other states have stumbled into by following the recipes from Koch Brothers think tanks.


/By Frank A. DeFilippo<>Maryland Matters/ More than a decade ago, the state of Indiana sold a 157-mile toll road to a private venture for a lump sum payment of $3.8 billion. The road lost $260 million a year later, the private consortium was unable to make the debt payments and the state almost got stuck with paying off the bonds. A second private consortium bailed out the deal for $5.7 billion with 66 years left on the lease. Tolls skyrocketed.

Illinois turned its lottery over to private managers but canceled the arrangement after three years when revenues fell $500 million behind projections. Ditto the states of New Jersey and Indiana when lottery revenues failed to live up to expectations and the private management experiment.

With the arrival of that bad news, Pennsylvania deep-sixed any thoughts of turning over what at the time was the nation’s most successful lottery to private managers. But the Keystone State did put the Pennsylvania Turnpike, the nation’s oldest, up for bid in 2008 and the winners agreed to pony up $12.8 billion for a 75-year lease on the toll road that traverses the state. Tolls on the Turnpike have gone up every year since 2009 at a rate of about 6 percent a year.

There are now 153 private for-profit correctional facilities in the U.S. with a capacity of 157,000 inmates, mainly strung across the Prince_George's_Deserves_Better.jpgSouth, where judges have allegedly been in cahoots with the corporations that own them when sentencing prisoners.

For-profit jails operate slightly cheaper than state-run prisons and they do so by serving cheaper meals, laying off senior employees and cherry-picking prisoners by sending more costly inmates back to state prisons, costing the states more in the bargain. And many of the troublesome containment camps at the southern border are run by private managers, with daily headlines revealing inhospitable conditions.

Closer to home, the City of Baltimore attempted to privatize some of its worst performing public schools and the experiment was a disaster. And many privately-run charter schools, funded with taxpayer dollars, are performing no better than the public schools they were supposed to academically surpass.

The Intercounty Connector, the variably priced toll road linking Montgomery and Prince George’s counties, has been an under-performing financial flop, with revenues running far below projections. The so-called “Lexus lanes” in Virginia have produced commuter backlash because of their excessive rates that are tagged to traffic volume – the fewer the cars, the higher the tolls.

And Maryland’s unique transportation fund is short-changed for a couple of avoidable reasons: Gov. Robert L. Ehrlich Jr. (R) introduced the use of GARVEE bonds to fund transportation projects, i.e., the borrowing of money against future federal highway funding; and Gov. Larry Hogan (R) has cut tolls, which help defray transportation bonds. (Bonds have a 1 x 10 borrowing ratio. Every dollar in the transportation fund will leverage $10 in bonding capacity.)

Now the for-sale sign is up once again in Maryland. At Hogan’s insistence, the state will plunge ahead with plans for an $11 billion public-private partnership (known as (a P3) – an arrangement in which private companies profit at taxpayers’ expense – to add toll lanes to Interstate 270 and Interstate 495 as the quickest way to relieve some of the nation’s worst traffic congestion, in the Maryland suburbs around the nation’s capital. Which project comes first was a matter of compromise to ease constituent complaints and concerns.

P3s are rare but not new to Maryland. In 2009, Maryland’s Department of Transportation signed a public-private agreement with Ports America to develop the Seagirt Marine Terminal in Dundalk. In 2012, the Board of Public Works awarded a $56 million contract for redevelopment of two Maryland travel plazas along I-95, Maryland House and Chesapeake House. The state estimated at the time that the deal would produce $400 million in revenue and 400 jobs over the life of the 35-year contract.

The holder of the contract at the time, HMS Host of Bethesda, contested the award over allegations of MDOT’s secretive process. And back then, in the middle of Gov. Martin O’Malley’s (D) push for privatization, was State Center, the $1.5 billion taxpayer-funded mixed-used complex in Baltimore that was challenged by a group of businessmen headed and financed by attorney Peter G. Angelos. The project is still revolving through the courts.

P3s got their start as a conservative cause in 1984 under President Reagan. The idea was that government should be a facilitator and not a competitor with private businesses wherever privately-owned companies can do the job and make a profit.

There was a demand, back then, that government auction off all of its assets, such as parklands, forests and buildings – other than national security interests – to private businesses to own and maintain as a way of solving the nation’s debt.

In short, profits belong in private pockets and not in the public purse, a latent form of crony capitalism and along with it surely another beneficial source of future campaign contributions. Taken to their ideological extreme, public-private partnership advocates would turn over Social Security and Medicare to Wall Street croupiers – as they tried and failed several times – to gamble with Americans’ well-being and future security.

If it all sounds like a scheme that self-interest author Ayn Rand would dream up, that’s exactly what it was.

Today, 36 states have enacted legislation to allow P3s, many out of desperation for funds in the slumping economy when the real estate bubble burst more than a decade ago. Ohio, for example, sold its turnpike for $3 billion. In return, it receives a share of the tolls.

And all of a sudden, around the turn of the decade, blue states, such as Maryland, began embracing the idea that was advanced at the time by the American Legislative Exchange Council, an organization that is funded by the hyper-libertarian sugar daddies, the billionaire Koch brothers. (As far back as 2012, O’Malley, an uber Democrat, advanced legislation formalizing P3s in Maryland.)

By now, students of human motivation might have recognized a distantly familiar pattern. Private profits at public expense are really nothing new in Maryland, especially in Baltimore. P3s are simply a sanitized version of the late Mayor William Donald Schaefer’s “shadow government” whereby he used public funds to subsidize construction and other projects for his businessmen-buddies and supporters who made huge profits using public bond money.

Schaefer pretended to abolish the public-private slush fund when the scheme was exposed by The Baltimore Sun. But the off-the-books operation existed long after Schaefer left City Hall because the city was still – and maybe still is – paying off the bonds. “Do-It-Now” government, Schaefer-style, didn’t come cheap.

Schaefer had another distinction as mayor. He sold the Baltimore Transit System (bus lines) to the state; he sold Friendship Airport (now Baltimore-Washington International-Thurgood Marshall Airport) to the state; and he sold City Hospitals (now the Johns Hopkins Bayview Medical Center) to the state and it eventually wound up in private custody. These were all valuable assets the city could no longer afford to support.

traffic_congestion.jpegThe rules of politics are the rules of the marketplace. P3s are designed to get government out of the money side of business deals. In doing so, the state sacrifices a certain amount of control as well as accountability.

The state has no control over prices, tolls or the revenue stream. Elected officials are responsive, to some degree, to the will of the voters. Private investors, in partnership with governments, are responsive to no one except the accounting ledgers. They can’t be voted out of office for screwing the public as was evidenced by the collapse of Wall Street (and by many accounts the next credit bubble is on the way because of “shadow banking”). After all, weren’t banks and brokerage firms that required taxpayer-funded bailouts and subsidies public-private partnerships?

Maryland’s P3 law has a uniquely local and liberal flavor. It is heavily protective of organized labor and therefore is enjoyed by unions that might otherwise have opposed such provisional financing. It requires that private partners pay a living wage and hire minority businesses, among other caveats.

This, in itself, might discourage many private entrepreneurs from joining in public-private partnerships with Maryland state government. One of the unspoken uses of P3s has been as union-busting tools in conservative states where right-to-work laws prevail.

Ohio and Indiana are examples. In Wisconsin, former Gov. Scott Walker (R) faced a recall election (he won) because of his union-busting. In Maryland, too, businesses, especially the construction industry, have long complained that Maryland’s prevailing wage law inhibits non-union companies from bidding on projects. And they may be unwilling partners in P3s because union protections add greatly to the cost of doing business at the expense of profits.

The primal scream about P3s is that they allow Maryland to undertake projects that it otherwise couldn’t afford because of debt constraints. And, of course, they will create jobs. But selling itself to the private sector in long-term arrangements might be a shortsighted strategy – especially for taxpayers who could eventually get stiffed with the bill.


Published June 10 by Maryland Matters.