The 51 percent solution
Looking for a new financing model at Cumberland County Meeting
By Kathryn Buxton
Public-private partnerships have become the cause celèbre of the transportation community. As the well of federal infrastructure financing has dried up in recent years, cash strapped state governments and municipalities are turning increasingly to the private sector to fund major infrastructure repairs and construction.
Still, the politicians, community leaders and the public should be wary about how those partnerships are structured, said Eva Lerner-Lam of the Palisades Consulting Group. Lerner-Lam was the guest speaker at the 2008 MBTA Cumberland County Meeting on March 6 at the Portland Marriott in South Portland. Her talk, titled “Not Business As Usual: A Statewide Transportation Development Corporation for Maine,” focused on the lessons Maine could learn from various public-private financing partnerships in the United States and China.
MBTA President Lauren Corey welcomed more than 130 MBTA members, state legislators and friends to the evening presentation on March 1. She also introduced Senator Damon (D-Hancock), chairman of the Maine Legislature’s Joint Standing Committee for Transportation.
Damon talked about the current realities of transportation funding in Maine during a time of rising fuel costs, inflationary pressures on construction and falling Highway Fund revenues. He was fresh from a series of budget sessions at the state house that ultimately led to $170 million in total cuts to the General Fund. He described the disheartening process of culling through the proposed cuts in services to Maine citizens. “These are dark days and we are making some very tough decisions.”
Yet despite budget pressures, Damon said there was a growing consensus among Maine’s senate and house leadership that the state needs to address the gap between the need to maintain our transportation system and the falling state and federal revenues. “It’s our future and our economy,” said Damon.
In contrast to Senator Damon’s dark portrait of Maine’s current transportation funding crisis, Eva Lerner-Lam offered a glimpse of a new trend in infrastructure financing, the public-private partnership (PPP). She dissected the different PPP models being introduced here in the U.S. She said that, despite their high-minded names, few of the PPP structures – from the “regional mobility authority” in Texas to the new “public benefit corporation” being proposed in New Jersey – is a true PPP that protects the public’s interest as well as it should.
She asserts that many of those PPPs are built on the same financing principles that have failed American public interest in the past, such as Enron and the subprime mortgage market failure. In many cases, the agreements are more about creating a debt that can be repackaged and resold than they are about capital investment in public infrastructure.
In contrast, she offered a look at the “government as shareholder” model that has fueled a two-decade-long infrastructure building boom in China. What makes a PPP successful, asserted Lerner-Lam, is a savvy government entity that retains a controlling stake in any given project and demands corporate transparency, whether the PPP has been formed to finance a new high speed rail line, reconstruct a bridge or expand capacity on a congested highway.
Lerner-Lam presented a quick history of the PPP in China, from the citizen’s protest of government economic policies at Tiananmen Square in 1989 to the present day, where China has rapidly developed a modern and efficient transportation system that includes high speed transit, advanced freight and an interconnected network of highways that have in turn fueled an economic revolution.
Because the Chinese people have little stomach for paying taxes, the government has had to look outside for funding. “I don’t think there is a right wing Republican in the U.S. who hates taxes more than the average Chinese citizen,” said Lerner-Lam.
The solution the Chinese government settled on was a form of PPP that established the state as the majority owner – whatever the venture, the local, regional or national government always retains at least 51 percent ownership. Lerner-Lam demonstrated how the Chinese model would work in Maine.
First, the government forms a shareholder corporation – a Maine transportation development corporation – to build, fix or maintain the state’s transportation infrastructure. Then various parties – local and regional government, tourism enterprises, banks and other private investors – are invited to participate. Each party brings cash, in-kind services, or other resources to the partnership in exchange for an equity stake.
The corporation’s capital is invested in a segment of the statewide transportation plan. The revenue streams are diversified in order to make the venture more robust: for example, fares, tolls, fiber optic leases, sales of e-data and proceeds from real estate transactions. The net income is either reinvested or paid out in the form of dividends to corporate shareholders.
Lerner-Lam said that not all of China’s PPPs have been successful, and when they fail, there is no bailout. The partnership goes into bankruptcy. When one is successful, the corporation goes public, encouraging even more investment that becomes available for maintaining existing highways or bridges or building new infrastructure.
The model works, because “it’s all about making money,” said Lerner-Lam and that “profit motive drives efficiency and productivity.”
Lerner-Lam’s presentation was a continuation of a presentation on China’s infrastructure building boom that she had made at the 2007 Maine Transportation Conference in December. She had won the Max L. Wilder Award for that presentation, and Lauren Corey took the opportunity to formally present Lerner-Lam with the award.
For her part, Lerner-Lam complimented her Maine audience, saying it was “extraordinary” to have a group that was willing to look “outside the box” for solutions to the enormous challenges the state faces. N
2008 Cumberland County Meeting Sponsors
Many thanks to the following companies for sponsoring this MBTA gathering.
The Lane Construction Corporation
T.Y. Lin International
Pike Industries, Inc.
Sebago Technics, Inc.
Wyman & Simpson, Inc.