Home Capital Program 2010-2014 Looking at private partners for capital funds

Looking at private partners for capital funds

by Benjamin Kabak

The MTA’s $10 billion gap in its current five-year capital plan has been much publicized of late. With only five months and change remaining in 2011, the time for action is dwindling, and Albany is going to have to confront this 800 pound gorilla when the state legislature returns in the fall. With rumors of a renewed effort to initiate a congestion pricing plan and fears of a capital works shutdown that could impact the MTA and construction industry percolate, authority officials are trying to be as flexible as possible while seeking out new ways to fund construction initiatives.

Yesterday, at Crain’s Future of New York City event, MTA CEO and Chairman Jay Walder spoke on a panel about the future of infrastructure investments. While I could not attend the session this year, Crain’s own reporters were on hand to hear the talk. Shane Dixon Kavanaugh has the skinny as various government officials spoke of the need to explore public-private partnerships:

Mr. Walder of the MTA also conceded that private funds may be necessary to help close the yawning budget gap on the authority’s five-year capital plan, which remains unfunded by about $10 billion. “Private capital may play a part [in the plan],” he said.

But Mr. Walder maintained the MTA’s primary focus would be to continue to lower costs through innovation and efficiency measures, which he hopes will increase public support for large infrastructure projects in the future. However, Mr. Walder noted the authority needed more. “By themselves, efficiency and innovation won’t be enough,” he said, after the panel discussion concluded.

Which is where infrastructure funds, like the one Felicity Gates runs, could step in and fill the void. Ms. Gates said the average return on such funds in Europe and Australia, where they are most prevalent, can run as high as 12%. These long-term investments, however, can take up to 20 years to see a return. Historically, U.S. pension funds have not included infrastructure, according to Ms. Gates, because the municipal bond market has made it easy for governments to finance these projects. While that’s beginning to change—Ms. Gates predicted infrastructure investments could eventually equal the level of real estate investment in a pension fund—it will be a slow evolution. “Everyone expects it to happen overnight,” Ms. Gates said. “But it will not.”

By and large, I’m hesitant to embrace these public-private partnerships. Internationally, they haven’t been very successful, and oftentimes, the government granting the partnership in the first place has had to step in to resume control. That is, at least, what happened when London tried to institute a PPP for parts of the Underground. Some in Australia, India and Canada have been successful though.

In New York, if the MTA has to resort to a PPP, we can only speculate at the form, but it would likely involve ceding some amount of fare revenue to the private entity in exchange for money to float bonds for construction. As far as I’ve heard, the MTA cannot issue more bonds without additional financial support. Whether this model would represent a sound investment for a private entity or a safe financial move for the MTA remains to be seen. After construction, too, the MTA’s operating costs will increase as the authority will have to provide additional service to the new stations.

Right now, these are all just ideas, but they’re ideas coming to a head. The MTA needs action on its capital plan, and it needs money. Walder knows that state representatives are listening, and he knows that some legislators won’t be too keen on public-private partnerships. The onus then is on Albany to keep the transit system afloat and expanding to meet demand without sacrificing its autonomy.

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Marc Shepherd July 20, 2011 - 8:30 am

Count me as a PPP skeptic, too. Private investors look to make a profit. I can’t imagine a workable scheme that involves ceding control or revenue to private operators whose main agenda is a rate of return, rather than providing a public service.

If legislators and citizens think the MTA is too expensive now, imagine how they’ll feel if their fare dollars are lining the pockets of private investors?

Michael E. Gruen July 21, 2011 - 11:58 am

Will they care if the service runs on time and provides a better value? Who cares if it’s private or public—do you care that private subway car manufacturers make a profit on making a better product that ultimately costs you money?

I think privatizing transportation, at least partially, could be a good thing. But, there are some situations that are fraught with peril: as an example, take a look at how an unresponsive private LLC (with investment from who-knows-where) controls Chicago City parking, making events like parades and street fairs all but impossible to pull off. To boot, we don’t know where the revenue goes. This situation was in response to a budgetary crisis that the current governing body needed to fix in order to get reelected.

It could work, but you need a very flexible private company. If I could, this is something I would bid on.

Bolwerk July 21, 2011 - 2:11 pm

Privatization fetishists don’t understand finance or economics. Privatization is all well and good if it works and there’s a profit, but if there isn’t it just means higher costs to get needed financing.

Scott E July 20, 2011 - 9:17 am

I can’t quite follow what the role of the “private” part of this scheme is. Are they simply investors buying bonds (they do that now), or will they take over some part of operations?

The problem with the latter is that, in order to do something more efficiently than is currently done, they will have to do it differently. Maybe engineer a new type of fare-control. Maybe close off one entrance to a station per hour to clean it. Maybe use different types of surveillance cameras. Maybe release a flood of ROOMBA robot-like contraptions to scrub the platforms every couple of hours.

My point is this: MTA, and particularly NYCT, is very resistant to change. If a contractor wants to do something, there is an extensive process to demonstrate what they want to do, why it is beneficial to do it that way, what the potential fallbacks are, etc. In the end, the process is so cumbersome that contractors often will do exactly what’s asked: they’ll buy the $7500 LCD display that’s specified rather than a $750 equivalent from Costco because the fight is just not worth it.

Unless the “Private” component of the partnership gets free reign to do things his way, he’ll end up doing the same thing that the MTA does now, except add a bit more cost to the top to line his own pockets.

Buzzwords like Public-Private-Partnerships are nice, but that requires a relinquishment of power, and I don’t think that will happen. Well… it is happening with LI Bus, let’s see how that goes.

Larry Littlefield July 20, 2011 - 10:56 am

Public private partnerships only work if a public activity is earning a profit that the private sector could capture. How the hell would that work at the MTA?

This smells like a ruse for stealing money from the future, such as turning over the surplus making TBTA to a private entity in exchange for money up front — leaving an even bigger hole in the future.

pea-jay July 20, 2011 - 2:41 pm

didn’t transit agencies do lease-backs for several years at the end of the 90s? I remember the CTA “sold” its rolling stock to an investment outfit and “leased it back” from them. CTA collected cash up front and the investment outfit was able to reap tax benefits from being able to claim depreciation (which the CTA would not be able to do).

Does anyone do that anymore?

Namer July 20, 2011 - 9:01 pm

Is that the same reason why I sometimes see NJ Transit buses with the words “Owned by the Port Authority” on them?

Al D July 21, 2011 - 9:23 am

Back in the big, bad ’80s, many NYCT buses had similar writing

MTA promises $2 billion in capital spending cuts :: Second Ave. Sagas July 20, 2011 - 3:53 pm

[…] for an organization not known for keeping costs down, and the commitment to costs along with a fear of public-private partnerships could spur Albany to […]

Ben Fried July 20, 2011 - 7:22 pm

it would likely involve ceding some amount of fare revenue to the private entity in exchange for money to float bonds for construction.

how would this be any better than raising the fare and floating bonds off of that?

Alon Levy July 21, 2011 - 2:34 am

Ia, ia! Ph’nglui mglw’nafh Ayn Rand R’lyeh wgah’nagl fhtagn! Ayn Rand fhtagn!


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