Cash-strapped NY to partner with private sector?

Against a backdrop of multibillion-dollar state deficits and a slate of major infrastructure projects beset by overruns and delays, Gov. David Paterson announced the creation of a public board that would oversee and arrange deals with the private sector to build and operate everything from wind farms to a high speed rail link.

The creation of the new body comes at the recommendation of a commission put together by Paterson last September to explore what types of deals the state could arrange with private partners and concessionaires to develop infrastructure and save on the maintenance and operation of assets it already owns.

The commission's findings were released in a final report along with the governor's announcement.

It suggests a host of projects that the state could pursue with private partners, including deals to develop a 439-mile high speed railway between Buffalo, Albany and New York City that would cost billions, a $1.4 billion replacement of the Kosciuszko Bridge on the Queens Expressway and also a massive $16 billion plan to rebuild the Tappan Zee Bridge and bring rapid bus and rail service along 1-87, the roadway that runs over the bridge.

The report also suggests that a single private entity could better maintain existing infrastructure like the Gowanus Expressway and that a private partner should be charged with overseeing the repair or replacement of 290 short span bridges across the state that have been identified as deficient.

Although more popular overseas, forging infrastructure deals with the private sector is not new in the U.S.

In recent years, Chicago leased its parking meter system for over a billion dollars and its Skyway for 99-years to a private partnership for $1.8 billion. Soon after, the nearby Indiana East-West Toll Road was privatized in a long-term deal for $3.8 billion.

With so many municipalities struggling during the tough economic times, more cities and states have been looking to similarly monetize public assets to patch soaring deficits.

Los Angeles for instance is exploring a parking meter deal similar to Chicago's and California State Gov. Arnold Schwarzenegger announced a possible plan in May to raise money for the state's $20 billion deficit by selling off state owned properties like the L.A. Coliseum, the Del Mar Fairgrounds and a collection of government office buildings.

One thing New York's report appears to eschew for the time being are these types of outright privatization deals that seek to turn public assets into lump sums of cold hard cash in order to plug daunting budget gaps; including a $6 billion deficit in New York that could very well widen amid the current long and deep, revenue sapping recession.

"We're not saying that we want to privatize anything or sell assets, we want to have relationships where we utilize the considerable financial resources, the talent and experience of the private sector working with public agencies to do a better job of delivering services to the people," said Carl McCall, a former New York State Comptroller and gubernatorial candidate who chaired the commission and spoke during the Governor's press conference on Monday.

According to officials who spoke at the press conference and the commission's report, New York's model would aim instead to supplement major projected shortfalls in infrastructure spending with private capital and offload the risk of construction cost overruns incurred developing infrastructure onto private partners.

"It's a stimulus plan that doesn't rely on tax increases or more spending, it uses an efficient allocation of risk to stretch our tax dollars and create more jobs and do more with less," said Samara Barend, a Paterson administration staff member who was a member of the commission.

Officials say that the partnerships will provide a pipeline of cash to develop more projects over a shorter time horizon, improving the state's energy, transportation and technological infrastructure and increasing its competitiveness without bogging it down in the debt that it would normally incur by taking the usual approach to financing infrastructure via the municipal bond market.

The commission's report pointed to an example in Florida where the construction of a new roadway, highway I-595, was partially financed by a private partner, which also was put in charge of designing and building the project--and paying any cost overruns.

In exchange Barend said, Florida will make steady payments to the concessionaire over a period of time, giving the entity a fixed return on its investment but allowing the state to avoid having to put up all the money itself or saddle itself with more debt.

The commission's report, along with comments delivered during the press conference by those involved in the study, seem to be a tacit acknowledgement that New York's financial health may be so fragile it will need contributions like this from the private sector to meet its considerable infrastructure costs.

The report said that the New York State Department of Transportation estimates the state is about $100 billion short towards the projected $175 billion it will need over the next 20 years to bring the state's highways, public transportation, aviation facilities, ports, railroads, and waterways up to a standard of good repair.

It also seems to make a stark statement about the ability of the government entities that have traditionally been charged with developing, maintaining and operating public infrastructure to keep their costs inline.

"The New York State Department of Transportation had a capital budget of $18 billion in recent years and of that, about $4 billion has been eaten up by construction inflation," Barend said, listing one example of many where government agencies handling building projects have been swamped by budget overruns.

"All of those costs can be transferred to the private sector through partnerships."

Infrastructure deals have traditionally been for income producing assets such as tolled highways and bridges, even municipal water systems, that can offer a private entity either a slice, or all, of that asset's stream of revenue for a set period of time.

But while the deals have caught on in countries like Canada, the U.K. and Australia, aside from a handful of exceptions in the U.S., deals to put public assets in the hands of private operators have been far less common in this country. According to privatization experts, there is the sentiment among the financial firms that structure these deals that most Americans are still irked at the prospect of handing over a toll or other payment attached to a public property to a non-government, for-profit owner.

Barend and McCall touched on alternate payment mechanisms and deal structures that would appear to diffuse some of the political sensitivities. The idea seems to be that private entities can better construct, maintain and operate public infrastructure and that a portion of the money saved by putting assets in private hands could be used as compensation.

The commission's report said that the maintenance contracts for the Gowanus Expressway for instance were currently handled by a collection of contractors. Installing one operator to oversee the roadway's upkeep would create efficiencies that could save money McCall said. The same was the case for the 290-bridge maintenance and replacement contract.

"We already have money in the budget to do these projects," McCall said. "By consolidating all of these projects into one overall contract we will produce efficiencies ... there will be savings and those savings will be shared with the private sector."