BILL ANALYSIS
AB 2600
Page 1
Date of Hearing: April 29, 2008
ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS
Mike Eng, Chair
AB 2600 (Niello) - As Amended: April 21, 2008
SUBJECT : State government infrastructure.
SUMMARY : Authorizes state agencies to enter into
"public-private partnership" contracts for purposes of
constructing and operating state infrastructure projects.
Specifically, this bill :
1)Authorizes state agencies to procure a private sector partner
and award contracts for the construction, operation, and
maintenance of public infrastructure projects, through
solicitations for project or information proposals, or
unsolicited proposals, if the state agency provides an
opportunity for competitive bidding on the unsolicited
proposal.
2)Authorizes state agencies to pay unsuccessful proposers an
amount not to exceed the estimated value of the proposer's
cost of preparing a proposal, and may condition the payment on
the right to use any information in the proposal.
3)Requires the state to set forth in its solicitation the
factors and relative weighting of the factors that it will use
to evaluate proposals.
4)Authorizes state agencies to charge a reasonable fee for the
evaluation of unsolicited project proposals.
5)Authorizes state agencies to procure information technology
systems and services through its private partner for purposes
of performing its duties related to public-private
partnerships.
6)Authorizes state agencies to include within public-private
partnership contracts, all of the following:
a) Provisions authorizing the private partner to collect
user fees, tolls, fares, or similar charges, including
provisions regarding what the private partner will do with
the collected moneys, and what technology the private
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partner is required to use to collect the fees, tolls,
fares, or similar charges;
b) Provisions allowing the public sponsor to accept
payments of money and share revenues with the private
partner;
c) Provisions addressing how the public sponsor and private
partner will share development costs and manage project
risks;
d) Provisions establishing performance criteria and
incentives;
e) Provisions addressing the acquisition of rights-of-way
and other property interests that may be required;
f) Provisions addressing the responsibility for
reconstruction or renovations that are required in order
for a facility to meet applicable government standards upon
reversion of the facility to public ownership;
g) Provisions identifying public sponsor specifications
that must be satisfied, including provisions allowing the
private partner to request and receive authorization to
deviate from specifications on making a showing
satisfactory to the public sponsor;
h) Provisions requiring a private partner to provide
performance and payment security, the penal sum or amount
of which may be less than the value of the contract
involved, based upon the public sponsor's determination,
made in its sole discretion and on a facility-by-facility
basis, of what is required to adequately protect the public
sponsor;
i) Provisions authorizing the private partner to receive a
reasonable rate of return on their investment;
j) Provisions specifying remedies available and dispute
resolution procedures;
aa) Provisions specifying that all work created by the
private partner during the course of performance of the
agreement shall be considered work made for hire and shall
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be the property of the public sponsor; and,
bb) Provisions requiring the private partner to indemnify,
defend, and save harmless the state, its officers, agents,
and employees from any and all claims and losses accruing
or resulting to any and all contractors, subcontractors,
suppliers, laborers, and any other person, firm, or
corporation furnishing or supplying work services,
materials, or supplies in connection with the performance
of the performance-based infrastructure partnership.
7)Authorizes state agencies to use any source of funding for a
public-private partnership project.
8)Authorizes the private entity partner to preclude from public
disclosure any information it deems to be a trade secret,
confidential or proprietary, as specified.
9)Defines the following terms:
a) "Eligible facility" means a facility developed,
operated, including an existing, enhanced, upgraded, or new
facility used or useful as public infrastructure, including
facilities related to transportation, water, wastewater,
public buildings, and other public facilities.
b) "Information technology" includes all electronic
technology systems and services, automated information
handling, system design and analysis, conversion of data,
computer programming, information storage and retrieval,
telecommunications, which include voice, video, and data
communications, requisite system controls, simulation,
electronic commerce, and all related interactions between
people and machines.
c) "Performance-based infrastructure partnership" means
either of the following:
i) An agreement whereby a private partner assists the
public sponsor, or the public sponsor and a local agency
or agencies, in defining a feasible project and
negotiates fair and reasonable terms for implementing the
project; or,
ii) An agreement whereby a private partner assumes
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responsibility for delivering, improving, operating, or
maintaining eligible facilities, in accordance with
established performance specifications and payment terms.
d) "Private partner" means a person, entity, or
organization that is not the federal government or another
public sponsor.
e) "Public sponsor" means a department or agency of the
state.
10)Contains a severability clause.
EXISTING LAW
1)Authorizes regional transportation agencies or Caltrans to
enter into up to four comprehensive development lease
agreement with public or private entities for transportation
projects, under the following conditions:
a) The projects must be primarily designed to improve goods
movement and must address a known forecast demand;
b) All negotiated lease agreements must be submitted to the
Legislature for approval or rejection;
c) Prior approval by the Legislature;
d) The project sponsor must conduct a least two public
hearings prior to submitting a proposal to the Legislature;
e) Tolls and user fees may not be charged to noncommercial
vehicles with three or fewer axles;
f) Existing non-toll or non-user-fee lanes cannot be
converted to toll lanes except that high-occupancy vehicle
(HOV) lanes can be converted to high occupancy toll lanes
(HOT) for vehicles not otherwise meeting the occupancy
level requirements for those lanes; and
g) No lease agreements can be entered into after January 1,
2012.
2)Authorizes a regional transportation agency, in cooperation
with Caltrans, to apply to the California Transportation
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Commissions (CTC) to develop and operate HOT lanes, including
the administration and operation of a congestion-pricing
program, using the following process:
a) The CTC is to review each application for HOT lane
development;
b) For each project, the CTC is required to conduct a least
one public hearing in northern California and one in
southern California;
c) Following the hearings, the CTC is required to submit
the application, including any public comments made at the
hearings, to the Legislature for rejection or approval;
d) Approval by the Legislature must be by statute;
e) The number of projects under this authority is limited
to four, two in northern California and two in southern
California;
f) The CTC, in cooperation with the Legislative Analyst,
must annually report to the Legislature on the progress of
the development and operation of HOT lanes; and,
g) No application may be approved under this authority
after January 1, 2012.
FISCAL EFFECT : Unknown
COMMENTS :
Purpose of this bill . According to the author's office, "The
Department of Finance estimates that California needs $500
billion worth of infrastructure over the next two decades to
protect our quality of life, improve our environment,
accommodate our population and keep our economy competitive.
California is not likely to meet that infrastructure need
without using innovative procurement methods that leverage
private sector financing and efficiency for the public good.
Currently, state agencies and departments do not have authority
to do so.
"By providing state agencies and departments the authority to
enter into Performance-Based Infrastructure (PBI) partnerships
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[public-private partnership] with private entities, this bill
would create another option to help the state to meet its $500
billion dollar infrastructure need. A PBI partnership can be
either: 1) an agreement whereby a private partner assists the
state agency or department in defining a feasible project and
negotiates fair and reasonable terms for implementing the
project; or, 2) an agreement whereby a private partner assumes
responsibility for delivering, improving, operating, or
maintaining an eligible facility in accordance with established
performance specifications and payment terms."
Background . Public-private partnerships refer to contractual
agreements formed between a public agency and a private entity
that allow the private sector to participate in the financing
and management of public projects. Historically, the private
sector was used only for construction of public projects. The
terms of public-private partnerships are specific to each
contract. Public-private partnerships represent a
non-traditional approach to public infrastructure projects that
comingle public and private funds, public and private
management, and public purposes and private profit. Supporters
and opponents of these public-private partnership agreements can
cite successes and failures of public private partnerships by
local governments, other states, and nations.
The authority of state agencies to enter into public-private
partnerships was enacted by AB 1467 (Nunez), Chapter 32,
Statutes of 2006, which authorizes regional transportation
agencies or Caltrans to enter into up to four comprehensive
development lease agreement with public or private entities for
transportation projects, and also authorizes a regional
transportation agency, in cooperation with Caltrans, to apply to
the CTC to develop and operate HOT lanes, and the administration
and operation of a congestion-pricing program.
Issues for the Committee's Consideration . In general,
supporters of public-private partnerships assert that California
is not likely to meet the infrastructure needs of a growing
population without leveraging private sector capital. This
capital is necessary to protect the quality of life of citizens,
improve the environment, and maintain economic competitiveness.
Opponents assert that public-private partnerships increase costs
to taxpayers because a profit margin is built into a fee
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structure that already includes higher borrowing costs than what
is available to public agencies, and that public -private
partnership agreements typically include "non-compete clauses"
that thwart the state or local agency's ability to increase free
transportation facilities throughout the life of the competing
public-private partnership franchise agreement.
The perspectives of supporters and opponents are presented in
more detail in the "Support" and "Opposition" sections below.
In addition to those comments, the Committee may also wish to
consider the following:
1)This bill would establish unlimited authority for state
agencies to enter into public-private partnership agreements
without Legislative approval. Existing law, as enacted by AB
1467 (Nunez), Chapter 32, Statutes of 2006, authorizes
regional transportation agencies or Caltrans to enter into up
to four comprehensive development lease agreement with public
or private entities for transportation projects, and also
authorizes a regional transportation agency, in cooperation
with Caltrans, to apply to the CTC to develop and operate HOT
lanes, and the administration and operation of a
congestion-pricing program. Since the enactment of AB 1467,
only one project has been submitted to the Legislature for its
review and approval - the State Highway Route 15 project in
Riverside County which is a public project that will assess
tolls for use of HOT lanes.
The Committee may wish to consider whether this bill will
prematurely eliminate the Legislature's oversight of
public-private partnerships. Currently, the Legislature must
give initial approval of specific projects, which provides an
opportunity for ongoing oversight and evaluation of results.
This approval also provides an opportunity for an objective,
side-by-side comparison of the merits of public-private
partnerships, traditional public financing, public financing
with toll/fee funding, and any other method that will result
in the selection of the project implementation method that
achieves the highest public purpose at the lowest cost.
2)This bill provides that the state may reimburse a losing
bidder's costs of preparing a bid. There is no precedent for
such payment in current state public contract law which
generally requires the award of contracts to be made according
to the principles of competitive bidding. The public policy
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that underlies competitive bidding is that competition between
bidders reduces the price paid by the state. Although a
precedent for paying a stipend to losing bidders was
established in the Bay Bridge project, the committee may wish
to consider whether granting unlimited authority to state
agencies make such payments should be extended to all state
public works projects without oversight by the Legislature,
and whether allowing payments to losing bidders would reduce
the incentive of bidders to offer the state lower prices if
they will be paid for their costs even if they lose.
3)The bill allows state agencies to forego all current state
laws governing the acquisition of information technology when
it will be used by the state in the performance of a public
private partnership. As previously noted, state law generally
requires competitive bidding on acquisitions as a means of
promoting competition that will result in lower prices paid by
the state. Competitive bidding also precludes favoritism and
impropriety in the award of public contracts. The Committee
may wish to consider the expansive nature of this exemption
which allows state agencies to purchase information technology
through the private partner and bypass established state
procurement laws.
Support . The Consulting Engineers and Land Surveyors of
California (CELSOC) write, "In the past 40 years, our capital
investment has plummeted precipitously. In the 1950s and 60s,
California spent 20 cents of every dollar on capital projects.
By the 1980s that figure dropped to less than five cents on the
dollar. Current estimates put infrastructure investment at
around one penny on the dollar. These reductions in General
Fund spending have created additional pressures to "fix"
infrastructure with state and local bonds. The situation is so
bad that in 2006 California voters overwhelmingly supported over
40 billion dollars of bonds for infrastructure investment
throughout the state; however, this alone is only a fraction of
the overall need.
"California simply cannot handle the challenge of addressing all
of its infrastructure problems with existing/restructured
revenue systems or bonds. Infrastructure needs for the next two
decades are expected to exceed $500 billion. Public-Private
Partnerships are contractual arrangements formed between public
agencies and private sector entities that allow for greater
private sector participation in the delivery of specific
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infrastructure projects. Engaging the private sector more often
in projects, for additional financial support, transfer of risk,
and other vital resources such as knowledge, skills and
technology, can help ensure the work that needs to be done to
California's infrastructure can be accomplished more quickly,
efficiently and cost-effectively.
"Additionally, P3s are all about capitalization, not
privatization. Public oversight and ownership of projects is
maintained during and after the completion of P3 projects.
CELSOC is a strong supporter of mechanisms that will provide
transparency and openness to the P3 process, both as a means of
ensuring public confidence in the P3 model and to facilitate the
greater use of P3's in California. AB 2600 adds definition and
clarity to the P3 process, while creating a model to address
critical infrastructure concerns."
The California Conference of Carpenters writes, "There is no
way public funds alone can provide the resources to erase the
infrastructure deficit. AB 2600 will allow public dollars to be
stretched by the infusion of private investment as part of the
effort to meet our infrastructure needs. Equally important,
private sector investors will bring a fresh set of eyes to the
infrastructure issue that will result in innovative approaches
to the infrastructure problem."
Opposition . The Professional Engineers in California Government
(PECG) writes "AB 2600 provides broad unlimited PPP
[public-private partnership] authorization for unlimited
infrastructure projects in the state of California.
"California's recent experience with toll roads has not been
positive. SR 91 and SR 125 are the most recent reminders of why
broad enabling authority is not in the public's interest. Both
projects experienced significant cost overruns and required
taxpayer bailouts. PECG believes a preferable method of using
fees to pay for infrastructure is to have public agencies issue
tax exempt financing, thereby saving the public a significant
cost for money and profit. Instead of paying investors a
profit, excess revenues can be used for other worthwhile
projects.
"PECG would also note that AB 2600 does not have any protections
for the public. This bill eliminates competitive bidding,
eliminates public inspection, does not require public meetings
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or community events, provides a subjective selection process,
and allows unlimited profit."
The California School Employees Association writes, "There is
growing and widespread dissatisfaction and opposition to P3 from
labor unions, environmental groups and taxpayers due to their
poor performance, lack of accountability, and long-term negative
effects on public services. A substantial body of research
brings to light numerous problems with P3.
"The assertion that P3 is a viable and positive way to fund
infrastructure projects in California is flawed and unsupported
by the evidence. Comprehensive review of these projects should
be undertaken and the claims of P3 supporters should be checked
and double checked before exposing taxpayers and the public to
the risks and drawbacks associated with these projects.
"Should the Legislature decide that there are circumstances
where P3 should be undertaken, clear safeguards for the public
should be written into law. These include safeguards relating
to missed deadlines, cost over-runs, displacement of public
employees, excessive profits, shoddy work, inferior maintenance,
oversight, inspection, public hearings, transparency,
competitive bidding, international treaties and lawsuits."
REGISTERED SUPPORT / OPPOSITION :
Support
California Conference of Carpenters
Consulting Engineers and Land Surveyors of California
Governor's Office of Planning and Research
Opposition
American Federation of State, County, and Municipal Employees
(AFSCME)
California School Employees Association, AFL-CIO
Food & Water Watch
Professional Engineers in California Government (PECG)
SEIU Local 1000
Analysis Prepared by : Ross Warren / B. & P. / (916) 319-3301