BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE  
          DEVELOPMENT
                              Senator Jim Beall, Chair
                           2015 - 2016 First Extraordinary

          Bill No:          SBX1 14           Hearing Date:     8/19/2015
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          |Author:   |Cannella                                              |
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          |Version:  |7/16/2015                                             |
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          |Urgency:  |No                     |Fiscal:      |Yes             |
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          |Consultant|Alison Dinmore                                        |
          |:         |                                                      |
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          SUBJECT:  Transportation projects:  public-private partnerships


            DIGEST:  This bill removes the January 1, 2017 sunset on the use  
          of public-private partnership (P3s), thereby extending the  
          authority indefinitely.

          ANALYSIS:
          
          Existing law conveys to the California Department of  
          Transportation (Caltrans) full possession and control of all  
          state highways and requires Caltrans to perform all improvement  
          and maintenance work, unless that responsibility is otherwise  
          delegated to another entity by statute.  Further, existing law  
          generally requires state and local officials to invite bids for  
          construction projects and then award contracts to the lowest  
          responsible bidder.  This design-bid-build method is the  
          traditional approach to public works construction.

          Assembly Bill (AB) 680 (Baker, Chapter 107, Statutes of 1989)  
          authorized Caltrans to enter into P3 agreements for up to four  
          projects.  P3 agreements are an alternative procurement method  
          to the design-bid-build method; generally speaking, with P3  
          procurement, a public entity contracts with a private consortium  
          to be responsible for performing some or all of the following  
          components of project development: finance, design, construct,  
          maintain, and operate a new facility for a period of time  
          necessary to repay the financing of the project.  Under this and  
          related legislation, Caltrans built 10 miles of tolled express  








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          lanes in the median of the existing State Route (SR) 91 in  
          Orange County.  Caltrans also built SR 125 in San Diego County,  
          which connects the area near the Otay Mesa border crossing with  
          the state highway system.  

          Senate Bill (SB) X2 4 (Cogdill, Chapter 2, Statutes of 2009)  
          expanded this authority and authorized Caltrans and regional  
          transportation agencies to use P3 procurement to enter into an  
          unlimited number of P3 agreements.  The legislation specified  
          that the P3 projects must achieve one or more objectives as  
          determined by the California Transportation Commission (CTC),  
          which is responsible for programming and allocating funds for  
          the construction of highway, rail, and transit improvements.  In  
          January 2011, Caltrans entered into its first P3 project under  
          this authority for the Presidio Parkway project, which requires  
          the private partner to complete the second phase of the design  
          and reconstruction of the southern approach to the Golden Gate  
          Bridge and to operate and maintain the roadway for 30 years.  

          This bill removes the January 1, 2017 sunset on the use of P3s,  
          thereby extending the authority indefinitely.

          COMMENTS:

          1)Purpose.  According to the author, the State of California  
            faces a $59 billion shortfall for the maintenance and upkeep  
            of infrastructure, after decades of investments not keeping  
            pace with demand.  P3s are an extra tool for funding state  
            infrastructure when state funds are not available.  According  
            to the Legislative Analyst's Office (LAO), under a P3  
            approach, the state can transfer a significant amount of  
            responsibility associated with a project to the private  
            sector.<1>  For example, the private partner will generally  
            make design and construction decisions and is responsible for  
            paying the costs to resolve any construction issues in order  
            to ensure that the project is completed on time.  In addition,  
            the partner will often be required to finance the project,  
            which generally includes the costs of design and construction  
            staff, materials, and construction equipment.  The contract  
            must specify a mechanism for repaying the partner for that  
            partner to be willing to finance these costs.  In many cases,  
            this involves a revenue source created by the project (such as  
            a toll or user fee on the infrastructure facility).  This  


          ---------------------------
          <1> Legislative Analyst's Office (LAO). Maximizing State  
          Benefits from Public-Private Partnerships. November 8, 2012.








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            means the private partner takes on the risk that the projected  
            revenues may or may not materialize at the level anticipated.   
            Alternatively, the state can commit to making annual payments  
            to the partner from an identified funding source, such as tax  
            revenues.

            The benefits associated with P3s include: transferring project  
            risk to the private partner; providing greater price and  
            schedule certainty; allowing more innovative designs and  
            construction techniques; freeing up public funds for other  
            purposes; and providing quicker access to financing for  
            projects and possibly better quality and more affordable  
            maintenance.

          2)On the other hand.  The LAO report cited above also notes that  
            P3s have some drawbacks, including: increased financing costs;  
            greater possibility of unforeseen challenges (due primarily to  
            the extended time periods involved in P3 agreements); limits  
            to governmental flexibility; greater risk due to more complex  
            procurement processes; and fewer bidders.

            The LAO report evaluated two completed P3 projects procured by  
            the state - SR 91 express lanes and SR 125 tollway - to  
            determine if the state achieved some of the intended benefits.  
             The LAO found that the projects were generally successful at  
            staying on budget and schedule, and if there were cost  
            overruns, they were generally small.  The LAO found mixed  
            results during operations, however.  The report reviewed two  
            completed P3 projects procured by the state, both of which  
            resulted in litigation between participating entities.  These  
            projects were subject to criticism for excessive costs and  
            prolonged delays. 

            The LAO report identified a set of best practices that have  
            been found to maximize the benefits of P3s and minimize the  
            potential limitations.  The LAO recommends that the  
            legislature:

             a)   Adopt overall P3 policy criteria to guide  
               decision-makers when evaluating different procurement  
               options and inform potential private partners and the  
               public of the process.  Specifically, these criteria should  
               address how project evaluation, review, and procurement  
               responsibilities will be carried out when the state  
               partners with local transportation so that there is no  









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               confusion over which agency is responsible for which task.   
               This will ensure consistency and transparency across  
               departments in terms of how P3s are selected. 

             b)   Adopt criteria for determining whether projects would be  
               a good fit for P3 procurement, as not all public  
               infrastructure projects would benefit from a P3 approach.   
               For example, the LAO report notes that technically complex  
               projects are more likely to benefit from the innovation or  
               specialized expertise that is associated with a P3.   
               Moreover, projects that are good candidates for P3s  
               generally have significant risks that government can  
               transfer to private partner.  Screening criteria should  
               ensure the ability for the government to transfer these  
               risks to the private partner.  Additionally, existing law  
               does not specify that a project must have a dedicated  
               revenue source to repay the money borrowed from the  
               partner.  Overall, these criteria should ensure that there  
               is a benefit to the government from financing the project  
               with a private partner, rather than using public funds to  
               pay for the project.   
           
             c)   Analyze and compare the project's costs using a P3 with  
               more traditional procurement methods to determine the value  
               for money.  More specifically, the LAO recommends that the  
               analysis set parameters for underlying assumptions (e.g.  
               appropriate discounted rates to calculate the net present  
               cost of the project, tax adjustments, payment schedules of  
               cost overruns, and accounting for competitive bidding  
               environments) so that all potential projects are evaluated  
               with similar criteria.

             d)   Require a separate entity to verify that the project  
               satisfies most of the established P3 criteria and that P3  
               procurement is the best option.  Specifically, this entity  
               should be independent from the agency sponsoring the  
               project.  

             e)   Identify and utilize a broad mix of expertise related to  
               P3 and state finance and procurement, such as hiring  
               private consultants to better protect public resources when  
               entering into large contracts with private developers.  The  
               LAO notes that such expertise has not been sufficiently  
               developed at the California state level.  










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            The CTC proposed similar recommendations in its 2011 Annual  
            Report.  Existing law states that a lease agreement proposed  
            by Caltrans or a regional transportation agency shall be  
            submitted to the CTC and that the CTC shall select and approve  
            the project before Caltrans or the regional agency executes  
            the final lease agreement.  The CTC noted that existing law is  
            ambiguous and resulted in lengthy public debate.  For example,  
            the result on one project is that the CTC voted to approve the  
            project but not its financial proposal which relied on a  
            30-year annual payment from the State Highway Account.  The  
            CTC argued that the lack of clarity and uncertainty of the  
            process in existing law may in fact lead to diminished  
            interest by private and public sectors to utilize P3 projects.  
             The CTC recommended that the Legislature and the  
            Administration address the following issues: (1) which  
            projects are appropriate P3s and which are not; (2) how to  
            determine whether a P3 is financially beneficial; and (3) more  
            meaningful oversight. 

          1)Indefinite Authority.  This bill would remove the sunset on  
            the use of P3s and grant indefinite authority to use this type  
            of procurement.  Given the issues raised by the LAO and CTC,  
            the committee may wish to instead consider extending the  
            sunset another 10 years to January 1, 2027.

          2)Support.  Those organizations writing in support argue that P3  
            procurement projects across the country have been successful  
            and conducted with clarity, transparency, and certainty.   
            These projects give private sector teams competing for these  
            projects the confidence that their investments of time,  
            personnel, and monetary resources will result in success for  
            them.  P3 projects are a vital tool used in California by  
            public agencies to utilize private investment to build  
            projects that would otherwise remain unfunded.  This bill will  
            send a clear signal that California remains committed to  
            attracting private investment in the state's transportation  
            infrastructure system.   

            American Road and Transportation Builders Association  and the  
            Association for the Improvement of American Infrastructure  
            argue that current law should not be changed to require public  
            employees to perform design and inspection work on P3  
            projects.  Current law designates Caltrans as the agency  
            responsible for performing these functions, but provides  
            flexibility to delegate those responsibilities to private  









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            developers as part of the overall risk allocation for a P3  
            project.  Supporters further argue that Caltrans agreements  
            with private developers already contain provisions that hold  
            these developers accountable for their quality of work.   
            Moreover, public safety is a statutory Caltrans mandate, given  
            its responsibility to conduct engineering and safety  
            inspections of all assets which operate within the state's  
            transportation system, and additional legislative oversight  
            would be inconsistent with that mandate.  
          
          3)Opposition.  The Organization of SMUD Employees, Professional  
            Engineers of California Government (PECG), San Bernardino  
            Public Employees Association, and San Luis Obispo County  
            Employees Association are opposed to the bill unless it is  
            amended.  According to these groups, the existing P3 authority  
            was part of a comprehensive budget agreement that was  
            negotiated by legislative leaders in SBX2 4 (Cogdill, Chapter  
            2, Statutes of 2009).  Since then, design-build authority  
            language was refined in AB 401 (Daly, Chapter 586, Statutes of  
            2013).  PECG is seeking similar refinements to the P3  
            authority that are consistent with the leadership agreement  
            and AB 401 of 2013.  The amendments PECG propose seek to  
            ensure that complex P3 projects are adequately inspected by  
            Caltrans, the agency that is ultimately responsible for them.   
            These amendments will ensure projects are safe and public  
            interests are met.

            A coalition, which includes AFSCME California, California  
            State Council of the Service Employees International Union  
            (SEIU), SEIU Local 1000, and PECG also oppose this bill.  This  
            coalition states that their organizations "oppose efforts to  
            privatize, outsource, and contract-out of the work performed  
            by public employees, either explicitly, or through less  
            obvious measures such as 'public-private partnerships,'  
            'design-build,' or 'alternative delivery methods.'"  They  
            believe these types of terms are "designed to obscure the fact  
            that the public sector workforce is being eliminated in order  
            to line the pockets of private, for-profit companies."
          
          Related Legislation:
          
          ABX1 2 (Perea) - deletes the sunset date on provisions that  
          authorize P3 agreements for transportation, thereby extending  
          the authority indefinitely.  This bill is in the Assembly  
          Transportation Committee.









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          AB 1265 (Perea) - extends, until January 1, 2030, the sunset  
          date on provisions authorizing P3 agreements for transportation.  
           This bill was held on the Assembly Appropriations Suspense  
          File. 

          FISCAL EFFECT:  Appropriation:  No    Fiscal Com.:  Yes     
          Local:  No


            POSITIONS:  (Communicated to the committee before noon on  
          Thursday,
                          August 13, 2015.)
          
            SUPPORT:  

          American Road and Transportation Builders Association
          Association of General Contractors  
          Association for the Improvement of American Infrastructure  
          California Alliance for Jobs
          California Association of Councils of Governments  
          California Transportation Commission
          Silicon Valley Leadership Group
          State Council of Laborers
          Transportation California
          United Contractors

          OPPOSITION:

          AFSCME California
          California State Council of the Service Employees International  
          Union 
          Organization of SMUD Employees
          Professional Engineers of California Government  
          San Bernardino Public Employees Association
          San Luis Obispo County Employees Association
          SEIU Local 1000
          Sierra Club
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