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 ----------------------------------------------------------------- |Author: |Cannella | |----------+------------------------------------------------------| |Version: |7/16/2015 | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant|Alison Dinmore | |: | | ----------------------------------------------------------------- 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 SBX1 14 (Cannella) PageB of? 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. SBX1 14 (Cannella) PageC of? 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 SBX1 14 (Cannella) PageD of? 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. SBX1 14 (Cannella) PageE of? 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 SBX1 14 (Cannella) PageF of? 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. SBX1 14 (Cannella) PageG of? 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 -- END --