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
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
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<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
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
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