BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 475 HEARING: 4/27/11
AUTHOR: Wright & Emmerson FISCAL: No
VERSION: 4/12/11 TAX LEVY: No
CONSULTANT: Weinberger
PUBLIC-PRIVATE PARTNERSHIP PROJECTS
Revises statutes governing local governments'
public-private infrastructure agreements.
Background
Local governments may solicit proposals and enter into
agreements with private entities for the study, planning,
design, financing, construction, maintenance, rebuilding,
improvement, repair, or operation by private entities of
specific types of fee-producing infrastructure (AB 2660,
Aguiar, 1996).
Construction and engineering firms want the Legislature to
revise and clarify provisions in the statutes governing
these public-private infrastructure agreements.
Proposed Law
I. Leases . A public-private agreement for the
construction of fee-producing infrastructure by a private
entity must provide for the lease of those facilities to,
or ownership by, the private entity for up to 35 years.
Senate Bill 475 clarifies that a public-private
infrastructure agreement may - but is not required to -
provide for the lease, license, or other permissive use of
facilities constructed under the agreement. SB 475 extends
the maximum period of ownership, leasing, licensing, or
other permissive use allowed under a public-private
infrastructure agreement from 35 to 50 years. SB 475 also
repeals a local agency's authority to provide for ownership
of the facility by a private entity during the term of the
agreement. �See �7 of the bill.]
II. Selection criteria . A local government must use a
SB 475 -- 4/12/11 -- Page 2
private sector contractor's "demonstrated competence and
qualifications" as the primary selection criterion when
selecting a private-sector contractor with which to enter
into an agreement for the study, planning, design,
financing, construction, maintenance, rebuilding,
improvement, repair, or operation of fee-producing
infrastructure. Senate Bill 475 requires a local agency to
use criteria that it identifies in the solicitation
documents when selecting a private-sector contractor.
These selection criteria must include the following
factors, as applicable to the proposed project:
Financial or price proposal or approach.
Features.
Life cycle costs.
Technical approach.
Acceptable safety record as determined by the
government agency.
Experience and qualifications of the private entity
to perform the services under the agreement.
The local government may identify other specific selection
criteria in the solicitation documents. ݧ6.]
III. Eligible projects . A local agency may enter into
agreements with private entities for the following types of
fee-producing infrastructure projects:
Irrigation.
Drainage.
Energy or power production.
Water supply, treatment, and distribution.
Flood control.
Inland waterways.
Harbors.
Municipal improvements.
Commuter and light rail.
Highways or bridges.
Tunnels.
Airports and runways.
Purification of water.
Sewage treatment, disposal, and water recycling.
Refuse disposal.
Structures or buildings, except structures or
buildings used primarily for sporting or entertainment
events.
Senate Bill 475 adds sanitary sewer systems to the types of
fee-producing infrastructure that are eligible for
SB 475 -- 4/12/11 -- Page 3
public-private infrastructure agreements. ݧ5.]
IV. Private sector financing . The 1996 Aguiar legislation
used the term "private sector investment capital" to
describe what types of new financial resources that private
sector entities could provide through a public-private
infrastructure agreement. Senate Bill 475 replaces the
term "private sector investment capital" with "private
sector financing" and clarifies that local governments may
use private sector financing, public financing, or any
combination of those financing sources to study, plan,
design, construct, develop, finance, maintain, rebuild,
improve, repair, or operate fee-producing infrastructure
facilities. SB 475 also specifies that private sector
financing may include:
"cash, cash equivalents, loans, debt assumption,
letters of credit, capital investment, in-kind
contributions of materials or equipment, construction
or equipment financing, carrying of costs during
construction, or any combination thereof."
ݧ�1,2, and 3.]
V. Fees . A public-private infrastructure agreement must
ensure a local govern-ment's authority to impose user fees
that are sufficient to protect the revenue streams
necessary to cover the costs of projects or facilities.
Senate Bill 475 clarifies that:
User fees may be paid to the local government or
the private entity;
User fees must be used exclusively to pay the
government agency and private entity's direct and
indirect costs for project construction, financing,
operations, fee collection, administration,
maintenance, a reasonable rate of return to the
private entity, and other project related costs; and,
The reasonable return to the private entity must be
stated specifically in the public-private
infrastructure agreement or included as part of the
costs and fees, as set during the procurement process.
ݧ7.]
VI. Exemption . The 1996 Aguiar legislation exempted
public-private infrastructure agreements, with specified
exceptions, from any provisions of the California Public
Contract Code or the California Government Code that
relates to public procurements. Senate Bill 475 expands
SB 475 -- 4/12/11 -- Page 4
that exemption to any statutory provision that relates to
public procurements. ݧ6.]
VII. Public notice . Before imposing or increasing a user
fee on infrastructure that is subject to a public-private
agreement, a local government must conduct a public hearing
regarding the proposed fee. Senate Bill 475 requires a
local government to hold two public hearings. Current law
requires that notice of a hearing relating to
transportation projects must be published four consecutive
times in a newspaper of general circulation. Senate Bill
475 applies the notice requirement to hearings related to
all infrastructure projects. ݧ7.]
VIII. Validation . State law allows an agency to file a
validation action, asking a superior court to determine the
validity of its actions. Senate Bill 475 adds a
cross-reference to the standard procedures that allow for a
government agency to initiate a validating proceeding.
ݧ12.]
IX. Prohibited projects . State law prohibits the state,
and any state agency, from directly or indirectly entering
into any public-private infrastructure agreement under the
1996 Aguiar legislation. Governmental entities can't use
the Aguiar statute to design, construct, finance, or
operate state projects, including:
Toll roads on state highways.
State water projects.
State park and recreation projects.
State financed projects.
Senate Bill 475 states that these prohibitions must not be
construed to prohibit a government agency from using
public-private infrastructure agreements to accomplish
projects that are not expressly prohibited by the statute.
ݧ11.]
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . Confronted by aging
SB 475 -- 4/12/11 -- Page 5
infrastructure, growing populations, and limited revenue
sources, local governments want to use public-private
partnerships to finance, build, replace or operate public
infrastructure. In 1996, the Legislature authorized local
governments to enter into public-private partnerships for
fee-producing infrastructure projects that might not be
feasible without private-sector involvement. In addition
to making new projects feasible by providing additional
financing options, public-private agreements can facilitate
new infrastructure projects through cost-savings and the
opportunity to transfer project risks from local
governments to their private sector partners. In
completing projects using these provisions, local agencies
and private entities have encountered some statutory
ambiguities and obstacles that hamper their ability to use
public-private infrastructure agreements. For example,
current law:
Seems to require, rather than simply allow, a local
government to lease infrastructure constructed under a
public-private agreement.
Creates ambiguity over whether local governments
must exclusively use private financing on projects
involving a public-private partnership, or whether
they may also use public funds.
Doesn't specify the allowed forms of private
financing.
SB 475 eliminates some of these problems, making it easier
for local governments to complete vital public
infrastructure projects using public-private infrastructure
agreements.
2. No new money ? The 1996 Aguiar legislation and SB 475
both cite the challenges of publicly financing
infrastructure improvements and local governments' need for
"new funding sources" as a reason for authorizing
public-private infrastructure agreements. SB 475's
opponents argue that, absent the use of "new funding
sources," public-private partnerships simply allow private
corporations to avoid competitive bidding for public
projects from which they profit at taxpayers' expense.
However, some local governments interpret current law as
allowing projects completed pursuant to a public-private
agreement to be publicly financed. SB 475 makes it clear
that a local government can use public financing, without
any private sector financing, or in combination with
private financing, as part of a public-private agreement.
SB 475 -- 4/12/11 -- Page 6
The Committee may wish to consider amending SB 475 to
eliminate local governments' authority to exclusively
publicly finance projects subject to a public-private
infrastructure agreement and require that private financing
cover at least half of the costs of a fee-producing
infrastructure project.
3. Longer leases . SB 475's proponents argue that the
current 35-year maximum lease period for public-private
infrastructure agreements doesn't give private investors
enough time to recover the capital costs of some large
public works projects, like roads. The bill's 50-year
limit on leasing, licensing, or other permissive use of
public property under a public-private infrastructure
agreement is shorter than the limits that generally apply
to leases on city or county property. In general, a county
can lease county-owned real property for up to 99 years. A
general law city can lease city-owned property for up to 55
years or, if specified conditions are met, for up to 99
years. However, 50 years far exceeds the 20 to 30 year
terms of bonds or other debt instruments that local
governments usually use to finance public infrastructure
projects. Longer financing periods typically result in
higher borrowing costs, which are ultimately paid by the
people who use the infrastructure. The Committee may wish
to consider amending SB 475 to specify that the period of
leasing, licensing, or other permissive use of
infrastructure under a public-private infrastructure
agreement cannot exceed the length of the financing used to
repay the project's costs, not to exceed 50 years.
4. Related legislation . SB 475 is similar to AB 1261
(Caballero, 2007), which died on the Senate Inactive File.
This year, SB 693 (Dutton, 2011) expresses the
Legislature's intent that local governments may use a
combination of public funding and private sector financing
to finance infrastructure projects through a public-private
infrastructure agreement. The Senate Committee on
Transportation & Housing will consider the Dutton bill at
its May 3 hearing.
Support and Opposition (4/21/11)
Support : Veolia Water, American Water, Bay Area Council,
Associated General Contractors, California Association of
SB 475 -- 4/12/11 -- Page 7
Sanitation Agencies, California Chamber of Commerce,
California State Council of Laborers, California Taxpayers
Association, California Water Association, League of
California Cities, Skanska Infrastructure Development,
Suburban Water Systems, and Western Council of Construction
Consumers.
Opposition : American Federation of State, County, and
Municipal Employees AFL-CIO, California School Employees
Association, Professional Engineers in California
Government, and Western Electrical Contractors Association.