Retrovision: Our local public Private Partnerships

This post originally appeared on 08 February 2018.

Public Private Partnerships are all the rage. The ballpark got one. The City is looking to develop luxury apartments on their parking lot downtown via a partnership with the Myers group. The City will be a partner in a water park and indoor surfing venue at the site of Cohen stadium, according to the announced plans for redeveloping the site.

So what are those Public Private Partnerships?

Well, they’re not free money. According to the NIGP – The Institute for Public Procurement,

First, and the most significant misconception associated with PPPs, is the belief that they represent new funds. That’s certainly not the case. A PPP is a financing mechanism. It is neither “new” nor “free” money. A private partner will seek to ensure adequate rates of return on investments. Even under fully privately financed PPPs, the funding for the project will come directly out of the fees paid by public users. In this sense, the financing of the project is transferred off the budget to users. PPPs allow governments to engage in longterm, high cost projects without legally acquiring debt, but that does not mean that the project will not cost the government anything. Quite the opposite. Considering a high financing markup, it could actually cost more, significantly more. The fact that the expense is not legally labeled as debt does not change the fact that for all intended purposes the cost of project is actual debt/financial obligation assumed by government. Without a doubt, there is no such thing as a free lunch – and although many might want us to believe otherwise, PPPs are certainly not an exception to this adage.

The City of El Paso seems to use PPP’s to incur debt without putting it on the balance sheet. Our elected officials will be out of office before the check comes due. Let me remind them that the internet does not forget.

Most P3 agreements are used to finance infrastructure, but some are used for economic development/redevelopment. The City’s more controversial P3 agreements fall into this category. Here’s what the Government Finance Officers Association has to say:

Use of a Public-Private Partnership (P3) for economic development or redevelopment purposes involves the use of public resources or financing capabilities to promote local economic development. Generally, governments participate in projects of high importance to the community; and, in some cases, public resources are required to make the project feasible. In these P3 agreements, the public entity will provide some combination of tax incentives, public land or other assets, infrastructure investments or financing assistance. The private entity will contribute capital investments, commit to provide jobs, contribute development expertise and should assume most of the financial risk for the ultimate project outcomes. These “partnerships” can either have short life spans covering only the construction period for the project, or longer life spans covering debt repayment or long-term operating agreements.

Well, gee, the ballpark fails most of those criteria, unless you call a ballpark an “infrastructure investment.” But a genuine infrastructure investment would be more like a roadway, or a water plant, and not a ballpark. It’s hard to slot a ballpark, or an indoor surfing facility, into the infrastructure category.

We are so desperate for economic development that we give away the store in the hopes of encouraging it. According to these criteria, most of our 380 tax-incentive projects and TIRZs are P3s. We are incurring the costs of public services while the private investors get a free ride. That’s debt that doesn’t show up on the balance sheet.

Depending on the project and the proposed terms of the agreement, the amount of risk facing the public and private entity can vary considerably. For some projects, the public entity may be serving only as an issuer of conduit debt, enabling the private borrower to gain access to tax-exempt financing but with no promise to commit any other public funding. However, the other end of the spectrum the public entity may be required to guarantee the private party’s debt or otherwise place public funds directly at risk.

For a P3 project to be successful the agreement must be mutually beneficial to both the public and private entity. For the public entity, the outcomes of the project need to be realized while the financial risk is minimized – the public benefit should justify the public cost. For the private entity, the project must provide an appropriate return for the level of capital and/or risk involved.

Business deals are supposed to be mutually beneficial. A win-win. The best business deals benefit both partners symmetrically. It’s hard to understand how, if the ballpark was a good deal when the City was investing $50 million, it was still a good deal when the City’s investment climbed to $64 million.

If governments pursue a P3 agreement, it should consider the following processes, tools, and practices in performing due diligence on P3 agreements.

Conduct an Initial Review of Project Feasibility. Public entities should complete a feasibility study to determine if the project(s) have short-term and long term financial viability. This initial review must be a realistic evaluation that looks at demand, project risks, expected revenues and cash flows, and the ability to achieve the project goals. All economic development and redevelopment projects are subject to overall market fluctuations and involve risk that the project will not deliver expected outcomes.

Evaluate the Project for Consistency with Community Priorities and Long-Term Strategic Plans. All P3 Agreements should be consistent with the overall strategic, master plans, and financial policies of the organization. In addition, the organization should evaluate the objectives for the project and determine if participation in the project is consistent with the mission of the government.

Identify any Unmet Competencies on the Government Staff. Complex projects will require specialized resources, but with many other P3 agreements, internal staff will be able to lead the analysis. For all P3 Agreements, the organization will need to gather a team that contains analysts, legal counsel, resources with industry related expertise, potentially a financial advisor/municipal advisor with economic development expertise, and/or bond counsel. Public entities should determine early on in their analysis whether outside resources are needed to complement staff resources in executing the recommended processes of this best practice.

Determine the Fiscal and Economic Impact of the Project. The public entity should determine the likely fiscal and economic impacts of the proposed project taking into account any project risks or uncertainty in the calculation. Factors to consider when identifying potential costs and benefits include:

Initial Costs of Incentives

Long-Term Costs of Incentives

Expected Return to both the Community and to the Private Entity

Operations Costs (salary, benefits, equipment, supplies, indirect costs

Taxpayers Risk – Assigning explicit costs to risk and risk-like consequences

Infrastructure Impacts, including the long-term costs of maintaining infrastructure.

Opportunity Costs – Do the public benefits of a project reflect the best use of the public investment (best use of funding, effort, and land

I don’t mean to pick on the ballpark, but that’s the only Economic Development P3 that the City has invested in so far. And, after reading the paragraphs above, I gotta tell you that the City sure shorted us on due diligence on the project.

One would hope that the City has developed the will, and the expertise, and the wisdom, to review the proposed P3 projects with an intelligent and unbiased eye, but from where I sit, the prospects seem doubtful. What they feed us is more rationale than reason.

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