“Public-Private Partnership” Agreements
There are two statutes currently: Indiana Code 5-23 and Indiana Code 8-15.5 regarding Public-Private Projects (P3’s).
Code 8-15.5 governs P3’s for toll road type projects. This code was used for the Marion Justice Complex and was rejected ultimately by the county council. It is not used typically for this type project because you have to get the Indiana Financing authority involved. The Indiana Toll Road and the extension of I-69 are examples of using this statute. Developers on the I-69 project had to be let go and the Indiana Finance Authority had to assume direct control. Although no state official will take responsibility, it would seem most obvious that the vetting of “I-69 Development Partners” did not provide the desired results. To finish the project $115 million dollars in increased construction costs will be borne by the state (taxpayers). They claim this increase will be covered by lower bond costs than those issued by the partnership. The state now bears any risk for increasing costs and maintenance for the next 35 years.
The Indiana Toll road lease in 2006 for 75 years provided an upfront payment to the state of $3.8 billion dollars, which was used primarily for road work and is now mostly gone. Due to a decrease in ridership and the recession, the consortium eventually filed for bankruptcy in 2015. The new operator of the toll road in June more than doubled the tolls when a state subsidy that was put in place expired this past May.
Obviously these are very large and complex projects that have huge downsides if expectations are not met.
Code 5-23 or the Build-Operate-Transfer statute was enacted in 1997 and establishes the method for build-operate-transfer agreements. Using this statute allows small municipalities and local governments to have a means to enter into P3 contracts for infrastructure and economic development projects. It is not a long statute and contains only seven chapters and very few mandates. Proponents would argue this gives the developer greater flexibility in design and in writing the terms of the agreement. The statue is “silent”. This is a term that recognizes the lack of procurement guidelines or different kind of rules. This vagueness of the statute allows developers too much latitude that can lead to disputes. One problem, with this lack of guidelines for legal oversight, is that public officials negotiating these arrangements sometimes lack the financial sophistication and advice to fully protect the taxpayers from costs and terms beneficial to the developer. Most terms try to protect the interest of the developers.
Advocates of P3 would contend that traditional methods limit creativity and raise costs. The claim that costs are lower because the developer takes on the financial risk is simply not true in most cases. Generally, financial institutions recognize most local governments as very low risk and would accept any paper (discounted) from a developer. These rates need to be compared to tax free instruments and any number of other issues affecting the overall long term cost of financing.
A professor at Cornell University points out that private firms (developers of P3 projects) and local governments can and almost always do have fundamentally different interests. The county has broad concerns for the taxpayers over a wide range of issues. The developers have a narrow concern–maximizing financial returns.
As a wise father always told his boys, “opening the vault door does not mean necessarily that the stranger will walk in”! Without very serious vetting and hiring a law firm knowledgeable in the terms of such agreements I would not consider P3 options. Otherwise, costs and other terms can easily be manipulated at the cost of the taxpayers
I hope this is informative and sheds light on what can be a confusing option for local government.