Lawmakers consider privatizing Turnpike

Saddled with Big Dig debt, pols look at leasing options for revenue

BOSTON. Urged Wednesday to take advantage of the equity held in public infrastructure, including the Massachusetts Turnpike, and to reach for more efficient management and upfront revenue that can come from privatization deals, lawmakers expressed interested in the concept but caution about locking into long-term toll hikes and turning over management of large public assets to private companies.

The Mass. Turnpike Authority's annual ratio of operating and maintenance costs to revenues run more than double the average public toll road owner's, and triple those of private-sector vendors, Reason Foundation analyst Leonard Gilroy told lawmakers.

For every $100 collected by the agency, $79 goes out the door for regular expenses, Gilroy said during a hearing called by the Transportation Committee to review options for leasing Interstate 90, Big Dig tunnels, and other assets owned by the MTA. That ratio makes the MTA one of the least efficient systems in the country, Gilroy said. Lawmakers smiled and shook their heads at the figure.

A turnpike spokesman said later that he could not corroborate the figure.

Legislators appeared apprehensive, asking questions about how the state could dispose of the more than $2 billion in Big Dig debt under a privatization plan, handle collective bargaining issues, and asset maintenance. Drawn by the appeal of an untold upfront payment that would help solve an estimated overall transportation maintenance financing deficit of up to $20 billion over 20 years, they were vocally uneasy about years of regular toll hikes, and wary about being shortchanged by public contractors.

While Senate lawmakers have promoted the public-private partnerships, House leaders appear less enthusiastic.

"I wouldn't say I am skeptical about public-private partnerships, but I certainly am cautious relative to those things," said Rep. Joseph Wagner, House chair of the Transportation Committee at the outset of a cramped, hot hearing.

Privatization efforts have encountered stiff resistance in Massachusetts. Sen. Robert Hedlund (R-Weymouth) noted that proposals to privatize skating rinks have failed for nearly two decades here.

Wagner also knocked the Patrick administration for advancing steep Turnpike toll increases, double in some cases, while not proposing a more comprehensive transportation reform. Lawmakers have long criticized Gov. Deval Patrick for not filing a long-delayed package that would restructure transportation bureaucracies, cut costs, and raise revenue. Wagner ripped the toll increase, worth roughly $100 million, as "disjointed" and "piecemeal."

The hearing was attended by more than 10 lawmakers who do not sit on the committee, along with bold-faced names from the state's transportation policy circles, including former Transportation Secretary Fred Salvucci, former Romney budget chief and MTA director Thomas Trimarco, and Paul Haley, a former top House lawmaker.

John Schmidt, partner in Chicago-based international law firm of Mayer, Brown LLP and a key negotiator in Chicago's privatization of a major highway, said many private-public partnerships have resulted in better care of roads, strong protection of employees jeopardized by the privatization, and, in cases where the public owner bargained carefully, controlled toll increases.

Negotiating for higher toll increases, he said, results in higher up-front payments. True market value, he said, could not be ascertained until the bid-solicitation stage.

Sen. Anthony Petruccelli wondered whether a private company could operate the complex Big Dig, which features three tunnels and a series of vent buildings. Schmidt said private companies operate many airports and in complicated urban environments as well as "in the mountains of Chile." Schmidt said the complexity of operating and maintaining the public asset is reflected in the costs calculated by private bidders.

Schmidt said bidders would look for political consensus behind transportation privatization in Massachusetts and said he believed there was the "potential" for that to develop. By contrast, he said transportation privatization efforts have run into politically savvy pushback efforts in Pennsylvania from public sector officials.

Under questioning from Senate committee chair Sen. Steven Baddour, Schmidt acknowledged he was Patrick's boss at the US Justice Department, where Patrick headed up the civil rights division under President Clinton, and once hosted a fundraiser for Patrick.

As Schmidt finished his testimony and rose from his chair, Baddour told him, "We'll be in touch."

When one lawmaker asked what would happen if the private operator went bankrupt, Schmidt told him, "You take back the road and you lease it to somebody else." He also said private firms may be required to post letters of credit towards the end of their leases to safeguard financing to cover the costs of transportation upgrades and maintenance during the final few years of a lease.

Christopher Voyce, managing director of Macquarie Capital Advisors, said the company is involved in more than 100 transportation privatization deals, including 20 in the U.S. Indiana's deal enabled that state to fully fund a 10-year transportation agenda, he said.

Private lessees are motivated to run quality public transportation systems in order to attract customers and deliver returns to their private investors, he said. In that vein, he said, private contractors look at operation, maintenance and upgrade spending as investments, while the public sector sees those expenses as costs.

Deals can be structured so that the public sector transfers risk to the private sector in the areas of cost overruns and revenue shortfalls, operation, maintenance and expansion costs, and changes in technology.

Describing the privatization market as "strong" and driven by deep-rooted demographic trends, Voyce said a bidder just offered 8 billion Euros for an unspecified European toll road and three bidders in Pennsylvania had collectively bid $30 billion there.

Some lawmakers expressed apprehension, in the wake the mismanaged Big Dig, of government, and taxpayers, losing in a privatization deal. "The state side was outgunned by the private side" on the Big Dig, Baddour said.

But Schmidt said the privatization process is designed to attract only qualified bidders and should be structured to avoid undue influence and deliver the lease to the bidder who offers the most money.

Asked about the criticism that privatization deals perpetuate toll hikes, Schmidt told Baddour, "The question is ultimately for you: What toll increases are acceptable?" Schmidt said the equity in public infrastructure is "a lot more than anybody thought" and very appealing to private investors.

Rep. John Fernandes (D-Milford) called public transportation a core government asset and expressed reservations about locking into toll hikes when the public was led to believe that tolls would go away.

"This isn't an easy thing to do," Fernandes said.

Unions, including those representing Turnpike workers, said they opposed privatizing the roadway and outsourcing operations to the private sector. Privatization could lead to another Big Dig, with a lack of accountability and the hiring of outside consultants, they added.

A group called the Coalition of Concerned Taxpayers, which includes the Greater Boston Central Labor Council, the AFL-CIO, Teamsters Local 127, IBEW Local 103 and the United Steel Workers Local 5696, called privatization of public roads "a scheme that has failed in several states, bringing higher tolls and no accountability."

But John Miller, a procurement attorney who has worked with the conservative-leaning Pioneer Institute, said with a proper procurement system, the savings and costs with a project can be handled at the outset of the contract and as it's put out to bid. "It doesn't have to be 99 years. It could be 25 years," he said of a possible lease of the Turnpike, adding that debt clearance and designs of extensions could also be included in a privatization package.

That aspect of changing up a possible deal appealed to Sen. Baddour. "We get to decide what the agreement will look like and see what the market will bear," he said.