Public-Private Partnerships Face Headwinds in Arkansas

by Marty Cook  on Monday, Jul. 17, 2017 12:00 am   5 min read

State Rep. Warwick Sabin finally got his public-private partnership bill passed in the Arkansas Legislature this year, but political compromises left some holes in its potential uses.

Public-private partnerships — or P3s — have come to the forefront in financing circles since President Donald Trump touted their potential when announcing a $1 trillion program to rebuild the nation’s transportation infrastructure. Sabin, D-Little Rock, tried unsuccessfully to pass bills allowing P3s in Arkansas in 2013 and 2015 before finding success with Senate Bill 651, whose lead sponsor was Sen. David Sanders, R-Little Rock.

The bill, which became Act 813 when Gov. Asa Hutchinson signed it into law in early May, exempts Arkansas’ highways from P3 arrangements, something Sabin said was an unfortunate necessity of politics. County and city projects are also exempt from the P3 statute.

“After three tries I thought it was more important to get something on the books that we could start using rather than have it be perfect from the get-go,” Sabin said.

Sabin said he was confident that once P3s are implemented in the state, their benefits will lead to expanded uses.

In a public-private partnership, a public entity contracts with a private company to build and operate a public-use facility. The private company gets to reap any profits from the operations while the public, in theory, saves money by having a private company foot most of the upfront costs of the design-build phase.

When he announced his infrastructure program, Trump said as much as $800 billion of the costs would be met by the private sector. In the case of highways and bridges, the private-sector companies could then recoup their investments from tolls and user fees.

But that won’t happen in Arkansas as long as Act 813 exempts highways from P3s. The Legislature in Texas, a state that allows P3s for infrastructure construction, recently voted down a bill that would have allowed P3s on several major interstate projects, chiefly because lawmakers were resistant to the use of toll roads.

Tool in the Toolbox
Sabin said he wanted to make it clear he didn’t think P3s were a one-size-fits-all solution to every funding problem the state has. It’s another tool in the state’s toolbox.

One of the main reasons it is not a tool for highway construction is the opposition of the Arkansas Trucking Association, which lobbied successfully for the exemption. The ATA opposed P3s for highways when Sabin introduced his legislation in 2013 and 2015, as well.

“The premise of a P3 is that there is private investment, and private investment means a return on investment,” said Shannon Newton, president of the Arkansas Trucking Association. “I don’t know how you have a return on investment in infrastructure without tolling, which means you have a profit margin built into a public utility.”

The ATA members believe that building or improving an interstate in Arkansas through the use of P3s would result in tolls. Since tax dollars — and fuel tax surcharges — are already used for highway construction, the ATA believes that would force all motorists, not just truckers, to pay twice for driving on Arkansas highways.

“Our members are significantly opposed to tolling as a mechanism for paying for roads and bridges,” Newton said. “That’s a philosophical position that I’m not sure we have deviated from as an industry, certainly not on the state level.

“Everybody, I and trucking companies, are paying fuel tax to fund infrastructure. If there is a public mechanism for funding and then a private mechanism for funding, it is double taxation.”

Newton said there aren’t any stretches in Arkansas that have a high enough traffic count to support tolls, unless the tolls were significant. Sabin said a private company that built a highway or bridge could generate revenue in other ways than tolls and, in some areas where tolling would work, it would be good to have P3s as an option.

Being viable in only a handful of places doesn’t mean the P3 model wouldn’t work to the state’s benefit in those areas, Sabin said.

“The reason I brought the bill up in the first place, back in 2013, was that obviously we have more infrastructure needs in Arkansas than the public sector can afford,” Sabin said. “It’s not just highways. It’s all kinds of infrastructure at the municipal and the state level, whether you’re talking about water systems and sewer systems or college campus and school buildings. We have a lot of needs, and we would never be able to afford to cover them all through government funding.”

Checks and Balances
Public-private partnerships are more common in Europe, Australia and Canada, where Sabin said they have been used for decades. P3s have also been in the news in Arkansas, such as when Arkansas State University in Jonesboro announced in 2016 that its board of trustees had approved two partnerships to build a convention center and expand student housing.

Former Arkansas House Speaker Davy Carter, in a recent commentary for Arkansas Business, compared Arkansas’ private option health care expansion, Arkansas Works, to a public-private partnership.

Sabin, who said last week that he’s considering a run for Little Rock mayor, said any cooperation between public and private entities could be called a P3, but Act 813 codifies it.

“It creates a structure that mitigates risks on both sides, and it offers predictability and reliability,” Sabin said.

The state of Virginia under Gov. Terry McAuliffe has been active with P3s to improve its interstate infrastructure. A P3 project in California backfired when the private entity cited a noncompete provision to prevent the state from expanding a road near the company’s toll lane. California ended up buying the lane back for nearly $100 million more than it cost.

“There have been cases in other states where they have done that, and inevitably you can’t really point to one that has been successful,” Newton said. “Even the ones that proponents say are successful are those that have equity firms from out of the country or have experienced toll increases of 10-15-20 percent year over year.”

Sabin said he understands the risks of P3s, which is why he spoke with the people who drafted the legislation in Georgia and Virginia and other states. The act runs more than 20 pages because Sabin said he wanted to make sure any possible contingency was covered.

“It can get complicated because you’re trying to make sure both sides of the equation are protected,” Sabin said. “I want to emphasize [that] this legislation was drafted in a way to really mitigate risks for all the parties involved. It’s a long bill because it has a lot of checks and balances requiring reviews by lawyers and CPAs and business plans and all kinds of different documentations. You’re not just having some kind of boondoggle occur.”

Sabin believes once P3s are used successfully on qualifying projects allowed by Act 813, more types of projects will be added — including highways.

“I’m confident our legislation is going to be able to achieve some infrastructure improvements that otherwise would not be possible,” Sabin said. “There is enough work to be done that once we get that started there may be interest again in opening up P3 to allow for other types of projects.”

 

 

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