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P3s still uncharted waters in most states

When Maryland officials look across the nation for examples of major public-private partnerships, they aren’t exactly combing through a large body of work.
Among transportation partnerships, only two states — California and Florida — have completed more than 10 such projects as of late last year, according to a recent study by the Brookings Institution. Virginia was in the top five with eight, while Maryland had completed only one, according to the study.
So it’s hard to even find a study examining whether P3s are more effective than conventional contracting to private companies or just having a public entity do the work.
“These public-private partnerships are often complicated contracts that differ significantly from project to project and from place to place,” wrote Emilia Istrate and Robert Puentes, authors of the Brookings report. “In the United States, many states lack the technical capacity and expertise to consider such deals and fully protect the public interest.”
To address this problem, states should form dedicated partnership units to make sure the public is protected and make the procurement process more transparent, Istrate and Puentes said.
Although the U.S. is a latecomer in such partnerships compared with many other nations, a number of states have been “very active” in the last three years in closing such deals, they said.
Maryland’s transportation P3 program dates to 1997 but has not been employed much until recent years. The program focuses on non-highway facilities such as the Port of Baltimore.
A bill winding through the legislature seeks to develop a uniform process for both solicited and unsolicited P3 proposals that must be followed before the state Board of Public Works can approve an agreement. A hearing in a House committee took place last week, while the Senate Budget and Taxation Committee has scheduled a hearing at 1 p.m. Wednesday.
In the last two years, the number of states adopting legislation such as Maryland’s bill has increased from 24 to 31, said Richard Norment, executive director of the National Council for Public-Private Partnerships in Arlington, Va.
“It’s not revolutionary,” he said. “It is a tried and true practice.”
The private sector’s higher capital costs and the “need to make a profit” may result in higher project costs through the partnerships, according to recent analysis by the state Department of Legislative Services.
In Northern Virginia, the Dulles Greenway was one of the first U.S. highway projects to be delivered by a partnership franchise agreement in the late 1980s, according to a study by Michael J. Garvin, an associate engineering professor at Virginia Tech, and Doran Bosso, a former Virginia Tech graduate student.
Other countries, particularly in Europe, have employed the mechanism for much longer than the U.S. has, Garvin said.
“One of the advantages that many European nations have is that their P3 program is driven primarily by the national government,” he wrote. “This creates consistency and stability for the market across the nation.”
The U.S. is more similar to Australia in the partnerships, where state governments lead the process.
“While autonomy among the states has certain advantages, we cannot have 50 unique markets for P3s; this would deter private participation and drive up transaction costs,” Garvin wrote. “Thus, some level of standardization is necessary.”
kshay@gazette.net

The Purple Line has languished in the planning stages for years, facing a seemingly endless series of delays as government funding grows scarcer.

The proposed 16-mile light rail line from Bethesda to New Carrollton has been on the Montgomery County master plan for more than two decades. But no one yet knows how much exactly the project will cost, much less where funding will come from.

What some are hoping could boost the Purple Line and other big projects is a tool employed in numerous states but that hasn’t been utilized much in Maryland: the public-private partnership, known as P3 for short.

“As funding becomes scarce, we have to be thinking outside the box,” said Richard N. Parsons, president of consulting firm Parsons & Associates and a former Montgomery County Chamber of Commerce president who has long advocated for transportation improvements. “We should embrace proven techniques being used in other states.”

Yet even as the state works on legislation to make P3s easier to undertake, two of its first major attempts have bogged down in court battles over contracts. A Montgomery County judge last week granted a temporary restraining order to Bethesda concessions company HMSHost, saying that the Maryland Transportation Authority failed to “follow governing procurement law and regulations” in recommending that a multimillion-dollar contract be awarded to a competing company, Areas USA of Miami.

The parties are due back in court Friday as Circuit Court Judge Eric M. Johnson is slated to consider motions by HMSHost to extend the restraining order by 10 days and by Areas to dismiss the complaint. The state Board of Public Works is slated on Wednesday to consider awarding to Areas the contract to redevelop and operate two travel plazas along Interstate 95 north of Baltimore.

Meanwhile, a $1.5 billion project to redevelop State Center in midtown Baltimore into an urban village with 2 million square feet of office space for government and private use, 1,400 housing units and 250,000 square feet of retail has been mired in a legal battle for more than a year. A Baltimore Circuit Court judge in December dismissed a counterclaim by the state against a group of property owners that sued, claiming the state violated a competitive bidding law in choosing a private development team led by Caroline G. Moore, CEO of Baltimore development firm Ekistics.

Plaintiffs such as Lexington Charles LP, the Peanut Shoppe and DaMimmo's Italian Restaurant claim the project will gut their customer base in downtown Baltimore. Some want the state to lease vacant space in their properties.

Developers cannot break ground until the lawsuit is resolved, Moore said. But she remains optimistic that the project will move forward, saying there were “too many reasons for it to continue,” such as a boost in needed jobs, being at the epicenter of sustainable development and leveraging public dollars through private investment.

“This project is bound to happen,” Moore said.

Truly effective P3s around the world are “extremely rare,” said Josh N. Ruxin, an assistant clinical professor of public health at Columbia University in New York, who has written about the issue.

“However, I do think that companies are catching on, and increasingly applying business metrics to the public sector,” Ruxin said.

Officials: Port P3 works

But another major P3 in Maryland involving the Port of Baltimore's Seagirt Marine Terminal is working well, officials said.

About two years ago, the state inked a 50-year deal to have Ports America Chesapeake, a Baltimore subsidiary of New Jersey marine terminal operator Ports America, expand and operate Seagirt. Ports America is building a 50-foot deep berth — expected to be finished this year at a cost of $105.5 million — to help the port compete against New York and other ports for larger ships that need the deeper berth. More ships are expected to hit the East Coast once the Panama Canal is widened in 2014, as they dock directly in Eastern ports, rather than land on the West Coast and ship goods east by train or trucks.

The port project is creating 5,700 jobs — 3,000 one-time construction jobs in the next few years and 2,700 direct and indirect jobs from expected increased container business — according to the Maryland Port Administration. The total investment and revenue to the state over the 50-year deal could reach $1.8 billion.

While paying rent to the state and making infrastructure investments, Ports America receives all net revenues and can move current container business to Seagirt. Baltimore’s port is ranked first nationally for handling imported farm and construction equipment, forest products, gypsum, sugar and iron ore, and is ranked second in exporting cars.

Ports America is investing at least $140 million to expand the capacity of the Port of Baltimore, Lt. Gov. Anthony G. Brown (D) said during a recent hearing before the House Environmental Matters Committee on a bill designed to implement a standard process for P3s. Officials didn’t want the larger ships that are expected to pass through the Panama Canal after the widening project to bypass Baltimore’s port, but knew the state didn’t have public money to expand the port, he said.

“It’s an economic engine. We need to maintain it as such,” Brown said of the port. “Nor did we necessarily have resources to invest in the port to expand the capacity. So we attracted private-sector investment in that most critical infrastructure. That’s a success story.”

Transportation Secretary Beverley K. Swaim-Staley added that the Seagirt P3 recently helped attract German shipping container company Hapag-Lloyd to start weekly service at the Port of Baltimore. The Seagirt deal has “been a national model on how to do public-private partnerships,” she said.

One problem area with P3s is the need for the legislative branch to maintain a level of input in the process, said Del. Anthony J. O’Donnell (R-Dist. 29C) of Lusby.

“A lot of us have concerns over the legislature being taken out of the loop on major executive branch enactments,” said O’Donnell, the House minority leader.

Six to 10 percent solution

The Joint Legislative and Executive Commission on Oversight of Public-Private Partnerships, chaired by Brown, recently reported that 6 percent to 10 percent — from $205 million to $315 million — of the state’s annual capital budget could be financed through P3 deals. Besides the Purple Line, other projects that could benefit are the proposed Red Line in Baltimore and replacement of the Md. 301 toll bridge over the Potomac River in Southern Maryland, Brown said.

“Not every capital project lends itself to a P3,” Brown said. “But I can tell you this: For every dollar that we spend in infrastructure that comes from the private sector, that’s an additional dollar that we spend on other [state] projects in Maryland.”

Several student housing complexes at the University of Maryland campuses operate through P3s. Those include the Courtyards at the University of Maryland, which opened in 2000, and South Campus Commons, both in College Park. They were built on university land and are managed by privately held Capstone On-Campus Management.

School officials also are studying how to use P3s for projects such as constructing new schools.

The Corridor Cities Transitway, a light rail or rapid bus line connecting the Shady Grove Metrorail station to Clarksburg, is another project that could be built at least partly under P3s, Parsons said.

Virginia is using a P3 to renovate parts of the Capital Beltway, he said. A project building four express lanes on a 14-mile stretch of the Beltway between the Springfield interchange and just north of the Dulles Toll Road at a cost of $1.4 billion is expected to be completed this year.

Two businesses, Fluor Corp. and Transurban Group, are financing, designing and building the project with oversight from the commonwealth of Virginia. When completed, Transurban will operate and maintain the express lanes, which the commonwealth will continue to own.

With the Maryland Blue Ribbon Commission on Transportation Funding reporting that the state needs an additional $870 million annually in new transportation revenues just to address current needs, a partnership is one mechanism to help meet those needs, Parsons said.

“It’s not just something for roads,” he said. “There are multiple applications.”

Like an asset management company

HMSHost, which has operated the two I-95 travel plazas in question since 1987, bid on the P3 project. The Maryland Transportation Authority last month recommended that Areas USA be awarded the contract, as officials said it was a more lucrative proposal for the state than HMSHost’s.

Under the proposed contract with Areas USA — a subsidiary of Areas S.A. of Barcelona, Spain — the state would retain ownership and oversight of the travel plazas and receive revenue over the 35-year agreement estimated by the state at as much as $488 million. The state saves money by not having to invest to renovate the plazas, because Areas would invest $56 million to renovate the facilities, along with $44 million to $48 million in future capital improvements, according to the transportation authority.

In return, Areas would keep at least 85 percent of gross sales at the plazas, according to the authority. HMSHost executives say that Areas’ forecast of total rent paid was “based on an unachievable sales forecast” and they were not allowed to improve their bid as Areas was; state and Areas officials say the process was fair.

Today, HMSHost leases and operates the restaurant and retail spaces in those two plazas from the state, and the building and site are the responsibility of the state, said Michael A. Jones, vice president of business development for the Bethesda company.

“This includes snowplowing, landscaping and capital reinvestment,” he said. “HMSHost is responsible for serving the traveling public and providing a clean facility, including restrooms, dining and other common areas. Today, we do not control the fuel; the state has a direct lease with the two different fuel providers.”

Under a P3 arrangement, all of the risk of financing, designing, building, maintaining and operating the plazas, including the fuel, would be the private partner’s, Jones said.

“The state's role in the P3 partnership is akin to an asset management company, ensuring that the short- and longterm performances of the sites meet their established goals,” he said.

P3s leverage the best of what each sector can bring to the table, Moore said. Without the private side development of the State Center project, the state would not have $200 million of private investment to build out the blighted campus, she said. And without the public leases, private developers would not be able to raise the amount of private financing needed for the mixture of uses.

“At the end of the day, we are better together,” Moore said. “We can solve bigger problems and make more of an impact if we work with a common vision for the future. [A public-private partnership] is the structure to make that common vision sing.”

kshay@gazette.net