Prepared Testimony of Matthew J. Brouillette for the House Republican Policy Committee Hearing on October 18, 2007
Thank you Rep. Turzai, Rep. Geist, and members of the House Republican Policy Committee for this opportunity to share with you why the Commonwealth Foundation believes that in order for Pennsylvania to meet its transportation system needs, while respecting the already-overburdened taxpayer, we must find alternative means of financing and managing our transportation infrastructure and mass transit systems.
Much of what I will highlight today comes from the report we released earlier this year entitled, The Emerging Paradigm: Financing and Managing Pennsylvania’s Transportation Infrastructure and Mass Transit. We also released a policy brief focusing on the cost savings of competitive contracting in mass transit services. Both of these resources for policymakers are available online at www.CommonwealthFoundation.org.
Now, if we agree with the November 2006 report from Pennsylvania Transportation Funding and Reform Commission that we annually need an additional $965 million to fill a funding gap for our roads, highways, and bridges, and another $700 million for our mass transit systems, then the question that remains is how to pay for these important and legitimate economic development investments?
Act 44—the legislation spawned by the Pennsylvania Turnpike Commission and its lobbyists—was supposed to be that solution. However, despite its fanfare, the Turnpike deal comes up short by more than $800 million in the coming fiscal year, with even greater projected shortfalls over the next 50 years.
(NOTE: Act 44 will provide only $500M for roads, highways, and bridges in FY 2008-09, and $350M for mass transit in FY 2008-09. Additionally, increases of only 2.5% are guaranteed after 2010, which means that the $2.873B promised by the Turnpike in 2057 will only be worth a projected $383M in today’s dollars. Source: House Committee on Appropriations Fiscal Note and calculations by the Commonwealth Foundation,).
At the same time, the traditional means of funding our transportation infrastructure—taxes, fees, and bonded debt—are insufficient and politically unattainable. In other words, the demands on our roads, highways, bridges, and mass transit systems are exceeding the supply of taxes and fees that citizens and commuters can afford to pay.
Fortunately, alternatives exist. Policymakers in Harrisburg don’t have to merely choose between higher taxes or bad roads. Indeed, an even better means of financing and managing our transportation infrastructure and systems could be placed at your fingertips. This tool—known as Public-Private Partnerships—will enable policymakers to leverage private capital and expertise to help pay for and operate our transportation infrastructure and mass transit systems.
This new paradigm is one that many cities and states across the nation are employing to meet their transportation needs. By partnering with the private sector, policymakers can better provide public services. I would to highlight a number of benefits of Public-Private Partnerships.
The first is reduced costs to taxpayers and commuters—a leading driver behind Public-Private Partnerships in transportation. There is a long history of achieving significant savings in operational functions. For example, Florida’s Public-Private Partnership initiatives for highway maintenance have generated cost savings between 15% and 20%. Additionally, some of the largest opportunities for savings occur in transit operations.
Closely related to saving money, Public-Private Partnerships can produce greater efficiencies through competition and specialization. Study after study shows that a competitive system is more efficient and effective than traditional single provider systems. For example when Massachusetts turned to competition for its highway maintenance, nearly half of the contracts were won by employee groups who competed. For the first time, efficiency and effectiveness were introduced system wide producing tremendous improvements. Massachusetts was able to lower labor input costs and receive greater productivity in return. Furthermore, the introduction of competition freed up resources that could be allocated to other, higher priority needs.
Access to New Capital
In addition to saving money, Public-Private Partnerships also open up new sources of capital to the Commonwealth. A lease of the Turnpike would potentially bring in billions of dollars that should be dedicated to strategic investments in other transportation infrastructure projects throughout the state. Other concession opportunities may also emerge bringing additional money for transportation purposes.
Achieving Performance or Quality Improvements
The contractual mechanism in Public-Private Partnerships increases the incentive to produce high-quality work and to ensure high performance. Indeed, the level of performance is firmly established in the contract. Generally, contracts can (and should be) performance-based (focusing on outputs or outcomes) and can include quality assurances. Often these performance standards exceed these established for the public agencies, the Indiana Toll Road agreement being just one example.
Enhancing accountability and performance also are prime considerations for many public officials. Partnerships require strong contracts with performance requirements. In many cases, this adds an additional level of transparency into the operations.
Changing the Incentive Structure
Similarly aligned with performance or quality improvements is changing the incentive structure. If nothing else, Public-Private Partnerships change traditional business practices, making them more flexible, innovative, transparent, and customer focused. In addition, these new incentive structures lead to more on-time and on-budget project delivery.
Enhancing Risk Management
Public-Private Partnerships also protect citizens’ interests. These contracts allow government agencies to shift risk from taxpayers to the contractors. With the power of a contract at hand, governments can build quality assurance and/or quality controls into project delivery as a means to manage risk. An increasing trend is the employment of warranty concepts whereby the contractor places a long-term guarantee on their work. This further shields taxpayers from risk.
Finally, Public-Private Partnerships produce innovative solutions. In non-competitive systems and where the incentive structure is not set up to reward innovation, there is no motivation to “swim upstream” and advance a new idea. Private firms have far more opportunity and incentive to encourage and foster innovative ideas at all levels.
In sum, the advantage of a Public-Private Partnership paradigm is that most, if not all, concerns about performance expectations and costs to the public can be adequately mitigated by the General Assembly and Governor. This level of accountability simply cannot be matched by the traditional funding and management model.
It is also important to note that the public sector retains full control of its transportation infrastructure and services. A public-private partnership is neither a divesture of responsibility nor a transfer of an asset. It is merely a contractual arrangement whereby the expertise of both the public and private sector are maximized.
It is not often that Pennsylvania lawmakers can choose between raising taxes and fees and reducing costs and improving services. Yet a Public-Private Partnership offers that potential. Across the nation, such partnerships have proven to generate greater financial resources and have increased the quality of services for citizens.
We hope the General Assembly and Governor embraces Public-Private Partnerships as an important tool in our policy tool box. Now, more than ever—especially given the failure of Act 44 of 2007 to provide sufficient transportation funds—Pennsylvania needs alternative means of financing and managing our infrastructure and mass transit systems.
Thank you again for this opportunity, and I look forward to answering your questions.
# # #
Matthew J. Brouillette is president and CEO of the Commonwealth Foundation (www.CommonwealthFoundation.org), a public policy research and educational institute located in Harrisburg.