Friends Don’t Let Friends Build PPPs
Three examples of public-private partnerships screwing up urban transit are on my mind. The Canada Line in Vancouver is not new to me – I was poking around a few years ago. But the other two in this post are. The Maryland Purple Line in the suburbs of Washington was supposed to be the smooth PPP offering low-risk orbital light rail connecting suburbs to other suburbs without having to go through Downtown Washington, and now it is in shambles because the contractor walked away. Milan is not a new example either, but it is new to me, as we’ve discovered it during the construction costs project comparing high American (and British) costs to low Southern European ones; even there, the PPP bug bit, leading not so much to high capital costs but to high future operating charges. In no case is such a PPP program good government; the bulk of construction and risk must always lie in the public sector, and if your public sector is too incompetent to build things itself, as in the United States, then it’s equally incompetent at overseeing a PPP, as we’re seeing in Maryland. Don’t do this.
Washington: the Purple Line
Maryland planned on building two major urban rail projects last decade, stretching into the current one: the Red Line and the Purple Line. The Red Line was to be a conventional public project to build a subway in Baltimore, mostly serving low-income West Baltimore neighborhoods. The Purple Line, a light rail project in the DC suburbs acting as an orbital for Metro, was designed as a PPP. Governor Larry Hogan canceled the Red Line, most likely for racist reasons. The physical construction costs per rider were higher on the Red Line, but the overall disbursement including very high operating charges made the Purple Line more expensive, and yet Hogan kept the more expensive system and tossed the cheaper one.
One might expect that the PPP structure of the Maryland Purple Line would allow it to at least resist cost escalation – the risk was put entirely on the private contractor. And yet, the opposite happened. Costs turned out to be higher than expected, so the contractor just quit. Once the contract is signed, no matter what it says, the risk is in practice public, and this is no exception. The contractor stopped all work and left the region with a linear swath of ripped up roads; eventually the concessionaire and the state came into a settlement in which the state would pay $250 million extra and the concessionaire would hire a new contractor. The cost overrun was $800 million and the state said that the deal was going to save taxpayers $500 million, but what it signals is that even with very high public-sector payouts over decades that intend to put the entirety of the risk on the private concession, the public sector shares a high proportion of the risk, and the private bidders know this. This is a lose-lose situation and under no circumstances should countries put themselves in it.
Vancouver provides another good example of PPPs and operating costs. SkyTrain operates driverless equipment throughout the system, which means that operating costs should be low, and, moreover, should not depend on train size much. The Expo and Millennium Lines, built and operated publicly, cost C$3.20 to run per car-km, cheaper than on any system for which I have data (mostly very large ones plus Oslo) and less than half as expensive as the major European systems. But the Canada Line, operated by a concessionaire as part of a PPP scheme, costs $17.90/car-km, which is considerably worse than any system for which I have data except PATH. Even taking into account that the Canada Line cars are somewhat bigger, this is a difference of a factor of more than 3.
This is not a matter of economies of scale. The Canada Line’s trunk runs every 3.5 minutes most of the day, which is better than the vast majority of non-driverless systems I am familiar with off-peak, so the high costs there cannot be ascribed to poor utilization. In fact, before the Evergreen extension of the Millennium Line opened in 2016, the two systems’ total operating costs were almost identical but the operating costs per car-km were about 3.5 times worse on the Canada Line – economies of scale predict that unit costs should be degressive, not almost flat.
Marco Chitti is busy collecting information and conducting interviews regarding subway construction in Italy as part of our construction costs report. Italian costs are low, which makes it feasible to build metros even in very small cities like Brescia, where per Wikipedia the cost of the metro was around €65 million per km and €15,000 per weekday rider. However, the use of PPPs has not been good in the places where it happened, due to fiscal austerity following the Great Recession.
- What is the impact on the cost of the PPP? The impact on costs of the potential transfer of risk from the Public to the Private is hard to calculate, but it appears to have an impact more on higher gross operational costs (the fee that the Municipality will pay in the 26 years of the concession for the operation and pay back a return to the private operators) than on the actual construction cost. But that is unclear yet. A bit of detail: the municipality will pay to the concessionaire a 1.09 €/passenger as a minimum granted fee up to 84 million passengers/year, 0.45€/passenger for each additional user up to a maximum determined as an increase of the IRR of 2 percentage points more than the “base IRR” of 5.93%. That means that this is basically the rate at which the private investors are de facto borrowing the money to the municipality, with most of the risk from low ridership transferred to the municipality. What makes calculations complicate is that the city is directly a majority stakeholder of the concessionaire Metro M4 S.p.A. and also, indirectly, as the owner of ATM, which will be the “private” operator. It’s very blurred compared to other PPP schemes where the concessionaire is 100% private (like M5).
- PPP emerges as a stratagem to finance the project without increasing the municipal public debt. The PPP schemes is used to compensate for the lack of local public funds matching the national ones, limited due to the debt cap imposed by the so-called “internal Stability Compact”, an austerity measure implemented after the 2011 debt crisis, which strongly limits the capacity of local governments to borrow money for infrastructure projects. It was suspended in 2016.
Note that contra the plan to build the system without public debt, the PPP does in fact include borrowing. It’s opaque, but the payment per rider is a form of borrowing. Driverless metro operating costs are lower than €1.09 per unlinked trip. The Expo and Millennium Lines cost C$1.55, which in PPP terms is about €0.90, and feature much longer trips, as the Expo Line is 36 km long and one-tailed, which means many people ride end-to-end, whereas Milan M4 is to be 15 km and two-tailed, which means few trips are longer than half the total. In effect, this is high-interest borrowing, kept off the books in an atmosphere of strict budgetary austerity
Don’t do this
PPP-built lines do not have to have high construction costs. The Canada Line was cheap to build – it was Canada’s last reasonable-cost subway, and since then costs have exploded around the country. M4 in Milan is inexpensive as well, around €110 million per kilometer at current estimates even while going underneath older subways in city center. The current annual ridership projection of M4, 87 million, means that the current projected cost per weekday trip is €6,000, which represents an enormous social surplus in a region that builds up to around €30,000-40,000 before even pro-transit activists demand cancellation.
But in those cases, the structure of the contract keeps the operating costs artificially high, privatizing what should be public-sector profit from building a very inexpensive-to-operate system. This is especially bad if it is bundled into construction costs as an up-front payment, as in Maryland. In Maryland, the extra operating costs raised the construction cost well above the maximum level that is acceptable to the public transportation community over here, and in the United States too, such lines tend to be under threat of cancellation from fiscally conservative governors if they are not portrayed as pro-market PPPs. But those PPPs then have higher costs and, through poor risk allocation, lead to the worst of both worlds: the private concessionaire increases costs in order to deal with the risk of escalation, but if the risk exceeds prior estimates, then the state remains on the hook.
Don’t do this. One can to some extent understand why Italy was forced into this position at the bottom of the financial crisis. This isn’t such a situation – all countries in Europe are engaging in large discretionary deficit spending nowadays, as the market appears to believe that not only will corona pass, but also the new vaccines developed will help prevent the common cold and the flu in the near future, increasing future health outcomes and improving productivity through less lost sick time. In the United States, a $2 trillion stimulus is sold as just the first of two steps, because there’s fiscal room. You, even as a state or local government, can find money in the budget for more spending – raise taxes or sell bonds, and do so transparently. Don’t take opaque high-interest loans just to tell the public that you haven’t borrowed on the open market. It’s not worth it.
Thank you! This needs to be said and repeated. Risk cannot be transferred as the population will always hold the government responsible for the delivery of the service. Governments can always borrow more cheaply. PPP are a scourge
Not a fan of PPPs, but for the Canada Line how much detail do you have for the breakdown in payments? Translink is paying back the financing portion of the PPP at the maximum rate allowed in the contract since it has lower borrowing costs than the rate in the contract. It is possible this is what you are seeing in your numbers.
The Milan section … I’m going to have to guess which PPP means Purchasing Power Parity as opposed to Public Private Partnership. Does the last paragraph imply that operating costs in British Columbia should be comparable to those in Milan? That comparison does not make much sense. The early parts of SkyTrain were given a blank cheque which ultimately became a gift to Bombardier. If anything it’s surprising that the Milan PPP was able to get operating costs so close to the artificially low costs fabricated by the Bombardier handout.
Do you consider the Texas Central HSR project to be a PPP or simply a private development? Does it matter that this is an intercity rail project and not a part of a regional transit network?
Bill Maher mentioned the cost problems with California HSR https://www.youtube.com/watch?v=8_eeavqZ8V8 on his show recently.
Maybe this doesn’t do anything, but as they say, the first step to solving a problem is acknowledging its existence
Montréal is falling hard into this trap, with the REM and REM-Est PPPs being branded as a Public-Public partnership (because the consortium owners is the public sector’s retirement fund). Existing infrastructure was given away for a dime, concession costs are opaque, and lines are being driven to maximize profits in redevelopment with limited coordination with the existing transit system (1 combined transfer station). The one good thing to come out of this is that transit is getting built without what would otherwise be a huge amount of province-city bickering, but it will be expensive.
They fell hard and while I understand the sentiment that this is getting transit built, not all transit is good. Between the line parallel to Pie-IX (sabotaging the BRT there) it will prevent the construction of the pink line which is needed. My grandparents used to live in RDP and there’s no effective way to transfer pax from the bus routes there to the east-end commuter train (which is a big detour) or to the Blue line of the metro. And the other east-end line is not going to to much. If you add the destruction of the Deux-Montagnes Line you end up in a situation where the Orange line gets no relief from pax coming from the east but with more pax coming from Laval, the STM will be forced to run parallel bus service for the Deux-Montagnes within Mtl, both branches of the Orange line and the whole east (north and south) whereas a good tramway line on Notre-Dame would be a better use of transit budgets. The consequences of this neoliberal infestation will be heavy and mess up transit in the Montreal area for decades to come. It’s sad, at this point I would rather that they don’t build anything. I am glad I no longer live in the area.
I’m not sure I agree with all of this.
Pie-IX BRT is about 2 km from the proposed Lacordaire line – certainly this is wide enough spacing to increase access to rapid transit, not to canibalize ridership from each other. I think the knocks against the REM de l’Est would be: 40 metre platforms constrain capacity in the long term; running above ground in downtown (although Renee Levesque Blvd. is kind of meh looking, but still), and prioritizing a far eastern section towards Point-Aux-Trembles/ Riviered-du-Prarie which has very low density. I think Lacordaire is a great choice myself, as it fills in a big hole of solidly dense and mixed-use Montreal that does not have rapid transit.
For the under construction Western section: Deux Montagnes line is a huge upgrade in service, no? It goes from commuter rail to frequent service all day. That would seem like a win. The trains will be smaller, but coming more frequently. The West Island branch may not be in a low density area, but politically likely necessary for ‘fairness’. There are also big plans for TOD (which of course raises another thorny question since they are proposed by the real-esate arm of the transit builder!) My concern on the West Island section parallel to the Trans Canada Hwy. will be how well they connect the stations to the surrounding areas for easy access: highway stations can be quite poor at this. Trudeau connection again likely needed to happen for political reasons, but will be useful and open up a station in the Techno-Park nearby. Top priority – probably not. Bad project – probably not. South Shore branch looks good.
So the overall REM, when I look at it, I really like the routing of the eastern sections. The central trunk will provide a big upgrade on the Deux Montange line and provide a faster connection to downtown for Blue Line pax and folks near U de M. This looks like it works to me. South shore sections look good as well. The Repintigny commuter line gets cut-off, but that line seems to have been a failure – low frequency, low ridership (7,000 pax/day over 13 stations), huge construction costs. Service to downtown will require a transfer onto the REM – is this the end of the world? Upgrading service on the Deux Montagnes line for those 30,000 pax/ day seems like a reasonable trade-off.
If the REM was a straightforward part of the Societe Transit de Montreal or the Regional provider I would see some big wins. I will definitely agree that his might not have been the PRIORITY expansions for Montreal (the downtown / plateau portion of the Pink Line Metro, a Blue Line Metro extension to Cote-des-Neiges, LRT on Park and/ or Cotes-de-Neiges, Orange LIne to Bois-Franc, would all be higher priority IMO). But that doesn’t mean the projects are bad, it means the politics of transit in Quebec and Canada are a continual fight between urban capacity/ quality and suburban expansions (usually of lesser value). The same situation is playing out in Toronto, where IMO they have chosen much lower value projects than the REM at even higher costs per kilometre, all while Toronto’s downtown subway capacity problems were much worse the Montreal pre-COVID.
The more I read about PPPs on this site, the more I am worried about the overall ownership structure of the REM. The construction costs are high, although not particularly so by USA – Canadian – British standards. That’s not a win, of course, but we are in line with our peers in getting hosed.
The Mont-Royal tunnel give-away does seem problematic, but the real test for the tunnel will be what happens with the VIA mainline service to the north-shore + Quebec City. There have been conflicting claims – I have read that mainline trains will still be able to use the tunnel, but I’ve also heard the opposite. If mainline trains can use the tunnel, than the project should be a win – much more service on Deux Montagnes line, new service to the West Island. Of course if the REM is running 30+ trains per hour through the central Mont-Royal tunnel this raises question about how much service VIA will be able to run. Also, what kind of track fees might the REM consortium charge them?
So I guess in summary, I think the REM project looks fairly good, with some provisos mentioned above. The usual concerns arise about PPP – the inflated costs. There are some more local concerns like the hand-over of the Mont-Royal tunnel – hoping VIA can still use it, but this is murky. The info above about Vancouver’s Canada Line running costs are very scary – let’s not have our new transit infrastructure in Canada 3x more expensive to run just to grab profits for the Caisse or other private operators.
The overall problems then, don’t seem to be with this particular project, but with construction costs and privitization. If the REM and Blue Line costs weren’t so high, Montreal could be looking at these projects, plus central parts of the Pink Line and other downtown and inner-city projects. It wouldn’t be as dramatic an either/ or question. Same thing in Toronto, although they seem to be picking bad projects, period. The privitization of planning/ explosion of costs seem like one jumbled mess, mixed in with a lot of tough politics. I’m more and more in line with Alan – the cost explosion is a huge problem in its own right, but also exacerbates long-range planning problems and overall transit politics.
I am not a supporter of BRT however the work is so advanced and of course it’s the connection at Pie-IX metro station that works better than at Lacordaire. So the pax forecast for Pie-IX very much depended on the pax on Lacordaire so it’s one or the other. That was clearly explained all along.
The train the l’est needed to serve Repentigny more than Terrebonne but with the forced transfer to go into the Mont Royal Tunnel it won’t serve anyone. Hence why pax from northeastern part of the island won’t transfer to that train. So they will remain on the bus to the Orange line which is already crowded.
Deux-Montagnes cannot be considered an upgrade when you cut 40% of its capacity. It does has all day service but every hour. I am old enough to remember they had all day service every 15-20 minutes. But the powers that be made the wrong calculation that because it’s a premium service it should cost more which is a monumental error which killed pax count and pushed them onto what was then an inadequate bus service. That’s a huge problem in Montréal and Toronto that rail is more expensive to use when a more rational plan would be to use existing resources. It shouldn’t matter which transport mode I use it should be the same fare. But with fare increase (through the implementation of the zonal system) they cut back service and now the STM is forced to run a lot of buses when these pax in north west Montreal should use the Deux-Montagnes line. Huge waste of resources. It’s fairly frequent in North America.
So that’s why along with my previous comment I say that there’s a lot of sabotage going on.
-Deux Montagnes: is that an overall capacity cut on the line or per train? What were the rush hour and off-peak frequencies on the line?
-Could the EXO Train de l’Est be rerouted into downtown on the same route as St. Jerome, to terminate at Lucien l’Allier? How much time would this add? How much time will the transfer at the REM add?
– Is there right-of-way space to double track any sections of the Train de l’Est.
– Will the new fare structure (which I understand is coming) be fully based on zones, or still charge more for ‘premium’ services like rail?
– Do you have a link to the Lacordaire versus Pie-IX ridership numbers? Curious how much the ridership is expected to drop on Pie-IX?
Unless Lacordaire fully drains Pie-IX they still look complimentary, not fully competitive. Lacordaire hits stuff directly (hospitals, St. Leonard, parts of Montreal-Nord and the CEGEP terminus) that will not be served by Pie-IX. Similarly, Pie-IX heads into Laval. A new LRT line running directly into downtown on Nortre-Dame also gives another transfer option to/ from Pie-IX BRT, making it more useful in that respect.
I’ve always thought the Train de l’Est was a questionable project on it’s own: not frequent enough to be really useful in the denser mixed-use parts of town it runs through, not direct enough routing to warrant the last leg to Macouche and missing the denser parts of Repentigny. The concept of commuter rail in North America is generally problematic – high costs, low ridership, poor midday service. I think it often supports car culture by providing a veener of transit in outlying areas instead of getting at the real urban design/ city form issues.
Deux-Montagnes: smaller trains operating at much lower speed. Hence even if they were to operate at full capacity( which the PPP group admitted only after the enabling legislation was adopted they cannot do) is that 40% reduction. CN sold to the PPP group the tunnel and the line which is what CN wanted to do for a while. The QC Gov’t wants more bus service through Trois-Rivières and more flight out of Quebec City. So unlikely that they will lay nice with VIA.
Train de l’est: would require a huge detour and new connections as that train is on CN and the St-Jérôme train is on CP (Lucien-L’Allier is what replaced Windsor Station). I agree with you that it’s not as useful as it could have been. I just don’t foresee many people using it when you can drive to Montreal and use transit there. That transfer to get through the tunnel is absurd.
Double tracking would require moving lanes on the highway so doable but expensive.
The zones went from 8 plus outside AMT to 4 zones plus outside CMM. It doesn’t change anything except may reduce incentive to use transit intra-suburbs. The zones fundamentally exists to ensure that rail will always be at a premium. That’s a policy decision that is now enshrined in legislation so to ensure that the private sector partners of the REM will make lots of money. Also the legislation reduced the amount of profits going into la Caisse (which was somewhat public) notwithstanding what was in the contract. It’s an outright scam. Promises were broken but no one was surprised.
I don’t have a link that works as stuff keeps moving around. However what I do remember is that Lacordaire or Pie-IX is all about bringing what we now call essential workers to downtown and has nothing to do with local service. COVID changes nothing in that regard and will continue to be peak service orientated.
Indeed a tramway line on Notre-Dame would have been cheaper, quicker to build and operate and would have been more useful. But that would depend on unionized operating employees. So a no go for the current provincial Gov’t. The whole point of course is to reduce the number of unionized employees which is what they openly campaigned on. La Caisse promised that the IT work would be done in Montréal but after all was done most of the IT work will be done in Bangalore. I have no issues with India, but a public project should aim to create as many good paying jobs as possible on the same region. So the REM as designed is not about transit but neoliberalism masquerading as transit.
Already the STM has said but retracted under pressure that they know they will have to run parallel service.
When it comes to train service politicians need to let go of the idea that’s it’s more expensive, you already have the line, equipment and staff. Build on that. Use what you have. Mainline rail is cheap to operate. We need all day service in both directions. But there’s no photo op in that
I work on the Purple Line and don’t recognize your description of it. The Contractor did not simply walk off, they exercised a clause in their contract that allowed them to terminate their involvement. The fact that such a clause exists should really be the question but it did and it was exercised. Why did the costs escalate, well there were a couple of reasons. Delays in getting the project started caused by challenges to the project by rich residents opposed to a light rail project from lower income areas traversing their areas. This led to almost a year of delay at the start of the project. This was not in MTA’s or the contractors control. Encroachment of private residences into the existing right of way which led to significant cost and court cases to reverse. And then there was the usual bad in pocket exercise from WMATA at Bethesda Station where betterment’s to the Red Line station were gold plated as WMATA weren’t paying for it. Ridiculous demands from CSX in areas where the RoW runs parallel to existing CSX tracks. State Fire Marshal wanting to impose Local building code on designs for station ventilation and fire life safety services rather than using NFPA codes and other third party approvers unused to transit systems trying to impose incorrect standards on the project. And many other examples. All these issues caused delay to the design, acquisition of real estate and RoW as well as construction, and money follow time. Was the value of the claim inflated, most likely given the value that was settled for but this could and should have been resolved without the Contractor leaving the project. Fluor was part of both the concessionaire and the contractor. It’s instructive that while the concessionaire remains in place Fluor is no longer part of it. The cynic in me tends to believe that the departure was more related to Fluors financial position more than MTA’s failure to manage the project especially as Traylor and Lane the other partners in the Contractor were apparently reluctant to leave due to reputational damage. What I would say is that this is a lose lose situation for everyone involved. As one of the design firms that has now been assigned form the Contractor to the MTA and currently preparing bid documents for procurement of another contractor to complete the work, we had a couple of change orders in process for additional scope that was added to the project, the design was completed and now through no fault of our own we are being asked to accept 25% of our actual costs. And many others involved are also being asked to take a loss because of this termination. What I would say is that for the part of the project we were involved in the design build was efficient and resulted in the critical path Plymouth Tunnel being fully completed on schedule and under budget. The Bethesda connection to Red Line only delayed due to a significant changed ground condition that resulted in a complete redesign, and was in construction when work stopped.
Does PPP work? Still not convinced that this model really brings the benefits it’s proponents claim. I’m involved in three design builds at the moment for underground work and Purple Line was actually the smoothest with a lot less interference from the ultimate operator the MTA.
Does PPP work?
Depends on which part you want to work. It is very good at socializing the risks and privatizing the profits.
I’d say Alon’s title is some kind of double entendre because in this game it is exactly friends in government who arrange these things for their friends, the usual suspects in finance, construction, consultancies etc.
Yes and no. Without profits, the “private” piece disappears, and you have a unionized civil servant monopoly (with monopoly prices) doing the work. The problem is the ‘risks’ side — it is clear to all parties these endeavors that built into the operation of the government is the ‘sunk cost fallacy’. Both sides know that once the project starts, it is going to get finished, no matter the cost. The former mayor of San Francisco cynically summed it up:
Willie Brown, former SF mayor, San Francisco Chronicle – July 28, 2013
“News that the Transbay Terminal is something like $300 million over budget should
not come as a shock to anyone. We always knew the initial estimate was way under the
real cost. Just like we never had a real cost for the [San Francisco] Central Subway or
the [San Francisco-Oakland] Bay Bridge or any other massive construction project. So
get off it. In the world of civic projects, the first budget is really just a down
payment. If people knew the real cost from the start, nothing would ever be approved.
The idea is to get going. Start digging a hole and make it so big,
there’s no alternative to coming up with the money to fill it in.”
@Reedman Bassoon: “Yes and no. Without profits, the “private” piece disappears, and you have a unionized civil servant monopoly (with monopoly prices) doing the work.”
Seriously, do you believe that nonsense? It is not the ridiculous binary choice you present. Are you suggesting that big infrastructure projects in countries that don’t use PPPs are all built by government employees? Digging the holes etc? And the equally absurd bogeyman of unionisation. Of course not. PPPs were devised to notionally share the risk of such projects beyond the historic situation of where it is essentially all carried by the government. It is this that has totally failed as anyone could have predicted because the private parties always have the option of walking away–and the way such deals are structured they often have more to gain by such action. Irrespective of the method of financing, responsibility for the possible risk of failure of education, health, transport or water services can’t be transferred from the government to the private operators in a democracy.
It was supposed to lead to wondrous efficiency because in principle the private parties would be so motivated, but that ignored the increased profit they gain from inflating costs and gaming the system, all aided by the increased opacity of arrangements. Pure rent seeking on essential infrastructure, most of which is a natural monopoly. Indeed, that is exactly what has occurred in those countries who have overindulged in PPPs. It has also happened to particular projects in countries/sectors that don’t normally use PPPs; for example in the case Alon uses in which the only TGV line built by PPP in France, the LGV Sud-Ouest (aka LGV L’Océane, Paris-Bordeaux) was the most expensive LGV to be built in France. This was done because SNCF is forced to take any capital expenses on its books, rather than getting direct subventions from government, and this has put it under a lot of financial pressure. Note, whether by direct funding by SNCF, or by this kind of PPP, the same private contractors build the things. Companies like Vinci or Bouygues, among the largest civil construction companies in France, EU and the world.
Bouygues were major contractor in construction of the Channel Tunnel, and are part of UK’s HS2. They (Bouygues Travaux Publics) were also part of the Paris Metro Line 14 northern extension which opened Oct-2020 (Pont Cardinet new station opens this month). This is the construction that Brian Rosenthal (NY Times) compared to NYC’s Second Avenue Subway debacle:
The public body that runs transit in Paris/Ile de France is RATP and they manage the construction, ie. tender the work and manage the actual construction companies like Bouygues etc.
This checks out with the articles I remember reading in WAPO and http://www.marylandmatters.org when PLTP (the concessionaire) first tried to walk away. They complained about multiple years of change orders and the state not wanting to pay as much extra as PLTP wanted, on top of prior delays (the Chevy Chase NIMBY lawsuit, etc.). The mid-pandemic timing of termination and the $367 million exit-payout (“demobilization costs and outstanding debt” per WAPO) made me wonder about the contractors’ financial status, and Hogan actually explicitly blamed Fluor’s “financial difficulties”–cost overruns on other projects, an SEC investigation, and falling stock price–, but the list of changes, delays, price hikes and disputes before the pandemic hit seemed easily long enough to account for a pissed-off contractor approaching their limit.
The 30-year operating contract is completely unnecessary and really ought to be severed and cancelled, if legally possible; as a Maryland voter and taxpayer I don’t want something like the Chicago parking meter fiasco (essentially privatizing a public function and contractually constraining public policy) happening here. And I will be more than happy for this experience with the Purple Line to poison the well for big infrastructure P3s in Maryland; would be nice to kill the Beltway/I-270 widening project before any ground is broken, even better before any legally-binding commitments are signed.
This reminds me of the Arlanda Express in Stockholm which is currently underutilized because of the high ticket prices imposed by the concessionaire. It’s amazing they went the PPP route when the state funded SEK2.4billion of the SEK4.1billion needed to build the line. This is just a private entity hoarding a critical piece of public infrastructure for 45 years except the Swedish government decides to buyout the concessionaire before their contract ends in 2040. The lack of coordination and integration with the rest of the public transit system is similar to what is going on with the REM in Montreal. I seriously can’t wait for this PPP trend to die off.
If it makes powerful private players lots of cash, while pushing the risks onto the government, it’s gonna be tough to kill. I live in a small Canadian province and we’ve been hugely burnt on PPPs for schools but are still moving forward with other PPPs for some massive hospitals. The mantra of private efficiency and public sector waste has been repeated endlessly and is deeply believed.
Don’t do the even stupider thing and pass your infrastructure renewal to PPPs like London did in the early 2000s, despite both London Underground AND TfL saying what a terrible idea it would be. It ended in infamy, with one PPP infraco going bankrupt, and TfL buying out the shareholders of the other infraco, at a cost of several billions… All to get the money off the government balance sheet.
Click to access SN01307.pdf
I’ve just been reading a bit about this in the Japanese context in a 600 page monster written by a train-tribe LDP diet member. He talks about the original UK stuff and…..is not very positive about it. And then states proudly “in our country we just sell private companies stock in public railways”.
I’m still learning the ropes on this but in Japan everything is mediated by the existence of never nationalised railways which are rather good (disclaimer I live next to one). Everyone talks about the JR rail, but more interesting for discussion are the post-1980 suburban railway systems which come under the “third sector” which range from run-like-a-for-profit-company-but-not actually-one Tsukuba Express, basically-owned-by-Keisei-but-still-has-government-owned-stock Hokusou line, the bought out by Nankai Semboku Rapid line in Osaka and a bunch of rural lines mostly ex-JR lines are run like companies but are owned by local municipalities, local chambers of commerce and neighbourhood groups etc.
Looking at these lines a couple things really standout compared to other PPP arrangements, there is an actual company that runs the stations, trains and other basics, if even public-private stock share is split. They keep a lot of stuff in house too judging from cleaning staff uniforms. And when there is sharing its usually with another rail company usually one with a connection or through running connection (Semboku had all these with Nankai decades before being bought out). And then add all the usual things that make Japanese mass transit work, ToD, no car subsidies, network size and you can see why privatising wouldn’t lead to any deterioration of service, at least in urban Japan. But at the same time it’s unclear whether it’s led to much improvement either. JR’s political soft-budget issues plus unions made it a particular case I think.
The most obvious weakness of both quasi-private 3rd sector and traditional private “2nd” sector is building new rail lines. Not just subways but newer commuter ones like Tsukuba and Hokusou. Even the one big private-to-private construction of the last decade, the Sotetsu-Tokyu connecting line in Kanagawa is 2/3’s funded national and prefectural government. And a majority of the funding for double tracking the Tobu Noda between Kasukabe and Kashiwa is government too. This probably relates to Alon’s Japan-as-a-moderately-higher-cost-country and not necessarily in a simple “corporates fleecing taxpayers” way. I’d love Alon’s take though.
I’m wondering if Japanese style arrangements are just going to come across as too corrupt to the entire political spectrum in Europe, the United States, Canada, Australia, and New Zealand. It involves the sort of semi-chicanery that gets a lot of liberal and conservative people really angry.
While Japan is no New Zealand or Scandinavian country re. corruption, it would be pretty rich for people in the U.S. and some European countries to consider it too corrupt to learn from or at least examine.
I’m not referring to actual corruption but more like the Japanese way of doing things will tick off the wrong boxes in the Americas and Europe.
I agree. It is ‘Japan Inc.’
No doubt vanilla corruption exists in Japan, like everywhere, but one strongly suspects what is referenced by that listicle of “corruption indices” is Japan’s strong protection of its perception of national interest, almost to the exclusion of anything else. I see that France is well down the list too but IMO it reflects something very similar, ie. protection of its national interest and of course France is infamous for protecting its cultural interest too in the face of rampant US multinationals who want the world to be pale identikit copies of American chain stores everywhere in the world.
What should I read only an hour after making that previous post:
(from Financial Times as reproduced in our local version, Australian Financial Review, both behind paywalls, so a short bit of transcription by me):
Shocking! Because you know, fee income for big merchant banks* is the most important thing, right? I don’t know anything directly about Couche-Tard but “Circle K chain” doesn’t exactly inspire confidence. Food is a critical aspect to French culture** so I absolutely agree with this decision, even if Carrefour doesn’t exactly signify the quality end of the food spectrum; however I notice it now owns (since a 1999 takeover) the Champion supermarket chain which I used when I lived in Paris–it was a cut above most such places (and had a direct entrance at Place d’Italie from M13, my metro line). And yes (to pre-empt some whinges) Carrefour was the first in Europe to adapt American supermarket ideas in the form of “hypermarchés” in the 50s and is the reason they are one of the world’s biggest retailers. I just realised, despite my sniffiness, I do tend to gravitate to their stores when in Asia.
*For those who like to claim Macron is a pure neolib, this surely is a test? If he intervenes (which would be stupid of him and one thing is clear, he is not stupid) I would concede the argument. But French Cuisine is not a UNESCO** listed heritage cultural artefact without reason. On that grounds alone the foreign takeover of their major food retailer should be blocked. But then, with age I am more and more hardline on this stuff. On the same grounds I would ban (thru the usual French “trickiness”) Starbucks though one would have thought the quality of its offerings should have meant it wouldn’t be successful in Paris; however that forgets that the biggest group among those 40 million tourists are Americans and …. say no more. If 45% of all voters voted for Trump and still believe the election was stolen, then yes I am confident that enough Americans can be that stupid; I mean travelling all that way to one of the gastronomic capitals of the world, to just go to the worst major kawfee chain in the world… (not that I’m saying Paris cafes have the world’s best coffee but they certainly have the best cafe culture and Starbucks and their ilk are direct threats. Plus, Starbucks is not going to create healthy competition but the opposite, a descent into lowest quality denominator).
I can understand that Japanese politics is quite different from Anglosphere politics. Europe not so much. Though the main rail privatizations were all the result of parties winning elections promising that policy (although they didn’t win those elections on that policy Osaka Ishin is a pain to explain). Compared to most austerity PPP’s in the West these policies were super-above board on transparency. I’d take Osaka Ishin over Cuomo. It helps that Japanese local government is elected by proportional representation, like in Europe and there is viable local media as well.
But I think Japan suggests a higher synthesis of capitalism-socialism on railways is possible….if the question of high Japanese construction costs can be solved.
I mean I live on the Shin-keisei a commuter line in Chiba, I passed Chiba’s main central quarantine hospital last night on a train with 100% mask usage. Ignoring Asian best practices has to stop, its literally killing people. I’ve been thinking about how to find a language to describe the Japanese case to English people, try brake the crappy back and forth between looting pseudo-privatization and incompetent “socialism”, not to advocate copying but learning. I wouldn’t necessarily use the above examples. I’d use Kobe’s commuter rail, Kintetsu, Meitetsu, Tsukuba Express, Saitama Rapid transit.
So in sum doing entering into a PPP just to avoid exceeding an arbitrary debt ceiling is like borrowing from a loan shark because you don’t like the idea of owing more money to the bank. There’s really no good reason to do it, especially since the interest for states to borrow is presently close to 0% p.a.. Deferring maintenance would also fall under this category, since the effective interest rate from doing so is extortionate.
Maybe we should be examining the harmful effects that credit ratings agencies have on public sector spending, since these are the bodies states are afraid of offending through higher debt levels.
Right now Germany should be building a ton of rail lines. There are very obvious targets and borrowing money is cheap as hell.
But unfortunately the process from “let’s build a rail line” to “we actually start shoveling dirt” takes ages. Let alone completion…
For example, Munich-Hamburg could be brought down to 4h.
Let’s say you got Munich Nuremberg in an hour (roughly the current level) and Würzburg-Hanover in two hours. That means Würzburg-Nuremberg in half an hour (absolutely doable with a newly built line) and a newly built line for Hamburg Hanover in half an hour…
It’s not like they’ve had ideas along those lines since the eighties…
From today’s Nature Briefing email (emphasis is mine):
In my writings I have pushed this line w.r.t. government biomedical research because most drugs and treatments begin life in research labs before migrating to the commercial world. This is absolutely true but one can forgive the public for thinking the opposite because BigPharma and neolibs spread the fiction that it is all done by them alone. The situation is particularly egregious in the US which has the highest prices for pharmaceuticals. (This extract is obviously from Wiki but I don’t have the link.)
In this example (above) Pfizer’s claims are simply outrageous lies. Immense political lobbying was brought to bear on congress to change the “sharing” policy. No accident that Pfizer refused any of Trump’s Operation Warp Speed vaccine development money because it wanted to remain totally unencumbered on how it profited from the BioNTech mRNA vaccine.
Mazzucato promotes this reality of industry benefiting and exploiting the public in a lopsided arrangement in her books The Entrepreneurial State: Debunking Public vs Private Sector Myths. and The Value of Everything: Making and Taking in the Global Economy..