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SEIU Testimony to the Senate Appropriations Committee on Public-Private Partnerships

Good morning Mr. Chairman and Members of the Committee. My name is John Adler, I’m the director of private equity for the capital stewardship program of the Service Employees International Union. SEIU, which was founded in Chicago in 1921, is the largest U.S. labor union, representing1.8 million members in public services, health care, and property services, and the largest union here in Illinois, with 165,000 members. Among our members are 800 toll collectors, money room drivers, clerks, custodians, and other employees of the Illinois Tollway.

Let me state at the outset that SEIU has a multiplicity of interests concerning public infrastructure and the possibility of leasing public assets to private operators. First and foremost, as in the case of the Illinois Tollway, we often represent workers employed by the public entities considering public private partnerships, and our goal is to protect and promote the interests of our members. Secondly, we have a keen interest in the fiscal stability of the governments that own the assets, as taxpayers, consumers of public services, and public employees. Lastly, public private partnerships can generate enormous windfalls for government entities, and we want to insure that those proceeds are used responsibly for appropriate purposes. Let me address these interests one by one.

SEIU’s strong preference is to see public infrastructure assets remain publicly owned because public management and decision-making take into account all the stakeholders and there is no single party – no owner – whose narrow interest takes primacy. We believe that public ownership usually makes the most financial sense as well, given the public sector’s long track record of efficiently building, operating and maintaining critical infrastructure installations. However, SEIU recognizes that a combination of factors may make private investment in these public assets attractive to governmental decision makers. These factors include:

  • Structural budget deficits at many if not most government entities

The current political and fiscal environment makes it virtually impossible to increase taxes, raise tolls, or issue additional debt, particularly in states with balanced budget laws or statutory caps on debt issuance. Unable to raise necessary funds from traditional sources, governments are looking to monetize infrastructure assets as an alternative source of revenue.

  • Growing deficits in capital spending on infrastructure

At the same time tax and bond revenues are under pressure, aging infrastructure assets owned by state and local governments require massive capital investment just to be maintained in their current condition. Billions more are needed to increase capacity on existing roads and to build new roads. Public private partnerships seemingly offer elected officials the chance to kill two birds with one stone.

  • Growing private investor appetite for public infrastructure assets

Private investors are raising literally tens of billions of dollars to acquire interests in public infrastructure assets. They project that these assets can generate equity-like returns with bond-like volatility. They are lobbying state and local governments with the promise of huge upfront payments to take control of these assets, and they think most elected officials will have a hard time saying no.

Where the combination of factors makes a compelling case for a public private partnership rather than continued pure public ownership of an asset, SEIU believes that certain conditions must be met in order for the partnership to be successful. First and foremost, it must truly be a partnership, and not a complete privatization. In other words, the public entity must retain an ongoing interest in the asset, either by keeping a minority stake, or by claiming a portion of ongoing revenues. If you take nothing else away from my appearance today, please remember this one point: the long-term success, and your legacy as public officials, utterly depends on the government retaining an ongoing interest in the asset it leases to the private sector.

We agree with the analysis of Fitch Ratings, which in a recent report stated:

"…privatizations that share in the profits as they are earned through appropriate levels of percentage rent or other such arrangements will likely result in better public sec to r value over time, as the governmental entity and the private sector’s interest will be better aligned."

We believe governments that sign long-term concession agreements for essential infrastructure assets without retaining an ongoing interest in those assets risk being perceived as the equivalent of the Native Americans who sold Manhattan Island to Peter Minuit for the equivalent of $24 in beads and trinkets. When that deal took place, the Indians couldn’t believe the riches they had acquired from the foolish Dutchman, but since then the perception of who got the better end of that bargain has changed considerably. Similarly, the recent transactions for the Chicago Skyway and the Indiana Toll Road currently appear to be bonanzas for the sellers; in the fullness of time, however, the leaders of Chicago and Indiana may be perceived as the Manhattan Indians of their time. In fact, a recent report by Merrill Lynch regarding the Indiana Toll Road transaction suggests that the private consortium could recover its $3.85B payment in as little as 15 years, then go on to generate as much as $21B in profits over the life of the concession agreement. If that projection comes true, then Governor Daniels’ portrait may end up hanging in a rather dank corner of the State House in Indianapolis.

In addition, because these assets are in so much demand right now, we believe that a public entity that leases out a well-maintained, established, revenue-producing infrastructure asset for a long term is likely to receive the same price, or virtually the same price, for a substantial majority interest – say 75-80% – as for a 100% interest. Such a transaction could be structured so the public entity continues to receive its percentage share of revenues, and could retain a put option – the ability to sell its interest – in the future when presumably the value of its stake will have been enhanced by the private sector management of the asset.

Another reason it makes so much sense for the public entity to retain an interest in the asset that it leases out for a long term -- say, 75 to 99 years -- is that it is impossible to accurately project traffic volumes and revenues over that length of time. Most toll road traffic projections extend out for no more than 30 years at the most. 100 years ago the automobile was in its infancy; with the accelerating pace of technological change, who knows what automobile traffic volumes will be 50 or 75 years from now. With so much uncertainty, it makes little sense for a public entity to accept a one-time upfront payment for a long-term lease for an essential public infrastructure asset and therefore have no stake in the potential upside gains inherent in such a transaction. We believe the failure to include some form of revenue-sharing in these early U.S. toll road transactions makes them overwhelmingly favorable to the private sector, potentially undercutting future deals or creating public pressure to undo privatizations that generate outsized profits for the private operator and/or toll hikes for the driving public.

Speaking of toll hikes, they are another important area for consideration. Clearly one reason these initiatives gain currency is because it is often very difficult politically for a public entity to raise tolls. For example, the last time tolls were increased on the Indiana Toll Road was 1985. Public private partnerships are somewhat insulated from those political considerations. At the same time, however, it is extremely important for the public entity to impose controls over the partnership’s ability to raise tolls. In Ontario, Canada in 1999 the government signed a 99-year lease for the 407 electronic toll road in Toronto without limiting the operator’s ability to raise tolls. The subsequent toll increases led to political upheaval, multiple lawsuits, and, eventually, concessions from the operator to the provincial government in lieu of rollbacks on toll increases. The Chicago Skyway deal, on the other hand, contains a schedule of toll hikes through 2017, with a schedule of future hikes based on the greater of inflation or nominal GDP growth, with a 2% annual floor. An analysis by NW Financial LLC of this formula demonstrates that if it had been applied to the Holland Tunnel that links New Jersey to Manhattan when it opened in1927 at a toll of 50 cents, drivers today would be paying a toll of $185.13 rather than the $6 they actually pay. NW Financial Principal Dennis Engright points out that if the toll had increased by GDP alone it would “only” be $49.95, and if it had increased by CPI alone it would “only” be $11.42, but when you combine the two criteria along with the 2% floor you get the astronomical $185 figure instead.

SEIU also believes that public private partnerships cannot succeed on the backs of the employees of the public entity. If a public private partnership is established simply to lessen the labor costs of an infrastructure asset by reducing wages, benefits, pensions or headcount, it is doomed to political and public opposition, and failure. However, since in virtually all cases infrastructure assets are capital-intensive rather than labor-intensive, the case for private investment rests not on reducing labor costs but on making the long-term capital structure more efficient and less costly, on removing the liabilities of the asset from the balance sheet of the public entity, and on allowing the dynamics of the private sector to improve the asset’s operations and services. Given those economic and political realities, SEIU believes that it is incumbent upon the public entity to ensure that the interests of its employees are protected in the concession agreement with the public private partnership.

Lastly, SEIU believes that for a public private partnership to make sense, the public entity must commit itself to appropriate uses of the proceeds. We are opposed to partnerships the proceeds from which are used as one-shots to take care of short-term projects, score political points, and/or fill budget shortfalls. Appropriate uses of proceeds from public private infrastructure projects would fund long-term investments in the public interest, including: first and foremost, defeasing existing debt incurred by the asset itself; secondly, paying for additional needed infrastructure projects outside the scope of the public private partnership, especially if such investments can leverage matching dollars from other levels of government; and thirdly, paying into trust funds for long-term obligations, such as for public employee pensions and retiree health care obligations. Annuities where income is spent on such projects while capital is preserved for future generations are preferable to plans that spend down the capital over a relatively short period of time.

In conclusion, let me reiterate that SEIU believes that all the uncertainties and risks that are inherent in public private partnerships make continued public ownership of essential infrastructure assets the best solution. If the combination of factors that I listed at the outset of my testimony lead a government entity to consider a partnership, we believe it is incumbent on that entity to proceed very carefully. Any public private partnership must retain a continuing proprietary interest in the asset for the public entity; place stringent controls on toll rates that allow the partnership to make a reasonable profit, but do not allow for unreasonable toll hikes that will undermine the public trust; spend the proceeds wisely, on long-term projects and liabilities that would otherwise go unfunded, and not to plug short-term budget or political holes; and protect the interests of the public employees who work for the asset.

Thank you for the opportunity to address you this morning. I would be happy to answer any questions you might have for me.

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