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January 10, 2011

 

Public-Private Partnerships Potentially a "Good Option" but Financial Risks for Taxpayers Must Be Addressed

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As New York state grapples with cost-effective solutions for its estimated $250 billion in infrastructure needs over the next 20 years, the state should examine both the opportunities that public-private partnerships offer as well as the underlying financial risks associated with forming those partnerships, according to a report released today by State Comptroller Thomas P. DiNapoli.

“Our public infrastructure needs a lot of improvements - $250 billion in improvements over the next 20 years,” DiNapoli said. “The big question is, how are we going to pay for that? Public-private partnerships are a good option to look at, but those partnerships don’t come risk-free.  It makes good sense for the state to look at public-private partnerships based on experience in other states, but we have to ensure public assets are not squandered and taxpayers are protected.”

Public-private partnerships are contracts between a public agency and a private sector entity that result in greater private sector participation in the financing and delivery of public services and facilities than is normal under traditional procurement practices.  

DiNapoli’s report noted that in order for public-private agreements to successfully enable the state to move forward with much-needed capital projects, there are four underlying financial risks in public-private partnerships that must be fully addressed:

  • Failure to identify the full value of public property. Public-private partnerships may underestimate the value of public assets and in doing so, short-change the public.
  • Unfavorable pricing mechanisms. Public-private agreements may include pricing mechanisms that burden the public with unwarranted costs such as excessive fees and toll increases.
  • Unrealistic expectations and poorly drafted agreements. Public-private partnerships may create unattainable expectations when the private entity promises more than it can deliver or contracts fail to detail the private partner’s obligations adequately.
  • Budget gimmickry. Public-private agreements sometimes provide short-term fiscal relief that ultimately pushes increasing costs to the future while increasing the public’s debt burden.

To avoid the underlying financial pitfalls of public-private agreements, DiNapoli recommends policy makers must first:

  • Identify the best practices for valuation of public assets and make sure taxpayers are not short-changed by an artificially low valuation;
  • Keep private sector profits within reason and ensure resulting services are affordably priced for its public users throughout the life of the public-private agreement;
  • Carefully draft agreements that specify what the private entity promises to deliver in exchange for the opportunity to participate in the partnership while not including unrealistic or inaccurate financial projections; and
  • Adopt financing rules that prevent any disproportionate shift of current capital costs to future generations of taxpayers.

DiNapoli’s report focused on the financial implications of public-private partnerships. The report noted there are many additional policy concerns that may be raised by public-private partnership agreements, such as regulatory oversight, workforce impact, and the effect on local communities, which are beyond the scope of the report but require comparable consideration.

In November, DiNapoli released a report detailing specific reforms to the state’s capital planning process by placing increased restrictions on the use of debt and capital spending. These reforms included imposing a strict and effective cap on public debt, restoring control of debt to voters, ending off-budget capital spending and using a comprehensive, statewide approach to prioritizing capital projects.

To view DiNapoli’s report on public-private partnerships, visit here.

To view DiNapoli’s report on long-term capital planning, visit here.




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