Democrat leaders Oberstar, DeFazio say interest in regulating P3s "heightened"
By Peter Samuel
Democrat leaders in the Congress James Oberstar and Peter DeFazio write today that the financial markets crisis has heightened their concern over public private partnerships (P3s) and innovative finance, especially what they call "the lack of adequate transparency and public interest protections under these deals."
The two congressmen, chairman of the house transportation committee and of the subcommittee on highways & transit respectively spell out their "concerns" in a two page letter addressed to US secretary of transportation Mary Peters. (The letter oddly is printed on stationery with a header that includes not DeFazio but ranking Republican John Mica, but this appears to be a clerical error because only the Democrats sign the letter.)
The first page is concerned the plight of state transit agencies which engaged in dodgy leaseback/tax avoidance deals with finance companies - since banned by the IRS - that have gone bad. Typically these involve bond insurance by AAA rated insurance companies and banks have the right to terminate or 'call' the loans now insurers like AIG are insolvent.
Oberstar and DeFazio characterize moves by banks to exercise their contractual rights under the terms of these deals as "efforts by private investors to exploit the financial crisis to place a number of the nation's transit agencies at risk of default and financial collapse."
The transit sector's exposure is put in the range $1.5 to $4 billion affecting public transit in some 25 cities in 17 states.
Oberstar and DeFazio say these moves "threaten the very existence of some of the nation's largest transit agencies" and urge Peters to work with the US Treasury to resolve the crisis.
On their second page they say the crisis has "raised serious questions over the governance structure and financial viability of firms involved in a number of PPPs."
They continue: "The dependence of these firms on debt and asset inflation rather than income or cash flows to finance acquisitions and pay dividends to shareholders has raised questions concerning the sustainability of this model. It also highlights the risks and consequences of rushing into longterm deals that are not structured appropriately or do not contain sufficient contingencies to address unanticipated crisis, such as the current credit crises."
"While no deal in the US has collapsed to date, the lack of transparency and unacceptable level of risk assumed by these firms underscores the need for strong public protections to ensure that the public partner to these deals is not left responsible for bad business decisions, or that roadway users are not forced to pay artificially high tolls to meet investor revenue expectations."
The letter goes on to denounce the "Bush administration's rush to promote PPPs..." but says the two "recognize the important role private sector capital and innovation can play..." They call for "strong guidelines to ensure the priority is on generating public value, not private profit."
see letter here: http://www.tollroadsnews.com/sites/default/files/OberstarLtr.pdf
COMMENT: Like so much verbiage emanating from these two, this is a lot of demagogic fuss about nothing. Once the upfront fees are obtained by a state or city at the start of toll concessions the financial risks are lodged firmly with the shareholders and creditors of the concessionaire company. If the concessionaire company collapses then under the terms of concession contracts the facility reverts to the control of the state free and clear. They are free to re-concession it, or operate it as a state toll facility.
Also Oberstar and DeFazio have misdirected their letter. They should have addressed it to Mayor Richard Daly of Chicago who started it all, and to the Governors of Indiana, Virginia, Texas, Florida, Mississippi, the Carolinas and other states, all of whom took the initiative to do P3s and all of which have written concession contracts, not the Bush administration.
But of course it is Nov 4 and they are just electioneering.
"The Bush administration" is the all-purpose villain.
Soon it will be "the sorry legacy of the Bush adminsitration," they'll be invoking.
HORRIBLE NEXT MORNING THOUGHT: Maybe Oberstar and DeFazio see Macquarie, Cintra, Abertis and like concessionaire companies as potential mendicants on the US Treasury along the lines of Fannie, Fred, GM, AIG, and Ford, and base their claim to regulate their financing structures on a need to limit the numbers in line for corporate welfare?