For Presidio, questions of legality

As California ponders whether to move forward with the procurement for the state’s first public-private partnership, the state’s 11 transportation commissioners will deliberate a thorny question that could undermine the whole project: is the proposal to rebuild San Francisco’s Doyle Drive even legal?

“This is something that the commissioners can’t actually resolve,” Stephen Maller, Deputy Director of the California Transportation Commission, said in an interview.

Nevertheless, the question was posed to the commission in April by the Professional Engineers In California Government, a union that staunchly opposes the project. The transportation commission, created by the state to allocate money to transportation projects, will discuss the question Thursday and vote whether to approve the project.

Presidio Parkway: under debate

At issue is whether the California law governing the project – Streets and Highways Code section 143 – allows for a public-private partnership (PPP) of the type envisioned by the Doyle Drive replacement project, also known as the Presidio Parkway project. It is the first PPP to be procured under the state’s PPP law, SB 4, which inserted language allowing PPPs into Streets and Highways Code section 143.

The project’s sproposers, the California Department of Transportation (CalTrans) and the City of San Francisco, have structured a phase of the $1 billion re-building of the access route to San Francisco’s Golden Gate Bridge as an availability-payment project. Under this structure, commonly adopted in infrastructure projects in Europe, the public sector periodically makes so-called “availability” payments to a private investor in exchange for financing the construction, and then subsequently operating and maintaining a public works project over a period of time.

Such payments would have to come out of California’s state highway account. But the Engineers In California Government pointed out to the commission in an April letter that “there is no provision” in SB4 allowing them “to make payments to private entities” for a PPP like this.

I don't think anyone expects the process we've seen over the last year will play out with each of these projects  Dale Bonner

The letter prompted the California Department of Justice to issue an opinion concurring with the Engineers, saying that “availability payments are not an authorised financing mechanism” for PPPs in California.

Dale Bonner, California’s Secretary of Business, Transportation and Housing, disagrees.

“It’s a hypertechnical issue,” he said, because “the commission has already taken action to commit state funds to the replacement of the Doyle Drive facility, to build a new Presidio Parkway. So that question has already been asked and answered and what we’re talking about now is a new way of financing the second half of this project.”

Maller , the commission's deputy director, said the commissioners “have not taken any position as to who’s right and who's wrong” on the question of the project's legality “because none of us are judges”. 

Bonner said he hopes the commissioners would not use Thursday's hearing to debate the legalities of the project. “What they’re being asked to do on Thursday is simply [to give] CalTrans and the San Francisco County Transportation Authority the approval to go forward with the procurement.” 

Instead, he hopes the commissioners will focus on the project's merits. The availability-payment proposal for Presidio, Bonner said, will save taxpayers money by reducing the state’s cost for maintaining the project over 30 years, despite the higher up-front costs involved in such a project structure. Under a PPP, the total cost for construction and maintenance over 30 years is about $1.9 billion, in nominal terms. If CalTrans were to hire a contractor to just design and build the project, it would cost about $1.3 billion. But the agency would be left with the cost of operating and maintaining it for 30 years.

The engineers' union has called this differential a “ripoff”. Bonner said the union is erroneously “juxtaposing” the value of a dollar spent today with the value of a dollar spent in 30 years. Once the time value of money is factored in, the taxpayers save money.
 
“There’s a sleight of hand that’s going on in some of these discussions,” he added.

But even if these issues get resolved in favour of the PPP approach, Maller said there is another complicating factor. The commission drafted a policy in October 2009 that requires it to only approve a project that “does not in and of itself create a new commitment of state transportation revenues”. By awarding availability payments from the state highway account, the Presidio Parkway project would test this policy guideline. 

Bonner said the intent of the legislature was to bring to California the “latest and greatest” PPP expertise and techniques to make the state’s PPP programme a success. Availability payments are a part of this expertise, he said, and once the questions of their legality are resolved, future PPPs featuring a similar financing mechanism will not undergo similar challenges.

“I don’t think anyone expects the process we’ve seen over last year will play out with each of these projects,” he said.

The California Transportation Commission will vote on the Presidio Parkway project today. Six of the 11 commissioners' votes are required for the project's procurement to move forward as a PPP.