Sunshine in Arizona

The Western US state has passed what many see as model legislation for PPPs in the US. Cezary Podkul sat down with a key observer of the statute to find out why it has the market feeling good.

For followers of public-private partnership (PPP) legislation in the US, Arizona is one of those states that has long been colored-in on the Federal Highway Administration’s map of states with PPP authority.

Now, it may finally have earned its color.

In July, Arizona Governor Jan Brewer signed into law HB 2396 – a bill giving the state broad authority to enter into PPP arrangements for transportation projects, including toll roads.

In a country where enabling PPP legislation often means one or two pilot projects and narrow contractual authority to pursue them, the Arizona bill rightfully has market observers feeling good. Leonard Gilroy, director of government reform at free market think tank Reason Foundation, who spearheaded education and outreach to legislators in Arizona as they crafted the statute, believes the bill has “codified best practices into one statute”.

Arizona: has
market observers
feeling good

 

 

 

 

 

 

 

 

One reason for this is the sheer breadth of contractual arrangements facilitated by the bill. It leaves virtually no project delivery method outside its reach: concessions for existing assets, the full alphabet-soup of DBFO (design, build, finance, operate) DBFOM (design, build, finance, operate, maintain) and other combinations of development functions and a catch-all provision for other delivery methods not explicitly mentioned in the statute.

The state has equal flexibility in financing projects. The law allows Arizona to use a mixture of private and public monies from a wide variety of sources, including federal grants, revenue bonds, tolls and lease proceeds, among others, to deliver projects.

And just like in Virginia, whose 1995 Public-Private Transportation Act (PPTA) is widely regarded as the gold standard for PPP legislation, both solicited and unsolicited proposals can be submitted to the state. In Virginia, this has led to welcome developments such as the flurry of business proposals recently submitted to the Port of Virginia pursuant to the PPTA. Arizona’s statute could well enable similar bidding contests for the state’s infrastructure assets.

The true test of any PPP bill, though, is not what it looks like on paper but what it delivers in reality. After all, politics can and often does destroy the effectiveness of well-intended statutes. Luckily, the architects of Arizona’s statutes took this into account. As Gilroy points out, Arizona’s bill diffuses political opposition to PPPs through several well placed clauses that address obstacles that have undermined PPPs in other states.

For example, the statute explicitly states that the Arizona “must not relinquish its power of eminent domain”, or the government’s right to seize private property without the owner’s consent. That may seem obvious enough, but in nearby Texas, a now-defunct development project called the Trans-Texas Corridor stoked widespread opposition to PPPs since many saw it as a land grab by the private sector.

Law HB 2396:
disarming political
opposition

“Part of that was a reaction to a false belief that projects like the Trans-Texas Corridor would involve egregious abuses of property rights, whereas that’s not the case. The property rights outcome can be a lot better under PPPs,” says Gilroy, who’s a native of Texas and now resides in Phoenix, Arizona. By enhancing the language surrounding eminent domain, he believes Arizona can avoid Texas’ troubles.

The bill also diffuses political opposition from trucking groups, who have traditionally opposed PPPs due to their potential for what they call “double-taxation”: paying tolls for roads that were originally constructed with taxpayer dollars. HB 2396 authorises the state to issue rebates to toll-paying drivers on roads developed or leased pursuant to the statute. The president of the Arizona Trucking Association, Karen Rasmussen, has previously told Infrastructure Investor that her group was neutral on the bill’s passage as long as this clause was included in its final form.

Finally, the act disarms political opposition that may arise due to concerns over non-compete arrangements. Investors in toll road projects typically seek non-compete agreements that prevent the state from building a neighbouring road that will siphon away traffic from their projects. Such agreements are a necessity for investors but a political hot-potato for politicians who see it as a way for the private sector to tell the public sector what it can and can’t do. HB 2396 strikes a compromise by allowing the state to build any competing roads that it already planned at the time a PPP was executed; if it decides to build any roads that the private sector partner was not aware of at the time the PPP was executed, then he or she may challenge it or seek compensation from the state for any revenue losses.

“I would say it the best balancing that we’ve seen so far in state legislation on that issue,” Gilroy says.

For other states hoping to attract private investment to their infrastructure project backlogs, a trip to Arizona may be well worth the trouble.