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How would Maryland pay for a privatized Purple Line?

To pay for the Purple Line, Maryland wants to use a form of "public-private partnership," or P3. Accomplishing this will require some complex accounting.

Rendering from MTA.

This form of financing is more expensive than bonds issued by the state, but it may allow the state to borrow money that doesn't count against its debt limit and free up funds for other transportation projects. Under a P3, a private operator would get those funds from equity investors and lenders.

Maryland has committed $900 million towards the $2.2 billion Purple Line, including $680 million from this year's gas tax increase. The federal government may contribute an estimated $900 million, and Montgomery and Prince George's counties will contribute as well. This leaves the state somewhere between $200 and $400 million short.

The state's debt limit applies to all debt that will be repaid from tax revenue. But the Purple Line will run at a loss, and thus tax funds must ultimately pay for construction. So the Maryland Department of Transportation devised a complex financing structure to get out from under the limit.

Flow of money during operation of Purple Line.

Fares from riders on the Purple Line will go not to the private company that builds and operates it, but into a special state fund. Meanwhile, the Transportation Trust Fund will pay the operator for the cost of running and maintaining the light rail line.

The operator will get a second payment, a so-called "availability payment," from the fare fund. Its amount will depend on how well the light rail line performs. This money will go to repay the lenders and investors who put up money for construction.

It's not clear whether this arrangement will pass muster, and MDOT has yet to work out all the details. On September 12, the agency requested guidance from the state's Capital Debt Affordability Committee on "parameters for structuring the availability payments to avoid classification as tax-supported debt that would impact the State's debt affordability analysis."

One issue is whether it's proper to separate operating costs from fare revenue. There can't be fare revenue without the state's ongoing expenditure of tax money to run the Purple Line.

Tax money supports the Metro much as it will support the Purple Line, but Metro does its accounting differently. WMATA subtracts revenues from operating costs and calls the difference its "operating subsidy." State and federal aid derived from taxes pays for new construction. If the P3 did its accounting like WMATA, MDOT would pay its construction debt with tax money.

A second question involves 'equity' investors. About $180 million of the Purple Line's construction costs is supposed to come from this source. These investors will get compensation from a share of the availability payments, plus operating profits and minus losses.

What will happen if the operations of the Purple Line are not up to snuff, and MDOT cuts its availability payments to the operator? The investors are likely to be large institutions whose managers get bonuses based on each quarter's returns. They might well push for a cutback on maintenance to generate operating profits in the short term.

That would surely be bad for riders. And would it not divert tax money meant for rail maintenance into repayment of construction debt?

Whether or not it avoids the debt limit, P3 financing will be more expensive than direct state borrowing. A private entity set up to run the light rail line will not have Maryland's AAA credit rating. The Maryland Department of Transportation also asserts that a P3 would manage the rail line better, resulting in lower construction and operation costs, but it does not promise any net savings. Indirect borrowing for the Purple Line is only wise if the other transportation projects it pays for are worth the money.

Ben Ross was president of the Action Committee for Transit for 15 years. His book about the politics of urbanism and transit, Dead End: Suburban Sprawl and the Rebirth of American Urbanism, is now available in paperback. 


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What will happen if the operations of the Purple Line are not up to snuff, and MDOT cuts its availability payments to the operator? The investors are likely to be large institutions whose managers get bonuses based on each quarter's returns. They might well push for a cutback on maintenance to generate operating profits in the short term.

All of this is negotiated in advance in a PPP. MDOT would not just arbitrarily cut payments; they would only do so if the contractor did not meet key performance metrics (on time performance, system availablity, failure to meet maintenance standards, etc).

On the flip side, the reason these PPPs have long terms (30-40 years often) is to ensure that the contractor is accounting for the life cycle costs of the project. Thus, if a contractor sees the availablity payment reduced due to poor performance, they are unlikely to skimp on maintenance because they will be on the hook for the system's reliability for a long contract term.

That's how it's supposed to work; the key will be in ensuring strong negotiations over the contract terms and the performance metrics that the contractor must hit.

by Alex B. on Oct 29, 2013 2:06 pm • linkreport

Hey, we should call the Purple Line a stadium. Funding problem solved.

by SJE on Oct 29, 2013 3:06 pm • linkreport

@Alex B.

The problem is that private money can go away at any time. Even if you have a strong contract, that still doesn't protect the state from having its private partner go belly-up.

by Adam L on Oct 29, 2013 3:38 pm • linkreport

@Adam L:
That's why the company would be required to post a performance bond. That way, if they go belly-up, the money is still there to fund their share.

Performance bonds are actually fairly common in development. It keeps, for example, a local government off the hook for finishing the roads into a development if the developer goes bankrupt.

by Matt Johnson on Oct 29, 2013 3:46 pm • linkreport

I appreciate the need for some sort of creative solution to the financing, but I just cannot get over the fact that a percentage of each and every payment from the state will go directly in to private stakeholders' pockets as pure profit. This is a reality and without it, no private company will get involved.

I was berated last time I brought this up for failing to consider the "risks" investors take with their money on these projects. I don't understand what these risks are. They know going in exactly what their payments are going to be, and it's not like the state of MD is going broke any time soon. If the operating costs get too high, the contractors just whines about the subsidy being too low, cuts service, and gets more money. And when the whining doesn't work, they simply pay off the politicians. Before anyone gets excited about PPP, I suggest they look carefully into the history of the giants in this field, specifically: RATP, First Group, Veolia, Bombardier, etc.

Public transit authorities exist primarily to move people. The private operator has a single goal in mind: profit. This generally equates to low wages and poor working conditions for employees, poor service, and minimal investment in infrastructure.

by dcmike on Oct 29, 2013 6:21 pm • linkreport

If I am following the line of reasoning, MDOT's options are limited for financing the Purple Line because the PG and MoCo share from the gas tax is insufficient to build the Purple Line.

Other options, I imagine, would include delaying construction a few years to let the reserves build up, tax landowners who benefit, transfer some significant development rights to the private partner....What else? Raising income, sales, or general property taxes will not happen.

by Jim Titus on Oct 29, 2013 9:32 pm • linkreport

There are a couple of factors at play. The first thing is that when most people talk about "cost" and "risk" for investors they aren't (at least with highly rated items like MDOTs normal bond issue or a major corporate debt issue) talking about the actual risk of default and the chance the investor losses a significant portion of their capital (though such things do happen and good financing tends to account for even the small 1-.1% risk of such a thing). Rather the risk tends to be what is known as opportunity cost. That is an investor, or in the PPP case contractor, has several hundred million dolars in sunk costs. That is money that will be spent and can't be unspent, since instead of building the rail line and sinking all that money they coudl instead have simply gone and invested those same hundreds of millions into something else and made money on that investment. If they are making LESS by operating the rail line than they could have made by simply tossing the money into an equally secure investment instrument (so another AAA security) then they are actually, in the long term, losing money. So even if they have a profit margin if that margin is less than their gain from equally secure investments they have lost.

So this means there are a couple factors at play: MDOT has an incentive to structure the whole thing in such a way that a contractor has a reasonable likelyhood of seeing a positive return on what will be a large chunk of cash. The contractor in turn has an incentive to ensure that they continue to receive the funds so that they continue to make money suficient to offset the opportunity cost. All of which means that both sides have incentives in this contract that push and pull based on HOW the contract is structured which means lots of boring details that folks don't want to get in to on most days but which will be critical to determine whether this is a good deal or not. If using a P3 gets the Purple Line built 2-3 years earlier than just building cash reserves (or clearing space in the transportation debt limit by paying down the ICC) the resultant increase in taxes from jobs along the corridor and rising proprety values should offset any increase in the raw cost over having MDOT do it themselves. Inparticular because whenever you can build something in current dollars while paying with future dollars you get more bang for your buck thanks to the effects of inflation.

by Greg on Oct 30, 2013 12:30 am • linkreport

@Greg, thank you for the thorough explanation, I now have a better understanding of the process. The "boring details" to which you refer is the type of thing that I typically find pretty interesting.

by dcmike on Oct 30, 2013 9:09 am • linkreport

If the operating costs get too high, the contractors just whines about the subsidy being too low, cuts service, and gets more money. And when the whining doesn't work, they simply pay off the politicians.

They can't just cut service if the contract doesn't allow them to cut service - and that's why a) the devil is in the details, and b) the details are negotiated in advance.

You seem to be describing something more like a Franchise arrangement. What Maryland is proposing is not that, but a concession contract for a long term DBFOM (design-build-finance-operate-maintain).

When they talk about spreading out risk to the private sector, here is an example: the concessionaire will likely be a consortium of companies, and one of those companies will likely make the trains. They are then obligated to keep them running and in good condition (per the operating terms of the contract) for the full life cycle of the deal (again, a long time - 30-40 years). The net effect is that the public entity has essentially a lifetime warranty on the vehicles.

The reason this spreads the risk is the assumption that the vehicle maker is better suited to handle the risk of car maintenance than the transit agency is. The manufacturer will have to stand behind their product. If their product stinks, then they get hit with penalties.

The opposite approach is something like New York's subway, where they don't want to get stuck with a batch of lemon rail cars, so they have extraordinarily extensive specifications for construction. However, they can do this in house because of their years of experience and expertise - it's a lot harder for a new agency to do that and do it well - they are not suited to mitigate that risk; but the car manufacturer is.

Not sure if that helps explain things at all...

by Alex B. on Oct 30, 2013 11:07 am • linkreport

I could see how Ben, and other readers of this article, might think a private Purple Line operator would try to cut corners and skimp on maintenance to boost their profits or offset other losses. After all, don't we see this happen all the time with our public sector transit agencies? How many times has WMATA or MTA cut necessary spending on maintenance or operations to plug other holes in the budget? (functioning escalators for WMATA anyone? Reliable engines for MARC? ) All to the determent of the people who depend on public transit.
One of the primary motivations behind a "performance-based availability payment" P3 contract is stop this nonsense. If the private operator of the Purple Line is not performing, they are financially penalized and their monthly payment is reduced. Station escalator not working? Payment deduction! Train late because the engine broke down due to poor maintenance? Payment deduction! Passenger cars are dirty? Payment deduction!
In some cases, obtaining the full availability payment could depend on rider satisfaction scores - so if too many customers rate their experience riding the Purple Line poorly, the payment to the private operator could be reduced. The private operator is accountable for their performance, and therefore highly incentivized to provide high quality service.
Can you imagine what would happen if the compensation paid to the people leading WMATA and MTA was directly tied to customer satisfaction scores and the performance of the system? For the first time we would finally begin to receive the service we deserve for so generously subsidizing these systems.

by Where Is My Streetcar? on Oct 30, 2013 1:24 pm • linkreport

@Alex B & @Where is my Streetcar, thanks to you also. Yes it does help explain.

Does anyone know if there is a functioning example of a performance based PPP? My google-fu is failing me.

It's a shame that APTA or a similar body doesn't get together to pool expertise in things like speccing out railcars, especially given the number of systems that are now in the planning or building phase. We did this with great success in the 1920s-30s with the PCC streetcars.

by dcmike on Oct 30, 2013 4:57 pm • linkreport

DBFOMs are basically the entire basis for building transit projects in Canada.

Try researching the Canada Line in Vancouver. It's probably the most similar project to the Purple Line in concept for a P3.

by Matt Johnson on Oct 30, 2013 5:07 pm • linkreport

Bus service in London in privatized. But at least from the user experience you don't really notice. The livery of the buses and routes are standardized and the buses I took were pretty frequent. I don't know where the similarities start and end but you could start there.

by drumz on Oct 30, 2013 5:15 pm • linkreport

Realizing I used "privatized" wrong. Bus schedules and routes are still decided by TFL but the operations are contracted between several companies.

by drumz on Oct 30, 2013 5:22 pm • linkreport

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