Greater Greater Washington

What do private firms really want from the Purple Line?

Maryland officials say that letting a private company build and run the Purple Line will avoid many of the inefficiencies of government. But the private sector has inefficiencies of its own.


Rendering from MTA.

By using a public-private partnership, or P3, to operate the light rail line, officials at the Maryland Department of Transportation hope for better service at lower cost. The private sector is better able to manage risk, they argue, and it saves money through greater flexibility and tighter oversight. Motivated by incentives, not a rulebook, a private operator or "concessionaire" would use its creativity to run the railroad better.

How well this will work depends on what the incentives are. The ideal concessionaire would be a 30-year-old railroad engineer who invests her life savings of $180 million. She runs the light rail line herself and keeps it impeccably maintained. She thinks about the steady income she will need when medical school tuition bills come due for her 1-year-old son.

Unfortunately, such bidders will be rare. In all likelihood, two groups of intermediaries, railroad managers and money managers, will stand between the source of money and the trains. They will face incentives of their own, which are not necessarily the same as those of riders and investors.

Money managers, in particular, tend to concern themselves with the next quarterly bonus. They earn large fees when the deal first goes through, whether or not it is a good one. During the housing bubble, Wall Street bankers issued bad loans with abandon and joked about the "toxic waste" they were passing on to clients.

What will happen if the cost of running the light rail line exceeds the budget? Managers, worrying about salary reviews and bonuses, will be tempted to maintain profitability by skimping on maintenance.

In the P3 structure, it is the job of investors and lenders to look out for the long term. But they may not do this well. We learned in the crash of 2008 that large financial institutions can do a poor job of oversight. And the Purple Line's equity investors, who expect a return of 11% per year, may not care that much about the long term. If the business pays dividends for 15 or 20 years and then goes bust, they will have already pocketed a substantial profit.

Under the contract, the state will cut the concessionaire's "availability payments" if the performance of the Purple Line does not meet targets. But these targets will be hard to set. How do you write specs in 2013 for running a state-of-the-art railroad in 2048?

The penalties for bad work, moreover, are unlikely to be all that severe. MDOT cannot replace the concessionaire until 2050. And the concessionaire's investors will put up only 7% of the construction cost. The availability payments will go mostly to repay lenders, whose main goal is to keep their money safe. They will hesitate to make loans unless the penalties are kept small and their bonds are not at risk.

In an ideal world, a privatized transit line would be run by a deep-pocketed young version of Jackson Graham, the engineer who built Metro. He might well outperform a government agency led by Pericles and George Washington.

But that is not the choice we face. Large organizations, both public and private, are made up of human beings. They are inevitably imperfect. Decisions about how to run public services must be based on things as they are, or as they realistically might be made to be.

Ben Ross was president of the Action Committee for Transit for 15 years. His new book about the politics of urbanism and transit, Dead End: Suburban Sprawl and the Rebirth of American Urbanism, is published by Oxford University Press. 

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I dunno.

All this talk about public-private partnership funding schemes is making me think we really can't afford the Purple Line.

by ceefer66 on Oct 30, 2013 12:25 pm • linkreport

What will happen if the cost of running the light rail line exceeds the budget? Managers, worrying about salary reviews and bonuses, will be tempted to maintain profitability by skimping on maintenance.

On one hand, this story is kind of like what happened at Pepco. OTOH, most utility companies are not like Pepco and provide reliable service at a reasonable (and regulated) cost. That said, there are significant differences between P3s and the regulated utility monopoly structure.

While you outline a number of possible problematic scenarios do you have any historical data showing how likely any of these scenarios are based on other P3s? From what I've heard anecdotally, there have been some failures and some successes but the successes significantly outnumber the failures. Although, it's too early to tell in a lot of cases whether it has truly succeeded/failed.

by Falls Church on Oct 30, 2013 12:32 pm • linkreport

profits.

So the issue is whether or not a for profit can build and run the system more cheaply but ideally at the same quality as "the government."

The question becomes how much extra costs are embedded in the government approach and where costs can be cut without diminishing quality. A big area is wages and especially pensions.

There is a fascinating article in the Sunday NYT Magazine, I guess I should have kept it, about the restoration of the NYC Subway after Superstorm Sandy. They attribute the bulk of their success to be the embedded knowledge of the longtime staff, people like the Jackson Graham that you mythologize, and their ability to kludge given the system's age, and mix of old and new technology. Part of what saved them were compressed air pumps in part of the system that didn't need electricity. Another was the "hunch" by one chief manager that a dam they built to protect one tunnel needed to be taller--they added 18 to 24 inches, and it had 3 inches to spare once the surge came. This dam prevented a significant amount of the system to be flooded by the Harlem River.

So there is a benefit to retaining that kind of knowledge within the transit system, rather than embedding it in outside firms. (This is one of the problems in DC in that plans are typically completed by outside firms, which gain knowledge with each plan they do, but this knowledge doesn't always trickle down to the local government.)

by Richard Layman on Oct 30, 2013 12:45 pm • linkreport

Motivated by incentives, not a rulebook, a private operator or "concessionaire" would use its creativity to run the railroad better.

This is a mischaracterization of the PPP, as the structure of the deal will still include a ton of rules for the concessionaire.

How do you write specs in 2013 for running a state-of-the-art railroad in 2048?

Base the specs on performance. Good transit performance is the same now as it was 40 years ago: frequency of service, reliability, on-time performance, etc. Plus, a good contract will include periodic opportunities for re-negotiation of key clauses, providing 'outs' for the public under certain circumstances.

What will happen if the cost of running the light rail line exceeds the budget? Managers, worrying about salary reviews and bonuses, will be tempted to maintain profitability by skimping on maintenance.

Or, they'll focus on other ways to cut costs. The idea of the long contract term is that the concessionaire is responsible for the life cycle costs of the system, and thus if they skimp on maintenance, they're only going to be hurting their own bottom line in the out years. The contractors thus have some skin in the game.

The penalties for bad work, moreover, are unlikely to be all that severe. MDOT cannot replace the concessionaire until 2050. And the concessionaire's investors will put up only 7% of the construction cost. The availability payments will go mostly to repay lenders, whose main goal is to keep their money safe.

Again, this all depends on the negotiations. Maryland can indeed terminate the concession contract if the concessionaire does not meet the standards in the contract - you just need to put it in writing.

Also, I don't think the assertion that the availability payments will go mostly to repay lenders is correct - they will go to the concessionaire in exchange for teh services that the concessionaire provides: namely, building and operating the system.

This is money that MDOT would be spending anyway; either they're paying off their own bonds and paying their own employees, or they're using that same stream of money to pay the contractor to do the work for them.

Contracting out transit service is not a new phenomenon, either - many systems are contracted out.

by Alex B. on Oct 30, 2013 12:47 pm • linkreport

11% a year returns seems pretty steep for what I'd view as a low-risk investment.

by John on Oct 30, 2013 1:14 pm • linkreport

Too bad the IRT and the BMT went out of business -- they did a pretty good job building a transit system in New York, especially given how much people here like to complain about Metro's inadequacies vs. the NY Subway.

by Robber Baron on Oct 30, 2013 1:43 pm • linkreport

There is so much misinformation in this article it is hard to know where to start. As a counter point it is worth pointing out the less than stellar track record our local transit agencies have delivering complex infrastructure projects. The sorry state of the Silver Spring Transit Center, and DDOT's struggles over the past decade to build even a short segment the DC Streetcar have both misspent millions of dollars that are needed to fund other critical priorities in our region.
Transferring the risk of completing the project on budget and schedule to the private sector has tremendous value to anyone who pays taxes. If the ill-fated Silver Spring Transit Center was done as a performance-based public-private partnership Montgomery County would have been financially off the hook for any schedule overruns or construction defects, until the private partner delivered a functioning building ready for service. That savings alone would have built or improved a number of schools in Montgomery County.
Money doesn't grow on trees anymore - whenever a major public project is needed it should be done in a way that provides the highest quality service at the best price to the tax payer. If that means a private company plays a role traditionally held by the public sector, then so be it.

by Where Is My Streetcar? on Oct 30, 2013 1:52 pm • linkreport

The Purple Line will foster millions (eventually billions) worth of economic growth in areas where there is already primary infrastructure but limited development (especially in Prince George's). The long-term economic benefits for Maryland's tax base will be enormous. Very unlike a certain rarely used 6-8 lane highway in the outer burbs. Hint, the ICC.

The ICC is a sunk cost -- we built it and we have to pay it off. But that failure shouldn't cloud proper infrastructure funding now. We should tax ourselves, pay for the purple line (whether fully public or public/private), and reap the economic dividends for several generations.

by Greenbelt on Oct 30, 2013 2:19 pm • linkreport

Where is my streetcar -- fwiw, WMATA had a great deal of expertise in building rail transit. Unfortunately, VA's conservative ideological desires to promote privatized construction (like with the Dulles and Greenway toll roads, and more recently the HOT lanes) with the Silver Line, plus a recession in 2003 led WMATA to RIF most of those people, because there weren't many transit construction projects on the horizon.

this is a reprint of a 2003 Post article, http://www.ble-t.org/pr/news/headline.asp?id=7204

by Richard Layman on Oct 30, 2013 5:49 pm • linkreport

Robber Baron -- the IRT and BMT projects were still pretty much funded by NYC.

by Richard Layman on Oct 30, 2013 5:52 pm • linkreport

@Greenbelt, so when all else fail blame the ICC but yet VDOT built the Dulles Greenway, Fairfax County Parkway, and Prince William County Parkway, and Springfield Interchange, and VA Beltway toll lanes and they still found a way to build a 25 mile subway from DC to Dulles.

by Rick on Oct 30, 2013 5:58 pm • linkreport

@Greenbelt
I agree that the Purple Line is critical to the economic future of the Maryland suburbs and the most important transportation project in the state. The ICC isn't a failure though. Whether it should have been built or not is a different matter, but it is currently meeting usage projections.

@Rick
The Dulles Greenway and Beltway toll lanes were not built by VDOT, but were constructed and are operated (and owned in the case of the Greenway) by private contractors. Unlike the ICC, both of these were financial failures that burdened their respective owners.

VDOT also has nothing to do with the Silver Line. That project is financed by the MWAA. In any case, I don't get the point of your comment.

by King Terrapin on Oct 30, 2013 9:40 pm • linkreport

An 11% return a year from a money losing business. How do I get in on that scam.

by TomA on Oct 31, 2013 8:13 am • linkreport

That 11% number jumped out to me. In particular because municipal bons with a 10-20 year maturity (and MDOTs are 15yr IIRC) are currently selling for 3-4%. Given that simply re-structuring existing finances would allow MD to operate with the same long term financing cost I think an 11% ROI for an outside equity investor is kinda ridiculous. Even if you grant that there is a huge sunk cost on their part which the state is statutorially limited from putting up if they were an investor in direct bonding the best they could hope for is perhaps a 5% return. For actually operating the line to expect to more than double the margin...that seems unlikely.

by Greg on Nov 1, 2013 12:49 am • linkreport

The 11% return is not the expected (as in most likely) return. It is the max return if everything works perfectly and there are no cost overruns and everything is on time. The perfect scenario isn't too likely.

by Falls Church on Nov 3, 2013 10:29 am • linkreport

Ben, I understand your concerns but we have experience to look at. Both light rail lines in New Jersey were built and are operated by the private sector. In addition, the Eagle P3 now under construction in Denver, will provide 3 electrified commuter rail lines in Denver. Finally, one upside is that the contract will specify the service levels and payments to the winning team. Cutting service on the Purple line to balance the budget will not be an option, like it is now with year to year funding.

by Dharm on Nov 5, 2013 11:42 am • linkreport

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