Tuesday, January 24, 2006

A Closer Look At HB 1008-Toll Road Privatization

Speaking as one of the attorneys who drafted and helped enact the original Public-Private Agreements Act on behalf of the City of Indianapolis during the administration of then-Mayor Steve Goldsmith, this writer believes strongly that public-private partnerships, erstwhile known as privatization, can be beneficial to all parties, in particular the taxpayers. Much attention is now being paid to pending legislation, HB 1008, the enabling legislation for Gov. Daniels’ Major Moves initiative to privatize the Indiana Toll Road to fund much-needed transportation projects. The question this writer poses is why we need another public-private agreements law as proposed in HB 1008 when one already exists?

By way of explanation, let’s be clear that privatization is nothing new. Most of the transportation systems in major cities like Indianapolis and elsewhere around the country were operated by private businesses through the early part of the last century long before we had major, publicly funded transportation systems. While both the state and local governments in Indiana had relied on privatization agreements to provide beneficial public services, attention was not paid to the statutory basis for such agreements until Mayor Goldsmith began undertaking major privatization initiatives for the city’s golf courses, the airport and wastewater treatment facility.

Mayor Goldsmith, like the state and other units of local government in Indiana, had relied on government procurement laws respecting contracts for awarding services. The purchase of services, unlike the purchases of goods, did not require a competitive bid process. Under privatization agreements, the private contractor often assumed responsibility for construction and repair of public facilities which would have ordinarily been undertaken by the governmental entity. Many complained that the privatization deals could be made in private without appropriate public scrutiny. The question was also raised as to whether these projects, when performed by the private contractor, had to still be publicly bid in accordance with public works laws and had to pay prevailing wage rates for the construction work performed thereon. The Public-Private Agreements Act found at I.C. §5-23-1 et al. answered all of those questions.

HB 1008, unfortunately, is written in isolation of the current Public-Private Agreements Act as if it were never written. Why? Perhaps because the administration chose to use an out-of-state law firm, Mayer Brown & Platt, which knows nothing about Indiana law? Maybe. It is more likely that the administration wanted to avoid the restrictions imposed by the existing Public-Private Agreements Act, which clearly applies to the privatization of the Indiana Toll Road. The existing Act provides for two types of public-private agreements: operating agreements and build, operate and transfer (“BOT”) agreements concerning a “public facility.” A “public facility” is defined as “a facility located on, or to be located on, real property owned or leased by a governmental body and upon which a public service is or may be provided.” The privatization of the toll road, because it proposes substantial construction work, in addition to the operation and management of the toll road, would fall within the definition of a BOT agreement.

The Act does not allow a public-private agreement to be made in the dark of the night. State and local governments are required to undertake an RFP process with public notice requirements, and which offers standard protections to competing bidders. The Indiana Press Association, with a full court pressure by the Indianapolis Star, lobbied hard for the public RFP process in the current law.

The Act requires BOT agreements to set out how the costs are to be funded by the private operator or the government, the requirement that the government property be leased for a predetermined period, or alternatively, that it be owned by the operator during the term of the agreement but revert back to the ownership of the government at the expiration of the agreement, which costs are paid by the private operator as opposed to the government, and the terms of compensation for the private operate (e.g., a percent of revenues or fixed amount). It also provides that if a BOT agreement allows for the use of public funds for construction work, then the prevailing wage must be paid for all labor performed in connection with the construction and the project must be publicly bid as any other public works project is bid.

HB 1008, like the existing law, does provide for an RFP process like what has been followed by the Indiana Department of Transportation, and which attracted several competing bids. HB 1008 proposes the creation of a new Public-Private Agreements For Toll Road Projects Act. Where it parts with the existing law is with respect to the requirement the construction paid for out of public funds must be publicly bid in accordance with the public works law and the common construction wage must be paid for labor performed on the work. HB 1108 specifically provides the following for toll road construction projects:

Unless otherwise provided by federal law, the operator or any contractor or subcontractor of the operator engaged in the construction of a toll road project
is not required to comply with IC 4-13.6 or IC 5-16 concerning state public works, IC 5-17 concerning purchases of materials and supplies, or other statutes concerning procedures for procurement of public works or personal property as a condition of being awarded and performing work on the project.

As opponents of the toll road privatization start looking for ways to tear down the Governor’s proposal, we suspect that they will eventually get around to focusing on this aspect. It certainly was a big bone of contention when the original act was enacted. The provisions the Governor seeks to avoid under this new law were not particularly favored by Mayor Goldsmith either, but in the end he accepted the bitter pill, as a tradeoff for having a clear statutory framework under which he could pursue his privatization initiatives. Let’s see if Gov. Daniels can pull of what Mayor Goldsmith could not.

Some legislative changes were necessary for the financial aspects of the toll road deal, but we wonder if the administration may not have been wiser to stick with the current statute for these type of agreements rather than creating an entirely new one.

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