The Outstater

March 18, 2021

EVERYONE IS EXCITED. Your city is getting a new mixed-use hotel, dining and entertainment district where once only dilapidated buildings stood. Adjacent will be a new baseball park and maybe down the road a basketball arena or soccer stadium and luxury condominiums.

The mayor put together a public-private partnership with a big-time out-of-state developer. There will be plenty of money to realize his vision of the most up-to-date city for the most discerning citizenry. He can be proud once again to show the town to visiting friends and dignitaries.

Whoa. Let’s back up a bit. What was that about a “public-private partnership”? Did your mayor mention that there are two kinds of partnerships? 

I feared as much.

It turns out that only the one kind attracts new investment. The other is something of a shell game or fiscal dance. The problem as a matter of policy is that the “public” in this public-private equation rarely knows which is which.

If the deal includes an “availability payment,” then it is the shell game. There is no owner, no real investor, nobody with a direct incentive to maintain the property and ensure that it succeeds long term.

The private consortium only designs, builds and finances the construction of the asset. After construction, it will operate and maintain the asset for the life of the contract. In exchange, the government may provide completion payments during the construction period, and afterward pay those annual availability payments, based on a predetermined formula covering both the developers’ costs and profit expectations.

The private “partners,” then, are only managers, and the deal does not represent anything like “free money” or “new money.” The often mysterious financing arrangements must be paid back by the government (the citizens) from the same revenue sources for which all infrastructure is funded: taxes, tolls and user fees.

Ultimately, that new mixed-use hotel, dining and entertainment district is not much different in its financial DNA from a plain old municipal parking garage — an ultra-sophisticated Potemkin village.

Randal O’Toole, an economic analyst for the Cato Institute, calls this the evil public-private partnership:

“In the evil P3 the government contracts with a private operator to build and operate a facility and agrees to pay the private party, out of tax dollars, whether anyone uses that facility or not. Where most of the risk of a demand‐risk P3 is borne by the private party, the risk of an availability‐payment P3 is almost entirely borne by the taxpayers.”

Indeed, if you read the fine print in many of the economic-development deals in Indiana you will learn that the “investors” get paid up front whether or not the project is successful, whether modifications have to be made down the line, whether there are unexpected maintenance bills or a falloff in usage or attendance. 

A friend of this foundation, the late Don McCardle, liked to say that if city councilmen are going to act like real-estate developers then we’re going to have to elect smarter city councilmen.

The problem, again, is it would take a team of bankers and lawyers armed with subpoena power to unravel the details. Today’s media has neither the will nor the means to do the job. It simply accepts the promises and helps boost the project over the political finish line. And the handful of politicians and officials who understand to the point of complicity will be retired to the Gulf before it all falls apart.

The cost? 

In a disturbingly predicable ratio, once it becomes known that nobody is paying for it, construction estimates triple the assessed value. But the saddest thing, when the town realizes the fraud, is how it deflates what was a sincere though misdirected sense of civic pride.

Nobody ever tallies that up. — tcl


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