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A Cheaper, Surer Way to Fund and Build Public Projects

How are we going to pay for it all? Isn’t there any way to lower the costs? These are the plaintive cries of taxpayers around the country as their local and state elected officials try to cajole them into supporting a growing list of infrastructure projects.
But even as the list grows, taxpayer tolerance for big ticket public works is declining. In Seattle, for example, where voters this week passed (turned down) a $50 million bond measure to help build the “Commons”park near the downtown, wary but resolute city officials are expected to ask soon for a new central library, expansion of the waterfront aquarium, improvements to parks and roads, new courts and police stations. With previously approved bond issues and City Council votes, Seattle expects to lay out $660 million for capital projects in the next six years, a figure that doesn’t include projects by school districts, the separately financed, and largely self-supporting water and light departments, or the port authority. The Port of Seattle alone, for example, has $1.6 billion of projects scheduled for the next six years.

King County and its neighboring counties in Puget Sound, and the State of Washington, meanwhile, have even bigger capital plans–some slated for action, some just a fond wish– including a convention center expansion, two sports stadia, a several billion dollar rapid transit system (headed for a vote in the fall), an environmental greenway between Seattle and the Cascade mountains to the East, and literally untold billions in freeway and bridge construction. Statewide, transportation infrastructure needs alone have been estimated at $20.8 billion in the next quarter century.

It would be an exaggeration to say that voters are either fed up or exhausted by the large construction agenda ahead, perhaps because they are only dimly aware of how big it is. But, if voters have not shown themselves angry, they clearly are impatient and highly selective. Part of their reluctance is probably based on a sense that taxes at all levels are too high. Another part is surely due to a concern that they can see no strategy or priority evident in all this capital planning, and too little coordination among governmental units.

But there also could well be some frustration that the costs of these projects are simply too high–that taxpayers are not getting their money’s worth. Past legislation meant to prevent corruption and to assure environmental protection has contributed to delays and higher overhead costs. However, also contributing has been the very nature of government, where typically the group that spends the money is different from that which plans how to spend it and is always different from those whose money is spent.

The usual pattern (to oversimplify for the sake of brevity) is that government decides to build, say, a prison, then hires a design team to plan it, and then lets it out for competitive construction bids. Once the low bidder is selected, the construction project gets underway. Soon enough, it seems, cost over-runs are noted. More money must be found. Even some projects that come in nominally under budget were unnecessarily expensive in the first place. The design team, having no responsibility for balancing all elements, including likely operating and maintenance costs, may “gold plate,” or over-engineer, the design and make high price tags inevitable.

At least, that is the charge laid against the present system by advocates of various alternative approaches. Some are promoting privatization of construction, wherein, say, a jail or prison will be built and managed by a private company. Nationally, there were 88 of these secure adult facilities under construction by the end of 1994, according the National Center for Policy Analysis. A 1991 study in Texas that found that costs for four prisons were reduced 14.4 percent by private building and management. An Australian report in 1994 found a 20 percent saving in a similar situation.

The term “design/build” is used for some such projects, and “design/build/operate” for ones that take the private theme still further. In the latter category is a new project by the City of Seattle to develop a water filtration plant along the Tolt River. But the money is still the public’s and so is the ownership.

This brings us to a visionary approach to public projects that has been pioneered in England, the so-called Private Initiative Project (PFI). The PFI has changed the very concept of government’s role from providing services as an owner to procuring them as a customer. An entire project–say, a prison, to go back to the example used before–is designed, financed, built, operated and owned by a private concern which then, per agreement, sells its services–correctional services, per inmate, in this case–to the government. The private concern technically owns the project and sells services to the government, which is spared any cash expenditure up front and pays fixed operating expenses over a long period, such as 30 years. The government’s short term role is to decide what correctional services it wants in the first place–technically, the values and performance standards it expects of a well-run prison, and the risks it wants to insure against–and then to ask for worldwide bids to design the project on that basis.

It is in the design process that the English have found that the most money can be saved; not because that process represents much expense itself, but because the quality of the design determines the ultimate costs of the project as a whole. With the full range of private sector expertise available to companies — and consortia of companies — involved in bidding the project, various cost controls, revenue streams and financing are offered to a public authority. Then the winning team bids out the construction, also worldwide.

The result in Britain over the past few years has been a steep increase in Public Finance Initiative (PFI) projects, which now amount to $28 billion, for roads, transit, prisons, hospitals, schools, libraries, government offices, and much else. Thanks to the wide expertise available to private consortia, their ability to integrate their work, and the freedom they enjoy as owners to create innovative solutions, they are able to bring in projects at an expense 20 to 30 percent lower than those of comparable public projects.

In the past couple of months, Douglas Hogg, who heads the PFI, and Jonathan Hugget, an associate from Vancouver, B.C. where this idea presently is being aired, have visited Seattle to meet with a few local business and governmental leaders who have expressed interest in the concept. The hope on all sides is that we might be able to learn from their experiences. Britain, Canada and the US all have differences in the way public development is governed today. In particular, we enjoy the benefits of tax exempt bonds for public works, which gives our public approach an advantage over almost any private one. Nonetheless, the advantage may not be conclusive and, in any event, the PFI concept may be adaptable to our particular circumstances.

When a half dozen Seattle bond attorneys and public finance analysts vetted the Public Finance Initiative idea last week, they concluded that potential benefits definitely warrant further investigation.

They noted that the English also might have something to teach us about handling the politics of this form of privatization. In the UK, the Conservative Party initiated the Public Finance Initiative and are especially pleased that it saves money, while the Labor Party backs it because its savings in overhead costs result in more money available for construction jobs. The tough job initially was persuading the bureaucracy. The Brits were courageous enough to take on that daunting challenge. Are we?

Bruce Chapman

Cofounder and Chairman of the Board of Discovery Institute
Bruce Chapman has had a long career in American politics and public policy at the city, state, national, and international levels. Elected to the Seattle City Council and as Washington State's Secretary of State, he also served in several leadership posts in the Reagan administration, including ambassador. In 1991, he founded the public policy think tank Discovery Institute, where he currently serves as Chairman of the Board and director of the Chapman Center on Citizen Leadership.