State Sen. Richard S. Madaleno Jr. was slogging through the proposed 876-page contract with the companies that would build and run Maryland’s light-rail Purple Line when he said his brain started to spin.
There on Page 481 was the formula that the Maryland Department of Transportation plans to use to calculate its monthly payments to a private contractor. The formula: MAPn = MAPGn + (MAPOn x ESCOn) + (MAPMn x ESCMn) + (I x ESCGn) + LCPn — ΣD + PSGS + QVA.
“Talk about a nightmare remembrance from my graduate school statistics class,” Madaleno (D-Montgomery County) recalled. “I thought, ‘Oh my God, what language is this written in?’ ”
Madaleno, vice chairman of the Senate’s Budget and Taxation Committee, is one of the key lawmakers expected to review the $5.6 billion, 36-year contract before the state’s Board of Public Works is scheduled to vote on it April 6. If approved, the public-private partnership would be one of the most expensive and longest-term contracts awarded in Maryland. The deal also is drawing national attention because it would make the Purple Line only the second U.S. transit project to rely on private financing.
But determining in one month whether the contract is a good deal for Maryland taxpayers isn’t easy, and Madaleno said he’s concerned that the people best equipped to explain the complex details have a vested interest in it being approved.
“I don’t hear the governor or the Department of Transportation talking about any of the risks,” said Madaleno, who describes himself as a longtime “skeptic” of the light-rail project. “We’re into the PR celebration more than a transparent and thoughtful review of the contract.”
Even experts in such partnerships say it can require the expertise of a Wall Street financier or a highly specialized lawyer to make sense of them. Moreover, it appears that even the parts of the Purple Line deal that are more transparent to a layperson won’t get widespread scrutiny.
The 30 days that the General Assembly’s budget experts have to review the contract hit during the busiest part of the legislative session. Lawmakers can comment on the contract but, under Maryland law, can’t make any changes. So far, no legislative hearings have been scheduled on the proposal.
Warren Deschenaux, executive director of the General Assembly’s Department of Legislative Services, said his office will evaluate the financial terms but that it’s difficult to predict what impact a project will have on available funding decades down the road. He said he doesn’t have any engineers to gauge the technical aspects.
“We have to rely on what the [transportation] department provides,” Deschenaux said. “We have to assume they’re not pulling the wool over anyone’s eyes. It’s kind of a ‘trust me.’ ”
Officials in Montgomery and Prince George’s counties, both of which are contributing millions of dollars to the 16.2-mile line’s construction, say they weighed in on technical aspects of the four bid proposals. But they’re leaving the details of the winning contract to the state.
Unless someone discovers an alarming surprise, observers say, the contract’s approval by the Board of Public Works next month is all but certain. Experts in such arrangements say the highly complex deals take years and cost companies millions of dollars to put together. If Maryland backed out at such a late point, it would probably spook the private sector. That could lead to less competitive bidding — and higher prices — on future state construction projects.
The contract needs two of the board’s three votes, and Maryland Gov. Larry Hogan (R) is expected to endorse what his transportation secretary has recommended.
A spokeswoman for another board member, state Treasurer Nancy K. Kopp (D), said Kopp will primarily focus on whether the state’s payments to cover the private team’s financing costs would count against the state’s debt affordability limits. MDOT officials say they have structured the payments in a way that wouldn’t add to state debt.
The third board member, state Comptroller Peter Franchot (D), is a longtime Purple Line supporter. A Franchot spokesman said the comptroller doesn’t comment on matters pending before the board but that he “plans on carefully reviewing the [Purple Line] materials.”
The winning bid team of companies called the Purple Line Transit Partners is led by three firms: construction giant Fluor Corp., Meridiam and Star America. Under the contract, construction would begin late this year, and trains would carry passengers by March 11, 2022.
The companies would finance about half of the line’s $1.99 billion construction cost, finish its design, build it over six years, and then operate and maintain it over 30 years. The state’s monthly payments, which would average $150 million per year, also would cover the debt service on the private team’s construction financing.
The Purple Line would run two-car trains mostly along local streets between Bethesda in Montgomery County and New Carrollton in Prince George’s County, inside the Capital Beltway. The 21 stations would include Silver Spring, Langley Park, the University of Maryland’s flagship College Park campus and Riverdale.
In announcing the contract March 2, Maryland Transportation Secretary Pete K. Rahn said Purple Line Transit Partners’ proposal had the lowest overall price — it came in $550 million below state estimates — and the best technical know-how.
In response to emailed questions about how difficult the contract is for laypeople to decipher, MDOT spokeswoman Erin Henson said that it “uses detailed technical language to protect the state and provides the best value for the life of the 36-year contract.”
Henson noted that a 19-page summary explaining key elements to the General Assembly appears on the state’s website.
She said Maryland’s public-
private partnership law provides for a 30-day review because companies have a limited time to keep their approvals for private equity and financing. Even so, Henson said, state officials have held numerous Purple Line meetings with lawmakers and the public over the years, and many early details of the contract have been online for 18 months. She said the state hired outside legal, financial and engineering experts to negotiate the deal, including firms that have worked on other transportation public-private partnerships, or P3s.
“If MDOT did not believe this P3 contract was a good value for Maryland, we never would have brought it forward to the Board of Public Works,” Henson said. “The fact that we could save $550 million from estimated costs gives us great confidence in the value of the contract to Maryland.”
Several experts in such arrangements noted key provisions in the contract that would serve the state well, particularly performance standards — clean stations, working elevators and escalators, on-time trains — that the concessionaire would have to meet to receive its full monthly payment. The contract also provides financial incentives for the companies to design, build and maintain the light-rail system well enough to ensure it’s in good condition at the end of the 36 years.
“It’s hard to evaluate a 36-year contract before you begin [construction], but in theory, this contract has strong incentives to try to minimize the lifetime costs of this system,” said Jonathan Gifford, director of the Center for Transportation Public-Private Partnership Policy at George Mason University.
Some U.S. road projects structured as public-private partnerships have been declared failures, with the companies declaring bankruptcy and governments facing soaring costs or unfavorable contract provisions that they couldn’t escape.
Although no U.S. transit projects with public-private partnerships have had significant problems, experts say, they also note that there are relatively few of them. There are about five others, and the only other one that involves the usually higher cost of private financing is a commuter-rail line in Denver that is still under construction.
Gifford noted that it’s hard to determine how well public-
private partnerships work on U.S. transit projects because “we have a pretty short track record” with them. Even so, he said, the best ones allow the government to assume only the financial risks it can best handle. In the Purple Line’s case, the concessionaire would have to pay for most of any construction cost overruns or delays, state officials said.
“These are very complicated projects,” Gifford said. “In a 16-mile project, a million things can go wrong. It’s hard for the state to manage those risks.”
One big risk that the state will assume is how many people actually ride the Purple Line. Because transit systems don’t typically turn a profit, the state will have to subsidize the operating and maintenance costs with other state money. If ridership doesn’t materialize as projected, the state would have to dip deeper into that funding, which would cut into the amount of money available for other state transportation projects.
Public-private partnerships can provide an innovative way for governments to build expensive infrastructure with limited public money upfront, said John Forrer, an associate research professor of strategic management and public policy at George Washington University. Even so, he said, government officials need to scrutinize the arrangements closely.
“People tend to look at the big numbers,” Forrer said, “and sometimes the details get squeezed out.”
A deal that looks good today might not work well 10 to 15 years in the future, he said.
“The state has to be really diligent and work really hard to make sure they’re checking all aspects of the deal,” Forrer said. “That isn’t easy, because the guys on the other side of the table [for the private sector] have a lot more experience” with such partnerships.
Del. Marc A. Korman (D-
Montgomery), a lawyer who has delved into Metro’s problematic finances, said what he’s read of the Purple Line contract so far is “undoubtedly complicated.” But Korman, whose district includes the future Purple Line’s Bethesda station, said he’s comfortable that the state can keep a close eye on the project.
“We’ll have the ability, as the owner of the project, to do oversight,” he said, “to bring the concessionaire in for questioning and make sure they live up to the obligations of this contract.”