Maryland transit officials’ proposal to have a private company design, build, operate and help pay for the light-rail Purple Line in the Washington suburbs would be one of the first such arrangements in the United States, raising questions about potential risks and financial impacts.
Only one other U.S. transit project, a commuter rail line in Denver, entails such a far-reaching public-private partnership, but it is still under construction.
Details of the 35-year Purple Line plan have begun to emerge as the Maryland Department of Transportation prepares to seek state approval Wednesday to pursue it. A consortium of private companies would be expected to contribute $500 million to $900 million to the $2.2 billion project.
The private team would be reimbursed for design, construction and equipment costs as work progressed over five years. The state would then pay the company $100 million to $200 million annually to operate and maintain the line for 30 years. The payments could be reduced if the company did not meet certain standards, such as providing reliable service and clean trains.
The private financing costs would be paid back over time with Purple Line fare revenue, officials said. If ridership on the 16-mile line between Montgomery and Prince George’s counties did not materialize as anticipated, fare revenue from other Maryland transit systems would make up the difference, state officials said.
Maryland transportation officials say such a partnership would take advantage of the private sector’s light-rail expertise and require the companies to assume the financial risks of any construction delays or cost overruns. The efficiencies gained from one private entity overseeing all aspects — from the drawing board to bulldozers to trains on tracks — are projected to save up to 20 percent over 35 years, officials say.
“There’s a really strong incentive for [the private companies] to focus on quality and durability,” said Maryland Deputy Transportation Secretary Leif A. Dormsjo. “They have to really own not just the construction project but also make sure we don’t have surprises once riders start to use it.”
The approach, while considered innovative, is drawing scrutiny. Five U.S. transit projects have used public-private partnerships in some form, Maryland officials say. However, the Purple Line would be the only one besides the Denver project to rely heavily on private financing.
The plan will get its first test of political support Wednesday, when the state Board of Public Works — comprising the governor, comptroller and state treasurer — is scheduled to vote on whether to allow the Transportation Department to seek private proposals.
State Sen. Richard S. Madaleno Jr. (D-Montgomery), who reviewed the plan as a member of the Senate Budget and Taxation Committee, said he considers it a “very risky proposition.”
“It’s attractive. It’s an innovative approach,” Madaleno said. “But we don’t have very many, if any, examples of how this works out.”
Moreover, he said, communities along the line need assurances that a private company would fulfill promises by the state, such as to run trains on a bridge over Connecticut Avenue in north Chevy Chase rather than stopping traffic.
The east-west Purple Line would run two-car trains along local streets and link communities between Bethesda and New Carrollton with Metrorail stations, MARC commuter rail stations and Amtrak.
Construction would not begin until at least 2015, but critical decisions about how the state would pay for, build and operate the line will be made over the next 12 months.
Maryland Treasurer Nancy K. Kopp said her staff is evaluating the details of the initial proposal, including whether bond rating agencies would consider the state’s payments toward the private sector’s borrowing costs to be government debt.
Kopp said she sees the benefits of sharing risks with the private sector and gaining companies’ expertise, but she shares concerns about the state’s lack of experience with such a far-reaching private partnership.
“It should cause everyone concern and make us complete our due diligence very thoroughly,” Kopp said. “We want to make sure that if we do it, we do it well. . . . We want to make sure we have ferreted out all potential problems.”
Several state lawmakers briefed on the proposal said it sounds good in theory, but they still have questions: What if the private company goes bankrupt? Should the state lock into one contract worth billions of dollars for more than three decades? How much of a funding crunch could the state face if Purple Line ridership falls short of projections?
“Will the revenues be there to cover it down the line?” said Sen. James E. DeGrange Sr. (D-Anne Arundel), who chairs the Senate Budget and Taxation Committee’s transportation subcommittee.
Several lawmakers said they worry that even with private investment, the Purple Line would siphon off money from roads and other transit projects, including the $2.6 billion light-rail Red Line proposed for Baltimore and the $545 million Corridor Cities Transitway bus line planned for upper Montgomery.
“The concern is what projects might be delayed — and be delayed for years — because of one project,” DeGrange said.
If the Board of Public Works approves the initial proposal, the Maryland Department of Transportation plans to issue a “request for qualifications” to companies by Oct. 31. State officials said they hope to announce a preferred private partner in fall 2014, begin construction in summer 2015 and open the line in mid-2020.
The state must move quickly, Dormsjo said, because the Federal Transit Administration is expected to announce in February whether it will recommend the Purple Line for $900 million in highly competitive federal funding.
“We need to demonstrate that we have our act together . . . so they see we’re ready for a federal grant and we have a good financial plan,” Dormsjo said. “We’re in a make-or-break period for the project.”
Traditionally, transit agencies plan and design new rail lines with government funds. To build them, the agency uses more public money or finances the project by issuing new debt. The agency then operates and maintains the line using fare revenue and public subsidies.
However, like other states, Maryland is looking for new ways to build expensive infrastructure projects with tight budgets and debt limits. Experts say public-private partnerships, like the one used to build the new tolled express lanes on the Capital Beltway in Northern Virginia, provide private money and pass on to the private sector some risks, such as unforeseen construction delays or changes in energy costs.
“It’s not necessarily cheaper, but you have someone with skin in the game protecting you from uncertainty,” said Art Guzzetti of the American Public Transportation Association.
Robert Puentes, a Brookings Institution senior fellow who has written about such partnerships, said the key concern for taxpayers will be knowing “what the public sector will be on the hook for.” Governments also must ensure that public policy goals such as providing better transportation and spurring job growth do not lose out to the private sector’s profit motive, he said.
“They’re not mutually exclusive,” Puentes said, “but there is a fine balance there.”
Critics of public-private partnerships say they can lack transparency and drive up costs because relatively few companies can compete to manage such large, highly complex projects. Others say private companies should not be ceded decades of control over a public asset.
“My concern is if the project goes south and the state has to pony up,” said Del. Luiz R.S. Simmons (D-Montgomery), who opposed the new Maryland law that made such partnerships easier to do. “If it is a mistake, generations of taxpayers will have to live with it.”
Dormsjo said it makes sense for a private company to operate the Purple Line because it would be too far from the state’s transit operations center in Baltimore. He said the Washington Metropolitan Area Transit Authority has no interest in running a light-rail system, because it specializes in Metro’s heavy-rail subway.
The state would buy private property needed for right of way, own the rail line, set fares and oversee the agreement. Along the way, Maryland officials said, legal, financial and engineering consultants would lend expertise and help the state analyze “lessons learned” from Canadian transit lines and other transportation projects with similar deals. The General Assembly’s budget committees would review any final Purple Line agreement before the Board of Public Works would be asked to approve it.
“I admit this is the maiden voyage for this idea,” Maryland Transportation Secretary James T. Smith Jr. told state lawmakers at a September hearing. He added, “If we can’t get a deal that looks good for 30 years . . . we’re not going to recommend it to you.”