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P3 Bonds Need Transparency

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President Obama’s stimulus law has two parts: cash payments and tax incentives. Infrastructure and energy projects benefit from both. But the law and a recent Presidential memorandum limiting permissible lobbying for stimulus projects only provide for the oversight of direct grants. There is no federal oversight of projectsunder the Act’s tax incentives. They are accountability-exempt.

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The law authorizes generous new tax credits and tax-exempt borrowing. It will have a major impact on the Treasury, influencing spending priorities. Monitoring is essential. Federal oversight should leave considerable discretion to state and local governments. However, the scale of the tax subsidies counsels against a hands-off approach. Oversight is especially necessary under provisions that encourage private equity participation using public-private partnerships (P3s).

The law repeals the Alternative Minimum Tax for private-activity bonds issued between 2004 and 2010. The first beneficiaries will be P3s arranged over the last five years. The economic crisis put many of these projects on hold and this will reactivate them. For example, the Port of Oakland recently announced a $700-million P3 port development deal while Florida made public a $1.8-billion Interstate-595 road partnership. The law also authorizes $15 billion of tax-exempt bonds to encourage investment in distressed areas and in high-speed rail.

Likosky
LIKOSKY

Simply putting these projects under the existing law’s oversight is not the answer. Accountability for P3s requires vigilant monitoring of private firms as well as governments. Furthermore, the time frame is wrong. The tax subsidies facilitate long-term, large-scale investments, rather than the short-term projects envisaged by the law’s direct grants. The accountability provisions sunset in September 2012 but most P3s will not have fully started by then.

Without public accountability, P3s are prone to systematic abuses. P3s helped drive economic growth in Malaysia in the 1980s and 1990s. When the 1997 crisis hit, private investors quickly abandoned projects. The government was forced to use state pension funds to rescue essential initiatives while others ground to a halt. In the U.S., the use of P3s to lay railroad tracks in the 19th and early 20th century was bedeviled by labor abuse, financial excesses and repeated reassertions of government control. At the same time, the extensive use of P3s during World War Two helped align the public good, private ingenuity and government purpose. P3s can be effective only if accountability advances the public interest.

Rose-Ackerman
ROSE-ACKERMAN

Accountability and oversight ought to extend to the bond provisions of the stimulus law but accountability devices must reflect the special challenges of P3s. The life of the oversight board must be extended, and its investigatory powers must include jurisdiction over banks and firms, as well as governments. The current law requires a state or local official to sign off on spending projects. This is not enough. The law should make subsidies conditional on oversight of subcontracting and transparent accounting by private partners.

Accountability at the planning stage is essential. Projects suitable for P3s often have broad national impact. Those who benefit from the subsidized loans will be eager to move forward. But the federal government should mandate public participation to be sure that those with a financial interest in the outcome do not dominate decisionmaking.

Accountability for federally subsidized state and local borrowing is a novel concept. Under current practice, the government provides tax subsidies but does not approve individual bond issues. If a project goes wrong, the federal authorities may prosecute individuals for fraud and corruption, but the Treasury does not seek to recover the value of misspent tax benefits. The pairing of accountable grants and accountability-exempt bonds in the stimulus law highlights this asymmetry. All projects that benefit from the stimulus ought to be transparent and accountable, whatever the subsidy.

Michael Likosky is a visiting professor at Fordham University and visiting scholar at New York University’s Institute for Public Knowledge, both New York City. He can be reached at 646-685-1792, or michael.likosky@nyu.edu. Susan Rose-Ackerman is a profesor at Yale University, New Haven, Conn. She can be reached at 203-432-4891 or susan.rose-acker man@yale.edu.

 

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