Kingsley Osei ()
The debate surrounding the financing of the replacement of the Tappan Zee Bridge1 has revived the need for New York State to take a hard and serious look at the use of public-private partnership (PPP) project delivery methods rather than relying exclusively on legislative appropriations and public debt to finance its infrastructural construction projects.2
The project, estimated to cost about $3.142 billion, is being constructed through a Design Build contract, a PPP project delivery method,3 and will be financed by a federal Transportation Infrastructure Finance and Innovation Act (TIFIA) loan of $1.6 billion,4 bonds, private lending and state appropriations.5 Coincidentally, two bills pending in the New York State Assembly (A.08183)6 and Senate (S.5501)7 will authorize private companies to develop and operate public infrastructure projects in New York.
Although the fate of these bills is yet to be determined, legislation in the Executive Budget of 2013/148 which would have allowed all New York State agencies to use the Design Build Method other than the five currently allowed to do so, failed to pass into law. Interestingly, the recently enacted SUNY Tax-Free Areas to Revitalize and Transform Upstate New York Program (START-UP NY) legislation9 is a novel PPP approach that allows the New York public university system and private colleges, to grant long term ground leases and leverage certain tax incentives to attract private businesses to the state.10
While the Build Design law and START-UP NY program are steps in the right direction, New York still remains with a minority of states that have not enacted a comprehensive PPP legislation to deploy innovative and penetrative PPP delivery methods that allow greater private sector participation in the delivery of public projects. As will be demonstrated in this article, there are public accountability, social policy and work force protection issues that constrain the state from embracing other PPP delivery methods.11
A public private partnership has been defined as:
an agreement formed between public and private sector partners, which allow more private sector participation than is traditional. The agreements usually involve a government agency contracting with a private company to renovate, construct, operate, maintain, and/or manage a facility or system. While the public sector usually retains ownership in the facility or system; the private party will be given additional decision rights in determining how the project or task will be completed.12
Arguably, PPPs “benefit both public and private partners by allowing governments to benefit from the efficiency, funding, and expertise of the private sector, while giving private company partners a reliable stream of revenue and consumers, not only guaranteeing a return, but making it easier to secure investors.”13 “Current data indicate that PPPs often can result in significant project cost and time savings compared to traditional procurement. Causes can include direct incentives to the private contractor for on-time delivery; use of warranties…or performance-based contracting; competition among bidders; transfer of risk to the private sector for cost and schedule overruns or revenue shortfalls; and lifecycle efficiencies…”14
On the other hand, PPP arrangements are often derided in some quarters as “corporate welfare” and thereby assailed as distorting the true cost of private sector participation in the marketplace and hiding the true cost of public debt. Optimal PPP arrangements, however, safeguard the public interest, but also create the economic imperatives that attract private sector participation in projects.
PPP methods are of infinite variety and reflect the continuum of private sector participation in projects that are typically undertaken by the public sector. The legislative framework adopted by a state may provide for a narrow range of PPP options, as evidenced in New York, or allow a broader array of options that are often influenced by political inclinations, public agency goals and financial considerations.
New York Program
Under the Infrastructure Investment Act, 2011 (IIA)15 a specified number of New York state agencies and public benefit corporations can utilize the Design Build method to fund and execute infrastructure projects. A Design Build PPP structure merges the traditionally bifurcated Design Bid Build16 process by awarding the design and construction phases of a project to a single bidder or a consortium of bidders.
IIA requires a two-step selection process. Contractors who have demonstrated the “general capability” to perform Design Build contracts are first, selected into a prequalified pool. They are then selected for a specific project on best value basis. By using this PPP and employing a Project Labor Agreement, it is estimated that the State of New York will save $452 million in project costs for the construction of replacement of the Tappan Zee Bridge.
Significantly, IIA addresses other unique political, social and economic imperatives by providing that construction for each capital project undertaken pursuant to it is deemed a “public work” subject to Labor Law prevailing wage requirements. It further requires contractors to comply with the objectives and goals of minority- and women-owned businesses or, in the case of projects receiving federal aid, comply with federal requirements for disadvantaged business enterprises.
START-UP NY program is a unique PPP model of a somewhat unchartered genre. Unlike the usual PPP framework, which typically allows private sector participation in the delivery of public services, START-UP NY program models a variation of that construct by leveraging public assets for private business purposes. Significantly, it is a public private sector partnership intended to promote entrepreneurism and job creation, particularly in Upstate New York, through the creation of “tax-free” communities co-located on designated public and private real estate.17
There are four distinct classes of real estate assets that may be designated as tax-free areas. These are generally, vacant land;18 vacant space in a building which are either situated on or within one mile of the campuses of the State University of New York or Community College and with respect to the City University of New York, vacant land or space in a building located on its campus. Also, up to three million square feet of vacant land or buildings on private colleges and universities may be also designated as tax-free areas by an approval board. The other two classes of real estate assets are: Strategic State Asset of the State of New York and affiliated Incubators of universities and colleges that meet eligibility criteria specified in Article 21 of the Economic Development Law.
In consonance with its policy focus on particularly jumpstarting the economy of Upstate New York, the program restrictively applies to the Downstate campuses of sponsoring institutions. Consequently, certain campuses of the State University of New York, namely, the Empire State College19 (except its campus in Saratoga Springs, Upstate New York); Downstate Medical Center (except an affiliated New York incubator); Maritime College20 and the College of Optometry,21 and any property located in Nassau, Suffolk, Westchester counties or New York City; and community colleges whose main campuses are in New York City, Nassau, Suffolk and Westchester counties unless otherwise provided under the law for limited participation, cannot be designated as tax-free areas.
Unsurprisingly, the main allure of the START-UP NY program is expected to be the generous tax incentives that will accrue to approved businesses that locate in the designated vacant space or on the designated land of New York State public and private colleges and universities, or within the strategic assets and New York State incubators affiliated with private universities or colleges that are designated as tax-free areas.22 Even though it is outside the purview of this article to provide a granular compendium of the state tax credit and exemption regime that will be available to eligible businesses and qualified employees, a broad overview of them is illustrative. To be eligible for the tax benefits discussed below, businesses that are approved to participate in the program and operates in a tax-free area must annually create and maintain net new jobs23 and further meet an annual employment test.24
For approved businesses, income earned in the tax-free area will be eligible for Tax Free Area Elimination Tax Credit which encompasses the corporate Franchise Tax pursuant to Article 9-A of the Tax Law and the Personal Income Tax payable under Article 22 of the Tax Law which would otherwise be payable under law.25 Likewise, approved businesses located exclusively in the tax-free area which would otherwise be amenable to the Organization Tax imposed under §180 of the Tax Law or the License and Maintenance Taxes under §181 of the Tax Law, whichever is applicable will be exempted from paying such taxes. Similarly, for approved businesses located in a tax-free New York area within the Metropolitan Commuter Transportation District (MCTD), which covers New York (Manhattan), Bronx, Kings (Brooklyn), Queens, Richmond (Staten Island), Rockland, Nassau, Suffolk, Orange, Putnam, Dutchess, and Westchester will not be amenable to pay Metropolitan Commuter Transportation District Mobility Tax.
Further, subject to certain qualifying criteria, the employees of eligible business will not be subject to state personal income tax, and where applicable, New York City personal income tax, Yonkers City income tax, and Yonkers City earnings tax on non-residents. Further, an approved business located in a tax-free area is also eligible for New York state and local and use taxes. Lastly, approved businesses entering into ground leases of real estate in tax-free areas will be exempted from paying New York state real estate transfer tax.
Even though the promise of the program is yet to be known, an anticipatory yardstick of its potential can be witnessed in the success of a bellwether project in the remarkably successful State University of New York College of Nanoscale Science and Engineering in Albany. It has attracted private sector investment in nanotechnology26 education, innovation, research and economic outreach, has created between 2,700 to 3,500 research and development jobs27 and attracted approximately $14 billion in private sector investment by consortia of multinational companies such as International Business Machines (IBM), Advanced Micro Devices (AMD), Global Foundries, and Semiconductor Manufacturing Technology (SEMATECH) a chip manufacturing research and development consortium, among others, at the NanoTech Complex in Albany.28
Panacea. The political character and composition of state legislative bodies plays a significant role in whether a PPP law will pass, and if they do, the extent to which the adopted PPP model has far-reaching private sector penetration. Based on a statistical analysis, Richard Geddes and Benjamin Wagner, economics professors at Cornell University, opine that states with strong public sector unions or a higher percentage of households belonging to unions or with progressive leaning lower legislative bodies, which is true of New York State, are pervious to adopting penetrative PPP models. This observation notwithstanding, what is notable is the balancing act which is done by New York’s Legislature when it enacts PPP frameworks by adopting countervailing measures such as participation of Minority and Women Owned Businesses Enterprises (MWBEs), work force protection requirements such as payment of prevailing wages and use of PLAs to hedge private sector dominance in such partnerships by ensuring public accountability, pursuit of social goals and protection of its strong union work force constituencies.
Words of Caution. It may be inevitable that in the near future New York State will transition from a Build Design jurisdiction and move up the PPP “maturity curve” to adopt a comprehensive framework.29 However, an all-embracing accelerative adoption of a comprehensive PPP framework should be matched by public sector capacity-building to enable its employees to deal with sophisticated private sector counterparts in structuring PPP deals.30 As succinctly put by the U.S Department of Transportation, establishing a public-private partnership framework within a public agency requires: 1) a legal framework to establish and enforce long-term P3 agreements; 2) Policies, processes, and tools to guide policy decisions; 3) Technical skills to identify, develop and evaluate P3 projects and to negotiate agreements; and 4) Skilled staff to manage and oversee projects over the long term. Also, informal consultative frameworks which allow the public and private sectors to meet to smooth over the misunderstandings and frictions that can arise on specific projects should be encouraged.
If the utilization of the Design Build method and the use of union labor results in the successful execution of the Tappan Zee Bridge, particularly, with realization of the projected cost savings,31 New York State might be on a logical trajectory to open its doors to more penetrative PPP project delivery methods. The noteworthy accommodation struck between the seemingly cross-purpose objectives of private participation on one hand and the work force and social imperatives on the other, which, instructively are replicated in the START-UP NY program, but may have set a workable precedent for more daring forays into the use of PPPs.
Kingsley Osei is associate counsel-contracts at the State University of New York and chair of the Office of General Counsel contracts practice group. He is an adjunct faculty member of the International Law Institute Africa Center for Legal Excellence based in Kampala, Uganda.
1. See Wall Street Journal article “$1.6B federal Loan Approved For Tappan Zee Bridge.”
2. See NYS Support Public Private Partnership for Tappan Zee Financing.
3. See joint announcement available at: http://www.newnybridge.com/news/2012/2012-12-19-plan-approval.html. See also Public-Private Partnerships: Terms Related to Building and Facility Partnerships”, Government Accounting Office, April 1999.
4. See announcement of the Approval of the TIFIA loan.
5. See John C. Osborn, Infrastructure News.
8. See Proposed Executive Budget for State Fiscal Year (SFY) 2013/14;
9. See Chapter 68 of the Laws of 2013(Part A).
10. See “Governor Cuomo Launches Start-Up NY Program.”
11. Richard Geddes and Benjamin Wagner, “Why Do U.S. States Adopt Public-Private Partnership Enabling Legislation.”
12. U.S. Department of Transportation, Report to Congress on Public Private Partnership, December, 2004.
13. Southard, U.S. Electric Utilities: The First Public-Private Partnerships, PCLJ Vol. 39, No.2.
14. Public Private Partnership For Transportation: A Toolkit for Legislators available at: http://www.ncsl.org/documents/transportation/PPPTOOLKIT.pdf.
15. See 2011 N.Y. Laws, Ch.56, at §§______.
16. See Freelander, Legal Issue Unique to Design Build at http://www.schiffhardin.com/binary/legal_issues_design_build.pdf.
17. See N.Y. Econ. Dev. Law §§432(McKinney 1988 & Supp. 2013.
18. See N.Y. Econ. Dev. Law §§432(McKinney 1988 & Supp. 2013.
19. See N.Y. Econ. Dev. Law §§452(3)(McKinney 1988 & Supp. 2013.
20. See N.Y. Econ. Dev. Law §§432-A(McKinney 1988 & Supp. 2013.
21. See N.Y. Econ. Dev. Law §§432(3)(McKinney 1988 & Supp. 2013.
22. See N.Y. Econ. Dev. Law §§434(McKinney 1988 & Supp. 2013.
23. See N.Y. Econ. Dev. Law §§431(5)(McKinney 1988 & Supp. 2013.
24. See N.Y. Econ. Dev. Law §§434(1)(B) (McKinney 1988 & Supp. 2013.
25. See N.Y. Econ. Dev. Law §§434(McKinney 1988 & Supp. 2013; See also TAX ART 9-A and 22.
26. See The Nanotechnology Revolution available at http://www.thenewatlantis.com/publications/the-nanotechnology-revolution.
27. See “How a Consortium Can Contribute To American Manufacturing Renaissance: U.S Photovoltaic Consortium” by Ross F. Goodman available at: http://www.semiconwest.org/sites/semiconwest.org/files/docs/PV R_D Research Consortia_Goodman for distribution-1.pdf.
29. See United Nations Economic Commission on Europe Guidebook on Promoting Good Governance in Public-Private Partnership available at http://www.unece.org/fileadmin/DAM/ceci/publications/ppp.pdf.
31. See note 59, supra