In 2011, the Texas state legislature enacted Senate Bill 1048 (SB 1048) to provide state and local governments in the Lone Star State with new tools to deliver infrastructure and facility projects through public-private partnerships (PPPs) with private firms for the design, construction, financing, maintenance or operation of public facilities. With the exception of new roadway projects (covered under other provisions of state law), Texas can now use PPPs to deliver nearly any type of public infrastructure, including schools, water and wastewater projects, ports and other public use facilities.
Modeled after Virginia's Public-Private Education Facilities and Infrastructure Act of 2002, which has been used extensively by agencies in that state to deliver a wide range of projects since its enactment, SB 1048 allows for both solicited and unsolicited proposals from private firms to develop infrastructure projects across a broad spectrum. Under SB 1048, qualifying PPP projects include, but are not limited to, “[…] any ferry, mass transit facility, vehicle parking facility, port facility, power generation facility, fuel supply facility, oil or gas pipeline, water supply facility, public work, waste treatment facility, hospital, school, medical or nursing care facility, recreational facility, public building, or other similar facility currently available or to be made available to a governmental entity for public use […]” Further, the law establishes a new Texas Partnership Advisory Commission to provide legislative review and oversight to projects advanced.
In this February 2012 interview with Reason Foundation’s Leonard Gilroy, Texas State Representative and Partnership Advisory Commission member Jim Murphy discuss the goals of SB 1048, the Partnership Advisory Commission’s oversight role and the long-term anticipated benefits of SB 1048 for state and local governments in Texas.
Leonard Gilroy, Reason: What factors led to the development of SB 1048?
Texas State Representative Jim Murphy: We knew that the shortage of funds that the state is facing is going to continue for the foreseeable future and that other branches of government are going to face the same thing. The other thing that’s occurring in Texas, which is terrific news, is our continued growth: 21% over the last ten years. And that trend is projected to continue, so that says our needs for infrastructure are growing tremendously. Plus, there’s the hidden amount of infrastructure that needs to be replaced due to all of the deferred maintenance our governments have experienced over the last couple of years.
Gilroy: Can you describe the scope of the projects authorized under SB 1048?
Murphy: In Texas under SB 1048, any political subdivision in Texas can enter into an agreement to provide some sort of a facility through a PPP, with the exception of roadway projects, which are covered elsewhere under state law. We deliberately made it broad because we wanted to make it widely available and locally controlled. That element of local control is tremendously important for the Texas legislature.
The scope of what can be provided through a PPP is really anything that a city, county, school district or special district would build for its own purposes. So it could be anything you could imagine, from a library to a sewage treatment plant to a city hall to a hospital district building. It’s a full range. The greatest application though is probably going to be in projects where there is an element of depreciation that’s significant, like an office building or a similar type of use, where that can be developed as a value proposition for the private sector investors.
And I think we’re going to find a number of state agencies that are interested. In fact, our state Facilities Commission was aware of the legislation and tracked it, and they are already looking at how they are going to apply it. I did not know how large our Texas real estate holdings are, in terms of improved properties, not land. Many of them are old and out-of-date, or need to be renovated, rebuilt or relocated, and that’s pretty much impossible in our current budget environment. Senate Bill 1048 provides them another option to do so without incurring debt for the state.
Gilroy: Oversight is an important aspect of PPPs from the public sector side. Can you describe the role of the Partnership Advisory Commission in overseeing the development of PPP projects?
Murphy: We’re just forming that commission now, and I will have the opportunity to serve on it. What I envision is truly an advisory role whereby if a local political subdivision, for example, wants to enter into a PPP arrangement then we will try to help them make the best possible decisions. We won’t tell them what they have to do, and we’re not there to regulate them. Those are their decisions, and the locally elected boards, committees or councils will make those determinations. Our role is to help them through the process of evaluating proposals, making sure they’ve got the right vendors, making sure that they’ve identified the appropriate value elements, what the risk aspects would be. It’s more about process than product.
There’s often a concern among public officials about whether the government entity will be able to negotiate as well as the private entity, given their different skill sets and the different incentives each one has. So one of the most important elements of this bill—and one of the reasons that I think it passed—was the provision for the Commission’s project reviews, which will be paid for by the project developer fees in the process.
Gilroy: Did legislators look to other states for models? If so, where and why?
Murphy: We certainly wanted to look at where this type of program was taking place and how that might translate to Texas. Virginia’s example was very helpful to us, and we were made aware of other projects that have been developed in California. We even looked around the globe for other projects that have been done. We sought information not just on what kinds of things were provided through PPPs, but also how they might be structured.
We were also interested in how receptive the market would be and what level of demand there might be in the financing world for these types of projects, as we wanted to make sure the conditions would be right in Texas.
Gilroy: Transportation PPPs have been controversial in recent years in Texas. What lessons did you learn from the state’s experience with transportation PPPs to apply to SB 1048?
Murphy: The experience we had in the past with the Trans-Texas Corridor is the reason we were able to pass SB 1048. We were well aware of the specific issues and the types of issues that would come up due to our experience. There was a whole series of issues related to the Trans-Texas Corridor for which any one of them in and of itself was not all that significant, but when you started adding one to the other, it ended up being too many negatives for that program to continue. And rather than trying to fix it—the fixes would have been very extensive—the legislature just wanted to call a time-out for two years, then another two years, and we finally said PPPs are disallowed unless it’s something on a list of specific projects we authorized in 2011. So now we only allow PPPs for specific road projects to continue.
For SB 1048, we tried to address this by putting in the review process and to make sure that local governments were ready to negotiate in their own best interest, because we know that the private sector can take care of itself.
But in the end, there are billions of dollars in private capital available for projects that make sense, and there is virtually zero capacity at the local level to take on these projects. You just have to find a way to have a marriage that works.
Gilroy: What long-term benefits do you expect to see over time via social infrastructure PPPs and SB 1048?
Murphy: It's going to allow local governments to have another way to address their facility needs and their construction needs, and I think that’s a huge benefit because the appetite for increased fees and taxes is going to continue to be low as long as the economy struggles. With the tremendous expansion we’ve had of the federal government, people are suspicious of giving more authority and more resources to government, so we’ve got to find ways to bridge the gap.
I think SB 1048 is going to catch on, and the use of it will expand if there are great projects coming out that we can point to here in Texas and say “that's how we do it here.”
Jim Murphy represents House District 133 (West Houston) in the Texas legislature and is a member of the Texas Partnerships Advisory Commission. For the past 20 years, Murphy served as one of the principal driving forces behind the Westchase District, the 4.2 square mile municipal management district in west Houston that has seen over $2 billion in new investment and thousands of new jobs. Currently he is working as a consultant to the district. Murphy’s business leadership also includes service as a board member of the Houston West Chamber of Commerce, West Houston Medical Center and as former chairman of the Association of Commercial Real Estate Professionals. He is an active member of the Greater Houston Partnership, the Houston Association of Realtors, and the Urban Land Institute and currently serves on the Board of Directors of the Houston Realty Business Coalition, Making It Better, and Strake Jesuit College Preparatory. He was also twice elected and served from 1997 to 2006 on the Houston Community College Board of Trustees.
This article will be featured in a forthcoming edition of Reason Foundation's Innovators in Action report.