As Mayor W. Wilson Goode of Philadelphia sifted through his notes last month, preparing to address a key state hearing on the fate of his city, a page marked "privatization" caught his attention and kept it.
The handwritten document listed ways in which the mayor's advisers believe the private sector can help him rescue Philadelphia from looming bankruptcy. Selling city-run enterprises like Veteran's Stadium or Philadelphia International Airport to private investors would offer one-shot revenues to the cash-starved general fund. And the free-enterprise system would be able to run them more efficiently, the theory goes.
Mayor Goode never got around the explaining to the hearing of state senators how privatization might help, and it remains to be seen whether Philadelphia will turn to such devices. But on several occasions, he has expressed his support for selling city assets, even to the extent of including the concept in his budget proposals.
The mayor is not alone in considering privatization. Across the country, mayors and governors are eyeing city office buildings, municipal parking garages, stadiums, and virtually any other city-or state-run operation with a constant source of revenue as potential candidates for sale.
And as elected officials find themselves unable to finance massive infrastructure needs, a second category of privatization is gaining acceptance -- creation of entirely new assets by private interests.
Several state legislatures have passed measures encouraging the private sector to build infrastructure projects from scratch and operate them on their own. Such projects -- like toll roads and certain types of railroads -- have traditionally been the purview of municipal and state government.
"The capital has to come from somewhere, and it would appear the private sector is a willing participant," said Barry P. Gold, a vice president of project finance at Citibank. As the public sector realizes the extent of the need and its own liability to meet that need, privatization -- or, more likely, public-private partnerships -- will become more common, Mr. Gold said.
Although bolstered by images of crumbling infrastructure nationwide, calls by lobbyists for more sources of funding have yet to make significant headway.
According to Charles A. Machemehl Jr., a former chairman of the American Road & Transportation Builders Association, the minimum annual need for infrastructure projects at the local, state, and federal level is about $70 billion.
"And nobody argues we could spend $100 billion," he said. Only a fraction of that amount is now being spent, but Mr. Machemehl said public-private partnerships could help the nation reach a higher level of infrastructure investment.
At the forefront of this new breed of municipal finance is the Dulles toll road in Virginia. Private interests are hoping to begin construction this summer on a 15-mile extension of the existing tollway to connect Dulles International Airport to additional suburbs of Washington.
A Project Moves Ahead
The project fell behind schedule when certain landowners along the route balked at selling portions of their property, despite predictions that the extension would dramatically increase property values in the area.
A governmental entity with emminent domain powers would have had an easier time overcoming such obstacles.
But the Dulles project now appears to have acquired the needed rights-of-way, and financing is expected to be in place sometime this summer, with construction beginning immediately thereafter, sources say.
Plans forecast the road will pay about $600 million in local, state, and federal taxes over 40 years, then be turned over to Virginia under the agreement.
California has also moved forward on privatization with a plan to set up four demonstration projects, to see how private efforts to build toll roads might offer an alternative to the state's traditional route -- the freeway.
One of the projects, a nine-mile stretch of road around San Diego expected to cost up to $600 million, will be headed by California Transportation Ventures. California Transportation will own and operate the stretch for 30 years, then turn it over to the state, explained John C. Glidden Jr., managing director of the public finance department at Prudential Securities Inc., which is a member of the consortium.
Mr. Glidden said the project is still in the design and approval stage.
The majority of the bonds sold to finance the project will have to be taxable, he explained, because they benefit private interest. But Mr. Glidden said this and other similar projects around the nation probably will not significantly increase taxable volume for some time, since financing is typically the last stage of the process. The San Diego bonds, for example, are not expected to come to market until 1993 at the earliest.
There also will probably not be a corresponding decrease in tax-exempt volume when the taxables finally make it to market, since states are already using virtually all of their bonding ability to finance infrastructure needs and will continue to do so in the future, industry sources say.
"States are stretched to the limit on GO capacity," Mr. Glidden said. "By bringing the private sector into the equation, you bring additional capital into the state."
Analysts say private toll roads developed more rapidly than other privatization proposals because of the tremendous need for new roads and the fact that tolls are a well-proven source of revenues that can be predicted with some degree of accuracy, lending credibility to feasibility studies.
But the infant industry still has many problems.
Liability questions, regulatory oversight, legislative roadblocks, and monopoly concerns are among the major obstacles facing private enterprise.
Exposure to lawsuits is a big worry for investment bankers considering involvement in public-private partnerships. When motorists on the New Jersey Turnpike are injured, for example, they are typically precluded from suing the state or the turnpike authority. And the few lawsuits that are brought are usually unsuccessful.
But what about protection for a private owner of a private road?
Insurance is one answer, but most investors say some degree of public exposure will also have to play a role in mitigating premium costs. Mr. Glidden said insurance costs have been calculated in the analysis of the San Diego project, and while a feasibility study is not yet complete, the premiums are not expected to be high enough to scuttle the project.
Toll Levels a Hot Topic
On other fronts, toll levels on public roads have become a hot political issue, and increases are often fought with the same degree of vigor as proposed tax rises. But for investors to feel comfortable with a private toll road, some degree of assurance would be required that regulators will permit tolls to rise to levels needed to secure the investment.
For an industry that will likely seek a toll monopoly for the region in which private roads are built, the political questions will be among the first that will have to be addressed.
With the Dulles toll road the project closest to getting under way, industry analysts are watching its progress closely for possible ways to address these concerns on future deals.
In the meantime, lobbyists are working hard to promote laws that would foster public-private partnerships. The road and transportation builders association, for example, is meeting with lawmakers in Washington to push for favorable legislative language in the transportation bill now making its way through Congress.
The association, which last July formed the Private-Public Ventures in Transportation Division, is hoping to get a provision into the bill that would allow states to use up to 35% of their federal highway funds in public-private ventures.
No Commingling
Federal law currently prohibits states from commingling federal money on projects using private funding sources, explained Stewart Kincaid, managing director of the public-private ventures division.
Mr. Kincaid said other potential legislative proposals that could benefit the effort include an increase in the gas tax of about 10 cents, with proceeds going to road construction and repair projects. Congress recently passed a five-cent gas tax increase, but half of the proceeds are earmarked for deficit reduction, which the association considers inappropriate.
Another area of interest for the association and other lobbying groups is the effort to establish a federal guarantee program for public-private ventures.
Mr. Kincaid said that during construction and in the early years of operation, the projects often do not provide enough revenue to meet debt obligations. The program envisioned would encourage public-private partnerships by providing federal loans during this critical early period, which would be repaid after revenues begin to grown, Mr. Kincaid explained.
Regulatory and environmental roadblocks have always plagued transportation projects with costly delays. Pressing public need and the benefits of tax-free financing have helped many projects survive the wait. But for private investors, the delays could be enought to kill a deal.
As a result, proposals also will have to find quicker ways around the red tape. "We'll see new approaches to the business during its first couple of years, then they'll catch on," Mr. Glidden predicted.
While toll road facilities have emerged as the trailblazer for privatization efforts, environmental projects could be another area in which the private sector can help finance projects the public wallet cannot.
John Petersen, a senior director of the Government Finance Officers Association's research center, said his organization is working with the Environmental Protection Agency to find ways to fund water treatment and supply operations with private dollars.
Elsewhere, political necessity is forcing the issue. Like Mayor Goode, Gov. William F. Weld of Massachusetts is pressing hard for asset sales to balance the budget.
And New York lawmakers last year named cosmetics tycoon Ronald Lauder to oversee their privatization efforts.
Will privatization someday usurp tax-exempt bonds as the favorite public financing vehicle?
Prudential's Mr. Glidden conceded it is probably not going to represent a very large segment of the public finance business for some time, "but everything points to growth.
"The less the public sector can do because of constraints on capital capacity, the more opportunity there is for the private sector," he said.
