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New California Law Authorizes Local Governments to Enter into Infrastructure Privatization Agreements Without Competitive Bidding
January 1997
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By W. Samuel Niece
Summary
Effective January 1, 1997, California Assembly Bill 2660 authorizes
local governmental agencies to enter into agreements with
private contractors, developers and other entities for the
development, improvement and operation of fee-generating
infrastructure projects without submitting to a competitive
bidding process, and authorizes the use of private financing
for the development and construction of such projects.
Applicable to Sixteen Types of Projects. AB
2660's provisions authorize local governmental agencies
to enter into agreements with private entities for the study,
planning, design, developing, financing, construction, maintenance,
rebuilding, improvement, repair, or operation of, and lease
to (or ownership by) a private entity of, sixteen different
types of revenue-generating projects, including the following:
(1) irrigation, (2) drainage, (3) energy or power production,
(4) water supply, treatment, and distribution, (5) flood
control, (6) inland waterways, (7) harbors, (8) municipal
improvements, (9) commuter and light rail, (10) highways
or bridges, (11) tunnels, (12) airports and runways, (13)
purification of water, (14) sewage treatment, disposal,
and water recycling, (15) refuse disposal and (16) any other
structures or buildings, except structures or buildings
that are to be utilized primarily for sporting or entertainment
events.
Elimination of Competitive Bidding. AB 2660
provides that project developers are not required to submit
to a competitive bidding process. Rather, governmental
agencies may select projects and developers in the agency's
discretion after a "competitive negotiation" process
in which the primary selection criteria shall be the "demonstrated
competence and qualifications" of the private entity
involved. Moreover, AB 2660 provides not only for
the development of projects through the solicitation of
proposals by a governmental agency, but also expressly authorizes
private entities independently to initiate and submit proposals
to governmental agencies.
Project Implementing Agreements Required. Projects
are to be implemented through written agreements providing
for the lease to or ownership by the private entity of the
infrastructure facilities for up to 35 years, and the complete
reversion of the facilities to the governmental agency at
no charge at the end of the agreement's term. The
"user fee" revenues generated by a project are
to be dedicated exclusively to payment of the private entity's
direct and indirect capital outlay costs, operations, maintenance
and administrative costs, user fee collection costs, and
a negotiated "reasonable return on investment"
to the private entity. Among other things, the agreements
also must include provisions for the "buyout"
of the private entity by the governmental agency in the
event of an early termination or default.
Open Issues. AB 2660 leaves many issues unresolved,
including the following: "User Fees" and
"Reasonable Rates of Return". While the
"user fee" concept provided for by AB 2660 may
be easily applied to toll "highways," "tunnels"
and similar projects, the concept is much less clear as
applied to "structures," "buildings"
and many other projects. Similarly, although the law
provides for application of a portion of the user fees to
a "reasonable rate of return on investment" to
the private entity, the law provides no guidance on the
level of return which might be deemed reasonable, or whether
different or more risky projects should be allowed different
or higher rates of return. Financial Resources of
Developer. The Bill provides that the project implementing
agreement must contain provisions to ensure "adequate
financial resources of the private entity" to "operate
the facility," but the meaning of these provisions
is unclear and it is uncertain to what extent private developers
will be able to develop projects on a non-recourse basis
through special purpose companies with limited amounts of
equity capital, as is commonly the preferred model for private
infrastructure project development. Buyout Procedures.
Although the Bill requires provisions for the "buyout"
of the private entity by the governmental entity upon an
early termination or a default, the Bill gives no guidance
as to the requirements, if any, relating to the methodology
for determining the buyout price, whether and how the buyout
price should vary depending upon the reason for an early
termination, or the payment terms and manner in which the
governmental entity will pay or finance a buyout payment.
Proposition 218. AB 2660 provides no guidance as to its
relationship with newly enacted Proposition 218 (the "Right
To Vote on Taxes Act" of 1996). As has been widely
reported, Proposition 218 greatly reduces the ability of
local governments to assess and collect taxes, assessments
and fees from the public, and may have certain direct and
indirect impacts on the ability of local governments to
authorize the assessment of "user fees" under
AB 2660.
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