59

Wheelabrator Clean Water Systems Inc.
Page 3

which, as I mentioned, we prefer to call public/private partnerships, and our experiences in
Franklin, Ohio and Wilmington, Delaware.

PUBLIC/PRIVATE PARTNERSHIPS,

Throughout the United States, municipalities are faced with the problem of balancing community
needs with available funding. ‘There is increasing pressure to provide quality municipal services
while holding the line on operating costs and complying with changing government regulations
This challenge becomes increasingly difficult as funding sources from the state and federal
governments dwindle. Many communities have partnered with the private sector to help address
these unique challenges.

In the past, barriers in federal regulations and the Tax Reform Act of 1986 have combined to slow
private investment in municipal wastewater treatment facilities, When President Bush signed E.O.
12803 in 1992, it increased the interest in public/private partnership options. ‘he Executive
Order states that infrastructure is critical to economic growth. It goes on to acknowledge that
state and local governments understand their own needs and how to satisfy them. The order
protects the public investment, It requires the privatized facilities to remain committed to a long-
term partnership and continue to operate within environmental compliance and budget. As
outlined in E.O. 12803, proceeds from a sale or lease of a publicly-owned wastewater treatment
facility must first repay state and local government investments in the project. Thus, after the
facility debt is defeased, the municipalities will have funds left over to invest in infrastructure or to
reduce taxes or other debt. Proceeds attributable to the federal grant less depreciation are
returned to the federal government. H.R. 1907, the Federal-Aid Facility Privatization Act, is
intended to address this last step thereby providing additional proceeds to the municipalities.

Public/private partnerships are an important financial opportunity for a community to explore.
The U.S. EPA estimates that publicly owned treatment works will need $127 billion in capital
investment over the next 20 years to meet Clean Water Act regulations. A wastewater treatment
plant can be a hidden source of cash that can be used for needed services through public/private
partnerships. The amount of money that could be freed up if the private sector were to acquire
current wastewater infrastructure is estimated at more than $30 billion from some 15,000
facilities

Public/private partnerships should be tailored to meet the community’s specific needs, There are
various arrangements that allow a municipality to free up badly needed funds that are tied up in
it’s wastewater treatment works. Property and income tax rolls would be expanded as tax-
exempt public properties become tax paying properties. Privately owned facilities may even cost
less to operate, as communities in Ohio and Delaware are finding out.

One of the biggest issues with public/private partnerships comes from a concern about what will
happen to employees when a publicly owned facility is transferred to a private sector owner. In

Wheelabrator’s case we want to be very specific about what it means. It make no sense to us to
approach a fundamental change in public policy, such as public/private partnerships, and then go
about making that change in such a way as to hurt people and alienate them to that change in the


123

of capital resources, “You cannot accept any payment whatsoever,

even for someone who wants to take those buses and take them for

parts, take them for whatever reason, because you've got to pay us
ack.”

We came up with a calculation; it was $58 million. Well, with
that hurdle, initially, to the MTA, it wasn’t a viable proposal.

Mrs. MALONEY. So what happened to the buses? What did they
do with them?

Mr. STANLEY. The buses were idled for years. There was later a
very complicated negotiation in terms of swapping out what our de-
preciated grant interest was and trading it for an interest in a vari-
ety of transit assets, a transaction which was required by this very
prohibition. We had absolutely no interest in taking a 30-percent
share in a bus station in Queens, and that’s what happened. But
we were forced to go through this Kabuki dance of trading it as if
we had made some kind of an investment.

The one I will mention, too, that was an arduous process, was
the rehabilitation of that station—which | think is one of the most
attractive in the system now—at 51st and 3d, which involved Mort
Zuckerman at the time, the city, and we were there, having made
somebody prior to my tenure a grant to help rehabilitate part of
the track.

Well, I was there at the negotiations saying, “I’m sorry, I won’t
permit you to combine in a public-private partnership to take the
money”—it was $8 million that was being offered by the developer,
who did a terrific job on the station, eventually—‘“until you pay me
back an interest I made as an investment in 1981 in the track. I
need that grant money paid back.”

It was a very difficult position to take. That transaction got done,
but what we did in the process, Congresswoman, is go through a
very ridiculous set of definitions. “OK, I will give up my interest
in the track and trade it”—to go through, really, a process that the
city didn’t want, the MTA didn’t want, and it was only the persist-
ence of the mayor at the time and Mr. Zuckerman that got that
station done.

Mrs. MALONEY. Who was the mayor then?

Mr. STANLEY. Mayor Koch.

Mrs. MALONEY. Mayor Koch?

Mr. STANLEY. And John Zucotti was the sort of brains behind the
whole project. It did get done, and today it stands as one of the fin-
est station rehabilitations. It was done more quickly than any we
directly funded.

Mrs. MALONEY. How was Mayor Koch able to push through all
the redtape and make it happen?

Mr. STANLEY. It didn’t get pushed through as much as I would
like to have seen it get pushed through. The city ended up making
a contribution and purchasing part of the assets back from us with
city funds, not Transit Authority funds. But it stands as the type
of sort of convoluted process that we were forced to go through by
this very prohibition.

Mrs. MALONEY. So what do you suggest? Do you suggest there
be no strings attached, that if you sell a Federal asset that was
built with grant money, that you should not have to pay anything
back to the Federal treasury?


25

Mr. Horn. Well, they’re very helpful. We'll have questions after
we've finished with Mr. Roth’s testimony. Allen Roth is executive
director of the New York State Research Council on Privatization.

Mr. Roth.

Mr. Rot. Thank you, Mr. Chairman, and I would like to also
thank my fellow New Yorker, Mrs. Maloney.

I am testifying as the executive director of the New York State
Research Council on Privatization. The council was created by Ex-
ecutive order of New York’s Governor Pataki.

My appearance is an indication of the importance we place on re-
moving Federal barriers to State and local privatization initiatives.
It is our belief that in this era of empowering State and local gov-
ernments to put their own houses in order, the Federal Govern-
ment should allow the States to make maximum use of all their as-
sets, even those that have benefited from Federal grants.

I believe that H.R. 1907 goes a long way toward giving States
like New York the option of realizing the full benefits of privatiza-
tion. In New York, we are seriously considering the outright sale
of airports and the privatization of wastewater treatment facilities
that have received Federal grants. Given this agenda, we under-
stand the need to eliminate Federal impediments to these efforts.

Since the issuance of Executive Order 12803—we were involved
in helping to draft that particular Executive order—our fears that
it didn’t go far enough have been realized. The failure to ade-
quately address the grant payback and grant restriction issues
have resulted in the completion of just one local federally backed
asset privatization, the sale of Franklin, OH’s wastewater treat-
ment facility.

As I’ve analyzed H.R. 1907, I applaud the provision that exempts
State and local governments from paying back Federal grants if the
asset continues to be used for the same purpose. The Federal Gov-
ernment has a right to require that its investment of tax dollars
be used to maintain an asset for its original purpose.

Another issue which needs addressing is grant restrictions that
govern the use of funds generated from that particular asset. Lift-
ing restrictions would increase the value of assets to buyers, there-
fore increasing sales proceeds for State and local governments.

I know there are opponents of allowing private investors to in-
vest profits in activities not directly related to the assets. For in-
stance, some have asserted that such a provision would undermine
the economic well-being of airports. They maintain, revenues real-
ized from airports should remain there. The rational justification of
this position is that, if permitted, the private sector owners will ne-
glect the needs of airports by investing proceeds in other areas.

I beg to differ. Private investors who commit considerable sums
to purchasing an airport will invest the necessary capital and oper-
ating expenses to maintain and improve the facility. There is no in-
centive to devalue the worth of their significant investment.

For example, BAA did noi abandon the capital or operating
needs of Heathrow and its other airports when it privatized. On
the contrary, it has expanded and improved the level of service at
its privatized facilities, and, in addition, BAA’s investments have
included paying dividends to its shareholders, expansion of its air-
port businesses, such as the organization of BAA USA, and invest-


154

public interest is better served by obtaining fair market value for the asset, or whether
the asset should be privatized at a reduced cost to the recipient entity due to the
potential benefits and cost reductions which will accrue to taxpayers. These issues argue

that some kind of a competition should occur for the privatization of any infrastructure
asset.

Another issue is the effect on large versus small businesses. ‘There are some instances
where the privatization of any federal asset may result in giving a large corporate entity
an undue competitive advantage over smaller business entities operating and competing
in the market. Safeguards need to be built into this legislation to prevent this from
occurring, The solution may be to compete the privatization under a format which levels
the playing field among large and small businesses and/or require that competing small
businesses be added to the privatization “team.”

HLR. 1907, as presently written, deals exclusively with privatizing infrastructure assets
which have received federal grants. It does not deal with the privatization of federal
facilities and functions. Perhaps some consideration should be given to the entire
universe of federal privatization opportunities, instead of only this one narrow area.

My experience in privatization has been acquired through several extensive efforts to
facilitate the transfer of federal facilities and functions to the private sector. President
Reagan appointed me to the Congressionally mandated Advisory Panel on Alternative
Means of Financing and Managing Radioactive Waste Facilities. The Advisory Panel
concluded that the function of ultimate disposal of high level nuclear waste should be
privatized, and moved from the Department of Energy to a quasi government
corporation. The Department of Energy opposed this recommendation, and argued that
the legislative and regulatory changes that would be required to privatize this federal
function were “to hard to do." The result was that the high level nuclear waste function
has remained in the Department of Energy since the Advisory Panel rendered its final
report in December 1984; and little progress has been made toward the ultimate solution
to this very critical and pressing national problem.

After the Defense Base Closure and Realignment Commission announced its final 1995
military installation closure recommendations and before the President made his final
decision to endorse these recommendations, the Department of Defense indicated that it
was attempting to structure a concept to privatize the operations conducted at McClellan
Air Force Base (Sacramento, California), Kelly Air Force Base (San Antonio, Texas), the
Naval Surface Warfare Center, Crane Division Detachment (Louisville, Kentucky), and
the Naval Air Warfare Center, Aircraft Division (Indianapolis, Indiana). The process of
closing these installations is presently in progress and local officials are attempting to
work with the Department of Defense to facilitate privatization. At the Naval Air
Warfare Center. the City of Indianapolis with the assistance of the Hudson Institute and
Arthur Andersen, LLP, has been attempting to facilitate a privatization effort which
would retain as many jobs as possible and contribute to the economic redevelopment
which will be required as a result of the defense conversion.


149

which are.different than investor question. We’ve approached it as
the investor, not as the seller or as the user.

Mrs. MALONEY. What other incremental things could make it
easier?

Mr. BuTLER. To answer the question raised earlier on rates and
charges, I have always assumed that the Government will always
be with us; that this is not going to be a free and clear trans-
action—“Here, you take the airport and do what you want with it”
that we are going to have safety regulation, and are likely to have
rate regulation of some form. Whether it is local, State, or Federal,
it will evolve. Those are the incremental things I am referring to
here.

A process will come from this that will allow a transaction to
occur that all the parties agree on. This will not happen in a vacu-
um. The airlines, AOPA, the cities, the FAA, all the parties will
have their say, and out of that will come a process that works. But
right now, the barrier to actually get people talking about it is con-
tained in this bill.

Mrs. MALONEY. OK. What other incremental things besides that?

Mr. BuTLER. I think those generally cover it.

Mrs. MALONEY. Is that it? You had mentioned also in your testi-
mony—or certainly in your written testimony—in the case of an
airport, you do not foresee a sale. You wrote that you thought, in
cases of airports, that it would be a lease arrangement. Do you see
further Federal sources for capital improvements under lease man-
agements?

Mr. BuTLER. Leasing in the United States, we think, is a more
effective method currently, in that you remove the problem of sell-
ing the underlying asset, so the Government does have a role. It
is still their property. It deals with the environmental issues
around the airport, and ensures that the Government will still sup-
port the roads coming to the facility. It is part of the community.

The private sector leases the facility, operates it as a business,
provides the investment capital to make it grow, and, at some fu-
ture date, it will revert back if the lease is not extended, so that
both parties are protected. It allows, perhaps, the use of tax-exempt
money to invest in the facility.

Mrs. MALONEY. Tax-exempt money because youre investing into
the capital structure of a city-owned property?

Mr. BUuTLER. Into publicly held property for the benefit of the
public.

Mrs. MALONEY. Yeah.

Mr. BUTLER. And it leaves open the intriguing question of wheth-
er the Federal grant program will continue to support that prop-
erty. There are a number of issues still to talk about that would
allow the investment community to join the Government in what
is called a public-private partnership to create new value on the
airport, run it as a business, increase revenue potentials, and
where the economy is a scale of multiple airports, yet the Govern-
ment is still a part of the process.

If you do a lease, all these rate issues are dealt with in the lease
document.

Mrs. MALONEY. We have to go vote; right?


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
WILLIAM F. CLINGER, JRr., Pennsylvania, Chairman

BENJAMIN A, GILMAN, New York CARDISS COLLINS, Illinois
DAN BURTON, Indiana HENRY A, WAXMAN, California
3, DENNIS HASTERT, Illinois TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, Jn., West Virginia
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
STEVEN SCHIFF, New Mexico EDOLPHUS TOWNS, New York
ILEANA ROS-LEHTINEN, Florida JOHN M. SPRATT, Jr., South Carolina
WILLIAM H. ZELIFF, Jn, New Hampshire © LOUISE McINTOSH SLAUGHTER, New
JOHN M. McHUGH, New York York
STEPHEN HORN, California PAUL E, KANJORSKI, Pennsylvania
JOHN L. MICA, Florida GARY A. CONDIT, California
PETER BLUTE, Massachusetts COLLIN C. PETERSON, Minnesota
THOMAS M. DAVIS, Virginia KAREN L. THURMAN, Florida
DAVID M. McINTOSH, Indiana CAROLYN B. MALONEY, New York
JON D. FOX, Pennsylvania THOMAS M. BARRETT, Wisconsin
RANDY TATE, Washington GENE TAYLOR, Mississippi
DICK CHRYSLER, Michigan BARBARA-ROSE COLLINS, Michigan
GIL GUTKNECHT, Minnesota ELEANOR HOLMES NORTON, District of
MARK E. SOUDER, Indiana Columbia
WILLIAM J. MARTINI, New Jersey JAMES P. MORAN, Virginia
JOE SCARBOROUGH, Florida GENE GREEN, Texas
JOHN B. SHADEGG, Arizona CARRIE P. MEEK, Florida
MICHAEL PATRICK FLANAGAN, Illinois CHAKA FATTAH, Pennsylvania
CHARLES F. BASS, New Hampshire BILL BREWSTER, Oklahoma
STEVEN C. LaTOURETTE, Ohio TIM HOLDEN, Pennsylvania
MARSHALL “MARK” SANFORD, South

Carolina BERNARD SANDERS, Vermont
ROBERT L. EHRLICH, Jr., Maryland ‘independent

JAMES L. CLARKE, Staff Director
Kevin Sapo, General Counsel
dupitH McCoy, Chief Clerk

Bub Myers, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY

STEPHEN HORN, California, Chairman
MICHAEL PATRICK FLANAGAN, Illinois CAROLYN B. MALONEY, New York

PETER BLUTE, Massachusetts MAJOR R. OWENS, New York
THOMAS M. DAVIS, Virginia FRANK MASCARA, Pennsylvania

JON D. FOX, Pennsylvania ROBERT E. WISE, Jr., West Virginia
RANDY TATE, Washington JOHN M. SPRATT, JR., South Carolina
JOE SCARBOROUGH, Florida PAUL E, KANJORSKI, Pennsylvania

CHARLES F. BASS, New Hampshire

EX OFFICIO

WILLIAM F. CLINGER, JR., Pennsylvania © CARDISS COLLINS, Illinois

J, RUSSELL GEORGE, Staff Director and Counsel
MaRK BRASHER, Professional Staff Member
ANDREW G. RICHARDSON, Clerk
Mites Q. ROMNEY, Minority Professional Staff

a


119

oO The total number of over-the-road tractors and trucks (class 6-8) will
increase 14%.

The total number of miles driven will increase by 34% and total ton
miles by 32%.

So, "yes", the economy will place greater demands on our nation’s
infrastructure.

QUESTION #3. How can capital from the private sector be best deployed to assist these
investment needs (for example, taxes, user fees, privatization)?

ANSWER:

Experience suggests that if there is no state matching revenue, commitment to
projects may change through the election process, resulting in costly delays.
The use of tax dollars to create infrastructure banks or revolving loan funds
will allow states to leverage private capital and help insure sufficient
government support of projects. Additionally, loan repayments can be
recycled as seed money for new projects.

Private sector participation in the provision of public infrastructure can be
structured to improve the project selection process to maximize the " rate of
return on investment". Project selection criteria must include adherence to
cost benefit analysis which includes consideration of the benefits to all users
including the trucking industry.

The American Trucking Associations do not support the use of tolls on
existing Interstate miles except under special circumstances for bridges and
tunnels. See the ATA proposed amendment, reproduced here:

b). In addition to the above criteria, in the case of a road tunnel or
bridge, the Secretary of Transportation shall approve a request
to privatize or transfer the asset only if the private party agrees
to comply with the provisions of 23 U.S.C. 129(a) that would
apply if federal funds and tolls were used to improve the asset.
A road, tunnel, or bridge or approach thereto that would not be
eligible for Federal participation under 23 U.S.C. 129(a) is not
eligible to be privatized under this act.

On other highway projects, tolls should only be applied after traditional
sources of revenue have been exhausted and if the value added to the
highway’s capacity and safety is proportional to the toll revenue generated.
Toll revenues that are recycled through state infrastructure banks or revolving
loan funds should only be used as "seed money" for other highway projects

QUESTION # 4: As the Federal role in infrastructure is reduced, what steps can
Congress take to allow others, including States, local governments, and the private
sector to increase infrastructure investment?

Enclosure 2


68

WHEELABRATOR EOS AWARDS:

#1995

Environ
Adana:

tal Procection Agen
‘ton County W:

Region IV - Best Tasting Water in Georgia
Treatment Plant. Alpharetta. Georgta

Arizona Water & Pollution Control Assoctation - Safery Award - Treatment and Collections
“olorado River Joim Venture Wheelabrator EOS inc.. Parker. Arizona

National Council for Public-Private Partnerships - Project Award
Franklin Area Wastewater Treatmen: Plant, Franklin, Ohio

Ohio Water Environment Association - Safety Award
Springboro Wastewater Treatment Plant. Springboro. Ohio

Pacific Northwest Pollution Contro! Association - Safery Award - Division B Lost-time Free Accidents and Five Years
of Lost-ume Free Accidents

‘ancouver Wastewater Treatment Plant, Vancouver. Washington
1994
Georgia Water Pollution Control Association - George W. Burke Safety Award

Albany Wastewater Treatment Plans, Albany. Georgia

Environmental Protection Agency. Region VI - Regional Administrator's Environmental Excellence State Award
Beneficial Use of Biosolids Operating Project Greater Than § MGD

Chickasaw Wastewater Treatment Plant, Bartlesville, Oklahoma

California Water Pollution Contro] Association « Safery Award
Burlingame Wastewater Tee fame, California

Ohio Water Environment Association - Safety Award

MCD Daston Wastewater Treatment Plant. Davton, Ohio

Pacific Northwest Pollution Controt Associ
Vancouver Wastewater Treat

ion - Safety Award, Division B, Zero Lost-ume Accidem Award
Vancouver, Washington

#1993

Georgia Water Pollution Control Assostation - Plant of the Year Award’Operations & Maintenance Excellence Award
any Wastewater Treatment Plant, Albany, Georgia

Environmental Protection Agency. Region IV - Award of Excellence for Beneficial Sewage Sludge Utilization
Albany Wastewater Treatment Plant, Albany, Georgia

Environmental Protection Agency, Region IV - Operations & Maintenance Excellence Award, Second Place
Albany Wastewater Treatment Plant, Albany. Georgia

Environmental Protection Agency. Region Ill - Operations & Maintenance Excellence Award
‘Oaks Wastewater Treatment Plant, Oaks. Pennsyivania

November 2, 1988


152

the people that are in the game now will end up being out of the
game, and I think that this needs to be given some consideration.

I gave, in the testimony that I submitted to the record, some ex-
amples that go into the base closure area of impediments to privat-
ization. I don’t have any examples at my fingertips of things that
could be impediments to implementing this bill, but the way the
draft is written, it does not state anywhere in there that I could
see that notwithstanding any other section of the law.

I think what you're going to find if you try to implement this is
that, going down through the process, you’re going to find a whole
bunch of other laws and regulations that are going to be in the way
of the intent of this bill.

Finally, I guess my final recommendation is that I don’t know
when this is going to get on the legislative agenda, but I think that
further study is certainly warranted. Maybe you would like to get
some type of a commission or some type of a study group to look
at not only how this legislation would be implemented, but also the
effects on through with the other privatization initiatives that are
going on. Thank you, Mr. Chairman.

[The prepared statement of Mr. Grimm follows:]


19

WHEELABRATOR EOS INDUSTRIAL FACILITIES

racity | stn | Pree
Facility Client Name & Address Phone No. MGD Type Date Type
| ie
| ost Susan Callaghan noe Terma 1988 Full OSM
| Sowttsirs ASIOM Rea’ Esule Manigement wwTP
| |
|

sllbrartaiivtacing



15

Mr. Horn. Thank you. I will yield first to the ranking minority
member, Mrs. Maloney.

Mrs. MALONEY. Thank you, Mr. McIntosh. In developing the Ex-
ecutive Order 12803, what consideration was given to releasing
grantees from any repayment to the Federal Government? Why
was that not adopted? Were there statutory obstacles?

Mr. McIntosu. When we looked at it, the original proposal that
went forward to the Competitiveness Council had that option as
one of the things to consider, that there would be no repayment.

Some of the people, particularly Director Darman at OMB, felt
that it was important that the Government receive some part of
the repayment of those grants and agreed that, rather than 100
percent, a depreciated schedule would be acceptable to him.

So the Council considered all of the options, felt they all could
be legally done, but declined to go the entire way in recommending
that to the President, and then the President signed it with the de-
preciation schedule that was put into the Executive order.

Mrs. MALONEY. The bill’s definition of “originally authorized pur-
pose” excludes certain types of grant conditions. Could you give us
some examples of some of the exclusions?

Mr. McINTosH. That would be considered? Part of the problem
you want to address is, you don’t want to tie the hands of local gov-
ernment, as they are continuing to provide the service to the pri-
vate sector, with some of the conditions that may have been part
of the original grant, but the Federal Government no longer feels
it has an interest in maintaining.

And so the effort there in the statute was to provide flexibility
so that as the infrastructure was privatized, the local government
could come back and say, “This grant restriction is preventing us
from bringing in a private sector manager.” We need some flexibil-
ity there.

Mrs. MALONEY. Does the bill only cover grant type assistance?

Mr. McINTOsH. That’s my understanding, yes, that it’s limited to
grants.

Mrs. MALONEY. To what extent have agencies reviewed barriers
and recommended statutory changes? And how does H.R. 1907 re-
late to and modify such barriers?

Mr. McINTosH. I would have to look at the record from the agen-
cies. I couldn’t give you that detailed information at this point.

Mrs. MALONEY. A witness which will follow you, a John T. Dowd
of Wheelabrator Clean Water Systems made this technical com-
ment on H.R. 1907, and I would like you to comment on it. Could
Tread it to you?

“The definition of ‘infrastructure assets’ may be too broad. It re-
fers to any asset financed by the Federal Government. We suggest
that, with respect to wastewater treatment facilities, the legislation
only apply to assets owned by State or local governments, or gov-
ernmental agencies or authorities, for the construction or improve-
ment of which Federal funds can be used. * * * “Furthermore, the
definition should clearly state that projects constructed with Fed-
eral financing via no-interest or low-interest loan, such as use of
a State revolving fund, are eligible assets for partnerships, but SRF
loans should not be forgiven. The provision in section 5 which voids


128

STATEMENTS OF VIGGO BUTLER, PRESIDENT, AIRPORT
GROUP INTERNATIONAL, INC.; AND JOHN YODICE, GENERAL
COUNSEL, AIRPORT OWNERS AND PILOTS ASSOCIATION

Mr. BUTLER. Thank you. At this point in the hearing, a number
of the songs I was going to sing have already been sung, so | will
avoid repeating the statements that I concur with that have been
previously made.

If I appear and act a little bit tired, I just returned from China,
where I was busily trying to figure out how to spend American cap-
ital on their infrastructure.

We are trying to do that in Australia, New Zealand, Mexico, Ar-
gentina, Germany, Britain, and a number of other countries. We
are very active in taking our capital overseas to develop their air-
ports and would love to have a chance to do that here. It would be
a lot easier on my body clock.

We are a 65-year-old company that started out building airports
privately in the United States. We built the Burbank Airport pri-
vately in 1929. Until recently, we were a wholly-owned subsidiary
of Lockheed.

Now we are 50 percent owned by Lockheed-Martin and 50 per-
cent owned by Soros Capital. The purpose of that change in owner-
ship was to create capital to invest in infrastructure. So we have
the funds to invest, are willing to invest, and ready to invest in the
infrastructure of airports in the United States.

Much of this debate and discussion centers around changing a
process; changing things that have been comfortable in the past. In
our particular case, in airports, the greatest fear that is discussed
is that of cost.

If this hearing was held under a situation where the telephone
company was owned by the Government, and we were talking
about selling it off, this room would be full of people saying, “It will
raise our costs. There’s no way we should do this Somehow the pri-
vate sector will gouge us.” Yet, we have a private phone company
that is the cheapest system in the world.

If we were talking about privitizing the airline industry, had it
been Government-owned in this country, the same conversation
would ensue. The room would be full of people saying, “It costs too
much. Ticket prices will go out of sight.” But we have a private sys-
tem that’s the cheapest in the world.

So my view is, why isn’t that same thought process applicable to
the airport business? The airport business is an assemblage of indi-
vidually-owned airports. It has no consolidation whatsoever. It has
no centralized purchasing, no centralized accounting, none of the
centralized anything that any other business system has, whether
it’s Wal-Mart or the phone company or anything else.

It is a very inefficient system of management of facilities, all lo-
cally operated, and, with private sector involvement, we believe
costs would go down dramatically in how they were operated.

Where private sector involvement in airports is extinct, either
through contract management or through overseas private develop-
ment, the costs are the lowest in their regions. There is no example
of the cost being higher where the private sector is involved. So we
believe that we can prove and demonstrate that cost is not an issue
in operating facilities privately.


134

Second, the private sector, responding to market forces, best allocates infrastructure
resources. For example, most public airport authorities do not respond to the market; they
respond to civic desires. An airport may, therefore, be located in the wrong place altogether —-
where there is little demand -- while another more logical location has no facility. Or, one airport
may be overbuilt, while another is underbuilt, The private sector would respond quickly to such
inefficiencies.

Third, all infrastructure users will benefit from the increased efficiency and cost
savings created by the private sector. Private firms, with their own money on the line, are going
to find the best deal and get it done quicker, both to save financing time and to secure the revenue
the project is intended to produce. Introducing this market incentive to the delivery of
infrastructure facilities will improve the quality of these assets, and therefore contribute to the
economic development of the area.

During this period of increased global competition and decreased Federal resources
for infrastructure projects, state and local officials must have the discretion to pursue these
innovative public-private partnerships. However, current Federal policy discourages the
privatization of infrastructure assets, depriving local governments of the full range of development

and management options.

Airport Group International, inc ® Page 5


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WHEELABRATOR EOS WATER AND WASTEWATER FACILITIES

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32

Mr. Horn. Thank you. Let me ask one question, then I’m going
to ask the ranking member to begin the questioning. Have each of

you had an opportunity to look at the legislation, H.R. 1907, before
us:

Mr. Rot. Yes.

Mr. Horn. Do either of you have any specific suggestions as to
language in the legislation?

Mr. Poo_e. I’m comfortable with it as it is. I know that there are
concerns that have been raised, including by Congresswoman
Maloney, about things like stronger provisions to protect consum-
ers and so forth. It seems to me that it’s very strong in the inter-
ests of the municipality or State government that would sell or
lease an asset to protect its own constituents in those ways and
that it doesn’t need to be micromanaged from Washington. | think
as minimal as necessary is all that’s really required here, and to
let the private sector incentives and the incentives of local govern-
ments handle the details.

Mr. Horn. Yes, Mr. Roth.

Mr. RoTu. In section 4, paragraph (b), wording there, “The pri-
vate party purchasing or leasing the infrastructure assets agrees to
comply with all applicable grant assurances,” is something that, as
I’ve testified, I think that there are some grant assurances—for ex-
ample, of taking profits away from the particular asset is some-
thing that would be desirable, and this particular legislation
doesn’t address that.

But I do agree that if this legislation was passed as is, it would
be a major step forward in the right direction.

Mr. Horn. Do you have any specific language you want to add
to subsection (b) in section 4?

Mr. Roru. Not at the moment, but I'll be glad to submit some.

Mr. Horn. Why don’t you write them to me. Mark it “personal
and confidential.” I would like to take a look at it. We’re open to
suggestion, and I say that to the other witnesses that are in the
room. If you have had a chance to read the bill—it’s a very simple,
precise, and to-the-point piece of legislation, not a lot of gobbledy-
gook—so we would welcome your comments after you testify.

We're interested, obviously, in the broad picture, as to need, as
to how successful experiences or unsuccessful experiences have
been; and then we would like your best language. Don’t feel you
have to hire a lawyer to give us sensible language. We find we
have sensible language whether there are lawyers or not lawyers.
So we would welcome that.

Now I yield to the ranking member from New York, Mrs.
Maloney; 5 minutes.

Mrs. MALONEY. First, I would like to welcome Mr. Roth from the
great State of New York.

Mr. RotH. Thank you.

Mrs. MALONEY. And just ask you, if the proceeds from these sales
can be used for anything that a local official wants to spend it on,
isn’t it just another form of revenue sharing, and wouldn’t a gen-
eral revenue-sharing bill be a more efficient way of getting funds
to the State and local governments for unrestricted uses?

Mr. Roru. I happen to believe that every time you take money
from a locality and you send it either to a State—like in New York,


103

structure improvement and paying them back to the Federal Gov-
ernment.

Tve said quite often, both in my experience as Administrator and
in attempting to develop these projects, the FAA has had a loan
program; UMTA had a loan program; I learned a minute ago that
the Federal Highway Administration is establishing a State infra-
structure bank loan program. These were grants, not loans, and
they weren’t meant to be repaid when they were made, and that
requirement, I think, does not serve any noticeable public policy.

Finally, the one question that came up and that is often raised,
the idea that these assets would be sold and suddenly resold by the
buyer. I've never seen an instance where our company or others
would be interested on that basis.

The fact of the matter is, most of these assets, the sales, take the
form of either concession agreements, franchise agreements, that
last anywhere from 20 to 30 years and, I can guarantee you, pro-
vide provisions that any transfer of that asset—was true in the
Dulles Toll Road; it’s true in the wastewater concessions being con-
summated in New Jersey—any transfer of that asset requires the
approval of the public entity who is your partner in the project, and
those transfers, I think, are simply not going to occur.

Finally, in conclusion, I’ve seen a number of iterations of H.R.
1907 and with very minor modifications. I cannot emphasize
enough the impact it would have (A) toward freeing up the ability
of State and localities to transfer some of these assets, and (B) pro-
viding an atmosphere with as few restrictions as possible so that
entrepreneurial infrastructure developers such as ourselves can
help to solve the infrastructure problems that are out there today.

[The prepared statement of Mr. Stanley follows:]


39

it is, in effect, a transfer tax. It makes them less likely to exert the
amount of effort of overcoming the opposition of all those who favor
the status quo to actually bring about this useful transaction.

Mrs. MALONEY. Well, I don’t have my opening statement here,
but in it I was talking about the comparison between this bill and
the Executive order.

Mr. POOLE. Yes.

Mrs. MALONEY. Where the Executive order required the funds,
really, to go into the infrastructure of the State, to help with the

lebt.

Mr. POOLE. Or tax reduction.

Mrs. MALONEY. To help with tax relief.

Mr. PooLe. Right.

Mrs. MALONEY. To help with, really, the infrastructure of the
whole State or city or whoever owns the asset. But by lifting this
total restriction—of course, this wouldn’t happen with our Gov-
ernor—but possibly there could be another Governor who decides
he wants to give a million dollar bonus to all of his top aides.

Mr. POOLE. Sure.

Mrs. MALONEY. And there’s really room for abuse. I mean most.
people are honest public servants, but every now and then we have
someone. What’s wrong with keeping the restrictive language that
was in the Executive order that the money go for tax relief or debt
restructuring?

Mr. PooLe. I don’t have a fundamental problem with that. I
think those are reasonable kinds of restrictions.

Mrs. MALONEY. I spoke to Mr. McIntosh on the way over, by the
way, and he said he would accept that change. He didn’t feel
strongly about it.

Mr. Poo.e. I don’t feel strongly about it either. I do believe,
though, that the spirit today, as he said in his opening statement,
of respecting the principles of the 10th amendment would say to
keep this as free of a lot of micromanaging strings as possible be-
cause, I think, it is very much in the interest of the State and local
governments to make these kinds of transactions happen, and it’s
in the interests of the country that we have better management of
these infrastructure assets.

Mrs. MALONEY. But this is an asset that’s owned by the people
of a State or the people of a city. Their tax dollars have helped
build it, and, then, shouldn’t they be ensured of receiving the bene-
fits, either in reducing the debt or in the tax relief or in some way
that helps the people?

Mr. Poo ts. As I say, I think that’s probably not unreasonable.

Mrs. MALONEY. And then it would remove the possibility for
abuse. But my time is up.

Mr. Horn. I am reminded that money is fungible, and Governors
do what they wish with money they find, and they simply cut it
out of the budget somewhere else. So who knows if the entities that
have been responsible for the growth of the airport, good or bad,
might not get any of it. Governors can just have it disappear some-
where.

At least, Governors of California have had that tendency. But, of
course, the New York Governors would never act like that, I’m
sure.


164

work” and organize those workers, but all too often, it’s too difficult
to do, because the private company will cut the wages, cut the ben-
efits. People are afraid for their jobs.

Mr. Horn. Well, but am I correct—you mentioned the repayment
requirement in your testimony—your union is unalterably opposed
to the idea of privatization, whether or not there’s a grant repay-
ment requirement; isn’t that true? The idea disturbs you.

Ms. KELLY. Well, yes, we’re opposed to this legislation, and, as
I also mentioned, we would like to see the Executive order re-
scinded.

Mr. Horn. So youre just basically against privatization? You
don’t think it’s a good idea, basically.

Ms. KELLY. Certainly in this context, yes.

Mr. Horn. Well, that’s the same, in a sense, as the pilots of gen-
eral aviation. They worry about an increase in fee. Change is dra-
matic; there’s no question, and sometimes it goes awry. But | just
wanted to get the philosophical background there.

Now, as I understand it, you’re obviously aware of the budgetary
restraints—because heaven knows, your members have suffered
from some of that—that various governments operate under. Do
you have any ideas as to the ways to harness the private sector in-
vestment to help build infrastructure, other than privatization?

Ms. KELLY. Well, certainly, we can explore partnerships working
with the private sector. We’re just opposed to cases where you have
Federal taxpayers money, which was used to build these facilities,
and now turning them over to the private sector.

Mr. Horn. Often, it’s very little, comparatively, Federal money
that’s involved, and usually the locality has floated bonds or what-
ever. But there’s no question that under the taxes that are levied
on airlines like the gasoline tax, goes to the improvement of the
airports, so you do have structures that incrementally have been
improved by the Federal Government.

I don’t know if you were in the room when the Pittsburgh airport
was discussed. Now, apparently, they've added a major mall which
would have a lot of people working and a lot of people coming
there. That might not have happened if the Government were
doing it.

So, in a sense, thousands of jobs have been created, and the wel-
fare of the community has benefited. People who could be your
members, as a matter of fact. I don’t know if they are or they
aren’t, but have you had a chance to visit the Pittsburgh Airport
at all?

Ms. KELLY. Well, yes, I have.

Mr. Horn. Have you? I mean are there some of your members
there in some of those shops?

Ms. KELLY. To be honest, I don’t know.

Mr. Horn. Well, it would be interesting to know because, again,
it seems that there’s a need for investment if you’re going to have
a job. You can’t have jobs without somebody building the infra-
structure where people work.

Ms. KELLY. I completely agree, but we would like to see that in-
vestment—I just don’t want to see the Federal Government abdi-
cating its responsibility for the public infrastructure to the private


Wheelabrator Clean Water Systems Inc.
Page 8

SUGGESTED ELEMENTS FOR LEGISLATION ON WASTEWATER TREATMENT INFRASTRUCTURE,
PRIVATIZATION

1 Local and state government should be encouraged to evaluate privatizing the wastewater
treatment infrastructure to pay for construction and improvements before utilizing federally
assisted financing for such projects.

Revitalizing the Nation's infrastructure will require increased private sector involvement. Local
and state government can either finance projects themselves, or seek to privatize the
infrastructure, before utilizing federally assisted financing for such projects. The public/private
partnership approach allows the public sector to take advantage of the equity that is in existing
infrastructure assets and work with the private sector to use that equity and other private
financing to pay for new construction and upgrades. In order to encourage and promote a
transition to public/private partnerships, before a local or state government seeks federally
assisted financing for infrastructure projects, they should determine (using the least burdensome
process practicable) whether

A. There is a private sector entity willing and able to undertake the project; and

B. The total net cost of allowing a public/private partnerships to do so would be
equally or more cost effective than public financing, ownership and operation of the
project or service

IL Asenvisioned in H.R. 1907, the requirement for repayment of federal construction grants
for wastewater treatment infrastructure should be forgiven

There is a substantial need for new and refurbished wastewater treatment infrastructure in the
Nation. There is also a substantial amount of equity in existing infrastructure that can be tapped
in addition to private sector investment, to help pay for new construction, expansion and system
upgrades. The opportunities to achieve real cost efficiencies should be made available to
communities with existing infrastructure projects that do not require, at the present time,
financing for new construction or upgrades. To this end, the following provisions should be
included in legislation

‘A, Legislation should allow public sector wastewater treatment infrastructure assets
to be transferred to the private sector by sale, and the requirement for repayment of
federal construction grant or grants used for that project should be forgiven. All proceeds
from the sale of such assets should go to the local and state governments, and

B. The process followed by local and state government to transfer wastewater
treatment infrastructure assets to the private sector should consider total net cost, and
allow processes such as competitive bidding, direct contract negotiation, or whatever is
required by state law.


148

infrastructure, so we don’t want to be that obstructionist. If it’s im-
portant Federal policy that wants to go forward, we would try to
accommodate our concerns and, at the same time, achieve those ob-
jectives.

Mrs. MALONEY. And you mentioned in your testimony that DOT
and FAA are going forward, developing new policies on airport
rates and charges. You say that this legislation might negate reso-
lution of these issues which are being considered by DOT and FAA.
Could you explain this? How would they negate what these issues
are going to be?

Mr. YopIcE. What I was trying to say in that statement was that
the process that the Federal Government is going through—the De-
partment of Transportation and the Federal Aviation Administra-
tion—is inviting input from all segments of the aviation community
on all of these issues. And then, as a result of all of that input,
they’re going to be formulating some ideas on what the policy
should be on; airport rates and charges.

I’m not sure that this bill is getting the same consideration, in-
depth consideration from the users and the airports, and we ought
to at least have an opportunity to see what that process develops
before we make any big decisions on this bill.

Mrs. MALONEY. And I understand that GAO is, incidentally,
going through a whole review on the same subject, too, which
should be out in, I think, a year.

But anyway, Mr. Butler, on page 6 of your statement, you say
that this bill, 1907, is “an incremental reform measure” that “re-
moves the primary regulatory barrier to privatization.” What other
incremental reform measures do you suggest?

Mr. BUTLER. To go to the specifics of this, we approached this bill
from the investor’s side. This bill removes the investor aspect ques-
tion, which is this repayment question on the Federal grants.

Mrs. MALONEY. But the repayment of the Federal grants really
doesn’t affect the private investor.

Mr. BUTLER. Well, I heard that debate earlier.

Mrs. MALONEY. I mean I think some valid points were raised,
particularly about the Grumman buses.

Mr. BUTLER. Yes.

Mrs. MALONEY. But I don’t think there’s a valid point on the pri-
vate investor point of view. The value of the property is the value
of the property.

Mr. BUTLER. Right. The likelihood of a seller selling is influenced
by this. The fact that nothing has been privatized in any of these
subjects under current rules would imply that it is not happening.
The investors have the money and are ready to invest, so some-
thing is stopping it. Our view is, from the investor’s side, this rule
on the grant repayment is the barrier.

That is what we're told by the customers, that if this was not
here, they would be in a better position to take the transaction for-
ward. So, from the investor's side, that is the No. 1 question.

For the users and for the sellers, there may be other issues that
still need to be developed. We have the questions on rates and
charges and questions on diversion. All of these issues are out
there which are political issues and Government control issues,


35

Our Governor has publicly announced that he would like to see
that sold off and turn the port authority back to its core business.

Right now, we are dealing with a bureaucracy, like any other bu-
reaucracy, which has not been challenged over the years, and the
port authority has the ability to float bonds. If it’s not making
money in a particular area, it’s able to float bonds to finance what-
ever it is that they want to finance.

They don’t have to go to the voters for approval. They have a fi-
nancing mechanism that most people don’t have, no private sector
people have. And their incentive, clearly, has been to perpetuate
themselves, and they’ve done a great job.

Mr. Horn. Robert Moses lives.

Mr. Rotu. Robert Moses lives.

Mr. Horn. Yes.

Mr. Rotu. That’s true.

Mr. Horn. Appointed by every Governor, regardless of party, and
appointed by every mayor, regardless of party.

Mr. Rou. Right.

Mr. Horn. For what—50 years—almost?

Mr. Rotu. The better part of 50 years, and as long as he was
willing to spend money and build, they were willing to hire him.

Mr. Horn. Now, you mentioned Cincinnati, and it reminds me
that Cincinnati’s airport is over the river in Kentucky, and, of
course, if that was privatized, it might be great, but Kentucky’s
going to get the property tax.

Mr. Rotu. It will get the property tax, but there are other reve-
nues and other financial benefits. In Pittsburgh, when Pittsburgh
contracted out its retail sales to BAA, it contracted with BAA to in
fact develop its retail sales. The retail sales increased tremen-
dously. That led to more corporate taxes; which led to more eco-
nomic development in terms of real jobs for people in the private
sector.

In Indianapolis, which is the first major privatization in the
United States of America for the management of an entire airport,
again, there was a very vigorous competition between BAA, Lock-
heed, and several other groups, including the members of the Indi-
anapolis Airport Commission—people like the port authority—who
were operating that airport. They actually joined in and competed
for the management contract.

That contract has the winner of that contract—and the others
were also willing to go down this particular route—saying, “We will
save X number of dollars every single year.” They actually put
down that it would cost less to operate this airport, plus they be-
lieve that it’s going to develop in a way that the economic develop-
ment of the entire region will benefit.

So property taxes are important, but, in fact, there is, I think,
an equal importance in terms of creating real private sector jobs.

Mr. Horn. Does the Port Authority in New York provide funds
to the State of New York and the State of New Jersey at all?

Mr. Rotu. Not directly. What it does is—for example, in New
Jersey—New Jersey has a train system called the Path system,
which goes between New York and New Jersey—lower Manhattan,
primarily-~and it brings people in from Hoboken, and they tend to

e Wall Street types who use it. Port Authority subsidizes Path.


67

Wheelabrator Clean Water Systems Ine.
Page LI

3. The bill does not address the need to set a threshold of “competency” for private sector
entities who are allowed to participate in partnership arrangements. For example, it is important
to ensure that private entities have a proven track record for efficient service delivery, have
operating expertise, can provide financial assurance to guarantee that services and operations
would not be disrupted if the entity encountered financial or technical difficulties, and has a
successful record of compliance with federal and state regulatory programs, especially
environmental regulations.

4. The definition of “infrastructure assets” may be too broad. It refers to any asset
“financed” by the federal government. We suggest that, with respect to wastewater treatment
facilities, the legislation only apply to assets owned by state or local government, or governmental
agencies or authorities, for the construction or improvement of which federal funds have been
used, Furthermore, the definition should clearly state that projects constructed with Federal
financing via no-interest or low-interest loans, such as use of the State Revolving Fund (SRF), are
eligible assets for partnerships, but SRF loans should not be forgiven. The provision in section 5
which voids requirements for repayment of federal funds should apply only to construction grants
in the case of wastewater treatment facilities

5. Section 6 of the proposed legislation, provides for state and local government recovery of
its capital investment in the affected asset. The provision also specifies the ability to recovery
“unreimbursed operating expenses”, and “a reasonable rate of return”. These two items are not
defined. It is important to define what is meant by these items so that any public/private
partnership projects following the principles set forth by the legislation does not become unduly
complicated and impossible to complete.

Mr. Chairman, that concludes my statement. I will be happy to answer any questions.


104

Ralph L. Stanley
Testimony

Subcommittee on Government Management,
Information and Technology

United States House of Representatives

November 15, 1995

Good afternoon. My name is Ralph Stanley and I am a
Senior Vice President of the United Infrastructure Company, a
development partnership involving the Bechtel Group and Peter
Kiewit Sons, two diversified engineering and construction
companies with significant international operations and combined

annual revenues of more than $11 billion.

United Infrastructure is a newly formed development
company whose purpose is to develop and invest in needed
infrastructure projects such as roads, bridges, water and wastewater
plants and aviation facilities. We are also committed as a company
to actively working with Congress, as well as state and local
governments to pass legislation that will enable the private sector

to be involved in infrastructure projects.


167

And I could see that type of thing happening. Instead of an infra-
structure development fund in our country that looked at what was
needed, they would say, “Well, we’re going to have $10. We're going
to divide it evenly with each representative for the infrastructure
in their area, because there’s going to be no recoupment if it’s not
used and you can sell it.” So I could see that having that type of
effect.

I think the hearing was very interesting. A lot of issues were
raised, but I have a fot of questions, and I agree, really, with the
testimony Mr. Grimm gave, that there are a lot of questions that
need to be answered.

One of the things that I think we have to look at is that, philo-
sophically, it’s changing, really, the whole way you look at Govern-
ment—this bill, in many ways—and it may have an unforeseen im-
pact on the investment dollars that the public is willing to put

forth.

But just to come back to reality and just ask a specific question,
Ms. Kelly, based on your testimony, do you have any suggestions
as to how this bill could assure protection of public employees of
public facilities being privatized?

Ms. KELLY. Well, again, we’re really opposed to the bill, so I’m
a little cautious about offering, because I would rather—the one
change I would like to see with the bill is that it be withdrawn.

But, in terms of privatization situations in the past that we’ve
dealt with, one of the things that we’ve done to protect public em-
ployees, we have something which we call a right of first refusal,
so that once the service, or whatever it happens to be, is now taken
over by a private firm, they have to offer a position to the existing
employees and allow them the right to refuse or to accept employ-
ment and to maintain the terms of the collective bargaining agree-
ment for the remainder of the term of the agreement.

Mrs. MALONEY. On page 2 of your testimony, you state that
“Prior experience’—and I’m quoting from your testimony—‘dem-
onstrates that it is bad policy to turn public facilities to private op-
erators” that prioritized profits. Could you please discuss these
prior experiences that you are talking about.

Ms. KELLY. Well, as I’ve mentioned, we've had numerous cases
where public services have been privatized. I’m most familiar per-
sonally with some of our social services. We’ve had mental health
services, welfare caseworkers, and so on, where these functions
have been performed by experienced public employees who had
years of experience and knew their jobs very well.

And then these functions were privatized, and the people then
performing these functions were often very young, had very little
experience, were being paid barely above the minimum wage, and
would receive no benefits. So the clients also ended up suffering be-
cause they no longer got the benefit of having people work for them
or providing them services who were experienced and knew what
they were doing and also were adequately compensated.

Mrs. MALONEY. Thank you, Mr. Chairman.

Mr. Horn. Ms. Kelly, let me ask you. There’s a number of rather
innovative groups that we’ve had in this country for 100 years—
some are more obvious now than they were 100 years ago—and
that is employee stock ownership plans, both in getting money from


126

only one that’s going to get it accomplished. That’s the type of ex-
ceptional facility that needs the type of public-private partnership
we talked about. I would predict that you’re going to see those ju-
risdictions in Congress very soon, requesting legislative authority
to do it on that facility.

There are hundreds of examples of projects, ranging from the
bridges in New York State, which are in dire condition, and, I
think, the Woodrow Wilson Bridge, which is the only one the Fed-
eral Government still owns. It is a perfect working example that
every Member of Congress is familiar with, that, even from a safety
standpoint, this has to be allowed very, very soon. Otherwise, we
are facing a very severe safety problem on that facility.

That’s multiplied in a number of States, particularly in the
Northeast, where I’m from, on bridges and in terms of compliance
with the very standards that Congresswoman Maloney raised on
the environmental side, to achieve that compliance, these addi-
tional capital resources are necessary, and we are standing willing
and able to make that investment.

Mr. Horn. Let me ask you, Mr. Collins. You've got, let’s say,
three lanes in one direction of an interstate highway, but the trate
volume builds ups. There’s a lot of truck traffic. You want to add
an extra lane. You've got a choice of the fast lane, or you've got a
choice of one on the right side near the shoulder.

Let’s say you add one on the right side—or let’s say you add the
fast lane. Are you going to charge for the use of all those lanes to
include the cost of the fast lane? And if a little lady from Pasa-
dena—as we use the example—wearing tennis shoes and having
her 1941 Ford, says, “I promise never to go in the fast lane. I sim-
ply want to go in the rest of it that was already built.” Does she
have to go through that toll booth and pay for that fast lane for
the hot shots, the trucks and everybody else? How about it?

Mr. Couuins. I think whatever would be set up would have to be
something that would be simple to administer. What we're seeing
is, around the country, differential tolls that charge different tolls
at different times of the day. And, in some areas, commuters get
a price break by being able to buy coupons, you know, across the
George Washington Bridge across Manhattan.

So I think there are differential tolls out there, but because vehi-
cles in one Jane flow into the other, if you’re decreasing the conges-
tion for one vehicle, you're really decreasing it for everyone. So I
would say that everybody should be sharing in the benefit if, in
fact, there is increased capacity being added to this system.

Mr. STANLEY. I would just like to add, in several weeks, we're in-
volved in a project in California called State Route 91, in which the
example you just described is exactly what we have been working
on for 4 years. There will be a 100 percent automated lane for toll

ayers.

° Mr. Horn. This is the east-west highway going from Los Angeles
to Riverside?

Mr. STANLEY. This is the highway, Riverside in Orange County,
a 10-mile stretch.

Mr. Horn. You're doing it in Orange County, not L.A.?

Mr. STANLEY. No, but we’re looking to expand the concept. But
that will open before the end of this year with this differential pric-


45

ments that they follow the pretreatment program requirements
that we have in place and industry benefits from what’s called the
domestic sewage exemption for hazardous waste.

President Clinton has actually suggested a modification to the
definition of publicly owned treatment works, so facilities that
serve the general public would not have to retain ownership of
some small part of the facility in order to privatize and yet be con-
sidered POTW’s for regulatory purposes.

So that’s some of the background on what happened, and we
really feel that in this case, given the inclusions that I have out-
lined on how this deal was struck in the end, that the public inter-
est has been protected and the users have benefited substantially.

In conclusion, just let me say that the Agency remains committed
to helping State and local governments with as many financing op-
tions as possible that serve the public interest, and public-private
partnerships can be a viable option and can result in a net increase
in environmental infrastructure investments, and certainly we
need such an increase.

[The prepared statement of Mr. Cook follows:]


87

Mr. Chairman, on behalf of the NAWC, we stand ready to assist this
subcommittee in its endeavors to promote privatization activities, and | am grateful

for this opportunity to testify before you today


8

that impacts of such transfers will not adversely affect other major
Federal policies and interests.

It is good, Mr. Chairman, that you are providing this opportunity
for exploration of these matters. I look forward to the testimony.
Thank you.

[The prepared statement of Hon. Carolyn B. Maloney follows:]


H.R. 1907, THE FEDERAL-AID FACILITY
PRIVATIZATION ACT OF 1995

WEDNESDAY, NOVEMBER 15, 1995

HousE OF REPRESENTATIVES,
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 2:05 p.m., in room
2247, Rayburn House Oltice Building, Hon. Stephen Horn (chair-
man of the subcommittee) presiding.

Present: Representatives Horn, Flanagan, Bass, Maloney, and
Peterson.

Ex officio Present: Representative Clinger.

Staff present: J. Russell George, staff director and counsel; Mark
Brasher, professional staff member; Andrew G. Richardson, clerk;
Donald Goldberg, minority assistant to counsel; Miles Q. Romney,
minority professional staff; and Elisabeth Campbell, minority staff
assistant.

Mr. Horn. A quorum being present, the Subcommittee on Gov-
ernment Management, Information, and Technology will come to
order. Today we review the proposed Federal-Aid Facility Privat-
ization bill. If enacted, this new law would make it easier for State
and local governments to raise private capital for maintaining the
Nation’s airports, waste facilities, and other infrastructure assets.

Our Constitution gave Congress power to regulate and maintain
post offices, post roads, and canals, besides the commerce clause,
in general. The Federal role in infrastructure investment grew dra-
matically in the 1930’s and remained large until recently. With
downsizing has come reduced Federal funding of State and local
services, including the infrastructure. We hope to reverse that
trend.

But as this trend continues, local governments have sought alter-
native financing mechanisms. Some have explored public-private
partnerships as a means of bringing in private capital and manage-
ment skill as the Federal presence has decreased.

Many federally financed infrastructure facilities are maintained
by States and localities. If privatized, prior to Executive Order
12803, States which had been used to paying back some of the
amount on the particular structure in which Federal funds had
been involved now had a change in policy.

Under President Bush, this Executive Order 12803—known as
the Common Rule—because it was common to all agencies—
changed it so that only the undepreciated part had to be paid off.

(D


150

Mr. Horn. We do. The 10-minute bell hasn’t rung yet, though,
I don’t believe. So go ahead. I’m going to go, but let me just ask
one last question of the panel. You mentioned, Mr. Butler, the type
of cooperation and regulations you have, but specifically at Toronto,
what is the regulatory mechanism with which you have to deal in
this area?

Mr. BUTLER. We do not have any. The one unique thing there,
though, is that it is a complete terminal complex, roadway, parking
garage, taxiways, all of that, but not the runways. So the landing
fee is part of the Government’s control. We charge rents, user fees,
and parking fees to either the customer or the airlines, and those
are outside of Government regulation. They are what we negotiate
with the user.

Mr. Horn. You've not focused on increasing fees, and it has been
mentioned here, at Pittsburgh, for example, the mall that attracts
people. What types of additional revenues have you been able to
coax out of these airports to justify the large investments that
you're making? What are some of the other ideas?

Mr. ButLER. It is two factors. One is cost management; how to
operate them successfully as a professional, low-cost operation,
with central management and all central purchasing, and all of
those aspects, so your costs are reduced. And then it is good retail,
good parking management, and other attractive facilities that are
put in that attract people to spend money. It is a business enter-
prise.

Mr. Horn. So if they shop in the mall at Pittsburgh—and I don’t
know, do you have a mall at Toronto at all?

Mr. BUTLER. We have a similar situation, a large retail complex,

es.

Mr. Horn. So you try to validate it, then, and they can park free.

Mr. BUTLER. That is part of the attraction, is all of the secondary
aspects.

Mr. Horn. True. Well, that’s good. It’s a very interesting develop-
ment. We thank you both, and if you have some comments you
want to write us on the legislation, please send them to us. We
would welcome them.

We now have panel VI, but I’m going to go vote, so we’re going
to take a 15-minute recess, and then we will have Mr. Grimm and
Ms. Kelly, hopefully, if we don’t have another vote by 5:35.

Mr. Yopice. Thank you for the opportunity.

Mr. Horn. We're in recess, probably until 5:40, if not sooner.

[Recess.]

Mr. Horn. A quorum once having been established, the commit-
tee will resume. We have Ms. Kelly and Mr. Grimm. You know the
tradition of the committee to swear the witnesses on under oath.
Mr. Grimm, you're on the other side here, at least the way the staff
set it up. You're right where you should be, Ms. Kelly.

[Witnesses sworn.]

Mr. Horn. Both witnesses have affirmed. We'll begin with Rod-
man D. Grimm, the president of Thicksten Grimm Burgum, Inc.;
Welcome, Mr. Grimm. As I remember, you were on a privatization
commission for President Reagan; is that correct?


42

Mr. POOLE. Well, I think you face a choice of either saying “for-
ever” or putting in some kind of potential qualification, because
times change. I mean if something comes along, if we invent some-
thing that makes air travel obsolete, you don’t want to be bound
forever to maintain that land as an airport.

Mr. Horn. We could be beamed up.

Mr. POOLE. Right, right. So, I mean, I think you just—to be real-
istic, you should not tie the hands of future generations forever.
But again, it’s left to the good sense of the people of the State and
municipality to recognize that, as long as they define that they still
need an airport there or a wastewater facility there, it should con-
tinue to operate for that purpose.

But if times change so radically 100 years from now that that’s
no longer needed, they wouldn’t be absolutely bound by the dead
hand of Congress.

Mrs. MALONEY. And, second, do you think the legislation should
address having a competitive process for such sale?

Mr. Poo.e. I don’t think it’s required, because, again, I think
we're talking not about hundreds of thousands of little trans-
actions. We're talking about probably, at most, a few hundred quite
significant and very visible transactions that clearly are going to be
done by a competitive process in any city or State that I can imag-
ine.

And again, I think we don’t really need to have Congress spell
out all the details about how these get done. I think this is a good
example of federalism in action to divest that responsibility to the
people that are directly concerned with the assets.

Mrs. MALONEY. Well, I think that to spell out that it be a com-
petitive process is not tying people’s hands. I think it’s common
sense.

Mr. Poo.e. I would agree with you. The common sense says,
“Yes.” The principle of federalism says it’s not necessary to micro-
manage.

Mrs. MALONEY. I wouldn't call a competitive process microman-
aging. It’s setting a principle. Anyway, my time is up.

Mr. Horn. My distinguished colleague believes in the competitive
process. She just hasn’t quite believed in the Republican process.
We're getting there; we're getting there.

Mrs. MALONEY. It’s not competitive; that’s why.

Mr. Horn. We have a Governor that wants to speak on this sub-
ject right now, and so, without objection, I would like to include at
this point in the hearing record a letter from Governor Frank
Keating of Oklahoma in support of H.R. 1907. Governor Keating
apparently wants to privatize the local airport, among other things,
so he’s a very enthusiastic supporter of the bill.

We now call in the next panel, panel III. If you will have your
places, Mr. Cook, Mr. Barr, Mr. Dowd.

{Witnesses sworn.]

Mr. Horn. All three witnesses affirmed. We will begin with Mr.
Michael B. Cook, the Director of the Office of Wastewater Manage-
ment, Office of Water, Environmental Protection Agency. Welcome,
Mr. Cook.


161

SEIU believes that privatization of public assets is a recipe for disaster.
Prior experience demonstrates that it is bad policy for government to turn over
public facilities to private operators that place a top priority on making money, not
protecting and serving the public. Privatization undermines the provision of
quality public services, threatens public employment, and could imperil the public
safety. And privatization also raises serious questions about public accountability
and oversight. These concerns are particularly grave when facilities dealing with
such sensitive or life-essential matters as water treatment centers, transportation
systems, and prisons are involved.

The supporters of this bill argue that public infrastructure needs massive
investment. The federal government won't be forthcoming with the funds, so
states and localities must turn to the private sector. Private firms will put up the
capital as long as they can obtain a market rate of return. But in order to assure a
market rate of return, the private sector will be inclined to raise user fees sky high.

In the event that a private firm cannot make a profit with a public facility, it
may be forced into bankruptcy. Under such a circumstance, the government --
and, ultimately, the taxpayers -- will be held liable. We could end up with a
situation much like the savings and loan debacle, with the taxpayers forced to bail
out the private firm. When vital public services are at stake, the government is
always ultimately liable for the health and well-being of its citizens -- whether or
not it technically owns the facility in question.

Putting America's infrastructure on the auction block will only serve to
harm ordinary Americans, businesses, shippers and communities by making
public facilities more expensive and less accessible. Low-income households
would be particularly harmed by the ensuing higher user fees.

Although the bill says that the facility should continue to be used for its
original purpose after it has been turned over to the private sector, it doesn't
specify who is to determine how long a facility will be needed for its original
purpose. Once privatized, facilities such as recycling centers, treatment plants,
hospitals, and schools could be converted to other uses once the new owners
determined that they are no longer needed for their original purpose.


73

Wheelabrator EOS Awards
Page 6

Pacific Northwest Pollution Control Association - Division B, Zero Lost-time Accident Award
Vancouver Wastewater Treatment Plant, Vancouver, Washington

#1981

California Water Pollution Control Association - Safety Award - First Place Program
California Wastewater Treatment Plants

Pacific Northwest Pollution Control Association - Safety Award
Eastside Wastewater Treatmem Plant, Vancouver, Washington

#1978

Georgia Water Pollution Control Association - Operations & Maintenance Excellence Award
Albany Wastewater Treatment Plant, Albany, Georgia

#1977

Georgia Water Pollution Control Association - Operations & Maintenance Excellence Award
Albany Wastewater Treatment Plant, Albany, Georgia



DRAFT

TESTIMONY OF
THE NATIONAL ASSOCIATION OF WATER COMPANIES
BEFORE

THE SUBCOMMITTEE ON GOVERNMENT MANAGEMENT
INFORMATION AND TECHNOLOGY

CONCERNING

HLR. 1907
THE FEDERAL-AID FACILITY PRIVATIZATION ACT OF 1995

PRESENTED BY

J. JAMES BARR

CHAIRMAN OF THE BOARD
NATIONAL ASSOCIATION OF WATER COMPANIES:

AND

SENIOR VICE-PRESIDENT, TREASURER, CHIEF FINANCIAL OFFICER
AMERICAN WATER WORKS COMPANY

NOVEMBER 15, 1995


H.R. 1907, THE FEDERAL-AID FACILITY
PRIVATIZATION ACT OF 1995

HEARING

BEFORE THE
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION
ON
H.R. 1907
TO PERMIT STATE AND LOCAL GOVERNMENTS TO TRANSFER—BY SALE
OR LEASE—FEDERAL-AID FACILITIES TO THE PRIVATE SECTOR WITH-
OUT REPAYMENT OF FEDERAL GRANTS, PROVIDED THE FACILITY

CONTINUES TO BE USED FOR ITS ORIGINAL PURPOSE, AND FOR
OTHER PURPOSES

NOVEMBER 15, 1995

Printed for the use of the Committee on Government Reform and Oversight

ee

U.S. GOVERNMENT PRINTING OFFICE
40-126 CC WASHINGTON : 1997

p

For sale by the U.S, Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC. 20402
ISBN 0-16-055039-4



108

fees can be negotiated between the local government and the

private entity in a manner that minimizes any rate increase.

Finally, the Committee has’ asked about the need to protect
the taxpayer. This concern should not extend to any requirement
whatsoever that the grant be repaid, whether on a depreciated basis
or not. These grants are a sunk investment, and to have any
repayment at all would only further reduce the funds available to
state and local governments for infrastructure improvement. If
they were really meant to be repaid, why weren’t they called loans?
There should also be no concern about “churning” because the
transfer of these assets is a competitive process, and almost always
includes a concession period of a considerable length, such as 20-
30 years, which prohibit a “resale” without the public entity

approval.

H.R. 1907 can be a major step toward improving our
Nation’s infrastructure. Its effect would be to attract hundred of
millions of dollars in private capital, at no cost to the federal

government, to the much needed investment in infrastructure.


131

‘Thank you Chairman Horn, and members of the Subcommittee, for the opportunity
to testify today regarding H.R, 1907, the Federal-aid Facility Privatization Act of 1995. My
name is Viggo Butler, and 1 am the President of Airport Group International, Inc.. Airport Group
International, formerly called Lockheed Air Terminal, Inc., is jointly owned by Lockheed Martin
Corp. and Soros Capital L.P.. Airport Group International has been managing, developing and
operating airports for over 65 years, contributing to the economic growth of many communities
across the country. To note just one example, Airport Group International has privately operated

Burbank-Glendale-Pasadena Airport since 1929.

A. PRIVATIZATION: A SOLUTION TO AMERICA'S INFRASTRUCTURE NEEDS
‘The Private Sector Meets Infrastructure Needs Around the World

For years, the governments of both developed and developing countries around the
world have relied on the private sector to finance, develop and operate infrastructure assets.
Today, private sector involvement in implementing innovative approaches to infrastructure
management continues to grow internationally. For example, in Mexico alone, thousands of
kilometers of toll roads are being privately built, and significant port projects are being sold to
private concerns. In Britain, most of the major airports -- including Heathrow and Gatwick -- are
now privately operated

Airport Group International now maintains 20 operations around the world -- from
Guam to Turkmenistan, and governments from Australia to Eastern Europe are at various stages
of development of airport privatization projects. In Toronto, Canada, in the early 1990s we
developed the $550 million Trillium 3 terminal at Pearson International airport entirely svith

Airport Group International, Inc Page 2


159

INTERNATIONAL UNION, AFL-CIO. CLC
1313 L STREET NW. » WASHINGTON, 0. 20005 + (202) @96-3200

RICHARD W CORDTZ
Sthaticun ese siereaond SECRET SEAS

Testimony of
Peggy Kelly

Senior Policy Analyst
Service Employees International Union, AFL-CIO

Before the
Subcommittee on Government Management, Information
and Technology

of the

Committee on Government Reform and Oversight

on H.R. 1907

The Federal-aid Facility Privatization Act of 1995

November 15, 1995




109

Mr. Horn. Well, I thank you for that testimony. I think the line
you have on the last page needs to be reemphasized, where you
say, in terms of discussion of grants that were made by various
Federal agencies, “If they were really meant to be repaid, why
weren't they called loans?” I think that says it all.

Our third and last witness on this panel is John J. Collins, the
senior vice president for government affairs of the American Truck-
ing Associations. Welcome.

Mr. Cotuins. Thank you very much, Mr. Chairman. In your let-
ter of invitation, you asked us 11 specific questions about your bill;
about H.R. 1907. We have provided that as an attachment to our
written statement. I won’t take your time this afternoon to go
through those, but I would be happy to explore those with you
afterward.

The trucking industry employs over 7.8 million people. We move
about 80 percent of the value of freight around the country, and we
use a highway system that’s the greatest and safest in the world.
The highway system is really our workplace, and even more so as
we have new technology to move our trucks safely and effectively
and also as the manufacturing system in the country demands
more and more just-in-time delivery, some really tight delivery
windows. The trucking industry has made a tremendous invest-
ment in our highway system. We pay taxes at the Federal level of
about $9 billion a year, and so we're vitally concerned about the
way that highway system is planned, built, improved, and main-
tained.

ATA supports cost-effective, innovative financing concepts to cre-
ate new highway infrastructure and to improve existing highway
infrastructure in our country. However, we’re opposed to paying
tolls on existing free facilities. We don’t want to rent what we’ve
already bought.

We believe tolls are not warranted until rehabilitation, recon-
struction, or facility capacity increases, and only then if traditional
sources of financing aren’t available. Furthermore, we want to
make sure that the value added by the toll measures is commensu-
rate with the toll revenue generated.

The Federal Aid Highway Program provides right now, generally,
that if you get Federal highway money, then you can’t put tolls on
the facility that has received the Federal highway funds. We’re con-
cerned that the bill, as written, would allow this current restriction
to be removed if the asset were transferred.

We believe some constraint should be provided when a major
public asset is transferred. Following along your lines earlier today,
what we've tried to do is draft some specific language, because we
believe the bill has strong merit and, with some fixes, with some
minor changes, that this problem could be solved. We’ve offered
language and it has been coordinated with proponents of the legis-
lation. I think it has pretty widespread support, and it’s attached
immediately behind my written statement, behind page 4.

The purpose of the amendment is very simple. What it does is
it conforms the privatization options in 1907 for roads, tunnels, and
bridges, to the framework that already exists in the Federal high-
way law for flexible public-private partnerships.


30

| know there are opponents of allowing private investors to invest profits to
activities not directly related to the assets. For instance, some have asserted that such
a provision would undermine the economic well being of airports. They maintain
revenues realized from airports should remain there. The rational justification of this
position is that if permitted, the private sector owners will neglect the needs of
airports by investing proceeds in other areas.

| beg to differ. Private investors who commit considerable sums to purchasing
an airport will invest the necessary capital and operating expenses to maintain and
improve the facility. There is no incentive to devalue the worth of their significant
investment,

For example, BAA did not abandon the capital or operating needs of Heathrow
and its other airports when it privatized. On the contrary, it has expanded and
improved the level of service at its privatized facilities and in addition, BAA‘s
investments have included paying dividends to its shareholders, expansion of its
airport businesses — such as the organization of BAA USA, and investments in related
businesses that are restricted by our federal policies ~ such as constructing a rail line

between Heathrow and London.


89

Another solution would be a form of accelerated depreciation,
which would make the economics better. I would hasten to add
that, because these will almost always be competitive processes—
that being the nature of the municipal beast, if you will—the ulti-
mate beneficiary of that will be the municipalities, because compa-
nies like ours will be competing.

And, to the extent those things are made available to us, we will
weigh how much we have to pass on so we make sure we get the
job. We will compete. So, in the end, even that will benefit the mu-
nicipalities.

Mr. Bass. Anybody else have any observations?

Mr. Barr. I think, Congressman, you've heard a fine list of a
number of what I would like to refer to as the “disincentives” that
we confront from time to time with respect to privatization. Cer-
tainly, this grant repayment provision is one.

There have been a number of provisions over time that tend to
prohibit privatization or interfere with it in the Internal Revenue
Code related to contracting the services that tend to interfere with
the tax-exempt nature of debt that has been issued to fund munici-
pal facilities.

Again, I would look at that as a disincentive, if you will, as con-
trasted to what others might call an incentive to private enterprise.
But the distinctions that are made based on ownership are typi-
cally the issues that are troublesome.

Mr. Bass. In your opinion, is there a significant amount of inter-
est on the part of private industry in this country in participating
in these sort of public-private partnerships, or is this something
that’s focused in just a few businesses—it would be some narrow
interests, rather than broad?

Mr. Barr. From my vantage point in both the water and the
wastewater industry, I think it’s fair to say there is more serious
consideration of privatization today than we've ever seen before.

But I think it is at the leading edge of the curve, if you will, look-
ing for some of these disincentives to be removed for it to ulti-
mately take hold. I think there are ample capital resources in the
marketplace ready to invest, given just a little bit of encourage-
ment to move forward.

Mr. Bass. Thank you very much. The chair will recognize the
gentlelady, Congresswoman Maloney.

Mrs. MALONEY. Thank you. Mr. Dowd, you are certainly to be
complimented on your testimony and, really, the thoroughness of
the prepared statement that you've put before us.

I would like to ask you; you state on page 2 that “The bill does
not address the need to set a threshold of ‘competency’ for private
sector entities . . . allowed to participate in partnership arrange-
ments.” How would you suggest that we change that to insure that
only competent companies are able to participate?

Mr. Down. There’s language in the Clean Water Act that the
House passed this summer which talks to financial responsibility
or, you know, financial thresholds and technical thresholds, quali-
fications in the business.

It doesn’t spell out precisely, but it says that those things need
to be established so that we have companies that are able to do it
because they've done it before and have been proven qualified and


84

tself modifies current federai regulation, called the “Common Rule”, which requires
the repayment of federal grants if the grant-funded facility is sold or jeased to a non-
government entity. The theory behind this policy is that the facility's use would

change with private ownership. However, in the case of water and wastewater

cilities funded by feder

| grants, the use of a facility is nat impacted by ownership

instead of requiring full grant repayment, Executive Order 12803 requires that
the locai government only repay the undepreciated portion of the grant. Also, the
iocal government is allowed to recaver its costs before any funds are used for grant

saybacy and the order places restrictions on the use of proceeds received by the city

a result of the sale or lease

The

ex

tive Order directs federal agencies to adopt rules to carry out its

requirements. To date, implementation has been very disappointing and has clearly

not achieved the order's intent of encouraging privatization efforts.
1.8. 1907 seeks to realize the Order's thus far unattained goal of increased

privatization by first codifying the order, and second, making some important changes

which yall ree

ove a significant impediment to privatization

The major change the bill makes is to eliminate all grant repayment obligations

now fall on localities, provided the grant-funded facility continues to be used

for its original purpose. This change 's highly desirable. if a water or wastewater

facility is privatized, yet still serving the public as originally intended, the purpose of
the federal funding when made is still realized. The benefit the community enjoys

froma the funding - that being enhanced public service - has aot changed, even though


12

Now, as the Director of Vice President Quayle’s Competitiveness
Council, we worked with OMB to revise that Common Rule, and
we fought to give States and localities the freedom to consider a
full range of infrastructure development and management arrange-
ments.

As a result, President Bush issued Executive Order 12803, which
asserted, “the States and local governments shall have greater free-
dom to privatize infrastructure assets.” The Executive order eased
the repayment requirement by permitting the repayment of the de-
preciated value of the Federal grants received.

Now, unfortunately, experience has shown in the years since Ex-
ecutive Order 12803 that we did not go far enough. The modified
repayment requirement continues to prevent State and local privat-
ization efforts, and despite the enthusiasm of a growing number of
Governors and mayors for privatizing or competing, whatever the
term they use, of various infrastructure assets and services, only
one transaction—a small wastewater facility in Franklin, OH—has
been formally completed during that time; and it was only com-
pleted after months and months of delay caused by Federal scru-
tiny of the transaction.

Now, H.R. 1907 removes this unnecessary burden on community
controls of infrastructure assets. Specifically, the bill allows the
State and local governments to transfer an infrastructure asset to
a private entity either by sale or long-term lease, with no repay-
ment of Federal grants so long as the asset continues to be used
for its original purpose. So we see, the purposes of the Federal
grant for building this infrastructure at the State and local govern-
ment level will continue to be maintained.

Now, defenders of the status quo here in Washington continue to
try to stand by the old form of legislation and the Common Rule,
but I think it’s time that we move forward and change this to en-
courage more innovative approaches at the local government level,
to allow mayors and Governors to have the freedom to decide how
their infrastructure should be managed, and not have a fairly pro-
hibitive formula of reimbursement stand in the way of these ef-
forts.

Mr. Chairman, I will submit the rest of my testimony for the for-
mal record and would be glad to answer any questions people
might have.

(The prepared statement of Hon. David M. McIntosh follows:]


54

Mr. Horn. Thank you very much, Mr. Cook. That has been very
helpful. I’m going to call next on Mr. Dowd, since that’s the rela-
tionship with the EPA, so we'll have the testimony in one place.
Mr. John Dowd is the senior vice president of Wheelabrator Clean
Water Systems, Inc. Welcome.

Mr. Dowp. Thank you Congressman, and thank you for inviting
me to share some thoughts of Wheelabrator and myself on public-
private partnerships and specifically on H.R. 1907.

I'll start off by saying we support H.R. 1907. We prefer to see
this become a maiter of law rather than just a matter of policy. We
also want to see grants forgiven, rather than just depreciating.

Rather than go through my whole testimony, let me just hit some
highlights of what we addressed. First of all, why are we even
here? Why is Wheelabrator here, speaking on this subject?

Our involvement in environmental matters and our involvement
in water and wastewater goes back more than two decades. Our
company was the first to contract operate a wastewater treatment
plant, the first private industry to contract operate out in Bur-
lingame, CA, and we operate that plant to this day; we did that
back in 1972.

As you've already heard, we are the first to privatize, under Ex-
ecutive Order 12803, a wastewater treatment plant, namely the
one in Franklin, OH. So our credentials seem to be in order.

What are the numbers in this business? EPA, back in 1992, esti-
mated that the needs were $127 billion to modernize and build new
wastewater treatment plants over the next 20 years, so the need
is very significant.

If you look at what is there today and you put a value on it—
in other words, of the fixed wastewater assets in place that could
be converted into cash for the municipalities—that is a number be-
tween $30 and $35 billion. So we’re talking about considerable pos-
sibilities here if we can move faster toward privatization.

The comment was made before, a question about would there be
rate gouging, would there be concerns? The Franklin contract is a
20-year contract—and this, by the way, would be typical of other
contracts. The service fee is set. It goes up by CPI over 20 years.
You actually have more control over the rates in the future after
the contract is signed than you did before the contract was signed.

It hasn’t been mentioned yet, but let me just bring into this dis-
cussion, employees. It is not the purpose of privatization to do
away with the public employees and bring in our own. Most of the
people that work in the plant today will work in the plant the day
after it’s privatized.

If, in fact, we modernize the plant and don’t have to have as
many employees, what we have committed to in Wilmington—the
second project that we're involved with—that we'll take care of re-
training. We'll take care of finding them another position in one of
our other plants, or, in some cases, the municipality may have
other uses for them. It’s not about cutting back on employees and
hurting them.

Franklin, itself, is a 4%-MGD plant south of Dayton, OH. We
paid $6.8 million for it. Their rates went down. All that’s repeating
what someone else said here, what Mr. Cook said. We have a 20-
year service agreement. We are on the NPDES permit, so we are


171

already there. So I don’t think it was a certainty that they would
be put out of work.

Mr. Horn. You mentioned that the recommendations were also
given to Congress, and they were transmitted by this group to the
Congress.

Mr. Grimm. Well, they were transmitted—I don’t want to say
something that’s not true. I think they were transmitted by the
Secretary of Energy.

Mr. Horn. I see.

Mr. Grimm. To the Congress.

Mr. Horn. And did anything ever happen in the Congress?

Mr. Grimm. Nothing ever happened in the Congress.

Mr. Horn. Nothing ever happened? Well, that’s what worries me
about commissions and task forces, is nothing happens. The Hoover
Commission is one of the exceptions, because the President—Presi-
dent Hoover—was smart enough to set up a nationwide advisory
group that kept the heat on by generating citizen interest all over
the country and just kept going after Members of Congress.

The Grace Commission didn’t have that. The Gore Commission—
and I have suggested this to him. He thought it was a good idea,
but he hasn’t done anything about it. His NPR is not really going
anywhere unless the President wants to take pen in hand and start
implementing. That’s the problem.

I mean it takes somebody to get the ball rolling. You can do it
by law; you can do it by Executive order; you can do it by putting
the money in the bill at one end of the avenue and the other and
paying for people to do something. So I guess I’m not too keen on
commissions at this point. It isn’t just because it’s—what?—6:25
p.m. That doesn’t bother me; that’s lunchtime.

Now, let me ask you this, Mr. Grimm. Isn’t it a State or local
responsibility to determine the policy implications of privatization
of locally owned Federal-aid facilities at the State or local level?
Why shouldn’t they? They’re the groups closest to the people. Isn’t
it State or local responsibility to determine the policy implications?

Mr. Grim. Yes, it is.

Mr. Horn. I mean if they’re worried—for example, Ms. Kelly has
a lot of unions there, and they've had a bad experience in terms
of privatization of that service. The State might be much more sen-
sitive, if you will, and the local governing officials, than the Federal
level, because they’re dealing with the problem. They see either
people put out of work or people not made better off, and they
might be very leery of doing this.

Mr. Grimm. That is correct, and I think that, at the local level,
that’s where you'll essentially—I guess what I would say, would be
your safeguard. From a public policy point of view and from some
of the things that have been presented here would suggest that
this may not be good public policy.

Mr. Horn. Now, in your testimony, you suggested that H.R. 1907
should be broadened to include the privatization of other Federal
facilities or functions. Do you have any specific suggestions, other
than a commission, as to how Congress or the administration ought
to identify favorable opportunities for privatization? Or is your
thinking only limited to having a commission study it in depth?


96

Hearing regarding
H.R. 1907

THE FEDERAL-AID FACILITY PRIVATIZATION ACT OF
1995

Before the
SUBCOMMITTEE ON

GOVERNMENT MANAGEMENT, INFORMATION AND
TECHNOLOGY

Statement of

Raymond Holdsworth
President and C.E.O.
Daniel, Mann, Johnson, & Mendenhall

3250 Wilshire Boulevard
Los Angeles, CA 90010
(213) 381-3663


170

a Federal law. Now, you’re saying there’s also State and local im-
pediments. I agree with you, there might be. Conceivably, Federal
law supersedes State and local law. At least that has been the
trend in the courts to interpret it.

Mr. Grim. Right. And then what you'll do is, yeah, it could su-
persede that. I’m not going to argue that. But then you might have
a whole bunch of mad State and local people because you got into
those issues.

I mean I'll comment that the—in something that I think you're
familiar with, all of the prior amendment did not eliminate the re-
quirement to take and return money to the base closure account,
and you still got that big conflict in transferring property. I see the
situation here where you could end up with the same types of
things here, even though that was supposed to supersede it.

Mr. Horn. Well, you can also say that human beings can do
strange things to buck any Federal mandate, and they start with
the human beings in the Department of Defense and the Federal
Government.

Mr. Grimm. Right.

Mr. Horn. So they have an obligation, obviously, to clean the
site. One, they don’t provide the money, and two, whether they've
ever asked Congress for more money, I’m not sure, but I doubt it.
And so that, without question, those actions by people, if they
aren’t in good faith, can wreck any program, if there’s no program.

Mr. GRIMM. But my recommendation was that I think that it
needs to be looked at much more carefully.

Mr. Horn. Yes. Now, the task force you were on, was that the
official name of it?

Mr Grimm. Jt was called the—let me get you the official name
of it.

Mr. Horn. And this was the early 80’s; right?

Mr. GRIMM. This was in 1983 and 1984, and it was the Congres-
sionally Mandated Advisory Panel on Alternative Means of Financ-
ing and Managing Radioactive Waste Facilities.

Mr. Horn. And this panel did its job and made recommenda-
tions; right?

Mr. GRIMM. That’s correct.

Mr. Horn. And they went to whom?

Mr. Grimm. And they went to the Secretary of Energy, and then
they went back to the Congress. It was a report to the Congress.

Mr. Horn. And what did the Secretary of Energy do about those
recommendations?

Mr. Grimm. The Secretary of Energy—I think if Don Hodel had
stayed, he might have tried to do something, but the panel com-
pleted its report just as Don Hodel left and John Harrington came
in. John Harrington, because of the resistance on the part of the
program people and because the program people pointed out how
much would have to be changed in legislation and everything else,
chose to reject the recommendations of the panel.

Mr. Horn. Would some of the program people also have been put
out of work by privatizing some of these facilities?

Mr. Grimm. Well, ’m sure that some of them might have been
put out of work, but, on the other hand, what likely would have
happened is you would have hired some of the employees that were


15

WHEELABRATOR EOS WATER AND WASTEWATER FACILITIES (Continued)

Start Project
Cliont Name & Address McD Date
ines ae Sree
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| |
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smn ices et [itn open woure m | raoss
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Pentre: 4 cron crease | er | ome | rouse
seomy

Noverser 13,1995



36

It’s the most heavily subsidized train system in the country. It is
outrageously subsidized, as a matter of fact. So, in that way, the
State of New Jersey benefits.

Some of New York City’s buses, through a lease arrangement
that it’s using New York City streets by the Transit Authority, are
leased through the Port Authority; and it’s beneficial. They could
not do that directly. It would cost more if they were purchasing the
buses themselves.

But, overall—there are individual examples that I can cite—I go
back to the World Trade Center. The World Trade Center is 20 per-
cent of the real estate market in lower Manhattan. Lower Manhat-
tan’s real estate market has gone down economically. Having the
Government driving the private sector out of business is not some-
thing that I think that rational people would want.

Mr. Horn. How much money does the port authority give the
State of New York outside the limits of the city of New York?

Mr. Rotu. It’s very, very difficult to assume. It’s not a great deal
of money. The Governor of the State of New York is willing to take
on the Port Authority because it really isn’t that much.

Mr. Horn. So if this law was passed, if the mayor said, “I would
like to privatize John F. Kennedy Airport,” does he have the power
to get the port authority to go with him, or is that strictly up to
the two Governors?

Mr. Roru. It’s up to the two Governors and the commissioners
that they have appointed. There is one bright star. Last Thursday,
the port authority, through the pressure of the Governor of New
York and the Governor of New Jersey, agreed to sell a hotel that
it owns. That’s the first major privatization.

The Vista Hotel went into contract last Thursday, and that deal
should be completed in a month. The two Governors agree that pri-
vatization is better than keeping the entity as it is, and we see the
first step in that direction with the actions that were taken last
Thursday.

So I think there would be support from both Governors to get
their commissioners to at least bring the World Trade Center to
sale, if the Federal Government allowed them to.

Mr. Horn. This is our second round. Mrs. Maloney.

Mrs. MALONEY. Thank you. Mr. Roth, on page 2 of your testi-
mony, you agree that no payback should be conditioned on continu-
ing the asset’s use for the same purpose.

Then you mention an issue Congress should address in the near
future, namely that Government restrictions on use of funds gen-
erated from the assets should be lifted. This, you say, would in-
crease the value of the asset to buyers and yield more proceeds.
Please explain the funds you refer to. Are you talking about the
sales proceeds?

Mr. Rou. I am saying that if the Federal Government—and the
one area where I’m particularly concerned about it, presently, the
Federal Government says that if you sold these—the sales pro-
ceeds—no, I’m not speaking about the sale proceeds.

Mrs. MALONEY. You're not talking about the sale proceeds?

Mr. RotH. No. If you sold this particular airport, and a private
entity bought the airport, that the proceeds that the sale generates
from the airport, the profits it generates, cannot be used for any-


48

3
facilities to surface waters have decreased by approximately 40%, from 5.4 billion pounds
to 3.2 billion pounds per year.

Our investments in secondary treatment have resulted in very real, even dramatic,
water quality improvements. While there are few good sources from which to make
estimates of long-term improvements in water quality, we can examine the relative level of
progress from 1972 to 1992. Based on information from the Association of State and
Interstate Water Pollution Control Administrators (ASIWPCA) and from the 1992 National
Water Quality inventory, we estimate that the number of waterbodies meeting their
designated uses nearly doubled, from approximately 1/3 in 1972 to roughly 60% in 1992
Again, let me reiterate that while these two reports are not strictly comparable, they do give
us an indication of the relative magnitude of progress we have made over the last twenty
years

While we, as a Nation, have an impressive record of accomplishment in the water
arena and in particular, in dealing with the pollution’ problems caused by municipal sewage
treatment facilities, significant challenges remain. While approximately 60% of our water
resources are in good shape today, 40% are not and are still in need of our attention. Of
the waters that were impaired (1992 National Water Quality inventory), municipal sources
are still responsible for 15% of the impairments to our rivers, 21% to our lakes, and 53%
to our estuaries

EPA publishes a Clean Water Act Needs Survey every two years to document
traditional wastewater needs as well as non-traditional ones, such as combined sewer

overflows (CSOs), storm water, and nonpoint sources. The latest survey (1992) includes


na

PROPOSED AMENDMENT TO H.R.1907

Section 4 of H.R. 1907 is amended by adding a new subsection:

b). In addition to the above criteria, in the case of a road tunnel or bridge, the
Secretary of Transportation shall approve a request to privatize or transfer the asset
only if the private party agrees to comply with the provisions of subsections (a)(1),
(a)(3) and (a)(8) of 23 U.S.C. 129 that would apply if federal funds and tolls were
used to improve the asset. A road, tunnel, bridge or approach thereto that would not
be eligible for Federal participation under 23 U.S.C. 129(a)(1) is not eligible to be

privatized under this act.

Enclosure 1


53

-8-
for communities and can result in a net increase in environmental infrastructure
investments,

Thank you again and | look forward to your questions.


138

such as Denver International Airport. Properly managing improvement projects directly results

in trust fund savings, since the ust funds typical

y provide 80%, or more, of the funding required

for these projects.
© Generates Tax Revenues

The privatization transactions which H.R. 1907 will permit will increase Federat
and local tax revenues in three significant ways. First, the income of a privatized infrastructure
facility is taxable income for the owner/operator, thereby increasing Federal corporate tax
revenues. Second, while public infrastructure owners may finance new facilities and
Improvements with tax-exempt municipal bonds, private owners/operators seeking to finance
improvements must rely largely on taxable bond financing. This shift to taxable bonds will
increase Federal and state income tax revenues. Third, privatization of infrastructure assets

increases the property tax base by placing public facilities into private hands.

©. WE MUST WORK TO IMPROVE OUR INFRASTRUCTURE FACILITIES

In conclusion, the explosion of international privatization programs demonstrates
that public-private partnerships can provide innovative solutions to domestic infrastructure needs
With your leadership, Chairman Horn, passage of H.R. 1907 will enhance the ability of state and
local officials to meet the daunting challenges they face in preserving and expanding our vital
infrastructure.

Again, | very much appreciate the opportunity to appear before you, and I will be

happy to answer any questions you may have

Airport Group International, Inc © Page 9


49

4
estimates of total needs at just over $137 billion, including needs of $31 billion for
secondary treatment projects, $15 billion for advanced treatment, and $41 billion for CSOs

EPA is currently in the process of conducting the first national needs survey for
drinking water related capital needs. The Agency plans to provide the results of this effort
to you in February, 1996, At present the federal government provides very little support to
communities to meet those important human health needs. The Administration has
continued to urge Congress to create a drinking water SRF, similar to the wastewater SRF
to maximize the potential impact of federal investments in this area and to ensure that the

States have independent and permanent sources of funding for these needs

INNOVATIVE FINANCING

In addition to this Administration's request for substantial funding levels for the Clean
Water State Revolving Fund program, EPA is working hard to spur greater investment from
non-federal sources. EPA has sponsored 47 demonstration projects to identify the most
promising financing concepts for improving environmental compliance. We have created
a State Capacity Task Force that has developed a catalog of alternative financing
mechanisms. Our Environmental Finance Centers, located at major universities across the
country, train State, local, and other official on environmental financing principles,
techniques and issues. EPA is currently working with the Environmental Finance Center
at Syracuse University to conduct a study of alternative funding approaches for water and
wastewater projects. One of the key features of the study has been a series of four public

meetings with key stakeholders to get input on a variety of options for funding these


78

WHEELABRATOR EOS GROUNDWATER TREATMENT FACILITIES

Client Name & Facility stat | Project |
Facility ‘Address Phone No. |_GPe Type Date__| Type
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1 es |
| enaen | ema | eat oxs
i i |
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wnt sae mf paras
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T | i H
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| | | |
‘ !

November 12:92


88

Mr. Horn. Thank you very much. I am now delighted to welcome
the very able colleague from New Hampshire, Mr. Bass. I believe
Mr. Dowd’s firm is headquartered in his area.

Mr. Bass. That’s correct.

Mr. Horn. He has been one of the most constructive Members
of Congress, less senior or more senior. So I’m delighted to welcome
him here.

Mr. Bass. Thank you very much, Mr. Chairman. I appreciate
your kind introduction, and I wish to apologize for having not been
here on time. These are busy times, as we all well know, here in
Washington right now, as is indicated by the two bells, which are
starting a vote.

But I’m really pleased to be participating in this process because,
clearly, there is a need to codify the efforts that have been made
by Executive order to assist in public-private partnerships.

Mr. Horn. Let me just interrupt. I’m going to go and vote, and
Mr. Bass will run the hearing.

Mr. Bass. Sure.

Mr. Horn. And then he will leave at 5 minutes before the end
of the vote, and, hopefully, I will be back here.

Mr. Bass. Very well.

Mr. Horn. And after his 5 minutes, Mrs. Maloney is recognized.

Mr. Bass [presiding]. I would just like to ask a couple of ques-
tions of the panel. I’m going to start with you, Mr. Dowd, and what
your opinion—and these are general questions and may reflect the
fact that I wasn’t here for some of the testimony. What could we
do to stimulate wastewater facility privatization?

Mr. Dowb. What’s contained in the bill stimulates it by dropping
the requirement for any grant repayment at all. What would fur-
ther stimulate it is to, with language in this bill or some other bill,
actually give priority, be preferential—first go to the private sector
as I sard-and seek to have your wastewater treatment plant prob-
lems solved through sale of that asset or some other similar way.
And only after that, if for whatever reason, it can’t be done, go to
the Federal Government for support there.

The second thing would be to get rid of regulations and things
that exist in the statutes right now—and some were referred to by
Mr. Cook—and the language that exists in regulations about, real-
ly, definitions—POTW definitions and other things like that. Those
things need to be and could be changed.

And the third thing that we haven’t talked about much is
leveling the playing field between private financing and public sec-
tor-type financings, but whether it be a public financing or a pri-
vate financing, level the playing field. It’s not now level.

Mr. Bass. Excuse me. Th get to you, Mr. Barr, in a second. I
think what you’re referring to in the playing field is the tax-exempt
nature of municipal bonds versus private bonds. Do you have any
thoughts about that, what we could do?

Mr. Down. Right, two possibilities. One would be to lift the cap.
A cap now exists in all the States, based on per capita and all that
sort of stuff, but it becomes a limit in and of itself, because there
are lots of uses for these private activity bonds, one of which we're
talking about today. But there’s other uses, too. So it becomes a
competitive thing; OK?


43

STATEMENTS OF MICHAEL B. COOK, DIRECTOR, OFFICE OF
WASTEWATER MANAGEMENT, OFFICE OF WATER, ENVIRON-
MENTAL PROTECTION AGENCY; JOHN T. DOWD, SENIOR
VICE PRESIDENT, WHEELABRATOR CLEAN WATER SYSTEMS,
INC.; AND J. JAMES BARR, CHAIRMAN OF THE BOARD, NA-
TIONAL ASSOCIATION OF WATER COMPANIES

Mr. Cook. Thank you very much, Mr. Chairman. I’m delighted
to be here to testify on wastewater and water financing and privat-
ization. The administration expects to have a position on H.R. 1907
within a week of resuming active Government.

Mr. Horn. We think the water people are essential, so hang in
there.

Mr. Cook. There is an essential aspect to what we do, particu-
larly on the water and wastewater side.

What I wanted to do to lead off was to talk a little about histori-
cal funding in the program. The Clean Water Aci of 1972 estab-
lished both regulatory and financial incentives for publicly owned
treatment work construction.

In probably one of the most successful programs in environ-
mental history, we have laid out over $66 billion since 1972 for con-
struction grants and for loans under the State Revolving Loan
Fund, which was capitalized beginning in 1987.

Our ultimate aim, the aim of this administration, is to have a re-
volving loan fund that will revolve at about $2 billion a year. To
do that, we have to double the capitalization in it from the current
$11 billion to somewhere around $22 billion of Federal, State, and
local moneys.

With this Federal investment and very, very substantial local in-
vestment, we now have 15,000 treatment plants and 3 or 4 billion
linear feet of sewers in place across the country with a current
value that probably reaches toward a trillion dollars right now.

Keeping that up, maintaining it, plus additional investments, are
clearly requiring a very, very substantial investment of Federal
funds on a continuing basis. We’ve done biennial surveys of needs
just for the capital aspects of construction, and that most recent
needs survey said $137 billion is needed for wastewater facilities.

Out of this, we have had very substantial gains that the Agency
is quite jealous of protecting, as you can imagine. We measure our
ultimate objectives in terms of water bodies that meet the uses
that have been designated, primarily fishing and swimming. In
1972, we estimate, about a third of the water bodies in the United
States met their designated uses, and now we estimate that’s near-
er two-thirds. We still have quite a way to go, but we’ve made enor-
mous progress since 1972.

Just a few comments on the drinking water side. There are a lot
more community water supplies across the country than
wastewater facilities. They tend to be very, very small, for the most
part. There are about 60,000. They, too, have improved steadily in
quality.

The sources of funding, though, are quite different, for the most
part. There have been some Federal subsidies, but most of the
money has come from State and local governments and from the
private sector, and there are a substantial number of private drink-


129

Additionally, the private sector can increase revenues and pro-
vide more services to the customer, both the airlines and the indi-
vidual passengers. I think our competitor, BAA, has shown that at
Heathrow with the additional services and comfort to the pas-
sengers that they’ve provided.

Our facility in Toronto, Canada, is a great example in North
America of how private sector investment can create a new, mod-
ern, large facility quickly and cheaply and do it in a design that
is effective for the passenger.

The biggest issue before us in this session is creating a vehicle
that allows the investment capital that is available to be put to
work in the infrastructure development of this country—whether
it’s wastewater, or roads, or in our particular case, airports.

Allowing the private sector to act quickly to respond to market
needs, to add new terminal facilities where they are needed, to add
new runway capacity where it is needed, and to convert military
facilities to civilian use quickly and effectively, is something that
we desperately need.

The demands for money for the air transit system are enormous.
This year’s aid bill is reduced. Aid will probably continue to be re-
duced. The airline industry is the most heavily taxed consumer
product in the United States, in my opinion, and there is debate
regarding increasing their taxes again.

It is a system that has gone awry, but in my view, can be cor-
rected by allowing some private sector involvement. The private
sector is ready, willing, and able to do that, has the money, has the
expertise, has the long experience, and we think this bill starts the
motion to do that, and it’s time this motion be begun in this coun-
try to allow us to act, because if we don’t do it now, things will only
get worse.

That’s my summation. You can read my statement at your lei-
sure. It just fills in the blanks.

[The prepared statement of Mr. Butler follows:]


113

L INTRODUCTION

ATA Represents the Trucking Industry

1am John Collins, Senior Vice President for Government Affairs at the American
‘Trucking Associations (ATA). Thank you for this opportunity to testify on the Federal-aid
Facility Privatization Act of 1995, H.R. 1907

ATA is the national trade association of the trucking industry. The ATA federation
includes affiliated associations in every state and 14 conferences. In aggregate, ATA
Tepresents every type and class of motor carrier in the country. Combined with ATA’s
direct membership, we are a federation of over 37,000 trucking companies.

ATA wishes to thank Chairman Horn and members of the Subcommittee on
Government Management, Information and Technology for holding this hearing. We
commend the leadership of this Subcommittee for providing a process for returning power
and decision-making authority to states and local governments. In your letter of invitation,
you asked a number of questions about privatization. My answers are attached.

‘The trucking industry employ's 7.8 million people. We generate 80% of the freight
revenues of this nation while moving freight safely and efficiently on our nation’s highways.
‘The highway system of this nation is the greatest and safest in the world. These highways
are the trucking industry’s office place, and ever more so with the rapid adoption of high
technology for more efficient operations. ‘The trucking industry has made a tremendous
investment in the highway system of this country and it is vitally concerned about the way it

is planned for, built, improved and maintained.


122

Mr. Horn. Well, let me ask you a question on that very point.
Let’s say the District of Columbia could privatize the bridge you
mentioned on 14th Street. Now, would you prohibit them from
charging tolls before construction begins, or would you say, as long
as there’s a firm commitment contractually, they could start in
charging tolls? It seems to me you have a real problem there of the
timing, as to when a jurisdiction can put tolls on a bridge that does
need substantial upgrading. You've got to also buildup some cap-
ital. Granted you might go into the market on that assumption, but
would you preclude them, and your association preclude them, from
having the tolls prior to the point of beginning construction? And
if so, what’s the time period in there?

Mr. Couuins. Mr. Chairman, we would not preclude them. We
don’t want to get down to that degree of micromanagement. Our
concern is just to make sure it’s a closed system, that the revenues
that are generated are plowed back into the system that’s needed.

According to the Federal Highway Administration, there’s a $290
billion backlog in highway and bridge needs in the United States,
so it’s important to keep that a closed system and make sure that
the money is put back into the system. As far as the timing, it
would depend on the economics of the particular facility.

Mr. Horn. And the toll they would charge, either prospectively
or after the fact, would be based on what base of input of re-
sources? The original plus what they did or simply what they’ve
put into it to recoup?

Mr. Couns. Under the language that’s in the statute that’s in-
corporated in here, which is in the Federal Highway Act, section
129, it would say that the proceeds could be used first to pay debt
retirement, then the reasonable profit for the investors, and then,
amounts after that could be used for other highway facilities.

Mr. Horn. And the understanding of what is a reasonable profit
for the investors, I take it, belongs to the Secretary of Transpor-
tation?

Mr. Cotuins. That’s right. What we would assume is the Sec-
retary would set general regulations on how this would actually be
carried out.

Mr. Horn. OK. I yield 5 minutes to the gentlewoman from New
York, the ranking minority member.

Mrs. MALONEY. I’m sorry that I missed some of the testimony.
It’s a very busy day today. But someone gave the example of Grum-
man trucks that were bought by the city of New York. I would like
to hear what I missed.

Mr. STANLEY. I had mentioned that during my tenure in the
1980’s as the FTA Administrator, there were a number of station
rehabilitation projects in the New York City subway system, one
that was notably successful at 51st and 3d Avenue.

The Grumman issue came up. It was a capital asset of the Au-
thority, as you're well familiar with. They were removed for a vari-
ety of reasons. There were initially some proposals from a number
of companies and private bus operators who wanted to pay the
Transit Authority after they determined that they were no longer
going to be in service for them.

We had a very black-and-white restriction that said to the MTA
at a point in time when they were very severely restricted in terms


127

ing. The applicability of that with the choice of the free lanes, ev-
erybody is going to end up benefiting, because there will be time-
saving all around. It was done with no State or Federal funds in-
volved, and we hope that that will be an example that I know is
applicable in highly congested corridors in other parts of the coun-
try.

Mtr. Horn. Absolutely right. It’s about as congested as any cor-
ridor in America. Even though the Glenn Anderson Freeway has
opened it up in Los Angeles County, in that Orange County seg-
ment, they’re correct.

Mr. HoLpswort. Congestion is our friend in these projects.

Mr. Horn. Yes, that’s right. You promote congestion. Well, any
other questions from the minority? We thank you all for coming.
I happen to have the Alameda Corridor in my district, Mr.
Holdsworth.

Mr. HoLpswortu. We're well aware of that, sir.

Mr. Horn. We wish you well.

Mr. HoLpswortu. Thank you very much. We're hoping that that
goes ahead full speed, since we’re the engineer.

Mr. Horn. Now, to my knowledge, there’s no Federal money in
there at this point. There’s a little bit.

Mr. HoLpswortu. Correct.

Mr. Horn. But no preexisting infrastructure that you can make
use of. You’re simply paralleling Alameda Street.

Mr. HoLpswortu. Yes, sir.

Mr. Horn. That goes from downtown Los Angeles to the Port of
L.A. and the Port of Long Beach.

Mr. Ho_pswortu. Correct, but we’re looking for Federal assist-
ance on that project.

Mr. Horn. I have made that point to a lot of people.

Mr. HoLpswortu. We wish you well in that endeavor.

Mr. Horn. We have bipartisan support on that from the sub-
committee to the full committee to the leadership of the House and
have had it in previous Congresses. What we don’t completely have
is the clarification of State highway trust funds being used on the
overpasses and which ones we can use those on. We have, as you
know, heavy truck passage on the Long Beach Freeway.

Mr. HoLpswortu. Well, at another opportunity, I would love to
talk to you about that. It’s a real critical project.

Mr. Horn. Next time you’re in town, let me know.

Mr. Hotpswortu. I will, sir.

Mr. Horn. OK. Thanks a lot to all of you.

Mr. STANLEY. Thank you.

Mr. Horn. | appreciate it. Very good testimony. I appreciate your
addition there, Mr. Collins on the Q&A.

Mr. CoLuins. Thank you, sir.

Mr. Horn. That’s helpful.

We're down to panel V, and we have Mr. Butler and Mr. Yodice.

[Witnesses sworn.]

Mr. Horn. Both affirmed. We're going to start with Mr. Viggo
Butler, the president of Airport Group International, Inc.; You
should have some very intriguing testimony, as I remember. Wel-
come again.


151

STATEMENTS OF RODMAN D. GRIMM, PRESIDENT, THICKSTEN
GRIMM BURGUM, INC.; AND PEGGY KELLY, SENIOR POLICY
ANALYST, SERVICE EMPLOYEES INTERNATIONAL UNION,
AFL-CIO

Mr. Grim. Mr. Chairman, it wasn’t exactly a privatization com-
mission. What it was was a congressionally mandated panel that
looked at alternative ways to manage and finance nuclear waste
disposal. What we did is we came to a conclusion that that Govern-
ment function should be privatized.

Mr. Horn. I see.

Mr. Grimm. And found in the process—I really hadn’t intended
to start out this way—but found in the process that it was very
hard to do because, in terms of setting it up for privatization, there
was so much legislation on the books and regulation that, by the
time you got through it, it was a very, very difficult process.

Basically, we made our recommendations, and the Department of
Energy opposed those recommendations. At least the program peo-
ple did there, basically, because of all the legislation on the books,
it became very much “too hard to do,” which is always the way the
Federal bureaucracy stops something that they don’t like.

In terms of considering this one piece of legislation, it seems to
be very narrowly focused, but I would caution that in terms of the
other things that we hear are going on up here, in terms of privat-
ization, FAA has been mentioned.

Mr. Horn. Well, the Patent Office certainly has been mentioned.

Mr. GRIMM. The Patent Office has been mentioned. That what
you do here is going to set a precedent, and is going to influence
the legislation that’s going to come out later.

One of the things that I would like to address is that the way
that this bill is written, in my opinion, is, I think, too open-ended
and leaves too much to interpretation. I think a good example is,
if you look at section 6, and the draft bill states that the local gov-
ernment may use the proceeds from privatization of an infrastruc-
ture asset to the extent permitted under applicable grant assurance
provisions.

It further states that the State and local government may re-
cover its capital investment, unreimbursed operating expenses, and
a reasonable rate of return. I would like to suggest that that be
tightened up, because having sat in many, many negotiations on
the other side of the table from the Federal program officials, I can
foresee a situation where you could argue for 2 or 3 days over what
a “reasonable rate of return” is.

I think there are some other inconsistencies in the bill that, basi-
cally, are going to cause a problem when you talk about implemen-
tation. I would like to go further and talk about a couple of issues
here that were brought up before, and I had also looked at those.

For instance, there doesn’t seem to be a requirement that State
and local governments complete these types of things. I think if it’s
the intent of the Congress that they should be completed, that that
should be written into the legislation.

The other thing is I can see a big controversy in terms of a tend-
ency to favor your larger players over your smaller players. It will
take so much money to get into some of these things that some of


155

For a cost effective, efficient privatization to occur in a defense conversion environment,
the private company must be in a position to attract (a) a strong work force and (b)
capital. This requires the following:

1.

A Business with a Strong Likelihood of Success. Both financial markets and
employees seek to minimize risk. In the environment of defense conversion, this
translates into determining a reasonable period (3-5 years) of sole source
contracting that will allow the new company to establish a track record before
entering full and open competition. During this period the company can search
out new markets to "hedge" against any possible loss of workload and grow into
non-Department of Defense markets to reduce casts to Department of Defense
and become more cost competitive. A contracting vehicle that permitted such
sole source workload for a limited period would support such a new private
enterprise.

‘A Business that Permits Concurrent Usage of its Facilities and Machinery, The
privatization will result in a company initially contracting with Department of
Defense but over time, the company will "spread its wings" and obtain other
government and commercial workloads. This will spread overhead over a large
base, thus, reducing costs to Department of Defense and all other customers.
This business expansion though, assumes that Department of Defense and other
work is performed in the same location and on the same equipment with a
flexible work schedule that maximizes profitability. Current regulations limit this
type of arrangement causing this type of co-location to be unprofitable.

A Business that can be Created Quickly. Again, employees will avoid risk and seek
certainty. As the closure process drags (2 to 6 years) the very best workers will
eave for a more certain future. If a private, interim use of the facilities could be
commenced prior to closure, some of the employees might be willing to stay. In
addition, a “limited” privatization could stand as a test case that would further
demonstrate the viability of the private company and support the "likelihood of
success.” Current regulations make it extremely difficult to begin private workload
on a base prior to closure.

Long Term Employees Need Pension Portability. Currently, public employees who
have over approximately 15 years experience hold pensions that are unportable.
A private company could not attract these employees with a cost effective rate
without the employee losing significant benefits, The benefits can be matched for
the younger employees (at Indianapolis they will receive a 10% increase) but
vested amounts were assumed to be portable.

In summary, each of these issues needs to be dealt with legislatively in order for

Department of Defense facil

ies to be privatized. The issues raised are extremely

complex from a policy standpoint.


CONTENTS

Hearing held on November 15, 1995
Text of H.R. 1907 ..
Statement of:
Butler, Viggo, president, Airport Group International, Inc.; and John
Yodice, general counsel, Airport Owners and Pilots Association .
Cook, Michael B., Director, Office of Wastewater Management, Office
of Water, Environmental Protection Agency: John T. Dowd, senior vice
president, Wheelabrator Clean Water Systems, Inc.; and J. James Barr,
chairman of the board, National Association of Water Companies . +
Grimm, Rodman D., president, Thicksten Grimm Burgum, Inc; and
Peggy Kelly, senior policy analyst, Service Employees International
Union, AFL-CIO
Holdsworth, Raymond, president and chief executive officer, Daniel,
Mann, Johnson & Mendenhall; Ralph Stanley, senior vice president,
United Infrastructure Co.; and John J. Collins, senior vice president
for government affairs, American Trucking Associations, Inc ....
McIntosh, Hon. David M., a Representative in Congress from the State
of Indiana
Poole, Robert W., Jr., president, Reason Foundation; and All .
executive director, New York State Research Council on Privatization ..
Letters, statements, etc., submitted for the record by:
Barr, J. James, chairman of the board, National Association of Water
Companies, prepared statement of .. .
Butler, Viggo, president, Airport Group International, Inc., prepared
statement of
Collins, John J., senior vice president for government. affairs, American
Trucking Associations, Inc., prepared statement of
Cook, Michael B., Director, Office of Wastewater gi
of Water, Environmental Protection Agency, prepared statement of .
Dowd, John T., senior vice president, Wheelabrator Clean Water Systems,
Inc., prepared statement of .
Grimm, Rodman D., president, Thicksten Grimm Burgum, Inc., prepared
statement of ...
Holdsworth, Raymond, president and chief executive officer, Daniel,
Mann, Johnson & Mendenhall, prepared statement of ..
Kelly, Peggy, senior policy analyst, Service Employees int
Union, AFL-CIO, prepared statement of .
Maloney, Hon. Carolyn B., a Representative in Congress from the State
of New York, prepared statement of
McIntosh, Hon. David M., a Representative in Congress from the State
of Indiana, prepared statement of ..
Poole, Robert W., Jr., president, Reason Foundation, prepared ‘statement

Roth, Allen, executive director, New York State Research Council on
Privatization, prepared statement of ..
Stanley, Ralph, senior vice president, Uni

statement of ..
Yodice, John, general counsel, Airport Owners and Pilots Association,
prepared statement of ....

ture Co., prepared

[oste)

Page

128

43

151

94
ll
16

82
130
111

46

56
153

96
159

13
1g
27
104
141


145

funds that the government would not have passed on to the users under the
this

system that -xisted before this legislation. The private entity will pas

amount on to the users.

likely the legislation envisions that the private entity

Likewise, it seems

would also be allowed a reasonable rate of return. ust like the economic

advantage to the seller, this economic advantage to the buyer must be passed

on to someone — Ultimately it follows that these costs will fall on the users of

sed costs may be passed on to

the national airspace system. These ing
aviation users through increased landing fees. or will flow through the new
private owner, to the Fixed Base Operators (FBOs) and then be passed on to
our membership through increased hanger tees, tie-down fees, and other

ces fens,

product and servi

The problems of these increased fees are exacerbated when it is
considered that airports often represent a monopoly over aircraft access to a
location, Even if privatization would theoretically encourage efficiency in some
areas, there less of a chance that any efficiencies will be passed on to the

users in monopolistic situations.

CONCLUSION

The seven short sections of this Bill hide the comptes: ramifications that
it might impiy. Such sweeping changes should not be undertaken without
giving thought to all of the implications. Consideration of the Bill at this time

does not afford the opportunity for such thought and is premature. 6

ting
mechanisms in aviation address many of the goals of this bill in that they
ch a working

consider the funding of the aviation infrastructure, To alter su

system, in a way that would potentially impose increased costs on its users,

with no corresponding benefit, is to move too quickly in an unmapped

direction



106

federal policy that will increase private involvement in

infrastructure.

This Committee is to be commended for calling this hearing,
for I can think of no simpler and more effective way to accomplish
this goal than the passage of H.R. 1907. The bill would end the
current federal policy requiring state and local governments to
repay the federal share of these grant, and by so doing remove a
major barrier to public-private partnerships. As FTA
Administrator, I signed thousands of grants a year, which were
capital investments in transit infrastructure, none of which were
made with the idea that they can be paid back. We have been
actively involved in this legislation, and have redrafted it recently

to address the specific concerns of the trucking industry.

The Committee has asked that we address three areas of

concern:

The need for Increased Investment
¢ Concerns of the Users

e The Need to Protect the Taxpayer


Wheelabrator Clean Water Systems Inc.
Page 10

allocations is often subject to rationing or a lottery system designed to allocate limited funds
among competing public sector demands that far exceed the cap.

Ic is essential to create parity between public and private sector investment in public purpose
infrastructure. Federal policy intended to subsidize public financing of wastewater treatment
infrastructure should be extended to private sector investment in the same types of capital projects
by providing changes in the tax code such as increases in the tax-exempt bond cap or tax
exemptions, deductions, credits or accelerated depreciation for private sector investments in
wastewater treatment infrastructure. I want to make the point that we are not asking for an
advantage over public financing only that we be treated in the same fashion

Mr. Chairman, 1 will now turn to the legislation before the Subcommittee, the Federal-Aid Facility
Privatization Act. As I noted at the start of my remarks, Wheelabrator supports your efforts to
stimulate privatization and this legislation makes an important contribution to that process

COMMENTS ON H. R. 1907

1 The use of proceeds trom a privatization effort (i€., asset sale proceeds) are limited in
section 6 of the legislation to uses consistent with applicable grant assurances and provisions.
This essentially extends federal oversight onto subsequent use of proceeds, even though the
executive agency or department would no longer be involved with providing grants for such
assets. Moreover, compliance with many of the grant assurances will not and should not be
appropriate for public/private partnerships. Local government and private partners will continue
to be regulated for environmental purposes, but such regulations are generally outside the grant
assurances requirements,

2 There appears to be a conflict between two provisions concerning consistency with grant
assurances and provisions. In Section 3(b), the text states that executive agencies and
departments can waive or modify any grant assurance consistent with Section 4. Section 4,
however, indicates that private parties purchasing or leasing the infrastructure asset will comply
with all applicable grant assurances, although such assurances were originally intended for the
public sector. On the face of it, it is not clear where federal grant assurances end or if they could
even be modified. We believe, and think that local government will concur, that when an
infrastructure asset is sold, and the federal repayment requirement is waived, the asset should not
have all grant assurances and provisions tied to it. The important assurances such as those
contemplated by EO. 12803 should be covered in the service agreement between the parties

This, in particular, is an example of why the unique conditions surrounding a wastewater
public/private partnership project need to be carefully reviewed, in light of how grant assurances,
will or will not apply after the asset transfer. Wastewater treatment infrastructure and related
federal construction grant assurances are unique compared to the plethora of grant assurances
attached to other types of infrastructure. The provision, as it currently stands in H.R. 1907,
masks such distinctions and is perhaps too broad and all encompassing.


52

7

The City of Indianapolis and the City of Silverton, Oregon are involved in the two
other public/private pilot projects sponsored by EPA,

Indianapolis conducted a comprehensive study of the operations and financial
management of its wastewater system to identify and analyze issues associated with the
possible transfer of the facilities to the private sector. After reviewing results of the study,
the City decided to request proposals for private management of its wastewater treatment
plants. Indianapolis selected a private firm in November 1993 ta manage the facilities
under a five-year contract, The Environmental Finance Center at Cleveland State
University is preparing a case study on the decision-making process and financial
outcomes of the City of Indianapolis’ 1993 decision to contract for private management of
the City's two advanced wastewater treatment plants.

The City of Silverton wishes to attract a private equity investor in its wastewater
system. The City intends to maintain a 51 percent majority interest in its facilities and
invest the resulting equity in capital improvements.‘ The community has crafted a creative
proposal that provides for economic development, wetlands mitigation, and wetlands
treatment of wastewater flows. We look forward to helping Silverton achieve the financial

and environmental successes it seeks through this innovative project

CONCLUSION

Given the Nation's tremendous environmental infrastructure needs, EPA remains
committed to providing State and local governments with as many financing options as

possible that serve the public interest. Public-private partnerships can be a viable option


173

Then we go on with the use of the proceeds. So it’s very separate
from what the Secretary considers at the time of the decision, and
when you go down to use of the proceeds, which is where you found
some problems with the language—and there’s no question that
sometimes we have euphemisms that leave large filing cabinets for
the executive branch to go through and interpret it because we
didn’t interpret it for one reason or the other.

It says, “The state or local government may use proceeds from
the privatization of an infrastructure asset to the extent permitted
under applicable grant assurances and provisions.” Those would tie
back, obviously, to some of the grant assurances that have been
made, I assume, by the Federal Government.

Mr. Grimm. Right.

Mr. Horn. And I see where you're talking about tightening it up,
because if they are to be also inclusive of something that the State
government might by law declare, since there’s a State interest in,
for example, the Port of New York authority, between the Gov-
ernors of New Jersey and New York, or in California, where the
San Francisco Port and the railroad, for example, there is a State
entity. All of that should have been privatized 100 years ago, and
San Francisco wouldn't be last on the Pacific Coast.

But notwithstanding any other provision of law, the State or
local government shall be permitted to recover its capital invest-
ment, an amount equal to its unreimbursed operating expenses in
any infrastructure asset and a reasonable rate of return. Now, I
think you're right. Much of that needs to be spelled out, a lot more.

Mr. Grimm. And going further into the other example that I
could really see myself, if I was representing somebody, sitting in
a room for 2 weeks arguing over one sentence because it wasn’t
tight enough. You've got this, under section 4, the bill reads, “Con-
tinued to be used for their originally authorized purposes, so lo as
needed for those purposes.” And the question would become, when
you sat in the context in the context of whether you could get a
dual use, because it would probably be the other side of the dual
use, the private side of the dual use, that would attract the capital
to essentially use the asset.

I can see sitting down across the table for a week, arguing about
how long it would be needed for those purposes, because I’ve been
through it probably 20 times on the other side with the executive
branch agency.

Mr. Horn. Ms. Kelly, if your union ever needs another nego-
tiator, you might think of Mr. Grimm to get into some of those ses-
sions. He’s willing to spend weeks on three words. That’s what
wins contracts.

You raise some good points there, and if either of you, or any of
the witnesses, have any other suggestions, we would welcome
them. We might as well get all the questions out on the table now.

Mr. Brasher tells me that antitrust economists have a definition
of reasonable rate of return at the Federal Trade Commission's Bu-
reau of Competition, so there are a lot of views, I’m sure, with long
case histories, both administrative and judicial.

I don’t have any more questions. I guess the minority doesn’t
have any more questions. We thank you both for coming. Sorry to
keep you so late, but it has been very useful.


101

Mr. Horn. Thank you. Our next witness is Mr. Ralph Stanley.
He’s the senior vice president of the United Infrastructure Co. I un-
derstand it’s a development partnership involving the Bechtel
Group in San Francisco and Peter Kiewit Sons, still in Omaha, I
assume, two diversified engineering construction companies.

You note here that it has combined annual revenues of $11 bil-
lion, so you can take care of the problems with the small towns and
the wastewater plants.

Mr. STANLEY. Thank you, Mr. Chairman. As I said, I’m a senior
vice president at United Infrastructure Co., and I would like the
record to show, particularly for Congressman Flanagan, that we’re
located in Chicago, although our parent is in San Francisco and
Omaha and formed this joint venture for the specific purpose of de-
veloping and investing in infrastructure projects, which include
roads, bridges, water and wastewater projects, as well as aviation
facilities. It’s important to recognize this, that our interests are a
broad category of infrastructure facilities, and the applicability of
the legislation before you would apply to all. We’re also very com-
mitted as a company to working with the Congress, as well as a
number of State and local governments, to pass the kind of legis
tion like H.R. 1907 that will enable increased private sector partici-
pation.

Before I joined UIC, I worked for a period as the vice president
for infrastructure development at Bechtel, and, as Ray mentioned,
we were able to witness first hand enormous progress that has
been made from Europe to the Asia Pacific in allowing for private
sector investment in infrastructure.

I raise this because those prejects are actively seeking capital,
and funds are forming from Latin America to Asia with U.S. pen-
sion funds, and U.S. life insurance funds, and U.S. investors look-
ing at attractive infrastructure investments worldwide. The capital
is out there. I think the steps need to be taken; now that those
funds are able to be invested in the United States.

I also have had experience as the founder of the Dulles Toll Road
Corp., which completed the Dulles Toll Road extension recently.
And I’ve had experience here in Washington, not only as chief of
staff to the Secretary of Transportation, but also was able to be ad-
ministrator of the Federal Transit Administration, an arena where
I actively tried to increase the role of the private sector.

I speak of my background in these variety of incarnations to il-
lustrate to the committee that I’ve been on the public and private
side, as well as a couple of Presidential commissions that are look-
ing at these very same issues that the committee is considering
today, and I’ve been acutely aware from each of these standpoints
what kinds of changes in Federal policy would be needed to in-
crease private involvement in infrastructure.

I frankly can think of no simpler and more effective way to ac-
complish this goal initially than the passage of H.R. 1907. The bill
would end the current Federal policy requiring State and local gov-
ernments to repay their Federal share of the grant and would re-
move a very, very significant barrier to these public-private part-
nerships.

As I mentioned, during my tenure as FTA Administrator, I
signed thousands of grants a year which were capital investments



26

ments in related businesses that are restricted by our Federal poli-
dies, such as constructing a rail line between Heathrow and Lon-
lon.

Moreover, here in the United States, the Port Authority of New
York and New Jersey, which operates the largest airport system in
the country, is permitted to invest its profits from Kennedy,
LaGuardia, and Newark Airports in other operations, including
making lease payments to New York City and Newark. What is
permitted for some airports should be permitted for all. This sig-
nificant exemption of general Federal restrictions is an excellent
example of how moving profits off airports is not tantamount to
decapitalizing these assets.

In conclusion, I want to say that, as we are proceeding in New
York, it has become very, very clear that New York’s State and
local governments—including the city of New York—the mayor of
the city of New York has clearly indicated that he would like the
opportunity to put Kennedy and LaGuardia Airports up for sale so
that the city can maximize its revenues from those facilities.

Right now, from Kennedy and LaGuardia Airports, the city real-
izes about $10 million a year. If these airports were in private
hands, and they were paying property taxes, it would be worth up-
ward of $200 million a year. That’s a considerable difference.

So on the State and on our local levels, the Pataki administration
is very much in favor of eliminating Federal barriers that are pre-
venting the private sector from investing the billions of dollars that
we need to build the infrastructure in this country. Thank you.

[The prepared statement of Mr. Roth follows:]


22

12803, OMB took the view that the federal government should still recover its investment when
ownership of the facility changed hands. The final wording of 12803. calling for repayment only
of the undepreciated portion of the grant funds, was an uneasy compromise

What I would like to suggest to you today is that the compromise was misguided, and
that the elimination of any repayment requirement, as proposed in this legislation, is the
appropriate federal policy. Three factors lead me to this conclusion

First, the fact is that the federal government made grants to cities and states, not loans.
The purpose of the grants was to help create infrastructure that would serve a public purpose
As long as there is a guarantee that the facility remains in service to the public for that purpose.
for as long as it is needed, then the federal purpose has been served.

Second, both economic theory and the overwhelming weight of evidence from around the
world suggest that privatization of infrastructure is a good thing. It has served this country well
for electricity and telephones, and it would serve this country equally well for airports,
highways, seaports, water supply, and waste disposal. Investor-owned firms have stronger
incentives for top-flight performance than government agencies. Both the Bush and Clinton
executive orders on privatization endorse this view in principle. But if they mean it, why should
federal policy extract a transfer tax when someone actually seeks to bring about such
privatizations? If Congress finds privatization to be sound public policy, it should at worst be
neutral about the decision of state and local governments to adopt it, It should not impose a tax
on their decision, which is what any amount of grant repayment amounts to.

Third, grant repayment is also ill-advised on fiscal grounds, because the federal
government will benefit handsomely if privatizations occur, but will reap no fical benefits if they
do not occur. Let me give you a brief quantitative example

At the request of the Bush White House, in 1992 we put together an estimate of what
dollar volume of privatizations might take place if there was a truly level playing field, and cities
and states took full advantage of it to sell user-fee-funded infrastructure facilities to investors.
Our widely quoted estimate was that cities and states, over a period of years, might sell some
$227 billion worth of enterprises and facilities.” A summary of those assets and enterprises is
included here as Table 1

What OMB and other advocates of grant repayment tend to forget is the enormous fiscat
benefits of this kind of privatization—to all three levels of government. First of all, there would
be a one-time infusion of capital for the local and state governments selling these facilities~about
$114 billion to cities and counties and $113 to states. In other words, without having to spend

> Robert W. Poole, Jr., David Haarmeyer, and Lynn Scarlett,

“Mining the Government Balance Sheet: What Cities and States Have
to Sell," Policy Study No. 139, Los Angeles: Reason Foundation,
April 1992.


105

Prior to joining UIC, | served as Vice President for
Infrastructure Development at Bechtel, and witnessed first hand the
enormous progress being made from Europe to the Asia Pacific in
allowing the private sector to be truly involved in infrastructure. I
have also served as the Founder, Chairman, and Chief Executive
Officer of the Toll Road Corporation of Virginia, the company that
built the private extension of the Dulles Toll Road, this country’s
first effort at infrastructure privatization. I have worked here in
Washington for six years as Chief of Staff to the Secretary of
Transportation and Administrator of the Federal Transportation
Administration, where I actively sought to increase the role played
by the private sector in providing needed transportation
infrastructure. I have also served on two Presidential Commissions
which both examined the means by which private resources, from
development expertise to private capital, can be involved in the

delivery of infrastructure projects.

I speak of my background to illustrate that I have been on
both the public and private side of these partnerships, and this

experience makes me acutely aware of the need for changes in the


162

Another downside to this bill is that states and localities will be tempted to
sell off assets as a quick fix to their financial woes -- without addressing the
underlying causes of their fiscal problems. After years of selling off assets to
balance their budgets, states and localities eventually could be faced with severe
revenue shortfalls. A fiscal crisis could ensue after these stop-gap gimmicks of
selling off assets run their course.

Moreover, the bill fails to address how the sale price for the assets is to be
determined. Companies looking to buy these facilities on-the-cheap could take
advantage of cash-strapped state and local governments and negotiate prices that
are below the market rate. Under financial pressure, state or local governments
may end up selling their assets to private operators for far less than fair market
value, thereby losing a great deal of money in the bargain. The statute states:
“The state or local government shall be permitted to recover its capital investment,
an amount equal to its unreimbursed operating expenses in any infrastructure
asset, and a reasonable rate of return." The words "shall be permitted,” however,
offer no guarantee that the state will actually receive an adequate price for the
facility

As the committee members are aware, the Environmental Protection
Agency recently approved the sale of a wastewater treatment plant in Franklin,
Ohio to Wheelabrator, a subsidiary of Waste Management, Inc. In this case, the
EPA ruled that the city need not reimburse the federal government and
Wheelabrator is hoping for similar deals in other wastewater plants. Two major
French firms are competing heavily in this field as well.

SEIU believes that the federal government should put a stop to any further
efforts to privatize public facilities. We urge President Clinton to rescind
Executive Order 12803 and to instruct the federal departments to grant no waivers.
regarding federal rights. This action would be more in the public interest than
enacting H.R. 1907 into law to expand and codify this Executive Order.


165

sector. It still has an obligation, and so do States and localities, to
fund these projects.

Mr. Horn. Well, it does, but it has got a $5 trillion debt, and
they’re cutting everything. Last year, the President wanted to cut
out every public works project in the Nation that was not inter-
state, and it took an awful lot of persuasion from Members of both
parties to get him off that kick.

I mean you think of vast States such as Texas, California, New
York, where you’ve got watersheds completely within the State that
historically have had Federal assistance, from the 1830’s up, with
Senator Benton. The railroads to the west wouldn’t have been built
without Federal assistance and private participation.

But that’s what you do, regardless of who’s President, Republican
or Democrat, liberal or conservative, when you've got a tight budg-
et. You start looking around, saying, “What can we slough off
here?”

Ms. KELLY. Well, I’m sure that we could brainstorm with you.

Mr. Horn. Good. Well, I would welcome any suggestions. We'll
keep the record open. Go ahead, get all the ideas you want. We
welcome them.

So, anyhow, now, Mr. Grimm, you mentioned the possibility of
the transfer of an asset to a not-for-profit or quasi-governmental
agency. I agree that we ought not to limit the range of choices to
the State and local governments.

Mr. Grim. Right.

Mr. Horn. How would the transfer to these entities increase the
tax base of a local community?

Mr. Grimm. Well, I don’t know that it would increase the tax
base to a local community. What I was saying was that there may
be some not-for-profit entities that would be interested in taking
some of these assets. The way you’ve written the bill, it appears
to be limited just to private sector entities.

I don’t know that you’re going to do anything different with the
tax base, so what you could do is you could transfer it to some type
of a quasi-government corporation. What you’re going to find in
some of these privatization endeavors that may not be strictly ap-
plicable to infrastructure assets.

But if you wanted to get into, say, the panel that I served on,
you would have had to have had a quasi-government agency be-
cause of the requirement for security clearances because you were
nuclear.

There is probably some other areas that would be candidates for
privatization where you would have to have a quasi-government
agency. Where I was going was, this bill seems to be in a position
where it could set a precedent, and all of those things in the lan-
guage should be looked at.

Mr. Horn. Well, it’s a good suggestion. I now yield to the gentle-
woman from New York.

Mrs. MALONEY. Well, one of the statements that Ms. Kelly made
earlier—you said something, to paraphrase, if I got you correctly—
is that the central question is whether the Federal Government
will abdicate its responsibility for public resources. That is, really,
I think, the central question of what we're doing here.


169

there’s something to be said for that, they divide the profits among
the staff, and we've seen a few cases nationally.

Let me ask you this, Ms. Kelly. You're pretty young, but did you
ever have a chance to see East Berlin and West Berlin? Because,
in a way, with Government running things—and that’s why the in-
frastructure is a mess in some places—we will look, in a tight
budget period, exactly like East Berlin looked for 40 years—drab,
dull, bureaucratic, 20 years behind.

And you walk through the wire gates, with their cement blocks
and everything else so you couldn’t escape to freedom, and you go
into West Berlin, and it’s a live city. Things are happening. In a
sense, it’s an example, I think, of Government versus the profit mo-
tive. The profit motive was in West Berlin; it wasn’t in East Berlin.

East Berlin was the shabbiest, dirtiest, rottenest place I think
T’ve seen almost anywhere in the world, but certainly in Europe.
It’s too bad you won’t have that experience, because, obviously,
East Berlin is now trying to catch up with West Berlin. But it’s a
shock. At least it was a shock to this young person, when he was
young.

Mr. Grimm, let’s back to some of your testimony. You advocate
the creation of a 6-month commission to determine the ramifica-
tions of privatization of a State or local asset. Given that there are
a wide range of assets and a wide range of jurisdictions covered,
what would be the mandate you would give this commission, and
could it really do its job?

Mr. GRIMM. Well, the mandate would not be just to look at this
particular issue that this bill takes up. I think the commission
would, more importantly, look at this issue in context with all the
other privatization initiatives that people are talking about.

I don’t know that it’s a 6-month commission, but I think that
what you probably need are people coming from stakeholder groups
that would be representative to take a look at this whole particular
privatization process.

I mean this bill, I think, came to the forefront because it’s prob-
ably the most logical first step, and there has been so many cities
and counties that have said, “If we could only get rid of the re-
quirement to pay back these grants, we could privatize them.”

On the other hand, I don’t think that the issues have been
fleshed out enough.

Mr. Horn. What do you think some of the issues are?

Mr. GRIMM. Well, I think the first issues are what other legisla-
tion are you going to get in the way of? You don’t have it saying
“notwithstanding any other legislation.”

I think what you're going to find is just like in the base closure
area, that it looks pretty simple when you start looking at the bill,
but you're going to find that there’s all kinds of not only Federal
but other State and local statutes that are going to be in your way
when you try to do this.

I’m not commenting on the policy of the bill, but what I am com-
menting on is: You should know what those impediments are be-
fore you pass something and then find out that it may not be work-
able.

_ Mr. Horn. Well, isn’t it true, though, that one Federal law that
is passed after another Federal law supersedes that law? If there’s


34

Mrs. MALONEY. Well, what is keeping the mayor from selling
Kennedy Airport if he wanted to?

Mr. Rotu. In this particular case, there are many things. First
off, it is owned—it is not owned. It is being leased by the port au-
thority, so he doesn’t have direct control over it. The land is New
York City’s land, but the port authority, under what is really a
sweetheart deal, makes use of that particular land—meaning Ken-
nedy and LaGuardia Airports.

Mrs. MALONEY. Couldn’t you pass—the city council—a law that
took it out of the port authority?

Mr. Roru. No, because there is a contract that goes on for an-
other 20 to 25 years. Now, that doesn’t mean that there can’t be
pressure from the State—the port authority commissioners are ap-
pointed by the Governors of the States of New York and New Jer-
sey—to either break that contract or to refine that particular con-
tract so that the city has more control over it.

But even if we got over that hurdle on the Federal level, we have
the grant payback issue. We have grant restrictions. Who’s going
to purchase an airport when, in fact, they have to invest all that
money back into the airport? They’re going to invest enough money
to keep that airport—if they’re going to spend $2 billion for Ken-
nedy Airport, trust me, they are going to invest enough money to
keep that asset valuable and to make it even more valuable.

I think that all the airport people in the world would agree that
Kennedy Airport can be made a lot better than it presently is. And
the private sector would have an incentive, because the bottom line
would drive them to doing things in a way that would benefit pas-
sengers, airlines, as well as the people of the city of New York.

The Government has demonstrated over a long period of time—
in this case, in terms of the port authority—that it is not motivated
by those particular needs of the people. That airport is in serious
jeopardy, and if something positive doesn’t happen to Kennedy Air-
port, it will affect the whole economic region, not just New York
City.

Mr. Horn. We'll have another round of questions. Let me follow
up on that, Mr. Roth. As I remember, and you sort of confirmed,
the port authority is a creature of the State because of its inter-
state nature. What is the goal of the port authority in its operation
of Kennedy Airport? If it isn’t to make a profit, what is it?

Mr. Roru. Well, the reason why the port authority does not have
to make—and it does make a profit. Any airport in that particular
area will make a profit. I mean you’re coming in with cargo, et
cetera. You're going to make a profit. Studies have shown that they
can make a lot more, and the people of the city of New York are
definitely being shortchanged, as I mentioned before, the difference
between $200 million and $10 million a year in tax revenues.

The port authority's major purpose—and it has wandered from
that particular purpose—was to improve transportation, primarily
the movement of goods within the region, meaning the New Jersey-
New York region.

Now, through a very broad interpretation of that mission, they
built the largest office complex in the history of the country, the
World Trade Center. It has more office space than the entire city
of Cincinnati. Why it’s in the real estate market is a great mystery.


115

Ill. PROPOSED CHANGE

To correct the problem we see, we have offered your staff language to amend Section
4 of H.R. 1907. The suggested amendment is attached.

‘The purpose of this amendment is to conform the privatization options in H.R. 1907
for roads, tunnels and bridges to the framework that already exists in the Federal highway
program for flexible public/private partnerships.

The amendment will allow privatization to go forward and tolls to be charged when
the effort increases highway capacity and productivity or pays for a major reconstruction
project on roads that are not part of the Interstate Highway System. ‘The amendment would
exclude efforts to sell existing free roads and charge tolls when no improvements are made
Otherwise, highway users would be paying twice for roads.

‘As under current law, as part of a major construction project, tolls could be placed on
bridges and tunnels that are on the Interstate System of highways, but could not be placed on
roads that are part of the Interstate System. This, we believe, recognizes the special
opportunity for innovative financing of high cost bridge and tunnel projects - like the
Woodrow Wilson Bridge crossing the Potomac. However, improvements to highways on the
Interstate Highway System should be able to be adequately funded from the twenty billion
plus dollars per year that highway users pay into the Federal Highway Trust Fund.

Our nation’s system of highways is the cornerstone of just-in-time freight deliveries
and provides people with mobility and the choices they need to live, work and play. Without
this amendment H.R.1907 could be used simply as a means to charge people again for an
asset they have already purchased through their highway fuel taxes and registration fees. For
example, the cash strapped District of Columbia government could sell the 14th Street bridge

3


136

a partnership led by Wheelabrator Technologies, Inc. to buy the city’s $53 million wastewater
treatment plant, but the deal faces several legal and regulatory hurdles before it is formally
completed.

H.R. 1907 repeals this regulatory barrier to privatization by permitting state and
local governments to privatize Federal-aid facilities without repayment of Federal grants, provided
the private entity is bound by contract or law to operate the facility for the purpose for which
Federal aid was given and to abide by Federal grant assurances. ‘This modest regulatory reform
will ensure state and local leaders the flexibility to undertake privatization programs, while
protecting the Federal government's legitimate interests, and, most importantly, the interests of
transportation users.

Protecting Air Transportation Users.

R. 1907 deletes a regulatory barrier to the privatization of all Federal-aid
facilities, while explicitly protecting the users of facilities which are sold or leased to a private
party. In the context of airport privatization, we believe that the sale of a U.S. airport in the
foreseeable future is highly unlikely, and not generally necessary to achieve the primary benetits
of public-private partnerships. Instead, long-term lease arrangements will permit state and local
governments to obtain the capital and expertise of the private sector.

Regardless of the form of privatization, H.R. 1907 explicitly ensures that a
privatized airport facility will continue to operate as originally intended. Specifically, H.R. 1907.
as introduced, requires the state or local entity seeking to privatize an airport to demonstrate that
a market mechanism, legally enforceable agreement, or regulatory mechanism will ensure that the
infrastructure asset continues to be used for its original authorized purpose until no longer needed

Airport Group International, Inc @ Page 7


Wheelabrator Clean Water Systems Inc.
Page 2

WHEELABRATOR CLEAN WATER SYSTEMS INC.

Wheelabrator Clean Water Systems is a wholly owned subsidiary of Wheelabrator Technologies
Inc., an American Fortune 500 company traded publicly on the New York Stock Exchange. One
of the world’s largest multifaceted environmental services companies, Wheelabrator Technologies
‘owns and operates trash-to-energy and independent power facilities, supplies air quality control
systems for a broad range of industrial and utility applications, and provides a comprehensive
range of water and wastewater treatment products and services to municipal and industrial
customers.

Our commitment to the water and wastewater industry spans more than two decades
Wheelabrator Clean Water Systems pioneered the contract operation and maintenance of water
and wastewater treatment facilities in 1972; this contract with the City of Burlingame, California
was recently renewed into the 2st century. Today we're pioneering a new form of public/private
partnership as the first private firm to purchase a municipal wastewater treatment plant under
Executive Order 12803

We're very proud of our successful track record. Our goal is to ensure that the facilities we
operate go unnoticed in the communities we serve, quietly providing safe, efficient, and
economical services. But our performance has not gone unnoticed by the U.S. EPA and other
agencies and associations. We have eared more awards for safety and performance excellence
than any other contractor in the field. A list of the communities we serve as well as a list some of
our awards is attached

Wheelabrator is a founding sponsor of the U.S. Conference of Mayors’ Urban Water Institute
(UWI), The UWT’s primary purpose is to assist local government in providing high quality water
resources in a cost effective manner. Wheelabrator is also a member of the Water Development
Council. The Council was created to advise local governments in the maintenance and
development of cost effective infrastructure. The Council will provide the mayors with expert
advice and information on water resource issues. The U.S. Conference intends to develop and
pursue policy designed to advance the ability of local government to provide long-term water
service delivery.

Wheelabrator has international experience as well. Our Mexican subsidiary, Wheelabrator
Mexicana S.A. de C.V., has partnered with Companie Mexicana de Aguas to rehabilitate and
operate wastewater treatment plants. This watershed collaboration is one of the first launched
since the introduction of the North American Free Trade Agreement (NAFTA). Wheelabrator
Clean Water Systems is eager to contribute vital environmental technologies and services to
support Mexico’s need for infrastructure development and environmental restoration, and to help
Canada meet its commitment to environmental protection. We support the environmental goals
endorsed by NAFTA, and will continue to seek international investment opportunities in the spirit
of free trade and to contribute to economic growth in Mexico, Canada and the United States

Mr. Chairman, We think this says a lot about our ability to keep up with changing times and the
changing needs of our clients. Now I would like to give you Wheelabrator’s view of privatization


2

SUMMARY OF STATEMENT

L INTRODUCTION

ATA represents the Trucking Industry

The National Highway System

Le INNOVATIVE FINANCE OPTIONS

Ill. ATA’S PROPOSED CHANGE

IV. CONCLUSION

Enclosures

Amendment to Section 4

Answers to Subcommittee Questions


76

WHEELABRATOR EOS WATER AND WASTEWATER FACILITIES (Continued)

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28

TESTIMONY OF ALLEN ROTH

| want to thank Chairman Horn and members of the House Government
Management, Information & Technology Subcommittee for granting me the
opportunity to testify on H.R. 1907, the Federal-Aid Facility Privatization Act

| am testifying as Executive Director of the New York State Research Council
on Privatization. The Council was created by Executive Order of New York's
Governor George Pataki. The Council is chaired by Ronald S. Lauder, who could not
be here today because of a scheduling conflict.

My appearance is an indication of the importance we place on removing,
federal barriers to state and local privatization initiatives. It is our belief that
in this era of empowering state and local governments to put their own houses in
order, the federal government should allow the states to make maximum use of all
their assets — even those that benefitted from Federal grants. Therefore, | strongly
support the passage of H.R. 1907. If enacted, it will go a long way toward giving
states like New York the option of realizing the full benefits of privatization. In New
York, we are seriously considering the outright sale of airports and it supports the
privatization of wastewater treatment facilities that have received federal grants.
Given this agenda, we understand the need to eliminate federal impediments to these

efforts.


94

STATEMENTS OF RAYMOND HOLDSWORTH, PRESIDENT AND
CHIEF EXECUTIVE OFFICER, DANIEL, MANN, JOHNSON &
MENDENHALL; RALPH STANLEY, SENIOR VICE PRESIDENT,
UNITED INFRASTRUCTURE CO.; AND JOHN J. COLLINS, SEN-
IOR VICE PRESIDENT FOR GOVERNMENT AFFAIRS, AMER-
ICAN TRUCKING ASSOCIATIONS, INC.

Mr. HoLpswortu. Thank you very much, sir. As you said, I’m
Ray Holdsworth, the president and CEO of Daniel, Mann, Johnson
& Mendenhall, known as DMJM, and we’re headquartered in Los
Angeles. I commend you personally, Chairman Horn, and the mem-
bers of the subcommittee for their attention to this important issue.

Privatization will happen. It’s more prevalent overseas. It’s hap-
pening at a rapid pace internationally, and I guess the big chal-
Jenge that this committee is faced with is how do you focus the
U.S. talent and the U.S. capital to be proactive in the United
States and not have it run overseas, as it’s currently doing.

As one of the Nation’s largest architectural, engineering, and
construction services firms, we've provided those kinds of services
both here in the United States and internationally for the last 50
years, and we have over 55 offices throughout the country. We
strongly support H.R. 1907 as a means to grant State and local
governments the discretion to consider public-private partnerships
to develop and manage the needed infrastructure for facilities.

Existing Federal policy contained in Executive Order 12803 re-
quires State and local governments to repay the depreciated value
of Federal grants received for an infrastructure facility when that
facility is transferred to the private sector. This repayment require-
ment presents an economic disincentive for the privatization of in-
frastructure facilities without any apparent policy rationale.

Federal grants are issued to help State and local governments
construct or improve a facility that provides a specific needed serv-
ice to the community. As the word “grant” implies, there is no_ex-
pectation that these funds will ever be repaid to the Federal Gov-
ernment. Therefore, so long as the facility continues to operate as
it was intended at the time the Federal funds were provided, the
expectation of the Federal Government is fully realized.

H.R. 1907 explicitly ensures that assets privatized pursuant to
the terms of the bill will be used “for their original authorized pur-
poses until such time as the asset or assets are no longer needed
for those purposes.” Let me give you an example. Two adjoining
communities can virtually have identical wastewater treatment fa-
cilities which need additional capital improvement and for that
funds are not available. Both communities may wish to enter into
a public-private partnership to raise the funds necessary to make
the capital improvement. Yet one community could find that the re-
payment requirement makes it virtually impossible to complete the
needed privatization arrangement while the other can do so simply
because of the different histories as to the amounts and to the tim-
ing of previous Federal grants. I believe a Federal policy that leads
to such an outcome is a defensible policy.

While the Federal grant repayment requirement is by no means
the only barrier to the widespread use of public-private partner-
ships, the deleting of this policy is a necessary step in permitting
State and local governments to explore and experiment with privat-


CAROLYN. MALONEY

hy
" a
wy Q
sevaag soma ane Congress of the United States .
SeuensT Wouse of Representatives .
Washington, DE 20515-3214

REP. CAROLYN B. MALONEY
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT.
INFORMATION AND TECHNOLOGY

HEARING ON HR 1907, THE FEDERAL-AID
FACILITY PRIVATIZATION ACT OF 1995

NOVEMBER 15, 1995

Mr. Chairman, thank you for holding this hearing on H.R. 1907. 1 think all of us
support efforts to give more resources to State and local governments for infrastructure
improvements. AS we ali know, money is scarce for much needed roads, bridges, waste
treatment plants, and other municipal facilities. However, I am skeptical that this legislation
is the best approach to reaching that objective

1 also question whether this is an “essential” hearing. The Federal govemment shut
down yesterday, and only essential Federal government employees are working and collecting
a paycheck today. In my district alone, thousands of Federal workers have been idled and my
staff has been reduced by over half. It seems to me that all of our time would be better spent
in trying to resolve the current budget impasse, rather than spending hours at this hearing,
But since £ won't win that argument, let me address the issues at hand,

There is currently in place a mechanism for transferring government assets to private
parties, Executive Order 12803, signed April 30, 1992. Tt provides important guidelines and
procedures for selling theses assets, and we are fortunate to have as the first witness today our
colleague from Indiana, Mr. McIntosh, who contributed substantially to the development of that
order while serving under the Vice President

Unfortunately, your legislation drops many of the essential safeguards from the executive
order that insure that when government assets built with Federal funds are sold to the private
sector, important standards are maintained,

For example, the executive order requires that any funds obtained from the sale of an
asset must be used for either additional infrastructure or for debt reduction or tax relief Debt
reduction and tax relief, at least in theory would help a local government obtain additional funds
for infrastructure improvements through beiter bond ratings. H.R. 1907 does not include that
requirement, and thus the proceeds could go to such unrelated items as bonuses for local
executives,

The executive order requires that the public purpose of the asset be maintained, and that
conditions be met that protect users and the public by limiting the charges for the asset, The
bill drops these limitations. That means that under this bill, Virginia could sell its part of the
beltway to a private company who could put up toll booths and charge $10 dollars @ car.

(over)


17

WHEELABRATOR EOS WATER AND WASTEWATER FACILITIES (Continued)

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Client Name & Addross Phone No. Type Date

Wandin Resin

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83

Good afternoon. Mr. Chairman and members of the Subcommittee, my name
is Jim Barr. { am the Chairman of the Board of the National Association of Water
Companies and a member of its Executive Committee. The National Association of
Water Companies is the trade association representing the nation's investor-owned
water utilities. Qur 360 water utility members provide safe, reliable and affordable
drinking water daily to over 22 million Americans in 41 states.

1am also Senior Vice-President, Treasurer, and Chief Financial Officer of the
American Water Works Company. Which is the largest investor owned water utility
in the nation. American owns and invests in 23 regulated water utilities which
provide water service to more than 6 million Americans in over 700 communities in
21 states throughout the country

We commend this Subcommittee for holding this hearing today. H.R. 1907 the
Federal-Aid Facility Privatization Act of 1995, introduced by Congressman Mcintosh
and this Subcommittee’s Chairman, Congressman Horn, is an important bill which the
NAWC supports, endorses, and believes should be passed into law as soon as
possible. It addresses one of several necessary legislative and administrative
provisions required to encourage and facilitate much needed privatization efforts in

this nation,

H.R. 1907 is a modified codification of Executive Order 12803, The Order


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3
thority, school district, special district, intrastate
district, regional or interstate government entity,
council of governments, and any agency of instru-
mentality of a local government, and any federally

recognized Indian ‘Tribe.

SEC. 3. PRIVATIZATION INITIATIVES BY STATE AND LOCAL

GOVERNMENTS.

The head of each executive department and agency

shall undertake the following actions:

(a) Assist State and local governments in their

ets.

efforts to privatize their infrastrueture

(b) Approve requests from State and local gov-
ernnents to privatize infrastructure assets and
waive or modify any grant assurance, consistent with

section 4,

SEC. 4. CRITERIA.

The head of an executive department or agency shall

approve a request if—

(a) the State or local government demonstrates
that a market mechanism, legally enforceable agree-
ment, or regulatory mechanism will ensure that the
infrastructure asset or assets continue to be used for
their originally authorized purposes, so long as need-

ed for those purposes; and

HR 1907 TH


lll

Before the

U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON GOVERNMENT REFORM and OVERSIGHT
SUBCOMMITTEE,

ON

GOVERNMENT MANAGEMENT, INFORMATION and TECHNOLOGY

Statement of the

AMERICAN TRUCKING ASSOCIATIONS, INC.
on
HLR. 1907

FEDERAL-AID FACILITY PRIVATIZATION ACT OF 1995

JOHN J, COLLINS
Senior Vice President for Government Affairs

November 15, 1995
Washington, D.C.



81

There are professional enterprises that have access to capital and
that possess the technical know-how to ensure proper water and
wastewater service to the public that are willing to invest in these
municipal assets. The requirement to repay grants made by the
Federal Government to build the asset in the first place, in the
event that that asset is either sold or otherwise privatized, inter-
feres with the ability of municipalities to tap the private sector cap-
ital resources that are available in the marketplace.

Given the fact that the public service purpose of these assets is
not altered by privatization, the disincentive, either real or per-
ceived, that grant repayment represents, we would respectfully
suggest is counterproductive, and we therefore support and encour-
age the passage of H.R. 1907. Thank you very much.

[The prepared statement of Mr. Barr follows:]


107

With regard to the need, the United States is ranked 55th
worldwide in capital investment in infrastructure as a percentage of
GNP. Estimates of the annual shortfall range from $40 - $80
billion dollars a year. The Environmental Protection Agency alone
projects the need for $200 billion in new capital to bring
communities into compliance with existing mandates for clean
water and clean air. The Federal Highway Administration has
estimated that $29 billion dollars a year is needed to merely
maintain the conditions of this nation’s roads and bridges. There
are several specific steps Congress can take. First, pass H.R. 1907.
Second, remove any restrictions on allowing user fees on
infrastructure, such as the ban on tolls on the Interstate. Third,
adopt the public benefit bond concept as outlined in the National
Infrastructure Development Act that was introduced in the last
Congress. And finally, the tax code should be changed to both
level the playing field between taxable and tax-exempt debt and

remove the five year limit on operating and maintenance contracts.

The concerns of the Committee regarding users are well
founded. While it is important that our Nation’s infrastructure be
provided at a reasonable cost, an increase in user fees is inevitable.

We believe that by allowing longer operating contracts, these user


92

Mr. Barr. That’s exactly the point.

Mr. Horn. Yes. Any comment, Mr. Dowd?

Mr. Down. Yes. We satisfy it in a different way, perhaps. We do
it through a long-term contract that sets the service fee as of the
date that we take over, and it establishes it for the next 20 years.
It has CPI increases in it, and that’s it.

So, from that standpoint, you’re actually better off with that con-
tract than you were just having the responsibility yourself and
kind of less control, if you think of it.

The second thing is, we don’t really set the rates, and here’s
where we're different. We are a wholesaler of a wastewater service
to Franklin, OH, and to other towns there who, they set their own
rates, and they take care of rates, and they deal with us as the
wholesaler, and they deal with their customers on the retail level.

Mr. Horn. Your mentioning of the rates related to CPI reminds
me that when, in southern California a few years ago, we asked
people to voluntarily use less water, they responded so efficiently,
effectively, and so greatly, that the water companies had to raise
their rates because we were not using enough water. Now, has that
situation happened in any of your areas of jurisdiction?

Mr. Down. No.

Mr. Horn. I just wonder how the regulatory agency treated it.
In our case, they raised the rates. So much for volunteerism. But
it was a surprise. Mr. Dowd, your testimony mentioned Federal
grant assurances. Are there specific grant assurances associated
with wastewater treatment plants that would cause a problem for
privatization in the area?

Mr. Down. I think the general comment—by the way, the grant
assurance thing, we’re not clear in reading this—I think it’s sec-
tions 3(b) and section 4 seem to contradict each other as to how
grant assurances are going to be treated. One says one and one
says the other, but maybe we're just not reading it right.

What we want to get away from is the specific grant assurances
that went along with that grant in the first place that had to do
with Federal Government policy at that time, things dealing with
employment issues and such as that.

What we would like to get to is, in doing this with a municipal-
ity, they have their own requirements. Believe me, they have their
own requirements, and if we want to work with them, they're going
to put them in the RFP, and if you want to do the job, you’re going
to comply.

So youre going to be satisfying your real customer—which is
Wilmington, DE, or Franklin, OH—as opposed to some nebulous
customer back here in Washington. That’s a much better way to do
it.

Mr. Horn. Let me read that section into the record. This is from
H.R. 1907, section 3, subsection (b). “Approve requests from State
and local governments to privatize infrastructure assets and waive
or modify any grant assurance, consistent with section 4.”

When you turn to section 4, which is “Criteria,” and you turn to
that section (b}—I should read the first part, the section 4—“Cri-
teria. The head of an executive department or agency shall approve
a request if’—and then they go into the “(a) The State or local gov-
ernment demonstrates that a market mechanism, legally enforce-


Wheelabrator Clean Water Systems Inc
Page 4

process. Wheelabrator intends to find jobs for all employees in any facility we privatize. Let me
emphasize that: all employees! Wheelabrator intends to operate the facilities it owns with the
number of people it takes to operate that facility safely, efficiently, and in an environmentally
responsible manner. Ifail the people at facility are not needed at that facility we will find them a

job at one of our other facilities, retrain them or work with the municipality to employ them
elsewhere.

Since Executive Order 12803, public/private partnerships have become an economically attractive
and sound alternative for municipalities. Two case studies are highlighted below.

(CASE STUDY ONE: FRANKLIN, OHIO

History

Located 25 miles south of Dayton, Ohio, the Franklin Area Wastewater Treatment Plant is a 4.5
million-gallon-per-day regional facility serving 25,000 residents. Wheelabrator EOS, a subsidiary
of Wheelabrator Clean Water Systems Inc., has operated the Franklin Area Wastewater
‘Treatment Plant under a contract with the Miami Conservancy District (MCD) since 1987. The
plant serves the municipalities of Franklin, Germantown, and Carlisle. In August of this year,
Wheelabrator, MCD, and the municipalities completed the historic first wastewater treatment
plant public/private partnership, which includes a 20-year service agreement. It was the
culmination of a two year effort by MCD, the communities and Wheelabrator, ultimately requiring
approvals from the U.S. EPA and the Office of Management and Budget. The following
highlights the major points of the transaction:

Purchase Price and Rates

The $6.8 million purchase price for the facility exceeded the outstanding debt on the facility
Thus, after the facility debt was defeased, the municipalities had funds left over to invest in
infrastructure or to reduce taxes or other debt. The annual service fee to be paid by the
municipalities for wastewater service was agreed to in conjunction with the purchase price and
was approximately 20 percent lower than the fee paid to MCD.

Ovnership Structure

‘The ownership structure is designed to allow private ownership under municipal control. The
plant is owned by Wheelabrator, who will be responsible for operations and maintenance (O&M)
and replacement of capital equipment at the facility. The collection system and interceptors are
owned by the municipalities who continue to be responsible for rate setting and new connections
to the system as well as enforcement of the industrial pretreatment program. The plant site is
owned by the municipalities and leased to Wheelabrator.

Expansions

Plant expansions will be determined by the municipalities since Wheelabrator does not have the
ability to add new customers to the system. Wheelabrator will manage and finance the expansion
and be responsible for its implementation. Wheelabrator will design the expansion and provide a
fixed price to the municipalities based upon bids solicited from qualified bidders. Any necessary
increase in the service fee for the expansion will not occur until the expansion comes on line


STATEMENT OF JOHN T. DowD, SENIOR VICE-PRESIDENT,
WHEELABRATOR CLEAN WATER SYSTEMS INC.

BEFORE THE
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION
AND TECHNOLOGY,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
UNITED STATES HOUSE OF REPRESENTATIVES

REGARDING
H.R. 1907, THE FEDERAL-AID FACILITY PRIVATIZATION ACT

NOVEMBER 15, 1995


18

if privatizations like this occur, but will reap no fiscal benefits if
no transactions take place.

Let me give you some numbers that are drawn from my written
testimony. We have previously estimated in a study that, if there
were a truly level playing field, cities and States might sell as
much as $227 billion worth of user fee-funded infrastructure. That
would mean a one-time infusion of capital to those cities and
States—about $114 billion to cities and counties and $113 billion
to States.

The Congress, of course, could open the door to this major infu-
sion of capital without having to spend a dime by just getting the
barriers out of the way. But, in addition to this one-time windfall,
every level of government would begin to receive new annual tax
revenues as these privatized facilities became ordinary investor-
owned businesses.

The table in my written testimony shows there would be about
$3.4 billion in new local property taxes; $2.6 billion in new State
income taxes; and over $8 billion per year in new Federal taxes.
That’s orders of magnitude more than the Federal Government
would ever make via grant repayments.

Finally, let me just close with a few words about bipartisanship.
For the past 242 years, I’ve been discussing these issues with peo-
ple at DOT, at EPA, at the National Performance Review, and at
the National Economic Council, as well as Members of Congress
from both parties.

What has really impressed me in all this is that there is a large
amount of agreement on the basic principles, agreement that we
can’t modernize America’s infrastructure with business as usual—
it’s going to require significant private capital; that shifting to user
fees is wise public policy—it brings about benefits like congestion
relief and conservation of resources; and that many of these infra-
structure projects are inherently monopolies, and there does have
to be some kind of control over the possible exploitation of consum-
ers.

We can haggle a bit over the details and the conditions, but, I
would submit, let’s not get bogged down by those details. Rather,
let’s seize the opportunity to remove this Federal barrier to private
investment and give cities and States the option to use this impor-
tant new tool.

That concludes my remarks. I would be happy to answer any
questions at the appropriate time.

(The prepared statement of Mr. Poole follows:]


47

program to assist communities in meeting requirements of the Act. particularly in the form
of financial assistance to construct wastewater treatment systems

In 1987, Congress eiected to phase-out the Grants program in favor of a system of
State revolving loans funds (the “SRF") to be capitalized in cooperation with the States
These revolving loans funds were seen as a more efficient way to invest funds for the long-
term and would provide localities with permanent, low-cost sources of financing for a wide
variety of environmental infrastructure needs (beyond traditional wastewater treatment.)

Since 1972, the Nation has made significant investments in wastewater
infrastructure. Today, the U.S. enjoys what is probably the most advanced network of
sewage treatment facilities in the world. Over $66 billion in federal funds have been
invested in this vast network since 1972. Many more dollars have also been contributed
by local and governments both for capital investment and for operation and maintenance
costs.

The Construction Grants and SRF programs have been majdr driving forces behind
extending modern sewage treatment to more and more of the population. Since 1972, the
number of people served by secondary or better levels of sewage treatment has nearly
doubled, from 85.6 million to 158.9 million in 1992. In 1972, only 42% of the population
was served by adequate levels of sewage treatment. By 1992, that number had increased
to 62% of the population

Pollutant loads to surface waters have also decreased dramatically during this time,
in spite of increases in the population served by municipal sewage treatment plants and the
corresponding increase in the volume of pollution being treated by those facilities. For

instance, since 1972, net pollutant discharges of BODS from municipal sewage treatment


51

6 -

> providing waivers to the regulations governing the original federal Construction
Grant:

> approving, along with OMB, the sale price of the asset (this was a negotiated rather
than a competitive sale.), and

» insuring that the public will continue to benefit from the operation of the facility, and

protecting the interests of the rate payers.

It is also noteworthy, in the context of today's discussion, to point out that a small
part of the plant (the oxidation pond) is still owned by the public sector. This was done so
that the facility would continue to be classified as a publicly-owned treatment works
(POTW) under the Clean Water Act and other environmental laws. If the facility were no
longer to be regulated as a POTW,, the private partner would be subject to unintended
regulatory consequences that might otherwise have discouraged the privatization efforts.

This plant would no longer be a POTW subject to secondary treatment limitations and
pretreatment requirements under the CWA, or the domestic sewage exclusion under the
Resource Conservation and Recovery Act, This is an obstacle thal needs statutory relief

In fact, President Clinton's Clean Water Initiative, which was released last year,

recommended that POTWs be defined, for non-financing purposes, as wastewater facilities
that serve the general public, regardless of ownership.

Overall we feel that this project is an excellent example of one of the Administration's
"Principles for Federal Infrastructure investments," established by Executive Order 12893
on January 26, 1994, which states that “Agencies shall seek private sector participation in
infrastructure investment and management .... and should work with State and local entities
to minimize legal and regulatory barriers to private sector participation in the provision of

infrastructure facilities and services."


80

Mr. Horn. Well, we thank you. Our third witness, and our last
witness on this panel, is Mr. James Barr, who is chairman of the
board of the National Association of Water Companies and a mem-
ber of the executive committee of that group. He also is senior vice
president, treasurer, chief financial officer of the American Water
Works Co., which, he notes, is the largest investor-owned water
utility in the Nation. We welcome you, Mr. Barr.

Mr. Barr. Thank you very much, Mr. Chairman, and good after-
noon to you and members of the subcommittee. It’s certainly a
privilege for me to have the opportunity to address you for just a
couple of minutes, as well, on this important subject.

At the risk of highlighting it just too much, I want to emphasize
that the National Association of Water Companies represents 360
privately owned, if you will, or investor-owned water utility compa-
nies that serve 22 million Americans in 41 States. I say that so
that you know that my perspective here is that of a water and/or
wastewater service provider.

H.R. 1907 is an important bill which NAWC supports, endorses,
and believes should be passed into law, because we believe it ad-
dresses one of several necessary legislative and administrative pro-
visions that are required to encourage and facilitate much needed
privatization in this Nation. We have submitted a statement on
that matter. I’ll try to briefly summarize it here for you in a couple
of key points.

The sale of a water or wastewater service facility to a profes-
sional, regulated, investor-owned utility does not convert that asset
to private use nor does it change the original purpose of the facility
that was constructed with Federal funding. Frankly, the only rea-
son a professional regulated, investor-owned utility would purchase
that asset would be for the purpose to continue its use as a public
service facility.

As you’ve already heard, the process of meeting both the water
and wastewater service requirements of the Nation is a highly cap-
ital-intensive enterprise. I think it’s fair to say even more so than
virtually any other utility service in this country.

The necessity to replace existing facilities, to expand them to
serve economic growth and development, and to upgrade them to
comply with environmental standards requires enormous amounts
of new capital investment every year. A significant portion of the
burden to attract this continued flow of capital into both the water
and wastewater business falls on local government.

That’s because about 80 percent of the population in this country
receives its water service from municipal entities, and about 95
percent of those that have public wastewater service receive that
service from municipal entities. More so than ever before, these
municipal entities are seeking alternative ways to meet these cap-
ital requirements that they face to maintain that service.

One of these alternatives that communities throughout the coun-
try are examining today involves the conversion, if you will, of the
equity that has accumulated in certain municipal assets into cash
which can be used to provide other vital services for which there
is no other alternative or, frankly, simply to reduce the economic
burden on taxpayers.


142

Novesiber 13, $995,

AR. Lar
PRIVATIZATION ACT OL 1995"

TESTIMONY. ¢
Mi PEDERAL-SUb CACILITY

Me. Chairman aiid embers of the Subcommittes

Uy name is Jahn S. Yodien. and bam General Counsel ar agPa

Legislative Sction We appreciate the opportunity to present our views on

ras

y Privatization yet of

WR P07 the “Bedersinsid Pac

STATEMENT OF INTERES!

isiative Action is a nonprofit organizetion formed to foster and

SOP
promote general aviatinn in the United States, Ther:

bute to nur economy by using

are more than 950,000

wide who conte

eheral aviation pilots acti
usinESS and personal transportation

jeral aviation aircraft to fulfill their
ate at ail of the

© than 2400 surports

jation pilots ope

needs. General

financed in Shole or in part by the Federal Government, and thererore have

se airports. We promote: ye

sht affect t!

an interest in teyiskation that am

aviation tur the benetit or all citizens throwet iegistutive and other activities

hes of government

at all ievels and bran

COMMENT.

Ye appreciate Congress’ efforts to address the needs of the nation’s:

>preciate the attempts of the proponents: of

ily. we

infrastructure. Additic
this Ul to address the needs of the aviation community. We particularly
vith us during consideration of this

appreciate their willingness to wark,

mn Weare concerned. however, that this legskuture may not be an

feyistat
Wr several reasons. First.

Appropriate veltele te address these needs


135

B, H.R. 1907: THE FEDERAL-AID FACILITY PRIVATIZATION ACT OF 1995
Incremental Regulatory Refarm to Encourage Public-Private Partnerships

Airport Group International strongly supports H.R. 1907, the Federal-aid Facility
Privatization Act of 1995, as an incremental reform measure which removes the primary
regulatory barrier to the privatization of state and local infrastructure assets.

Prior to 1992, Federal policy -~- known as the "Common Rule” ~- required state and
local governments to fully reimburse the Federal government for all grants received for a Federal-
aid infrastructure asset upon the transfer of that facility to the private sector. This 100%
repayment requirement was a prohibitive economic disincentive to privatization transactions. To
address this disincentive, and “promote private investment in local infrastructure,” President Bush
issued Executive Order 12803, which liberalized the 100% repayment requirement by permitting
repayment of the depreciated value of Federal grants received.

Notwithstanding the articulated purpose of Executive Order 12803, the modified
repayment requirement continues to be a significant disincentive to the use by state and local
governments of privatization as a tool to attract more capital for, and improve the management
of, infrastructure facilities. Despite the strong interest of many local and state officials in using
privatization in appropriate cases, as demonstrated by the surge in privatization of government
services, to which I alluded earlier, privatization of Federal-aid infrastructure assets has been
almost nonexistent. In fact, the first and only completed privatization transaction of any type
pursuant to Executive Order 12803 was the 1995 sale of a $7 million wastewater treatment plant
in Franklin, Ohio. it was a facility with fully depreciated Federal grants, obviating the need for
any grant repayment. I also understand that the City of Wilmington, Delaware, has just selected

Airport Group Intemational, Inc ® Page 6


13

cre ninoney roummconontss
a Congress of the United States
Wouse of Representatives

COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
2157 Revounn HOUSE Orrice BuLonG.

Sceeds Se Wasninaron, OC 20515-6143

Testimony of Rep. David M. McIntosh
Before the Subcommittee on Government Managment,
Yaformation and Technology
November 15, 1995, 2:00 p.m,

Thank you, Mr, Chairman, for the opportunity to testify today on H.R. 1907, the
Federal-aid Facility Privatization Act of 1995. I appreciate your attention to the
important issue of infrastructure privatization, and I commend you for your continuing
involvement in the effort to enact this needed regulatory reform.

One of the issues driving the 104th Congress, and particularly my colleagues in
the freshman class, is the need to revive the principles of the 10th Amendment to the
Constitution by reordering the relationship between the federal government and state
and local governments, For decades the federal government has accumulated power,
depriving states and localities of their constitutional authority over matters not explicitly
reserved for federal oversight. As a result, the people most capable of efficiently
providing government services -- dedicated local government officials ~- often have their
hands tied by overbearing federal directives.

In the first term of this Republican-controlied Congress, we have aggressively
fought to reverse the concentration of power in Washington. From ending unfunded
mandates and reforming the welfare system to our efforts to save the Medicare and
Medicaid programs, this Congress has steadfastly sought to return authority and
discretion to the states and local governments, The bill we are considering today is a
modest, but vital, step forward in this continuing effort.

Prior to 1992, a federal regulation - known as the "Common Rule” -- required
state and local governments to fully reimburse the federal government for all grants
received for any federal-aid infrastructure facilily upon the transfer of stich facilities to
the private sector. This 100 percent repayment requirement was a prohibitive economic
disincentive to privatization transactions, preventing local officials from realistically
considering public-private partnerships as a means for improving infrastructure services.

As Executive Director of President Bush's Competitiveness Council, I fought to
give states and localities the freedom to consider a full range of infrastructure


187

for that purpose. In addition, | understand that the Aircraft Owners and Pilots Association
("AOPA") has suggested that the bill be amended to grant the Secretary of Transportation the sole
authority to determine when an airport facility is no longer needed by a community. AOPA has
also suggested additional language which explicitly requires that privatized airport facilities
“continue to be available for public use on reasonable conditions and without unjust
discrimination,” grants tie Secretary of Transportation the authority to enforce this provision in
Federal court, and permits the public to petition the Secretary to investigate possible violations
of this additional mandate. Airport Group International believes that these suggested amendments
strengthen H.R. 1907, and encourages the sponsors of H.R. 1907 to consider adding these changes
during markup of the measure.
Financial Benefits ta Federal, State and Local Government

By encouraging the privatization of state and local infrastructure assets, H.R. 1907
will reduce the demand for Federal grant assistance, and generate additional Federal, state and
local tax revenues.
© Creates Trust Fund Savings

I commend each of you for undertaking to balance the Federal budget, but [ think
we can all agree that the resulting spending cuts will dramatically increase the pressure on the
transportation trust funds as the primary source of infrastructure investment. Private infrastructure
development and management companies, like Airport Group International, can help alleviate this
pressure by creating savings in the transportation trust funds. For example, the private
operation of infrastructure assets will ensure that only fiscally justifiable capital improvements are
undertaken, avoiding the "gold plating" which has plagued public capital improvement projects

Airport Group International, inc @ Page 8


55

environmentally responsible for that plant. This is not about get-
ting out of responsibility.

The second one that we're involved with—and it’s not finished
yet, I would hasten to point out—is Wilmington, DE, a 90-MGD
plant, one of the larger plants in the country. We will pay, if the
deal goes through, $53 million. The service fee again goes down,
and I would point out again, this is one of the larger plants in the
country and perhaps typical of what can be done with privatization.

There’s a number of specific subjects I talked about in my testi-
mony. I will just mention two. We would ask the Congress to en-
courage municipalities—and I don’t know the exact language here,
and maybe we can help on it—but I would encourage them to first
go to the private sector and see if you can’t get your wastewater
or water treatment problem solved, and only if you can’t for what-
ever reason, then turn to the Federal Government for assistance.
But sort of turn it around from the way it has been over the last
number of years.

The second thing that I would like to see would be a, I use the
phrase, “threshold of competency.” This is a very competitive busi-
ness. There’s lot’s of good companies in this business, and we don’t
mean to preclude any of them.

What we are concerned about is incompetent companies becom-
ing part of this, somehow, some way getting a contract and kind
of messing the whole thing up, because there is talent involved in
this. It’s technical; it needs to be done right. So there should be
some qualifications in our package here.

So, in closing, Mr. Chairman, we're very interested in seeing that
public-private partnerships succeed in this country. It’s good for
business; it’s good for us. Otherwise, we wouldn’t be chasing it. But
it’s good for business in general, lots of construction opportunities
and other opportunities.

Our belief is that it’s good for municipalities, the $30 billion I
mentioned of new-found money, so to speak, and I actually believe
it’s good for the Federal Government. It’s a way to get the infra-
structure taken care of without new taxes and without increasing
the deficit. So we would encourage this bill. We would encourage,
perhaps, a somewhat more comprehensive approach. Those sugges-
tions are contained in my testimony. I thank you very much.

[The prepared statement of Mr. Dowd follows:]


2

An infrastructure facility fully depreciated could be privatized. The
bill before us, H.R. 1907, would ease restrictions such as the ones
I’ve mentioned.

While that sounds encouraging, there are other issues that need
review as public control of many of our facilities transitions to pri-
vate ownership and operation. We'll look at some of those issues
this afternoon.

With us now are private experts who manage formerly govern-
ment-owned infrastructure facilities, officials from professional
groups which use them, administration representatives from the
Environmental Protection Agency, and two Members of Congress.

Mr. Klug of Wisconsin, our acknowledged privatization expert,
heads the Speaker’s panel on privatization, and Mr. McIntosh of
Indiana, who comes to Congress with a rich experience in the exec-
utive branch and is the sponsor of the legislation before us.

We thank you all for joining us, and we look forward to your tes-
timony. We would appreciate it if all witnesses limit their testi-
mony to 5 minutes. The written statement you have submitted will
be put in right after the introduction of you as a speaker. That’s
automatic for all witnesses, and since we have a large number of
witnesses, we do hope to hear from all of them during the next 3
hours.

1 would like to ask the ranking member, a distinguished col-
league, Mrs. Maloney of New York, if she has an opening state-
ment. Mrs. Maloney.

[The text of H.R. *i907 follows:]


174

And I want to thank, before we close out the hearing, the major-
ity staff. Russell George, staff director; Mr. Brasher is to my left,
the professional staff member that developed the hearing; Mr.
Polzak, in his second-to-last hearing with this committee, is a legis
fellow from the Department of the Army; Mr. Richardson in his
10,000th hearing to go, from the committee, who sets all these
things up very efficiently.

The minority staff—Miles Romney and Don Goldberg, and, then,
the official reporter, Jan del Monte. So we thank you all.

With this, the hearing is adjourned.

(Whereupon, at 6:35 p.m., the subcommittee meeting was ad-
journed.]}


163

Mr. Horn. Well, thank you. Let me start with a few questions
here. Ms. Kelly, I take it your union, in its national conventions,
has adopted a platform plank against privatization?

Ms. KELLY. Yes. We're certainly against efforts to privatize public
services which will ultimately end up hurting public employees,
who will end up losing their jobs.

One of the prior panelists talked about how his company made
an effort to relocate or retrain or maintain the employees once the
facility was privatized, but all too often, in our experience, if a pub-
lic function is privatized, public workers lose their jobs and there
is no accommodation.

And all too often, privatization is an effort for companies, in
order to make a profit, they'll either have to raise user fees or cut
back on labor costs—reduce wages, cut back on benefits, and so
forth.

Mr. Horn. I take it, in the union’s overall position on privatiza-
tion, it’s primarily with regard to governmental functions—let’s say
janitorial service or something—where the city government or
county government or the Federal Government has gone in to take
a segment of public employees and put their work out for bid. Is
that basically the motive for opposing privatization, or have you
had specific work with the airport-type or infrastructure-type situa-
tion?

Ms. KELLY. Well, as I mentioned, we represent public employees
who work at many of these facilities, so they would be directly im-
pacted. We have airport personnel. Many of them are the mainte-
nance workers at those airports, but they would certainly be af-
fected, or wastewater treatment workers or highway maintenance
workers. So, in those cases, if this legislation is enacted, they will
certainly be directly affected.

Mr. Horn. And that’s because they would no longer be public
employees, technically.

Ms. KELLY. They could certainly lose their jobs. There’s no provi-
sion that the private employer would have to maintain those work-
ers or would fave to honor their collective bargaining agreements.

Mr. Horn. Yes, I was going to say, if they’re privatized, your
union would still accept them as members. Isn’t that correct?

Ms. KELLY. Oh, certainly. Half of our members, or nearly half of
our membership, is private.

Mr. Horn. Is private, right.

Ms. KELLY. We have nothing against private employees.

Mr. Horn. Right. Have you had any opportunity or have mem-
bers of the Government relations staff had any opportunity to visit
Toronto and see what the experience is since they’ve privatized an
airport in Toronto? You cover Canada, as I remember don’t you?

Ms. KELLY. We do have some members in Canada, as well.

Mr. Horn. Yes.

Ms. KELLY. Primarily health care workers.

Mr. Horn. Well, you might want to take a look at what they’re
doing up there and see if it meets some of your criteria, since the
workers would be in your union, even though they’re privatized.

Ms. KELLY. Although, believe me, we’ve had quite a bit of experi-
ence with the privatizing of public function, and there have been
some cases where we’ve been able to, what we call, “follow the


72

Wheelabrator EOS Awards
Page S

Pacific Northwest Pollution Control Association - Division B, Zero Lost-time Accident Award
Vancouver Wastewater Treatment Plant, Vancouver, Washington

#1985

Georgia Water Pollution Controt Association - Plant of the Year Award/Operations & Maintenance Excellence Award
Albany Wastewater Treatment Plant. Albany, Georgia

San Francisco/San Mateo County - Safety Council Award of Honor
Burlingame Wastewater Treatmen: Plant, Burlingame. California

San Franesseo’San Mateo County - Safety Council Award of Merit, Program f
of Hours Worked 10 Lost-time Accidents
Burlingame Wastewater Treatment Plant, Burlingame, California

che Achievement of Outstanding Ratio

New York Water Pollution Contro! Association - Regional Safery Award
Poughkeepsie Wastewater Treatment Plant, Poughkeepsie, New York

Pacific Northwest Pollution Control Association - Division B. Zero Lost-time Accident Award
Vancouver Wastewater Treatment Plant, Vancouver, Washington

#1984

San Francisco’San Mateo County - Safety Council Award of Merit, Program for the Achievement of Outstanding Ratio
of Hours Worked to Lost-ume Accidents
Burlingame Wastewater Treatment Plant, Burlingame, California

Pacific Northwest Pollution Contro! Association - Division B. Zero Lost-time Accident Award
Vancouver Wastewater Treatment Plant, Vancouver, Washingion

#1983

Pacific Northwest Pollution Comtrol Association - Safety Award
Eastside Wastewater Treatment Plant, Vancouver, Washington

Pacific Northwest Pollution Control Association - Safery Award
Westside Wastewater Treatment Plant, Vancouver, Washington

"1982

Georgia Water Pollution Control Association - Operations & Maintenance Excellence Award
Albany Wastewater Treatment Plant, Albany. Georgia

California Water Pollution Control Association - Safety Award
Burlingame Wastewater Treatment Plant, Burlingame, California

Pacific Northwest Pollution Control Association - Regional Safery Award
Westside Wastewater Treatment Plant, Vancouver. Washington

November 2. 1995


H.R. 1907
The Federal-Aid Facility
Privatization Act of 1995

Testimony of
Allen Roth
Executive Director,
New York State Research Council on Privatization

Presented before the House Government Management,
Information and Technology Subcommittee

November 15, 1995.



70

Wheelabrator EOS Awards
Page 3

Ohio Water Pollution Control Association - Safery Award
Springboro Wastewater Treatment Plant, Springboro. Ohio

Pacific Northwest Pollution Control Association - Division B, Zero Lost-time Accident Award
Vancouver Wastewater Treatment Plant, Vancouver, Washington

#1990

Georgia Water Pollution Control Associaton - Plant of the Year Award
Albany Wastewater Treatment Plant, Albany. Georgia

Environmental Protection Agency, Region VI - Award for Environmental Excellence - Pretreatment Programs
Chickasaw Wastewater Treatment Plant, Bartlesvitie, Oklahoma

Ohio Water Poflution Control Association - George W. Burke Safery Award
Franklin Area Wastewater Treatment Plant. Franklin, Obio

ZimproyPassavant Company - Plant of the Year Award
Great Falls Wastewater Treatment Plant, Great Fells. Montana

Pacific Northwest Pollution Control Association « Division B. Zero Lost-time Accidem Award
Vancouver Wastewater Treatment Plant, Vancouver, Washington

=1989

Georgia Water Pollution Control Association - Plant of the Year Award/Operations & Maintenance Excellence Award
Albany Wastewater Treatment Plant. Albany. Georgia

Environmental Protection Agency, Region IV’ - Award of Excellence for Beneficial Sewage Sludge Utilization
Albany Wastewater Treatment Plant, Albany. Georgia

‘Ohio Water Potlusion Contro! Association - George W. Burke Safery
MCD North Regional Wastewater Treatment Plant. Dayton. Ohi

ard

Massachuserts Water Pollution Control Assoctation - Operations & Maintenance Excellence Award - Honorable Mention
Leominster Wastewater Treatmem Plant, Leominster, Massachusetts

Department of Ecology - Washington State - Operations & Maintenance Excellence Award
Vancouver Wastewater Treatment Plant, Vancouver, Washingion

#1988

Environmental Protection Agency, Region {V - Operations & Maintenance Excellence Award Finalist
Albany Wastewater Treatment Plant, Albany, Georgia

Ohio Water Pollution Contro! Association - Safety Certificate
MCD North Regional Wastewater Treatment Plant, Dayton. Ohio

Ohio Water Pollution Control Association - State Safety Award
MCD North Regional Wastewater Treatment Plant, Dayton, Ohio

November 2, 995


146

Mr. Horn. Let me ask a couple, and then I’ll turn it over to the
ranking minority member. What’s your understanding of when the
FAA will finish its review of airport rates?

Mr. Yopice. The FAA, of course, has not given us any timetable,
and they don’t intend to be bound by any timetable.

Mr. Horn. In other words, 5 years, or 4 years? How long does
it take them down there?

Mr. Yopice. I would expect, I honestly expect that we will have
a final policy early next year.

Mr. Horn. Early next year?

Mr. YopIce. Yes, sir.

Mr. Horn. Are we talking January, February, or March?

Mr. Yopice. I couldn’t make it any finer than that.

Mr. Horn. Well, let’s ask the FAA. Aren’t we making them inde-
pendent of that transportation bureaucracy so they don’t have to go
through 50 more people? Let’s see what they say to that. I under-
stand your association’s concern about fees. We always hear from
them when there is even a sniff of a 10-cent increase.

Now, it seems to me that if you object to increased fees, we could
spell that out in legislation in some way. They've tied it to the cost
of inflation, for example. Now, does that seem unreasonable?

Mr. YopIce. No, sir. In fact, I think that probably we could find
some methodology to ensure that the fees remained reasonable.
But it’s not in the bill right now.

Mr. Horn. Yes, but aren’t you unhappy with the condition of
some airports in which your membership lands? Or is all you guys
care about is just a strip, where you can get on whether it’s paved
or not. I mean I grew up in the ranch country, where we actually
have nonpaved strips, so I’m used to bumping along in a private
plane.

Mr. Yonice. Well, Mr. Chairman, that’s an interesting question,
because when I first read the bill, I had visions of what I see very
frequently, of roads and bridges and tunnels really in need of re-
pair and some capital infrastructure improvements.

But, in general, that’s not true of airports. I don’t think you find
airports falling apart the way you find these other infrastructure
assets falling apart. And I think it may be because of the funding
mechanisms that are available in aviation.

Mr. Horn. Maybe.

Mr. Yopick. We have the trust fund, which is funded by user
fees, and out of that trust fund comes the money to improve those
airports.

Mr. Horn. When the President isn’t using it for budget bal-
ancing. As you know, we're trying to get those trust funds inde-
pendent of the appropriations process.

Mr. YopIce. Yes, sir.

Mr. Horn. Because if you pay it in, we think you ought to use
it to maintain what you paid it in for, be it highways or airports.

Mr. Yopicr. That’s correct, sir. We never get out as much as we
would like.

Mr. Horn. Yes.

Mr. YooIce. But we do get out a significant amount to make our
airports a matter of pride.


Wheelabrator Clean Water Systems Inc.
Page 7

1) the encouragement for the public sector to first consider the private sector to
finance, construct, own and operate wastewater treatment infrastructure assets before
making use of federaily assisted financing:

2) the elimination of statutory and regulatory barriers to privatization; and

3) __the opportunity for the private sector to compete on an equal footing with
subsidized public financing

Providing federally assisted financing to the public sector without requiring a cost comparison
with the private sector's ability to provide the service at the same or lower total net cost is
inconsistent with a fully competitive market. If the private sector can finance, construct, own and
operate wastewater treatment infrastructure assets while assuming the same, if not higher, level of
service and environmental protections, on a cost effective basis, then the private sector should be
given the opportunity to do so. Anything less leads to inefficiencies and further dependence on
ald solutions which have proven, over time, to be inadequate.

Providing the private sector with an opportunity to compete with subsidized public financing will
require that Congress level the playing field. Federal policy should, in order to encourage
public/private partnerships, raise the tax-exempt bond cap allocation or allow access to tax
exemptions, deductions, credits or accelerated depreciation for private sector investments in
wastewater treatment infrastructure construction, ownership, and operation. This will allow the
public sector to harness the financial strength of the private sector, and offer alternative financing
options that are currently ignored by the public sector because of the availability of federally
assisted subsidies.

As a direct result of this change in federal policy, an increasingly significant portion of the
Nation's wastewater treatment infrastructure will be financed, built, owned and operated by the
private sector. This, in turn, will break the gridlock of waiting for federal grants and other loan
programs, and accelerate investment in infrastructure. Such investment will create jobs and
promote economic growth.

The House has already taken steps to address some of these points. H.R. 961 The Clean Water
Act Amendments of 1995, passed by the House on May 16, 1995, includes provisions in sections
504 and 603 that redefine Publicly Owned Treatment Works (POTW) and allows states or other
relevant agencies to transfer POTWs to qualified private sector entities, and generally codifies
E.O, 12803. H.R. 1907 the Federal-Aid Facility Privatization Act builds on a key element of the
Sale of Treatment Works provision in Section 603 by allowing total forgiveness of those grants.

As explained below, a comprehensive bill combining the elements of both bills would be a
tremendous assistance to local communities and the private sector’s efforts to pursue
public/private partnerships.


20

My name is Robert W. Poole, Jr. am president of the Reason Foundation, a nonprofit
public policy research institute based in Los Angeles. For 17 years we have been researching
privatization on a worldwide basis. I have done research on this subject under the auspices of
the U.S. Agency for International Development and the World Bank, and I have advised, among
others, the President's Commission on Privatization, the White House Office of Policy
Development, the U.S. Department of Transportation, and in the current Administration, both
the National Economic Council and the National Performance Review.

My testimony today focuses on the privatization of infrastructure facilities at the state and
local level: facilities such as airports, bridges and highways, electric and gas utilities, seaports,
and water and wastewater systems. The bad news is that funding for such vital infrastructure is
not keeping pace with recognized needs. The growth of our population and economy require
expansion of the infrastructure used for energy, environmental, and transportation purposes. The
deterioration of major highways and environmental infrastructure requires substantial investments
in reconstruction and modernization, And increasingly stringent environmental standards will
require additional investments in water quality and waste disposal

While the need is evident, federal funding is becoming less and less available, due 10 the
overriding need to balance the federal budget. Moreover, there is a growing recognition, from
OMB Director Alice Rivlin and numerous members of Congress, that with few exceptions,
infrastructure is a state and local rather than a federal responsibility.

Other countries face similar infrastructure problems. Increasingly, their response is to
turn to the private sector and private capital to meet these needs for new and modernized
infrastructure. The latest global survey of major privatized infrastructure projects is being
released this week by the newsletter Public Works Financing. \t reports that 356 privatized
infrastructure projects worth $146 billion have been financed and put under construction in 42
countries during the past decade. They include:

+ 58 water/wastewater facilities worth nearly $11 billion

+ 124 toll roads. bridges, and tunnels worth almost $70 billion
+ 18 rail projects worth $7 billion

+ 10 airport terminal and runway projects worth $21 billion

+ 18 seaport projects worth $2.1 billion

+ $7 (non-U.S.) power projects worth $29 billion.

Overall, including both financed and planned projects, some 980 specific projects with an
aggregate value of almost $700 billion are in some stage of active consideration by governments
in 95 countries

Unfortunately, only a handful of these projects--and only a small fraction of this massive
investment--is taking place in the United States. While the World Bank and USAID are telling
governments worldwide why they should privatize major infrastructure, the United States itself
relies primarily on government finance, ownership, and operation for airports, highways,


37

thing other than reinvesting in the airport. That, I think, devalues
the worth of that particular asset.

Mrs. MALONEY. You're not talking about. restrictions on sales.

Mr. Rotu. No, I’m not talking about the sale proceeds.

Mrs. MALONEY. You're talking about restrictions on the proceeds.

Mr. Rotu. Right, the proceeds of the private owner, what it can
do with its profits, once it takes over the asset.

Mrs. MALONEY. This bill doesn’t restrict the proceeds of the pri-
vate owner.

Mr. Roru. No, but presently, Government policy does. That’s
what I’m saying.

Mrs. MALONEY. It doesn’t restrict in the bill. This bill doesn’t ad-
dress that.

Mr. Rotu. No, this bill does not.

Mrs. MALONEY. Only to bring the discussion down to a concrete
example, you gave the example of Kennedy Airport, yet this bill,
if it were enacted, would have absolutely no impact on the sale of
Kennedy Airport, because that is leased land.

Mr. RoTu. Correct, except that it would permit right now—I
know that the Governor of the State of New York and the Governor
of the State of New Jersey both look positively upon privatization.

Mrs. MALONEY. But this bill would not affect the sale of Ken-
nedy.

Mr. Roru. No, it will not affect, but it’s a step in the right direc-
tion. That’s what my testimony said.

Mrs. MALONEY. But it would not in any way affect the sale there,
which is leased land, to the Port Authority.

Mr. RoTH. Right, but it would permit the Governors of the States
of New York and New Jersey to move ahead if they so desired.

Mrs. MALONEY. But not with Kennedy Airport, but with maybe
some other.

Mr. Roru. Well, there are. In New York, we have two other air-
ports. We actually have three other airports.

Mrs. MALONEY. But aren’t they all leased?

Mr. Rotu. No. Stewart Airport is owned outright by the State of
New York. It is a rather large airport. It is an airport that has the
longest runway on the east coast of the United States. It is an air-
port that is an alternate site for the landing of the space shuttle.
Stewart Airport, right now, the Governor of the State of New York
is moving toward issuing an RFP for Stewart Airport.

Mrs. MALoney. And this bill would have no impact on that.

Mr. Rotu. Yes, sure it would.

Mr. Poote. It certainly would.

Mr. Rorn. It certainly would. If the prospective buyers did not
have to pay back the Federal Government grants, the airport be-
comes more valuable in terms of what they would pay for it.

Mrs. MALONEY. But it’s not the prospective buyers who pay back
the Government.

Mr. Rotu. Well, it would be—it would calculate that.

Mrs. Maoney. In other words, it would be Governor Pataki and
the State of New York paying back.

Mr. Rotu. True. Technically true.

Mrs. MALONEY. So it has no impact on the sales price.

Mr. Rotu. Correct.


157

Mr. Horn. Well, we thank you. Ms. Kelly, it’s a delight to have
you here, and glad to see somebody from the female side of the pro-
fessional ledger testifying this afternoon.

Ms. KELLY. I see you noticed that, as well.

Mr. Horn. I noticed it.

Ms. KELLY. Well, good afternoon, or I should say good evening.
I am Peggy Kelly. I’m a senior policy analyst with the Service Em-
ployees International Union. Thank you, Chairman Horn and the
other members of the subcommittee for the opportunity to present
SEIU’s views on this legislation.

SEIU represents over 1.1 million members in both the public and
the private sectors, including those who work as janitors, highway
maintenance workers, airport personnel, wastewater treatment
workers, prison guards, nurse aids, and school cafeteria workers.
We are deeply concerned over the potential for widescale privatiza-
tion of public infrastructure that this bill authorizes.

By permitting State and local governments to sell or lease Fed-
eral-aid facilities to the private sector, H.R. 1907 encourages the
wholesale privatization of such essential Government facilities as
roads, bridges, airports, waterways, schools, prisons, and hospitals.

The consequences of privatizing any or all of these assets could
be devastating to a community. American taxpayers have invested
in the Nation’s infrastructure to serve the public interest, not to
generate profit for private companies.

Other witnesses have already discussed the erosion of our phys-
ical infrastructure, but the solution to this decline is not to hand
over Federal responsibility for financing infrastructure to the pri-
vate sector. We believe, in fact, that the situation will only worsen
if States and localities are enticed into selling off major public fa-
cilities to private companies in exchange for quick cash to settle
debts or pay for other public services.

The itt says that the facility should continue to be used for its
original purpose after it has been turned over to the private sector,
but the definition of original purpose does not include every origi-
nal condition of the grant.

This leads to the point that privatization is often used as a way
to escape the statutory responsibility to abide by Government
standards. As a result of privatization efforts, for example, safety,
labor, and other standards could be relaxed, eliminated, or by-
passed.

SEIU believes that the privatization of public assets is a recipe
for disaster. It is bad policy for Government to turn over public fa-
cilities to private operators who place a top priority on making
money, not protecting and serving the public. Privatization under-
mines the provision of quality public services, threatens public em-
ployment, and could imperil the public safety. Privatization also
raises serious questions about public accountability and oversight.

These concerns are particularly grave when facilities dealing
with such sensitive and life-essential matters as water treatment
centers, transportation systems, and prisons are involved.

The supporters of this bill argue that public infrastructure needs
massive investment, and since the Federal Government won’t be
forthcoming with the funds, States and localities must turn to the
private sector. Private firms will put up the capital as long as they


57

Mr. Chairman and Members of the Subcommittee, J appreciate the opportunity to testify on
behalf of Wheelabrator Clean Water Systems Inc. and to share my thoughts on Wheelabrator's
experience with privatization, which we prefer to call public/private partnerships, and H.R. 1907,
‘The Federal-Aid Facility Privatization Act.

I will start by telling you who Wheelabrator Clean Water Systems Inc. is, then explain
Wheelabrator’s views on public/private partnerships and our experience with the Franklin Area
Wastewater Treatment Plant and the Wilmington Wastewater Treatment Plant. I will then tun to
some of the impediments to privatization and our recommendations on how the Congress can
stimulate public/private partnerships. I will end with Wheelabrator’s comments on H.R. 1907

At the outset, I want to make it clear that Wheelabrator supports the concept behind the Federal-
Aid Facility Privatization Act. First, it will put into law what is today only an executive order.
That Executive Order, 12803, was signed by President Bush in 1992. Today the current
Administration supports the executive order and has seen first hand that positive impact it can
have. Future administrations, however, may not feel compelled to support it. Wheelabrator
would like to see privatization a matter of law as well as policy

More importantly, H.R. 1907 improves on Executive Order 12803 (E.O. 12803) by freeing up
additional capital for states and local governments to use by forgiving rather than depreciating the
federal grant. The local governments are really the best ones to decide how to recycle the money
the federal government has given them. The original purpose of the wastewater construction
grants was to build needed public purpose infrastructure. Today the private sector can provide
that assistance and service, It only seems logical to me that those funds remain in the hands of the
local government instead of being returned to the federal government.

My comments about H.R, 1907 stem from Wheelabrator’s experience in forging a public/private
Partnership with some Ohio communities. There the publicly owned wastewater treatment plant
was purchased by Wheelabrator and we entered into a 20 year service agreement to provide high
quality wastewater management services at stable rates. We know these are complicated
transactions and are learning what some of the unforeseen problems and consequences are. But
neither are they too difficult to properly structure so that the users of the system enjoy the benefits
of cost reductions. This is why the efforts of Congress are so important to us and the
communities that find public/private partnership approaches both practical and necessary. We as a
company believe that E.O. 12803 provides a basis upon which H.R. 1907, and other legislative
initiatives, can substantially improve. My experience in this area leads me to comment that H.R.
1907 provides greater incentives for public and private sector entities to make decisions about
public/private partnerships . It also, however, raises the level of uncertainty about how beneficial
it may or may not be based on its linkage to federally imposed grant assurances.

Speaking for Wheelabrator, we applaud the time and effort the Subcommittee has, and continues
to devote to the subject of privatization. It is important that Congress address this area with
legislation to clear away impediments and stimulate the revitalizing of the nation’s infrastructure.

Let me introduce you to my company.


23

a single dollar of federal funds, Congress could open the door to this major infusion of capital
into state and local governments.

In addition, every level of government would begin receiving new streams of annual tax
revenues as the privatized facilities became ordinary investor-owned businesses. Local
governments would benefit to the tune of about $3.4 billion per year (making the conservative
assumption that property taxes would average 1.5 percent of market value; in many places it
would be more than that),

Federal and state governments would get three new streams of tax revenue. First, they
would collect ordinary corporate income taxes from these newly privatized businesses. Second,
they would tax the dividends earned by investors in the stock of these businesses. Third, they
would tax the interest paid to investors in the bonds of these businesses. Table 2 lays out these
projected fiscal impacts, assuming the entire $227 billion worth of infrastructure in Table 1 were
to be sold. You will note that the federal government would receive over $8 billion per year in
net new tax revenue. That is orders of magnitude more than it is making today via grant
repayments!

In conclusion, I want to say a few words on behalf of bipartisanship. For the past two
and a half years 1 have been discussing these issues of public-private partnerships in
infrastructure with people at DOT, at EPA, at the National Performance Review, and at the
National Economic Council-as well as with members of Congress from both parties. What has
impressed me in all this is how much agreement there is in principle on these issue

+ We cannot modernize America’s infrastructure via business-as-usual: it is going
to require significant amounts of private capital.

+ Shifting to direct user fees produces many benefits, among them congestion-relief
and conservation of resources, thanks to the incentives provided by pricing.

+ For inherently monopolistic infrastructure, users must be protected from
exploitation.

There is far more common ground than there is disagreement, To be sure, we can haggle a bit
over the details--exactly what conditions should be put on privatization transactions, to protect
the public interest. But let us not get bogged down in those details. Rather, let us seize the
‘opportunity to remove this federal barrier to private investment in this country’s infrastructure,
giving cities and states the option to use this important new tool.

I would be pleased to answer any questions you may have.


Airports Should not be Included inthe Infrastructure Assets sddressed_in
This Legisiation

We are concerned that airports may be less appropriate tor privatization

than other cateyories of infrastructure assets. Several mechanisms contribute

to the current potential sources: tur funding the nation’s airport

infrastructure that may distinguish airports from other assets. Caique te

is the

tion trust fund. stich is funded by taxes

aviation, for instance

imposed an users: of air transportation system Other mechanisms. such as

passeager tucilitios charges (PFCs) and various nusuis of state support are

unique te aviation. While increased funding is an ctiective, uevertheless:

J sums are bemg received trom these existing sources. We pe

rhsstaant

bo gencralized degradation of airport assets.

fhe Bill May Lead to Increases in Fees Paid by Lsers of the National Airport

systen

Ye are concerned that the Bill might have an adverse effect on airport

sss tor

fees, which in turn. sould translate inte the denial of reasonable ac

z dl aviation to federally funded airports Although we recognize that

ne

several protections have been incorporated into the BL these protections de

pot allay concerns that there will not be a drmumatic rise in fees charged te

our oembers, There are several reasons why the cost of ase of an airport

sgislation w

could inerease if this » implemented,

fender the text of the legislation, the state or local government will be

ital Investment. an amount equal to its

permitted to recover its ¢:

unreimbursed operating expenses in any infrastructure asset, and a reasonable
rate of return.’ In recovering its capital investment. it is unclear whether

the government would be constrained to its historic costs. Ho may be

reasonable te think that the government will be able to include vther factors:

0

In the resowery of ats capital investment, The state or local gewernment will
Use br allowed te recoup a ‘reasonable rite ot retuen as a vesult of the

privatization. (to appears that the initial cost te the private entity will involve


90

are financially in a position to take this risk. I mean there are
risks involved with anything.

Mrs. MALONEY. I would like to see that language, if maybe the
counsel could get it to me, or someone. I would just like to see what
the Clean Water Act, how they solved the problem, or how they
tried to.

On page 1 of your statement, you mentioned how complicated
these privatization transactions can be and that you're learning
from some of the unforeseeable problems and consequences. Could
you elaborate on these problems and consequences?

And also on page 1, you state that although H.R. 1907 provides
greater incentives for public and private sector entities to make de-
cisions about partnerships, it raises the level of uncertainty about
how beneficial it may or may not be, based on its linkage to feder-
ally imposed grant assurances. Would you discuss this uncertainty
or us!

And I must say, I’ve got to go vote, but it will be in the record,
and he can tell me. But if you'll excuse me, we're in the middle of
a vote, and we've got a long way to go.

Mr. Dowp. Should I just wait? Would that be better?

Mrs. MALONEY. Why don’t you just wait, then.

Mr. Bass. Yes let’s call a 10-minute recess. We'll reconvene in 10
minutes.

[Recess.}

Mr. Horn [presiding]. If we might begin now. Gentlemen, I hear
Mrs. Maloney asked a question. We'll pick up with that when she
gets back. Let me just ask a couple of questions here. Mr. Cook,
the Clean Water Act will continue to require increasing invest-
ments in infrastructure. What other sorts of innovative financing
will be available for communities in the absence of grants?

Mr. Cook. Well, I mentioned the State revolving loan funds that
we administer at the Federal level. Other than that, it’s a matter
of private sector and any additional State and local programs that
might be available. There has been some discussion here about pri-
vate activity bonds, and, of course, there are public bonds available;
but I guess at this point they’re not particularly innovative, since
they’ve been in use for so long.

Mr. Horn. What do you hear people talking about when you
meet with them on a regional or State basis? They must be won-
dering, how do we do this job? Because a lot of small communities
are going to have great trouble.

Mr. Cook. Yeah. What I hear is that they feel it’s going to be
extraordinarily difficult, given the competition for funds at the local
level. Thus this administration certainly has a strong commitment
to continuing funding for the State revolving fund and setting up
even a new one for drinking water.

Mr. Horn. Well, are there any other innovative ways we might
stimulate private capital?

Mr. Cook. Well, while you were out, there was some discussion
of the tax code. I am certainly not authorized to endorse any of
those ideas, but obviously, they’re relevant.

Mr. Horn. Well, just pass them on. We don’t care what the hier-
archy does down there. We just want a good idea. A good idea is
a good idea. What do you hear?


172

Mr. GRIMM. Well, I mean, I think there are certain functions that
you could very quickly go through and determine. There are some
that have been set up. The depots, such as Kelly Air Force Base
and McClellan, have been set up as something that you could prob-
ably privatize, and they’re right there.

But you need a lot of legislation, as I’ve pointed out in my testi-
mony, to change a whole number of things in order to do that. Cer-
tainly things like, you’ve mentioned, the Patent Office which is
probably one. I don’t think it would be too hard, or take a commis-
sion, to go through and pretty quickly come up with what the right
opportunities might be.

1 think there’s probably lots of what I guess I would call func-
tions, such as nuclear waste disposal, that would be very conducive
to privatization and where privatization would remove a lot of the
bureaucracy so you could go forward and implement the program
on a much more efficient basis.

I hope that my written testimony and what I’ve said here doesn’t
give the idea that I am against privatization. I happen to be very
much for it. I just think that it needs to be much more thought out
than it seemed to be from the context of this particular bill, based
on a lot of the inconsistencies that I saw in it.

Mr. Horn. Well, your main inconsistency, now, you pointed out
are between those two sections, I take it.

Mr. Grimm. Right.

Mr. Horn. Were there some others?

Mr. Grim. There are some others, and I would be glad to sub-
mit that for the record.

Mr. Horn. Are you familiar with any cases where the reasonable
rate of return has been defined, other than by public utility com-
missions. Which at the State level, when they’re looking at rate
changes, and they obviously look at the investment, and they want
to encourage it to get infrastructure updated and they grant a rate
increase to cover that cost of capital? Is there any other process
where you've seen where that’s defined, other than strictly market
conditions?

Mr. Grimm. I’m not sure. I think, in some instances, you might
find water rates that might be subject to that if they're private
companies, but I would be guessing. What I was more going to on
that reasonable rate of return is the fact that you’re going to end
up with a Federal bureaucrat, based on the way this is set up,
making the decision on what a reasonable rate of return is.

You've got the heads of these agencies that are going to have to
make that determination, and what my fear is is that you can end
up sitting in a room, as I’ve done many times, arguing over a very
minute detail where a tenth of a point might make the difference
between whether somebody is able to privatize something or some-
body isn’t, and I thought that that particular issue should be more
thoroughly dealt with in the legislation.

Mr. Horn. Well, as you suggest, right now, in section 4, we say,

“The head of an executive department or agency shall approve a request if, (a)
the state or local government demonstrates that a market mechanism, legally en-
forceable agreement, or a regulatory mechanism will insure that the infrastructure
asset or assets continue to be used for their originally authorized purposes so long

as needed for those purposes; and (b) the private party purchasing or leasing the
infrastructure asset agrees to comply with all applicable grant assurances.”


44

ing water supplies that operate, and many of them operate very
well, particularly the larger ones across the country.

The administration has requested that the State revolving fund
concept be expanded to drinking water facilities, and, indeed, the
bill now being considered in the Senate—the reauthorization of the
Safe Drinking Water Act—would set up a new drinking water
State revolving fund.

The notion there is to ultimately capitalize that at a level where
it would revolve at about $500 million a year, basically targeted at
helping out those communities, and in this case it could be used
to help out private facilities which are marginal from a financial
point of view. It’s evident that the available Federal and State sub-
sidies are not enough, and, as we all know, local governments are
often facing financial difficulties; so innovative financing tech-
niques are obviously desirable and one of those is from the private
sector.

The Agency has had a number of projects going on to encourage
innovative financing. At last count, I think we had 47 such projects
that we had financed, and we also have set up Environmental Fi-
nance Centers across the country to give advice and assistance on
financial issues related to the environmental infrastructure.

Now, in the course of working on these projects, we have taken
quite an interest in privatization of the publicly owned treatment
works and have worked closely with the Miami Conservancy Dis-
trict in Ohio, which successfully sold a large share of its treatment
plant assets to Wheelabrator. I think you will hear more from
Wheelabrator about that, but I just wanted to discuss a few aspects
of this sale that are of particular interest, I think, to the Federal
Government and the EPA.

First, our overall concern here, I think, was that a project of this
kind benefit the community while protecting the public interest. To
talk about a few of the features that relate to that, the negotiated
agreement actually resulted in reduced user charges, 15-percent re-
duction with a guarantee for 20 years that user charges would only
be raised to take account of inflation.

Wheelabrator put up a bond and, also, they had a parent com-
pany guarantee that there would be continuing service; even in the
case of a failure on the part of Wheelabrator for some reason.
There was a transfer of funds associated with this—about $6.8 mil-
lion in total—much of which went to retire the debt on the facility.
The rest was distributed and, as I understand it, is primarily ear-
marked for sewer improvements, which is something that we’re de-
lighted to see.

The communities have retained a significant role in these
privatized facilities. First of all, they’re collecting the user charges,
and there obviously is an attractive aspect to having the police
power available to collect. money from people.

Second, they will continue to administer the pretreatment pro-
gram, which insures that industrial contributors to the sewers
meet certain pretreatment requirements before just charging into
the sewers. Finally, they have actually retained title to a small
part of the plant so that the facility can be treated as a public-
owned treatment works under the law for regulatory purposes.
That means that they are subject to secondary treatment require-


85

ownership of the facility has.

‘The Need for Greater Private Sector Involvement in Water and Wastewater

Passage of this bill will remove a significant disincentive to greater flow of
private capital to basic infrastructure assets, and help satisfy a growing need in our
country today

Today, approximately 80% of Americans receive their water service from
various governmental agencies and municipal utilities. For wastewater services, the
percentage of public or governmental ownership is above 95%. The cost to the
public of repairing and upgrading the aged infrastructure of water and wastewater
systems in combination with the expense of complying with the mandates of both the
Safe Drinking Water Act and the Clean Water Act is enormous and challenges the
funding and technical capabilities of all systems. EPA's 1992 needs survey estimates
that the Clean Water Act will cost federal, state and local governments $137 billion
over the next 20 years. This was $57 billion more than the 1990 estimate.

In order to address these growing financial responsibilities it makes sense to
remove impediments to expanded private capital investment.

There are concems with the privatization of basic vital utilities, such as water
and wastewater facilities. However, it must be remembered that investor-owned
water companies are regulated by professionals at the state level. These regulators
have a long history of distinguished service in economic regulation and are respected

3


62

Wheelabrator Clean Water Systems Inc.
Page 6

Environmental Regulations

As noted above, Wheelabrator pioneered the implementation of a new arrangement for NPDES
permitting, The arrangement identifies both the private owner and municipal service client as joint
holders of the permits. This relationship satisfies the U.S. EPA and will be the recommended
approach for the WWTP transaction. The City will remain the enforcement agency for the
industrial pretreatment program. The service agreement will detail the components of the
industrial pretreatment program along with specific procedures for compliance and enforcement.

The joint permit responsibility provides incentives for both parties to ensure influent and effluent
compliance

Purchase Option/Extension

The City will have the option to purchase the facility or extend the Service Agreement at the end
of the 20-year term. The option price in year 20 will be the fair market value

Mr. Chairman, let me now turn to what Wheelabrator sees as some of the impediments to
privatization and what Congress can do to stimulate public/private partnerships for wastewater
treatment infrastructure

PROMOTING WASTEWATER TREATMENT INFRASTRUCTURE REVITALIZATION

As discussed earlier, in order to maintain, expand and build new wastewater treatment
infrastructure, local and state governments are dependent on their ability to finance such projects.
Federal funding of wastewater treatment infrastructure assets in the form of grants, loans or tax
exempt treatment of municipal financing has reached the limit of effectiveness in supporting these
activities. In many ways it serves as a barrier to the achievement of economic efficiencies and
new construction. Private enterprise provides economic efficiencies via competitively driven
improvements, but these efficiencies are inaccessible to local and state government because
existing laws, regulations and policies prevent or severely limit their application where federal
financing has been the traditional option

To allow for the building, revitalization and maintenance of our wastewater treatment
infrastructure with minimal impact on the federal budget, Congress should turn to the economic
efficiencies that can be achieved by encouraging public/private partnerships. This can be
accomplished by facilitating financing for, and eliminating barriers to private ownership and
operation. Private sector investment can provide the necessary equity for capital improvements,
expansions and upgrades which are desperately needed by local government to meet public health
and environmental standards. The traditional model of federal financing and public ownership and
operation of infrastructure must be subjected to the competitive practices of the private sector if
wwe are to provide for economic growth.

If Congress is to achieve the most cost effective revitalization of the Nation’s wastewater
treatment infrastructure, federal policy must provide:


86

professionals in their field. Their work assures the public that only those costs which
are legitimately incurred as part of our providing water service are reflected in the
rates we can charge. {tis the continued vigorous oversight by state regulators which
is key to assuring the American people that private investment in infrastructure is fair

and not abusive. And we welcome that oversight.

The current grant repayment requirement, which H.R, 1907 would aileviate, is
but one obstacle localities face toward much needed privatization. My company and
the other members of the NAWC have demonstrated that we have the experience and
resources to professionally operate water and wastewater facilities. Our members
provide service to residence in cities such as San Jose, CA, indianapolis, IN, and the
Suburbs of Philadelphia. PA, amongst others. It may also be of interest to this
Subcommitiee that NAWC members provide service in the Congressinal districts of
many of the members of this Subcommittee, inciuding yours, Mr. Chairman. This
attests to the capability of the private sector to provide safe, reliable and affordable
drinking water ta the public

Mr. Chairman, what | do for fiving is provide the public with some of their most
basic needs, that being both safe, reliable drinking water and wastewater service
ironically, | think it is because these services are so fundamental, that they are often
taken for granied by the public. However, it is clear that continued economic growth
cannot be attained if aging government infrastructure concerns remain unresolved.

4


121

QUESTION #7: Is there a tradeoff between lower levels of service and higher rates?

ANSWER: The trucking industry is currently accepting lower levels of service of the
highway system as congestion increases without seeing lower rates of federal,
state, and local fuel and vehicle tax. Tax expenditures for reduced service
result in higher trucking operating costs.

Ne to Protect the Taxpay

QUESTION #8: H.R. 1907 anticipates ending the requirement that grants are repaid.
What, if any, conditions should the Federal Government impose as this repayment
requirement is ended?

ANSWER: We have offered an amendment to address the conditions the Federal
Government should impose as this repayment requirement is ended.

QUESTION #9: Should the grants be repaid on a depreciated basis? Grants are defined
as gifts of money or land for a particular purpose. Should the grants be repaid at all?

ANSWER: If the intent is to make a grant, defined as a gift of money or land for a
particular purpose, then the grant should not need to be repaid. However, the
asset should continue to be used for the original public purpose.

QUESTION #10: Does any repayment requirement make privatization less attractive?

ANSWER: A repayment requirement would make privatization less attractive to the
grantee and should be weighed against the benefits of such a requirement to
the grantor.

QUESTION # 11: Should there be some sort of prohibition against "churning" (i.e.
obtaining a grant and then selling the asset constructed by the grant within a short
period of time)?

ANSWER: Yes. First, it would be contrary to the prior use of the public funds and assets
to have them transferred by grant and then quickly sold, with the proceeds
used for a purpose unrelated to the original purpose. Second, if the first group
of investors sold to a second group at a profit and the second group put the
profit in their base costs, the user would be assessed fees for the costs that did
nothing to improve the infrastructure. "Churning", therefore, would not
improve the infrastructure.

Enclosure 2 4


124

Mr. STANLEY. I think that requirement—I mentioned earlier, the
best way I can sum it up, as having signed thousands of these
grants and turned down rehabilitations of stations in Pittsburgh
and in Cleveland, cities that were in desperate need of this. I never
anticipated, if these were to be loans, we should have called them
loans at the time.

Mrs. MALONEY. Do you agree, Mr. Holdsworth?

Mr. HoLpswortu. Yes, I do.

Mrs. MALONEY. Do you, Mr. Collins?

Mr. Couns. I think that there are needs for restrictions when
it comes to highways for two reasons. I can’t speak to the other
kinds of assets, but when it comes to highways, the first thing that
you have is the people who are being charged are probably not the
people who were there voting. In a transit system or in a
wastewater system, you have the people who are being charged are
also the people who are the voters. But with an interstate highway
system, the people I represent—who are UPS, bring packages from
one end of the country to the other—they need, frankly, Federal
oversight to make sure that the use of the highway is maintained
and the price that’s charged is under the existing Federal rules.

The second thing is interstate commerce. We all want, or there’s
a general push toward federalism, toward more responsibility to
the States, but the Constitution spoke of interstate commerce as
one of the major needs, or one of the major focuses, of the Federal
Government, and that interstate commerce—or the vehicles, the
tourists, travelers, and trucks going across interstate highways—is
a need for some special rules.

Mrs. MALONEY. Well, if there was ever an interstate responsibil-
ity, it’s probably water. I mean if we pollute our water in one State,
it flows to another State. It really is intertwined.

Mr. STANLEY. I don’t think anybody here or on any of the pre-
vious panels is advocating any change in terms of safety standards,
regulatory requirements. In the projects and processes we’ve been
involved in, those are to be maintained and not altered at all.

It really is—the idea that was embodied in all of these grants
proceeds—and we talked about a couple of airports earlier, one in
New York State, which was frustrated that—I hope the subsequent.
panel discusses—is in Albany, in which there was a consensus of
the country, the airport authority, and county executive. That
transaction, which made imminent sense, was prohibited by this
grant payback provision in large part.

You've had agencies like mine wanting to give that ability to re-
habilitate those assets with other capital sources, and we’ve been
standing there, saying, “I’m sorry, you’ve got to pay me back.” I
think that restriction makes no common public policy sense I know
of.

Mrs. MALONEY. It certainly should have a waiver. The Grumman
bus example is an extreme example.

Mr. STANLEY. Those buses were parked on the lower side of Man-
hattan for 2 years. I had offers from a variety of parts manufactur-
ers, operators, other cities that had successfully maintained and re-
paired those facilities, and I couldn’t let the transactions go for-
ward without putting my hand out and saying, “I need $57 mil-
lion.”


31

Moreover, here in the United States, the Port Authority of New York and New
Jersey, which operates the largest airport system in the country, is permitted to invest
its profits from Kennedy, LaGuardia, and Newark Airports in other operations,
including making lease payments to N.Y,C. and Newark. What is permitted for some
airports should be permitted for all.

This significant exception to general federal restrictions is an excellent example
of how moving profits off the airports is not tantamount to decapitalizing these assets.

It is my belief that the federal government should eliminate federal barriers to
privatization so that state and local governments can maximize the value of assets in
their communities. This is the only way we are going to tap the private sector funds
that are waiting for the opportunities to invest in roads, airports, and wastewater
treatment facilities, and other critical public infrastructure assets.

Thank you for considering this testimony in your evaluation of H.R. 1907, The

Federal-Aid Facility Privatization Act.


156

Privatization is an extremely complex issue. H.R. 1907, the Federal Aid Facility
Privatization Act of 1995, may be extremely beneficial as it could potentially remove one
of the biggest impediments to privatization - the requirement to pay back federal grant
monies if an infrastructure asset is transferred from a state or local government entity to
the private sector. On the other hand, in an environment where many local communities
are experiencing severe financial difficulties, a situation could develop where local
communities might sell infrastructure assets to meet cash flow requirements, but later
approach the federal government for additional funding if the privatization effort fails.

In summary, do to the complexity of this issue, I would recommend that the Congress
require a study to consider the issues in more detail. The study should be undertaken by
a blue ribbon Commission, similar to the Advisory Panel which was assembled to
evaluate the nuclear waste issue. This effort would assure that all of the important issues
are adequately considered. The study could be completed in three to six months. The
result would be well thought out recommendations for legislative changes.

Mr. Chairman, I agree with the basic premise that privatization has the potential to be
extremely beneficial. However, due to the complex issues which are involved, much
more thought should be given to legislative changes. Thank you for giving me the
opportunity to testify.


7

Mrs. MALONEY. Yes, I do. Thank you, Mr. Chairman, and thank
you for holding this hearing on H.R. 1907. I think all of us support
efforts to give more resources to State and local governments for
infrastructure improvements. As we all know, money is scarce for
much-needed roads, bridges, waste treatment plants, and other
municipal facilities. However, I am skeptical that this legislation is
the best approach to reaching this goal.

I also question whether this is an essential hearing. As you
know, the Federal Government shut down yesterday, and only es-
sential Federal Government employees are working and collecting
a paycheck today. In my district alone, thousands of Federal em-
ployees have been idled, and my staff has been reduced by over
half. It seems to me that all of our time would be better.spent in
trying to resolve the current budget impasse rather than spending
hours on this hearing. But since I won’t win that argument, let me
address the issue at hand.

There is currently in place a mechanism for transferring Govern-
ment assets to private parties—Executive Order 12803, signed
April 30, 1992. It provides important guidelines and procedures for
selling these assets. We are fortunate to have as the first witness
today our colleague from Indiana, Mr. McIntosh, who contributed
substantially to the development of that Executive order while
serving under the Vice President.

Unfortunately, your legislation drops many essential safeguards
from the Executive order which insure that when Government as-
sets built with Federal funds are sold to the private sector, impor-
tant standards are maintained. For example, the Executive order
requires that any funds obtained from the sale of an asset must be
used for either additional infrastructure or for debt reduction or tax
rehet.

Debt reduction and tax relief, at least in theory, would help a
local government obtain additional funds for infrastructure im-
provements through better bond ratings. H.R. 1907 does not in-
clude that requirement, and thus the proceeds could go to such un-
related items as bonuses for local executives.

The Executive order requires that the public purpose of the asset
be maintained and that conditions be met that protect users and
the public by limiting the charges for the asset. The bill drops
these limitations. That means that this bill—for example, Virginia
could sell its part of the beltway to a private company, who could
put up toll booths and charge $10 a car.

Finally, the Executive order requires that the State or local gov-
ernment reimburse the Federal Government for the portion of the
asset that it funded, minus the accelerated depreciation. This is to
ensure that State and local governments do not take Federal grant
money for a road or treatment facility and, then, the next year, sell
the asset to a private company and pocket the proceeds. This im-
portant provision is dropped from H.R. 1907.

Mr. Chairman—uh-oh, we're being called. Privatization of infra-
structure assets is certainly an important trend in this country, as
well as in several foreign nations.

Although it may warrant support as a general policy, the imple-
mentation must be carefully controlled to assure that the objectives
for which Federal funds have been awarded are not forgone and


139

Mr. Horn. Yes, I have. Well, it’s very well said. Mr. Yodice.

Mr. Yopice. Thank you, Mr. Chairman, and members of the sub-
committee. With your permission, I would like to submit my writ-
ten statement for the record.

Mr. Horn. Sure.

Mr. Yopicr. And then just take the opportunity to summarize it.
I’m general counsel of AOPA Legislative Action, and I’m here rep-
resenting the general aviation users of the airports.

Mr. Horn. I think you had better spell out AOPA for the record.

Mr. Yovice. That’s Aircraft Owners and Pilots Association.

Mr. Horn. A very active group.

Mr. Yonice. Thank you, sir.

Mr. Horn. I sit on Transportation and Infrastructure and did sit
on the Aviation Subcommittee for the last Congress.

Mr. Yopice. Those are kind remarks.

Mr. Horn. Yes.

Mr. YopIce. So, essentially, we’re here representing the general
aviation users of airports that will be affected by this legislation.
By our estimate, there are probably 2,400 federally-aided airports
owned by State and local government entities, and they include all
of the major airports of this country, and probably those 2,400 are
the most important airports in our national airports system plan.

I think it’s important to note that general aviation uses all of
them and, perhaps, to provide a contrast. The scheduled airlines
have service at approximately 400 of those airports. And even that,
I think, may be a little bit misleading, because there are just 25
or 50 airports at which the air carriers predominate, and it’s gen-
eral aviation which is either the predominant or exclusive user at
all of the other airports.

It’s hard to arrive at statistics except where we have control tow-
ers. There are 700 airports with control towers, which are the
busier airports. By our computation, general aviation accounts for
59 percent of the operations at the control-towered airports, and so
it’s not hard to imagine that they account for a heck of a lot more
than 59 percent at the totality of the airports.

Mr. Horn. I think Long Beach, CA, is an example. When I
moved there in 1970, it had the second most used airport in Amer-
ica, only behind O’Hare in Chicago. Now, they only had three com-
mercial flights a day; all the rest was general aviation, which was
half a million takeoffs and landings a year.

Mr. YODICE. A very good example, Mr. Chairman. So general
aviation has a very important interest in preserving access to these
airports on fair and reasonable terms and without unjust discrimi-
nation. Now, right now, this interest is protected by the Federal
Government, principally through the Federal Airport Aid programs.

You've heard about assurances as a condition to receiving Fed-
eral airport aid. The airport sponsor must provide certain promises
to the Federal Government, and, among those promises is the one
that I just cited to you, that the airport will be available on fair
and reasonable terms and without unjust discrimination.

The Federal Government, through the Department of Transpor-
tation and the Federal Aviation ‘Administration has structured pro-
cedures where these kinds of matters can be complained and liti-
gated and assurances can be made that the promise is being ob-


147

Mr. Horn. Mr. Butler, what do you think now? You’ve heard Mr.
Yodice’s comments. Is the Canadian situation that you were in-
volved with—weren’t you involved with Toronto? Do they have an
airport pilots association that worried when you took over Toronto?
Or does general aviation go into that airport?

Mr. BUTLER. We did only air carrier work at that airport.

Mr. Horn. Yes.

Mr. BUTLER. But we have, at Burbank, 65 years of general avia-
tion activity with nary a complaint, and most of that under private
ownership.

Mr. Horn. Would you say the Burbank Airport fees are similar
to the Government-run, if you will, Los Angeles Airport?

Mr. BuTLER. They are likely to be less.

Mr. Horn. Yes. So it doesn’t necessarily always mean the fees
are higher, your example was earlier, than the Government run-
ning something?

Mr. BUTLER. Right.

Mr. Horn. Competition does do something.

Mr. BuTLer. And a system has to work effectively to preserve it-
self. If you have one airport that is privatized and charges too
much, it’s not likely you are going to do a second one. The system
is self-correcting in that regard.

Mr. Horn. Do you have any questions, Mr. Yodice? Here’s an en-
trepreneur sitting here, and you're representing a lot of concerned
members. What would be your basic question to an entrepreneur?

Mr. Yonice. Well, I think, in response to the question that you
put to the gentleman—and I would like to address it myself, as
well. I’m well aware of the fact that they have done a very good
job. That’s because there have been other incomes derived from the
airport other than fees on the general aviation users of the airport.
That has been great.

The problem is with the legislation, as we're looking at it today,
or as we see it today, is we do have the Federal Government that
now imposes some restrictions on the fees. The fees are limited by
the costs that the airport owner expands on the airport that can
be recouped in these fees.

If we remove the Federal Government, then we no longer have
that assurance, and we're left to the bona fides suggested by Mr.
Butler, and it seems to us we're trading off something certain for
something that may not be so certain.

Mr. Horn. You've got the mayor of New York and the mayor of
Los Angeles that would like to get a decent fee out of the airport.
And, in the case of Los Angeles, they’re so behind everybody else
in the country, raising the fees, you would hardly notice it if you
paid fees elsewhere. So we’ve been through that argument with the
Federal Government.

Well, Mrs. Maloney.

Mrs. MALONEY. Well, thank you, Mr. Chairman. Mr. Yodice, you
mentioned in your statement that you think this bill may be some-
what premature at this point. I’m wondering, do you think airports
should be exempted from the bill altogether for some of the reasons
that you raised in your testimony?

Mr. Yopice. That’s certainly a solution to the concerns that we
have, but it may ignore the benefits of the bill as far as improving


153

TESTIMONY OF RODMAN D. GRIMM
PRESIDENT, THICKSTEN GRIMM BURGUM, INCORPORATED
Subcommittee on Government Management, Information & Technology
Committee on Government Reform and Oversight

I am pleased to offer my testimony in regard to H.R. 1907, the Federal Aid Facility
Privatization Act of 1995, which is a bill to permit state and local governments to
transfer - by sale or lease - federal aid facilities to the private sector without repayment
of federal grants, provided the facility continues to be used for its original purpose, and
for other purposes.

It is my understanding that the intent of this legislation is to foster privatization by
empowering state and local governments to transfer infrastructure assets financed in
whole or in part by the federal government and needed for the functioning of the
economy without an obligation to repay to the federal government any federal grant
monies received in connection with the infrastructure asset that is being privatized.

The bill, as presently drafted, appears to have some inconsistencies. For instance, the
draft bill is contradictory in terms of compliance with the original grant program. SEC
4B states that the private party must agree to comply with all applicable grant assurances.
SEC 2C states that the originally authorized purposes means the general objectives of
the original grant program; however the term is not intended to include every condition
required for a grantee to have obtained the original grant. This needs to be clarified and
defined more explicitly.

The bill has other language which is contradictory. In the TEXT, the bill reads that the
facility must "continue to be used for its original purpose, and other purposes." Under
SEC 4, the bill reads "continue to be used for their originally authorized purposes, so
long as needed for those purposes." This language needs to be clarified. In some cases,
the rational for privatization could be to split the use of the asset. Dual uses may be
necessary to provide the basis for financing, Adherence to a policy of requiring one
hundred percent of the use of the facility for public purposes would therefore in some
cases eliminate the basis for cost reduction and financing, This issue needs to be
considered in much more depth.

SEC 6 of the draft bill states that a state or local government may use proceeds from the
privatization of an infrastructure asset to the extent permitted under applicable grant
assurances and provisions. It further states that notwithstanding any other provision of
law, the state/local government may recover its capital investment, unreimbursed
operating expenses and a reasonable rate of return. This is too ambiguous.
Implementation would be difficult because arguments could arise over such issues as the
definition of “a reasonable rate of return."

One of the most difficult issues in any privatization initiative is policy in regard to
whether federal assets, paid for by taxpayers, should be awarded on a preferential basis
to any one entity instead of competitive entities. This begs the question of whether the


46

TESTIMONY OF
MICHAEL B. COOK
DIRECTOR
OFFICE OF WASTEWATER MANAGEMENT
OFFICE OF WATER
BEFORE THE
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION AND TECHNOLOGY
OF THE
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

U.S. HOUSE OF REPRESENTATIVES

November 15. 1995

Good afternoon Mr. Chairman and Members of the Subcommittee. | am pleased to
be here today to represent the Office of Water in EPA and to offer our comments on ways
the federal government can contribute to improving the Nation's environmental
infrastructure

This administration has strived to promote not only increased investment in
infrastructure but also to permit enhanced fiextbilty for our State and local partners in their
role of protecting our environment. We see public-private partnerships as another financing

option available for communities to meet their infrastructure needs

THE NEED FOR INCREASED INVESTMENT

The Clean Water Act (CWA) of 1972, contained provisions to address two important
sources of water pollution. These provisions, which include both regulation and financial
incentives, were directed at the massive problems associated with industrial and municipal
sources of pollution, The CWA established regulatory limits for the discharge of pollutants

from industrial and municipal “point sources.” It also established the Construction Grants


4

1 (b) the private party purchasing or leasing the
2 infrastructure asset agrees to comply with all appli-
3 eable grant assurances.

4 SEC. 5. NO OBLIGATION TO REPAY FEDERAL GRANT
5 MONIES.

6 A State or local government shall have no obligation
7 to repay to any agency of the Federal government any ted-
8 eral grant monies received by the State or local govern-
9 ment in connection with the infrastructure asset that is
10 being privatized.

11 SEC. 6. USE OF PROCEEDS.
12 A State or local government may use proceeds from

13. the privatization of an infrastructure asset to the extent

14 permitted under applicable grant i

arances and provi-
15. sions. Notwithstanding any other provision of law, the
16 State or local government shall be permitted to recover
17 its capital investment, an amount equal to its unrein-
18 bursed operating expenses in any infrastructure asset, and

19 a reasonable rate of return.


40

Mrs. MALONEY. Never.

Mr. Horn. Never. Mr. Roth, I was very interested in this book,
“Privatization for New York: Competing "br a Better Future.” Just
to lay it on the record, I wonder if you could sort of identify some
of the Federal barriers faced by State and local governments as
they privatize. I think you’ve done it in here, and just so we have
it in this record. While we want to make you a rich author, we
want to also get the facts on the record.

Mr. Rotu. We're giving it away for free. Basically, it has been
covered here by Congressman McIntosh and by Bob Pode. The
grant restrictions where the—if there is no profit motive other than
reinvesting your money back into a particular asset, there’s going
to be that much less interest in terms of the private sector taking
over the particular asset. I think that that is a very, very impor-
tant restriction, and it is a Federal policy.

We also have, depending on the agency, whether it’s the FAA or
the EPA—and, with the EPA, there is on record a great success
story, but it took quite a bit of time, which was the privatization
of the wastewater treatment facility in Franklin, OH.

Here it is; it’s really walking people, government officials,
through, into a policy, to adopt a policy that relinquishes Federal
control. So there are many Federal regulations that, until you
bring something up to privatize, you’re not even quite sure what
they are.

But last night I had the opportunity to meet—I don’t know if any
of you are familiar with the book, “The Death of Common Sense”,
which was a bestseller—Philip Howard.

Mr. Horn. It’s on the Speaker’s reading list. .

Mr. RoTtu. Oh, OK. Great, great. I had an opportunity to spend
a couple of hours with Philip Howard last night. And here is a
Democrat, here’s a liberal Democrat who said that the regulations,
you don’t know quite what they are, except that they’re restrictive.
They don’t want to give up power.

If the Federal Government can dictate what a local government.
can do with the asset of a sale, that is something that is not, in
fact, encouraging the sale of an asset. And that type of a restric-
tion, I believe, has to be eliminated and also the grant paybacks,
simply because, as Bob said, politically, the people want to know.

If you’re going to sell an airport, a wastewater treatment facility,
or a highway, the people would like to know where that money is
going to. And if you’re able to tell them that $50 million is going
to go to fighting crime, that could be the all-popular issue, fulfilling
need for the State of New York. But if the Federal Government is
telling you, “No, you can only spend it on debt reduction or on tax
relief,” tying that hand, in fact, changes the political dynamic of
that particular privatization, and I don’t really see the need.

I think that if a local government entity gets the money, again,
the people who elected those people to office, who empowered them
to—in the case of the city of New York, empowered the mayor to
spend billions upon billions, far more, even if he sold both air-
ports—they had the confidence in him to spend that money cor-
rectly.

Why should the Federal Government say, “Well, wait a minute.
If you get $2 billion from Kennedy, you really don’t know how to


ANSWER:

120

ATA supports this Committee’s efforts to provide a process for returning
power and decision making authority to state and local governments

However, Congress must continue to oversee the responsible distribution of
the Highway Trust Fund. Commercial trucks paid $9.1 billion in federal fuel
tax in 1993. We believe that the Federal government should not relinquish its
authority to use this money wisely to provide a safe and well maintained
Interstate and National Highway System; this is the sector of the highway
system serving 75% of commercial truck mileage

‘The Federal Government is in the process of improving State and local
government's access to private capital markets through more flexible grant
agreements. ATA supports these innovative financing efforts, with the
caution that the project selection process should include full consideration of
the freight industry as established in Intermodal Surface Transportation
Efficiency Act (ISTEA) and that highway revenues, including tolls, are spent
on highway direct construction, reconstruction, rehabilitation, repair.
maintenance and improvements.

ATA opposes the diversion of highway program funds for non-highway uses.

Concerns of Users

QUESTION #5. Many infrastructure assets are natural monopolies. Should Congress
be concerned about the possibility of increased fees on the users of infrastructure

assets?

ANSWER:

Congress should be very concerned that cash-strapped state and local
governments will view tolls, especially on Interstate bridges and tunnels, as a
revenue stream for non-highway purposes.

Highway toll revenue should not be used to subsidize other infrastructure
assets. The distortions in the cost of using highways, including the freight
costs, could offset the anticipated benefits of private sector participation in
providing highway services.

QUESTION # 6: What ways can we ensure that user fees do not increase at an unfairly

high rate?

ANSWER:

Enclosure 2

Tolling should only be allowed when more traditiona] sources of revenue have
been exhausted, and then only if the value added to the project is proportional
to the revenue collected

It is important to require that toll revenue used as repayment to be recycled
through an infrastructure bank or revolving loan fund be used for highway
Projects only


19

REMOVING FEDERAL OBSTACLES TO PRIVATIZATION

Testimony of
Robert W. Poole. Jr.

Presented before House Subcommittee on
Government Management, Information & Technology

November 15, 1995

Reason Foundation
3415 S. Sepulveda Blvd., Suite 400
Los Angeles, CA 90034
310-391-2245


14

development and nitnagement arrangements by eliminating this barrier te. public-private
Partnerships. As a result, President Bush issued Executive Order 12803, which asserted
that “State and local governments shall have greater freedom to privatize infrastructure
assets." The Executive Order eased the repayment requirement by permitting the
repayment of the d of federal grants received

Unfortunately, the intervening years have shown that Executive Oruer 12803 did
hot go far enough. The modified repayment requirement continues to prevent state and
local governments from implementing innovative infrastructure management
arrangements, Despite the enthusiasm of many governors and mayors for privatizing
infrastructure assets, only one transaction -- a small wastewater facility in Franklin, Ohio
+= has been formally completed. And it was only completed after months and months of
delay caused by federal serutiny of the transaction

H.R, 1907 removes this unnecessary burden on community control of
infrastructure assets. Specifically, the bill allows a state or local government owner to
transfer an infrastructure asset to a private party, either by sale or long-term lease, with
hho repayment of federal grants, so tong as the asset continues 10 be used for its ariginal
purpose. This needed reform returns decision making power ta state and local
governments while preserving the federal interest by requiring that the asset continue to
meet the needs for which it was intended.

Defenders of the status quo in Washington will continue to try to stand in the way
of legislation, like H.R. 1907, which returns authority and diseretion to state and
municipal governments, ‘They will claim that these proposals are too complex or have
unanticipated consequences in order to delay action, But these claims are atten
motivated by a paternalistic belief that the federal government must protect local
governments from themselves

Local governments should have the freedom to employ innovative infrastructure
‘management arrangements, including public-private partnerships, without interference
from Washington. H.R. 1907 is narrowly crafted to remove the primary federal policy
restricting such privatization transactions, without otherwise altering federal oversight of
these facilities.

H.R. 1907 is an important first step in this Congress’ privatization efforts. If we
can remove existing barriers to privatization through enacting this legislation, we will
untie the hands of state and local governments and encourage private fnvestment in
infrastructure. This privatization will generate revenue and improve state and loc
facilities across the nation

‘Thank you, again, Mr. Chairman for considering this important piece of
legislation


1047H CONGRESS
Ist Session H. R. 1

‘To permit State and local governments to transfer—by sale or lease—Federal-
aid fucilities to the private sector without repayment of Federal grants,
provided the facility contimes to be used for its original purpose, and
for other purposes.

IN THE HOUSE OF REPRESENTATIVES

JUNE 21, 1995
Mr. McINtosi (for himself and Mr. Horn) introduced the following bill;
which was referred to the Committee on Government Reform and Over:
sight, and in addition to the Committee on ‘Transportation and Infra-
re, for a period to be subsequently determined by the Speaker, in
each case for consideration of such provisions as fall within the jurisdie-
tion of the committee concerned

A BILL

To permit State and local governments to transfer—hy sale

or lease—Federal-aid facilities to the private sector with-
out repayment of Federal grants, provided the facility
continues to be used for its original purpose, and for
other purposes.
1 Be it enacted by the Senate and Ilouse of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.

This Act may be cited as the “Federal-aid Facility

Ue wWN

Privatization Act of 1995”.


182

private funds, retained a partial ownership interest in the facility, and we are operating the
terminal under a 40 year lease with the government. The success of the Trillium 3 project
demonstrates how private initiative and ingenuity can provide needed intrastructure capacity.
without further burdening the taxpayers. And, in October, 1995. the Jordan Civil Aviation
Authority, in the first major joint Israel-Jordanian venture since the signing of the recent peace
accord, awarded a contract to conduct a feasibility study for a proposed new international airport
to a Lockheed Martin Corp. team which includes Airport Group International.

Unfortunately, Federal policies have prevented a parallel rise in domestic
opportunities for public-private partnerships. This has forced many American companies, such
as Airport Group international, to pursue privatization projects abroad —- driving U.S. capital and
expertise out of the country. Thus, most of our opportunities in the foreseeable future will be
abroad. unless Federal policies change.

Public-Private Partnerships are Emerging as.a Solution to Domestic Infrastructure Needs

State and local governments are increasingly recognizing the benefits of private
management and capital investment in the delivery of basic services to their constituents and in
the funding and operation of infrastructure assets. As the Wall Street Journal recently reported,
the percentage of local governments contracting out various services. such as janitorial services,
solid waste collection, street maintenance, and data processing has risen dramatically since 1987
Academic studies show that these privatization efforts typically reduce costs by approximately
10% to 20%

“These successful public-private partnerships have lead a number of forward-thinking
state and local officials to consider aggressively the role the private sector can play in the

Airport Group International, tne ® Page 3


110

Let me describe to you what that means. What it means is pri-
vatization could go forward and tolls could be charged when the ef-
fort increases highway capacity or fixes the facility or when there
is major reconstruction that needs to be done on roads that aren’t
on the interstate highway system.

The amendment would preclude, however, efforts to sell free
roads and then charge tolls when no improvements are made.
Again, otherwise highway users would be paying twice for the
same facility. The amendment would also establish a hierarchy on
how toll proceeds could be used.

T’ve been talking about regular bread-and-butter roads like Route
9 in New Jersey, U.S. Route 1, and roads like that. As to interstate
system roads, which are the roads with the shield on them, I-95
and so forth, tolls could be placed on bridges and tunnels under the
amendment which could be placed on bridges and tunnels that are
part of the interstate system, but could not be placed on regular
bread-and-butter highway segments on the interstate system.

The reason for that is there are some very special needs in the
interstate system right now. It’s over 20 years old. There are very
high-cost bridges, like the Woodrow Wilson Bridge here in Wash-
ington, that, frankly, the Federal Government does not have the
billions of dollars available to put the money into that facility.

We need that facility; we need it fixed, and so we recognize that
a public-private partnership and a blend of toll proceeds and Fed-
eral aid highway funds are what’s needed to get that bridge fixed
and fixed in a quick way. However, when it comes to bread-and-
butter highways, the 40,000 miles of interstate highways around
the country, the highway users pay $20 billion a year into the Fed-
eral aid highway trust fund. That’s a dedicated fund, and we think
that the regular roads can be maintained and improved out of that
money.

As I said, our system of highways is the cornerstone in just-in-
time deliveries, and we're concerned that without the amendment,
H.R. 1907 could merely be used as a way to charge people twice
for a facility they’ve already purchased with their highway taxes.

Let me give you an example. I live here in the District of Colum-
bia, and, under the language of H.R. 1907, I’m concerned that the
cash-strapped District of Columbia could take the 14th Street
bridge and sell it to investors, and the investors would then put
tolls on to be able to pay their cost of buying that facility.

The District would get a windfall, but the highway users would
be charged twice for the same facility, and the end result would be
congestion and pollution from the toll booth without any improve-
ment in the basic highway infrastructure.

We think that our language, coupled with section 5, would take
care of the problem of grant repayment. We don’t see a need for
grant repayment as long as the facility is continued in public use.

That concludes my statement. I would be happy to answer any
questions.

{The prepared statement of Mr. Collins follows:]


69

Wheelabrator EOS Awards
Page 2

Ohio Water Environment Association - Safety Award - Plant Operations
Springboro Wastewater Treatment Plant, Springboro, Ohio

Ohio Water Environment Association - Safety Award - Collections Systems
Springoora Wastewater Treatment Plant, Springboro, Obio

Environmental Protection Agency. Region VI - Operations & Maintenance Excellence Award Finalist
Vancouver Wastewater Treatment Plant, Vancouver, Washington

Pacific Northwest Pollution Control Association - Safery Award - Division B, Zero Lost-time Accidents
Vancouver Wastewater Treatment Plant, Vancouver, Washington

Pacific Northwest Pollution Controt Association - Operations Challenge - First Place Overall
Vancouver Wastewater Treatment Plant Team, Vancouver. Washington

=1992

Georgia Water Pollution Contro! Association - Plant of
Albany Wastewater Treatment Plant, Albany. Georgia

1e Year Award Operations & Maintenance Excellence Award
Environmental Protection Agency, Region {V - Operations & Maintenance Excellence Award
Albany Wastewater Treatment Plant, Albany, Georgia

Georgia Water Pollution Control Association - Best Operated Plant in Georgia - Greater than 15 MGD
Atlanta-Fulton County Water Treatment Plant, Alpharetta. Georgia

Chrysler Corporation - Quality Excellence Award
Chrysler Canada LTD, Wastewater Treatment Plant, Bramalea, Ontario, Canada

Obio Water Pollution Control Association - State Safery Award
MCD North Regional Wastewater Treatment Plant, Dayton, Ohio

Obio Water Pollution Control Association « State Safery Certficate
MCD North Regional Wastewater Treatment Plant, Dayton, Ohio

Montana Water Pollution Control Association - George W. Burke Safety Award
Great Falls Wastewater Treatment Plant, Great Falls, Montana

#1991

Environmental Protection Agency. Region IV - Operations & Maintenance Excellence Award
Albany Wastewater Treatment Plant, Albany, Georgia

Georgia Water Pollution Control Association - Plant of the Year Award:Operations & Maintenance Excellence Award
Albany Wastewater Treatment Plant, Albany, Georgia

Environmental Protection Agency, Region VIII - Operations & Maintenance Excellence Award
Great Falls Wastewater Treatment Plant, Great Falls, Montana

Environmental Protection Agency. Region VIII - National Operations & Maintenance Excellence Award
Great Falls Wastewater Treatment Plant, Great Falls, Montana

November 2, 1995


Table 1: Salable State and Local infrastructure
(S Billions)

: OT boca state
Airports" 25.0 40
Electric Utilities” 13.0 37
Gas Utilities 2.0 ~
Highways/Bridges ” 96.0
Parking Structures 66 -
Ports" 9.0 24
Turpikes ” 74
Water 23.8 -
Wastewater 305 ”
Waste-to-Energy 4.0

$114.3

* Localistate breakdown estimate

Federal

One-Time Proceeds
New Annual Revenues

. Property Taxes

. Corp. Income Taxes
. Dividend Taxation - 0.340 1.02
. Bond Interest Taxation
Total Annual $3.40 $2.621 $8.12

‘Assumptions:

‘Sale price equals § times gross annual revenue.

Net taxable income equals 15 percent of gross revenue.
Federal corporate tax rate equals 34 percent of nat taxabi
‘State corporate tax rate equals 10 percent of net taxable
Local property tax equals 1.5 percent of market value
Dividends equal 80 percent of net taxable income.
Dividends taxed at 30 percent federal, 10 percent state.
Filty porcent of purchase price financed with taxable bonds,

Modamization investment equals 1/3 of market value, financed with taxable bonds,
10. Taxable bond interest rate equals @.5 percent.

11: Interest earnings taxed at 30 percent federal. 10 percent state



148

mature. Second. airports may not

consideration of this topic at this time is: pri
be a candidate for inclusion in this legislation even if other parts of our

nation’s infrastructure do require new measures to fund their apkeep because
of unique funding mechanisms available to airports. Third, we are concerned

result in unreasonable increases in fees to

that privatization of airports mig!

general aviation users

Prenatur

We feel this legislation is premature for fo ressons, First, this Bill is

2 considered at a time when the Department of Transportation and the

»pment of a policy on
tor

Federal Aviation Administration fave underway the deve

os, as well as rulemaking on procedur formal

airport rates and char

sues rela

te to the subject matter

compltints against airports. Both of these
of this legislation and are being reviewed and implemented by government
bodies who have the collective expertise on this subject matter, There has

ready been substantial time spent in ironing out these issues before

DOT/FAA. including inputs by all of the parties in response to the solicitations:
of comments. This legislation may negate the considered resolutions of these

issues by DOT/FAA,

The second reason consideration of this Bill is premature at this time is
s that this

based on the major impact to our national system of airpor
legislation could have. While it is a seemingly simple will, cur initial analysis
indicates it could have complicated offects throughout the system, effects that
could have a potentially damaging influence on general aviation’s access to
airports, We continue to study the Bill to better understand the
needed

these

effects. but more study



10

Finally the executive order requires that the state or local government reimburse the
Federal government for the portion of the asset that it funded, minus. the accelerated
depreciation. This is to insure that state and local governments do not take Federal grant
money for a road or treatment facility and then the text year sell the asset to a private company
and pocket the proceeds. This important provision is dropped for H.R. 1907

Mr. Chainman, privatization of infrastructure assets is certainly an important trend in
this country. as well as in several foreign nations, Although it may warrant suppor as a
general policy, the implementation must be carefully controlled to assure that the objectives for
‘which Federal funds have been awarded are not foregone and that impacts of such transfers wil
not adversely affect other major Federal policies and interests

It is good, Mr. Chairman, that your are providing this opportunity for exploration of
these matters, T lock forward to the testimony


141

AOPA LEGISLATIVE ACTION
SODE Street, SW « Sute 920» Washington DC 2
Telephone (202) 479.4050 « Fx (207) 484 1312

Statement of John S. Yodice
General Counsel

AOPA Legislative Action

Before the

House Committee on
Government Reform and Oversight

Subcommittee on Government Management,
Information & Technology

The Honorable Stephen Horn, Chairman

Concerning H.R. 1907
The Federal-Aid Facility Privatization Act

November 15, 1995


In 1992, Ronaid Lauder and | became active participants in changing federal
privatization policy when Mr, Lauder hosted a meeting at which Vice President
Quayle discussed the proposed Bush Administration Executive Order to facilitate
state-initiated privatizations. While all the people in the room applauded the thrust
of the proposed order, we did express the sentiment that it probably did not go far
enough.

Since the issuance of Executive Order 12803, our fears have turned into reality
The failure to adequately address the grant payback and grant restrictions issues have
resulted in the completion of just one local, federally-backed asset privatization - the
sale of Franklin, Ohio's wastewater treatment facility. °

As I've analyzed H.R. 1907, | applaud the provision that exempts state and
local governments from paying back federal grants if the asset continues to be used
for the same purpose. This is a rational public policy. The Federal Government has
a right to require that its investment of tax dollars be used to maintain an asset for its
original purpose.

Another issue which should be addressed by Congress in the near future are
grant restrictions that govern the use of funds generated from the asset. Lifting
restrictions would increase the value of the assets to buyers, therefore, increasing

sales proceeds for state and local governments


166

If you think about it, you’re taking not-for-profits, transferring
them over to for-profits, which then will send some tax money
back. But now it’s for-profit, must make money, which means the
impact on the citizens in our country, theoretically, will have to go
up in their user fees or whatever.

So, you know, I have to think—it’s the end of the day. I’m think-
ing philosophically, Mr. Chairman. So I just think that that’s a
question that needs to be answered, and I think that—well, actu-
ally, my good Republican colleague in the back just gave me a com-
ment when I walked in. She said, when I was talking about the
water flowing from State to State, one of the things we're trying
to accomplish in New York is buying Sterling Forest and preserv-
ing a whole watershed area in upstate New York. But what that
does is preserve the water for New Jersey.

To the extent that we preserve a whole vast area in New York
State, the water stream goes through that down to New Jersey,
which, then, New Jersey will sell that water. So, in a sense, we’re
all, in public resources, very intertwined in a Federal way, whether
we like it or not. I just think there are a lot of questions to this
that need to be answered.

One question that I have, personally—and you just touched on
it earlier, when you talked about the President’s reluctance to in-
vest in infrastructure that was just in-state or in one particular
State. I think one problem we see in the Federal Government is
there’s a lack of support for investment, anywhere. Instead of pull-
ing back from the investment, it’s making accommodations for ri-
diculous examples.

For example, the Grumman—I don’t know if you were here ear-
lier—-Grumman buses. They gave the example where they couldn’t
sell them because all the money would be recouped to the Federal
Government, so therefore they went through years of depreciating
it and doing all kinds of things that got like a tenth of the value,
eventually, for the city.

But certainly having some provisions that would exempt some-
thing such as a Grumman bus sale but not take away the whole
theory of investment in infrastructure. For example, all of us watch
where Federal dollars go in investment, and they want them to be
fairly distributed. But if it was to the point that they were distrib-
uted and they weren't recouped back, I think you would have more
of a reluctance for any spending of Federal dollars.

For example, I support parks and infrastructure development in
other areas, in other States across the country, because I feel that
my constituents eventually, when they travel around this world of
ours, our country, are going to benefit. They're going to go to the
beautiful Federal parks in other States; they’re going to travel on
their roads; they’re going to go to their museums. It’s an invest-
ment.

But if the investment then becomes an investment that belongs
to that State or city which, then, they can just sell, I think there
will be more of a reluctance of the Federal Government to invest
in that particular area. It got so bad on the city council, before you
could spend a dollar, we had formulas. Is it going equally to each
district?


98
ll, H.R, 1907 -- PERMITTING LOCAL GOVERNMENTS TO EMPLOY
PRIVATIZATION

DMJM strongly supports H.R. 1907, the Federal-aid Facility Privatization
Act of 1995, as a means to grant state and local governments the discretion to
consider public-private partnerships to develop and manage needed infrastructure
facilities

Existing Federal policy, contained in Executive Order 12803, requires
state and local governments to repay the depreciated value of Federal grants received
for an infrastructure facility when that facility is transferred to the private sector
This repayment requirement presents a severe economic disincentive to the
privatization of infrastructure facilities, without any apparent policy rationale

Federal "grants" are issued to help state and local governments construct
or improve a facility which provides a specific needed service to a community. As
the word "grant" implies, there is no expectation that these funds will ever be repaid
to the Federal government. Therefore, so long as the facility continues to operate as
it was intended at the time the Federal funds were provided, the expectation of the
Federal government is fully realized. H.R. 1907 explicitly ensures that assets
privatized pursuant to the terms of the bill will be used "for their original authorized
purposes, until such time as the asset or assets are no longer needed for those
purposes."

H.R. 1907 also solves a problem created by a Federal demand for grant
repayment. Two adjoining communities can have virtually identical wastewater

treatment facilities, to pick an example, which need additional capital improvements


140

served. We’re not sure what will happen to these protections if the
airports are privatized under this bill.

We've been studying the bill very carefully, but we’re not yet sat-
isfied that we understand all of its ramifications. We do believe
that it will have a serious and significant effect on the whole na-
tional airport system and on general aviation, and we suggest we
really need more time to continue to study the bill and to under-
stand better its ramification.

We also need more time, principally because the Federal Govern-
ment right now is developing a policy on airport rates and charges.
Perhaps some earlier witness may have mentioned that to you.
This was pursuant to your legislation. DOT came out with an in-
terim policy and solicited comments.

As a result of those comments, they proposed changes to that pol-
icy and again solicited comments, and those comments were due
about a week or so ago. There were many comments by airports,
as well as by DOT. I think it’s important to see the final result of
that airport policy and evaluate this bill in light of that policy, be-
cause it affects the very same airports and many of the same issues
that are addressed in this bill.

So our position here today is not necessarily in opposition to the
bill, but rather to suggest to you that the bill is premature and
that we would prefer not to see it go forward in this session of Con-
gress, but to give us the opportunity for additional consideration of
the bill in light of the new Federal airport policy which will eventu-
ate probably early next year.

In conclusion, let me also say this. The proponents of this bill
have been very forthcoming and willing to address the concerns of
general aviation. They’ve met with us; they've worked with us, and
T want to acknowledge that.

I particularly want to say that also we will continue to work with
them to see if we can find some common ground, common ground
that would address the concerns of general aviation and, at the
same time, achieve the objectives, the very worthwhile objectives of
the bill.

I think if you'll read Mr. Butler’s testimony, as I think you've al-
ready indicated you have, you will see that we have already come
together on some proposed changes which we think the legislation
warrants in terms of our consideration for general aviation.

Thank you for the opportunity to appear here today, and I would
be happy to try to respond to any questions.

{The prepared statement of Mr. Yodice follows:]


91

Mr. Cook. So far as privatization goes, there are limits on pri-
vate activity bonds on a State basis. What that means is that,
given the tremendous amount of competition for such tax-exempt
bonds, it’s difficult for the private sector to take advantage of those
for environmental infrastructure. So one possibility is to be some-
what more relaxed, at least for the environmental infrastructure
aspect.

Mr. Horn. Let me move to the Ohio example in which you and
Mr. Dowd were involved. Now I am interested in EPA policy, per
se. Do you envision any type of continued oversight role with re-
gard to privatized facilities? In other words, does EPA have a re-
sponsibility to insure that the Ohio facility will continue to operate
as a wastewater treatment plant?

Mr. Cook. We have a responsibility to insure that it meets its
obligations in their NPDES permit—that’s the permit issued under
the Clean Water Act—and also that there is an adequate operating
pretreatment program for industrial users. Those are the principal
obligations that we would expect to continue.

Mr. Horn. That reminds me of my electronic filing bill. EPA is
being very helpful with the California EPA and California industry
on both seeking permits and reporting, to do it by electronic trans-
mission. Are we doing that in this area of EPA, too?

Mr. Cook. We're working hard on incorporating electronic trans-
mission into reporting requirements that we have in all of our EPA
programs. We have a ways to go, but it’s certainly a priority.

Mr. Horn. Now, really, Mr. Dowd and Mr. Barr, the water and
wastewater facilities, if they’re privatized, will there be a cor-
responding need for increased economic regulation in those jurisdic-
tions where currently there is none, since it’s Government-owned?

Obviously, an investor might hesitate to make a large investment.
in the presence of a regulatory body without a clearly established
regulatory record. How have your companies handled this problem
in the past?

Mr. Barr. Mr. Chairman, every operation we have throughout
the United States is regulated at the State level from an economic
regulatory perspective. Frankly, we’re very comfortable with the
process.

Mr. Horn. This is as to rates?

Mr. Barr. As to rates; as to the methods and the approaches to
financing that we use, and large prescribing service standards that
we must meet. And that is not only true of my particular company,
it is true of the member companies of the National Association of
Water Companies. That regulatory framework is well established
in every State throughout the country and responds very effec-
tively.

We attract capital as an industry, essentially every day, under
the regulatory framework that I described, so that, in that sense,
we do not see that as an impediment or a problem, if you will, to
the process going forward in terms of privatization if it involves the
acquisition, ownership of the assets and the provision of services.

Mr. Horn. In other words, as far as you’re concerned, the public
interest is satisfied by the State regulatory apparatus of which
there is a long tradition, and we don’t need a Washington appara-
tus to substitute for it.


11

Mr. Horn. I thank the gentlewoman from New York, and we're
honored to have the chairman of the full committee, Mr. Clinger
of Pennsylvania here. Is there an opening statement you would like
to make?

Mr. CLINGER. Thank you, no, Mr. Chairman.

Mr. Horn. If not, I’m delighted to introduce the author of the
bill, and, as I said, a person who comes to Congress with great ex-
perience in the executive branch dealing with these problems. Mr.
McIntosh, the gentleman from Indiana.

Mr. McINTOsH. Thank you.

Mr. Horn. You’re welcome to join us afterwards on the hearing,
if you would like to question some of the witnesses.

STATEMENT OF HON. DAVID M. McINTOSH, A REPRESENTA-
TIVE IN CONGRESS FROM THE STATE OF INDIANA

Mr. McINTosH. Thank you very much, Mr. Chairman, and thank
you for giving me this opportunity to testify today on H.R. 1907,
the Federal-Aid Facility Privatization Act of 1995. I appreciate
your attention to the important issue of infrastructure privatiza-
tion, and I commend you for your continuing effort and involve-
ment in this area.

One of the issues during this 104th Congress, and particularly
with my colleagues in the freshman class, is the need to revive the
principles of the 10th amendment that says, essentially, we should
get back to the original structure of relationships between the Fed-
eral Government and State and local governments.

For decades, power has flowed toward the Federal Government
and away from States and local governments and, in many ways,
has abrogated the constitutional structure that our Founding Fa-
thers envisioned. As a result, the people most capable of efficiently
providing Government services—dedicated local government offi-
cials—have often had their hands tied by overbearing Federal di-
rectives, both regulatory and funding directives.

In the first term of this Republican-controlled Congress, we have
aggressively fought to reverse the concentration of power in Wash-
ington. From ending the unfunded mandates, which Mr. Clinger,
our chairman, took through as the first contract provision, and re-
forming the welfare system that we are going to be taking up as
part of the Reconciliation bill, this Congress has steadfastly sought
to return authority to the State and local governments. The bill we
are considering today is a modest but vital step forward in continu-
ing this effort.

Prior to 1992, a Federal regulation—known as the “Common
Rule”—which was administered by the Office of Management and
Budget, required State and local governments to fully reimburse
the Federal Government for all grants received upon the transfer
of a facility to the private sector.

Now, many of the cities had sought to engage in privatization of
local facilities and services, but were finding that this 100-percent
repayment requirement was a prohibitive economic disincentive to-
ward that privatization, preventing local officials from realistically
considering public-private partnerships as a means for improving
infrastructure services.


INTRODUCTION

1am Ray Holdsworth, President and C.E.0. of Daniel, Mann, Johnson,
& Mendenhall, also known as “"OMJM," headquartered in Los Angeles. Thank you
for the opportunity to testify this afternoon on H.R. 1907, The Federal-aid Facility
Privatization Act of 1995. 1! commend Chairman Horn, and the members of the
Subcommittee, for their attention to the important issue of infrastructure privatization.

As one of the nation's largest architectural, engineering and construction
services firms, DMJM has provided professional consulting services to both public
and private clients for over 50 years. With 50 offices worldwide, 1500 employees,
and revenues in excess of $225 million per year, DMJM is a leader in meeting today's
multimodal transportation demands, designing, and managing the construction of
public transit systems, highways and roadways, bridges, railroads, airport and
aviation facilities, and ports and harbors. We also provide a wide range of
professional services for the many types of infrastructure required to support today's
urban environment, including water and wastewater systems, flood control channels,
dams, and power generation facilities. In the Washington area, for example, we are
managing the capital improvement projects at both National and Dulles airports, the
Pentagon Renovation Program, the development of the Air Force One Maintenance
Complex at Andrews Air Force Base, and the construction of the Washington Metro
Green Line. In Los Angeles, DMJM is providing preliminary engineering and design
services for the $1.8 billion Alameda Corridor project representing a partnership of
Jocal, state and private interests. We also designed the Los Angeles Hyperion water

facility, the largest such facility in the western U.S..


102

in transit infrastructure, none of which we ever intended or were
made with the idea that they can get paid back.

Also, I would like to mention that during that time, we were
forced on a number of occasions, particularly in the New York met-
ropolitan area, to say “no” to developers who wanted to invest in
rail station rehabilitation. In one instance, a highly publicized inci-
dent when New York City MTA removed 800 Grumman buses,
which were capital assets, from the streets, and private owners
wanted to purchase those assets, we were forced to tell the MTA,
no, you couldn’t take the money because of this provision that you
needed to pay us back those proceeds.

I would like the record to illustrate, and I would be glad to follow
up with Congresswoman Maloney, those instances in which we de-
prived needed infrastructure investments from being made. The
committee asked us to briefly touch on three areas of concern—the
need for increased investment, concerns of the users of these facili-
ties, as well as the concerns of the taxpayers.

The statistics in terms of need don’t really need to be repeated.
We are 55th worldwide in terms of capital investment in infra-
structure as a percentage of our GNP. Earlier witnesses outlined
the needs as determined by EPA.

J would add, the Federal Highway Administration has estimated
that there’s an additional $29 billion a year necessary to just main-
tain the condition of the Nation’s roads and bridges. In addition to
HLR. 1907, I'll briefly touch on several other specific steps Congress
can take in terms of increasing private sector participation.

First, we’re supportive of removing any restrictions on allowing
user fees on existing infrastructure. Next, I think I would encour-
age the committee to take a look at the public benefit bond concept
that was outlined in the National Infrastructure Development Act
introduced in Congress last year. Finally, there has been talk today
of revisions to the Tax Code. This is not the subject of this hearing,
but I believe that when the debate about the flat tax takes center
stage here in Congress, the two simple provisions—one, leveling
the difference between taxable and tax-exempt debt, and removing,
if necessary, by codification the limit on operating and maintenance
contracts—would be very significant steps forward.

The concerns with regard to users, I think, are very well founded
by the committee, and I think that the infrastructure has got to be
maintained at a reasonable cost, but I would encourage this legisla-
tion, because we need as many resources to be invested in infra-
structure as possible, and the increased use of user fees, I think,
is inevitable, whether by public or private contract.

It’s our experience, in negotiating franchises with local and State
governments, that many, if not all, of the issues and concerns
raised by the committee and raised by Congresswoman Maloney
can be addressed in those franchise agreements.

The final concern mentioned in the committee correspondence
was the need to protect the taxpayer. I very firmly believe that
that concern should not extend to any requirement whatsoever that
the grant be repaid. Practically speaking, these investments have
been made, and any repayment basically punishes the local tax-
payer by taking funds that might otherwise be available for infra-


118

ANSWERS FROM THE AMERICAN TRUCKING ASSOCIATIONS
to the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION AND TECHNOLOGY
of the
GOVERNMENT REFORM AND OVERSIGHT COMMITTEE

Questions for November 15, 1995 Testimony

The Need for Increased Investment

QUESTION #1: America’s crumbling infrastructure needs majo
are the best estimates of experts as to the investment levels required to maintain current
levels of quality for roads, bridges and other infrastructure categories?

ANSWER: It is true that America’s stock of transportation infrastructure has suffered over
the years from neglect: investments in maintenance and improvement of
highways and bridges have not kept pace with either the natural rate of decay
any facility suffers or the increased demands placed upon it by commerce and
the public.

Regarding the "best estimates of experts’, ATA believes there is none better
than the USDOT. According to the USDOT (in The Status of the Nation's
Highways, Bridges and Transit: Conditions and Performance - Report of the
Secretary of Transportation to the United States Congress; January, 1993, pg
200)

© About 25 percent of the nations federal-aid highways are in poor to
mediocre condition. The cost to repair: $212 billion. There are
approximately 118,000 structurally deficient bridges in the U.S. The
cost to upgrade: $78 billion, That's a total of $290 billion in highways
and bridges alone. This does not factor in inflation which, at 3 percent
a year, pushes the 1995 cost past $300 billion. Nor does it count any
other infrastructure needs such as ports

QUESTION #2: What about future levels of investment needed due to changing needs
(such as shifts in population) and legislative mandates (such as the Clean Water Act)?

ANSWER: ATA released a study in April, 1995, performed by DRI/McGraw-Hill,
entitled, U.S. Freight Transportation Forecast ... to 2003. DRI concluded
that, based on it’s economic and demographic analyses, the total volume of
freight moved in this country will increase eighteen percent to over 6 billion
tons. To move the freight:

Enclosure 2 1


65

Wheelabrator Clean Water Systems Inc.
Page 9

In order to ensure that such activities do not adversely impact the local or state government and
users of the infrastructure system or facility, the principles guiding such asset utilization and
transfer embodied in E.O. 12803 should be followed.

IIL, Appropriate qualifications criteria for private sector participation should be established.

Private sector entities who intend to participate in the privatization of wastewater treatment
infrastructure assets must be “qualified” to undertake the responsibilities accompanying the
public/private partnership arrangements so as not to jeopardize the performance of the
infrastructure facilities and to ensure uninterrupted service. To this end, legislation should require
that the following “qualifications” be demonstrated by the private entity in order to be eligible to
participate in an asset transfer arrangement, or to be eligible for preferred federal tax treatment:

A. Private sector entities must demonstrate sufficient experience and financial strength
to address problems associated with the ownership and long-term operation of wastewater
treatment infrastructure assets, and the ability to satisfy requirements to meet any
‘guarantees agreed to as the result of a transfer of assets:

B. Private sector entities must demonstrate the ability to assure protection against
insolvency and interruption of services through appropriate contractual and financial
guarantees; and

C. Private sector entities that intend to enter into public/private partnerships by taking
ownership of a transferred public infrastructure asset, to the extent consistent with GATT
and NAFTA, must be majority owned and controlled by citizens of the United States, and
does not receive foreign government subsidies since the fate of the service provided by
that transferred asset may be influenced by foreign government decisions.

IV. Federal statutory, regulatory and policy barriers to privatization should be removed

Each executive department and agency should be required to review those procedures, legislative
and regulatory provisions, and policies affecting the management and disposition of current and
future wastewater treatment infrastructure assets owned by local and state governments, and
modify them, where possible, to remove barriers to privatization of such assets. Where the
barriers are of a statutory nature, each agency should recommend necessary modifications.

V. Create parity between public and private investment in public purpose wastewater
treatment infrastructure

The Internal Revenue Code currently recognizes that certain private sector capital projects
contribute to the public good, and so provides a special method for extending the availability of
tax exempt financing to qualifying projects. This access, however, requires that projects compete
for limited financing under a bond cap in each state, which is usually awarded on a first-come,
first-served basis. While certain projects may qualify, the granting of tax-exempt bond cap


ml

Wheelabrator EOS Awards
Page 4

‘Ohio Water Pollution Control Association - State Safery Award
Franklin Area Wastewater Treatment Plant, Franklin, Ohio

‘Ohio Water Pollution Control Association - Safety Centificate
Franklin Area Wastewater Treatment Plant, Franklin, Ohio

Environmental Protection Agency, Region | - Operations & Maintenance Excellence Award
Leominster Wastewater Treatment Plant, Leominster, Massachusets

Pacific Northwest Pollution Control Association - Division B, Safety Award
Vancouver Wastewater Treatment Plant, Vancouver, Washington

Pacific Nonthwest Pollution Control Association - Division B, Zero Lost-time Accident Award
‘Vancouver Wastewater Treatment Plant, Vancouver, Washington

91987

Environmental Protection Agency, Region IV - Operations & Maintenance Excellence Award
Albany Wastewater Treatment Plant, Albany, Georgia

Georgia Water Pollution Control Association - Plant of the Year Award/Operations & Maintenance Excellence Award
Albany Wastewater Treatment Plant, Albany, Georgia

Georgia Water Pollution Control Association - George W. Burke Safety Award
Albany Wastewater Treatment Plant, Albany, Georgia

‘Ohio Water Pollution Control Association - Safety Certificate
MCD North Regional Wastewater Treatment Plant, Dayton, Obio

Ohio Water Pollution Control Association » Safery Certificate
Franklin Area Wastewater Treatment Plant, Franklin, Ohio

Massachusetts Department of Environmental Quality Engineering - Operations & Maintenance Excellence Award
Leomunster Wastewater Treatment Plant, Leominster, Massachusetts

Pacific Northwest Pollution Control Association - Division B, Zero Lost-time Accident Award
Vancouver Wastewater Treatment Plant, Vancouver, Washington

#1986

Georgia Water Pollution Control Association - Plant of the Year Award/Operations & Maintenance Excellence Award
Albany Wastewater Treatmem Plant, Albany, Georgia

San Francisco/San Mateo County Safety Council - Award of Merit, Program for the Achievement of Outstanding Ratio
of Hours Worked to Lost-time Accidents
Burlingame Wastewater Treatment Plant, Burlingame, California

New York Water Pollution Control Association - Safery Award
Poughkeepsie Wastewater Treatment Plant, Poughkeepsie, New York

November 2. 1995


16

requirements for repayment of Federal funds should apply only to
construction grants in the case of wastewater treatment facilities.”

Do you have any comment on that?

Mr. McInTosu. As to the first one, I think the key there would
be to hear from the folks, particularly at the Environmental Protec-
tion Agency, who, at least when we were working on this, wel-
comed the effort to give them more flexibility. 1 think it applies
mainly in cases where they have already developed a private sector
involvement, and it may be an effort to create even greater flexibil-
ity to maintain that arrangement. I would defer to the technical ex-
perts in that area.

On the loans, I do think it’s important that we go ahead and in-
clude the provision there for giving the loans, and the reason is,
essentially, that I think the purpose of that original loan has been
maintained in building the infrastructure project and that, often-
times, the value of the asset doesn’t justify the continued payment
of the loan, so you can’t get a private sector party to actually take
that on, and the effect of maintaining the loan is that the city has
to continue to own the asset.

So I would urge us to keep that provision, regarding the second
comment from that gentleman.

Mr. Horn. We're going to have to recess for about 10 minutes so
we can vote. There’s a vote on the floor, and we have 5 minutes
to go. Usually the Democratic buzzer does five, but I didn’t hear
it.

[Recess.]

Mr. Horn. All right. We will call the first panel forward now—
or, technically, the second. That includes Mr. Poole and Mr. Roth,
if you would come forward. We have a tradition of swearing all wit-
nesses but a Member of Congress. I was swearing them in for
about 5 months, but the chairman said it’s inelegant to swear in
your colleagues. But so be it.

[Witnesses sworn.]

Mr. Horn, All right, the clerk will note that both witnesses af-
firmed. We’re delighted to have Mr. Robert Poole, the president of
the Reason Foundation as the first witness. Mr. Poole.

STATEMENTS OF ROBERT W. POOLE, JR., PRESIDENT, REASON
FOUNDATION; AND ALLEN ROTH, EXECUTIVE DIRECTOR,
NEW YORK STATE RESEARCH COUNCIL ON PRIVATIZATION

Mr. PooLe. Thank you very much, Mr. Chairman, members of
the committee. I’m Robert Poole, president of Reason Foundation.
We have been researching privatization for 17 years, and have ad-
vised the Reagan, Bush, and Clinton administrations on this sub-
ject.

My focus today is the privatization of State and local infrastruc-
ture. We all know that funding for infrastructure is not keeping
pace with needs and that Federal assistance is going to shrink, not

‘Ow.

Other countries face similar problems. Their response is to turn
to the private sector and private capital for infrastructure. The lat-
est global survey from Public Works Financing, which is being re-
leased this week, reports there are 356 privatized infrastructure
projects around the world, worth $146 billion.


160

Good afternoon. I am Peggy Kelly, a Senior Policy Analyst with the
Service Employees International Union (SEIU). Thank you, Chairman Hom and
the other members of the subcommittee on Government Management, Information
and Technology of the Committee on Government Reform and Oversight for this
opportunity to present SEIU's views on H.R. 1907, the "Federal-aid Facility
Privatization Act of 1995."

SEIU represents over 1.1 million members in both the public and private
sectors, including those who work as janitors, highway maintenance workers.
airport personnel, waste water treatment workers, prison guards, nurse aides, and
school cafeteria workers. We are deeply concerned over the potential for
widescale privatization of vital public infrastructure that this bill authorizes

By permitting state and local governments to sell or lease federal-aid
facilities to the private sector, H.R. 1907 encourages the wholesale privatization of
such essential government facilities as roads, bridges, airports, waterways,
schools, prisons, and hospitals. The consequences of privatizing any or all of
these assets could be devastating to a community. American taxpayers have
invested in the nation’s infrastructure to serve the public interest, not to generate
private profit.

In recent years, the United States has witnessed an unprecedented erosion of
our physical infrastructure. Our highways and sewer systems are crumbling,
bridges are collapsing, airports are overcrowded, and rail rights-of-way are in a
state of disrepair. But the solution to this decline is not to hand over federal
responsibility for financing infrastructure to the private sector. We believe, in
fact, that the situation will only worsen if states and localities are enticed into
selling off major public facilities to private companies in exchange for quick cash
to settle debts or pay for other public services.

The bill says that the facility should continue to be used for its original
purpose after it has been tumed over to the private sector. But the definition of
original purpose does not include every original condition of the grant. This leads
to the point that privatization is often used as a way to escape the statutory
responsibility to abide by government standards. As a result of privatization
efforts, for example, safety, labor and other standards could be relaxed,
eliminated, or bypassed


99

for which public funds are not available. Both communities may wish to enter into
a public-private partnership to raise the funds necessary to make the capital
improvements. Yet one community could find that the repayment requirement makes
it impossible to complete the needed privatization arrangement, while the other can
do so, simply because of different histories as to the amounts and timing of previous
Federal grants. | do not believe a Federal policy that leads to such an outcome is
defensible.

While the Federal grant repayment requirement is by no means the only
barrier to the widespread use of public-private partnerships, deleting this illogical
policy is a necessary step in permitting state and local governments to explore, and
experiment with, privatization transactions. We believe that this experimentation will
demonstrate the benefits of including the private sector in the funding, development
and management of infrastructure assets, leading to the full partnership of the private

sector in providing the nation’s infrastructure.

lll, PRIVATIZATION REDUCES COSTS TO THE COMMUNITY

Opponents of public-private partnerships incorrectly argue that
privatization will necessarily lead to higher costs. Exactly the opposite is true. To
begin with, the private sector can build and operate infrastructure assets in a more
cost effective manner, reducing costs to the community. OMJM is already
demonstrating these savings by performing work "outsourced" by the Department of
Labor, the General Services Administration, the Internal Revenue Service and the U.S.

Postai Service in a more cost effective manner.


21

seaports, water supply, and waste disposal facilities.

Based on our 17 years of researching privatization, | believe there is a very powerful case
that private ownership of major infrastructure will generally lead to greater efficiency, wiser
investment decisions, and greater customer-friendliness. Those types of infrastructure where the
United States has relied primarily on the private sector--electricity and telecommunications--are
the world-standard in their field. But the same cannot be said about the quality of our airports,
our highways, our seaports, our waler supply, or our waste disposal facilities. The most-
advanced infrastructure in these fields is in countries such as Britain, France, Italy, Japan, and
Hong Kong, where long-term private franchises or outright private ownership are becoming
standard practice.

There are several reasons why the United States lags well behind other developed
countries in making use of the private sector for infrastructure. The Reason Foundation
published a policy study in May explaining the many ways in which federal law is biased against
private capital and private ownership in infrastructure.' There are tax-code barriers, regulatory
barriers, and grant-related barriers. The purpose of today’s hearing, and this proposed
legislation, is 10 address only the grant-related barriers.

This is an issue first identified by the Reason Foundation in 1991. In looking into the
potential for privatization of airports, highways, and wastewater facilities, we noted that many
Of the larger and more attractive candidates for privatization had been built in part with federal
grants, and that many federal strings were attached to these grants. Attorney John Giraudo,
former general counsel to the President's Commission on Privatization, pointed out in a Reason
Foundation paper that although OMB’s Common Rule permits grantees to terminate federal grant
agreements unilaterally (in order to privatize), the granting agency could generally require the
repayment of the federal grants in question.? The repayment requirement would serve, in effect,
as a “transfer tax" on privatization transactions, making them more costly and’ therefore
discouraging them from occurring.

Giraudo’s paper attracted the interest of Vice President Quayle’s Council on
Competitiveness, which began to research some kind of federal reform that would reduce or
eliminate this federal barrier to privatization of state and local infrastructure. The ultimate result,
in April 1992, was President Bush’s Executive Order 12803, which is the starting point for the
legislation under discussion today. In the internal White House debate over the provisions of

» Robert W. Poole, Jr., “Revitalizing State and Local
Infrastructure: Empowering Cities and States to Tap Private Capital
and Rebuild America," Policy Study No. 190, Los Angeles: Reason
Foundation, May 1995.

* John P. Giraudo, “Breaking Free of Federal Grant
Restrictions: Making Infrastructure Privatization a Real Option,"
Policy Study No. 127, Los Angeles: Reason Foundation, February
1991.


50

5
projects EPA's public-private partnership effort is just one component of the overall
strategy to facilitate investment in environmental infrastructure

EPA considers the use of private resources, including public-private partnerships.
to finance construction and expansion of wastewater treatment facilities to be @ viable
option for community decision makers. This option allows the private sector to participate
in the financing, construction, ownership, operation, and/or maintenance of the facility
Public-private partnerships produce flexible solutions that can benefit both the community --
by providing capital for expansion without necessarily lowering its debt capacity -- as well

as the private partner, by offering an equity stake in the facility

The Miami (Ohio) Conservancy District

As you are all aware, this past July, EPA approved the first public-private partnership
deal involving a federally-funded wastewater treatment plant since the "Infrastructure
Privatization” Executive Order (E.0.12803) was gigned in April of 1992

The Miami (Ohio) Conservancy District's Franklin Area Wastewater Treatment Plant
was designated in December of 1992 as one of three U.S. EPA pilot projects as part of the
Agency's implementation of E.0, 12803, EPA staff in the Office of Wastewater
Management (OWM) worked closely with the State of Ohio, the Miami Conservancy
District, and the communities served by the Franklin plant to identify and address the many
issues surrounding the sale

EPA had several different roles in the transaction as result of E.0. 12803, these

included


95

ization transactions. Opponents of private-public partnerships in-
correctly will argue that privatization will necessarily lead to high-
er costs. Exactly the opposite is true.

To begin with, the private sector can build and operate infra-
structure assets in a more cost-effective manner, reducing costs to
the community. DMJM is already demonstrating these savings by
performing out-source work to many Government agencies, includ-
ing the Department of Labor, the GSA, the IRS, and the Postal
Service in a much more effective manner.

Private management can also better develop the revenue poten-
tial for a facility without raising user fees. For example, many ex-
isting airport facilities have expansive unmet potential to develop
retail operations across the United States that would be run by pri-
vate firms.

In the context of bridge and highway construction, there are sev-
eral examples all over the world of private capital being invested
in new facilities. Just locally here, we have the Virginia Dulles
Greenway. Often this is the only way sufficient capital can be ac-
quired to permit a project to go forward.

H.R. 1907 will give State and local government an additional
tool—and this is an important part—to meet the ever-growing need
for infrastructure in our national economy. Right now, with all the
focus being placed on budgets and financing, we think this tool will
very, very significantly help the State and local governments.

I think also that the innovative privatization transaction will re-
duce day-to-day operating costs and provide a means for infusion
of capital that today is going offshore. Thank you very much for
this opportunity. I will look forward to answering questions.

[The prepared statement of Mr. Holdsworth follows:]


33

take from New York City, sending it to Albany—or sending it to
Washington and then getting the money back, that a good amount
of that revenue seems to get eaten up along the way. It’s not the
most efficient way of doing things.

I think it would be far more efficient to allow localities to actu-
ally get the maximum value out of their assets, and privatization
is the way to do that. It leaves the money there, in the locality, and
lets local governments determine how they think it is best to
spend.

PMs. MALONEY. And what about the provision protecting users
from price gouging? How do you ensure that a private enterprise,
which would then be in a monopoly position—with an airport or a
waste treatment plant or whatever—act in a responsible manner to
keep charges reasonable to the public?

Mr. Rotu. In New York City, as an example, if you sold one air-
port—let’s say you sold Kennedy—you have a minimum of two
other airports, really three other airports. You have Stewart,
LaGuardia, and Newark airports, so it would not be a monopoly.
There is nothing that says that you should sell all of them to one
entity.

Mrs. MALONEY. But we’re not—this legislation is for the whole
country.

Mr. Roru. No, I understand.

Mrs. MALONEY. There will be areas where they could sell—I un-
derstand not for New York—but say in New York or in Chicago or
wherever.

Mr. Rotu. OK.

Mrs. MALONEY. In Norfolk, you only had one airport. What’s
going to provide that people don’t gouge prices and really abuse it
once they’ve got a monopoly?

Mr. Rou. And the British example, I think, addresses this di-
rectly. When they privatized their airports—seven airports total,
the major airport being Heathrow—part of that privatization in-
cluded a limit on how much prices could be increased.

Mrs. MALONEY. But this bill doesn’t limit.

Mr. RoTu. Oh, but this bill—like I said, I think this bill can say
more in different areas, but I think that the general grant issue
has to be addressed, in this bill or in another bill, and that as it
stands, the grant payback issue makes this bill a valuable bill.

The city of New York sells Kennedy Airport, as an example, it
can build into that contract an agreement that prices cannot in-
crease above a certain amount. But in Great Britain, when they did
that, prices not only never reached that level, they have always
been lower than that particular level.

Mrs. MALONEY. Well, Mr. Roth, do you think we should consider
sort of a local utility commission type of process to review charges
and profits?

Mr. Rotu. Absolutely not. No.

Mrs. MALONEY. It just should be part of the contract of sale.

Mr. Rortu. I think that we have elected officials who will enter
into contracts as they enter into thousands of contracts every single
year, and this would be one other contract, which would be the sale
of an asset under terms that are best for the people who have elect-
ed them to office.


168

employees and, also, employee takeover of companies. United Air-
lines and others are good examples of these.

But on the employee stock ownership plans, what would you
think of them as possible bidders for the infrastructure projects,
where they go use their capital that they have in retirement funds,
whatever?

For example, in my State of California—and I’m a 23-year mem-
ber of it—the California PERS is the largest fund in America—pri-
vate, public, nonprofit, whatever. They're in the market regularly.
What would you think of one of those groups buying some of the
infrastructure, taking it over to raise the capital? Would that be
considered privatization for you?

Ms. KELLY. Well, I mean, if you were talking about a nonprofit
organization, they wouldn’t be driven by the profit in the same way
that a private company would, although some of the other issues
that I raised would still be a concern. I mean, as I said, what
would happen if one of these organizations went bankrupt?

If they owned a vital public service, then what would happen to
that service? We just can’t see water production or something of
that nature. So there are still—even though I would see something
like that as being far preferable than turning it over to a private
company just driven by profit, there are certain problems we would
have to work out.

Mr. Horn. Well, what you have, of course, is when, once employ-
ees take over a company, they realize if you’re going to expand,
there must be some way that you get the capital, and you need to
repay the cost of the capital. But the workers do rather interesting
things when they take over.

I was interested when my colleague from New York mentioned
the need to go from nonprofit to profit. That’s what, I guess, dozens
of health maintenance organizations have done in the last 10 years.
They've moved from a nonprofit status to a profit status.

When you do that in California, the Department of Corporations
says you must have an accounting firm go out and evaluate, in es-
sence, what was your profit, even as a nonprofit.

And then you need to either get a plane and drop the money out
of a plane over where you made it, or there’s another option, you
can create a foundation. And most of the HMO’s have created a
foundation to do good deeds and raise the value of health care here
and there. Obviously, they also have somewhat of a motive to pub-
licize their HMO.

Now, I don’t know. It would be interesting to know whether there
are better healthcare services now that nonprofits have gone to be
for-profits as HMO’s. There might be. They’ve raised more capital
in the market; they can expand.

On the other hand, there might not be, because they might be
holding their workers to a tighter standard, which maybe doesn’t
provide the preventive care that an HMO is supposed to be inter-
ested in providing. So it’s hard to say. People do strange things,
whether they’re in governmental context, a corporate context, or a
nonprofit context.

One Senator told me years ago—he said, “Steve, nonprofits are
simply where they divide the profits among the staff.” And I think


133

financing and operation of infrastructure facilities 10 meet their constituents’ needs. Mayor
Stephen Goldsmith of Indianapolis has already cut more than $100 million from the municipal
budget by privatizing city infrastructure assets, and by permitting the private sector to bid against
the city government for municipal contracts. And, Mayor Roy Bernardi of Syracuse is moving
forward with his plans to consider the privatization of the City-owned Hancock airport. In
addition, several Governors, including Gov. George Pataki (NY), Gov. Christine Whitman (NJ),
Gov. William Weld (MA), Gov. Pete Wilson (CA), and Gov. Frank Keating (OK), are actively
seeking to increase the opportunities for public-private partnerships in their states.

‘These leaders’ interest in public-private partnerships is driven by three important
factors. First, the demand for domestic infrastructure investment far outstrips available public
resources. According to a new U.S. Department of Transportation report, Federal, state and local
governments must spend $15.1 billion a year more than current levels just to maintain the existing
national highway and bridge system. To improve the system would require an additional $36.6
billion a year in spending over a 20-year period. And, the U.S. Environmental Protection Agency
estimates that local governments require $127 billion just to undertake the modifications required
by the Clean Water Act. At the same time, the much-needed effort to balance the Federal budget
will constrict the availability of Federal funds for infrastructure investment. Public-private
partnerships can replace government debt or equity with private capital, at no expense to the
government itself. Privatization, therefore, provides a public owner the means to continue
existing operations of infrastructure projects and develop new ones, regardless of the availability

of Federal, state and local funds.

Airport Group Intemational, Inc © Page 4


17

These have been financed and are under construction in 42 coun-
tries in the past decade, but only a handful of all of these projects
are in the United States. USAID is telling foreign governments
why they should privatize infrastructure, but the United States re-
lies primarily on Government ownership and operation of some of
these very same types—airports, highways, seaports, water supply,
and waste disposal facilities.

There’s strong evidence that private ownership leads to greater
efficiency, wiser investment decisions, and greater user friendli-
ness. Those types of infrastructure where this country has relied
primarily on investor ownership—namely electricity and_ tele-
phones—are recognized as the standard of the world.

But we can’t say the same thing about our U.S. airports, high-
ways, seaports, water supply, and waste disposal facilities. Those
are not the world’s standard. There actually are better ones in
many other countries.

Why does the United States lag behind others in this field? This
study that we produced in May found that the Federal law today
is biased against private capital and private ownership and infra-
structure. There are tax code barriers, regulatory barriers, and
grant-related barriers. It’s only the latter that are the subject of to-
day’s hearing, which I'll talk about today.

In 1991, the Reason Foundation identified the grant repayment
requirement as a problem, which essentially amounts to a transfer
tax on privatization transactions, which makes those transactions
more costly and, therefore, discourages them from occurring.

That study was helpful in aiding the Vice President’s office to
bring about Executive Order 12803. As Congressman McIntosh
mentioned, there was actually some internal tension within the
Bush administration, and the compromise with OMB was this par-
tial repayment requirement that ended up being in the final word-
ing.

But I maintain today that that compromise was misguided.
Elimination of the repayment requirement is the appropriate policy
for three reasons.

First, the Federal Government did indeed make grants, not
loans, to the cities and States to help create infrastructure to serve
a public purpose. As long as there is a guarantee that the facility
remains in service to the public for the original purpose, then the
Federal objective has already been served, regardless of ownership.

Second, both economic theory and worldwide evidence say that
privatization of infrastructure is a good thing. It has served this
country well for electricity and telephones, and would serve us
equally well for other kinds of infrastructure. Investor-owned firms
have strong incentives for high performance. Both the Bush and
Clinton Executive orders—Clinton’s Order, 12893—endorsed this
view in principle. But if they mean it, why should Federal policy
extract the equivalent of a transfer tax when someone actually
seeks to bring about this result? If Congress finds privatization to
be sound public policy, as the Bush and Clinton administrations do,
Congress should be neutral or even encourage cities and States to
adopt it. It should not impose a tax on their decisions.

The third reason is that grant repayment is ill-advised on fiscal
grounds. The Federal Government, in fact, will benefit handsomely


61

Wheelabrator Clean Water Systems Inc.
Page $

Environmental Regulation

During the approval process, Wheelabrator pioneered a new concept for National Pollutant
Discharge Elimination System (NPDES) permitting. The NPDES permit is jointly held by
Wheelabrator and the municipalities. Wheelabrator will be responsible for plant operations; for
monitoring and sampling services for industrial pretreatment programs; and for proper regulatory
reporting, The municipalities will be responsible for enforcing the industrial pretreatment
program. The Service Agreement details the components of the industrial pretreatment program
along with specific procedures for enforcement. The joint responsibility for the NPDES permit
gives all parties the incentive to ensure compliance for both plant influent and effluent

Purchase Option/Extension
‘The municipalities have the option to purchase the facility or extend the Service Agreement at the
end of the 20-year term. The option price in year 20 will be the fair market value.

CASE STUDY TWO: WILMINGTON, DELAWARE.

History

Wheelabrator EOS has operated the City of Wilmington’s biosolids dewatering facility since

1985. In May of this year, the City issued a Request for Proposal for professional services for the
purchase, management, operation and maintenance of the Wilmington Wastewater Treatment
Plant (WWTP). The City’s 90-million gallon per day advanced wastewater treatment facility
serves 400,000 residents in the City and New Castle County. In August of this year, the City
selected Wheelabrator for the project and entered into negotiations which are still in progress.

Purchase Price and Rates

Wilmington predetermined the price for the facility in it's request for proposal at $53 million, The
City will be paid their purchase price after receiving state and federal approvals. The service fee
bid by Wheelabrator is less than the City’s current operating cost

Ownership Structure

The City of Wilmington will retain significant control through the structure of the purchase, The
facility will be owned by Wheelabrator, which will be responsible for management; operations and
maintenance (O&M) and replacement of capital equipment at the facility. The City will retain
ownership of the collection and interceptor systems. The City will also be responsible for all rate
structures and the enforcement of the industrial pretreatment program. The WWTP site will also
be owned by the City and leased to Wheelabrator under a ground lease.

Expansions

Plant expansion needs will be determined by the City. Wheelabrator will manage, design and
finance the scheduled expansions, provide the City with fixed cost for the expansion and be
responsible for on schedule completion and start-up. Any necessary service fee increase will not
occur until the expansion has been completed and operational


130

H.R. 1907
The Federal-Aid Facility Privatization Act of 1995

Testimony of
Viggo Butler
President, Airport Group International, Inc.

Presented before the House Government Management,
Information and Technology Subcommittee

November 15, 1995

Airport Group International, Inc.
330 North Brand Boulevard
Suite 300

Glendale, CA 91203-2308

(818) 409-7979


114

‘The National Highway System

We believe it is essential that legislation to designate the National Highway System,
the transportation infrastructure system that will move this country into the 21st century, is
passed by Congress very soon. The bill has been pending before a Senate/House Conference
Committee since late September. Since October Ist, the failure to enact NHS legislation has
delayed the distribution of over five billion dollars of funds to the states, The trucking
community is paying approximately eight million dollars a day in taxes for the NHS; we
now have been paying for it at this rate for over a month while the Conferees deliberate
We hope members of this Subcommittee will add your voices to the call for speedy

resolution of issues and enactment of this vital legislation.

Tl, INNOVATIVE FINANCE OPTIONS

‘The American Trucking Associations supports cost-effective innovative financing
concepts to create new highway infrastructure and to improve existing highway infrastructure
capacity and productivity. However, we oppose placing tolls on existing free facilities - we
don't want to pay rent on highways that we have already bought. We believe tolls are not
warranted until rehabilitation, reconstruction or facility capacity increases are needed and
then only if traditional sources of funding are inadequate and the value added by use of toll
revenues is commensurate with the toll revenue to be generated.

‘The Federal-aid Highway grant program generally provides that roads that have been
built with Highway Trust Fund monies are free from tolls. We are concerned that the bill as
written would allow this current restriction to be removed if the asset were transferred. We
believe some constraints should be provided when a major public asset is conveyed.

2


116

to investors to raise cash. The investors, under current language of H.R. 1907, could put in
1oll booths to repay their investment. Highway users would see no benefit - all they would
get is congestion and air pollution. Privatization that leads to a proliferation of tolls without
2 corresponding transportation benefit will be a barrier to commerce and the mobility of our
society.

Tolls are not needed for routine maintenance of the Federal-aid highway system
Highway users already pay over $114 billion a year in Federal, State and local road user
taxes, according to the American Petroleum Institute, Research Study #078. "Estimates of
Annual U.S. Road User Payments Versus Annual Road Expenditure’, March 1995. ‘These
funds can be used to properly maintain the system. provided diversion to non-highway
projects are eliminated

This amendment, coupled with the language in Section 5 of H.R. 1907, ensures that
road, tunnel and bridge projects that meet these requirements and are privatized do not

trigger grant repayment provisions.

{V. CONCLUSION

With the amendment to Section 4 we have offered, we believe that this legislation has
merit. However, it could have sweeping impacts on the construction and maintenance of our
nation’s infrastructure. We applaud you for providing this hearing today and hope that you
Will look for additional opportunities to obtain advice on privatization as your bill moves
forward

‘Thank you for the opportunity to comment. 1 would be happy to answer any

questions.


nN

w

SEC. 2. DEFINITIONS.

For purposes of this title:

(a) “Privatization”? means the disposition or
transfer of an infrastructure asset, whether by sale,
lease, or similar arrangement, from a State or local
government to a private party.

(b) “Infrastructure asset” means any asset fi-
naneed in whole or in part by the Federal Govern-
ment and needed for the functioning: of the economy.
Examples of such assets include, but are not limited
to: roads, tunnels, bridges, electricity supply facili-

ties, mid

transit, rail transportation, airports,
ports, waterways, water supply and delivery facili-
ties, recycling and wastewater treatment facilities,
solid waste disposal facilities, housing, schools, pris-
ons, and hospitals.

(c) “Originally authorized purposes” means the
general objectives of the original grant program;
however, the term is not intended to include every
condition required for a grantee to have obtained the
original grant.

(d) “State and local governments” means the
government of any State of the United States, the
District of Columbia, any commonwealth, territory
or possession of the United States, and any county,
municipality, city, town, township, local publie au-

HR 1907 I


93

able agreement, or regulatory mechanism will ensure that the in-
frastructure asset or assets continue to be used for the originally
authorized purposes as long as needed for those purposes; and (b)
The private party purchasing or leasing the infrastructure asset
agrees to comply with all applicable grant assurances.” Now, you
see a conflict there?

Mr. Down. Well, I think we do. I mean one says you have to—
the one you just read says you have to comply with everything. The
word “applicable” may be some grayness there, you know. Maybe
something else is meant than what we interpret it to be; OK? It
just sounds like they’re going against each other.

Mr. Horn. Well, that’s important. You have a general counsel in
the firm?

Mr. Down. Yes.

Mr. Horn. I hate to ask for lawyers to get into this, but why
don’t you, with common sense and your general counsel, send us
a letter on what your worries are on that language so we can make
sure it’s very clear what the intent of the authors are.

Mr. Down. We'll do that.

Mr. Horn. Thank you. Now, we'll yield to the gentleman from
New Hampshire, Mr. Bass.

Mr. Bass. Mr. Chairman, I have no further questions.

Mr. Horn. All right. We thank the panel very much. Mrs.
Maloney’s question, if we could get that in writing we’ll put it in
the record.

Mr. Dowp. Do you want me to try and answer it? I mean she
suggested. I'll be glad to.

Mr. Horn. Well, fine. Fine. Please, get it on the record, then. I
don’t know what the question is.

Mr. Down. Her point was—somebody help me here if I miss it—
but the point was that we talked about the complications of doing
privatization. We refer to, of course, the one that we’ve done, which
is Franklin, which was the pacesetter. Everything we came upon,
every problem was, “Here’s the first time we’ve seen this one.”

That’s complicated. We’ve worked through every one of them,
and everybody has approved it, all the way up through EPA and
OMB, so we're at the other side of that now, however, it was time-
consuming, and it was somewhat complicated. That, I think, was
the point of that. Perhaps through this just practice and through
this legislation, we can simplify all that. You know, now that we're
more used to it.

Mr. Horn. Very good.

Well, we will call our next panel, which is panel IV, Mr.
Holdsworth, Mr. Stanley, Mr. Collins.

[Witnesses sworn.]

Mr. Horn. All three witnesses have affirmed. Mr. Holdsworth is
the first on my list, president and chief executive officer of Daniel,
Mann, Johnson & Mendenhall. Mr. Holdsworth.


38

Mrs. MALONEY. If I’m buying it, I don’t care what they do with
the money.

Mr. Roru. You're right.

Mrs. MALONEY. I’m giving them the money; I’m getting the asset.
It doesn’t in any way precede or help with that sale.

Mr. Rotu. Correct. But that sale—let’s say the sale was $200
million. If Governor Pataki then has to give the Federal Govern-
ment $10 million—because that’s what the grants total—it’s less
valuable to the State of New York.

Mrs. MALONEY. But it does not increase the value of the asset.

Mr. Roru. At the end of the day, I think it does.

Mrs. MALONEY. Not really.

Mr. Rotn. Well, if he can take home $200 million, rather than
$190 million, I think it does.

Mrs. MALongy. If I’m going to buy it, whatever Governor Pataki
decides to do with the money is not going to influence the value
of the asset.

Mr. Rotu. Right. I’m talking about the State. To the State, the
value of the asset is less because an amount of that proceed has
got to go to the Federal Government.

Mrs. MALONEY. Well, is Pataki not going to sell?

Mr. Rotu. I don’t know. I’m meeting with him tomorrow. I think
he’s going to move ahead under any circumstances, but it would
make it more valuable. To him, it would make it more valuable.

Mrs. MALONEY. It would make it more valuable.

Mr. Rotu. To him and to the State of New York, the people of
the State of New York.

Mrs. MALONEY. But not the value of the asset.

Mr. Rotu. No, the proceeds.

Mrs. MALONEY. And whether or not this is passed, it will not
have any effect on whether he decides to sell. Let’s just make that

joint.

P Mr. Rotu. Well—no. I don’t think it will. I don’t think it will. I
have not spoken to him specifically about this for about 2 months.
I think he will go ahead in any event, but if he, as an elected offi-
cial, could keep that money in New York State, that $10 million
in New York State, it is more valuable to him. That’s what I’m say-
ing.

Mrs. MALONEY. Well, I would like to ask Mr. Poole some ques-
tions. Mr. Poole, your testimony cites the requirement in the Exec-
utive order that State and local government reimburse the Federal
Government for the undepreciated value of the assets as the stum-
bling block to selling these assets. That certainly would not affect
the private sector’s interest in this asset. Why would it discourage
State and local governments from selling these assets?

Mr. POOLE. Because, precisely, there’s a lot of inertia in govern-
ment. Selling an enterprise that has traditionally been operated by
a city or State is difficult to do. You have to change a lot of people’s
minds. And so, if a city or State can realize a significant amount
of revenue by a privatization, it’s more likely to be a strong enough
incentive to actually go to all the trouble of making the transaction
happen.

If a significant amount of what they could potentially raise from
the transaction has to be turned over to the Federal Government,


158

can obtain a market rate of return, but in order to assure a market
rate of return, the private sector will be inclined to raise user fees
sky high.

In the event that a private firm cannot make a profit with a pub-
lic facility, it may be forced into bankruptcy. Under such a cir-
cumstance, the Government and, ultimately, the taxpayers will be
held liable. We could end up with a situation much like the savings
and loans debacle, with the taxpayers forced to bail out the private
arm.

When vital public services are at stake, the Government is al-
ways ultimately liable for the health and well-being of its citizens,
whether or not it technically owns the facility in question.

Putting America’s infrastructure on the auction block will only
serve to harm ordinary American businesses, shippers, and commu-
nities by making public facilities more expensive and less acces-
sible. Low-income households would be particularly harmed by the
ensuing higher user fees. Imagine a low-income household whose
trip to work could be doubled or tripled in cost if highways or
bridge tolls get raised. Another downside to this bill is that States
and localities will be tempted to sell off assets as a quick fix to
their financial woes without addressing the underlying causes of
their fiscal problems.

After years of selling off assets to balance their budgets, States
and localities eventually could be faced with severe revenue short-
falls. A fiscal crisis could ensue after these stop-gap gimmicks of
selling off assets run their course.

Moreover, this bill fails to address how the sale price for the as-
sets is to be determined. Companies looking to buy these facilities
cheap could take advantage of cash-strapped State and local gov-
ernments and negotiate prices that are below the market value.

Under fiscal pressure, State and local governments may end up
selling their assets to private operators for far less than the fair
market value, thereby losing a great deal of money in the bargain.

I would like to conclude by saying that SEIU believes that the
Federal Government should put a stop to any further efforts to pri-
vatize public facilities. We urge President Clinton to rescind Execu-
tive Order 12803 and to instruct the Federal departments to grant
no waivers regarding Federal rights. This action would be more in
the public interest than, we believe, enacting H.R. 1907 into law
to expand and codify this Executive order. Thank you.

{The prepared statement of Ms. Kelly follows:]


125

And this is at the same time in the Reagan administration when
the other hearing that we would have the next day, we were ex-
plaining that we were cutting the capital budget. So it just made
no sense in terms of a signal to local and municipal officials. It
makes no sense today.

Mrs. MALONEY. All right. Now, Mr. Collins, I would just like to
comment on your testimony. I came in at the end, but it was very
thoughtful, and you had some amendments and recommendations
that seem very thoughtful. Your example suggests that it is inher-
ent in major Federal aid projects that special legislative provisions
should be included for these programs, and maybe in all areas, not
just roads.

This indicates that a much more complex measure than the
present bill may be required. Could you comment further? You
don’t see other requirements, say, in other areas, besides roads?
Like you gave the example of roads having a Federal commitment
or a public commitment to maintain them, pay back, et cetera.

Mr. CoLLins. It’s the roads that are our major focus, because
those are the ones that connect one locality to another locality.
Maybe there are analogies in some of the other areas, but, you
know, for captive water systems.

Mrs. MALONEY. Water flows from one locality to another. The
safety standards at one airport impact on the safety standards in
another. I mean we are a Federal Government.

Mr. CoLLins. But what I understood from the earlier speakers,
they were talking about like a drinking water distribution system,
which would have a certain finite area. So it’s not the rivers. It’s
not the water in the rivers. It’s the water that’s flowing in a fee
system, a drinking water distribution system or sewer collection
system. Those people don’t move. It’s not a new rater-payer coming
in every instant and leaving at the other end, the way the high-
ways are.

Mrs. MALONEY, But water moves.

Mr. CoLuins. Yes.

Mrs. MALONEY. If the water isn’t treated well in one locality, it
can seep and flow to another locality.

Mr. CoLins. Yes.

Mrs. MALONEY. Thank you for testifying.

Mr. Horn. Let me ask you closing questions here. Obviously, Mr.
Stanley, you heard Mr. Collins’ comments.

Mr. STANLEY. Yes.

Mr. Horn. Do you agree with some of them? Or where do you
agree and disagree with his comments.

Mr. STANLEY. I agree with his comments, and I’m familiar with
the amendment attached to his testimony, and we are in complete
concurrence with that as applied to surface transportation and
roads and bridges.

I do think there are going to be—and, as an example, it was
mentioned earlier, the Woodrow Wilson Bridge. We have made a
proposal to Federal Highways and the States of Maryland, Vir-
ginia, and the District of Columbia, specifically as a public-private
partnership for that facility.

__I think I can confidently predict, and there has been legislation
in the Senate, that is a project in which this type of solution is the


100

Private management can also better develop the revenue potential for a
facility without raising user fees. For example, many existing airport facilities have
expansive unmet potential to develop retail operations. The possibilities for full-
service retail facilities are best demonstrated at Pittsburgh airport, where, | am told,
iocal residents now visit the airport just to shop at the adjacent mali

In the context of bridge and highway construction, there are examples
all over the world of private capital being invested in new facilities. Often, this is the
only way sufficient capital can be acquired to permit a project to go forward. But we
need look no further than northern Virginia, where the Dulles Greenway opened one

month ago, to see the real benefits of policies that encourage such investments

IV. CONCLUSION

H.R, 1907 will give state and local governments an additional too! to
attempt to meet the evergrowing need for infrastructure to support our national
economy. These innovative privatization transactions will reduce day-to-day
operating costs, and provide a means for the infusion of capital.

{again want to thank you for your leadership, Mr. Chairman, and | will

be happy to answer any questions.


41

spend it. We’re going to tell you how to do it.” I think, then, in
terms of the Toth amendment, in terms of empowering local gov-
ernments to fend for themselves, those types of restrictions have
got to be eliminated.

Mr. Horn. Yes. I think the current majority in the House will
agree with.

Let me ask you, Mr. Poole, in Mr. Roth’s book, you were the au-
thor of the section on the airports. I was impressed by your analy-
sis of the economics of privatizing those New York City airports.
I was curious if the analysis assumed that the rates charged for
using the airport would be unchanged. Was there any assumption?

Mr. PooLe. There was not an explicit assumption. The implicit
assumption was that they would probably go up at the rate of infla-
tion.

Mr. Horn. The rate of inflation. Not like the rate of medical
healthcare inflation.

Mr. PooLe. No, no. Just the CPI.

Mr. Horn. Good. Well, this has been very helpful. You’ve both
been major architects of these ideas, and you've explained them
very well, and we thank you for coming before us.

Mr. Roru. Thank you for having us.

Mrs. MALONEY. Could I just “add?

Mr. Horw. Sure.

Mrs. MALONEY. You did, I believe both of you—I know that Mr.
Poole did, on page 4 of your testimony—you seem to say that if re-
payment is forgiven after privatization, there should be a guaran-
tee that the facility remain serving the public for the same pur-
pose, as long as it is needed. But, you’re supporting—and do you
also support—that part of the bill, that it’serve the purpose as long
as it’s needed. So you're supporting that caveat. Why wouldn’t you
then support that the money go back to the taxpayers or go back
to the total common good?

Now, long before our present mayors and other mayors in recent
history, some of them haven’t supported the private good. I mean
some of them have given Ynulti billion-dollar contracts to their cro-
nies on companies that didn’t exist and services that didn’t exist.

Corruption, unfortunately, in New York State has been written
about at great length, based on the decisions made by some of our
grand elected officials. Granted, they’re voted out of office, but if
they make poor decisions with taxpayers’ funds, then they’re out of
office, but the people living in the city pay the price.

You know, just for argument’s sake, you had a mayor who de-
cided to use the proceeds on the Parking Violations Bureau con-
tract—that’s an example—$28 to a company that didn’t exist,
owned by Stanley Friedman. The citizens are out that money.

Wouldn’t it be a safer way to have it go for tax relief? Certainly
one of the things the Governor is standing for very firmly, and cer-
tainly the mayor. Why not designate it, since it is a publicly-owned
utility?

You've been arguing against that, yet you argue that you should
use the facility as long as it’s needed. So I’m just throwing that out,
but I would also like to specifically have a question on “as long as
it’s needed.” I mean what is that? How long is that? And who is
going to decide how long “as needed” is?