 Welcome back to Think Tech. I'm Jay Fiedel. This is Talking Tax. More specifically, this is Talking Tax with Tom Yamachika, President and Tax Foundation of Hawaii. Today, we're going to talk about the love-hate relationship with P3. That's public-private partnerships, PPP. More specifically, we're going to talk about public-private partnerships and how they work in Hawaii and whether they're really desirable or not. Welcome to the show, Tom. Thanks for having me on the show, Jay. So what is this thing with the love-hate relationship? What do you love about it? What do you hate about it? Well, it's not me. It's our state government. Part of being a PPP is that there's a public involved. The first P is public, and the government has to play ball in order for it to work. So what we're going to do today is talk about some recent examples and see if they're working or not, and try to come up with what's not working and why, and what can we do about it? Well, let's first have a robust definition of a PPP. What is it? How is it structured? Where does it fit? What does it do operationally? Well, a PPP, public-private partnership, is where private interests and government interests combine to do a particular project. The most recent example of this is our iconic Aloha stadium, which has been up for redevelopment because the current stadium is getting a little old. It was kind of built in the 60s, right? Did you say iconic? I thought you might have said sardonic. I think you might have said pathetic or ironic. That's what you must have said. Not ironic at all. It's rustonic. That's been one of the big problems with it. But anyway, the current plan, or at least it was current until a few weeks ago, was to have a public-private partnership develop the stadium into a new Aloha stadium entertainment district, or NASAED. You may have seen that abbreviation in the news a lot. And the idea was for a private developer to come in, and in exchange for fronting some of the cash, would get the right to develop residential towers, shops, and so forth around the new stadium. And that would be their part. And of course, the state would have its part in constructing the stadium and making sure it's available for such things as UH football games, swap meets, or whatever the heck they want to use it for. Let me only stop you there then. So each one has certain duties and obligations and benefits under an agreement of some kind. Let's call it a partnership agreement. So the state has certain things it has to do, like money mostly, and permissions. And I suppose that gets around the procurement aspect. How does the procurement aspect work? I want to ask you. And the developer, he gets what could be a really tremendous benefit. If he's a sharp negotiator, he's going to be rich. Am I right? Well, we don't know. In terms of how it works, you just asked me that question. It typically goes through an RFP process request for proposal. So the stadium authority would go out to the community and say, okay, who's interested in doing this? Give me your best shot for what you plan to do, how you plan to do it, and what's it going to cost us the state? Okay, let me interrupt again. So it seems to me that when you negotiate a deal like that, your first offer is really not what you wind up with. I guess I'm talking about a private-private partnership. I make an offer, a term sheet, if you will. And the other guy comes back with a different version of that. We sit in a conference room for hours or days or weeks. We go back and forth. And the ultimate agreement is way different than what the original proposal was. So I have a problem with seeing this as an RFP because actually the terms of this relationship, the public-private partnership, document, term sheet, are going to be way different. So it's not like anybody can come in and give you that term sheet and an RFP response. Well, I mean, that's not how the state apparently is looking at it. I mean, they look at it as, all right, various proposals come in. We're going to score them based on certain criteria, which are then made public. Maybe 10 bidders come in. We knock out eight. We talk further with the remaining two. Give me your best and final offer and address this and don't address that, and stuff like that. And then you get to a deal with the state on what they're going to do and how they're going to do it. Now, with Aloha Stadium in particular, it's been kind of funny because what the stadium did was the first went out and purchased the services of consultants, maybe like $20 million worth of consultants and planners to come up with either a concept or a rough plan for how the land's going to be used. And presumably the state would put that into its RFP. You know, I feel and I've said this before, Tom, and it's you, but it may be others. I am sure that if you put us together, you and me in a room and asked us to consult on this, we could do it for no more than $15 million. What do you think? Well, of course. But they do come out with work product, with conceptual drawings, they do go to the community. They have these public meetings and so forth around IEA, which is obviously where the stadium is. And they solicit community input, go back and edit, refine whatever based on the community input, and they come up with something relatively final that they then go out for an RFP with. Now, the problem with this stadium, with Aloha Stadium, is that the governor cut the process short. Because as you probably heard in the news a couple of weeks ago, the project was with the Department of Accounting and General Services to solicit bids on. And the governor said, stop. And the state comptroller, Kurt Uhtoguro said, stop. And governor said, yeah, stop. We are taking this project in a different direction. And further analysis will be made by Mike McCartney, who's head of D-bed. We're going to switch the agency. And of course, the DAGs folks are saying, geez, I hope they wouldn't do that because we have contacts, we have experience, we have a lot of relationships that have been built up over the past two, three years, amongst the $20 million. And we're obligated for the $20 million, right? They paid it. Well, what a waste of money that is. I mean, presumably you wouldn't be starting from scratch, but where would you be starting from? That's the question. I mean, how are they taking this in a different direction? We don't know. And that's, I think, one of the big risks that you have in any public-private partnership of significant size, and that is, is somebody going to come along later on in the game and pull out the rug? That's actually what I was thinking about. I wanted to talk with you about, but let's take the stadium first. You have a crisis of confidence by the business community against the government. What happened here? So my first question to you is, what happened here? What is the change of policy based on? And what they tell us is that the real reason or is it some subterranean political reason? What are your thoughts? What's been in the press about the reason for this change? I've already said it. The governor said he wants to take the project in a different direction. What that means, I don't know. Is the governor some kind of expert in the land-use planning? Well, of course not, but he's the governor. Okay. I think I've got my answer. The point to make here is that it's, and I've been a governor, by the way, with perhaps one or two months left in his term. Right. It's so strange. I hope somebody ultimately finds out what went on here because it is certainly not what it seems to be. And taking a different direction doesn't satisfy me. And it certainly doesn't repay the loss of 20 million dollars of our money. But the other thing I wanted to mention, and I think this pervades the whole concept, is dealing with government is different. You deal with a private partner. And the courts, you've got the law, you've got starved decisis and the rule of law, and it can't be all that political because some judge may have to decide on a controversy or an arbitrator. But when you deal with the government, it's different. The government has built in, I don't know if you've ever run across this, built in statements in the law that says it can change its mind with impunity and can break a lease with impunity. It can break a contract and it does break contract. So you have a completely unpredictable partner is what you have. Maybe subject to very strange and subterranean political influences. And that is really not as attractive as dealing with somebody that you can vet, that you can research, that you can determine the litigation background for, and that you can sue if he goes south. So I just want to lay that out as a foundational point in my thinking is that dealing with the government is dealing with an unreliable partner. Sorry. Well, I mean, that has been played out in history. There are other instances where our state government has worked with private developers and has gotten some questionable results. You may remember back in 1998, we had the Hawaii Community Development Authority, which of course is trying to redevelop Kakaako. And they selected a plan by Republican D. G. Anderson, Andy Anderson, for an entertainment complex. You know, they're in Kakaako, including a Ferris wheel, laser light tower, concert shell, shops, restaurants, and a mini golf course. But the HCDA staff was hostile. The governor, Ben Caetano, at the time, he was hostile to it when they were trying to negotiate the details. And ultimately, the HCDA board lost confidence, the financial projections, or that's what they said. And they basically scuttled the deal. That's one. Of course, Anderson complained that his plan was solid and was scuttled for political reasons. We don't really know what the truth is, but the truth lies probably somewhere in between. HCDA came back again in 2005 and selected a $650 million proposal from Alexander and Baldwin to develop 37 acres of land in Kakaako. They were thinking about condominium towers, restaurants, stores, a hula amphitheater, a waterfront promenade, and other things. There, the 2006 legislature passed a bill to prohibit any residential use in the area, basically making the deal impossible. You know, I remember so well that I got a call from the then CEO of A&B one afternoon on Wednesday, and he said he wanted to come down to Think Tech Hawaii, then on radio on an KHPR, and he had an announcement he wanted to make. And sure, come on down. He came down and he announced it was our big scoop. He said they were pulling the plug on that deal because it was unworkable, and they had had these issues. That was announced on Think Tech, Tom, so you're really hitting one that reminds me of our past. Very good. Yep, no Think Tech has been instrumental in our history, and here's another one. Maui Memorial Medical Center. When it was run by the state, it was bleeding like crazy, not blood, not actual blood, but red ink in the accounting parlance. The state decided to go out and get a private contractor to run it. Kaiser Permanente was selected and is running it. Lawsuits abounded, but apparently the legal kerfuffle cleared up, and Kaiser is still running it. And I think they're doing a better job than the state did. Well, is that the fundamental conclusion we're moving toward here, that if a private company can do the job without having this love-hate partnership with the state, it works out better generally? Is that the conclusion? Well, I think the issues are pretty much the same as the argument about privatization of government services generally. Are we willing to let some Joe Schmo profit from a good or service that government is or was providing? Are we willing to let those jobs be staffed by folks who are not in our powerful government unions? Would it be justifiable if Mr. Schmo can provide the goods or services more efficiently? Would it be justifiable if Mr. Schmo can provide those goods or services at lower cost to the taxpayers without an appreciable reduction in quality? And would it be justifiable if the vendor is as transparent and accountable to the general public, namely us taxpayers, as the government agency is or was? If I'm a private developer and I want to do a project, why would I enter into a deal with the government? It's unpredictable, sometimes completely wrong-headed, and I have all these burdens and possible losses down the road ahead of me. Why do I need to do it with the government? What is the way to open the path for me to do it by myself? And I would suggest an answer to you is that it probably helps you ingratiate yourself to the powers that be in the government and get favors from them and avoid at least some of the red tape and the permitting delays. And if I can get into a partnership with them, I'm better off in that aspect of the partnership with the government. Am I right about that? And if not... I would think that if you are a developer who already has that goodwill built up, you already have those chits, then I think it's much less risky for you to go into the public-private partnership in the first place and you stand to make some good money, and that's why you would want to go into it. That's my take on it. Well, how would you change the system here to get the best of both worlds? You know, that's a very, very good question. I mean, I think to get the best out of government in terms of efficiency services, benefit to the people, you have to be willing to look outside the box, okay? You have to be willing to consider alternative forms of procurement of which PPP is one. And if you can strike a deal where everybody benefits, and I think Maui Memorial is one such deal, then everybody's better off. You haven't really answered my question about the negotiation of the deal in the first place. I come in with a term sheet and they accept that because they like that for their RFP. But then the deal that emerges is completely different. Seems unfair to the other guy who might have come in with a term sheet that's closer. You know, to the ultimate result that I get. Yeah, and I think if that were to happen, if the deal were to get changed very much differently from the original RFP, I think some court would force the government to go out for another RFP to go back to the beginning. Yeah, that's another element that we should throw in the fire. You talk about the Maui hospital, they had wrinkles, they had disputes, they had controversies and lawsuits and what have you. And it seems to me that the possibility of controversies and disputes and lawsuits is much greater when you're dealing with a public-private partnership. Not only because the government is not completely reliable, but because there's an invidious comparison out there by others who are resentful that they didn't get it. And they want to attack it. And they try to find ways that the law relating to the establishment of public-private partnership has not been fully complied with. And so you have litigation. And I would ask you, you know, is the possibility of litigation greater in the establishment, you know, in the stabilization, if you will, of a public-private partnership than the development of an ordinary partnership? No, I would imagine it would be because there are more variables. It's tougher to convince, you know, a court, when you have more degrees of freedom, that what you've done is fair in process and followed the letter of the procurement code. I mean, the simplest cases is you go up for procurement. The government specifies, you know, a good that they want to buy and everybody comes in and the government selects the lowest price, right? Easy. No degrees of freedom, just the price. When you kind of go out toward, all right, you know, give me the best product that does this, there are more degrees of freedom because, you know, people come in with different models, different types of things. And so you're looking not only at price but quality. Then you get to things like the public-private partnership, where you have, okay, we have this land, we're going to, you know, this is what we want to do. Come give us a proposal where, you know, you can develop X, Y, and Z, but we got to make money too. So the universe of solutions is multidimensional, right? Because there are many criteria and then so the losing bidders, if any, would have to come. And that's one of the catches, by the way. Is there more than one bidder? Sometimes there's not. Okay. But if there's a losing bidder, then yeah, the fact that you have all these degrees of freedom can give an opening to challenge the bid process in court and the agency has to come back and say, well, we had a bid committee that looked at these criteria. You know, here's who the committee members were. Here's how they scored each proposal. Here are the score sheets. And this is why we went with this bidder because the score was X, as opposed to the second bidder whose score was X minus 50, and so on. You know what? Most score sheets can be manipulated too. We both have seen that. But let me, you know, let me ask you this, though. The decisions that are made... You mean like the referendums in Donetsk? Okay. Good comparison. One other factor in play here is that, you know, you talk as if the level of sophistication of analysis is equal, but it's not. If I'm a developer, I have a room full of very sharp pencils that are able to make close decisions on how this project should go. If I'm the government, I don't have that. And I make mistakes. And I have people who are assigned to look at the project and opine on it, engage on it. They may not know which end is up, including the lawyers who haven't written a partnership agreement like this. So, you know, I think the problem is that the government compensates for that by sometimes being very aggressive without being incisive. And then you get a very skewed result. So it's hard to negotiate with someone who is in that spot who doesn't know, who can't see exactly what you're aiming for, who gets paranoid about, you know, that you're going to make too much money and he's going to make too little money. Hard to negotiate a deal like that. And it winds up as an imperfect arrangement that ultimately they find they can't live with. Haven't you seen that? Well, of course. I mean, there are a lot of considerations as to why governments may want to scuttle a prospective deal with a public partner. I mean, a private partner. One is the perception that the private partner is making off like a bandit, which is the concern that you've addressed. But there are counter-billing considerations. Like, you got to realize that the private partner is taking a lot of risk for the reasons we've outlined. Well, yeah. And I, you know, I tilt on that side of it. He's taking a lot of risk and we have to be, you know, sympathetic with that end of it. But, you know, I want to go to another point. We have a few minutes left, Tom, and that is this. Hawaii seems to have a problem. I don't know if it's unique on this in large projects. We have a problem in building the convention center. We certainly had a problem and we still have a problem in building Kakaako. Nobody can say that Kakaako is a success, you know? And then there's rail. And then there's rail. Exactly. And then the stadium, as you mentioned, we always seem to get klutzy when it comes to these big projects. As a result, we really don't do well in building them. And we can't build them as much perhaps as we should be building them. I think we are in our own special sui generis category on that. And it has to do with bureaucracy. It has to do with politics. It has to be what school you went, you know, kind of thing. And I'm worried about that. And I wonder if you can see a way that we can develop either public-private partnerships or some other system to encourage, you know, competent, honest developers to build big projects without getting stuck and without the public getting stuck. And with the project, it's actually well-conceived, necessary for the community development, and successful. We don't have that experience. And I wonder what we need to do to get there. Well, I think one reason why we've got the experience that we have been is the shroud of secrecy surrounding projects like those. Yeah, the government usually is not forthcoming with details, you know, who the bidders are, what the bids were, what the bid said. I think over the years that's gotten better. But I think it really needs to get better and better to at least let the rest of us who have to pay for this, you know, Joe Blow taxpayer like me, we need to kind of figure out what went on. And, you know, is there a real problem? If there's not, then what we can do to fix it? Or have we just kind of made a mistake in going out for a bid at all? Yeah, it seems to me that the procurement act needs to be reformed. And there has to be something in it or with it to allow for better process on building big projects. The public, yes, I totally agree with you. The public has to be informed. So there aren't a lot of secrets. And ultimately, you know, ultimately tell them it's the lawyers. The lawyers have to make an agreement that is resilient against the change of administration, coming or going. We can't have a dramatic $20 million shift for no stated reason, two months from the end of the term of the governor. We can't have that. And the private side of that partnership has to be able to rely on what the government has promised. And so those agreements have to be better drafted. And they have to stick, you know, through thick and thin. And of course, through the changes of political administrations. You agree? Oh, yeah. One of the, and as we've seen, you know, some of these big projects have have gotten killed midstream, you know, and no, you know, no contractor worth is or her salt, who's, you know, going to be, you know, putting in lots of free effort, you know, to bid on this stuff wants to be faced with that if they, you know, if they win, they commit all kinds of resources to it and then find that the rug's been pulled out from under them. Yeah, including, including federal authorities that, you know, may or may not give us the money we hope to get from them like rail. And, you know, it strikes me that when you have this kind of obstacle, when you have the, this kind of machination and risk, you know, you are actually sidelining a lot of developers who might enter the field, but are not willing to do it. They're not willing to deal with government because they've been scared off. Furthermore, as I've said before on this and other programs, we need young developers. We need developers who are local developers. We need to bring in a whole generation of developers who develop the state. And we have to invite them in and promise them a fair game. And we're not doing that. We're doing just the opposite. So I'm very concerned about it. And finally, and this is my last point on question to you. When we have a failed project, and we have many big failed projects, you and I have talked about some of them here, you've raised some very good examples. But when you have a failed project, who loses? It's the taxpayers. That's why the Tax Foundation of Hawaii is interested in this subject, right? Of course. That's why we're talking about this today. This is an aspect of public finance. This is one way government can or might or might not get things done. And then the use of taxpayer money. So we have to clear these things up if we want to develop the state. And developing the state is really critical at this point in time when we're at an inflection and at risk of backwater. Well, thank you, Tom. Tom Yamachika, President of the Tax Foundation of Hawaii. Thank you so much for appearing and co-hosting on the show. Thank you for having me on the show. Aloha.