AJCL - Public-private Partnerships

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Public-Private Partnerships Author(s): DOMINIQUE CUSTOS and JOHN REITZ Source: The American Journal of Comparative Law, Vol. 58, Supplement: Welcoming the World: U. S. National Reports to the XVIIIth International Congress of Comparative Law (2010), pp. 555-

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DOMINIQUE CUSTOS* & JOHN REITZ**

Public-Private Partnerships!

In U.S. law, the term "public private partnership" is a term that

began to be used in the late 1990s and early 2000s in two distinct but related senses. In both cases, the term is used to denote government contracts in which the private contractor takes on more responsibility than has been customary in the past for the delivery of the services contracted for. With respect to transportation infrastructure, such as

highways and bridges, the term refers to a family of relatively new contract types, actively promoted by the federal government for use by state governments, such as Operations and Maintenance or Design Build-Finance-Operate-Maintain, by which the government is able to

shift much of the financing, maintenance, and lor operating cost for public infrastructure to private contractors, who may then be allowed to recoup their costs through tolls or other user payments, thus ena

bling the government to use the market to accomplish its purposes and to relieve public budgets of the financial burden associated with infra structure upgrading and maintenance. By extension, the term has been applied broadly to all types of contracting out of important gov ernment services, including such things as schools and prisons, provision of health care, and even the administration of state welfare programs and financial rescue of the economy. In neither case are the contract types in question really new. There is an extensive history of such use of government contracting, both with respect to transporta tion infrastructure and more broadly. But the use of the term "public

private partnerships" appears to symbolize a new enthusiasm for privatizing governmental functions. In both cases, this extensive use of contracting out raises important public law questions, both with re

spect to the ways in which the enthusiasm for contracting out has led to efforts to weaken existing legal protections for the public interest

* Judge John D. Wessel Distinguished Professor of Law, Loyola University,

New Orleans, College of Law. ** Edward L. Carmody Professor of Law, University of Iowa College of Law and Director, LL.M. Program & Visiting Scholars. Professor Reitz thanks Natalia Lazarova and Corinna Ochsmann for research help, the University of Iowa and Dean Caroline Jones of the College of Law for a research leave that was partially devoted to writing his parts of this report, and the Obermann Center for Advanced Studies for a congenial place to work during the leave.

t DOI 10.5131/ajcl.2009.0037.

555


556 the american journal of comparative law [Vol. 58

and with respect to the ways in which existing law fails to ensure that public values and interests are protected in such contracting out.

In recent years, the use of the term "public-private partnership" (PPP) has become quite common to describe ways in which the state relies on private actors instead of government employees to deliver certain infrastructure and services to the public. The mixing of public and private action raises a host of legal issues. This report on U.S. law governing PPP and the issues raised by that law is divided into three parts. The first section discusses terminology and definitional issues and reviews the history of PPP in the United States. It stresses the paradoxical nature of the development of PPP in the

United States. Although the notorious American preference for pri vate enterprise would seem to provide fertile ground for an early emergence of PPP, the modern acceptance of the term only recently made its way into the United States. The paradox is better assessed against the historical background of the public-private divide and the precursors to PPP. The second section focuses on defects, not in the law and legal models we presently have, but rather on the way in

which the political and financial pressures to attract private contrac tors for types of PPP have led to a tendency to weaken some of the protections that existing law provides for the government's interest as a contracting party or for a more broadly defined public interest. The third section examines some of the most important deficiencies in current law. The section will show how current law fails to extend the public values of administrative law, especially for the protection of the non-contracting parties who are most likely to be affected by the kinds of government contracts that constitute PPP. In this report there is space only for the briefest introduction to these problems.

I. Terminology and History: New Name, Old Phenomenon

A. Definition and Development of the New PPP

Defining PPP in the United States is not an easy task for at least two reasons. The first one relates to the polysemous nature of the

concept. In this regard, the American literature reflects three of the four possible PPP approaches:1 1) the local regeneration approach, 2) the policy approach, 3) the infrastructure approach. The first two have strong American roots whether it is in urban governance litera

1. The fourth approach enumerated by Guri Weihe is the development approach. Guri Weihe, Public-Private Partnerships: Addressing a nebulous concept, Working paper, Copenhagen Business School, International Center for Business and Politics, 2005, available at http://openarchive.cbs.dk/cbsweb/handle/10398/7348; Public-Pri vate Partnerships: Meaning and Practice (2009)(unpublished Ph.D. Thesis), available at http://openarchive.cbs.dk/bitstream/handle/10398/7734/Gudrid_Weihe.pdf? sequence=4 (last visited February 10, 2010).).


2010] PUBLIC-PRIVATE PARTNERSHIPS 557

ture2 or in public policy literature.3 The third approach is the one championed in the U.K. since 1992,4 and which more recently made its way in the American political and scholarly discourse as part of its global spread.5

The definitional difficulty resulting from this general polysemy is compounded by the complexity of the American legal structure. The federal characteristic of the United States in itself calls for a number of definitions, at least one at the federal level and potentially many different ones in the several states. Moreover, Congress has enacted no general legislation on PPPs. Instead, it has passed different laws to fit different governmental departments.6 In that, the United States contrasts with other countries, where typically, the adoption of a central statutory framework heralds the embrace of infrastructure PPP. The lack of general federal statute on PPPs results in the ab sence of a federal statutory definition of PPP, and not all states have laws on this matter. Each state decides whether to develop its own template for PPP. Consequently, at this level, definition and designa tion7 exhibit variety.

Clearly, in the United States, the law of PPP is fragmented. Sources of uniformity can be found in model codes drafted by the Fed eral Highway Agency (FHWA)8 or the American Bar Association (ABA)9 for states and local governments and in the Federal Acquisi tion Regulations (FAR).10 Potentially, circulars issued by the

2. Robert Beauregard, PPPs as historical chameleons: The Case of the US, in Partnerships in Urban Governance, European and American Experience 54 (J. Pierre, ed., 1998).

3. Pauline Rosenau, Public-Private Policy Partnerships (2000). 4. Australia and the U.K. pioneered forms of PPP under the name "private fi

nance initiative" (PFI). 5. Darrin Grimsey and Mervyn K. Lewis, PPP, The Worldwide Revolution in

Infrastructure Provision and Project Finance (2004). 6. For instance, the National Highway System Designation Act of 1995 (Pub. L.

No. 104-59) or the National Defense Authorization Act for Fiscal Year 1996 (Pub. L. No. 104-106), authorized DoD to enter into PPPs for the provision of military housing and introduced a two-phase design-build (DB) selection procedure (10 U.S.C. 305a; 41 U.S.C. 253m; FAR Subpart 36.3); The Safe, Accountable, Flexible, Efficient Transpor tation Equity Act: A Legacy for Users (SAFETEA-LU) of 2005 (Pub. L. No. 109-59) which originally was set to expire on September 30, 2009, but was extended through December 31, 2010, contains the current PPP enabling provisions in transportation.

7. In Texas a PPP is known as a "Comprehensive Development Agreement" ("CDA"). See infra n. 45. Other names are: "concessions", "leases", "development agreements," or "facility concession agreements."

8. In this case, the expected uniformity concerns a particular sector, road

transportation. 9. The 2000 revision of the Model Procurement Code for State and Local Govern

ment (2000 MPC) incorporated PPP-types of public contract. With regard to infrastructure projects, in 2007, the ABA published, the 2007 Model Code for Public Infrastructure Procurement ("2007 MC PIP"), a condensation of the 2000 MPC. Patri cia A. Meagher, News from the Chair, 43 Procurement L., Spring 2008, at 2.

10. See infra text at nn. 69-72.


558 THE AMERICAN JOURNAL OF COMPARATIVE LAW [Vol. 58

President's Office of Management (OMB)11 to federal agencies could also serve that role. The one particularly influential definition has turned out to be that put forth by the GAO in 1999. It was notably endorsed by the FHWA in its 2004 Report on PPP to Congress.

1. GAO Definition for Infrastructure and Contracting out of Government Service Functions

The GAO broadly defined a PPP as a "contractual agreement formed between public and private sector partners, which allows

more private sector participation than is traditional."12 It went on to

explain that "the agreements usually involve a government agency contracting with a private company to renovate, construct, operate, maintain, and/or manage a facility or system [that provides in whole or in part a public service]. While the public sector usually retains ownership in the facility or system, the private party will be given additional decision rights in determining how the project or task will be completed. The term public-private partnership defines an expan sive set of relationships from relatively simple contracts (e.g., A+B

contracting), to development agreements that can be very compli cated and technical (e.g., design-build-finance-operate-maintain)."13

From the GAO's definition, two main ideas may be drawn. First, a PPP is a specific form of government contract, a method of procure ment. As a procurement contract, a PPP articulates the terms and conditions under which, in agreement with a government agency, a

private party finances,14 designs, builds, operates, maintains, or

manages a facility or a service. Second, due to the actual combination of responsibilities assumed by the private partner, a PPP appears to be an umbrella-concept, which encompasses a wide range of contrac tual arrangements.

This latter point is shared by a much broader usage in which the term PPP refers to the contracting out or privatizing of many kinds of government service functions, especially where the contractor is ac corded a larger role than has been customary in determining how the

11. Such as OMB Circular A-76, (May 29, 2003), available at http://oam.ocs.doc. gov/docs/OMB%20Circular%20A-76%20Revised%202003.pdf (last visited February 9, 2010) [hereinafter "OMB Cir. A-76"] The Circular was originally issued in 1955 to regulate contracting out. It was revised in 1967, 1969, 1983, and 2003. The latter revision introduced the principle of managed competition between agencies and the private sector for the provision of commercial services. See infra Section IIA.

12. GAO, Public-Private Partnerships: Terms Related to Building and Facility Partnerships, GAO/GGD-99-71, April 1, 1999 (expanded version of glossary), availa ble at http://www.gao.gov/archive/1999/gg99071.pdf [hereinafter "GAO Glossary"].

13. GAO, PPPs: Key Elements of Federal Building and Facility Partnerships, Glossary, GAO/GGD-99-23, February 3, 1999, available at http://www.gao.gov/ archive/1999/gg99023.pdf.

14. This responsibility is missing from the GAO definition stricto sensu but figures in the example provided at the end of the quotation.



service is rendered.15 There are thus two rather different usages of PPP in the United States, the one influenced by the GAO, promoted by the FHWA, and focused on the construction, maintenance, and op eration of infrastructure and a broader usage in which PPP refers to any contracting out of major governmental functions.

a) A contractual agreement between a public party and a private party

When one examines the PPP concept one enters that part of American administrative law covering government contractual deal

ings. From a comparative standpoint, it is useful to bear in mind three characteristics of this body of law. In the United States, aca demic study of the rules governing government purchase of goods and services as a discipline in its own right is relatively recent. The first casebooks were published in the twentieth century.16 Moreover, lo cated at the intersection of the common law of contracts and the attributes of sovereignty, it denotes a tension between private and

public law.17 Third, it does not differentiate public works contracts (march?s publics) from contractual delegations of public service (d?l?

gations de service public). Indeed, the concept of public service being devoid of the cornerstone function historically assigned to it in French administrative law, the American law of government con tracts does not feature such a bifurcation.18 Nor does it vest the

jurisdiction over government contracts disputes in an entirely dis tinct judiciary. Although such challenges are brought before special administrative courts19 at the trial level, these first instance rulings are appealable to the U.S. Court of Appeals for the Federal Circuit. A judgment there is conclusive unless reviewed by the U.S. Supreme Court on writ of certiorari.

The American PPP is thus a type of government procurement agreement. Despite its name, it rarely takes the legal form of a part

15. See, e.g., Donald F. Kettl, Sharing Power: Public Governance and Pri vate Markets 4, 6-12 (1993)(describing wide range of government contracting since World War II as PPP); Jody Freeman, Extending Public Law Norms, 116 Harv. L. Rev. 1285 (2003); Martha Minow, Public and Private Partnerships: Accounting for the New Religion, 116 Harv. L. Rev. 1229 (2003)(using PPP for contracting out of schools, prisons, welfare agencies, and social service programs).

16. The publication in 1966 of the first edition of the Federal Procurement Law casebook authored by John Cibinic and Ralph Nash is usually considered the defining

moment, although R. Preston Shealey had published his first edition of the Law of Government Contracts in 1919.

17. Joshua Schwartz, Liability for Sovereignty: Congruence and Exceptionalism in Government Contracts Law, 64 Geo. Wash. L. Rev. 633 (1996).

18. To be sure, due to the influence of some overarching principles of E.U., the bifurcation of the French law has been attenuated.

19. Either an agency Board of contract appeals or the U.S. Federal Claims Court.



nership,20 in which the respective parties are co-owners of a business, and share profits and losses. The scarcity of the business organiza tion model seems in keeping with the traditional reluctance in the

United States to rely on the state to conduct market activities.21 As a result of the rareness of the joint-venture type, the U.S. law of PPPs does not present the neat distinction between contractual and insti tutional PPPs observed in E.U. law. In the United States, the concept of PPP is definitely embedded in public contracts law and focuses chiefly on two types of contracting for services. It may involve the design, financing, construction, upgrade, or repair of public infra

structure, such as a highway or a bridge. It also generally includes a

contracting out of related services that would otherwise have to be provided by the government, such as maintenance and operation of the infrastructure or even the operation of a program of government services, such as welfare, not tied to specific infrastructure.

b) Sub-forms of infrastructure PPP

Even if we restrict our view to the infrastructure PPPs, we see a wide variety of forms. The private party could potentially finance, de sign, build, operate, maintain, manage, lease, purchase, develop, transfer, or own a facility or a service. Based on the actual mix of

rights and obligations, the contract falls under one sub-form of a rich array of PPPs. In 1999, the GAO identified eighteen possible combi nations which may be used across sectors.22 With regard to

transportation, the FWHA currently enumerates eight types, one of which features sui generis PPPs.23 The existence of these sui-generis

20. Julia Pascal Davis, Public-Private Partnerships, 44 Procurement Law., Fall, 2008, at 9. For state constitutional prohibitions on such partnerships, see infra n. 116.

21. John Reitz, Political Economy and Contract Law, in New Features in Con tract Law 247 (Reiner Schulze, ed., 2007), available at http://ssrn.com/abstract= 964476; John Reitz, Doubts about Convergence: Political Economy as an Impediment to Globalization, 12 Transnat'l L. & Contemp. Probs 139-159 (2002).

22. The GAO lists 18 categories: 1) O&M: Operations and Maintenance {conces sion)', 2) OMM: Operations, Maintenance & Management (wastewater treatment); 3) DB: Design Build; 4) DBM: Design-Build-Maintain; 5) DBO: Design-Build-Operate; 6) DBOM: Design-Build-Operate-Maintain; 7) DBFOM: Design-Build-Finance-Operate Maintain {concession); 8) DBFOMT: Design-Build-Finance-Operate-Maintain-Trans fer; 9) BOT: Build-Operate-Transfer also called greenfield PPP; 10) BOO: Build-Own Operate; 11) BBO: Buy-Build-Operate; 12) Developer Finance; 13) EUL: Enhanced Use Leasing or Underutilized Asset (the Department of Veterans Affairs (VA)); 14) LDO or BDO: Lease-Develop-Operate {affermage) or Build-Develop-Operate (munici

pal transit facilities); 15) Lease/Purchase; 16) Sale/Leaseback; 17) Tax-Exempt Lease (used to finance a wide variety of capital assets, ranging from computers to telecom

munication systems and municipal vehicle fleets); 18) Turnkey. GAO Glossary, supra n. 12.

23. New facilities: 1) DB, 2) DBOM, 3) DBFO; Old facilities: 4) O&M, 5) Long Term Lease; Hybrid facilities: 6) Lease-Develop-Operate; 7) Private Contract Fee Ser vices; 8) Other Innovative PPPs. FHWA, P3 Defined, available at http://www.Aiwa. dot.gov/ipd/p3/defined/index.htm.



categories is indicative of the non-exhaustive nature of the classifica tion as tailoring and innovation are of the essence in PPP design.

The U.S. categories of PPP now reflect global trends. This state of affairs betrays a process of legal transplantation. Thus, in trans

portation, a 2002, and a 2004 study24 commissioned by the FHWA deplored the difference between the continuing reliance on fixed-price sealed bidding with award to the lowest price in the United States and the increasing use of best-value contracting in Europe and Ca

nada, which allows consideration of non-price factors. Now, the U.S. is emulating its European and Canadian counterparts in adopting best-value contracting for transportation PPPs. Likewise, the reports contrasted the entrenched reliance on tolling in Europe with the dedi cated (gasoline) tax revenue sources preferred in the United States since the development of the automobile. In fact, starting in 1995, the opening of the Dulles Greenway in Virginia, whose private owner25 was allowed to collect tolls from motorists, signaled a limited intro duction of the French model of concession as an alternative to the fuel tax form of highway financing. Since 2000, this model has made headway in the United States.26 The signing in March 2009 of the first availability payment scheme in Florida is illustrative of the in troduction of the UK form of PPP, PFI.27 Further British influence is evident in the replacement of the separate financial package between

private contractor and lender with a financial structure incorporated into the concession and determining risk allocation between all par ties involved in the completion of the project.28

24. David O. Cox, et al., Contract Administration Technology and Practice in Eu

rope, October, 2002, available at http://international.fhwa.dot.gov/contractadmin/; Steven De Witt, et al., Construction Management Practices In Canada and Europe,

May, 2005, available at http://international.fhwa.dot.gov/links/pub_details.cfm? id=537.

25. Transfer of ownership to the state of Virginia in scheduled for 2056. 26. Detroit stands as a precursor in that as early as 1927 and despite the ascen

dancy of state intervention in transport in the twentieth century; it experimented with concession in perpetuity: the Ambassador Bridge and the Detroit-Windsor tun nel. Illustrations of the recent trend towards privatization include: Concession: 2007 opening of California South Bay Expressway (SR 125), the first TIFIA funded project to open; in 2007 Missouri DOT signed a Design-Build-Finance-Maintain agreement with a private party to replace and rehabilitate 802 bridges. Long-term lease: Chicago Skyway (2005), Virginia Pocahontas Parkway (2006), Indiana Toll Road (2006).

27. The public project sponsor pays availability payments to contractors based on construction milestones or performance measures. See infra n. 87. On March 3, 2009, the Florida DOT signed a DBFOM including availability payment clauses for the up grade of a segment of 1-595. Jeff Paniati, (FHWA Acting Deputy Administrator and Executive Director), Transportation Infrastructures Financing Opportunities and Challenges, Fifth Annual Public Private Partnerships USA Summit, March 12, 2009,

Washington, DC, available at http://www.fhwa.dot.gov/pressroom/re090312.htm. 28. Such parties include government, developers, project company, project lend

ers, construction consortium, operators. Jacques Cook, Modern Enhancements for PPP Concession Agreements, 28 Construction Law. Fall, 2008, at 24, 26.



2. The Recent Development of PPPs

Paradoxically, the absence of a legal definition has not prevented the federal government from promoting PPPs starting in the 1990s. Almost half of the states have followed suit. This use of the term "PPP" is thus quite new in the United States. The rest of subsection IA will survey the recent use of the term at federal and state levels. Subsection IB will look at the historical background which led to the more recent use of the term, including debates over the public-private distinction and a long history of use of similar forms of contracting out important governmental functions.

a) Federal government use of PPPs since the 1990s

The 1990s mark the date of birth of modern American PPPs with an average of 1000 PPPs being created annually since 2007.29 As elsewhere, they came about in a context of privatization, aging infra structure and shortage of public funds. U.S. PPPs do not face any sectoral restriction. The sectors of these creations include transporta tion,30 water/wastewater, real estate/economic development,31 education, health care, welfare, corrections, parks and recreation, and technology.32

Among the federal departments conducting promotional cam

paigns for PPPs, the role of the Department of Transportation (DOT) has been prominent. It has resorted to a large array of means to en

courage transportation PPPs. Within the DOT, FHWA engaged in three experimental programs under which it waived statutory or reg ulatory restrictions impeding the establishment of PPPs or explored innovative methods.33

As a complement to these non-financial incentives, federal finan cial support is provided through bonds, direct loans, loan guarantees, and lines of credit. Other means of encouragement deployed by the FHWA have been educational publications and material for state transportation officials; presentations to states and developers, work

29. Arthur L. Smith, Public-Private Partnerships: the U.S. Experience http:// www.unescap.org/ttdw/common/TPT/PPP/text/bfi^f_arthur_smith.pdf (last visited, February 9, 2010). Already in 1985, the National Council for Public-Private Partner ships (NCPPP) was founded as a non-profit, non-partisan, advocacy organization.

30. Such as the Washington D.C. metro station. 31. Urban regeneration projects including schools, housing, and administrative

facilities. 32. In particular communications: the FCC entrusted a PPP with the construction

of a nationwide broadband public safety network which will serve both public agen cies and commercial users, the 700 MHz Second Report and Order , 22 FCCR 15289 (2007).

33. The first program, SEP-14, came in 1990. See FHWA website at http://www. fhwa.dot.gov/hfl/framework/10.cfm. It was followed in 1994 by TE-045. See FHWA

website at http://fhwainter.fliwa.dot.gOv/innovativefinance/ifq61.htm#TE045. Lastly, the FHWA launched SEP-15 in 2004. See FHWA website at http://www.fhwa.dot.gov/ ipd/p3/tools_programs/sep 15_faqs.htm. All websites last visited on Feb. 9, 2010.



shops;34 a co-sponsored annual conference on public-private ventures in transportation,35 or on transportation finance;36 drafting model

legislation for states; adoption of PPPs and tolling (as a long-term revenue stream attractive to investors) as key components of DOT's

congestion mitigation initiatives; the creation of a PPP website;37 the establishment in October 2003 of a Task Force in charge of identify ing ways of facilitating the use of PPPs as well as the Office of Innovative Program Delivery. In this supportive capacity FHWA may be viewed as an American sectoral counterpart of the British Trea

sury Task Force on PPPs or the French MAPPP.38 These efforts are likely to continue under the Obama administration which has pro posed PPPs for transportation infrastructure projects and to stabilize the financial system39 or the securing of the cyber infrastructure.40

b) State legislation authorizing PPPs since the 1990s

Apart from taking advantage of the federal promotional policies, states have also adopted policies of their own. State legislation typi cally empowers state departments of transportation. It may sometimes vest the right to sign PPPs in local governments.41 The first state statutory authorizations of PPPs were enacted in the mid 1990s.42 As of 2007, the FHWA identified twenty-three states with some type of PPP- enabling legislation in transportation infrastruc ture.43 With regard to transit projects, as of February 2009, twenty

34. The first one of which took place in November 2001 and explored the "vision ary possibilities of the private sector building and operating most projects and the public sector taking a subordinate role." FHWA, Report to Congress on PPPs, Decem ber 2004, at 32.

35. Together with the American Road and Transportation Builders Association. 36. Together with the Transportation Finance Board. 37. FHWA, Public-Private Partnerships, available at http://www.fhwa.dot.gov/

ipd/p3/index.htm (last visited on February 9, 2010). 38. Mission d'Appui aux Partenariats Public-Priv?. 39. Obama Transportation Pick [Transportation Secretary LaHood] Urges Role

for Private Sector, Infrastructure Investor, January 22, 2009, available at http:// www.infrastructureinvestor.com/Article.aspx?article=33806&hashID=DlF2EBADCB 66B60913A33B1A45601AD68B6BEE43; Treasury Department, Fact Sheet on Public Private Partnership Investment Program, March 23, 2009, available at http://www. treas .gov/press/releases/tg65 .htm.

40. Barack Obama, Remarks by the President on Securing our Nation's Cyber Infrastructure, May 29, 2009, available at http://www.whitehouse.gov/the_press_ office/Remarks-by-the-President-on-Securing-Our-Nations-Cyber-Infrastructure/. See also Kenneth Chang, Obama Plan Privatizes Astronaut Launchings, New York Times, January 29, 2010, at A9.

41. As in California. 42. Virginia was among the pioneers in 1995. Transportation Research Board,

Major Legal Issues for Highway PPP, Legal Research Digest 51, January 2009 at 25. available at http://onlinepubs.trb.org/onlinepubs/nchrp/nchrp_lrd_51.pdf [hereinafter "TRB, Legal Issues"].

43. The state were: AL, AK, AZ, CA, CO, DE, FL, GA, IN, LA, MD, MN, MS, MO, NC, NV, OR, PR, SC, TN, TX, UT, VA, WA, WA. See FHWA website available at http:// www.fhwa.dot.gov/ppp/tools_state_legis_statues.htm (last visited, Feb. 9, 2010). In



states had authorized PPPs.44 Still, more than half of the states lack such legislation, a fact which is indicative of the significance of im pediments to the development of PPP. The latter category of states tends to be located in the Northeast and the Midwest whereas the new growth economies in the North and the South appear to be the pioneers. Due to the controversial nature of PPP, some of the states that have adopted forms of PPP have suffered backlash. Thus, in 2007, the Texas legislature imposed a moratorium on new privately financed toll roads and changed to 31 August 2009 the original sun set date (31 August 2011) of the PPP enabling legislation.45 In June and July 2009, it did not reauthorize PPPs for toll-roads. Even among the existing authorizations, variations may be observed whether one considers the types of arrangement covered or the requirements de

limiting the exercise of the statutory authority. The FHWA's model legislation is meant to inject some uniformity into state laws.

B. Historical Examples of PPP

The distrust of government, the strong emphasis on privatism, and the entrenched bias against U.S. participation in the economy would seem to be fertile ground for a preference for public-private cooperation. Interestingly, the emergence of the term PPP in the 1990s coincides with a long period of decline in the salience of the public-private divide, and the history of government contracting in the United States shows considerable use of forms of contracting out that stand as precursors to forms now being touted as PPP.

1. Historical Background

a) Decline in importance of the public-private divide since 1945

In American law, the public/private distinction crystallized in nineteenth century legal discourse46 as a result of the intersection of two movements born in Europe, on the one hand, the advent of the nation-state and its attendant claim of sovereignty in the sixteenth and seventeenth centuries and, on the other hand, natural rights the ories articulated in the seventeenth century. Relying on sovereignty,

February 2009, California enacted a bill providing unlimited authority for public-pri vate partnerships for transportation projects until January 1, 2017.

44. The number grew from 17 in 2008 to 20 states in 2009 (the bold font indicates the states which joined the list in 2009): AI, CA, CO, DE, FL, GA, HI, IN, LA, MD, MI,

MO, NC, NV, NJ, OH, OR, TX, VA, WA. Nossaman LLP, State Legislation Authoriz ing Public-Private Partnerships for Transit Projects, as of February 2009, available at http://www.ncppp.org/FTA/EnablingLegislation.pdf (last visited, February 9, 2010).

45. TRB, Legal Issues, supra n. 42, at 16. CDAs, the Texas term for PPPs, had been introduced in 2003. Id. See also supra n. 7.

46. Morton J. Horwitz, The History of the Public I Private Distinction, 130 U. Pa. L. Rev. 1423, 1424 (1982).



public law sought to protect a public realm from the king's feudal power. Relying on natural rights, private law sought to protect a pri vate realm from interference by public power.

Crystallization into a sharp public/private separation occurred when legal thinkers and judges sought to preserve the integrity of a so-called "neutral and apolitical" system of private law from what

they viewed as "the dangerous and unstable redistributive tendencies of democratic politics" epitomized by statutes.47 From the distinction a classification of legal fields was drawn. It militated in favor of con tractual freedom and expansion of private law and correlatively for the containment of regulation and public law.

That first phase came to an end when legal realists unmasked the conservative underpinnings of the dichotomy in the 1920s and 1930s. Scathingly criticized, the dichotomy ebbed away. Correla

tively, the responsibility of the state for the public interest was magnified. Thus, in a sense, under the legal realist approach public law absorbed private law. Moreover, the Great Depression was the

impetus for a multi-faceted state intervention until 1945. After World War II, in reaction to the totalitarian bent shown by

the socialist state in its embodiment of the public interest, the func tion of the state was redefined. Accordingly, the state shed its attributes of superiority vis-?-vis private self-interests as its role

morphed into "a reflection of the sum of the vectors of private con flict".48 Private law displaced public law as the dominant form of law, albeit with the same weakening effect on the public-private law di vide. Although there was an expansion of government programs during Johnson's Great Society, the Reagan conservative counter-re

action, fueled by neo-liberal theory, and the subsequent two Bush

administrations, continued the trend. Even though the Clinton ad ministration fell on the other side of the partisan spectrum, it advocated a reinvention of government which similarly aimed for a

government that works better and costs less. Tellingly, use of the term PPP emerged during the Clinton years. While the Obama ad

ministration's stance, as may be gathered from its first year, appears to be interventionist, it also incorporates the PPP philosophy.49

47. Id. at 1425. 48. Id. at 1427. 49. An example of such a mixed stance is the combination of the Recovery and

Reinvestment Act (ARRA) of February 2009, Pub. L. No. 111-5, 123 Stat. 115 (2009), and the announcement of a Public-Private Investment Program (PPIP), supra n. 39, as part of the massive bank bailout in March 2009. The ARRA relies entirely on gov ernment for the purchase of troubled assets whereas the PPIP also uses private sector investors.



b) Predominant assimilation of administration to business since 1945

Unsurprisingly, the public law-private law debate reverberates in the conception of administration. Coupled with the claim of an au tonomous sphere sheltering the exercise of natural rights is the notion that "the field of administration is a field of business"50 which also lends a supportive environment to PPPs. Prevalent from the late nineteenth century until 1929, the concept receded under the New Deal and swung back into fashion after the second world conflagra tion.51 In the 1990s, it was echoed by the New Public Management (NPM) paradigm52 which "refers to a cluster of contemporary ideas and practices that seek, at their core, to use private sector and busi ness approaches in the public sector."53 The NPM, which advocates broad use of PPP, was embraced by the Clinton administration,54 and endorsed by President George W. Bush.

A great deal of the critique of the growth of PPPs in the late 1990s was grounded in the public-private law distinction, revealing that the importance of the distinction had declined but not com pletely disappeared. Interestingly, in this quasi-resurrection of the late 1990s, a discursive reversal has occurred. On the one hand, since the end of the twentieth century those concerned with the assertion of the public interest and the preservation of the public sphere have stressed the distinction. On the other hand, over half a century ear

lier, the legal realists who equally meant to protect the public interest and public law argued that the distinction was an obstacle toward that end. In other words, alternatively the champions of the public interest and public law have sought either to expand or to con fine the public-private divide. Those who currently object to PPP make much of the distinction that the legal realists sought to mini mize. But they all share an attachment to the public interest.

One might have thought that the seeming decline of the public/ private distinction, the longtime diffusion of the notion that business methods provide an operational model for government administra

tion, compounded by pervasive distrust of government would have resulted in an early introduction of PPP in the United States. In fact,

50. Wilson Woodrow, The Study of Administration, 2 Pol. Sci. Q., June 1887, at 197-222 (reprinted in 55 Pol. Sci. Q. , December, 1941, at 481-506).

51. David H. Rosenbloom, Building a Legislative-Centered Public Adminis tration: Congress and the Administrative State, 1946-1999 (2000).

52. David Osborne & Ted Gaebler, Reinventing Government: How the En trepreneurial Spirit is Transforming the Public Sector (1992). David Osborne served as a key advisor to the Clinton administration during the implementation phase.

53. Robert B. Denhart, The New Service Public 12 (2007). 54. Vice-President Al Gore spearheaded the government reform through the Na

tional Performance Review launched in 1993, renamed The National Partnership for Reinventing Government in 1998.



even though the term was not used until the 1990s, various levels of government in the United States have long contracted out important governmental services in ways that look very similar to the modern ppp 55 Thus, in the United States, as in Europe, the term PPP is a new name for an old phenomenon, even though the U.S. tends to as

sign a more restrictive role to government.

2. Precursors to PPP

a) Construction and operation of major infrastructure

We see the precursors to PPP especially in contracts for the con struction and operation of major infrastructure. This development falls roughly into three periods: In the initial period infrastructure construction, maintenance, and operation were left to private enter

prise, with government merely providing incentives (usually monetary) for such work. For roads and water transportation, this

period started well before the nineteenth century. Other forms of in frastructure development came chiefly during the nineteenth century. The first phase was followed by an era of increased public responsibility for major infrastructure. In general this public role started in the late nineteenth century and took the form of command and-control regulation of utilities or common carriers. For roads and water transportation, this greater public role began already in the

early nineteenth century and involved direct financing and owner

ship. Finally, in the 1990s, we reach the beginning of the current period of widespread use of and experimentation with PPPs. In a sense, the era of the modern PPP is a return to the first phase of development and it in that first phase that we find the major precur sors to modern PPP.

Thus up into the nineteenth century, private entrepreneurs as sumed responsibility for the construction and the maintenance of

private roads from which toll-based revenue was derived. The first

turnpike built in 1792 was under private ownership and chartered by Pennsylvania. The nineteenth century saw substantial state subsidi zation of private enterprises laying down the backbones of American utilities.56 As they were pressed to build canals, commercial docks, piers, post roads, railroads, telegraph, telephone, electrical and water

supply systems necessary for economic growth, states developed in

centives, whether to circumvent the reluctance of the private companies to assume the risks of free-enterprise or to supplement in

55. NCPPP, Critical Choices: The Debate over PPPs and What It Means for America's Future 9 (2003); John B. Miller, Principles of Public and Private In frastructure Delivery 81, 103, 113-14 (2000).

56. See, e.g., Minow, supra n. 15, at 1237-38; James Willard Hurst, Law and the Conditions of Freedom in the Nineteenth-Century United States 32, 96-07, 79

82, 88 (1967) (cited by Minow, op.cit., at 1237, nn.25, 27).



sufficient private funding. Under franchise contracts passed with private corporations, their financial aid came in six ways: cash pay ments, loan of credit, bond issuance, purchase of shares in the

corporation, tax-exemption and in the case of railroads, land

grants.57 Public contribution was such that subsequent failures in those joint initiatives and resulting public indebtedness prompted the introduction of constitutional amendments to curtail unwise com

mitments of state funds to private entities.58 Thus, the first phase of development embodies the idea of a public-private tandem in which government pursues its public policies largely by encouraging private enterprise to deploy its commercial capacities toward those same ends. In this sense, the nineteenth century foreshadowed the 1990s' use of PPPs. Public support for development in these periods is largely indirect in the sense that it tries to avoid public ownership and operation or provision of services by the government directly to the public.

In the second phase, the model changed to one of direct public intervention, in the particular case of roads and water transporta tion.59 The era of public ownership really60 began in 1806 with the construction of the National Road,61 exclusively with federal funds.62 In the 1830s, the federal government inaugurated the concept of in tergovernmental responsibility, in which it shared responsibility with the states,63 a concept that the Federal Aid Road Act of 191664 insti tutionalized. In the nineteenth century fuel taxes, and dedicated tolls?both governed by the idea that user pays?became the main sources of revenue for road construction and maintenance. The high way system which developed was publicly designed, financed and owned, and constructed by private corporations on the basis of com

petitive procurement contracts awarded to the low bidder.

Although direct public intervention differs from indirect inter vention, it still accommodates private participation through procurement and therefore might be thought to amount to a type of

57. The federal government also resorted to such incentives to construct the indis pensable transcontinental rail lines indispensable to the westward expansion. Karl B. Raitz & George F. Thompson, The National Road 23 (1996).

58. David E. Pinsky, State Constitutional Limitations on Public Industrial Fi nancing: An Historical and Economic Approach, 111 U. Pa. L. Rev. 265, 278 (1963).

59. This model of direct public financing was also employed for harbor improve ments, navigable river projects, navigation aids, territorial roads and trails, and public buildings, Miller, supra n. 55, at 82.

60. From the early years of the Republic, counties had been responsible for rural roads, but had sparingly discharged such responsibility.

61. It is otherwise known as the Cumberland Road. 62. Mainly through appropriations, with some land sales. Id. at 111. 63. The states, which gradually assumed ownership of the road, raised revenues

through tolls while the federal government was in charge of upkeep and repairs Rickie Longfellow, The National Road, available at http://www.fhwa.dot.gov/infra structure/back0103.cfm (last modified on Dec. 23, 2008).

64. Ch. 241, 39 Stat. 355 (1916).



precursor to modern PPPs. However, this is not the analysis em braced by contemporary PPP advocates such as the National Council for Public-Private Partnerships (NCPPP), who typically regard this phase of public ownership as a displacement of free enterprise which must be restored through modern PPP. In this sense PPP in the 1990s is viewed as a revival, a restoration of a pre-nineteenth century order, although in the earlier period, the role assigned to the private party seems to have been even more encompassing than it is cur

rently. In any event, the reference to the past is apparently meant to

legitimate modern PPPs.

b) Lease-purchase of public buildings

Interestingly, some of the closest relatives of modern PPPs can be found in public building contracts where government is tradition ally expected to assume most of the responsibilities. Indeed, "in 1954, Congress initiated a new program for an integrated approach to the acquisition and delivery of buildings."65 Known as Lease-Purchase

contract, that delivery method could be approximated to the Design Build-Operate contract now in fashion as one type of PPP. The exper imentation was suspended in 1957 but resumed under the Public Buildings Amendments of 1972. In 1989, Congress revived the proce dure for individual projects,66 and labeled it an "alternative financing method to finance federal ownership" of public buildings.67 It was to be distinguished from direct appropriation, thus reflecting an early but isolated experiment with modern PPP.

C. Summary of PPP Definition and History The use of the term PPP came rather late to the United States

and the term was not formally recognized by government until the 1990s when its adoption was influenced by European models, includ

ing the New Public Management. While the term PPP is, on the one hand, used to refer to a fairly specific family of government contracts for the construction, maintenance, or operation of infrastructure, es

pecially for transportation, it is also used quite broadly in the United States to refer to any kind of contracting out or privatizing of impor tant government functions, especially where the discretion accorded the contractor under the contract gives the contractor a broader role than has been customary in determining how service is rendered to the public or how well the public interest is protected. While often touted as new, the basic ideas involved in either form of PPP are seen

65. Miller, supra . 55, at 113. Miller is referring to The Public Buildings Purchase Contract Act of 1954, 68 Stat. 518 (1954).

66. GAO, Report to Congress: Federal Office Space, GAO/GDD-90-11, December 1989, at 24.

67. Id. at 23.



in government contracts going back to the founding of the Republic, if not before. The legal regime of PPP is thus not entirely new and the phenomenon raises all the issues that extensive contracting out or

privatization of important government services raises.

II. Problems in the Application of Existing Law to Forms of PPP

There is a large and sophisticated body of federal government contract law that deals reasonably well with many of the problems raised by various forms of PPP, especially those concerning the re

spective interests of the government and private contracting parties.68 State contracts are not subject to federal contracting law, but many of the most important examples of PPP in the United States involve contracts on the state and local level, not the federal level. The state law is quite varied and difficult to research.69 Never

theless, federal law provides an influential model for how to deal with many of the issues of fairness between the parties and how to subject the contracts to certain public policies. Space does not permit a de tailed discussion of this law in the published version of this report, but because a substantial number of the questions in the General Re

porter's Questionnaire concern issues that are regulated by that law, a summary of federal procurement law will be provided to the Gen eral Reporter in an appendix and will be available to readers of this report upon request to the authors.

For present purposes, it suffices to note that this body of govern ment contract law provides, for example, for systems of procurement that require competition as much as reasonably possible. Competi tion is not restricted to sealed bids for fixed prices, however; the rules allow a range of competitive negotiation techniques. In the 1990s, competitively negotiated procurement, which long permitted trade offs of price and quality factors for technically complex contracts for which the government lacked the expertise to produce design specifi cations, was expanded to allow more general use of best-value

contracting, a prominent aspect of European forms of PPP.70 Stan dard government contract law further establishes a special administrative litigation system for resolving disputes about the awarding of government contracts. It also provides clauses to protect

68. See generally Steven W. Feldman, Government Contract Guidebook (4th ed. 2008-2009).

69. The most important standard for state procurement law is the ABA's Model State Procurement Code, supra n.9. See also Ellen Dannin, To Market, to Market:

Legislating on Privatization and Subcontracting, 60 Md. L. Rev. 249 (2001)(meant as a primer for states to write better rules for privatization through contracting out, with many examples of different state's rules on procurement generally and on contracting out specifically).

70. See supra text following n. 24.



government and private party interests in contract performance, such as clarifying who owns property under construction or intellec tual property developed as part of contract performance. It provides special clauses that allow the government to change the work under the contract or terminate all or part of the contract but also impose on the government the obligation to pay for certain costs in the event of a change or termination of contract work. It also establishes an other special administrative litigation system for resolving disputes over those matters.71 Finally, government contract law has long been used to further socio-economic and other important public policies. Thus, for example, preferences are established for contract awards of some kind of contracts to small businesses or minority owned busi

nesses, government contractors may have to establish plans to increase the award of subcontracts to preferred groups, and contrac tors must certify compliance with labor standards and environmental

protection statutes.72 There are, of course, some other important sources of law that

may apply to most forms of PPP. One especially important one is the National Environmental Policy Act ( E A), which applies whenever there are "major Federal actions significantly affecting the quality of the human environment."73 E A thus clearly applies to federally funded contracts for the construction of highways, dams, and other

major infrastructure. Where it applies, E A requires that before construction may begin, an Environmental Impact Statement (EIS) or Environmental Assessment (EA) must be prepared to ensure that the expected costs of the project do not outweigh its expected costs.

This section will focus on the way that enthusiasm for PPP has led to a tendency to weaken some of the protections provided by these kinds of law. As specific examples of this phenomenon, this section will look at the failure to ensure adequate competition in the letting of PPP contracts, the way in which NEPA's rules for environmental

protection have been weakened by shortening the review process for EISs and EAs, and how non-competition clauses in some transporta tion infrastructure contracts have had unexpectedly negative consequences. The theme of this section is that the legal models for

adequate protection of the public interest exist, but excessive enthu siasm for PPP may lead to failure to use them or use them wisely.

A. Competition

One of the chief arguments for contracting out is the claim that private contractors can provide the services more "efficiently"?i.e., for lower overall cost?than government personnel. Some advocates

71. See supra text at n. 19. 72. See generally Feldman, supra n. 68. 73. 42 U.S.C. ? 4332 (C) (2006).



of contracting out make very broad claims in this regard,74 and in a market-centered political economy like that of the United States, such arguments may find especially strong resonance. The posited superiority of the market rests on the belief that markets are charac terized by competition and that competitive pressure will force private entities to trim costs to the bone. The reality, however, is

that, despite the preference government contract law gives to compet itive procurements, "[a]t least at the local level, competitive bidding is not the norm."75 Sole-source contractors cannot be said to be under

any market discipline. If contracting out is to realize any of the prom ised reduction in public expenditures, it ought generally to be restricted to the kinds of services for which there is a competitive

market,76 but it does not appear to be so restricted.

Government audits and the detailed accounting standards that

govern cost-plus contracts (the usual form of sole-source contracts) may provide some protection to the public against price gouging,77 but then one needs to add the costs of monitoring (including the sub stantial costs of resolving disputes through the courts and special contracting boards of appeal) to the contractors costs to see the true costs to the public of contracting out.78 In fact, it is not self-evident that contracting out would generally be the low-cost solution for pro

74. See, e.g., Michael J. Trebilcock & Edward M. Iacobucci, Privatization and Ac

countability, 116 Harv. L. Rev. 1422, 1422 (2003)("flaws in private markets, significant though they may be, pale in comparison to the flaws associated with public provision or even public oversight of private actors").

75. Ellen Dannin, Red Tape or Accountability: Privatization, Publicization, and Public Values, 15 Cornell J.L. & Pub. Pol'y 111, 114 (2005). See also Sharon

Dolovich, State Punishment and Private Prisons, 55 Duke L.J. 437, 495-500 (2005) (because of lack of competition, states tolerate prison contractors who do not meet contract requirements). Cf. TR?, Legal Issues, supra n. 42, at 30 (only a handful of private companies bid on large-scale PPP highway projects).

76. "[A]ny absence of robust competition, a lack of experience specifying contract results or a failure to monitor performance, can undermine privatization benefits . . . ." Dannin, supra n. 75, at 121 (quoting Representative Christopher Shay's sum

mary of General Accounting Office report). 77. The Truth in Negotiations Act (TINA), 10 U.S.C. ? 2306a (2006), applies to

most federal forms of PPP contracts. See generally Feldman, supra n. 68, ? 9:63 ff., at 301 ff. TINA applies to any negotiated federal contract expected to exceed $650,000, or to any modification of any type of contract, even to a sealed-bid contract, which is

expected to involve a price adjustment exceeding that amount, and to any subcontract

exceeding that amount if the prime contractor is subject to the Act. If it applies, TINA requires the contractor to submit cost or pricing data to the government and to certify that the data are correct and complete, upon pain of civil and criminal penalties. If upon audit, the government is able to show that the data were deficient, the contrac tor will at a minimum be forced to pay the difference between the contract price and the price that the government would have negotiated if the disclosures had been accu rate. Id. at ? 9:64, at 302; ? 9:76, at 312.

78. The government also incurs monitoring costs when its own personnel perform a task, and it is an empirical question whether monitoring costs are greater for moni

toring a non-governmental entity, but it seems likely because the costs of monitoring privates include litigation costs to resolve disputes, substantial costs that are proba bly not incurred in the case of government monitoring government.



viding a service. The true cost of using a private contractor includes not only the contractor's own labor and government monitoring costs, but also the contractor's own administrative costs, which may include factors the government does not incur, like taxes. And the contractor would like to earn a profit, to boot. For those very reasons, advocates of contracting out have opposed allowing government to compete against private contractors in deciding whether or not to contract out a given service, and government employees are often precluded from

doing so by state or local law.79

One good idea that has nevertheless come out of the battle over contracting out is the idea of "managed competition" (also referred to as "competitive sourcing") in which public employees must be allowed to compete against private-sector firms for a given contract, and the contract is awarded to a private bidder only if it truly offers the best contract. The federal rule is embodied in OMB Circular A-76,80 which has engendered considerable controversy.81 Federal employees have

apparently had some success in prevailing under these competitions, at least at some agencies,82 but when they lose, private industry is

offering the public a documented cost savings, and the competition may spur government workers to be more efficient. It is hard to argue against managed competition, but it does not appear that most states have a general requirement similar to OMB Circular A-76, and the federal rule is weakened by the courts' refusal to recognize the stand

ing of interested government employees to invoke judicial review of the process.83

79. Dannin, supra . 75, at 114 (in 2002, only 26.5 percent of local government employees allowed to compete); see also Dannin, supra n. 69, at 302-06 (state statutes limit information that could be considered and the decision makers in ways that favor privatization, and in some cases, simply require privatization without consideration of the costs).

80. See supra n. 11. 81. Private contractors see a bias against contracting out because Circular A-76

prohibits contracting out unless the private contractor offers at least a ten percent savings over the government. Both government employees and contractors fear sub

jectivity in the trade-off of price for quality factors under best-value contracting. See

generally Mary E. Harney, The Quiet Revolution: Downsizing, Outsourcing, and Best Value, 158 Military L. Rev. 48 (1998)(discussing tension between best-value con

tracting and competition); David M. Walker, The Future of Competitive Sourcing, 33 Pub. Cont. L.J. 299 (2004)(then-Comptroller General, head of GAO, offering ten prin ciples to guide future decisions under Circular A-76).

82. Dannin, supra n. 75, at 113-14, 122 (in fiscal years 2003 and 2004, federal employees won ninety percent of all price competitions conducted under Circular A 76). See also letter from Allen Li, Director, Acquisition and Sourcing Management, GAO, to Representative Bart Gordon, GAO-07-434R, March 16, 2007, on implementa tion of OMB Cir. No. A-76 at science agencies (finding that private sector won few competitions, only three out of twenty-two in fiscal years 2003 through 2005), availa ble at http://www.gao.gov/new.items/d07434r.pdf (last visited Feb. 12, 2010).

83. Paul R.Verkuil, Public Law Limitations on Privatization of Government Func tions, 84 N.C.L. Rev. at 440, 452-53 (2006)(disappointed private bidders have standing, but for government employees only administrative review possible, not judi cial review).



A related point about competition concerns the issue, important mainly at the state and local level, whether the government should be permitted to accept unsolicited proposals for PPP contracts. The argument in favor is that unsolicited proposals may provide new in formation and ideas to the government. The chief concern, however, is ensuring competition. Companies submitting unsolicited proposals argue that forcing them to compete for the privilege of performing on their proposal may require the disclosure of proprietary information. But that argument would permit contractors in effect to establish a protected monopoly on the subject of their proposal. The better view, however, is to permit them but provide that an agency should not

accept an unsolicited proposal without first "allowing other entities to

propose alternative approaches or submit competing bids."84

B. Weakening Current Law to Encourage Contracting Out: The

Example of E A

Enthusiasm for PPP may lead to pressures to modify current law perceived to be an obstacle to business participation. For example, under current law, one particularly significant obstacle to any major construction project involving federal funds is the National Environ mental Policy Act ( E A). Under current legislation, contracts to build highways today are typically awarded by state governments, which receive federal funds and work closely with the U.S. Depart ment of Transportation (DOT). The EA or EIS required by E A is generally drafted by consultants hired by the state that is proposing the project, and DOT then reviews it. Final design, land acquisition, and construction may not commence until DOT approves the EA or EIS and issues a Record of Decision (ROD) or Finding of No Signifi cant Impact (FONSI).85

Eager to promote PPPs in the transportation field, the federal government in recent years has attempted to streamline the process of reviewing the EIS by permitting concurrent review of the EIS or EA by the lead agency and other participating agencies. Critics argue that this streamlining reduces the deliberation over the environmen tal documentation and permits a rush to the start of construction, the

point after which it is very hard to stop any project. Perhaps even more disturbing is the federal pilot program to allow states to per form their own E A review without federal agency oversight. Because judicial review of agency approvals of the EAs and EISs is quite deferential and because the state agencies are generally the proponents of the project, opponents' best chance to block a project is to persuade the federal DOT during the review process, and by elimi

84. TRB, Legal Issues, supra n. 42, at 29. 85. Ellen M. Ehrhardt, Note, Caution Ahead: Changing Laws to Accommodate

Public-Private Partnerships in Transportation, 42 Val. U.L. Rev. 905, 922-25 (2008).



nating DOT's approval role or collapsing it with that of the states, the streamlining weakens or eliminates that opportunity.86

C. Ill-Advised Contracting: Government Regret in Agreeing to Non

Competition Clauses

Another result of uncritical enthusiasm for PPP is that govern ments have agreed to contractual terms they later come to regret. One clear example concerns non-competition clauses in contracts to lease and operate toll roads. Such non-competition clauses may bind the local governmental entity not to make improvements to highways that offer alternative routes. In a number of celebrated cases, such clauses have proven to be an obstacle to highway improvements on other roads.87

Could clauses in PPP contracts prevent a government from sub

sequently taking action to promote the general public good, especially through legislation? The law used to look more protective of govern

mental prerogative. But in United States v. Winstar Corp.,88 the

Supreme Court may have made it easier for courts to find govern mental bodies liable for breaching their contracts. There are two doctrines that used to protect the government. One was the sovereign acts defense, which says that to the extent that the state is exercising its sovereign powers to regulate through general, public acts, it can not be liable for breaching its contracts. The other was the unmistakability doctrine, which says that the government's sover

eign power will remain intact unless it is surrendered in unmistakable terms. Perhaps those doctrines continue to protect the

government because five justices applied them to the case at bar

86. Id. at 928-29, 939-40. The author also argues that the review process was further restricted by tight deadlines, further squeezing out public comment and par ticipation in the process. Id. See also Sharon Buccino, E A under Assault

Congressional and Administrative Proposals Would Weaken Environmental Review and Public Participation, 12 N.Y.U. Envtl. L.J. 50 (2003).

87. Ellen Dannin, Infrastructure Privatization Contracts and Their Effect on

Governance, July 10, 2009, at 1 (also describing two other types of clauses commonly found in these kinds of contracts that create similar problems: clauses describing "compensation events" and those giving the contractor a right to object to and receive

compensation for legislative, administrative, or judicial decisions), available at http:// ssrn.com/abstract=1432606; Nicholas J. Farber, Note, Avoiding the Pitfalls of Public

Private Partnerships: Issues to Be Aware of when Transferring Transportation Assets, 35 Transp. L.J. 25, 35 (2008)(even though contract clause expressly permitted safety

modifications, in order to avoid threatened litigation over non-compete clause, Orange County, California, government ultimately bought whole tollway back); TRB, Legal Issues, supra n. 42, at 35-36.

The non-competition clause is an important part of a PPP in which the contractor is to be compensated by collecting tolls because in such a case, the contractor is as suming the risk of changes in traffic loads. Without a non-competition clause, which

many governmental bodies are now unwilling to agree to, private contractors will pre fer to be compensated by an availability payment from the government, leaving the government to collect tolls or taxes to cover the cost of the project. Id. at 32-33, 35-36.

88. 518 U.S. 839 (1996).



though they disagreed about how the doctrines applied. The two dis senting justices thought that the doctrines applied to protect the government from liability in the case. Three concurring justices thought that a contract between certain healthy banks and the Fed eral Home Loan Bank Board authorizing the banks to use a favorable

accounting treatment as an inducement for the banks to buy some

failing banks constituted an unmistakable promise not to change the law on the accounting practice in question. So they voted with the plurality of four justices, who also found the government liable for subsequently enacting a statute that prohibited the accounting treat ment in question, but on grounds that call into question the continuing validity of either the sovereign acts or the unmistakability doctrines. The plurality opinion thus destabilizes the old law that kept the government's dual roles as regulator and contracting party separate and distinct.89 The fear is that after Winstar governments may not be as free as they used to be to issue laws or regulations for the general public good if such action would arguably breach existing contractual commitments.

III. The Challenge of Developing New Law to Protect Public Interests and Values Affected by PPP

This section examines some deficiencies in current law. Specifi cally, the section looks at how current law fails to extend the public values of administrative law, especially for the protection of the non

contracting parties who are most likely to be affected by the kinds of government contracts that constitute PPP.

Contracting out complex services to the public that would other wise be provided by government constitutes a delegation of governmental authority. This should be quite clear in the case of

privatization of health care through managed care organizations, the use of private organizations to administer state welfare programs, the use of charter schools and educational management organiza tions to operate public schools, and the privatization of prisons.90 Gillian Metzger has perceptively argued that each of these situations involves "not simply the ability to exert coercive powers on a noncon sensual basis, but also control over access to governmental resources and government programs."91 Perhaps the degree of power and con

89. See Jody Freeman, The Contracting State, 28 Fla. St. U.L. Rev. 155, 209-12

(2000). 90. See Gillian E. Metzger, Privatization as Delegation, 103 Colum. L. Rev. 1367,

1377-94 (detailed analysis of way each of these arrangements grants governmental power to privates).

91. Id. at 1462. Cf. Lester M. Salamon, The New Governance and the Tools of Public Action: An Introduction, 28 Fordham Urb. L.J. 1611, 1614 (2001) (new govern ance tools involve "the exercise of discretion over the use of public authority and the spending of public funds").



trol is not quite so dramatic in the case of a private operator of a public toll road, but even in such an example of PPP, the contractor may exercise discretion affecting public assets and a numerous pub lic, such as whether and when to engage in road repair and

maintenance or which subcontractors to select to operate rest stops. If this kind of power and control were subject to tightly drawn

contractual limitations, perhaps concern would be unwarranted. The contractor could be seen as the mere agent of the government, which remained in charge of the major policy and legal decisions. But as every lawyer knows, "providing services always entails some element of interpretation and discretion that may cause the execution to differ from what was intended."92 Moreover, the strategy of gaining cost

savings through contracting out depends on giving contractors sub stantial discretion with regard to how they render the service so they can introduce techniques the government did not think of or cannot use.

The combination of power and discretion thus means that private contractors on major forms of PPP may effectively be determining some of the important rules about the application of coercive power to individuals and their access to governmental programs. When gov ernment wields this kind of power, we have developed basic rules of

public law to constrain the government in the name of such public values as transparency, public participation, due process for affected

individuals, and public rationality. These rules and values are found in the federal and state constitutions, the federal and state adminis trative procedure acts (APAs), and numerous other statutes and

regulations at both the federal and state level. But these rules gener ally do not apply to private parties, and some do not even apply to government decisions to contract out. Contracting out is thus all too

susceptible to being abused as a way to evade the complex of public values imposed by public law. In order to protect the interests of af fected members of the public and to preserve the idea of limited government, a growing number of commentators argue that is neces

sary to extend the reach of public law principles so that they apply to forms of PPP.93

A. Applying Public Law Rules to Protect Public Values

In thinking about how to protect the interests that public law seeks to protect, we have to think both about what, if any, constitu tional or administrative law applies to private contractors and how

much of that law applies to governmental decisions to contract out.

92. Ellen Dannin, supra . 75, at 144 (footnote omitted). 93. See, e.g., Dannin, supra n. 75; Freeman, supra n. 15; Freeman, supra n. 89;

Metzger, supra n. 90.



1. Contractor Actions

The situation is clearest and at its most stark with respect to actions by private contractors. The Constitution does not apply to them unless their activity is so clearly intertwined with the govern

ment that their acts can be deemed to be "state action." Merely having a contract with the government does not turn contractor ac tions into state action. Thus due process, which attempts to restrain

governmental power by ensuring that private parties have an oppor tunity to be fairly heard on issues that affect them individually in a process that is free from obvious bias, does not apply to private con tractors. Nor do other important constitutional guarantees, like equal protection. The APAs with their specific rules providing for fair hear ings and the notice-and-comment form of rulemaking do not apply to

contractors; they apply only to governmental bodies and officers. Neither the APA requirements for publication of the rules followed by an agency, nor the Freedom of Information Act (FOIA) with its re quirements for disclosure of agency records or any of the related

transparency statutes like the Government in the Sunshine Act94 or the Federal Advisory Committee Act (FACA)95 apply to private con tractors.96 So citizens cannot use FOIA or similar statutes to find out how PPP contractors are exercising their discretion.

2. Government Decisions to Contract Out

The exemption of private contracts from the rules of public law goes further. While government decisions to contract out are not ex

empt from constitutional requirements since the government is

clearly acting in such cases, the constitutional requirement of due

process probably does not require any hearing by affected interests,97 and the federal APA does not add any hearing requirements. By their own terms, the formal hearing requirements of Sections 554, 556, 557

94. 5 U.S.C. ? 552b (2006). 95. 5 U.S.C. App. 2 (2006). 96. When contractors submit documents containing confidential financial infor

mation to the government as part of the bidding process, as is required, for example, in best value procurements, important issues are raised whether those documents are

exempt from FOIA disclosure requirements as confidential business information under 5 U.S.C. ? 552(b)(4) (2006). The law has to strike a balance between the need for transparency in government contracting and the contractor's need to prevent dis closures of information that could disadvantage it competitively. TRB, Legal Issues, supra n. 42, at 30-31.

Section 7 of the OPEN Government Act of 2007, 121 Stat. 2524 (2007), amended the FOIA, 5 U.S.C. ? 552(f)((2) (2006), to make it clear that any records maintained for a federal agency by a records management contractor are to be treated as govern ment records for purposes of the FOIA.

97. Because the decision to contract out services to the general public does not affect a person as an identifiable individual in a closed class, but only as a member of an open class of persons affected as by a general rule, due process remits them to the

political process to defend their interests, not to the courts. See United States v. Flor ida East Coast Ry. Co., 410 U.S. 224, 244-46 (1973).



do not apply unless another statute imposes the requirement, and federal contracts and grants are exempted from the notice-and-com ment rulemaking procedures of Section 553.98 In most cases of PPP, the projects will require authorizing legislation, so there is likely to be a legislative process?probably, but not necessarily, with legisla tive hearings?in which there will be an opportunity for affected interests to be represented. Whether legislative hearings provide a sufficient substitute for due process hearings depends on one's view of how well federal and state political processes work. The legislative process would appear to be a particularly problematic substitute in situations in which instead of authorizing a specific PPP project that could be the subject of a clearly defined debate during the legislative process, the legislature grants wide discretion to an administrative

agency to engage in a variety of PPP projects on a schedule of its own choosing. The enactment of that kind of general or framework legisla tion is unlikely to generate as specific and concrete a debate as

legislative authorization of a specific project would.

3. Using the Contract to Protect Public Law Values

If contract law is a large part of the problem because it does not adequately protect public values, it could also be the solution in the sense that an easy way to extend the requirements of public law would be to make them applicable to the contractors in PPP by con tract clauses (or by statutes or regulations that in effect determine what the contract clauses are).99 While different types of PPP may typically adopt some aspects of public law by contract clause or stat ute, there does not appear to be any general, thoroughgoing attempt to specify which public law rules should be extended to which private contractors. There are, at least, no general requirements that would ensure the extension of public law values into all important forms of

contracting out.100

98. 5 U.S.C. ? 553(a)(2) (2006). 99. Jody Freeman is one of the most vigorous and creative spokespersons for the

view that contract could be a vehicle for creating much greater mechanisms of ac

countability for forms of PPP. See, e.g., Freeman, supra n. 15; Freeman, supra n. 89. 100. One might have expected contracts for the management of prison facilities to

provide examples of contract clauses imposing due process obligations on the compa nies running prisons. But instead, the recommended approach in this industry is to leave all significant decisions that might disadvantage prisoners (concerning classifi cation, transfer, discipline, or parole) to government personnel and to limit the role of the private prison operator and its employees to such functions as making reports and recommendations about individual prisoners and carrying out disciplinary decisions by the government. National Institute of Justice, U.S. Department of Justice, Con

tracting for the Operation of Prisons and Jails, in 3 Prisoners and the Law 22-17, 22 19 to 22-21 (Ira P. Robbins, ed., 2008); Ira P. Robbins, The Legal Dimensions of Pri vate Incarceration in 3 Prisoners and the Law, op. cit., 22-33, 22-138 to 22-142

(discussing a model contract for prison privatization). Public values are protected by the involvement of the government official if that official does not just rubber-stamp contractor recommendations.



B. Judicial Powers Not Generally Effective to Guard Against Contractor Abuse

Since the contractor is not a governmental entity, its actions are not subject to judicial review under the APA. Do the affected individ uals have any private law causes of action against the contractor? Prisoners who are beaten in a private jail may have a claim under state tort law, but what about the harm an unemployed person suf fers when the company that contracted with the government to provide unemployed persons in his neighborhood job training and a job for at least one year completely fails to fulfill its obligations? Those harmed would like to assert either their standing as third party beneficiaries under the government contract or an implied right of action under the legislation authorizing the contract. The beneficiaries of these kinds of PPP have not, however, fared well with these kinds of claims. The courts are reluctant to imply rights of ac tion under statutory schemes that do not literally provide such rights to the beneficiary class and they have generally refused to find that the beneficiaries have the right to sue as third party beneficiaries unless the contract expressly says so.101

This problem can also be cured by statute or contract. The gov ernment has to be willing to include in legislation authorizing the contracting out of the delivery of services express rights of action by the people to whom or for whose benefit the services are to be ren dered. In the contracts for the carrying out of PPP, the government could include clauses expressly permitting beneficiaries to invoke ad

ministrative and judicial review.

C. Limits on What Can Be Contracted Out or Privatized

The best cure for serious abuse is prevention. Perhaps there are some kinds of functions that simply should not be contracted out be cause of the risk of grave violations of public values. Constitutional limits on what law-making powers the legislature may delegate to the executive branch are notoriously weak in the United States, at least in federal law, so it may not be surprising that constitutional limits on what law-making powers the legislature may delegate to privates are also rather unclear and seemingly quite limited. The U.S. Supreme Court did invalidate a delegation of regulatory power to private actors on due process grounds in one New Deal case,102 but

The extent to which contract clauses in other types of PPP might extend public values is not well documented and needs further research.

101. The fact pattern involving unemployed persons in the text is from Martinez v. Socoma Co., Inc., 521 P.2d 841 (Cal. S. Ct. 1974)(rejecting third party claim). See also Davis v. United Air Lines, Inc., 575 F. Supp. 677 (E.D.N.Y. 1983)(rejecting third party claim after Second Circuit rejected implied right of action claim in connected case).

102. Carter v. Carter Coal Co., 298 U.S. 238, 311 (1936)(holding that the scheme of subjecting the entire coal mining industry to the wage decisions of the majority of



subsequent decisions effectively eliminated the due process limita tion by upholding most delegations to privates as long as the government has a power of ratification, "however perfunctory."103 Paul Verkuil has argued that "the duty to be accountable for public decisions is not a function performable by those outside government" and he sees such duties as typically inhering in offices for which there is a requirement to take an oath or to carry a badge.104 Jack Beerman

makes a similar argument that the Appointments Clause of the fed eral Constitution may prohibit delegating certain functions to privates.105 But the Supreme Court has not held any government function clearly nondelegable nor has it clarified which functions must be subject to the oath or the Appointments Clause, so it appears that federal constitutional law is unlikely to impose significant limits on delegation to privates.106

Such limitations on delegations as there are under federal law are rather to be found in statutes and regulations, which may limit the executive branch's power to delegate, but do not, of course, limit

Congress's power. The Subdelegation Act, for exam

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