The Real Deal New York

Why does the cost of public projects soar? Because budgets are bunk, Rechler says

Panelists talked about the importance of public-private partnerships
By Kathryn Brenzel | November 16, 2017 06:10PM

From left: Scott Rechler and Pat Foye

The cost of public infrastructure and development projects often soar well above initial estimates because the original budget projections are bogus, according to RXR Realty’s Scott Rechler.

“The dirty little secret is a lot of elected officials don’t want to do public-private partnerships because it gets in the way of their politically expediting a project,” he said. “They are taking conceptual plans, putting a number on it, approving it, and they’re saying, ‘You know what, my election cycle is four years, two years, six years, whatever it is. By the time everyone realizes it’s over budget, it’ll be done, I’ll cut the ribbon, I’ll get credit for it and we move on.'”

He cited the East Side Access project, whose budget has climbed to $10.17 billion and is, at this juncture, nearly a decade behind schedule. Rechler and Pat Foye, president of the MTA and former head of the Port Authority of New York and New Jersey, discussed the importance of public-private partnerships (P3s) on Thursday at New York University Schack Institute of Real Estate’s Capital Markets in Real Estate Conference.

Rechler said the private sector brings “innovation and discipline” to public projects because they establish a specific budget and timeline. Foye noted that these partnerships are imperiled by the House Republican tax bill (passed immediately after the panel), which repeals private activity bonds — a major source of financing for affordable housing and infrastructure across the country. Such bonds made the design-build contract possible for the redesign of LaGuardia Airport. (Gov. Andrew Cuomo, who’s pushed for the redesign of the airport, was scheduled to deliver the keynote address but canceled due to the House voting on the tax bill.)

Foye said he’s hopeful that the White House still wants to fund important infrastructure, like the Gateway Tunnel, though President Trump hasn’t yet committed necessary funding for the project.

“It’s a project that literally has to be built,” Foye said. “It would cause a dramatic, negative impact in New York in terms of jobs and economic creation.”

Another obstacle standing in the way of more P3s taking on major projects, the panelists suggested, is the fact that public agencies are outdated and mired in their own bureaucracy. Rechler, who stepped down from the Port Authority last year and hasn’t been shy in criticizing the bi-state agency, noted that “nothing is more dysfunctional than the Port Authority” with the exception of the MTA. Foye acknowledged that government agencies tend to be “analog in a digital world,” saying it can be difficult to attract young talent when competing with the Facebook and Ubers of the world.