As Gov. Arnold Schwarzenegger demands that lawmakers allow private interests into California’s huge market for public works projects, a company with close personal and financial ties to the governor’s economic advisor is positioned to benefit.
The advisor, David Crane, has spent years promoting private-sector involvement in public construction projects -- one of a few issues holding up a deal between Schwarzenegger and legislative Democrats to ease the state’s worsening fiscal crisis.
Babcock & Brown, the financial services firm where Crane worked for a quarter of a century, hired a Sacramento lobbyist last year to influence the governor’s office on so-called public-private partnerships, records show. Since joining the governor’s team in 2004, Crane has received hundreds of thousands of dollars of income from deals he made while at Babcock, a firm founded in San Francisco and based in Australia, according to financial disclosure reports.
Those deals included projects in areas such as telecommunications, in which he served as a financial advisor; personal investments in real estate from Babcock’s public-private partnership projects in England; and partnerships he formed with other Babcock executives to invest in oil wells and an Italian restaurant chain.
In an interview, Crane said the income he earns from deals completed years ago has nothing to do with Babcock today or the firm’s potential to generate business from his support of public-private partnerships. He said he sold his ownership stake, which was less than 10%, when he left in 2003.
“There is nothing that Babcock & Brown could do, or any company in public-private partnerships, that could benefit me,” Crane said.
State ethics law prohibits a public official from taking actions that would benefit himself or his family.
Jessica Levinson, the director of political reform at the nonprofit Center for Governmental Reform in Los Angeles, said Crane appears to be operating within the letter, though perhaps not the spirit, of the law.
“It starts to have the appearance of doing political favors for old friends, and that is not something that I think is illegal, but it still may not be fully ethical,” Levinson said. “I think it all comes down to, is he making this decision for public good or is he making it to help his old business friends?”
Babcock is one of a number of firms that compete for public-private partnerships with governments worldwide.
Another major company, Macquarie Infrastructure Group, has lobbied the governor’s office in the past.
With 30 offices worldwide, Babcock engages in business related to finance, real estate, infrastructure and equipment. Through a subsidiary, Trans Bay Cable LLC, the company is constructing a 55-mile electrical line for the city of Pittsburg under San Francisco Bay, and it has invested in California wind farms.
As Babcock has seen its stock, listed on the Australian exchange, plummet in the economic downturn, executives have said they plan to sharpen their focus on infrastructure, a core company business. Since January, Babcock & Brown Infrastructure Group LLC has paid $18,000 to Lang, Hansen, O’Malley & Miller, a firm with offices across the street from the Capitol, to lobby the governor’s office on public-private partnerships, according to filings with the secretary of state.
Babcock executives in San Francisco did not respond to several interview requests. Matt Dallas, a company spokesman in New York, denied that Babcock was trying to influence the governor’s office on public-private partnerships, but he was unable to explain the records of its lobbying activity filed with the state.
The governor, citing the need for new construction, has long sought to persuade legislators and unions to accept private capital and expertise, but they have repeatedly rebuffed him. Now Schwarzenegger has injected what some see as a peripheral issue into talks on how to fund schools, healthcare and other services.
“There’s no credible evidence to suggest that public-private partnerships help to balance the budget,” said Jean Ross, executive director of the nonprofit California Budget Project, which focuses on the economic plight of low- and middle-income residents.
Schwarzenegger says that giving private companies a greater role in construction and relaxing some of the environmental permitting rules will bolster the economy by speeding up these efforts.
Crane, 55, of San Francisco, is described by associates as an idea man, bright and zealous -- “a philosopher,” he says -- preaching the virtue of free market competition.
He is one of Schwarzenegger’s most trusted confidants and a longtime friend. In the 1990s, they did business together when Schwarzenegger bought a Boeing 747 from Singapore Airlines and leased it back to the airline, which had hired Babcock to help it replace its fleet.
Crane, a Democrat, had been at Babcock since 1979, when it was a tiny firm. By the time Schwarzenegger, a Republican, won the recall election in 2003, it had arranged more than $250 billion in financings. Crane did what he said most private-sector businessmen would not have: He went to work for the government. The $94,500 a year he receives as Schwarzenegger’s special advisor for jobs and economic growth is less than he has continued to make from his former career.
Between 2004 and 2007, Crane reported more than $700,000 in income related to Babock, including deferred compensation that he described as fees he was still owed from former clients, and proceeds from real estate investments in public-private partnership projects, such as courthouses managed by Babcock in the United Kingdom.
Crane has earned tens of thousands of dollars in income since 2005 from Pangloss Oil Partners, a company formed in Texas to invest in oil wells that was based out of Babcock’s San Francisco office. Crane is listed on Pangloss corporate filings as a manager along with his friend James V. Babcock, a company founder who remained a major shareholder after resigning from the Babcock board in November, and Robert Tomczak, a Babcock executive.
Crane reported holding a stake in 2007 of between $10,001 and $1 million in another Babcock-related business, Harrison Street Partners LP, whose investments have included Pomodoro, a restaurant chain, and Green Mountain Energy, a clean power company.
He has a diverse government portfolio as well. Schwarzenegger appointed Crane to the Commission for Economic Development, a state advisory board, and to the High-Speed Rail Authority, where he has pushed plans for private investment along with the $10 billion in bonds voters approved in November.
“I am a big fan of having that option available,” Crane said of public-private partnerships. “I think it would produce great service for Californians.”
But Bruce Blanning, executive director of the Professional Engineers in California Government union, contends that private-sector partnerships often cost more. In 1989, the Legislature permitted the state to allow private companies to create four transportation projects. Two were never built.
“They don’t work in theory, and they don’t work in practice,” Blanning said.
Though infrastructure financing is not directly connected to the state’s budget gap, estimated to reach $42 billion by mid-2010, Schwarzenegger’s administration has demanded that Democrats allow an unlimited number of public-private partnerships before he will sign their budget bills.
The projects the administration wants built privately include a $6-billion truck tollway between Los Angeles and Long Beach and the $1-billion replacement of the Schuyler Heim Bridge in the Port of Los Angeles, according to administration documents.
Schwarzenegger argues that those projects are needed as urgent economic stimuli. His spokesman, Matt David, pointed out that Democrats such as House Speaker Nancy Pelosi (D-San Francisco) have expressed support for using private-sector funding.
The Democratic budget proposal the Legislature passed Dec. 18 would have allowed up to 10 public-private projects if they were to reduce traffic congestion and air pollution and improve safety. Schwarzenegger called that too restrictive.
“The governor,” said Will Kempton, director of the California Department of Transportation, “has been very clear he wants the broadest possible authority.”