Public-Private Partnerships (P3) have a definite role in financing transportation infrastructure in the future. However, the role of P3s should be based on, and support, an overriding transportation infrastructure strategy. This strategy should be established on a firm foundation of a reliable transportation funding stream and effective performance management strategies that are used, monitored and reported for all transportation infrastructure investments—not just those implemented through one of the P3 models. 

             It should also be recognized that P3s can take many forms. For example, in some respects, the traditional design-bid-build model is a form of P3 in that the construction of the facility is implemented by the private sector. As we explore opportunities for P3 investments in the context of a robust, reliable mobility planning and implementation strategy, we must provide opportunities for flexibility in the way deals are structured. What may work for one project may not be as effective in another. The primary considerations should be safety, cost-effectiveness, performance and protection of the public interest. These objectives can be best met in an open, competitive process with ample opportunity for public input—especially if the underlying revenue stream involves tolling or congestion pricing.

             As we move forward with transportation infrastructure options, we must consider these options in the broader context of land-use, liveable communities and environmental concerns and build solutions that address our mobility needs within that context. Toward that end, infrastructure investments—whether made through direct public funding or financed through the private sector—should include such factors as: 

• Increasing and improving the reliability of public funding for transportation infrastructure on a life-cycle basis
• Developing performance objectives that can be measured and reported for all kinds of solutions, not just P3s
• Identifying user-based revenue streams that link use of the facility to frequency and time of use
• Implementing evaluation tools to enable decision-makers to evaluate the merits of various project delivery methods, including P3s
• Maximizing opportunities to incentivize behaviors that promote conservation of limited resources (such as energy independence, clean air, land-use, liveable communities, etc.)

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While the discussion to this question has been both thoughtful and emotional, the main point of the discussion continues to be the value of continued monetization of transportation infrastructure. While the value and costs of major infrastructure needs to be captured in a way that helps return and perpetuate the national investment, it is only one part of the public-private partnership world.

ACT’s membership is comprised of another part of the universe of PPPs: the partnership between employers, employees, and the public sector to provide commuting alternatives. PPPs on this sort of small scale can have real impacts on the levels of congestion in major metropolitan regions to avoid or prevent the need for the massive investments under discussion on this board. The program with the most detailed data and study, Washington State’s Commute Trip Reduction Program, showed a reduction of 5% in drive-alone commuting to affected worksites in the 2007 report. This decline was large enough to be reflected in the overall state drive-alone commuting rate (see www.ctrboard.org for information and reports on the program). There are other examples from across the country of employers, both using the commute to work tax benefit and through their own investments, working with other public and private partners to create transportation solutions that benefit their employees.

The need for transportation investment is a need for handling the volume in peak commuting periods.  By focusing only on the large needs and large investments, we miss an opportunity to promote and reward collections of smaller investments, public and private, that create partnerships to bring about commuting solutions and broaden the available options in those peak periods.

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P3s are an integral part of various funding options. They can be very helpful when applied to the right project. Equal partnering by all parties must be built into the assessment process. The transfer of an existing publicly-owned asset can be controversial, but P3's for new projects that would not otherwise be built for many years due to restricted funding have not been controversial and have been widely accepted. The operator must maintain a quality product and resulting dollars must go back to improving infrastructure. States need to work together on an agreed course of action, much like a business deal, not at opposite ends.

In railroading circles, public private partnerships have a slightly different meaning than they do for highways. In railroading, the private sector owns the right of way and is responsible for its maintenance and expansion through the revenues derived from the marketplace. Thus, while the question on the highway side is to what extent the public sector should participate, the question is flipped around for railroads: what is the public's role in projects on private railroads? The bottom line, in my view, is that there is a place for public/private sector partnership in both the rail and highway systems wherein both networks can be improved to benefit of the public.

PPPs in railroading are not new. They are premised on the principle that that public entities and private entities should pay for their respective benefits. That means railroads should not be taxed for the public's share of investment, since railroads pay for any benefit they derive from a PPP project and because they bear the burden of funding all of the freight network (a $10 billion expenditure in 2008). Further, railroads would add that publicly-funded projects should not require non-economic private investment or service, and that public investment should not supplant, diminish or strand private investment. Chicago's CREATE is the granddaddy of them all to date, because it involves almost all the Class I railroads, every level of government and every mode of surface transportation - Metra, Amtrak, the publicly funded road system and the private freight railroads. The public and the private sector's benefits have been calculated and the bills have been presented, except the public - to date - has not paid in full.

There are many other examples of railroad PPPs at the state and local level in which public funding is aimed at producing better vehicular and train traffic flows, which in turn reduce emissions and fuel use and improve supply chain economics for an area. These objectives are national in scope, not just local, and worthy of recognition in federal policy. With the Recovery Act, Congress for the first time recognized the value and benefit of public funding for rail-related projects. The flexibility that the Recovery Act provided for states to use those funds for rail and port projects provides part of that missing partnership. In addition, the $1.5 billion discretionary fund that Congress created for which freight rail projects are eligible is an important step toward effective PPP policy in the rail sector. Hopefully it will have positive implications for what Congress does in the upcoming reauthorization bill.

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We need to close the gap between our nation's transportation infrastructure needs and available funding sources and public-private partnerships (PPP) play an important role. PPPs offer a mutually beneficial way for private entities and governments to solve critical transportation problems. PPPs might not be the solution for every situation, though, as outlined by the Pew Center and U.S PIRG reports. However, we in the freight rail industry have had great success with PPPs on projects like the Alameda Corridor and the CREATE Program in Chicago. These projects have been so successful because the public and private benefits and associated costs have been clearly defined and publicly supported. These projects have reduced noise and congestion in communities, made the streets safer, cut down on pollution, and allowed faster, more efficient freight movements. In addition, partnerships allow governments to greatly expand the use of rail while paying only for the public benefits. It’s a win-win for everyone involved.

Finding creative ways to fund our nation's transportation infrastructure will be an enormous challenge during the next surface transportation reauthorization. PPPs have a proven track record as a successful way to leverage private sector investment in transportation infrastructure. PPPs can be a part of the solution to our nation’s infrastructure funding challenges.  

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Steve suggests we respond not to Lisa’s question but to the question “what part of our investment shortfall are PPPs most likely to address?” Is this a good idea?

Questions assuming the existence of “shortfalls” or “gaps” (which, incidentally, tilt the responses against choosing the private sector) assume that there is a known amount of investment “needs” and that the problem is to fund the “shortfall”, which is generally the difference between what politicians want and what users are prepared to pay.

The “needs” approach might be acceptable in dealing with “public goods” such as lighthouses or street lighting, for which it is difficult to collect payment. But why should the vast majority of those who use transport facilities not be required to bear all the costs arising from their choices? The small minority of users in difficulty could be helped with a transport equivalent of food stamps.

Many of the so-called “needs”, such as the Dulles and Honolulu rail transit systems, are no more than wish lists, often driven by supplier interest rather than by consumer demand. Some “needs” are exaggerated by officials who do not expect their funding requests to be met in full.

Those of us who accept the “user pays” principle would respond to Lisa that we prefer PPPs to provide all transport facilities. This was difficult in the past because of problems with paying for roads. But modern technology enables road use to be charged for as easily as cell-phone use, without violating the privacy of road users. Rob can confirm that development and application of this kind of technology was recommended by the National Surface Transportation Infrastructure Financing Commission.

Steve goes on to suggest that “there is not much money to be made” from maintenance. On the contrary, the returns from maintenance to private owners are enormous. It is governments that tend to neglect maintenance. This has been known for a long time. In a book published in 1776 an acute observer wrote that

"The proud minister of an ostentatious court may frequently take pleasure in executing a work of splendour and magnificence, such as a great highway, which is frequently seen by the principal nobility, whose applause not only flatter his vanity, but even contribute to support his interest at court.

But to execute a great number of little works, in which nothing that can be done can make any great appearance, or excite the smallest degree of admiration in any traveller, and which, in short, have nothing to recommend them but their extreme utility, is a business which appears in every respect too mean and paultry to merit the attention of so great a magistrate.

Under such an administration, therefore, such works are almost always entirely neglected".

         The Wealth of Nations, Book V, Article I of Part III, Chapter 1.

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The topic of how we fund transportation is very important to the future of our nation. The problems we now face have been years, if not decades, in the making. Unfortunately, there is no quick or easy fix.   Public-private partnerships (PPPs) have a role to play in the overall funding solution; however, where utilized, they must be carefully implemented with a priority given to protecting the public interest. 

As a general principle, “greenfield” projects that focus on adding new capacity to the system are likely to provide greater value to the public than “brownfield” projects that lease or sell existing capacity to the private sector. Regardless of which type of project is being considered, the same level of public interest scrutiny is warranted. 

Due to long-term lease examples like the Indiana Toll Road (ITR) and Chicago Skyway, and what has been considered in Pennsylvania and New Jersey, the public has not yet attained a comfort level with the concept of leasing public transportation assets to private interests. Our roads and bridges are not just financial assets to be sold to highest bidder. Key questions for States and local governments considering such arrangements include:

·         What are the intermediate and long-term plans to improve surface transportation in the State and how will PPPs involving one or more toll road directly or indirectly facilitate this plan?

·         Has the State explored whether it can achieve its financial objectives by a “public monetization” approach that would allow it to maintain control of the toll road?

·         What public oversight will there be to ensure that the concessionaire is operating the road in a manner:   a) consistent with a specified level of service, and b) that will optimize statewide mobility?

·         Will the bidding be based on “best value” (to the State and the public) or simply on price?

·         What restrictions will be placed on the concessionaire paying dividends to the equity investors? 

·         What tradeoffs does the State see in considering a longer vs. shorter lease term?

Interesting work has been done to compare concession deals in some European countries to the U.S. experience. While foreign governments have the same desire to raise capital through concessions, they seem to do a better job balancing that interest with concern about the public interest, including the costs (tolls) borne by the users of the roads. The trade-off is a lower upfront payment. The ITR and Chicago Skyway concessions were structured to maximize the size of the upfront payment.

As Congress considers a variety of options to fund and finance transportation going forward, a federal framework for public-private partnerships should be established that ensures: the public interest is not dismissed in the quest for the highest bid price; motorist fees are fair and equitable; upfront payments to States or local governments are not diverted to non-transportation purposes; high levels of public oversight are maintained; the public is adequately compensated for the value of the leased facility; and that States consider any identifiable benefits of an alternative public-public partnership model. 

Unfortunately, the public discourse on PPPs over the last couple of years has portrayed them as a painless way to fund our transportation infrastructure. The reality is, there is no painless way to generate the significant increases in revenue that are needed going forward. To get the public’s buy-in for any transportation funding solution, policymakers will need to be upfront with them about what they’ll be asked to pay and what they can expect in return.

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As Chair of the National Surface Transportation Infrastructure Financing Commission, I sat through countless hours of discussion and debate about the promise and potential pitfalls of PPPs. The Commission, which represented a wide range of perspectives and interests, ultimately came to the unanimous conclusion that PPPs were a useful tool in the tool box of transportation agencies struggling to deliver better transportation performance with fewer resources. The Commission developed a set of recommendations to ensure the different kinds of  PPPs would  protect the public interest, a goal we broke down into numerous specific goals. Specifically, the Commission recommended 1) the Federal Government allow tolling on the National Interstate System under certain circumstances, 2) Congress should continue and expand a pilot program which allows tolling of existing interstate system capacity to fund reconstruction and rehabilitation, 3) residual revenues from tolling should be used for transportation purposes within the state or other relevant jurisdiction, 4) private toll facility operators should be required to publish their price data in a widely available electronic format and 5) US DOT should develop standard rules to govern the use of electronic tolling and interoperable systems   See pages 207-209 of the Commission’s final report.  

Therefore, rather than banning so-called “bad PPPs” (“brownfield” PPPs) as Greg Cohen suggests, we encourage Congress to keep options available to states and to encourage the best PPP models and best PPP practices that protect the public interest while at the same time ensuring the needed expansion of our surface transportation infrastructure.

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There seems to be no lack of strong opinions about public-private partnerships among my fellow bloggers. My own view is that it’s too early to judge PPPs on their substantive merit. There are only a few of them in existence so far, and the few that have been entered into are only in an early stage of implementation. It will take several more years before the effectiveness of recently-negotiated concessions (such as the Indiana Toll Road, the Chicago Skyway and the SH-130 in Texas) can be properly evaluated. Hence, any judgments expressed today are merely opinions and speculations, often colored by the individual’s ideology or political philosophy. What we can do, however, is to assess the prospects for this still evolving concept. We can do so by observing the signals being sent by congressional leaders, state-level policy-makers, the Obama administration, the transportation community and the private sector. Their actions and attitudes should be a reliable predictor of PPPs’ likely future. Noting and interpreting these signals is what we have tried to do in our recent NewsBrief, "The Prospects for Public-Private Partnerships in a Changing Political/Market Environment" (referenced in an April 6 Wall Street Journal article). Here are the facts as we reported them:

1. Transportation Secretary LaHood Comes Out in Favor of PPPs

In a March 3 interview with the Wall Street Journal, Secretary LaHood made it clear that public-private partnerships will be among the "principles" that he will be recommending to Congress as a foundation for the next surface transportation authorization. Mr. LaHood’s willingness to "think outside the box," as he put it, has been reinforced by the White House’s emphatic opposition to raising taxes in a recession— leaving only a limited set of other funding options on the table. Among them is the use of private capital and long term concession-based PPPs.

The appointment of Roy Kienitz to the No. 3 position in the Department of Transportation as Undersecretary for Transportation Policy, strengthens the likelihood of a positive federal posture on private sector involvement in transportation. As Gov. Ed Rendell’s deputy chief of staff and principal adviser on transportation, Kienitz was intimately involved in developing Gov. Rendell’s plan for a concession of the Pennsylvania Turnpike to a private consortium (the plan was subsequently aborted because of opposition in the state legislature). He will presumably continue to be well disposed toward the approaches championed by his former boss.

2. Congressional Attitudes Have Become More Accepting of PPPs

Congressional attitudes also are becoming more accepting of private sector involvement. While Rep. James Oberstar still believes that the fuel tax remains, in his words "the cornerstone of federal transportation system financing," he acknowledges that private capital must be part of the infrastructure funding equation. Support for public-private partnerships also has been publicly expressed by other congressional leaders such as Speaker Nancy Pelosi (D-CA); Sen. Barbara Boxer (D-CA), Chairman of the Environment and Public Works Committee; Sen. Max Baucus (D-MT), Chairman of the Finance Committee; Sen. Chris Dodd (D-CT), Chairman of the Banking Committee; Rep. John Mica (R-FL), Ranking Member of the House T&I Committee; Rep. Peter DeFazio (D-OR), chairman of the House Highways and Transit Subcommittee and Rep. Earl Blumenauer (D-OR), member of the House Ways & Means Committee.

3. The Stimulus Bill May Help to Leverage Private Investment

Even the stimulus bill had some good news for PPP advocates. It authorized the Secretary of Transportation to allocate up to $200 million of the $1.5 billion set aside for discretionary transportation grants to support the Transportation Infrastructure Finance and Innovation Act (TIFIA) program. TIFIA often has been critical to making PPP projects financially viable by leveraging private capital contributions. A $200 million allocation to TIFIA would provide approximately $2 billion worth in additional lending capacity.

4. The Financing Commission Has Given a Big Boost to Private Sector Financing

In its recently released report, the National Transportation Infrastructure Financing Commission has recommended a series of measures to expand the ability of states and localities to fund infrastructure investments. Prominent among the recommended options is facilitation of public-private partnerships. While the Commission was careful to note that public-private partnerships should be pursued "with appropriate protections for the public interest," it recommended that primary oversight responsibility should reside with the states.

5. Florida’s I-595 project pioneers a New PPP Approach

In a project that Secretary LaHood called "part of the Obama Administration’s commitment to reviving the economy and putting Americans back to work," the Florida Department of Transportation (FDOT) has entered into a $1.8 billion 35-year private concession to build and operate high-occupancy toll lanes in the median of I-595. Florida DOT will set toll rates, retain all revenues and make "availability payments" to the private concessionaire annually out of the toll proceeds.

6. The Texas I-635 Managed-Lanes Project is Continuing a Statewide Practice of Private Toll Road Concessions

In another fresh example of private sector involvement, the Texas Department of Transportation (TxDOT) has awarded a $2.7-billion 52-year private toll road concession ro construct and operate the I-635 high occupancy toll (HOT) lanes on the LBJ Freeway in north Dallas. This is the third private toll road concession to be awarded in Texas to a Cintra-led consortium.

7. The Dulles Rail Line — An Unusual Public-Private Financing Arrangement

On March 10, the U.S. Department of Transportation extended a formal $900 million commitment to the long-planned extension of Metrorail to Dulles Airport. The project has a unique financing arrangement that involves the federal government, the Commonwealth of Virginia, toll road users and the local business community. As much as 56% of the total cost will come from tolls and the private sector.

8. California’s new PPP Law Sets Forth a New Model for Public-Private Cooperation

After several failed attempts, the California legislature has passed comprehensive PPP legislation (SB 4). Among its provisions is an independent Public Infrastructure Advisory Commission to advise state and local agencies on PPP best practices. There are some 10 toll projects on the drawing board that are possible candidates for public-private partnerships. In the past, California often has been a bellwether state for policy innovation. Its new PPP law may offer a legislative model for how the public and private sectors can work together at the state level to improve critical infrastructure.

9. Support for Private Sector Involvement at State Level is Growing

A number of governors—Mitch Daniels of Indiana, Ed Rendell of Pennsylvania, Rick Perry of Texas, Tim Kaine of Virginia, Charlie Crist of Florida, Arnold Schwarzenegger of California, and Jon Corzine of New Jersey, to mention only the most prominent—are well-known for their vigorous and steadfast promotion of private sector involvement in statewide transportation programs. The latest evidence of interest comes from the State of New York where a special 11-member Commission on State Asset Maximization set up by Governor Paterson last September, is about to release its recommendations on the potential uses of public-private partnerhips in the state's capital investments and asset management.

10. PPPs Are Receiving Positive Assessments

As already noted, there have been several recent assessments of PPPs. In addition to the Pew Center's report "Driven by Dollars;" and the U.S. PIRG Education Fund’s report, "Private Roads, Public Costs," they include GAO testimony before the Senate Committee on Finance (July 24, 2008, GAO-08-1052T); the National Governors Association’s report "An Infrastructure Vision for the 21st Century;" a December 2008 report by a Texas Legislative Study Committee on Private Participation; and a Transportation Research Board report "Public Sector Decision making for Public-Private Partnerships," (NCHRP Synthesis Report 391); All but one (the PIRG report) have provided a generally favorable assessment of PPPs.

Conclusion

The preponderance of the available evidence thus suggests that public-private partnerships have been accepted as a legitimate financing tool and will play a growing role in future transportation infrastructure development. To be sure, the economic downturn and the financial crisis have introduced new uncertainties into the calculations. Toll road traffic and toll receipts have declined, the cost of borrowing has risen, and the days of highly leveraged deals are gone. This may render certain concession-based PPPs more problematical, as shown by the recently stalled negotiations concerning the long-term lease of Midway Airport. The nature of private concessions may also change as more future PPP projects adopt "availability payments." Huge upfront payments incident to long-term asset leases are probably a thing of the past.

But this does not mean that private capital is no longer interested in infrastructure development or that toll roads have ceased to be a sound long-term investment. The recent decline in toll road traffic is properly viewed as a temporary phenomenon linked closely to the current economic recession. In the long term, toll roads are still seen as a relatively safe investment with reasonable and predictable long-term returns. At the same time, investors’ earlier fears of excessive government regulation of PPPs are receding as congressional leaders and administration officials seek to reassure the investment community that they do not intend to impose draconian controls on private concessions. By our calculations, there is some $340-400 billion in private funds dedicated to infrastructure investments.

On balance, therefore, I believe, we are justified in concluding that private capital and concession-based PPPs will play a central role in modernizing the nation’s transportation infrastructure.

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Finding enough funds to meet the transportation needs of commuters and freight haulers presents challenges to all public officials, but especially during times of economic uncertainty and extreme budget shortfalls.

It is easy to see why schemes such as public-private partnerships that lease existing portions of the national highway system tempt lawmakers. They offer a quick, short-term fix to funding shortfalls, without having to discuss the two of the most dreaded words in politics, “tax increase.” But let’s keep in mind that more than money is at stake. The United States cannot maintain a national highway network if key segments are leased to the highest bidder. Moreover, leasing existing roadways allows states only to postpone, not solve, their budget problems.

During the Pennsylvania turnpike debate, voters realized this as well. A poll conducted in April 2007 by Susquehanna Polling and Research stated that by nearly two to one (59 percent – 31 percent), Pennsylvanians opposed leasing the Turnpike to a privately owned company – at the time when the Governor was telling folks the state would receive about $22 billion for the Turnpike. The winning bid was, in fact, only $12.8 billion.

The leasing of existing roads for a large upfront amount may help a state’s present budget but compromises the future. The U.S. PIRG Educational Fund Report highlights this long-term financial downside. The Indiana toll road’s 75-year lease finances the state’s transportation plans for only the first 10 years. After that the state will potentially have to deal with the same budget problems, but without revenue from the toll road.

The same argument applies to the Pennsylvania Turnpike situation. Private capital offered $12.8 billion upfront for a 75-year lease of the toll road. But this pales in comparison to the amount the state could generate by keeping the toll revenue over the same time period. Estimates show that during 50 years alone the state could generate $26.5 billion. These types of PPPs that lease infrastructure assets for longer than double their life expectancy are unlike other PPPs around the world. For example, Spanish law limits PPP agreements to no more than 20 years for the lease of existing infrastructure and 40 years for new infrastructure.

Without complete transparency, all involved parties do not know what to expect within these deals. Taxpayers need to be comfortable with their long-term return on investment and businesses need to be aware of the effects on commerce. ATA hopes lawmakers will consider increasing fuel taxes to address immediate budget shortfalls. Collecting fuel tax costs far less than any other proposed alternatives, making it the most efficient way to fund highway projects.

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I agree with Ed Wytkind’s statement: “We cannot build and maintain a national, intermodal surface transportation system that is overly reliant on for-profit PPPs.” I don’t think anyone is suggesting that we should.  As Steve Heminger points out, PPPs are not appropriate for all projects, but can be an excellent option for certain capital intensive, critically needed projects that would benefit from private financing. This is particularly true in those cases when the private sector can produce better value for money than conventional delivery and when the alternative to PPP delivery is indefinite project deferral, together with attendant delays in mobility improvements and lost economic productivity.

The objections Phineas Baxandall raises in the US PIRG report are not new. Those of us who work in transportation generally and the PPP field in particular have been grappling with these issues for years. The National Surface Transportation Infrastructure Financing Commission addressed many of the concerns raised in the US PIRG report--and a few more that were not. We included in our recommendations to Congress suggestions on the development of guidelines to protect the public interest in PPPs (p.182-183) financecommission.dot.gov/Documents/ NSTIF_Commission_Final_Report_Advance%20Copy_Feb09.pdf.

Over the last several years the State of Texas has had one of the most active PPP programs in US history. In response to concerns from a variety of stakeholders, the Texas Legislature two years ago formed a blue ribbon committee to undertake a critical self-examination of its program. The committee’s report, the so-called SB 792 Report www.senate.state.tx.us/75r/senate/commit/c820/SB792Report.pdf , was largely positive about the use of PPP’s - provided the best practices to safeguard the public interest are followed.

The US PIRG report names the ‘loss of public control’ as one of the pitfalls of road PPPs. There is of course a cost to maximizing public sector control, a price that is not always in the taxpayer’s best interests.   Nevertheless, when the public sector wishes to maximize its control over toll rates and revenues, the availability payment PPP is an excellent tool to deliver significant value for money efficiencies for the right application. One such example is the I-595 Corridor Roadway Improvements Project in Fort Lauderdale, for which financing closed in the last month, http://www.nossaman.com/showAnnouncement.aspx?show=5460 , an extraordinary accomplishment at a time the credit markets generally and the tax exempt markets in particular offered little hope. Under this type of PPP the private concessionaire is responsible for completing and maintaining the project and receiving payments based upon the performance of the infrastructure over the life of the contract. The government retains all toll revenues and complete control over the setting of toll rates.

Simply put, we have not been good stewards of our existing transportation infrastructure, built, financed and operated almost entirely through conventional tools. If we are to do a better job, we should look beyond standard approaches that rely on past practices and identify carefully selected opportunities to incorporate private capital, lifecycle efficiencies and performance innovations into the baseline program. Failure to do so is no more defensible than insisting that PPPs are a panacea to what the Financing Commission properly labels the fiscal and physical crisis we are turning over to our children.

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With a funding gap that is wide and growing, we have long said that all options must be on the table when it comes to building America’s transportation system. PPPs are an option to be considered – but only if we can make sure PPP doesn’t stand for “Picking the Public’s Pocket.”

It needs to be emphasized that PPPs are not without public cost. On the limited projects that may be appropriate for PPPs, there will either be new tolls or increased tolls and if traffic fails to generate enough revenue, private parties will hold governments accountable for revenue shortfalls. For many projects, PPPs simply will not work – a road across a less populated area will not generate enough revenue to make the PPP model viable. 

There are also serious labor concerns with PPPs because labor standards and protections are written into PPP contracts and most are not covered by federal and state laws. This opens up opportunities for abuse and allows for wages to be driven down at a time when working families need good paychecks.  

America’s transportation system is one of our most valuable assets and not something that should be carelessly sold to the highest bidder. Where PPPs provide the best value for taxpayers and proper safeguards for users and workers, they can be considered – but at best they represent only a piece of the solution and they should not be seen as a cost-free substitute for the political will to properly fund America’s transportation needs. 

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After literally days of testimony on PPP's before the National Surface Transportation Policy and Revenue Study Commission, I am just about worn out on this subject.  The debate about the wisdom of greater private investment in our surface transportation system is almost always contested on theoretical or ideological grounds, and that may be enjoyable for the debaters but it is completely unenlightening for the rest of us.

I suggest instead that we try to answer the following practical question: what part of our investment shortfall are PPP's most likely to address?  It is probably not deferred maintenance (about 50% of our total shortfall), because there's not much money to be made in that unglamorous activity.  It is also probably not many public transit extensions, which tend to require operating subsidy, not generate operating profit.  Nor is it new road capacity that may be needed for overall national system connectivity, but may be located in areas with slower population growth (and less income potential).

So, that probably leaves the sweet spot for "greenfield" PPP's in extremely congested, high growth areas, where new highway or freight capacity can not only pay for itself but generate additional income through tolls or other fees to pay back investors.  This category of investments is critical to the nation's future economic well-being, but it probably represents less than 20% of our total investment shortfall.

We do not face an "either/or" choice between PPP's and traditional forms of public funding such as gas taxes and municipal debt.  We need both of these tools (plus others) if we are to climb out of the huge investment hole we've dug for ourselves.  And we need to deploy these funding tools in the right proportions to address the functional and modal investment needs we face.

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Public-Private Partnerships have a role to play in the future of U.S. transportation but it is critical that governments use PPPs in a way that protect the public interest and that elected officials understand that PPPs are no substitute for a well-funded, nationally oriented federal-aid highway program.

Broadly defined, a PPP could mean almost any government activity that involves some private participation.  There are many government activities that can perform better, faster, and less costly by the private sector.  For highways, private companies are regularly involved in planning, design, and construction.  Some see a growing opportunity for large private constructors to also maintain their projects. 

But the current controversy surrounding one type of PPPs for highways is focused on a specific, objectionable practice:  the "monetization" and leasing of toll roads (or conversion of free roads to toll roads for monetization).  Toll road authorities are traditionally charged with providing the best possible service to users at the lowest possible toll.  This public service concept is turned on its head by the idea of monetizing and cashing out the value of future (inflated) tolls.  A private operator has every incentive to maximize its net profits and few if any incentives for keeping tolls low .  The market of motorists using a road slated for tolling, monetization, and leasing are held hostage by sharply increased tolls under such a scheme.  No state or local government official would support such a terrible idea except for the prospect of an immediate windfall (or annuity) paid by the private company in exchange for their rights to decades of future toll revenues.  It is simply a sign of political cowardice when elected officials refuse to vote for a needed fuel tax increase and instead engage in a scheme to collect up-front the present value of future decades of toll increases.

Of particular concern for interstate motorists (particularly truckers and tourists) is the idea that tolling, monetizing, and leasing major interstate routes will supply local and state governments the revenues from out-of-state interstate travelers.  This concern is valid because a Governor or Mayor can claim that he's protecting his constituents by making "outsiders" pay the high tolls.  Such thinking threatens to pit State again State through placement of toll booths at state borders. 

Congress and the federal government are the only ones who are obligated to take the more thoughtful, federal interest view.  Congress should ban PPPs that involve monetization & leasing of existing interstate and regional highway capacity.  In order to do this, Congress should continue to limit or abolish tolling on Interstate routes and develop a strong "public interest" test to protect motorists from predatory tolling and PPP schemes.

Beyond the narrow scope of leasing existing roads, there is certainly a lot of room for PPPs to be used to build new capacity or convert underutilized HOV lanes to HOT lanes.  There are a wide range of "good" PPPs.  The I-495/95/395 projects in Virginia are good examples where new capacity is built and the existing motorists will have the option to use the new tolled lanes or the existing untolled lanes. 

But to make sure the public interest is protected, Congress needs to step in and stop "bad" PPPs in the next highway authorization bill.

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How Useful are New Reports on PPPs for Highways?

By Robert Poole

Three reports have appeared in recent weeks, offering advice to state policymakers on making use of the public-private partnership approach to highway infrastructure. The highly negative report from PIRG contrasts sharply with the reports put out by the Pew Center on the States and the Transportation Research Board.

PIRG continues to attack PPP toll roads, presenting a very misleading picture of what is actually going on. In particular, their report blurs the distinction between leasing existing toll roads (“brownfields”) and creating new toll roads via PPP mechanisms (“greenfields”). Reporting the total amount committed to various PPP projects (including relatively uncontroversial design-build projects), the report says that $21 billion was “paid for 43 highway facilities” between 1994 and 2006. The context and the wording make it appear that 43 existing highways have been long-term leased during this period. In fact, a grand total of four toll roads have been leased in the United States. All the rest of the PPP activity has involved the financing of much-needed new capacity.

PIRG’s report also makes it sound as if most of these projects involved 75 to 99-year leases, such as those involved in the four brownfield projects. In fact, most new PPP toll roads are being developed under 35 to 50-year concessions. And large up-front payments, another PIRG target, are relatively uncommon on the growing number of greenfield projects. Why? Because these projects are challenging to finance solely based on their projected toll revenues. In the event that traffic and revenues turn out to be more than originally forecast, the trend now is to include revenue-sharing provisions in the concession agreements.

The other two reports take a far more careful look at the pros and cons of PPP mechanisms, generally concluding that they have an important role to play in bridging the enormous funding gap between transportation needs and available public-sector funding sources. Obviously, the public interest needs to be carefully protected in long-term PPP agreements—and that is what most states are already doing. The Pew report draws useful lessons from the politically charged debate over leasing the Pennsylvania Turnpike, but does not pretend that leasing existing toll roads is the main arena for PPP activity. It offers a number of useful guidelines for states pursuing both brownfield and greenfield projects.

The TRB report is a product of the National Cooperative Highway Research program, in which transportation researchers work on topics proposed by state DOTs, with careful peer review from both academics and practitioners. NCHRP Synthesis 391 is by far the most comprehensive overview of “Public Sector Decision Making for Public-Private Partnerships,” its formal title. Anyone looking for a comprehensive treatment of the subject, including useful guidelines for protecting the public interest, should consult this report.

By contrast, the public-interest recommendations of the PIRG report are either platitudes (“the public should retain control over decisions about transportation planning and management”) or unrealistic. Two examples of the latter:

1.     No deal should last longer than 30 years.

2.     The legislature must approve each negotiated PPP agreement.

The first would rule out many projects that would pencil out at 40 or 50 years, thereby reducing the scope for the private sector to help close the funding gap. And the second is a proven deal-killer. The few states that have included such a provision in their enabling legislation have received exactly zero proposals. Why? Because the cost and time involved in winning a competition for a billion-dollar project and then negotiating a 300-page concession agreement are too large to be risked on the whim of a legislative vote. The workable approach, which both California and Florida figured out after trying the PIRG way, is to enact legislation spelling out the parameters within which deals can be negotiated, and leaving the details to their state DOT or transportation commission.

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There’s always been a large role for the private sector in building our transportation system, but to push Public-Private Partnerships (PPPs) as the solution to our nation’s severe transportation investment shortfalls is ideology at its worst.

We recognize that PPPs, when the public interest is properly protected, will play a role in future transportation financing. But we must remember that only a small fraction of transportation projects are even candidates for this funding mechanism – typically some form of dedicated revenue and potential profit are needed to induce the private sector to participate.

We cannot build and maintain a national, intermodal surface transportation system that is overly reliant on for-profit PPPs. This is a fact the Bush Administration never understood in its zeal to make the private sector the answer to every funding challenge. Fortunately, the PPP ideologues that ran the Bush DOT fell short in executing their agenda.

PPPs must be in the public interest. Taxpayers must be protected from one-sided agreements that may benefit investors without improving service or infrastructure. And workers and their bargaining rights should be protected as well. To meet this objective, a rigorous initial cost-benefit analysis should be utilized and there should be clear accountability for the cost and quality of the work performed. Moreover, longstanding rules that safeguard the rights of workers must be honored.

The fundamental problem, as we all know, is that the Highway Trust Fund is going broke. Gas tax receipts haven’t kept pace with the growth of the economy, rising costs, and an aging transportation system. The federal gas tax of 18.4 cents per gallon has been frozen for 16 years.

The gas tax should be increased and other revenue-raising ideas should be developed and considered. The answer to this crisis should not be the sell-off of critical public assets to the highest bidder. PPPs could become a distraction from addressing the real challenge: the need for a bipartisan agreement in Washington to break the gridlock over increasing federal investment in our decaying transportation infrastructure. PPPs are only a side show. 

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Despite the extra funds provided by the stimulus bill, we are still underfunding our transportation infrastructure.  The revenue derived from the gas tax no longer covers our transportation needs, which means new sources of revenue must be found.  Some of this may come from a cap and trade system, new taxes on pollution, tolls and other user fees, or a higher gas tax.

But while government has an important role, it cannot, shoulder the burden alone. As it happens, private capital investors are hungry for high-quality investment opportunities after the collapse of mortgage-backed securities and the turbulence in the equity markets.

In response to this market demand, banks and private equity firms have raised funds to invest in major infrastructure projects. According to McKinsey & Company, the world's 20 largest private infrastructure funds have nearly $130 billion under management, with 77 percent of it raised over the last two years alone.

This represents an enormous opportunity for funding our infrastructure needs.

The public-private partnership (P3) debate is heating up again with the release of two new reports. Over the last week and a half, both the Pew Center on the States and U.S. PIRG weighed in on the topic of P3s and how they should be better structured.

The Pew report is a well-written case study on last year’s debate on the concession of the Pennsylvania Turnpike (report), while the U.S. PIRG report continues that organization’s skepticism about the value of P3s (report).

The Pew report is must reading for anyone following P3 policy and implementation. While the report leaves out a couple factors governing the debate on the PA Turnpike, e.g. the Turnpike’s aggressive lobbying against the transaction, it clearly lays out the challenges of P3s in terms of the public policy balancing required and the complexity of the transactions. Policy leaders interested in unlocking the value of government-owned infrastructure, should not allow the pulse-quickening, multi-billion dollar payouts blur their vision. The Pew report recommends a thoughtful approach to P3s that should allow governments new to these transactions to steer clear of potential pitfalls.

The PIRG report is less illuminating and appears to be focused on trying to highlight all potential downsides of P3 transactions. PIRG’s anti-P3 exuberance leads it to make assertions a bit remote from the facts. For example, page 13 of the report declares that Abertis engaged in a two-year, $410 million lobbying campaign at the federal level, which, if true, would make it the most expensive lobbying campaign in American history focused at the wrong level of government.

PIRG’s reporting every potential downside of a P3 transaction makes the report somewhat unbalanced. For example, the report comments that concessionaires may have vastly under paid for the right to collect tolls on the Indiana Toll Road (apparently it is worth as much as $11.38 billion, not $3.85 billion). Yet, on the next page, the report expresses concern about the financial health of the concessionaires, noting that one of the owners of the Indiana Toll Road (ITR) wrote down the value of its investment by 45 percent. While the adequacy of a concession payment is always a legitimate policy concern, it’s hard to imagine the same payment be both inadequate and excessive.

Most importantly, however, the PIRG report fundamentally misses the impact the concession of the ITR had on the finances of Indiana. The report accurately notes that toll payments made to the concessionaire will not be available to the government. However, the report then concludes that because the tolls are dedicated to the concessionaire they will not be available to help the State meet future structural budget shortfalls. The tolls, however, were never used to support the State’s budget. The tolls were dedicated to support the operations of the ITR and were not a reliable source of revenue for the State. Under the concession, there will be no structural shortfall on the ITR because the concessionaire is obligated to maintain and improve the road under the concession agreement. In effect, the concession allowed the State of Indiana to pass to the concessionaire all the future costs of the facility (to which the tolls were already dedicated) and to generate $3.8 billion in capital from an asset that was providing essentially nothing to the State.

The PIRG report does include a couple recommendations worth heeding –

• The public must receive fair value for the facility; and

• The process should be transparent so the public feels comfortable that an appropriate balancing of risks has taken place.

P3s alone do not have the potential to bridge America’s highway funding gap. However, P3s do make up 10-15% of all infrastructure funding in Australia, the United Kingdom, and parts of Canada, and they offer great potential here in the U.S.

That said, P3s are complicated transactions raising significant questions of public policy, questions worthy of debate.

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The notion that the next transportation bill will bring more private financing has taken on an air of inevitability. Elected officials have little incentive to question the truism. It gives people something to say about where additional money might come from without taking political heat for mentioning new taxes or fees.

But upfront money for privatized roads is not akin to money falling from trees. As the GAO’s report on this topic concludes, “there is no “free” money in public-private partnerships and it is likely that tolls on a privately operated highway will increase to a greater extent than they would on a publicly operated toll road.” Privatized toll roads – which remain the dominant business model – don’t actually avoid borrowing or increasing drivers’ fees. It only enlists a private middleman to conduct the borrowing and charge the higher fees.

With that in mind, debates about private highway financing are really about the merits of two things: ceding control over toll hikes to private contracts, and using banks and private investment funds to raise the money for public infrastructure. The bankers tell us to trust their superior abilities in managing risk. They want increases in the federal tax subsidies that make these 50-year plus deals possible. Much of the financial industry is lobbying hard for Congress to shift from the pay-forward model of the Highway Trust Fund toward a model that uses private intermediaries to borrow against tolls that will be paid by future drivers.

Congress will need to scratch beneath the surface of benign-sounding terms such as “innovative finance” and “public-private partnerships” (PPPs). We should remember that sub-prime mortgages and derivatives are also innovative finance. The troubled Freddie Mac and Frannie Mae are also PPPs. It should give us pause when Jim Chanos, an early critic of Enron, warns in Fortune magazine that Macquarie, the world’s largest private road operator’s financial practices bear “the hallmarks of a Ponzi scheme.” A letter from Representatives Oberstar and DeFazio express similar concerns about the stability of this model. A recent analysis by PricewaterhouseCoopers draws direct parallels with reckless practices that caused the subprime meltdown.

Whether to have public-private partnerships poses the question in a way that obscures more than it explains. The private sector has always been a close partner. Departments of transportation use subcontractors for most road construction and much maintenance. Private investors already purchase the publicly issued bonds that finance highways and roads at rock-bottom interest rates. It is already possible to hire private expertise for state-of-the-art practices such electronic tolling or advanced tunneling technology.

Clear criteria are needed to ensure that private finance actually provides added value instead of just providing short-term fixes for state and local budget problems. Any private deal must demonstrate that it saves money compared to what public authorities could generate by borrowing against the same toll hikes. This will be hard to do. Private companies have much higher borrowing costs for debt that mean drivers will have to pay higher tolls than could have been achieved with public borrowing. Private equity similarly requires drivers to pay higher tolls to cover the 10-12 percent return that shareholders expect. On top of these costs additional costs, the government must pay handsomely to oversee and enforce contracts and compensate the private toll operator when policies reduce the flow of toll-paying traffic.

Safeguards will also be needed to prevent a loss of public control. Proponents of private toll roads typically assert that detailed contracts at the outset solve this problem. But it’s simply not possible to adequately anticipate future needs or estimate the value of risks for contracts that typically span 50 to 99 years. Public policy should not be infringed or fragmented along separate corridors. Likewise, the state legislatures should be required to vote on the final version of any contract to ensure that highways will be operated for the public good.

None of this is to say that there might not be new opportunities for private participation to enhance America’s transportation system. Rail and bus systems, for instance, are still figuring out the best arrangements for on-board WiFi. Likewise, new methods of “value capture” could tap real estate developers to defray the cost of transit since bus and especially rail substantially increases nearby property values.

The point is that if public entities choose privatized assets as a way to generate upfront financing, there should be clear public benefit over the long term. For highways the evidence so far suggests otherwise.

A final note: Since the privatization proponents at the Reason Institute repeatedly blog here, it is worth responding in advance. Their attack on the U.S. PIRG report does not deal with its main arguments. Instead it makes an issue out of the difference between their own tally of the completed private toll road projects listed in our appendix and another number we also cite of private highway financing. They actually suggest that, “somebody seems a bit math-challenged here.” As footnoted in the body of our report, the larger number comes from a broader Deloitte study, whereas we explicitly include only arrangements that grant a private entity rights tantamount to ownership and a stream of future toll revenues. Had the reviewers at the Reason Institute read the footnotes to the figures they take issue with, this would have been apparent.

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