Ken Orski and Bill Graves mentioned legislation introduced by Senators Bingaman (D-NM) and Grassley (R-IA) that would place limitations on P3 transactions for surface transportation projects.  Lisa Caruso suggested that I post a copy of a brief white paper done on these bills explaining their impact on P3s and the policy implications.

Here it is --

Summary and Talking Points for

The Transportation Equity for All Americans Act and

The Transportation Access for All Americans Act

On April 28th, Senators Bingaman and Grassley announced two pieces of legislation discouraging the use of concession public private partnerships (P3s) for highway projects.  The Transportation Equity for All Americans Act (S. 884) would reduce highway apportionments for those States using P3 concessions and the Transportation Access for All Americans Act (S. 885) would change the tax treatment for brownfield P3 concessions.  Given the significant infrastructure funding gap this nation has, it is surprising that some are advocating disincentives for private infrastructure investment.

The Transportation Equity for All Americans Act

S. 884, the Transportation Equity for All Americans Act, reduces federal highway dollars allocated to states with "privatized highways.”  Privatized highways are those in which there is an agreement giving the private sector the right to collect tolls and control the operation of the highway.  The bill applies to brownfield and greenfield highway projects but, as drafted, would probably not apply to 63-20 corporations or to P3s utilizing an availability payment structure. 

S. 884 reduces apportionments to States utilizing privatized highways by excluding the lane miles and vehicle miles traveled (VMT) on such highways from the National Highway System, Surface Transportation Program, and Interstate Maintenance formulas used to determine a State’s share of funding.

In their press release announcing the introduction of S. 884, the Senators noted that this change in law was necessary to prevent States from “double-dipping,” i.e. collecting funds for highway miles on which users would be paying tolls.  In conversations with advocates for this legislation, it has also been noted that there is a concern that P3s do not work in rural areas and that largely rural states are put at a disadvantage if urban states can use P3s and collect federal highway dollars.

However, S. 884 raises a number of policy concerns, including:

·        The legislation distinguishes between government-owned and operated toll roads, on which States or Authorities are collecting tolls and also receiving federal highway apportioned dollars, and government-leased toll roads.  Yet, there is no policy reason for this distinction.  Currently, toll road lane miles and VMT are included in a State’s apportionment formula.

·        The legislation has a federal-centric, zero-sum-game view of surface transportation funding.  It is highly unlikely that federal dollars will make up a majority of surface transportation funding, and thus states and localities should be encouraged to increase their contributions.  Any State or locality willing to raise its own funding should be encouraged because such funding frees up federal funds to be spent in areas in which it is not possible to raise funds locally. 

·        The legislation creates an unprecedented penalty for one model of infrastructure delivery.

·        The legislation could effectively remove from the table one model for funding surface transportation infrastructure by making it politically unpalatable.

The Transportation Access for All Americans Act

S. 885, The Transportation Access for All Americans Act, increases the depreciable life and the amortization period of a “leased highway property.”  The authors of the legislation noted in their press release that such a change is necessary to prevent an incentive for longer-term leases than owners may otherwise prefer and to limit what they consider to be an undue federal taxpayer subsidy to P3 concessions.  

In addition, advocates for this bill are concerned that ownership of the asset could flip several times within the life of the asset allowing different owners to take advantage of accelerated depreciation during one asset lifetime.

While reasonable, the concerns about P3 concession tax treatment are somewhat misplaced because:

• Competitive bidding processes ensure that the benefits of current tax law flow through to the government owner of the asset, not the concessionaire.  When valuing a P3 concession in a competitive bidding process, concessionaires will value any tax benefits available and add them to the concession price. 
• Asset owners have traditionally used these benefits to fund additional infrastructure, which is usually 100% taxpayer financed.  This is a more nuanced, but extremely important, point.  The tax treatment change proposed in S.885 is not for consumer products or office buildings, it is for infrastructure that if not financed by the private sector will be 100% financed by the public sector (or not built at all).  Any incremental tax benefit that draws in additional private sector financing allows the leveraging of public funds, something that is non-existent in traditional surface transportation financing.  In other words, if a dollar of private sector financing is attracted to infrastructure because of a dime’s worth of tax benefit, taxpayers are much better off than if they have to pay the entire dollar.
• Increasing taxation on infrastructure projects runs counter to the policy imbedded in the recently-passed Build America Bonds, which provides tax benefits for those borrowing to develop infrastructure.  It also runs counter to the policy behind traditional tax-exempt debt, which involves a taxpayer subsidy.
• Such a change in tax treatment would make P3 concessions less attractive and would either reduce the concession payment to the asset owner or limit the amount of scope that could be constructed under a P3 concession.

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 I agree with the other bloggers that the collapse of the Midway transaction is much more of an indication of the current state of the financial markets than of the long-term prospects of infrastructure privatization generally in the US.  The economic crisis will have an impact on infrastructure privatization transactions over the near term, but ultimately the potential is there for a more robust infrastructure market once the credit system rights itself.   But, as I explain below, I don’t believe the prospects for privatization of airports in the United States are really very encouraging.    

Why? It is true, as a general matter, that there remains quite a bit of pent up demand from investors for infrastructure transactions, and this competition will tend to push values up over the long-term.  And while the stimulus package led some to believe that our infrastructure financing needs would be handled by the federal government, in fact, the new law mainly provides funding to infrastructure projects where money can be spent quickly --so-called bike path and pot-hole projects.  Plus, there is still not a sufficient amount of money dedicated to infrastructure repair, let alone constructing green-field projects.   When you add on top of all of this, that municipalities and states have ever increasing budget gaps, these short-falls combined with the ever increasing Federal tax burden and difficulties of municipalities to issue debt will lead governmental authorities to find novel ways to bridge budget gaps.   Read: privatization of infrastructure assets.

That’s the good news.  

The problem with airports is not the credit crisis, it is the state of the law regarding privatization. As others have noted, privatization transactions in the U.S. have been heavily constrained by federal law (principally, FAA’s governing statute, Title 49 of the U.S. Code), grant assurances applicable to airports that receive federal funding, and most importantly, FAA policies and related interpretations of the statute and those assurances.   These constraints basically lie in three areas: the need to obtain FAA approval of any substantial transfer of airport assets; the characterization of proceeds from the transfer of airport property as "airport revenues,” along with the obligation that such revenues be used for airport purposes (the anti-diversion rule); and the requirement that airport-airline fees be "reasonable." Absent a policy change, the combination of these constraints -- in light of the way that FAA has interpreted them to date -- poses a significant obstacle to commercialization of U.S. airports.

The second constraint is by far the most significant, so I will examine it.   Federal law has long required that all “revenues generated by an airport” be spent only on the capital or operating costs of the airport (or the local airport system or local facilities owned by the sponsor and directly and substantially related to air transportation). This general restriction on revenue diversion is required by statute. Congress’ intent when it added this restriction to FAA statute in 1982 was that airlines not be forced to pay "hidden taxes" to finance other state and municipal programs. 

Following that legislation, several commentators looked at whether payments made to a government for the purchase or lease of an airport would constitute airport revenues under the statute. They generally concluded such payments would not and that federal law permitted the sale or lease of a municipal airport to a private firm, that a privatized airport would still be eligible to receive federal grants, and that a municipality could then employ the sale proceeds for general purposes. The last conclusion was premised on the notion that "airport revenues" as used in the Act refers to operating revenues -- not the one-time proceeds from an asset transaction -- and was bolstered by the history of the 1982 Act, standard accounting definitions, and an admission in FAA's own AIP handbook, which stated that "Airport revenue does not include proceeds from the sale of real property owned by the sponsor."

In 1992 President George H.W. Bush signed an Executive Order on Infrastructure Privatization that was intended to relax the barriers to privatization and encouraged private sector initiatives in infrastructure assets including airports.   The EO provided that, to the extent permitted by law, the proceeds from the transfer of privatized assets should be distributed as follows: first to the State and local governments to recover their full project costs; next to the Feds to recover airport grant awards minus depreciation; and the remainder of the proceeds to the State and local government.   The order also provided, again to the extent permitted by law, the grantee of the privatized asset should use the transfer proceeds to invest in additional infrastructure assets or for debt or tax reduction.

In 1994 Congress became concerned about allegations investigated by the DOT Inspector General of several instances of airport revenue diversion.  So, in the 1994 FAA Reauthorization Act Congress tightened the law concerning use of airport revenues. It enacted a new requirement that airports be as "self-sustaining" as possible and not create excessive airport revenue surpluses; it required airports to report any payments to other government units; directed the Secretary of Transportation to establish policies and procedures to assure the prompt and effective enforcement of the revenue use provisions; and it created administrative enforcement provisions and civil penalties to prevent illegal revenue diversion.   Note what it did not do:   bar the privatization of airports.

As Congress was considering tightening the airport revenue use assurances and also permitting a pilot program for airport privatization, FAA sought to clarify its policy on airport revenue use and privatization.   FAA’s counsel reasoned that the statutory revenue-use restriction and grant assurances in the statutes superseded the Executive Order's directive on disposition of the proceeds from a privatized asset.   The agency concluded that it could not use the flexibilities inherent in the EO due to the constraints of its airport revenue use laws.   The net result leads us where we are today: FAA preliminarily decided that proceeds from the sale of airport property should thenceforth be considered “airport revenues" for purposes of compliance with the revenue use restriction. 

In 1996, Congress adopted a compromise of sorts, enacting the pilot privatization program, which was supposed to facilitate airport privatization on a small scale.  However, the conditions included in the program so diluted the incentives for investors as to make the program unattractive in most commercial contexts. A public airport sponsor may use the proceeds from the privatization transaction for non-airport purposes only if 65 percent of the scheduled airlines serving the airport, and 65 percent of the scheduled and nonscheduled air carriers by landed weight, approve the diverted amounts. Similarly, the private airport operator may increase airline fees faster than the rate of inflation only if the fee increases are approved by 65 percent of the scheduled airlines serving the airport, and 65 percent of the scheduled and nonscheduled air carriers by landed weight. (The private airport operator may recover its capital investment through airline fees, though).   As a condition to receiving the exemptions, the private operator must also agree to comply with economic non-discrimination provisions, safety and security requirements, noise mitigation standards and collective bargaining agreements in effect on the date of the transaction.

In 1999, when FAA finalized its Revenue Use Policy, it retained the expansive interpretation of "airport-generated revenues" it had first proposed in 1996.   In addition to the reasons it gave earlier, FAA now pointed to the fact that the privatization pilot program Congress adopted in 1996 expressly authorized FAA to grant exemptions to permit the airport sponsor to use the airport sale or lease proceeds for non-airport purposes.   FAA reasoned that such an exemption would not have been required unless Congress had recognized that the sales or lease proceeds constituted airport revenue.  

Against the backdrop of this legal bar, Michael Jackson, in his response, raises an interesting alternative: As he correctly points out, “you don’t have to lease the entire airport . . . to attract substantial private investment.”   So could the sponsor lease out less than the entire airport?  

Maybe.  

FAA went further (in my opinion, than it needed to) and concluded in 1999 that not only that the proceeds from the sale, lease or disposal of an entire airport constitute “airport revenues,” but also that the disposal of any lesser interest would be subject to the same characterization and resulting revenue-diversion prohibition. It’s logic?  “Since the proceeds from the sale of an entire airport are airport revenue, it follows that the proceeds from the sale of individual pieces of airport property are also airport revenue.”    Hmmm.  .  .   It even decided, some might say absurdly, that royalties from mineral extraction, too, constituted revenues “generated by” the airport. “(M)ineral and water rights represent a part of the airport property and its value. Just as proceeds from the sale or lease of airport property constitute airport revenue, proceeds from the sale or lease of a partial interest in the property – i.e., water or mineral rights – should also be considered airport revenue.” 

I think the agency’s reasoning is suspect.    The key term, "revenues generated by a public airport," is clearly subject to varying interpretations; Congress has previously instructed FAA to adopt policies clarifying the revenue use assurance, and many legal observers believed prior to 1996 that the term did not include the proceeds of a sale or lease of the airport.   And while it can arguably be inferred from the creation of the pilot program that Congress must have believed then-current law forbade privatization (or else it would not have been necessary to authorize a pilot), it is just as compelling to infer from these circumstances that Congress could have – but chose not to – define the key term in creating the program. 

 In any event, the creation of the pilot program for a complete airport privatization does not settle the matter of whether the FAA was correct in interpreting the term so broadly as to preclude the sponsor’s sale of non-aeronautical airport assets or exploitation of non-aeronautical property rights (e.g., mineral extraction). The program on its face does not apply to a lease of these assets.   Indeed, most of the conditions imposed on the parties to a complete privatization would have no bearing in the context of the lease of something less than the entire airport.  

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When the planned sale of Midway Airport to private investors by the City of Chicago fell through, several observers viewed it, as a blow to the privatization of transportation infrastructure.  Whether this is true or premature, it highlights an important issue for transportation policy:  the appeal of infrastructure to private investors will ebb and flow with market conditions, experiencing booms and busts, like other areas.  Public policy must take this into account, when considering the role that private capital can play in infrastucture investment.

Many have noted that there are tens, perhaps hundreds, of billions of dollars of private capital, seeking transportation infrastructure investment opportunities.  Unquestionably, there is a need for investment capital for transportation, both public and private.  Private capital must play a role in meeting this need under terms that are acceptable to the public, while assuring adequate returns to private investors.  These requirements have not changed.

What has changed, almost certainly, are the nature and structure of these transactions.  It is unlikely that the Nation's financial system will emerge unchanged from its current crisis, and private investment in transportation will change with the rest of the financial sector.  Highly leveraged deals almost certainly will not occur.  There will have to be more private equity with related changes in the levels of projected returns.  This may mean that the nature of the private investors in these assets will change, as will the forms of the transactions.

I believe that we will increasingly see genuine partnerships of the public and private sectors.  Each deal will be structured differently, and creativity in structuring these transactions will bring the greatest rewards.

Most importantly, the disciplines and risk assessments that have been missing from too many financial transactions in the last 15 or so years must become a staple of private-public partnerships and of all investments in transportation infrastructure.  In other words, we must target scarce capital -- public and private -- on those projects and programs that bring the greatest benefits and returns.  To paraphrase the National Surface Transportation Infrastructure Financing Commission, we must have wiser investment, as well as greater investment.

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A brief update:  I said at the end of my recent response to this week’s question that DOT would publish “next week” proposed guidance to applicants for discretionary grants made by the Secretary of Transportation from the $1.5 billion included in the Recovery Act for projects of national or regional significance.  That guidance will indeed be published next week – Monday, to be exact, in the Federal Register – but it was actually made available today.  It can be found at http://www.federalregister.gov/OFRUpload/OFRData/2009-11542_PI.pdf.  I am pleased to report that the proposed guidelines do include positive references to the role of private participation, without suggesting that it is in any way a prerequisite to funding.

It’s hard to see how the collapse of the Midway deal isn’t a sign of the times. As the opening entry alludes to, a few years ago people who make their living promoting and charging fees on the burgeoning privatization industry were predicting an inexorable wave of deals. That hasn't happened. While Midway or some other big airport might still get privatized, thre are major sea changes that are hard to ignore:

1] Private debt is no longer cheap. More importantly, the historic gap between public and private borrowing costs, which was unusually narrow a few years ago, has returned to historical norms and widened further. This means that a private entity must overcome its higher private financing costs with other efficiencies that can usually be outsourced piecemeal, when they exist at all. The cost-of-captial gap may narrow some in the future, but it will be a long time before investors again believe that private sector leveraging is virtually risk-free.

2] The public has become more wary of these deals. Public opinion tends to be solidly against privatization of public infrastructure, as we’ve document in a recent research report on toll roads. Moreover, the survey evidence suggests that the more people know about these deals, the less they like them. People just seem to believe that vital public functions should be operated in the public interest. Perhaps future deals will resemble regulated utilities, more akin to the European model. The recent I-595 deal in Miami is a step in that direction because it maintains greater public control.

3] New public mission at U.S. DOT. Back when privatization seemed inevitable, a major reason was that the U.S. Department of Transportation was acting as if its chief mission was to make it so. The Department promoted model legislation, dished out subsidies, brought people from the industry into its top ranks, and produced glossy publication declaring the virtues of privatization as the way of the future. The Obama administration is more cautious and not an active booster. The noteworthy infrastructure financing innovation in the Economic Recovery Act is Build America Bonds that chiefly help public entities finance their own operations.

None of this is to suggest that private investment won’t continue at public airports. The Obama administration isn't about to nationalize the airlines. The state of Illinois won’t be manufacturing the carpets or extending school lunch programs to air travelers. As in the past, there can be private investment without privatization.

What was different about the Midway deal was that a private entity would manage broader policies and planning with a direct interest in maximizing profits rather than advancing public goals. The public would have relied upon the master contract agreement to keep the private operator in line, much like consumers rely on their contract rights with an HMO but without an exit option for 50 years. This week's question is whether future private investment in air travel will be governed by those kinds of long-term concession agreements.

In that respect, the collapse of the Midway deal is part of a larger trend against such deals.

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I agree with everyone who thinks the Midway story tells us very little about the future of public-private partnerships in the United States. To better understand the implications of Midway for future privatizations, however, it might be more instructive to ask:  What if the Midway deal had succeeded? Since our, timid, toe-in-the-water, airport privatization pilot program allows a grand total of one large hub airport to be privatized, success at Midway would have meant the end of large hub airport privatizations in the U.S. (Call me cautious, but I'm not planning to bet very much money that the opportunities for large hub airport privatization expand in the 111th Congress.)

So our relief that Midway probably isn’t a harbinger of anything important shouldn’t be allowed to obscure the essential hostility to  private equity that continues to pervade U.S. transportation law. In the federal highway program, for example, we began with a blanket rule: Any highway facility that has been built with federal financial assistance “shall be free from tolls of all kinds.” That’s still what it says in the statute (§301 of Title 23, U.S. Code). Yes, a subsequent amendment now exempts from this categorical tolling prohibition all highways, bridges and tunnels that aren’t part of the Interstate system, but (1) the most important opportunities to leverage private capital are on the Interstate system, and (2) the law prescribes a variety of conditions for the use of toll proceeds that in many cases will compromise the prospects for successful transactions. 

As for PPPs that are on the Interstate system, we’re still confined to a handful of opportunities made available in a few other tentative legislative experiments that have come down to us over the years: ISTEA’s Value Pricing Pilot Program (1991); TEA-21’s Interstate Reconstruction and Rehabilitation Pilot Program (1997); SAFETEA-LU’s Interstate System Construction Toll Pilot Program and Express Lanes Demonstration Program (2005). Each program established a limited number of opportunities; few remain available today.

We need to be very clear about this in the run-up to the reauthorization of America’s surface and air transportation programs: Federal law today severely restricts the flexibility available to our states and communities in their efforts to address mobility issues. None of them knew that participation in the historic federal transport infrastructure programs that propelled the U.S. economy for so many decades was actually a Faustian bargain, that they were in fact signing up for indefinite micromanagement of their transportation solutions by Washington. 

As a DOT witness at Congressional hearings on these issues during the last administration, I was sometimes accused by Members of Congress of “wanting to toll everything.”  I don’t.  Honest.  I just don’t think we should have federal laws that prohibit tolling, even in places that state officials know would benefit from it. The opponents of including private equity in transportation need to explain why they have so little confidence in the states' ability to act responsibly in keeping with the public interest as they define it.   It's time for Congress to demonstrate greater respect for the capability and innovation we see throughout the states today.

A final note: DOT will be issuing guidelines next week in connection with the $1.5 billion of discretionary stimulus money that Secretary LaHood will distribute for transportation projects of national or regional significance. That money will go a lot further if the guidelines indicate that project proposals will get more points it they have been validated by private equity participation.

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“The Air Transport Association has said for decades (including with regard to the proposed Midway deal) that if there is a strong business case for any airport privatization that makes economic sense to airlines and their customers, we are interested. The negotiations that led to the Midway plan are testimony to that commitment. It is unfortunate that the unforeseeable turn in the broader economy caused the plan to collapse, but airlines remain interested in future proposals that make sense economically.”

 When Bill writes that

“The United States cannot maintain a national highway network if key segments are owned by Wall Street investment firms or foreign consortiums.”

one cannot help wondering whether he is visiting Cuba or North Korea. Do not most Americans rejoice that foreigners (who cannot conveniently repatriate their assets if unfairly treated) have the confidence to invest in US infrastructure?

Bill then suggests that

“The only private investment projects that should be considered are those that create new roads, adding greater capacity and mobility as an alternative to already-existing options”.

Not necessarily! Private investment in existing facilities is also important, if only because maintenance gets high priority from private owners but low priority from many governments. Do not Bill’s members have compelling incentives to maintain their assets?

Furthermore, new roads, though highly desirable in many places, have to compete against government-subsidized ones, so only a few are likely to be provided. How many of Bill’s members would wish to compete against government-owned trucks? Why should road suppliers feel differently?

Might not de-socializing all the roads, and having them all provided by competing private concessions, be the target to aim for? We now have the technical capability to run road networks commercially, in the manner of telecom networks. State-run commercial entities could eventually be sold to pension funds and others needing steady income streams, as would be obtainable from privately managed roads paid for by electronically collected VMT charges.

In the short term, the priority is surely to stop the “Re-authorization” of the federal financing of state roads. Stopping it would abolish the federal fuel taxes legislated in 1956 and leave the states responsible for their own roads and road-use charges. The Midway Airport financing issue would then be forgotten, and states would, as pointed out by Michael Jackson, make long-term arrangements to provide the roads that traffic and landowners are prepared to pay for.

The nice people at AASHTO could then, as requested, coordinate the transportation activities of different states, allowing the federal government to focus on more appropriate activities.

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Midway, Airport Privatization and PPPs

The apparent collapse of the Midway deal says very little about private-public partnerships, lease deals, or the role of private capital at airports.  The program operates within very tight boundaries that mean only a select few deals will ever be put together.  The limited number of "slots" available and the role of airlines in approving the deal make the program a challenge and help explain why there have been few attempts at putting deals together. The Bush Administration recommended several measures (including creating more slots and reducing airlines' influence over the deals) that would have created additional opportunities.

Even more important has been the availability of tax-exempt (AMT and non-AMT) debt for airports, federally authorized PFCs, and capital grants through the Airport Improvement Program.  In the rest of the world, privatization has been driven by a lack of available capital, in the U.S. privatization was driven (at least for airports) by a desire on the part of airport sponsors, such as the City of Chicago, for an upfront payment.  As the Chicago O'Hare's modernization shows, if you have a market, you can raise the capital.

Private capital has been all over airports and will be for the future.  This includes building and operating terminals, management contracts, concessions, on-airport development and many other deals.  The fact that private interests (outside of Branson, Alliance, and several other airports) have not become airport sponsors and the fact that the Midway deal didn't go through are not very significant when the airport industry is viewed as a whole.

Steve Van Beek

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Having read Ken's input more closely, I'm glad to see that his initial reactionof declaring private financing dead was not his final view.  Too often, we tend to see the extreme swings on this issue--it's the only way or it's never the way.

The Midway deal should remind us that we are in a marketplace situation.  The parameters of any deal are going to be influenced by where the market is.  The infrastructure financing market is as vulnerable to "bubbles" as any other, and the valuation of any project is going to depend on those conditions.

It strikes me that the transactions focused on cashing in the value of prior investment are particularly affected by changing conditions.  If your objective is simply to get maximum cash, anything that falls below your expectations is going to be a disappoinment.

If your goal is to develop a new facility, whatever it might be, there's a more sophisticated calculus--what are the benefits of the projects, what are its costs, and within what range will one be comfortable with the financing proposal? And if you are concerned about the political acceptability of the PPP approach as oneof the tools for transportation development, you're going to be better off over time pointing to the facility or service that the public is receiving as opposed to the diminishing pile of cash that was spent by a prior administration.

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I agree with Ken Orski and Robert Darbelnet - the collapse of the Midway Airport deal is hardly the death knell for PPPs. Despite very difficult markets, there is good evidence that investors are still interested in infrastructure as an asset class, and greenfield deals in particular. In Florida, the I-595Express, the first availability payment contract in the United States representing the FDOT's largest construction contract, reached financial close in March. In Texas, two very large managed lanes toll concessions (North Tarrant Express and I-635) generated robust competition resulting in the selection of preferred bidders in the last few months. In North Carolina, the Mid-Currituck Bridge successfully attracted a partner ready and willing to work with the Turnpike Authority to achieve a feasible private investment opportunity. In our experience representing the agencies on those deals, we have found the flexibility to roll with changes in the private equity markets may be just as important as investor interest. In the article linked below, my colleague, Patrick Harder, explains how flexibility built into procurement and contract documents, as well as the partners’ flexibility, ensured the I-595Express deal’s success. http://www.nossaman.com/showarticle.aspx?show=5536

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The increasing attempts to privatize various modes of transit should raise red flags about the one-sided nature of these investments.

Privatization of our highways is billed as a way to increase state funding for transportation, but it’s really just a quick fix for struggling state governments. Leasing roadways simply postpones budget problems without ever understanding the long-term implications. While states receive significant compensation, there’s no guarantee that the funds received by the states will even be spent on infrastructure and taxpayers always end up paying higher tolls to the private operator.

As Mr. Orski mentioned, the legislation introduced by Senators Bingaman and Grassley will reduce expensive federal subsidies for highway privatization by reclassifying privatized highways to reduce tax benefits. These Senators have shown great leadership by addressing an issue that threatens to undermine the national highway network and our nation’s freight mobility. The United States cannot maintain a national highway network if key segments are owned by Wall Street investment firms or foreign consortiums.

The only private investment projects that should be considered are those that create new roads, adding greater capacity and mobility as an alternative to already-existing options.

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Better Players, More Goals, Winning

I agree with those who say the collapse of the Midway Airport deal reflects short-term financial conditions rather than a setback for public-private partnerships.  I also say “Amen” to Michael Jackson’s brilliant analysis of the current situation. I won’t repeat it; I’ll just say, read it.

Since the Washington Capitals are still alive in the Stanley Cup Playoffs, I’d like to use a hockey metaphor to respond to Lisa’s question. The object of the game is to win. The team whose skaters shoot more pucks into the opponent’s goal wins the game. Red light. Thunderous cheers from the crowd. Victory.

I don’t much care how the puck crosses the goal line. It can be a slap shot; it can be a wrist shot; it can be a wobbly shot that ricochet’s off someone’s skate. The important thing is that the puck crosses the goal line between the two posts.

In this game of transportation as hockey, let’s not confuse players with goals. A goal is the creation of mobility. A player is someone who helps to score a goal. One kind of player in the game is a system in which a state department of transportation uses tax dollars to build and maintain infrastructure that provides mobility.   Another type of player is public private partnership. “Privatization” is yet another type of player. Long-term concession of a transportation asset is still another kind of player. You can mix and match characteristics of all of these players to create still other players who skate faster or slower, who take more or fewer shots on goal, who assist other players, etc.

Now, some folk would put certain types of players in the penalty box even before they’ve taken to the ice. They suggest that before we let the PPP player onto the ice, we need input from affected individuals and communities, accountability, transparency, equity, public access, consumer rights, and reasonable rates of return. Well, if we apply these standards to one type of player, shouldn’t we apply them to all the players? We should also ask, “Can this player help score a goal? Can this player promote mobility? Can this player satisfy the fans who have spent their hard earned money to watch our team score goals?” 

We need all kinds of players: traditional state DOT delivery method, PPPs, concessionaires, etc. We especially need players who can perform. I don’t care how much time a player spends on the ice. What I do care about is whether they can score goals and win. That’s the name of the game.

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The collapse of the Midway airport PPP deal alone probably doesn't portend a shift in investor appetite for U.S. infrastructure assets, despite the ultimate lack of financing in that instance. What that case-study does foreshadow, however, is that in the short-to-intermediate term, the price these assets can fetch from private investors will be much lower.

From AAA's perspective, this could be a good development. Although we recognize states are struggling to address significant budget shortfalls and transportation funding needs are great, the motivation and focus for considering greater private sector investment should not solely be receiving a large upfront payment. All options to fund increased investment in transportation should be considered, including gas taxes, tolling and PPPs. Public interest must be paramount regardless of the funding source. Current market conditions may help shift the focus from simply how much money can be raised through PPPs, to how targeted assets can be operated more efficiently and effectively by a private operator.

The main motivation for any "brownfield" PPP investment should be reducing costs, accelerating project delivery, and better allocating project risk - all resulting in higher quality projects. This is also the criteria that should be used to evaluate whether a deal is ultimately in the public interest. Hopefully, the current difficult market conditions will cause us to get back to basics and keep the public interest paramount in future decisions.

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Public private partnerships (PPPs) make the public nervous, particularly as they relate to the nation’s critical infrastructure systems. If PPPs are going to become well-established options for infrastructure financing—and they must given the staggering costs of addressing current and future needs—we need to acknowledge that fact and address it head on.

In most people’s minds, infrastructure falls in the realm of traditional government authority, and the sense of yielding that control to the private sector that comes with a PPP can be discomforting. It can certainly be argued that this sense of distrust in the minds of the public comes from a simple lack of understanding about what PPPs are and what they can do. Who can blame them? Even within the transportation sector (or any other infrastructure-related sector, for that matter), a single, tangible definition for PPP that everyone can agree on just does not exist. That has to change. We have to make an effort to set guidelines and begin educating the people about what PPPs are and are not.

For PPPs to be truly effective there must be official standards. The surface transportation authorization is the perfect opportunity to direct government agencies to develop such regulations. A 2007 GAO report on PPPs, Highway Public-Private Partnerships, pointed out that the lack of regulation overseeing PPPs not only puts the public’s interest at risk, but could mean that governments are not realizing the full benefits of PPPs. To prevent this, ASCE supports guidelines that include things like input from affected individuals and communities, accountability, transparency, equity, public access, consumer rights, sustainability, long-term ownership, and reasonable rates of return. We also recommend that governments invest funds derived from PPPs into other ongoing infrastructure projects.

In our most recent Report Card for America’s Infrastructure, ASCE estimated a five-year investment need of $2.2 trillion just to bring the nation’s infrastructure systems up to a good condition. And, while approximately half of that estimate ($1.1 trillion) already exists in current budgets, it’s obvious that the funding is insufficient to maintain safety and economic viability when it comes to our vital infrastructure systems. There is a clear need to look beyond traditional funding mechanisms.

PPPs will not be a cure-all for the nation’s infrastructure crisis and cannot replace all other funding sources. They can, however, be a powerful tool in our toolbox and absolutely must be a part of the solution to the nation’s infrastructure crisis.

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The current economic crisis has made public-private investments more difficult, but no less compelling.  Public sector leaders and private sector investors will, however, need to arrive at the negotiating table with revised expectations. 

The deplorable inability at the federal level to achieve consensus to support greater transportation investment is unlikely to change in the near term.  The gridlock impacts all modes.  Indeed, the welcome stimulus appropriation ironically may temporarily mute demand for true structural investment reform, as it seems somehow a bit ungenerous to insist upon a real fix while rushing to cash large stimulus checks.

Cash-strapped state and local leaders have few options.  Public Private Partnerships are an inherently sensible solution to remove at least some of the hay from the haystack of problems associated with deteriorating public investment and increased demand for all modes of transportation. State and local leaders will find welcome partners in the private sector, but the private sector will likely insist on more favorable transactions.

This requires a mindset change at the state and local level.  Partnership will mean that transportation asset transactions are less likely to generate windfall profits for public coffers.  Both Wall Street bankers and main street mayors will find it harder to recognize overly ambitious returns. Instead, real partnership will mean that innovative leaders will find themselves negotiating simply to preserve for public use vital assets and mobility that communities need to prosper.  Smart investors, and especially pension funds and other investors seeking greater stability, will not try to match double-digit gains of successful venture capital investors.   

In short, the economic crisis offers opportunity to re-calibrate, innovate and, perhaps, to do so without so much federal oversight. 

What might that mean for aviation?  Heck, you don’t have to lease the entire airport, and beg FAA approval along the way, to attract substantial private investment.  Project-specific lease transactions are less visible, but perhaps more doable.  Smart airport executives have historically obtained from the airline industry capital investments that come with reasonable terms and long-term leases.  Needed cargo facilities are being built with private capital in exchange for long-term ground leases.  The private sector is ready to make investments in capacity-expanding and security-enhancing infrastructure, if structured to return a reasonable profit. 

This can be particularly important regarding investments in security technology, much of which has a useful service life of only a bit longer than, say, the family car.  Nimble investing for such assets can both help deter terrorist attacks and improve aviation operations.  Taking clumps of the overall investment problem away in this manner just might make it possible to address the remaining need with more traditional public investment tools.

In the short term, hard times will continue to drive infrastructure financing innovation. The states and the locals have a higher probability of incubating real change than the federal government.  Rather than quit the scene, let’s hope that private sector investors will sharpen their pencils and lend a hand.  

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I was in Chicago a few weeks ago for our Airport Board and Commissioners Conference, hosted by Commissioner Rosie Andolino and the wonderful staff at the Chicago Department of Aviation. While officially appointed on April 22, Rosie is well known and respected in the airport world, successfully overseeing the O’Hare Modernization Program and the November 2008 opening of the new runway in Chicago. In responding to questions about termination of the program, Rosie indicated that while it was unfortunate, there was hope for a future privatization program at Midway. 

As for ACI-NA, we have not taken a position on the FAA privatization pilot program because we have members on both sides of the issue.  However, it is important to point out that many airports in the rest of the world have been successfully privatized, with benefits for passengers, shippers, airlines and the economy. I am frequently asked why there has been surprisingly limited interest in the FAA pilot program.  A few years ago, as part of the stakeholder outreach process, FAA asked us the same question.  We surveyed our members and their responses, as well as other pertinent information on airport privatization can be found at http://www.aci-na.org/index/issues_private_primer.

Certainly the current credit environment has had an effect, but it is my observation that the US generally has little interest in privatization of aviation infrastructure. It is a topic that gets some overall assessment but the implementation is another story entirely. I have a colleague in the UK who has written a comprehensive management report on US airline privatization and is unable to find buyers. I suspect that there will continue to be considerable discussion but far less progress.

I agree with Ken’s conclusion: the collapse of the Midway Airport deal reflects short-term financial conditions rather than a long-term signal regarding the future of PPP. 

This does not mean, however, that the future of PPP is assured.  Based on the current gap between the demand and supply for transportation services, the future of PPP and other innovative approaches should be very positive.   This assumes of course that we live in a transportation world that encourages common sense policies.    

I see several factors that could slow the attractiveness of PPP.  First, Wall Street and financial entities in general are mistrusted at best and disliked by a large fraction of the US population and thus by our political leaders.  Second, the current political flavor is that the government can solve all our problems.  The US Congress in particular seems to have brought an anti-business flavor to some recent legislation. 

Most decisions about PPP are made at the state and local level, however, so the real issue is the degree to which these new attitudes translate across the country and how long these views stay with us.    I suspect the imbalance between demand and supply will, in time, overcome the public uneasiness about trusting infrastructure investment to financial wizards.  On the other hand, we seem to be entering a period when transit and high speed rail are the answer to every transportation question.  This view may make it difficult to add new roadway and airport capacity in many states -- but surely not all of them.

A third factor, of course, is the prospect of “solving” our current transportation finance crisis.     The flavor of the year is VMT-based fees.  Will these be implemented?  How quickly?  In which states?  And will the fees be set at high enough levels to meet demand?  I am a fan – and advocate – of VMT fees but even an optimist will be hard pressed to provide a positive answer to all these questions.   But, just as the innovation of the Highway Trust Fund placed the growth of the toll road industry on hold for a couple of decades, so any broad-based solution to transportation finance risks slowing the growth of PPP and other innovations.

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Airport Privatization Alive and Well, Despite Midway

The failure of the proposed Midway Airport lease to get financed is a setback for U.S. airport privatization but hardly the end of the story.

Like many other analysts, I was surprised at the size of the $2.5 billion winning bid from the Midco consortium, considering it very high given Midway’s limited growth prospects. That high price tag made the deal harder to finance, at a time when debt markets are still very risk-averse. A deal that would have required perhaps 30% equity and 70% debt 18 months ago may well have needed 50 to 60% equity today. That was likely more equity than Citi Infrastructure Investors (the dominant player in Midco) was willing to put into this one deal. Citi and its other Midco partners just made a bid for London Gatwick Airport, which has much better growth prospects than Midway—and is likely a far better use of its limited pot of equity capital.

In terms of the future of U.S. airport privatizations, there are pluses and minuses from the collapse of the Midway deal. On the negative side, since the $2.5 billion valuation of Midway could not be sustained, other cities contemplating airport privatizations will have to scale back their assessments of how much an airport lease could bring in. And that may dampen the enthusiasm in some quarters.

On the other hand, under the federal Airport Privatization Pilot Program, there is only one slot for a “large hub” airport, and Midway had taken that position. The freeing up of that slot means that other large airports—Minneapolis/St. Paul has been proposed by two Minnesota legislators—may now have a shot at privatization.

For the other governments that have been considering privatization—Austin, Hartford/Bradley, Jacksonville, Kansas City, Milwaukee, New Orleans, etc.—there are still three slots in the Pilot Program for small and medium hub airports, so their prospects are unchanged.

The enduring significance of the Midway deal was that the City of Chicago figured out deal terms that the airlines serving the airport were comfortable with. That is hugely important, since prior to Midway, U.S. airlines had always opposed airport privatization. So the Midway deal terms remain as a template for others hoping to gain airline support for their own privatization plans.

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The question this week brings to mind an online discussion that some of my colleagues and I engaged in a few weeks ago. Much to our colleagues' surprise, I suspect, my fellow journalist, Peter Samuel, Editor of TollRoads News and I expressed some doubts about the future prospects for private financing of infrastructure. I explained my reasons as follows: "Many of us who have been ardent advocates of private investment in infrastructure ---myself included--- have failed to realize how profoundly the world has changed since the financial/credit crisis. The rosy predictions of hundreds of billions of dollars eagerly waiting to be invested in toll roads --- and I confess to have been among those who were subscribing to this message --- are proving to be illusory. Peter and I are simply reporting what we see and what we hear from our ("usually reliable") sources. And the news is that it's another new world out there, with private equity, pension funds and investment banks (to the extent they still have capital) re-assessing their old investment strategies. Attitudes toward private infrastructure investments are one of the victims, and the stalled Midway Airport deal is the latest case in point. Old assumptions about credit availability, high leverages and low-cost debt are out the window. Nobody knows how permanent a change this is, but for now, I must agree with Peter: the market for private investment in toll roads simply is not there."

This exchange happened to be followed shortly thereafter by an official announcement of the collapse of the $2.5 billion Midway airport concession. The deal fell apart after the winning bidder --- a consortium composed of Citi Infrastructure Investors, (a subsidiary of Citigroup Inc.), John Hancock Life Insurance Co., and Vancouver Airport Services --- was unable to come up with the needed financing. The Midway Airport concession was closely watched as a possible harbinger of many other "brownfield" concessions of revenue-generating public assets .

The Midway announcement prompted me to add a postscript. "This news," I wrote in a follow-up email to my colleagues, "confirms Peter Samuel's and my earlier fear that the world of infrastructure financing has indeed changed. There is no denying that the collapse of the Midway deal is a serious setback to any efforts to structure ‘brownfield’ concession deals. How permanent an effect this will have on future deals---both ‘brownfield’ and ‘greenfield’--remains to be seen. But for now, its psychological effect has been devastating, judging from the reaction I have heard so far."

My observations caused considerable consternation among my colleagues– especially so since they have always known me as a strong advocate of PPPs and private infrastructure financing (see, for example, our NewsBrief of May 17, "The Prospects for Public-Private Partnerships in a Changing Market/Political Environment"). My good friend David Horner, former Deputy Assistant Secretary for Policy at the U.S. DOT and currently senior counsel with the law firm Allen & Overy, chastised me in an email, saying that the brownfield pipeline is actually growing, citing as examples assets coming to market in Detroit, Los Angeles, Pittsburgh and Milwaukee. David concluded, "Midway only suggests that assets support less debt than they did during the salad days of abundant credit (when the Midway deal was signed). Having just returned from Europe to visit with infrastructure investors, I can report that the US remains the preferred destination for global infrastructure capital --- for both ‘green’ and ‘brown’ investments. The credit crunch means lower prices for infra assets but it is not a 'serious setback' for the concept or the market."

(David’s conclusions were partly based on a global survey that Allen & Overy recently conducted among its infrastructure clients. The survey was designed to provide some insights into what leading market participants see as the key markets and sectors for infrastructure investment and what governments can do to attract investors in an increasingly global and competitive infrastructure market. The results are based on responses from 300 leading players in the global infrastructure market in Asia, Continental Europe, the Middle East, UK and the US.)

Another thoughtful response came from Dana Levenson, Managing Director and Head of North American Infrastructure at the Royal Bank of Scotland. Certainly, Dana wrote, "the era of cheap and plentiful debt is over. And well it should be, given that it prevented investors from running assets in a more businesslike manner when they could make huge returns by merely flipping them over a few years after acquisition."

"You’re correct," Dana continued, "in that there still is a large amount of money chasing not a lot of assets. But the amount of money earmarked for infrastructure certainly hasn’t decreased... For sure the notion of infra assets being "recession-proof" is no longer credible, but the downturn we’ve seen in drivers on toll-roads is hardly comparable to the downturn in retail sales in this recession.

Other colleagues also took me to task, echoeing David's and Dana’s upbeat assessment. They cited as evidence the recently negotiated Florida I-595 HOT lane concession and the fact that the debt for the project was oversubscribed by a significant amount. They further cited the attempts to resuscitate the Port of Miami project (cancelled earlier for lack of adequate private financing); the bids that TxDOT has received in the last 90 days on two major toll concessions; and the PPP negotiations currently underway in California pursuant to the recently enacted enabling PPP legislation.

Another colleague pointed out that the Midway and Miami Tunnel deals were not the only projects to be scrapped or delayed. The same fate met a large number of publicly financed infrastructure projects that fell victim to the credit crisis, he noted in a personal email.

My skepticism was further challenged by recent press reports that the City of Chicago is considering a variety of strategies to revive its collapsed Midway airport concession. This might include the possibility of the city issuing tax-exempt debt to fund part of the upfront payment that it was to receive in the original deal, The city then would be repaid its contribution over time through lease payments from the airport's private operator. Such a move could substantially lower the amount of private financing needed to make the deal viable.

The weight of all this evidence, plus the arguments of many colleagues whose judgment I respect have caused me to reconsider my initial skepticism. I still think that future infrastructure investors will demand a more stringent test of the assets’ economic viability and profitability, but I no longer consider the collapse of the Midway Airport deal as a watershed event that marks a fundamental change in how private investors view infrastructure financing opportunities.

Of far greater importance, I believe, will be the future posture of our policy makers. In this regard, I have been encouraged by the statements of support from our congressional leaders, administration officials, governors and state legislators. On the other hand, the bills introduced by Senators Chuck Grassley (R-IO) and Jeff Bingaman (D-NM) (S.884 and S.885), if passed, could seriously undermine the market for toll road concessions and discourage private investment in highway infrastructure. (The first bill would create significant disincentives for state governments to lease highway assets by excluding lane-miles and VMTs traveled on "privatized highways" from apportionment formulas for federal highway funds. The second bill would substantially reduce the federal tax benefits currently available to "brownfield" toll road concessions by disallowing accelerated depreciation. How Congress reacts to the Bingaman-Grassley initiatives and how much active support (as opposed to simply rhetorical support) federal and state policy makers are willing to provide to public-private partnerships will be decisive in how private investors respond to future opportunities in infrastructure financing.

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