Public-Private Partnerships (PPPs) in U.S. Surface Transportation

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Public-Private Partnerships (PPPs) in U.S.
Surface Transportation

• Rick Geddes
• Associate Professor
• Department of Policy Analysis Management
• Cornell University
• June 23, 2008

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Background on PPPs U.S. transportation funding
in turmoil

• Key question now How to pay for rebuilding,
  refurbishing, and expansion of roads, bridges,
  tunnels, ports, inter-modal facilities?
• United States is facing The Perfect Storm
  (Sebastian Junger) with regard to transportation
  funding
• Consider both the revenue side and cost side in
  transportation

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U.S. transportation funding in turmoil (cont)

• Revenue Side
• Most funding for U.S. transportation comes from
  per-gallon fuel taxes (in addition to tolls,
  vehicle fees, etc.)
• Gasoline tax at both state and federal level
  (18.4 cents federal, 28.6 cents state average)
• Historically, feds pay for 40, state and local
  60 of highway costs
• Gas tax revenue declines as fuel consumption
  declines

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U.S. transportation funding in turmoil Revenue
Side (cont)

• High gas prices causing changes in behavior
• More fuel efficient cars (Hydrogen Honda FCX
  Clarity in California)
• Less driving (VMTs declined most since 1942!)
• Moving closer to work
• Car pooling, public transit, biking
• U.S. policy encourages efficiency
• C.A.F.E. standards increased
• Revenue from gas taxes declining

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U.S. transportation funding in turmoil Revenue
Side (cont)

• Politically impossible to raise fuel taxes in
  United States
• Highly regressive tax
• Revenue viewed as wasted Bridge to Nowhere,
  3,671 earmarks in last highway bill
• Fuel tax now most hated tax
• Gas tax increases would ultimately further reduce
  gas use policy at war with itself

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U.S. transportation funding in turmoil Revenue
Side (cont)

• States facing broader financial problems
• State income tax (and other tax) revenues down
  due to economic weakness
• States facing higher costs for health care,
  unemployment etc.
• Some states raiding transportation funds for
  other uses!

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U.S. transportation funding in turmoil Cost Side

• Cost of system (roads, bridges, tunnels) rising
• Construction costs (steel, concrete, tar, etc.)
  rose 35 percent since 1998, more than twice as
  fast as overall inflation
• Construction activity (e.g. in India and China)
  caused explosion in cost of construction
  materials
• Rising costs of environmental mitigation
• U.S. highway system is old Interstate system
  started in 1956, now end of original design life
• System needs major refurbishment and expansion

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U.S. transportation funding in turmoil The
Perfect Storm

• American Society of Civil Engineers
• U.S. public works infrastructure (overall) needs
  1.6 trillion investment over next 5 years
• Where will funding come from??
• United States turning to private investors for
  financing via Public-Private Partnerships (PPPs)
• Estimated 400 billion of private infrastructure
  investment available worldwide

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Defining Transportation PPPs

• General Accountability Office definition
• Highway PPPs refer to highway-related projects
  in which the public sector enters into a
  contract, lease, or concession agreement with a
  private sector firm or firms, and where the
  private sector provides transportation services
  such as designing, constructing, operating, and
  maintaining the facility, usually for an extended
  period of time.

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Defining U.S. Transportation PPPsTwo Main Types

• Brownfield PPPs
• Long-term leases of existing transportation
  facilities (mostly toll roads) by private
  concessionaires
• Usually team of investment bank and operator
• Investors bid for right to collect tolls/operate
  road on basis of up-front concession fee

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Defining Transportation PPPs

• Investor offering largest fee for a defined
  contract (toll rate increases, quality of
  service, expansion of road, etc.) wins
• Government retains ownership of facility
• Government controls operation of facility through
  the concession agreement (or lease or
  contract)

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Examples of Brownfield PPPs in United States
Chicago Skyway

• 7.8 mile elevated toll road south of Chicago
• Leased by Macquarie/Cintra group in 2005 for 99
  years
• Caps rate of toll increases
• City received 1.8 billion in competitive bidding
• About 70 of citys annual budget proceeds used
  to
• Pay off Skyway debt
• Create reserve fund (generates as much in
  interest as Skyway did in tolls)
• Pay off City debt (debt rating improved)
• Homeless shelters, senior citizen facilities,
  libraries

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Examples of Brownfield PPPs in United States
Indiana Toll Road

• 157-mile toll road along the northern border of
  Indiana
• Connects to Chicago Skyway
• Leased by Macquarie/Cintra group in 2006 for 75
  years
• Lease caps rate of toll increases to inflation
• State of Indiana received 3.8 billion in
  concession fee
• State used proceeds to fund a 10-year
  transportation plan called Major Moves
• Indiana only state with a fully funded
  transportation plan for those 10 years

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Examples of Brownfield PPPs in United States
Pennsylvania Turnpike

• Proposed by Gov. Rendell (not yet finalized)
• 537 mile toll road from New Jersey to the Ohio
  border
• May 2008 Albertis-Citigroup infrastructure fund
  offered Pennsylvania up-front concession fee of
  12.8 billion
• Plus 5.5. billion of investment in renovating
  Turnpike
• 75-year lease tolls capped at inflation
• Proposed use of proceeds
• 2.3 billion to pay off Turnpike debt
• Remainder invested by State yields 1.1. billion
  in annual interest payments
• Interest used to fund transportation in
  Pennsylvania

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Some Benefits of Brownfield Concessions Raising
Capital

• Allows citizens (i.e. highway owners) to realize
  more value from facility, but still retain
  ownership and control
• Bond financing conservative approach
• Creates predictability in toll increases
• Length of concession longer than usual bond term
• Private operator will keep costs down, usage (and
  revenues) up

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Some Benefits of Brownfield Concessions
Transfers Risk

• Some risks associated with toll roads
• Traffic risk
• Changes in construction costs
• Risk of tunnel, bridge failure, etc.
• Currently (risk-averse) citizens bear risk
• PPP transfers risk to investors (professional
  risk bearers)
• Investors charge a price (rate-of-return) to
  assume risk

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Some Benefits of Brownfield Concessions
Competition

• Bidding process injects competition into
  provision of services
• Currently toll roads operated by toll authority
  or state department of transportation no
  competition
• Ensures services provided more efficiently

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Some Benefits of Brownfield Concessions
Incentives

• Private operator has incentive to maximize profit
  ? keep revenues up, costs down (given quality of
  service required in lease)
• Revenues Up?
• Will seek out customers (advertise)
• Increase throughput of cars via electronic
  tolling, use of congestion pricing
• Remove accidents/dead animals/snow/ice quickly
• Repair road quickly

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Some Benefits of Brownfield Concessions
Incentives (cont)

• Costs down?
• Keep repair and construction costs down
• Lower operating costs

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Greenfield PPPs Definition

• Private sector provides financing for
  construction of new toll facility
• Usually a DBFO (design, build, finance, operate)
  contract
• Competitive bidding

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Example of Greenfield PPPs Dulles Greenway

• 14 mile highway in Northern Virginia (near
  Washington, DC)
• Opened to traffic in 1995
• Built for 350 million under a DBFO contract
• Operation will revert to the State of Virginia
  after 42.5 years
• Initially financed by 10 U.S. institutional
  investors
• Purchased by Macquarie in 2005 for 617 m.

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Additional Benefits of Greenfield PPPs

• Additional risks associated with Greenfields
  Greater traffic risk, environmental risk, etc.
• Benefits of risk transfer are greater
• Initial construction costs incurred Impact of
  cost-minimizing incentives are greater

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Additional Benefits of Greenfield PPPs (cont)

• Incentives to complete project faster
• Project can be built without federal money Is
  not subject to federal regulations that slow
  project down
• 13 year time lag!
• NEPA
• Davis-Bacon
• Lack of inter-agency coordination

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Conclusions

• Fuel taxes should not be abandoned as a funding
  source
• Tolling and PPPs will play a larger role over
  time as fuel tax revenue falls
• Policy should focus on how to encourage more
  private investment
• U.S. transportation will come to resemble other
  utilities, such as electricity, natural gas,
  telecommunications

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Additional Background on PPPs

• National Surface Transportation Policy and
  Revenue Study Commission
• http//transportationfortomorrow.org/
• Entire commission supports increased use of PPPs
  (pp. 48-51)
• Minority report (green section, page 59)
  suggests avoiding new federal restrictions on PPPs