Public-Private Partnerships (PPPs) in U.S. Surface Transportation Rick Geddes Associate Professor Department of Policy Analysis & Management Cornell University June 23, 2008

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

U.S. transportation funding in turmoil (con’t) 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

U.S. transportation funding in turmoil: Revenue Side (con’t) 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

U.S. transportation funding in turmoil: Revenue Side (con’t) 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”

U.S. transportation funding in turmoil: Revenue Side (con’t) 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!

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

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

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.”

Defining U.S. Transportation PPPs: Two 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

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”)

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 city’s 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

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

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

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

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

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

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

Some Benefits of Brownfield Concessions: Incentives (con’t) Costs down?  Keep repair and construction costs down  Lower operating costs

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

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.

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

Additional Benefits of Greenfield PPPs (con’t) 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

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

Additional Background on PPPs National Surface Transportation Policy and Revenue Study Commission Entire commission supports increased use of PPPs (pp ) Minority report (green section, page 59): suggests avoiding new federal restrictions on PPPs