Recent Developments in Transportation Public-Private Partnerships in the United States

Rick GeddesAssociate Professor

Department of Policy Analysis & ManagementCornell University

June 24, 2009

Overview

Current U.S. transportation financing crisis Role of private investment (PPPs) Stimulus bill Challenges to using PPPs: the Pennsylvania

Turnpike example Obama administration transportation policies

Please ask questions as we go!

Background: U.S. transportation financing in turmoil

Focus on transportation infrastructure: Roads, highways, bridges, tunnels, ports, inter-

modal connectors, airports Main focus currently on highways, bridges and

tunnels Also applies to dams, hospitals, schools, prisons

U.S. transportation financing problems: fuel-tax revenue

declinesRevenue Side About 53% of U.S. highway funding comes from

per-gallon fuel taxes (in addition to tolls, vehicle fees, etc.): Gasoline tax (plus diesel tax) at both state and federal

level (18.4 cents federal, 28.6 cents state average) Federal fuel tax goes into Highway Trust Fund States have similar funds

How is transportation infrastructure currently financed?

U.S. transportation financing problems: fuel-tax revenue declines (con’t) State/local/federal transportation resources

depleted: State and federal fuel taxes usually on per-gallon

basis (not ad valorem) Revenue unstable Depends on vehicle use Purchasing power of tax revenue erodes with inflation

U.S. transportation financing problems: fuel-tax revenue declines (con’t) Federal policy encourages fuel efficiency (e.g.,

CAFÉ, truck effic. standards) but relies on fuel taxes for funding

Vehicle Miles Traveled declining (U.S. Vehicle Miles Traveled in April 2008 1.4 billion less than April 2007, largest decline since 1942)

VMT still declining (slower rate) U.S Transportation Secretary Mary Peters: “Policy

at war with itself”

U.S. transportation financing problems: fuel-tax revenue declines (con’t) $8 bill. “bailout” of Highway Trust Fund in

Sept. 2008 from general fund Larger bailout of HTF expect this year No new Federal proceeds! Obama administration has ruled out:

New federal fuel taxes (recommended by National Surface Transportation Policy & Revenue Study Commission)

VMT fee (recommended by the National Surface Transportation Infrastructure Financing Commission)

States in Fiscal Distress

Recall: State and local government funds about 80% of system

Tax declines from sales, personal income, and corporate taxes (more business-cycle sensitive)

Rising health care and pension costs States face budget shortfalls of $230 bill.

between 2009 and 2011 “Raiding” transportation budgets

Highway financing needs are very high U.S. highway system is old

Interstate system started in 1956 Well beyond original design life of 25 years Needs major refurbishment and expansion:

American Society of Civil Engineers rating U.S. infrastructure overall as “D”

Estimates of highway “funding gap”: around $200 billion over next 25 years

2009 “Stimulus” bill

American Recovery and Reinvestment Act of 2009

Passed February 2009 $30 bill. in highway funding Part of that goes to bike and pedestrian paths

New sources of infrastructure financing U. S. turning to private investors for financing

via Public-Private Partnerships (PPPs) Estimated $400 billion of private

infrastructure investment available worldwide

Defining Transportation PPPs

Highway PPPs refer to (General Accountability Office):

“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 Transportation PPPs (con’t) Federal Highway Administration:

Public-private partnerships (PPPs) are contractual agreements formed between a public agency and a private sector entity that allow for greater private sector participation in the delivery and financing of transportation projects.

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 size of up-front concession fee

U.S. Transportation PPPs:Two Main Types

Greenfield PPP: Private sector provides financing for

construction of new toll facility Usually a DBFO (design, build, finance, operate)

contract Competitive bidding Title remains with public sector Operation may revert to public sector after

specified period (or can re-bid)

Example of Brownfield PPPs in United States: Indiana Toll Road 157-mile toll road along the northern border of

Indiana 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

Example of Greenfield PPP: I-595

I-595 in Florida (around Fort Lauderdale) About 17 miles, deal closed March 2009 ACS Infrastructure Development (ACSID) will

redevelop facility Add new toll lanes, bus lanes and improved

interchanges Cost of $1.8 billion

Example of Greenfield PPP: I-595 (con’t) DBFO contract for 35 years Toll revenues go to State of Florida (state

takes on toll risk) Investors paid using “availability payments” Receive annual payments for providing,

maintaining and operating roadway to specified standards

Some benefits of PPPs

Creates competition in provision and operation

Faster project delivery (13 year time lag!) Risk transfer: Risks assumed by investors

instead of citizens (revenue, construction risk)

Some benefits of PPPs (con’t)

High-powered incentives (to maximize throughput, safety, fast repair, etc.)

Facility built at little (or no) cost to the state

Some benefits of PPPs (con’t)

Brownfields: Risk transfer (different types) Set service standards via contract Funds to maintain facility (i.e. cannot defer

maintenance) Allows citizens to “monetize” value of facility

PPP Benefits for Investors

PPPs offer opportunity to invest in tangible assets

Long-term stable attractive returns (more so that real estate)

Appealing to pension funds

Problems with PPPs: Public Sector Agreement

Proposed lease of Pennsylvania Turnpike 537 mile toll road from New Jersey to the Ohio

border May 2008: Abertis-Citigroup Infrastructure

Fund offered Pennsylvania up-front concession fee of $12.8 billion

Plus $5.5 billion of investment in renovating Turnpike

Problems with PPPs: Public Sector Agreement (con’t) 75-year lease; tolls capped at inflation rate Gov. Rendell’s 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 would be used to fund transportation in Pennsylvania

Problems with PPPs: Public Sector Agreement (con’t) But, state legislature had already enacted Act

44 (which included tolling I-80) Governor surprised legislature with PPP

proposal Little input from legislature Legislature did not act Role of enabling legislation

Obama Administration and PPPs Indications are that Obama Administration

supports PPPs Retained FHWA website on PPPs FHWA recently released Public-Private

Partnerships for Highway Infrastructure: Capitalizing on International Experience

Secretary Ray LaHood has indicated support