The Congressional Research Service (CRS) of the U.S. Congress recently released an updated version of a report titled “Public-Private Partnerships (PPPs) in Highway and Transit Infrastructure Provision.” You can read an earlier version of the report dated July 9, 2008 here: http://opencrs.com/document/RL34567/2008-07-09/
According to CRS, “This report describes the wide variety of public-private partnerships in highways and transit, but focuses on the two types of highway PPPs that are generating the most debate: the leasing by the public sector to the private sector of existing infrastructure; and the building, leasing, and owning of new infrastructure by private entities.”
Advocates of PPPs frequently argue that private sector involvement in infrastructure is the best hope for injecting new resources into the maintenance and expansion of transportation systems and could potentially reduce costs, project delivery time, and public sector risk. Opponents argue that PPPs have limited applicability and could disrupt the operation of the surface transportation network, increase driving costs, and subvert the public planning process – unless they are carefully regulated.
What do you think? Is it time to encourage greater private sector involvement in the development and maintenance of our road infrastructure – in the face of congressional gridlock on transportation authorization and government deficits as far as the eye can see? Or are the risks and uncertainties of private sector involvement in the maintenance and expansion of roads too great for the public to bear?
Sunday, March 7, 2010
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It is widely recognized that America has grossly under-invested in its highway infrastructure in recent decades. The Surface Transportation Infrastructure Financing Commission estimated that the annual capital investment shortfall just to maintain current conditions and performance is $55 billion (federal/state/local), while the shortfall if we seek to improve the system cost-effectively is $89 billion per year.
ReplyDeleteSince political factors continue to make increases in federal and state highway user taxes (fuel taxes) modest and infrequent, we are going to need a large-scale increase in funding based on toll revenues to have any hope of closing these investment gaps. The question before the house is this: Can or should expanded tolling be done only by public-sector toll agencies or is there a significant role for PPPs?
The recent CRS report on PPPs acknowledges that PPPs can play a meaningful role, despite its need to take the “on the one hand/on the other hand” approach. Numerous other studies agree that long-term toll concessions can add value, transfer risk to sophisticated investors, and protect the public interest. And the types of toll projects that most interest the private sector are precisely the areas where America needs large-scale highway investment: adding priced congestion-relief lanes to urban expressway systems and rebuilding critical long-haul Interstate routes to cope with projected growth in goods-movement and personal travel.
Some states and metro areas already have experienced public-sector toll agencies which can often use the financial strength of their existing system to underwrite the financing of additions. In those settings, the PPP model may or may not have something to add.
The majority of states and metro areas do not have such agencies, but many of them have near-term needs for large-scale projects that are likely to be possible only with toll finance. Given the high risks involved in transportation mega-projects and the additional traffic and revenue risks of green-field toll projects, this type of situation is a natural for toll concessions. Those same considerations may well apply in states and metro areas with newly created public sector toll agencies. With neither a track record of doing toll projects nor an existing toll system’s revenue base, such new agencies would likely reduce their risks by partnering with private concession companies.
Even established toll agencies may find it advantageous to partner with private concession companies for large new toll projects in certain situations. First, they may have already reached the limits of their bonding capacity, but still have a list of needed projects to build. Second, some proposed new projects (such as HOT lanes) may be considered higher-risk than a conservatively managed toll agency can be comfortable with.
Finally, let’s look at the controversial issue of leasing existing toll roads (or even currently non-tolled Interstate highways). Over the next two decades, large portions of the Interstate system will be reaching the 50-year mark, likely the end of their original design life. Most of these will need major reconstruction, and in many cases widening and redesign. Unless there is a major change in public sector funding, these projects will need to be paid for via toll revenues. And in all those places without established toll agencies, PPP concessions will make good sense, for the reasons discussed above. These projects will not be the brown-field leases like Chicago Skyway and Indiana Toll Road; because they will involve redesign and reconstructions, they will be hybrid brown/green-field projects.
Given the magnitude of the highway investment challenge, the last thing we need is infighting among toll advocates over who will do what. There is more than enough work to go around, for public toll agencies and PPP concession companies.
--Robert Poole, Reason Foundation
Posted by Ken Daley, President, International Development, Transurban
ReplyDeleteThe current seemingly circular debate relating to the role and benefits of public- private partnerships in transportation is so often misguided. Proponents and opponents equally, and somewhat blindly, continue to singularly focus on the principles of administration and the framework for managing P3 projects. Rarely is the real issue given the appropriate level of prominence - that is, how is America going to deliver the transportation services required to meet the present and future community needs? The proper context for the P3 debate requires a confronting recognition of the scale of the transportation challenge. The apparent disconnect is simple and clear – there is a critical and reducing level of service across most transportation operations and, increasingly the ‘pure public’ means of addressing the situation are not able to meet the nation’s needs. Surely the question should be can P3 programs assist in meeting the responsibilities to the community to provide mobility and accessibility? Unfortunately however, the ‘wrong’ debate on the matter looks set to continue – and the cost may be in terms of safety, environmental impacts, quality of life and economic development.
Posted by Robert L. Darbelnet, President & CEO, AAA
ReplyDeleteThe 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.
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 they can potentially reduce costs and project delivery times, and how targeted assets can be operated more efficiently and effectively by a private operator.
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.
In summary, our view is that PPPs need to be included in the mix of tools States and local governments can use to finance transportation projects going forward. Where it makes sense to pursue them, the public interest must be the overriding consideration.
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.
ReplyDeleteThe National Surface Transportation Infrastructure Financing Commission addressed most if not all of the concerns PPP opponents have raised in recent years. We included in our recommendations to Congress suggestions on the development of PPP guidelines to protect the public interest (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 2009, 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.
From a posting on another (private) forum:
ReplyDeleteI have just read a very interesting book, "Population Growth and Land Use" by Colin Clark, that came out in 1967. Colin Clark seems to have been well respected at the top level of the economics profession and it is odd that he is not more famous today.
The above book is full of extraordinary insights, presented in a non-argumentative way amid pages and pages of dry analysis. (I have read a suggestion by a biographer that this is a significant reason for Colin Clark's lack of fame).
He suggests, on the question of "externalities", that positive externalities are always more significant than negative externalities, and that regulatory intervention in the free market needs to be focused more on the issue of "free loading" in consequence of positive externalities, than on the issue of remedying negative externalities.
Excuse me if this is old stuff in this forum, but this was a revelation to me.
As Glover and Simon revealed, (and Colin Clark was an acknowleged influence on them) there is a strong correlation between the provision of roads and economic performance. (And a strong correlation between roads and densification) I wonder, then, whether Colin Clark's point about positive externalities, means that public funding of roading is a lot more justified than I ever granted?
I certainly still believe that road use pricing adds economic efficiencies, but that the positive externalities generated by the provision of roads is an important justification for public contribution to the costs.
PPP is a hot topic right now in the European Union’s world; in fact the European Commission has published a Communication last November (you can download it at the following link:http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2009:0615:FIN:EN:PDF ) called “Mobilising private and public investment for recovery and long term structural change:developing Public Private Partnerships”. Basically the European Commission analyses PPPs in the framework of the wider EU Action Plan for economic recovery, which was launched by the EU Institutions last Autumn in order to face the international financial crisis. In the document (which is NOT a legislative one, but nevertheless it is an expression of a political message from the European Commission to the other Institutions), the EC says that investments in infrastructure projects through PPP schemes represent the best solution in order to sustain the economic activity mainly during crisis periods and in order to ease the recovery and the re-establishment of a viable economic growth. Namely at page 3 EC says: “ The combination of public and private capacities and money can therefore help the process of recovery and the development of markets that will form the basis of Europe’s future economic prosperity”.
ReplyDeleteFinally the EC plans, as from 2010, to carry out some initiatives aimed at ensuring that PPPs continue to play an effective role in the longer term; in particular EC would like to set-up a European PPP group inviting relevant stakeholders to discuss their concerns and further ideas with regard to PPPs.
At present, also the European Parliament and the European Council of the EU are analysing the issue and in the next days we are also expecting, from the European Commission, the publication of its legislative program, which could contain a reference to future initiatives on the matter.
Emanuela Stocchi - AISCAT
Posted by Jack Opiola, Senior Partner, D’Artagnan Consulting (Part 1 of 2)
ReplyDeleteI think there are several models for PPP and not only the more common ones addressed in the referenced report. Whatever the model for PPP's, however, it has to fit the situation and the needs of the local economy where it is being used.
It is often forgotten that the USA transport network between major cities was built by PPP's between 1786 and the 1840's, which were toll roads since neither the Federal Government nor the State Government had funding to build roads in the new Republic. There were over 2,000 across the colonies and Virginia had a number of them that remain today with names that end with "pike" - Columbia Pike, Leesburg Pike, Shenandoah Turnpike. These were and still are ‘arrow straight’ because the PPP mechanism used by the State of Virginia was a 40% owner in the road by granting recognizing the value of lane given as the right-of-way in the concession deed. The “share holders” were the locals who contributed $1 or $2 dollars so that a good road could be built and bring their produce to market thereby building a local economy. Leesburg pushed for the Leesburg Pike so that it could be the commercial capital of Northwest Virginia and provide merchants a quick trip back to the port of Alexandria with the produce they bought from the local farmers. It was a WIN-WIN-WIN for the locals, concession, and State. The state was a major shareholder and recipient of a road that was recognized and well used after the concession deed ended. The shareholder got a share of the revenue from every horse, buggy and carriage that used it to save time and the concession made money for taking the risk of building and operating it.
Maybe we should turn back the clock and remember what PPP’s meant to this country and not be so quick to dismiss them. I recently helped justify and write PPP legislation in Abu Dhabi, UAE. The Emirate houses eight of the richest men in the world due to our dependency on oil. They don’t need PPP’s to fund their roads; but they need to innovate and be creative to build a sustainable economy after the oil dries up. Justification for PPP’s was based on innovation. PPP operators for roads are more innovative and inventive than Ministry or government departments of transportation, or toll road operators. Yes, there are some that are both innovative and creative, but all PPP operators are innovative and creative or they go out of business! PPP concessions develop work programs, maintenance and tolling operations that are lean, efficient and effective when compared to their public sector counterparts. They have to be efficient or they go out of business, They innovate and create new practices and ideas to squeeze more profit out of a road or facility because they are incentivized to do so. They work hard at PR and marketing of their road because they need customers - just like Macy's or Nordstroms. They were the first in the world to use ETC, free-flow tolling and indexed toll rates for minimizing their operating/transactional costs and future proofing their profits. They make long-term procurement and quality decisions on equipment and supplies because they see the value of long term saving rather than short-term capital cost procurements for the lowest price. They understand business drivers and the value of the long-term investment to lower operating costs. Abu Dhabi recognized this and wanted PPP’s to transfer knowledge, operational and maintenance practices back to the public sector to make them better, more efficient and more effective. They wanted competition because competition is good – it creates change and transforms the market. Competition creates a comparative to hold and measure against. The winners are the general public who get better maintained roads, better service and greater benefit for less money while stimulating the economy.
Posted by Jack Opiola, Senior Partner, D’Artagnan Consulting (Part 2 of 2)
ReplyDeletePPP’s will never own the majority of the roads or toll facilities in a network. It is an unfounded fear. We need to find the right balance and better ways to reinvest capital back into our infrastructure. PPP’s did it in the 18th century and they can do it again today. Maybe we should go back to the future. Even today, prior to PPP’s indexing the toll to inflation indexes by their contract as a practice was copied by several toll agencies that previously had little luck doing the same. Now it is being done and discussed. Innovative ideas are coming out of PPP’s. Maybe we need PPP’s to innovate and introduce change, new ideas, new operational and maintenance concepts to compare our overheads and transaction costs. Competition is good. Rather than labeling PPP’s and private operators as pariahs, we should welcome them into the market to eat away the fat that has grown into it. Whatever we do, we need to find the PPP formula that works for us – we need to borrow the good ideas from abroad, but find a satisfactory formula that works here, not one that worked in Australia or Europe. Our forefathers did, I am sure we can do the same.
Posted by Bill Graves, President and CEO of the American Trucking Associations in Arlington, Va. Prior to joining ATA, Graves served as governor of Kansas from 1995 to 2003.
ReplyDeleteI would like to thank Pat Jones and IBTTA for requesting the trucking industry’s participation in this discussion. It’s always challenging to find the funds necessary to meet the vast transportation needs of commuters and freight haulers, especially during difficult economic times. Public-private partnerships (PPPs) provide a seemingly easy solution to these funding dilemmas, but they are not without their problems.
PPPs should only be considered a viable option if used for the construction of new roads. Private investors benefit from the ability to toll these roads. Drivers should never be forced to use toll roads because they represent double taxation. Motorists already pay a federal fuel tax of 18.4 cents per gallon of gasoline or 24.4 cents per gallon of diesel fuel. The trucking industry has long favored a fuel tax as the preferred method for financing our nation’s highways because it is the most equitable, cost efficient method of funding available. At present, 99 cents out of every 1 dollar in collected fuel tax goes to the Highway Trust Fund, which finances highway infrastructure projects.
Engaging in PPPs that lease existing portions of the National Highway System (NHS) provide a short-term fix to funding shortfalls and allow lawmakers to avoid tax increases. However, the United States cannot maintain a national highway network if key segments are leased to the highest bidder. These partnerships provide states with a temporary fix, postponing the problem but never addressing the root of the funding shortfall. Leasing existing roads for a large upfront “pay off” may help a state’s present budget but compromises the future. The U.S. PIRG Educational Fund Report highlights this long-term financial downside. For example, 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. In many cases the private capital offered upfront for a long-term lease does not match the potential amount the state could generate by keeping the toll revenue over the same period.
ATA hopes lawmakers will consider increasing fuel taxes to address immediate budget shortfalls, as well as long-term highway revenue needs, instead of permitting states to sell portions of the NHS. Collecting fuel tax costs far less than any other proposed alternatives, making it the most efficient way to fund highway projects.
Comments posted by Jordi Graells, International Vice President, IBTTA, and Managing Director of Toll Roads, North America & International, Abertis Infraestructuras SA, Barcelona, Spain and Washington DC.
ReplyDeleteThere are 5,000 miles of toll roads in the United States. Less than in France. A small fraction of the toll road miles existing in Europe. A tiny fraction of the toll road miles of the world. Some 7.3% of all expressway mileage in the US only.
Imagine the United States with 50% of the Interstate Highway System –some 25,000 miles- with mild, open road tolling tolls, say, 10c per mile for cars, 20c per mile for trucks. Tolls introduced on that same 50% of the IHS where Average Daily Traffic is higher than 30,000. No tolls on the other lower traffic half of the IHS (until ADT reaches 30,000).
Imagine that revenues obtained with those tolls on each sections have to be mandatorily used on the same fifty mile wide corridor along the section where they are collected –operation, maintenance, rehabilitation, expansion, nearby greenfield construction-, and for a reasonable profit for the operator. No subsidy permitted to out of the corridor agencies.
It looks like those 25,000 Interstate Highway System miles will stand on their own with no recourse to gas or other taxes, thus freeing them for enhanced use on the untolled portions of the IHS and other road systems. No likely need to increase the gas tax significantly.
It looks like this can be an attractive recipe for these 25,000 miles and for improving transportation on their 50 miles wide surrounding corridors and communities, that will get a tangible outcome in return for the new (mild) tolls.
Do we have any alternative other than pricing expressways with high traffic, instead of taxing them, once it has become apparent that the public will not accept more (gas, even VMT) taxes without any tangible investment and service improvements directly and locally linked in return?.
In this scenario -25,000 more IHS miles tolled- there is room for everybody, on a competitive basis. Let State DOTs design smart, brownfield/greenfield hybrid projects, including an existing, to be tolled, IHS section with an ADT higher than 30,000, and a significant mandatory capital expenditure, including a full rehabilitation and modernization of the existing section, lane expansion, new interchange construction, and one or more significant greenfield components nearby (“those projects long promised to your daddy or your grandpa and never delivered”). Then let State DOT call for a well structured, public interest fully protected, toll schedule regulated, O&M quality standard and supervision regulated, mandatory capex set up, net income taxed bid. And you will find interest from all over the nation and the world showing up, for this is what they know that has worked well in five continents for fifty years. Parties showing up ready to pour billions of at risk invesment and tapping worldwide financial resources, to provide experienced management, ability to pay income taxes, and, above everything, ready for full accountablility. Let public entities compete in this framework.
And, in ten years time, those 25,000 miles and their corridors will be put in the 21st century on transportation.
See what they are doing on this regard in Puerto Rico now. It can quickly become the benchmark for the rest of the US.
Tom Bamonte, Illinois Tollway
ReplyDeletePublic Private Partnerships come in many shapes and sizes and are not just limited to highways and bridges. Roadside fuel, restaurant and convenience centers are sometimes leased out to private sector developers in exchange for capital investments and/or rent. Even standard engineering and technology contracts are a form of PPPs as they involve the private sector taking on tasks the public agency is not as well equipped to handle.
In most of the country PPPs have the aura of being something exotic and risky. It might be helpful for proponents of PPPs to convey how PPPs are not a species apart but rather a variant on the kinds of public-private partnerships that are routinely formed every day when a public agency enters into a contract with a private party.
There is one key difference between the type of PPPs at issue in this post and standard agency procurements. Standard agency procurements proceed under well established procurement codes with which all involved are familiar. PPPs generally operate under a new and untested statutory framework. The unfamiliar statutory framework coupled with the size of many PPPs and the attendant controversy make all involved extremely nervous.
However, proceeding with a PPP without there being a clear statutory framework and/or without the explicit support of key decision makers outside the agency can be risky if the PPP enterprise fails, as they sometimes do. When that happens, pubic officials who weren't asked to approve the project can turn on the agency and claim that the agency failed. In Illinois for example, when the bank financing the operator of roadway "oases" initiated a foreclosure action this was treated as a failure of the agency and sparked legislative committee hearings. This was so even though the operator had made over $75 million in capital improvements at no cost to the agency.
A key lesson learned was that it is important to have a clear statutory mechanism for securing the approval of PPP projects from the Governor and the legislature. Indeed, a PPP bill that requires such approval is pending in the Illinois General Assembly (SB 3482-http://www.ilga.gov/legislation/BillStatus.asp?GA=96&DocTypeID=SB&DocNum=3482&GAID=10&SessionID=76&LegID=51391)
While such an statutorily-mandated approval process may take time and make PPPs a somewhat less attractive option, it can protect the agency from damaging recriminations down the road.
(Note the views expressed are those of the author and may not reflect that of his agency.)