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

1. Recent Developments in Transportation Public-Private Partnerships in the United States Rick Geddes Associate Professor Department of Policy Analysis & Management Cornell University June 24, 2009

2. 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!

3. 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

4. U.S. transportation financing problems: fuel-tax revenue declines Revenue 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

5. How is transportation infrastructure currently financed?

6. 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

7. 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 billionless than April 2007, largest decline since 1942) • VMT still declining (slower rate) • U.S Transportation Secretary Mary Peters: “Policy at war with itself”

8. 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)

9. 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

10. 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

11. 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

12. 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

13. 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.”

14. 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.

15. 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

16. 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)

17. 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

18. 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

19. 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

20. 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)

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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