To remain globally competitive, the United States must reassess its approach to funding transportation infrastructure, according to a February 2009 report from the National Surface Transportation Infrastructure Financing Commission. But some of the options under consideration would take years to implement, others are politically unappealing, and none yet proposed resolves the infrastructure funding crisis.6 Increasing state and federal gas taxes could help, but that move remains politically sensitive because drivers-voters-dislike higher prices at the pump, even as those prices have fallen.
"In the long run, the crisis is even more serious because the current gas tax could not support the levels of expenditures that we have become accustomed to over the last several years," explains Kenneth Orski, a transportation funding expert who writes Innovation Briefs, a transportation newsletter. "Some kind of additional resource will have to be found to sustain the needed expenditures."7 One alternative, a per-mile driving tax, presents many of the same political headaches as increasing the gas tax and introduces new privacy concerns.
A national infrastructure bank-a Congressional proposal also endorsed by President Obama- would allocate $60 billion in federal loans to projects as determined by a bipartisan commission. At this writing, other federal funding will come through a stimulus package that will include $27.5 billion for road and bridge projects across the country. While that is a substantial sum, it is a far cry from meeting the accumulated need. The National Cooperative Highway Research Program estimates that to maintain only the current highway system, the funding deficit amounts to $47 billion annually.8
CHICAGO SKYWAY |
Facts and Figures • Leased in 2005 • 7.8 mile toll road • $1.83 billion upfront payment • 99-year lease • No revenue sharing • Annual toll increases (after 2017) capped at highest of 2 percent, Consumer Price Index or per capita GDP increase • No non-compete clause Struggling with a budget deficit in 2004, the City of Chicago looked for ways to maximize its assets, including the Chicago Skyway, a 7.8-mile toll road connecting Interstate 94 to Interstate 90. During the 47 years the city's Department of Streets and Sanitation managed the Skyway, toll changes were infrequent, with tolls even decreasing by approximately 25 percent in real terms between 1989 and 2004. Chicago accepted bids for the Skyway in October 2004; the winner, the Macquarie/Cintra consortium, bid $1.83 billion for a 99-year lease and took control in January 2005. Macquarie/Cintra is able to gain more than the city from the road in part because of annual toll increases. A pre-established toll schedule runs until 2017, after which annual toll rate increases will be capped at the highest of 2 percent, the Consumer Price Index (CPI), or the increase in nominal gross domestic product per capita. The city used the upfront payment for the Skyway to pay down outstanding debt, create a reserve fund, provide immediate budget relief and pay for other non-transportation-related programs. Although those expenditures did not directly improve the city's transportation system, they led to an upgrade in the city's credit rating, which will reduce the costs of borrowing. The concessionaire must follow detailed technical specifications based on industry "best practices," addressing such maintenance and operational issues as roadway and drainage maintenance, safety features, toll collection procedures, emergency planning and snow removal. While under public control, the Skyway had no such formal standards, suggesting that the concessionaire is required to uphold the road system to a better standard than the city had. Sources: Chicago Skyway Lease and Concession Agreement, January 24, 2005; NW Financial Group, The Chicago Skyway Sale: An Analytical Review, May 1, 2006, and Then There Were Two…Indiana Toll Road vs. Chicago Skyway: An Analytical Review of Two Public/Private Partnerships: A Story of Courage and Lost Opportunity, November 1, 2006. |
INDIANA TOLL ROAD |
Facts and Figures • Leased in 2006 • 157 miles of road • $3.8 billion upfront payment • 75-year lease • No revenue sharing • Annual toll increases capped at highest of 2 percent, Consumer Price Index or per capita GDP increase • Non-compete clause In May 2005, facing a $1.8 billion shortfall to build necessary road improvements over the next decade, Indiana policy makers decided to lease the state's toll road. A portion of Interstate 90, the Indiana Toll Road (ITR) runs 157 miles across the northern border of Indiana. From 1981 to 2006, Indiana DOT operated and maintained the ITR, then an underperforming asset that consistently lost money. Four final bids were submitted for the same 75-year lease contract; the winning proposal of $3.8 billion came from the Australian-Spanish consortium of Macquarie and Cintra, which took operational control in June 2006. With the funds from the lease, the state allocated money toward road projects, paid off existing toll road bonds and established two transportation project funds, including a fully funded 10-year statewide "Major Moves" transportation plan-making Indiana the only state with such a plan. Standard & Poor's also upgraded Indiana's credit rating, lowering the state's cost of borrowing, which reduces the cost of future projects. The concessionaire is contractually obligated to maintain the road, which the budget-strapped DOT was often unable to do sufficiently. Indeed, if Macquarie/Cintra does not meet the specified level of service standard, it can default, awarding the asset back to the public sector at zero cost. An oversight board, composed of state employees and private citizens, reviews the concessionaire's performance and operations for non-compliance. Although the concession agreement includes a non-compete clause-if Indiana builds a new highway 20 miles or longer within 10 miles of the ITR, it must compensate the concessionaire's lost revenue-Macquarie/Cintra committed at least $4 billion in improvements to the ITR over the span of the lease and in mid-2006 announced a $250 million toll road expansion, to be completed by 2010. Macquarie/Cintra also introduced electronic tolling along the ITR, which will improve mobility and allow the ITR to bear higher traffic volumes. Sources: Indiana Toll Road Concession and Lease Agreement, April 12, 2006, www.in.gov/ifa; United States Government Accountability Office, More Rigorous Up-front Analysis Could Better Secure Potential Benefits and Protect the Public Interest, February 2008, http://www.gao.gov/products/GAO-08-1052T (accessed February 18, 2009). |
Given the gap, state policy makers across the country are considering more seriously the idea of turning to the private sector for help. Public-private partnerships, whereby a private company or consortium finances, designs, constructs or operates government-owned infrastructure, represent one such funding mechanism.
In a concession, one type of public-private partnership, the government leases an existing or to-be-built piece of infrastructure to a private company or group of companies (the concessionaire), usually determined through an open bidding process according to government procurement rules. In exchange for the concessionaire's upfront lease fee or a share of future revenue, the government allows the concessionaire to operate the asset, with contract terms detailing maintenance and performance requirements, caps on toll increases and other provisions. Concessions have become more attractive to states because-at least in concept-they allow government to capture the financial benefits of an asset without many of the operating challenges and risks.
Such arrangements are relatively new to the United States, gaining prominence in 2005 when the City of Chicago leased its Skyway to a foreign consortium for $1.83 billion. Policy makers in a number of other states, in search of similar infusions of cash, are debating or have enacted legislation to facilitate public-private partnerships. (See Exhibit 3 on page 16.) The private sector appears to be interested in these partnerships, particularly transportation concessions, because they offer a consistent financial return and represent a stable investment, especially in times of market volatility. Orski describes public-private partnerships as safe havens for long-term investors such as insurance companies and pension funds- including many state pension funds.9
A January 2009 report by private equity firms including the Carlyle Group, Morgan Stanley and Credit Suisse estimated that as much as $180 billion in private dollars is targeted for infrastructure investment. Using additional debt to finance projects, that $180 billion could facilitate some $450 billion in projects, the groups assert.10 Much of that money will be invested in Europe and Australia, where public-private partnerships have long histories. Spain, for example, plans to use them to fund more than one-third of its transportation infrastructure needs over the next decade. The arrangements are also becoming increasingly popular in developing Asia, South America and Africa. India has begun to plug its infrastructure funding gap with more than $35 billion worth of highway partnership projects. And nearly one-seventh of all African infrastructure, including many transportation assets, is funded using these models.11
So why isn't that money flooding the American market, especially when investors are looking for stable, reliable returns? Some proponents of the partnerships say there simply aren't enough high-quality deals available from states and cities. "The demand side of the equation is a little weak," says Stephen Goldsmith, director of the Ash Institute of Government at Harvard University and the former mayor of Indianapolis. But part of the reason is that lawmakers are not sold on the idea. Some policy makers worry, for instance, that a private operator might skimp on maintenance or service to maximize profits. Other experts express concern about lengthy leases, skyrocketing tolls, the fate of existing public employees and the economic and national security consequences of ceding control of public infrastructure.12
The discussion is complicated, too, by the volatile economy and the fragile credit markets, which are instrumental to piecing together complicated public-private partnerships. For instance, over the last year, what was seen as an innovative $800 million public-private partnership program to rebuild bridges in Missouri was scaled back to a more traditional financial structure, and a proposed concession of Interstate 75 in Florida was on hold as of mid-February 2009.13
The debate over public-private partnerships will continue, but given the gap between infrastructure needs and available funding, more of these deals are likely to emerge. "Right now, we have some of the largest infrastructure needs for increased capacity and rehabilitation in the past 70 to 80 years," says John Flaherty, principal for infrastructure at the Carlyle Group. "You have hundreds of billions of dollars of private investment that wants to participate in infrastructure improvements. How that dialogue occurs in the next 18 to 24 months is going to decide where our transportation public finance policy is going for the next 20 to 25 years."14