Since 2005, more public-private partnerships ("PPPs")1 for surface transportation facilities have reached commercial and financial close than during any comparable period in U.S. history. Among the most prominent of these PPPs have been the $3.8 billion Indiana Toll Road PPP, the $1.8 billion Chicago Skyway PPP and the approximately $1.8 billion Capital Beltway HOT Lanes PPP. In addition, there are currently more than 20 major highway and transit PPP projects at various stages of procurement in the United States.2
In the Indiana Toll Road and Chicago Skyway PPPs, long-term concessions for the operation and maintenance of existing toll road facilities enabled the public sector to realize significant upfront value. These landmark deals were followed by PPPs for the operation and maintenance of the Pocahontas Parkway outside Richmond, Virginia, and the Northwest Parkway outside Denver, Colorado, two relatively new toll roads then struggling to make debt payments. Building on the momentum of these four projects, public authorities in a number of other states are also considering innovative PPPs for existing toll road facilities.
In addition to existing toll facilities, several states have adopted PPPs as a preferred approach for delivery of new transportation capacity and capital improvements. Texas is currently considering PPPs for five highway projects.3 Florida is using innovative PPP structures for three new surface transportation projects.4 Georgia has four highway PPP projects in various stages of procurement.5 Virginia reached commercial and financial close on the Capital Beltways HOT Lanes project in December 2007 and has three active procurements for long-term, concession-based, highway PPPs.6 PPP projects are also being procured in Missouri, California, Alaska, North Carolina, Mississippi, South Carolina and Colorado.7
Since 2005, eight states have enacted legislation authorizing public authorities to enter into PPPs for highway and/or transit projects.8 A total of 25 states now have P3 authority. Elsewhere, state and local authorities in the United States are increasingly considering PPPs for transportation infrastructure. The Federal government has continued to encourage PPPs through new and innovative programs, including the Private Activity Bonds program, the TIFIA program (which was updated in 2005), Interstate Tolling programs, the SEP-15 program, the Corridors of the Future Program, and FTA's PPP Pilot Program.
There is a growing recognition in the United States that traditional approaches to funding and procuring highway and transit projects are failing.9 We spend record amounts on highways and transit, yet congestion and system unreliability continue to increase, as they have for decades. Governments across the country are having a difficult time keeping up with the demand for transportation investment. Scarce transportation resources are increasingly misallocated for political or special purpose spending. We rely on fuel taxes to fund transportation despite national, bipartisan efforts to promote energy independence, improved fuel economy, reduced emissions and alternative fuel development. Advancing a major project from concept to completion often takes well in excess of ten years, making it extremely difficult for the public sector to respond to transportation priorities.10
PPPs have been widely recognized over the last several years as an innovative approach to transportation funding and procurement that can reduce project costs, accelerate project delivery, transfer project risks to the private sector, and provide valuable, high-quality projects; but these benefits alone do not explain the growing number of PPPs that are being procured in the United States. PPPs are being utilized at a record pace because:
• PPPs respond to congestion and system unreliability by providing high-quality, well managed projects and better performance;
• PPPs address the demand for transportation investment by providing access to a vast amount of private capital available for investment in transportation;
• PPPs reduce the wasteful effects of political and special purpose spending by incorporating financial accountability for investment decisions into the transportation funding process;
• PPPs help align the Nation's transportation funding policy with critical energy and environmental policies by substituting private capital for fuel tax revenue; and
• PPPs can significantly accelerate project delivery by providing upfront private capital for a project's full cost.
While there are risks that the public sector needs to be aware of in PPPs, there is no evidence that PPPs are inherently more risky than traditional procurement approaches. Moreover, it is important to recognize that PPP risks are manageable and that properly structured PPPs can meaningfully reduce public sector exposure, as compared to traditional procurement approaches.11 The public sector can mitigate risks within the framework of a PPP by taking prudent and reasonable steps to ensure that they are creating well-balanced PPP programs, by doing necessary due diligence before committing to projects, and by negotiating well structured concession agreements.
For example, in a PPP structure, private concessionaires can be bound by contractual requirements to operate and maintain facilities in accordance with high standards of performance, which can be specified in detail by the public sector. In fact, private concessionaires can be more accountable than public authorities for the operation and maintenance of facilities because private concessionaires have significant financial incentives to comply with concession agreements and provide high levels of customer service.12
In other countries, and in innovative states and local jurisdictions, the risks of PPPs have been considered and addressed in the context of well-balanced PPP programs and carefully negotiated concession agreements. Best practices will continue to be developed as more PPPs are procured and states and local jurisdictions explore and implement innovative solutions that manage these risks. Also, while PPPs require vigilance from public officials, they respond to the pressing failures of status quo approaches to transportation funding and procurement noted above and can only be properly evaluated in that context.
A staggering amount of private capital has been raised over the last two years for investment in global infrastructure and state and local governments have a window of opportunity to attract this money to the United States through the implementation of PPPs for transportation projects. The Financial Times reported at the end of 2007 that estimates of equity raised for investment in global infrastructure run from $50 billion to $150 billion.13 The McKinsey Quarterly in February 2008 reported that the world's 20 largest infrastructure funds now have nearly $130 billion under management, 77 percent of which was raised in 2006 and 2007.14 The McKinsey Quarterly noted that in some situations $1 billion of equity could be leveraged to pay for as much as $10 billion in projects. Even assuming more conservative leveraging, the equity available for investment could help pay for several hundred billion dollars worth of infrastructure projects.
Given the vast amounts of private capital raised over the last two years for investment in infrastructure and the PPP expertise and best practices that have been developed and continue to evolve both in the United States and around the world, the ability of states and local governments to attract private capital and implement successful PPPs has never been better.
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1 PPPs are essentially contractual arrangements between the public and private sectors that allow a single private entity to assume significant control of, and risk for, multiple elements of a project, including design, construction, financing, operation and maintenance. A detailed definition is provided in Section III.
2 The growing use of PPPs in the United States is detailed in Section IV.
3 The I-635 Managed Lanes project, the North Tarrant Express, the DFW Connector, the I-69/TTC project, and portions of the TTC-35 project.
4 The Port of Miami Tunnel project, the I-595 Improvements project, and the First Coast Outer Beltway.
5 The Northwest Corridor project, the I-285 Northwest TOT Lanes project, the GA-400 Crossroads Region project, and the I-20 Managed Lanes project.
6 The I-95/I-395 HOT Lanes project, the US Route 460 project, and the Midtown Corridor Tunnel project, which is expected to proceed with procurement upon receipt of authorization from the Virginia Department of Transportation's Chief Engineer.
7 The Missouri Safe & Sound Bridge Improvement Project, in Missouri, the BART Oakland Airport Connector, in California, the Knik Arm Bridge, in Alaska, the Mid-Currituck Bridge, in North Carolina, the Airport Parkway, in Mississippi, the Greenville Southern Connector, in South Carolina, and the Denver RTD FasTracks Capital Program, in Colorado.
8 State authorizing legislation is described in greater detail in Section IV.
9 In January 2007, for example, the U.S. Government Accountability Office ("GAO") added transportation finance to its "high risk" program, which identifies serious weaknesses in areas that involve substantial resources and provide critical services to the public. GAO highlighted increasing congestion, funding shortfalls and the un-sustainability of the fuel tax, as important factors in its decision. In making its determination, GAO suggested that Congress and the U.S. Department of Transportation consider alternative sources of revenue and stimulate private investment. High Risk Series: An Update, U.S. Government Accountability Office (GAO-07-310), January 2007, pp. 16-20.
10 These failures of traditional transportation policy, and how PPPs respond to these failures, are the subject of Section V of this report.
11 Managing risks in PPPs is the subject of Section VI of this report.
12 GAO recently reported that the concessionaires for the Indiana Toll Road and Chicago Skyway are actually held to higher standards of performance than the public operators of such roads were before them. Highway Public-Private Partnerships: More Rigorous Up-front Analysis Could Better Secure Potential Benefits and Protect the Public Interest, United States Government Accountability Office (GAO-08-44), February 2008, pp. 41-42.
13 Infrastructure M&A, The Financial Times, December 30, 2007.
14 Palter, Robert N., Walder, Jay, and Westlake, Stian, How investors can get more out of infrastructure: Opportunities to invest in public infrastructure will increase during the next few years, but so will competition for deals, The McKinsey Quarterly, February 2008.