In 1956, when the Federal government established the Interstate Highway System and a fuel tax mechanism to fund construction it could hardly have foreseen the difficulties that this funding system would be facing more than a half century later. Following the completion of the Interstate Highway System in the 1970's, political spending and special purpose programs flourished making it more difficult to fund priorities. The fuel tax has come under increasing pressure over the last few decades and non-fuel tax revenues are growing much faster than fuel tax revenues. Today, revenues generated from taxes on fuel represent a minority of all revenues generated for highways and transit-related expenditures. Funding for the operation and maintenance of the transportation system has suffered under a political spending process which struggles to capitalize transportation assets and balance transportation spending with competing needs.
Today, as a result of these and other developments, all levels of government in the United States are having a difficult time keeping up with the demand for transportation investment100 and are increasingly using transportation related revenues to pay for system preservation and maintenance, with little or nothing left over for new capacity and capital improvements.101 As noted at the beginning of this Section, individual states are forecasting ominous funding shortfalls. In addition to the funding gaps identified for Massachusetts and Idaho, a report considered by Iowa lawmakers, for example, estimated a $27.7 billion funding gap over the next 20 years,102 and Texas estimates that it has a funding gap through 2030 of $86 billion.103 At the Federal level, the U.S. Office of Management and Budget estimated in 2007 that the Highway Account of the Highway Trust Fund would likely see a deficit of $4 billion in 2009.104
While transportation investment needs can and should be reduced through more effective pricing105 , better management of the existing system and better investment decision-making, it is increasingly clear that the current model for funding transportation is incapable of adequately responding to the demand for transportation investment.
PPPs provide access to a vast amount of private capital available for investment in transportation. As noted in Section IV(A), a private sector consortium paid an upfront concession payment of $3.8 billion to the Indiana Finance Authority on June 29, 2006, for a concession to operate and maintain the Indiana Toll Road ("ITR") and Indiana used this money to fully fund a 10-year road improvement plan. Similarly, the private sector paid an upfront concession payment of $1.8 billion to the City of Chicago on January 25, 2005, for a concession to operate and maintain the Chicago Skyway. These and other PPPs demonstrate the ability of the private sector to invest significant amounts of private capital in transportation projects. Since 1985, $415 billion worth of transportation PPP projects have been put under construction or completed around the world, and transportation PPP projects worth $572 billion were in a pre-construction phase as of October 1, 2007.106 The two companies that invested equity in the Chicago Skyway and the ITR, Macquarie Group and Ferrovial-Cintra, had approximately $44 billion and $38 billion invested in transportation infrastructure around the world, respectively, as of October 2007.107 In addition to the Chicago Skyway and ITR, Macquarie has made investments in the Dulles Greenway in Virginia and the South Bay Expressway in California, and Cintra recently closed a concession for the $1.36 billion SH-130 Segments 5&6 Project in Texas.
A significant portion of the capital that is available for investment in transportation projects is managed by private infrastructure funds and pension funds. Private infrastructure funds looking to invest in U.S. transportation infrastructure include funds managed by Goldman Sachs, the Carlyle Group, JP Morgan, Citigroup, GE and Credit Suisse, Morgan Stanley, Merrill Lynch, Babcock & Brown, Macquarie and others.108 CalPERS, the largest public pension fund in the United States, approved a $2.5 billion pilot infrastructure investment program in 2007.109 Funds have raised billions of dollars for investment in infrastructure projects, and a significant amount is expected to be invested in stable western countries like the United States. Infrastructure projects are attractive because the steady, long-term earnings generated by these projects, while lower than that of other private equity investments, match the liabilities of long-term, low-risk investors.
The Financial Times reported at the end of 2007 that "estimates of equity already raised for infrastructure investment but not yet invested range from $50 billion to $150 billion."110 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 2007.111 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. The ability of the private sector to invest large amounts of private capital in transportation projects can provide significant relief to the public sector in its efforts to keep up with the demand for transportation investment in the United States.
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100 See Performance and Accountability: Transportation Challenges Facing Congress and the Department of Transportation, United States Government Accountability Office, Statement of Patricia A. Dalton, Managing Director Physical Infrastructure Issues, March 6, 2007, pg. 4, which states that "[f]inancing mechanisms for the nation's transportation system are under stress" and that "[r]evenues to support the Highway Trust Fund […] are eroding."
101 See (i) GAO Congestion Report, pg. 7, which states that an "increasing proportion of available funds is being spent to preserve existing infrastructure, and (ii) the Massachusetts Report, pg. 1, in which the Massachusetts Transportation Finance Commission "conservatively" estimates that Massachusetts has a $15 billion to $19 billion funding gap over the next 20 years, "which only includes maintaining the present system without enhancements or expansion."
102 Transportation Investment Moves the Economy in the 21 st Century, Iowa Department of Transportation, http://www.iowadot.gov/time21/images/RUTF_booklet.pdf (last visited July 7, 2008).
103 Meeting The Texas Transportation Challenge, Texas Department of Transportation, pg. 5, http://www.dot.state.tx.us/publications/government_and_public_affairs/state_agenda.pdf (last visited July 7, 2008).
104 Mid-Session Review, Budget of the U.S. Government, Fiscal Year 2008, Office of Management and Budget, July 11, 2007, Page 5.
105 In 2006, USDOT estimated that if optimal congestion pricing were imposed on congested roads in the United States the cost to maintain those roads could be reduced by $21.6 billion per year from $78.8 billion to $57.2 billion. 2006 Status of the Nation's Highways, Bridges, and Transit: Conditions & Performance, USDOT, FHWA, FTA, 2006, pp. 10-5 and 10-6.
106 2007 International Survey of Public-Private Partnerships, Public Works Financing, Volume 220, October
2007 ("PWF International Survey"), pg. 4.
107 PWF International Survey, pg. 6.
108 See The Rise of Infra Funds, Project Finance International, Global Infrastructure Report 2007.
109 CalPERS Approves Infrastructure Investment Program and Pilot Inflation-Linked Asset Class, CalPERS Press Release, September 10, 2007. The CalPERS Investment Committee Chair said that "CalPERS could become a major player in solving some pressing public policy problems related mainly to energy and transportation."
110 Infrastructure M&A, The Financial Times, December 30, 2007.
111 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.