The difficulty that the current transportation funding system has responding to the demand for transportation investment is aggravated by the political processes that dictate how transportation investments are made. Ideally, transportation revenue should be allocated to high priority projects for which research indicates that benefits outweigh costs and that the public sector is going to get a valuable return for every dollar invested. Revenues from transportation-related taxes and fees, however, are often deposited in public trust funds and allocated to particular projects through a political process, without any analysis of the projects' underlying economic merits or adequate consideration of the taxpayers' potential exposure.
Political earmarks exemplify the misallocation of resources under the current system of transportation funding. The number of earmarks in Federal highway and transit authorization bills exploded from 10 in the 1982 bill to more than 6,000 in the 2005 bill.112 Not all earmarks are wasteful. Some, like transportation funding generally, are used for necessary projects that are included in state or local transportation plans. Nevertheless, there is no mechanism in place to ensure that all or even a substantial number of earmarks are based on a project's underlying merits, economic or otherwise. In addition, because Federal earmarks are often inconsistent with state or local transportation plans, many earmarks languish, unspent, while high-priority projects may be delayed or cancelled for lack of funding.113
Unfortunately, the lack of economic analysis is not limited to the earmarking process; it pervades many parts of the current transportation funding system. A recent report from the GAO indicated "that many state and local transportation agencies are not consistently using formal economic analysis as part of their investment decision-making process to evaluate project alternatives."114 GAO noted that "political concerns" play a role in limiting the expansion of formal economic analysis of investment decision making115, but also leveled responsibility on the current system of formulas used to allocate Federal highway funding, which does not include any requirements that a project have economic merits.116 GAO also reported that the actual outcome of a project is rarely assessed to determine whether an investment was in fact valuable or whether it failed to provide economically justifiable benefits.117 This lack of economic analysis helps explain why rates of return on public highway investments have plummeted in recent years; according to one estimate, from more than 15 percent in the 1970's to less than 5 percent in the 1990's.118
PPPs can reduce the wasteful effects of political and special purpose spending because private investment is research-based and follows demand, not political influence. Because private investors typically look to the revenues generated by a project to repay debt and equity investments, they have significant incentive to ensure that the cost and performance forecasts for projects, on which the build-decision is based, have a high probability of accuracy. In addition, as noted in Section III, because private companies are accountable to their shareholders and financially liable to counterparties and financiers they have significant incentive to avoid cost overruns. A decision to invest funds in a PPP is only made by the private sector after a careful consideration of the project's underlying value and expected costs and benefits.
The substantial incentive for the private sector to understand and control a project's costs and benefits compares favorably with the past performance of many government grant recipients. For example, in 2003 the Federal Transit Administration ("FTA") studied the predicted and actual costs and benefits of several major transit projects implemented in the past two decades using Federal funds. The actual as-built capital costs of 16 of the 21 projects studied were greater than the forecasted costs by an average of 20.9 percent.119 Only three of the 19 projects studied had achieved their forecasted ridership at the time of the study. In a report prepared for FTA in 1990, none of the ten projects studied had achieved forecasted ridership and only one was carrying more than 50 percent of forecasted ridership.120
FTA implemented its Public-Private Partnership Pilot Program ("Penta-P") in January 2007 to "study the proposition that when risks associated with new construction are appropriately allocated between a project sponsor and its private partner, FTA may rely on the commercial due diligence, financial incentives, and potential liabilities of the private partner to control for such risks."121 Through the Penta-P, FTA is studying whether commercial due diligence of proposed transit mega projects clarifies their costs and benefits better than conventional due diligence, and thereby improves the build-decisions. A business-oriented investment model can reduce the wasteful effects of political and special purpose spending and help ensure that the traveling public gets cost-effective and valuable projects.
A recent report comparing the performance in Australia of 21 PPP projects and 33 traditional projects concluded that PPPs demonstrate "clearly superior cost-efficiency" over traditional procurement methods.122 The report indicated that for $4 billion of traditional projects the net cost over-run was $602 million, while for $4.4 billion of PPP projects the net cost over-run was only $52 million, which was not considered statistically different from zero. The report also indicated that while traditional procurements were completed 23.5 percent behind schedule, PPPs were completed, on average, 3.4 percent ahead of schedule.
A survey of 37 PPP projects in the United Kingdom confirmed that the private sector is more reliable than the public sector when it comes to completing projects on time and on budget. The report revealed that while 73 percent of traditional public sector projects resulted in construction costs exceeding the price agreed at time of contract, only 22 percent of the projects procured as PPPs resulted in construction costs exceeding the price agreed at time of contract, and that in these cases the price increase was due to changes requested by the public sector not through the fault of the concessionaire.123 The report also revealed that while 24 percent of the projects procured as PPPs were delivered late, only 8 percent of these projects were delivered more than 2 months late, which compared favorably with traditional public sector projects which were delivered late 70 percent of the time.124
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112 STAA: Surface Transportation Assistance Act of 1982; ISTEA: Intermodal Surface Transportation Efficiency Act of 1991; TEA-21: Transportation Equity Act for the 21st Century; SAFETEA-LU: Safe Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users.
113 Wall Street Journal, "Bridges to Somewhere", August 4, 2007, Page A6. This article reported that in 1992 64 percent of the money earmarked in the 1987 reauthorization bill remained unspent, and that in 1997 55 percent of the money earmarked in the 1991 reauthorization bill remained unspent. The Wall Street Journal did not report comparable numbers for the 1998 and 2005 highway bills "because the federal Transportation Department stopped disclosing the figures, lest it embarrass Members of Congress."
114 Highway and Transit Investments: Options for Improving Information on Projects' Benefits and Costs and Increasing Accountability for Results, United States Government Accountability Office, Report to Congressional Committees, January 2005 (GAO-05-172) ("GAO Accountability Report"), pg. 23.
115 GAO Accountability Report, pg. 27, stated that "[t]hirty-four state DOTs said that political support and public opinion are factors of great or very great importance in the decision to recommend a highway project, whereas only eight said that the ratio of benefits to costs was a factor of great or very great importance."
116 GAO Accountability Report, pg. 25.
117 GAO Accountability Report, pg. 35.
118 Shirley, Chad and Winston, Clifford, Firm Inventory Behavior and the Returns from Highway Infrastructure Investments, Journal of Urban Economics, Volume 55, Issue 2, March 2004, pp. 398-415. The authors conclude that large investments in a mature highway system during the 1980s and 1990s may have generated low returns because they were, in part, undermined by inefficient highway pricing and investment policies, and that if these inefficiencies are inevitable for public investments, "the time may have come to investigate the benefits of greater involvement of the private sector in highway provision."
119 Contractor Performance Assessment Report, FTA, September 2007. Forecasted costs refers to costs forecasted at the completion of the Alternatives Analysis and Draft Environmental Impact Statement.
120 Pickrell, Don H., Urban Rail Transit Projects: Forecast Versus Actual Ridership and Costs, DOT-T-91-04, Office of Grants Management, Urban Mass Transportation Administration, Washington DC, October 1990.
121 Federal Register, January 19, 2007, Volume 72, Number 12, pg. 2583-2591
122 Australia PPP Report, pg. 1.
123 UK NAO Report, pg. 3.
124 UK NAO Report, pg. 3.