Large up-front concession fees, typical of brownfield concessions, are popular with politicians managing governments in financial difficulties (Thornton 2007). They provide a budgetary windfall that can be spent flexibly on any public purpose, transportation or otherwise (Brown 2007). Besides paying down debts and funding social programs, $500 million from the Chicago Skyway deal placed in a "rainy day" fund is earning $25 million annually, as much as the city used to earn from operating the Skyway itself (Thornton 2007). Applying proceeds in such ways can be seen as fiscally responsible ways of improving a city's credit rating and risk assessment. It is also possible to have the proceeds come as an annual rather than up-front payment. Although this appears to be an option, no specific examples were found through the literature review of PPP deals where the public sector is collecting annual payments from a concessionaire. A policy brief on greenfield PPPs from the Reason Foundation (Gilroy et al. 2007) indicated that this type of concession arrangement has been used in Europe.
Fitch Ratings, however, noted the need to match investment decisions made today with long-term sustainability of transportation. Fitch considers the choice of high up-front payments a risk to the government's fiscal position, as it may limit its flexibility to meet future transportation needs. However, Fitch positively assesses deals that generate large up-front payments "if proceeds are invested in comparable long-term assets that provide lasting economic benefits." Conversely, it will view negatively "the use of proceeds for short-term operating needs of the government" (Fitch Ratings 2006; Checherita and Gifford 2008).
The use of the proceeds is an important consideration, and most observers agree that it could be used for transportation; otherwise, government would be taxing future infrastructure for general needs today. Buxbaum and Ortiz (2007) recommended that decision makers consider debt service, transportation programs, and reserve funds as potential uses for concession proceeds, and that if revenues are used for non-transportation uses, decision makers should make a case for the relationship between the source and the uses of funds. In addition, the study suggests that funding could be allocated to projects that benefit the users of the lease facility and find mechanisms to ensure that projects can be funded over the life of the lease. By investing up-front or recurring revenues in capital projects, particularly from brownfield concessions, the public receives the benefit from other system improvements by monetizing the future revenue streams of an existing facility. Replogle (2007) recommended that surplus revenues (specifically in toll-managed lanes) be used for transit and impact mitigation.
PPP-enabling legislation in 12 states prohibits revenues from being diverted to the state's general fund or for unrelated uses. According to our state DOT survey, most states (excluding five respondents) consider the use of up-front proceeds to be an important concern. The Pennsylvania Turnpike valuation analysis by Foote et al. (2008) raised the concern that under a PPP agreement, up-front revenues from leasing the Turnpike might be redirected for non-transportation uses (such as budget relief), because there are no constitutional or statutory protections that could prevent such action, although the reason for considering a long-term lease of this facility is to provide much needed transportation funding. In Virginia, any up-front payments are to be used in the project corridor.
The appropriate amount that up-front payments should be is also difficult to calculate. Assumptions regarding discount rates, travel demand, or maintenance schedules may have a profound impact on the value of the project. The value of the facility is also driven by the length of concession, toll rates and toll increase assumptions, private equity, and risk. Some commentators are concerned that the public sector may be achieving less value than it should for its capital infrastructure (Baxandall 2007; Enright 2007).
For example, there are several instances in Europe of private partners earning so-called "super profits"-profits that grossly exceed the expected profits projected in the original contract (Jeffers et al. 2006). Such profits can result from unanticipated demand and windfalls from refinancing debt. To remedy this, European countries and some Australian states generally include a clause in PPP contracts that requires sharing of any refinancing profits that may otherwise provide windfall profits for private partners. In the case of TIFIA loans (a type of federal government subsidized loan), profits from refinancing could be used to expand or complete the project for which the loan was issued (Hedlund 2007). However, revenue sharing related to refinancing may not be appropriate in some contracts, because the value of the refinancing may have been included in the initial valuation analysis (GAO 2000b). In the case of the Chicago Skyway, equity was reduced after refinancing, but, according to an investment banker involved in the deal, no refinancing gains were realized, because this had been assumed in the financial offer to the city (GAO 2000b).
Profit can be difficult to measure, because this involves delving into the detailed accounting practices of companies that may have many lines of business and/or a portfolio of toll projects that they spread management expenses among. In response, European PPP sponsors suggest structuring profit-sharing models based on revenue rather than profits because revenue is easier to monitor. They also suggest incorporating contract clauses that allow for the review of the concession contract clause every 7.5 years (Jeffers et al. 2006). Rebalancing provisions, which bring the contract terms back into the financial balance achieved in the original negotiation, are currently used in Spain and Portugal (Izquierdo and Vasallo 2004; Mayer 2007; GAO 2000b).