Long agreement terms, such as the 99 years for the Chicago Skyway, 85 years for the Capital Beltway HOT Lanes, and 75 years for the Indiana Toll Road are a frequent criticism of PPPs, in particular for DBFO or long-term concessions. Our state DOT survey confirms the importance of this concern. Some respondents of the interested parties' survey suggested concession terms of no longer than 30 to 35 years. A study by Virtuosity Consulting for the OECD and the European Commission of Ministries of Transport on successful examples of PPPs concluded that the optimal concession length is between 30 and 35 years; a concession may be sub-optimal for taxpayers beyond that range (Stambrock 2005).
The Chicago Skyway and Indiana leases specified long terms to encourage larger up-front fees. While private operators aim to maximize the length of concessions to safeguard future cash flows, the European Commission (2003) aims to promote open competition and fair market access, reduce the possibility of monopolies, and ensure the public benefit. These objectives would suggest shorter concession agreements.
As the experience level has risen, European Union countries have restricted the length of PPP contracts to 21 to 35 years. (Jeffers et al. 2006). The shorter concession terms correspond with the accepted lengths of government bonds, commercial mortgages, and reasonable risk assessments. In addition, several countries include review and renegotiation of payments every 7.5 years to prevent private partners from earning more than could be earned through other investments given the same risk environment, so-called windfall profits. Some innovative procurement methods propose short concession terms (10-15 years), after which the state pays a residual value to the concessionaire, recouping this payment through another concession (Izquierdo and Vassallo 2004).
Abdel-Aziz (2007) advises against legislating maximum lengths of concession agreements, maintaining project time-lines could be decided on a project-by-project basis considering unique conditions, whole life-cycle cost, likely term of senior debt, and financial structure. Public and private partners, for example, may decide to end the concession once the private debt is retired. A limit on the length of concessions; for example, the 35 years in California's AB 680 or the 50 years in Texas HB 2702, unless established for specific reasons, might unnecessarily affect achieving the best value for money. The experience in Mexico shows how very short concession terms (maximum of 12 years, and in some cases 5 years) resulted in high toll rates and uncertainty in traffic demand, which led to the failed concessions in the 1990s (Izquierdo and Vassallo 2004).
The length of concession agreements will affect the ability of the concessionaire to realize tax benefits from depreciation. Although lessees (concessionaires) of toll roads are not owners, if the term of the lease exceeds the remaining design life of an asset at the time of the transaction, the Internal Revenue Service treats the lessee as the owner for tax purposes (Subcommittee on Energy, Natural Resources, and Infrastructure 2008). Thus, the lessee may depreciate the portion of its up-front payment allocated to tangible physical assets in an accelerated manner over a period of 15 years instead of the entire term of the lease (Subcommittee on Highways and Transit, House Transportation and Infrastructure Committee 2007a). This amounts to a government subsidy to the concessionaire that may significantly reduce corporate taxes if the project proves profitable. Longer-term agreements thus allow the private partner to depreciate the asset in the most attractive manner possible and will be reflected in the amount the private partner is willing to pay for the concession (Giglio 1997; Brown 2007).