A recent General Accouting Office (GAO) report on private-sector participation in major projects found that transportation projects involving private investment or sponsorship were built sooner than they would have been had the private sector not become actively involved.[52] For example, the GAO studied five private-sector toll-road projects and one monorail project, each of which had been on their respective federally-approved State transportation plans for periods ranging from 7 to 30 years.[53] But for a public-private partnership, some of these projects might not have been built at all in light of other State transportation priorities.
State, local, and Federal officials described these projects to GAO as needed and worthy, but as projects that the State and local governments were either unable or unwilling to undertake for some time because of resource constraints. According to these officials, private sector sponsorship and investment were critical to advancing these projects;[54] without private sector investment, some of these projects might never have been built.
∙ Dulles Greenway: In 1993, the Toll Road Investors Partnership, L.P. (TRIP II) was formed to build the Dulles Greenway, a four-lane 14-mile private toll road extending from the Dulles Toll Road to the Dulles International Airport. Under the franchise agreement, TRIP II owns the franchise for the Dulles Greenway and developed it as a private, for-profit venture. The partnership is responsible for all costs associated with operating and maintaining the road, including the costs of State troopers assigned to the toll road.[55]
∙ The South Carolina Southern Connector: In 1998, after a proposal in the General Assembly to increase the motor fuel tax did not pass, the State authorized a private consortium to build the Southern Connector, which had been on South Carolina's transportation plans since 1968.[56]
The Connector 2000 Association financed the project costs of $217.7 million through the sale of tax-free toll revenue bonds, which will be repaid by toll revenue over a 35-year term.[57] The Connector 2000 Association is a local not-for-profit corporation set up to finance and operate a facility and is the first public-private transportation project in the United States to be financed using a 63-20 (not-for-profit, as defined by the IRS) corporation.[58] The bonds included $66.2 million in tax-exempt senior current interest bonds, $87.4 million in tax-exempt rated senior capital appreciation bonds, $46.6 million in tax-exempt unrated subordinate capital appreciation bonds, and a $17.5 million contribution from the South Carolina Department of Transportation.[59]
Standard and Poor lowered the rating on the bonds from "stable" to "negative" in 2002 because of significantly lower traffic performance than had been expected. This lowered revenue to the point where the debt service reserve account had to be used to meet debt service requirements. At the time of the downgrade, average daily traffic stood at 10,000 transactions, 64 percent less than the 28,000 originally forecasted.[60]
∙ SR 91 and SR 125 South projects: In 1989, the California legislature passed AB 680, which allowed for the creation of highway franchises. AB 80 amended State law to permit the State of California to award franchise agreements for the design, construction, operations and maintenance of highway facilities. This created two of the most innovative road procurements in the Nation. The toll financing for these procurements allowed these projects to be built far sooner than scheduled. A California Department of Transportation (Caltrans) official told GAO the State had identified the need to add lanes to SR 91 in 1983 and had proposed adding High Occupancy Vehicle lanes in 1988. The SR 91 Express Lanes opened in 1995 but would likely not have been built until 2001 without private-sector involvement.[61] State Road 91 was privately financed at a cost of $125.6 million, paid for mostly through a combination of equity and bank and institutional debt.[62] The project generates revenue through tolling, with the toll prices varying by time of day though "congestion management pricing." Revenue has increased steadily in recent years, as the volume of traffic increased from 7.3 million trips in 1999 to 9.5 million in 2002, and revenue increasing from $19.5 million in 1999 to $29 million in 2002.
After signing a noncompete clause with project developers, California was barred from making improvements on competing roadways. But when public pressure forced California to make improvements to the nontolled lanes of SR 91, the Orange County Transit Authority (OCTA) reached an agreement to purchase SR 91 for $207.5 million. OCTA took possession of the road in January 2003. The sale was contingent on State legislation authorizing OCTA to buy and operate the toll road, eliminating the noncompete clause from the agreement.[63]
In the case of the SR 125 South Toll Road project, a $140 million TIFIA loan is an essential element of the project's financial plan, which also includes senior bank debt as well as private equity. This project demonstrates how innovative finance can attract private investment to transportation projects. Over $150 million in private at-risk equity was invested in this project. In addition, local real estate developers are donating approximately $48 million of land for right-of-way. If the SR 125 South project had not been advanced as a private financed facility under AB 680, operation would have been delayed to 2020 or later, according to Caltrans.
∙ New Mexico State Route 44: In this project, the NMSHTD worked with the private sector to develop an alternative financing mechanism for this project. Instead of using the traditional pay-as-you-go method of finance, which would have taken 27 years, the State issued GARVEE bonds backed by future Federal-aid payments. This financing combined with the contracting approach cut the total project time from 27 years to within 3 years.[64]
∙ Eastern Toll Corridor: In Southern California, the Transportation Corridor Agencies had similar reasons for opting for a public-private partnership for the Eastern Toll Corridor. The design-build project was constructed 16 months ahead of schedule. The more notable savings in time, however, was a result of the decision to finance the facility with bonds backed by toll revenues. The funds needed to build the project were available immediately. It has been estimated that the project would have taken 20-30 years to complete had it been financed using traditional means.[65]
Similar to the California and South Carolina projects, a public-private partnership enabled the Pocahontas Parkway in Virginia to be built 15 years earlier than it would have been by relying solely on State funds.[66]
Another benefit of private investment in transportation projects is that the debt issued by the partnerships is generally not considered debt of the State. It is not backed by State tax revenues and consequently does not jeopardize the State's ability to issue bonds for other purposes.[67] Debt repayment is typically through revenues from tolls, although the State may use tax revenues to enhance the quality of the credit or to cover other expenses. Bond buyers voluntarily purchase bonds on the basis of the contribution they expect the bonds to make to their portfolios, considering returns, risk, diversification, maturity, tax status, and other factors.[68]
For example, when the Dulles Greenway partially defaulted on its debt in 1996, Virginia was not liable for the debt, nor did the debt affect the State's credit rating. Similarly, both the Pocahontas Parkway's and Southern Connector's bond ratings have been lowered to below investment grade; however, this has no effect on either Virginia's or South Carolina's credit ratings.[69] But, States that expect to utilize public-private partnerships as part of their long-term financial management strategy have an interest in not letting private bond ratings fall to the point where investors will not purchase future issues. Both the private and public sectors have much to learn about the public's willingness to pay tolls in different situations, and how to manage the risks of short-term revenue shortfalls.