Federal Rules Promote Privatization

Policies by the Internal Revenue Service and particularly the Department of Transportation (DOT) have also promoted road privatization.

The tax code encourages privatization in a number of often unintended ways. As discussed earlier, many private projects take advantage of the IRS 63-20 rule to utilize benefits meant for nonprofit organizations. The federal tax code also treats private holders of road concession deals that last longer than the expected life of a road (normally 40 years or more) as owners for tax purposes and allows them to depreciate the value of those assets at an accelerated rate of 15 years. Senator Jeff Bingaman has described this as, "the tax tail wagging the dog: Exceptionally long leases in order to recover capital outlays on an accelerated schedule."31 As an overview study by the Transportation Research Board of the National Academies concludes, "This amounts to a government subsidy to the concessionaire that may significantly re-duce corporate taxes if the project proves proftable."32

The U.S. Department of Transportation also subsidizes private road projects in a number of ways. The Transportation

Infrastructure Finance and Innovation Act (TIFIA), passed in 1998, established funds for the federal DOT to spend on secured (direct) loans, loan guarantees, and standby lines of credit to attract private investment in surface transportation infrastructure.33 The TIFIA website lists $5.8 billion in past or pending financing provided by the department as of February 2009, with most of it devoted to highway projects.34 The DOT also publishes model legislation for states and a newsletter to encourage privatization of roads.35

The biggest incentives are for private "green field" deals in which companies construct a new toll road and then operate it and collect tolls. The federal DOT allocates over $2 billion per year in credit that can be used to subsidize private borrowing for highway and surface freight transfer projects by exempting private bonds from taxes. The DOT also grants private projects special federal waivers that suspend normal requirements on contracting, project finance, compliance with environmental requirements, and right-of-way acquisition. For example, Oregon and Texas both received federal waivers allowing them to begin negotiating contracts before the environmental review process had been completed.36

In addition to passing favorable regulations, the federal DOT under the Bush Administration actively lobbied state governments to approve privatization agreements. Then-Secretary of Transportation Mary Peters traveled to numerous states to encourage their use of private investment, and tolling became an official key component of the DOT's congestion mitigation initiatives. In one instance, the Federal Highway Administration (FHWA) even threatened Texas for pulling out of an agreement with a private company. The Texas Department of Transportation (Tx-DOT) initially accepted a proposal from Cintra, a private company, to construct and operate State Highway 121. However, due to significant public opposition to the project, TxDOT eventually rejected the proposal in favor of a bid by the North Texas Toll Authority (NTTA), a public entity. The deal with the NTTA was estimated by some analysts to save the public $2.3 billion versus the bid from the private vendor.37 In response, the FHWA sent a letter to TxDOT threatening to with-hold future federal funds for the project. FHWA argued that acceptance of NTTA's bid violated federal regulations requiring a "fair and open" competitive process and rules prohibiting public entities from bid-ding against private companies. While the FHWA eventually backed down from its threat, many in Texas saw the exchange as an unjustified use of federal powers to influence state decisions.38

In a more recent signal of its support for privatization, the Federal Highway Administration issued a rule in the Federal Register requiring any future reorganization of public agencies to be justified on market concession terms. What this essentially means is that any time a state agency at-tempts to reorganize or transfer authority over a toll road, it must first undergo an analysis to determine what price a private company would bid to operate the highway under a concession agreement. When this concession price is determined, the public entity would be required to charge that amount to the other agency that is taking over the roadway. Thus, if TxDOT wanted to transfer authority over a road to the NTTA because it thought the NTTA was better suited to operate that highway, TxDOT would be forced to charge NTTA an amount equivalent to what a private company would bid. After a large number of private agencies and other stakeholders voiced concern during the public comment period, the U.S. DOT revised the rule to give agencies wide latitude to determine the criteria for market valuation. While the immediate effect of this ruling has been muted, it nonetheless set a troubling precedent by establishing private concession deals as the standard.