Governor Corzine and the New Jersey legislature are currently determining whether to pursue private investment in the State's transportation assets. These proposals, collectively known as public-private partnerships (PPPs), can have the effect of transferring control of public infrastructure systems - such as highways - to private entities. PPPs offer the potential to gain significant immediate financial gain, but usually rely on investors recouping their payment over time through toll collection and other revenue sources. Perhaps the most important aspect of these proposals is that they entail long-term fiscal consequences. The public must be well informed of the potential implications of any proposed asset sale or lease.
A PPP around a highway is not necessarily a good or bad proposition. The details of the agreement, contract or lease that establishes the partnership determine its value to the State, private investors, motorists, and New Jersey residents. PPP agreements are long and complex, requiring hundreds of hours of highly-skilled professional input and resulting from high level negotiations. PPPs also require enabling legislation at the State level. These agreements and legislation can contain the answers to some important questions, including:
• How much will tolls increase, and when?
• How will toll revenue be used, compared to the status quo?
• Will toll strategies be designed to help cut congestion and pollution?
• What happens if the road does not raise enough revenue, or the deal defaults? Are taxpayers at risk?
• How will windfall revenues be spent by the State?
• Will the new facility operator deliver superior transportation system performance?
• If corridor performance degrades over time, what remedies does the contract allow?
• How will important labor, environmental and related concerns be addressed?
• What are the land use impacts?
New Jersey residents, especially motorists, need to know the answers to these questions. The two largest and most recent PPPs in the U.S., for the Chicago Skyway and Indiana Toll Road, will be in effect for 99 and 75 years, respectively. The public should not assume that the private sector will act in the public interest in its development of a contract with the government or in its management of toll roads. A PPP's structure should ensure that public and private interests align.1
PPPs on toll roads work because future toll revenue is often worth more to private firms than it is to public entities, and private firms are willing to pay upfront for the opportunity to collect tolls in the future. Toll roads can be worth more to private firms primarily because they can potentially raise tolls more easily, and, in some cases, because they can reap substantial tax benefits. Private firms are insulated from a political climate that discourages raising tolls, and the ability to schedule and rely on future toll increases, even if such increases are modest, attracts investment into privately-operated toll roads. The key thing preventing the government from similarly capitalizing on future tolls is its political unwillingness to raise tolls or schedule regular toll increases. The second element that can increase the value of toll roads for private firms is tax ownership. Some private operators can account for depreciation of the asset, and such tax ownership keeps private firms' taxes low. Public authorities historically do not account for depreciation. A third factor that is occasionally mentioned is that the private sector can more efficiently operate toll roads. This factor is often overstated: the value of efficiency savings depends mostly on labor agreements, which may not change under private management. Regardless, efficiency savings are dwarfed by the enormous value of future toll increases.2
At present, the Turnpike and Garden State Parkway are operated by the New Jersey Turnpike Authority, a public authority headed by government appointees. This agency is responsible for the maintenance and operation of the roads, including toll collection. The Authority has a budget of approximately $829 million.3 Most of its revenue is collected from tolls (approximately $716 million), while the rest is collected from concession fees and miscellaneous sources. About half is spent on operating the roads ($427 million), while the rest is spent on debt service ($234 million) and 'interfund transfers' to various funds ($168 million). Approximately $22 to $50 million of this supports State capital projects, including the Transportation Trust Fund. 4 This funding source will need to be replenished if the Turnpike Authority can no longer make these payments to the State.
The most important policy for addressing these and other complex issues raised by PPPs is full transparency. Only by fully disclosing details of the PPP and allowing sufficient time for analysis and public debate can New Jersey residents be assured that their best interests are being met, both now and well into the future. An additional, and equally important, recommendation of this paper is for revenue from a PPP to be spent responsibly. Expenditures should be structured to improve long-term fiscal stability, to prioritize the "user pay" principle that underlies transportation finance, and to restore the fiscal integrity of the Transportation Trust Fund and advance future transportation capital projects. A PPP, properly structured to protect the public interest, can greatly benefit the State's overall fiscal condition and economy by helping to fund NJ DOT's and NJ Transit's now-under-funded capital programs.