Gas tax or tolls?

Nobody has an answer yet for how to fund our transportation needs, both the backlog and future demands. Some people think we're past the point of no return.

Congress isn't helping. The reauthorization process has been so hard because gas tax revenues don't cover expenses and even maintaining current spending will require someone to find a lot of money somewhere else. For example, Mica's oil and natural gas levies.

The answer to that question is tied to what happens next November. If the "No-compromise" wing of the Republican Party becomes a majority, then I think the "starve the beast" option will be on the table.

Without any new revenues, federal highway spending from gas taxes alone looks to be headed for a 30% reduction and transit by 50%. Cities will take a big hit. State DOTs are not very good at supporting urban infrastructure. They don't understand why costs are twice as high as anywhere else. And those costs are unpredictable, hence very risky.

The federal stalemate has already begun to starve the states, obviously.

To try to get projects funded in this environment, you don't go to the state legislature looking for money. That line goes around the block.

You've got to bring a viable plan of finance. These days, if you don't bring a problem and a solution to the table, then you're dinner.

One good argument for a gas tax increase goes like this: the federal gas tax runs about $19 per month for the average driver. A 10 cent per gallon increase equals about $4 per month. So, the question gas tax supporters ask is: "will America let its most important public investments crumble rather than pay $4 per month?"

Apparently yes. The last federal gas tax increase was in 1993 and that was a nickel. That nickel is worth about 2 cents today.

I come from New Jersey. Our gas tax hasn't been raised in 24 years. It was worth 10.5 cents back then and 4 cents now, with inflation. The state's highway trust fund is broke. New Jersey gets a share of the Port Authority's recent toll increase and that will help for a while. But, no doubt, the system is broken.

Looking at that record, I tell gas tax supplicants to look up Einstein's definition of insanity: Doing the same thing over and over again and expecting different results on a gas-tax increase.

What if Einstein isn't always right, they say? It came up a few weeks ago that Einstein might have been wrong about the speed of light, to mention one example. So if the great Einstein was wrong about that, then perhaps we will get a different result out of this Congress than we did from the previous 18 congresses.

So, if not a gas tax increase, then people talk about a national user-fee system based either on vehicle miles traveled, a distance- based charge, or an aggressive expansion of the toll technology in use today.

If it's VMT, it will take 10 years before we see a dime.

So it's tolls. And not just slightly more tolls. Everyone in the highway P3 business wants to toll the Interstates and other national highways.

That would change everything in transportation. It would prove we're smarter than we look. All of the private capital on the sidelines now and much more would be put into play. It would create an intelligent highway system coast to coast. And it would put millions of people to work on craft labor, bringing substantial wealth to the middle class and tax revenues to Washington.

Ray Lahood's position? When every governor in America comes crawling to Washington, he'll consider it.

Which brings me to the question: Are we at an inflection point with P3s?

Are we at the point where need finally determines the demand by government for the benefits of P3?

Are the governors and mayors crawling toward Washington? And what will they find when they get there?

Puerto Rico may be a bellwether. I hope Puerto Rico is a bellwether.

First, they're broke and they know it. So, the new governor passed a comprehensive P3 law a few years ago, put his most trusted agency, the Government Development Bank, in charge, and spent a lot of money to hire the best staff and advisors.

He also guaranteed to contractors that they would be subject to a fixed income tax rate of 10 percent of the net income derived from the project for the full term of the P3.

The Government Development Bank has awarded two projects so far. The first one was the concession of the PR22 toll road. It took 12 months, used legal documents that evolved from three similar projects, and cost the winner $3 million to bid. It reached financial close last month, paying $1.1 billion to the GDB, which resulted in Puerto Rico's first debt upgrade in 23 years.

The other current project is for building 100 public schools, which is in the process of being awarded in several procurement packages. The P3 pipeline includes a gas line, new water/wastewater projects, the concession of Puerto Rico's main airport, provision of new correctional facilities, a 40-km extension of the PR22 toll road and four other toll road projects.

I think there will be many more Puerto Rico's. Almost everybody's broke. We just haven't gotten the word down to the troops yet.

Back to the inflection point. Mary Meeker, a famous Morgan Stanley banker, put together a pro forma income statement for the United States last March. It's frightening.

The U.S. currently has a net worth of negative $44 trillion. Most of the problem is entitlements. Military pensions were the only entitlements in the Civil War era. That grew slowly until the 1930's and WWII when the federal government began to expand its business lines. The Great Society vastly expanded the federal enterprise.

Current status: GNP grew by 2.7 times since 1965 and entitlements grew by 11.1 times.

Here's the problem: Mary Meeker says there is an 82% correlation between rising entitlements spending and falling personal savings rates.

People believe they are entitled to more and more services from government, but our huge deficits and negative net worth say to me that most people are not willing or able to pay for those services.

This isn't new, it's just getting worse.

There is a huge gap between what we need and what we're willing to pay for. In the PPP industry, it sometimes results in someone, usually a politician, claiming that P3s are a terrific answer to this huge problem. And then they say: Good bye and good luck.

That's changing. More and more government officials "get it" and are running procurements that allocate risks in ways that draw in private capital, creativity and long-term diligence. In the transportation PPP market, I would include Puerto Rico, Florida, Alaska, Texas, Colorado, Indiana and Kentucky, to name a few.

So, I believe we are at the inflection point now in the PPP market where governments are really broke and they know it. And they are increasingly willing to entertain PPPs as a compelling option for helping to close the infrastructure gap.

Thank you for listening.