Executive Summary

This report is the second in a series that examines private-public partnerships (PPP) as an alternative way to manage and finance highways in the US. This report provides an overview of Federal legislation that has paved the way in the last three decades to allow PPP projects, and also reviews individual state legislation that addresses issues on economics, public finance, and governance as well as technical aspects of PPPs. Examples of such legislation includes (1) designating specific types of funding sources, limiting type, location, or number of projects, (2) outlining the project selection and review process, and (3) assigning rights to non-compete clauses, toll rate controls, and alternate non-toll routes-essentially providing a framework for PPP projects from inception through operation. State legislation is likely the more important factor in determining the level of flexibility in contract negotiation between parties involved and whether PPP projects will come to fruition and be successful in each highway project in a given state. This report was compiled by examining and analyzing both academic and professional PPP literature as well as previous and existing Federal and state transportation and PPP legislation. The focus of this report is on description, synthesis, and interpretation; we do not reach specific conclusions regarding the wisdom of PPPs, nor do we make recommendations to Caltrans regarding the pursuit of PPPs.

With few exceptions, since the passage of the Federal Aid Highway Act of 1956, user costs for the state and interstate highway systems have been paid by the public sector, mostly from motor fuel taxes collected from drivers. As increases to fuel tax levies have proven increasingly difficult politically, inflation-adjusted highway funding has failed to pace the growth in vehicle travel. In response to a worsening financial squeeze, many state and local transportation agencies are looking to PPPs as an innovative way to address chronic funding shortfalls. However, recent, controversial concession deals in the US, such as the Chicago Skyway and the Indiana Toll Road, have sparked significant debate among the public and policymakers. While there was some opposition to these projects by taxpayers, the deals brought in significant cash flow for these two states to utilize for social services, other infrastructure improvements, debt repayment, and rainy day funds. But the long-term financial benefits of these deals for Chicago and Indiana remain very much in question, and may reveal spectacular failures that may set very unsuccessful precedents to swipe off consideration of carefully designed PPP schemes.

Twenty-three states currently have PPP-enabling legislation. Legislation sets the ground rules by which a public agency and private firms can negotiate an appropriate PPP scheme among the many different forms of PPP available for designing, constructing, operating/managing, and/or financing transportation infrastructure, in addition to no PPP. Specifically, legislation sets conditions that: 1) either promote or prevent PPPs for highway projects, 2) provide foundations for contracts between a public agency and a private firm, and 3) affect risks involved in PPPs for both parties. Legislative conditions also influence the attractiveness of PPP deals for private firms. However, when the laws are set to reduce the risks for the private sector, they often reduce the benefits for the public sector in the PPP deal.

Most evaluators of PPPs agree that appropriate legislation should be set in place prior to private sector involvement to enable the best outcome from PPPs and to protect the public interest. Legislation establishes in advance which phases of highway projects should be privatized and what types of PPP schemes highway agencies can undertake. While some details should be left to contracts between agencies and private firms for individual projects, lawmakers can institute legislation to either aggressively promote PPP projects in order to reap the financial benefits with recognized risk, or to limit applications of PPPs in order to protect the public interest from the risks (and benefits) of PPPs. Given that voters are often wary of enacting measures that may be construed to broadly endorse privatization and risk the public interest, successful PPP legislation has been promulgated in a careful, deliberative fashion.

There are numerous risks to be carefully considered in PPP planning. Most obvious are the financial risks, which can be placed upon private entities investing in the project, or public agencies, which in turn can expose taxpayers to considerable risk. Thus, a related risk of PPPs is losing the trust of the public, or a backlash against PPPs by the public because of the risk, real or perceived, placed upon taxpayers. Such concerns have only been heightened amid the recent economic downturn and associated government efforts to fail out the banking and automobile industries. Other risks include accurate projection of future traffic flows, competition from other projects, and the environmental limitations or impacts of infrastructure construction. Uncontrollable risks include natural disasters and other unforeseen events. These risk factors are considerable, and are carefully distributed between the public and private sectors in successful PPPs.

There are important federal policies that since the late 1980s allow individual states to promulgate enabling legislation. Beginning in 1987, federal legislation has allowed toll roads and road pricing on federal highways. The 1991 Intermodal Surface Transportation Efficiency Act (ISTEA) included the federal pilot program for toll-based public-private partnerships, and moved forward with the Congestion Pricing Pilot program that allowed states to begin congestion pricing projects on a few of their Interstate highways. This limited trial program covered initial projects in California, Texas, and Florida. The Transportation Equity Act for the 21st Century (TEA-21) passed in 1998 included provisions that granted states the authority to levy tolls on new and reconstructed state highways, as well as new Interstate highways, through creation of the Interstate Reconstruction and Rehabilitation Pilot Program. TEA-21 also widely enabled the use of high-occupancy toll (HOT) lanes. The 2005 Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) federal transportation bill allowed greater use of toll finance and private sector involvement in highway procurement, while limiting the use of revenues.

Federal legislation generally provides guidelines for PPP implementation, but leaves it to officials in each state to decide whether it wants to allow PPP projects. Consequently, PPP legislation varies widely from state to state. Although officials in many state governments are expressing interest in experimenting with new PPP legislation, first-hand experience with PPP projects in the United States, particularly privately financed projects, is still limited. Of the 23 states that have PPP legislation, only 15 have made significant use of PPP schemes. Our review of existing state legislation suggests that statutes governing PPPs fall into five general categories: 1) Project Selection and Approval; 2) Procurement and Project Management; 3) Proposal Review Process; 4) Funding Requirements and Restrictions; and 5) Toll Management. Within these categories, there are more specific provisions that are often included in legislation, either to allow or disallow certain activities in the PPP process (See Table ES-1).

Table ES-1 State Legislation in Five Categories

While states with PPP related legislation appear to have a consensus on several issues (such as allowing for design-build projects, long-term leases, and use of funds from the Transportation Infrastructure Finance and Innovation Act-TIFIA-of 1998, which provides Federal credit assistance to major transportation projects of national importance to fill market gaps and leverage private investment), there is a huge variation among the same states on other issues (such as restricting what types of transportation are eligible for PPP projects). Further, there are some provisions that have not been widely addressed in legislation. For example, only five states-California, Colorado, Delaware, Florida, and Minnesota-address HOT Lane projects (all of which permit them). Additionally, there are policies on which only a handful of states differ from the majority. For example, all states with legislation addressing unsolicited proposals allow them, except for Indiana and North Carolina. In fact, Nevada allows only unsolicited proposals. Of the 21 states with legislation regarding local vetoes, only Arizona, Delaware, and Minnesota require that proposals be subject to possible vetoes. Of the twelve states with legislation addressing proposal confidentiality, only Arkansas and California protect confidentiality. Georgia is the only state to prohibit the public sector from issuing revenue bonds.

Only Mississippi disallows outsourcing of operations and management, and only Arizona and North Carolina require the public to maintain comparable non-toll routes. Only North Carolina and Tennessee require that tolls be removed once the financing debt has been paid. Such variation in legislative specifics reflects each state's general philosophy toward PPPs: 1) aggressive (Indiana, Texas and Virginia), 2) positive, but cautious (Arkansas and Minnesota), and 3) wary (Alabama, Missouri, and Tennessee). In addition, there are some issues and a certain level of details, such as toll rates and non-compete clauses, that appear to be better decided in contracts by the parties involved in each project, reflecting the significant variation in the scope, scale, and settings of projects.

In the future, federal legislation may become more or less favorable toward highway PPPs as the current projects progress and long-term results become apparent and public agencies accumulate their experience and knowledge on PPPs. In any case, with so much flexibility at the federal level, states clearly must exercise care when crafting their own enabling legislation to ensure that they meet their needs and receive the results they desire, while protecting the public interests, in their highway PPP programs.