For the past half-century, the federal government has funded much of the construction and maintenance of the United States' Interstate highways using fuel tax revenues. As the paying entity, it holds much of the decision-making power over policy changes affecting the nation's interstate highways. In light of the declining ability of the federal fuel tax to finance the nation's road travel needs and recognizing the dire financial state of much of the country's highway agencies, the federal government has begun to consider partial private-finance as a solution to the funding shortfall. The federal government introduced increasingly aggressive bills allowing states to develop and implement highway PPP proposals, gradually evolving from pilot programs in the late 1980's to broader enabling legislation by the mid-2000's (AECOM Consult 2007)
Since 1987, the federal legislation began to allow 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 (Gougherty 2005a).
The Transportation Equity Act for the 21st Century (TEA-21) passed in 1998 marked a step further toward the widespread use of toll finance. Although converting existing toll-free interstate highways to toll roads is generally prohibited, the provisions in TEA-21 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 (Federal Highway Administration 2002). This pilot program authorized states to use road pricing for up to three facilities that were previously non-tolled interstates highways, but limited the use of toll revenues to directly cover upgrade costs. TEA-21 also widely enabled the use of high-occupancy toll (HOT) lanes by allowing states to designate certain HOV lanes where single-occupant cars would be permitted. Together, these policies formed the basis for concession-based PPPs, and allowed individual states to form their own enabling legislation (Gougherty 2005b).
The 2005 Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETY-LU) federal transportation bill allowed greater use of toll finance and private sector involvement in highway procurement, while limiting the use of revenues. For example, while the HOT lanes program was expanded to include all HOV lanes in the country, the bill mandates that any single-occupant cars must be charged a variable toll, and that revenues cannot be spent outside the corridor where they were generated. Also, the SAFETY-LU limits the number of congestion pricing projects where revenues may be spent on other corridors. In short, a significant limitation for PPPs is the requirement that any new interstate highways financed by toll revenues must give preference to public toll authorities, though this restriction does not apply to state highways (Gougherty 2005b). As a rule of thumb, states may levy any type of toll on new and reconstructed state highways, new interstate routes, and reconstructed toll interstate facilities, but tolls may not be charged on existing free interstate highways. Limitations on revenue generally direct states to spend the money within the tolled corridor with priority given to actual construction costs (Gougherty 2005b). In addition, the Federal Acquisition Regulation enforces limitations on procurement methods, as it does for most government-funded projects. Contracts must be awarded based on a competitive selection process, with the intent to provide equal opportunities to bidders and maximize cost-efficiency (Bult-Spiering and Dewulf 2006).1
Federal legislation provides some 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, and some states do not yet have any PPP-specific laws at all. Officials in many states that have expressed interest in experimenting with PPPs primarily seek to push much-needed highway projects forward without spending large amounts of scarce public funds. Enacting enabling legislation is the first step that state governments take toward building a highway PPP program, but the legislation must conform to federal guidelines. In addition, officials of state governments need to be aware that the legislation formation process involves significant risks associated with the choices made, such as taxation constraints, control issues, right-of-way procurement, and rejection by the public.
While several states, such as Indiana, Texas, and Virginia, have been aggressively promoting PPPs and passing state legislation toward this new financing strategy, some people raise a serious concern regarding the protection of public interests. James L. Oberstar (D-MN), Chairman of the U.S. House of Representatives Committee on Highway and Infrastructure, and Peter DeFazio (D-OR), Chairman of the Subcommittee of Highways and Transit, in their letter to state governors on May 10, 2007, wrote, "[w]e write to strongly discourage you from entering into public-private partnerships ("PPP") agreements that are not in the long-term public interest in a safe, integrated national transportation system that can meet the needs of the 21st Century." To some extent, the debate and discussion that have been held in the Federal committees are characterized by different perspectives on the two extremes, strongly for or strongly against PPPs, similar to the political/ideological differences over any privatization of the production and provision of public infrastructure and services.
Some states, including California, begin cautiously, allowing only a limited number of pre-approved demonstration projects. In these instances, highway agencies are implementing PPPs on a trial basis with the intent of creating future legislation to allow more projects if the initial ones produce favorable results (AECOM Consult 2007). Lawmakers see this as a prudent strategy for initiating a PPP program, since it allows the state transportation agency to gain firsthand experience with the new finance models before making a long-term commitment to their use. Such a strategy is also more politically palatable, seeing as the public will recognize the initial use of PPPs as a temporary experiment, rather than a drastic and permanent shift in the way highway improvements are funded.
If state policymakers are pleased with the outcome of the trial program, they may then initiate a second-phase trial, or introduce more permanent legislature allowing unlimited PPP projects and clarifying the conditions of their use. This gives officials a chance to incorporate lessons learned during the trial program when making long-lasting changes to their states' highway programs. A state government wishing to make a bolder first step might skip the trial program and use permanent legislation to initiate PPP use.
With the many types of PPP schemes available for highway finance, states have adopted a variety of enabling legislation. Some have limited themselves to models like Design-Build, which varies from traditional procurement methods by combining several contracts into one, compared to having different contracts with potentially different private parties for different stages of the project. Others have pursued a more radical departure from conventional finance methods, and adopted long-term leases and concessions that allow highway operators, regardless of whether it is public or private, to charge tolls.
In summary, the federal legislative acts-original pilot programs, ISTEA, TEA-21, and SAFETY-LU-form the legal basis for highway PPPs in the United States. States are given considerable authority to decide whether to implement tolls, adopt congestion pricing schemes, or solicit greater private sector involvement. Should current economic trends continue, state governments will face continuous funding shortfalls in future, and federal legislation may become more flexible toward highway PPPs. Federal transportation administrators under the Bush administration have issued declarative, unequivocal statements that they believe PPPs will lower the costs of highway projects and speed their completion in most cases, citing the severe lack of public transportation funds as the key motive for pursuing PPPs so aggressively (AECOM Consult 2007). The federal government has accordingly given state governments the authority to pursue highway PPPs as they see fit, and they have a lot of leeway with regard to which models and projects they select. However, as we observe in the deals for Chicago and Indiana, the long-term financial benefits of on-going PPP projects remain very much in question. Furthermore, several early long-term concession deals, including ones in Chicago and Indiana, which were made without much PPP experience in the U.S. transportation industry, may be shaping up to be such spectacular failures that it will wipe off future possibility of effective PPP schemes with careful analysis and decision making transparency (Ortiz and Buxbaum 2008). Therefore, even with so much flexibility given at the federal level, states must exercise care when crafting their own enabling legislation to ensure that they receive the results they desire, while protecting the public interests, in their highway PPP programs. State officials must also keep in mind that full public projects are always an available option.
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1 However, this often forces states to award contracts to the lowest responsible bidder, and not necessarily the most reputable one. It is also costly in terms of time, as the bid procurement and review process can be lengthy. Arizona notably circumvented the competitive bidding requirement by prohibiting the spending of state funds on PPP projects unless the money is reimbursed later (Federal Highway Administration 1992).