Capital budgets for surface transportation facilities have flattened or been reduced while the needs for and costs of new facilities and rehabilitation of older infrastructure have grown well beyond available funding. Increased taxation is politically unpopular, yet the public demands continued improvements in the capacity, safety, and efficiency of its transportation facilities and services. The result is an ever-widening gap between available funding and needs of the nation's surface transportation program.
These issues and their underlying causes, as listed in Exhibit 1, are driving the growing interest by transportation agencies across the United States in alternative project delivery approaches and innovative finance techniques.
Exhibit 1 - Issues Driving Greater Interest in Alternative Project Delivery Approaches
| • Growing demand for U.S. transportation infrastructure - Favorable economic conditions in U.S. - Lower long-term traffic and revenue risks - Relative safe haven for international investment - low political and economic risks - Heavily industrialized states in the northeast with extensive transportation facilities they cannot afford to rehabilitate or replace - Expanding states in the south and southwest with rapidly growing populations and expanding transportation capacity requirements • Widening funding gap between public revenues and surface transportation needs is leading to critical fiscal conditions for the nation's highway program - Declining growth in traditional revenues, especially motor fuel tax proceeds - Increasing costs of renewal, replacement, or expansion as material and right-of-way costs escalate - Increasing use of the automobile and truck for mobility • Scarcity of federal funding is forcing project sponsors to seek alternative ways to finance and deliver projects - State/local governments take on more program and funding responsibilities - State/local agencies lack resources and tools to efficiently address needs • Opportunity for increased transportation program revenues and cost-effectiveness - Access to capital markets - Creative capital financing - Expedited project delivery and lower inflationary project costs - Application of best practices - Access to new technology • Liquidity of existing tolled facilities provides quick returns for current officials - Address critical state and local budget issues - Address backlog of transportation reconstruction and expansion needs - Turn "paid for" assets into current sources of long-term program funding |
The last driving issue listed above may turn out to be somewhat fleeting. The early examples of leasing existing tollways to concessionaires who offered substantial up-front funds in return for the proceeds of future escalating tolls have become increasingly controversial as their terms became better understood. Those deals in which windfall profits are likely to accrue to the concessionaire due to embedded toll rate increases (e.g., Chicago Skyway and Indiana Toll Road long-term concession leases) or where the up-front lease proceeds are used for non-transportation purposes (e.g., Chicago Skyway concession lease) have raised several important questions regarding:
• What is the value of these kinds of PPPs and how they are structured?
• Do sponsoring agencies have trained and experienced staff resources to adequately value long-term leased assets?
• Are long-term concession leases structured to be in the public's best interest, while also satisfying private partner feasibility criteria?
These questions and uncertainties reflect the importance that both public and private partners fully understanding the implications of PPP agreements and their relative allocation of responsibilities, risks, and value capture when drafting the Request-For-Proposal and negotiating the subsequent contract.
The purpose of this is to ensure there is provision for the following results of the PPP procurement process:
• Equity for all parties to the partnership;
• Fulfillment of feasibility criteria for the public and private partners, respectively; and
• Assurance that the public interest is best served by the project delivery approach selected.
When properly structured and executed, alternative project delivery approaches offer a variety of potential advantages for cash-starved transportation infrastructure programs, including those listed in Exhibit 2 below. These potential advantages will be more fully discussed in Section 3.
Exhibit 2 - Potential Advantages of PPPs Relative to Traditional Project Delivery
| • More rapid development - of infrastructure assets and introduction of new technologies under a PPP project arrangement. • Improved efficiency - in construction, operation, and maintenance of the infrastructure arising from: - Innovations in service delivery; - Incentives in the PPP contract; - Better institutional integration throughout the life-cycle of the facility; and - The potential for increased "value for money" relative to traditional approaches. • Access to new private capital - including taxable equity and either taxable or tax-free debt to supplement scarce public funds. • Higher quality and customer satisfaction - due to focus on performance-based standards, enhanced quality control and assurance, and contractual accountability. • Public agencies able to focus on their strengths - including long-term service planning and management, environmental clearance, permitting, right-of-way acquisition, standards setting, and performance measurement and reporting - having turned over part or all of financing and/or day-to-day operating responsibility to their private partners. |
Despite their potential advantages, public-private partnerships in transportation have been relatively slow to develop in the United States, especially when compared to many other countries, especially in Europe, Asia, and South America. The notable feature of a PPP is a sharing of risks and rewards that accompany the project. This sharing of risk and reward is foreign to most transportation agencies in the U.S., which are more accustomed to a strict delineation of public and private sector roles and responsibilities. In addition, numerous legal and institutional impediments have slowed early efforts to implement PPP approaches, even on a pilot basis.
In most cases, enabling legislation has been required to allow state or local transportation agencies to enter into PPPs for highway or transit infrastructure projects. New business relationships are required, often with larger national or international firms that can handle the increased risk and responsibility of a PPP contract which is often much larger than typical projects of the past. This, in turn generates competition and fairness concerns, both for sponsoring agencies which seek to attract a sufficient number of bids for the contracts, and for smaller contractors who may feel unable to compete in the new environment. In addition, the scope and complexity of negotiations between the sponsoring agency and its contractors can increase significantly, as the allocation of risk, the acceptable rate of return, and the contract incentives are carefully defined.