Transcript Slide 1

Public-Private Partnerships
(PPPs) in U.S. Surface
Transportation
Rick Geddes
Associate Professor
Department of Policy Analysis & Management
Cornell University
June 23, 2008
Background on PPPs: U.S. transportation
funding in turmoil
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Key question now: How to pay for rebuilding,
refurbishing, and expansion of roads,
bridges, tunnels, ports, inter-modal facilities?
United States is facing The Perfect Storm
(Sebastian Junger) with regard to
transportation funding
Consider both the revenue side and cost side
in transportation
U.S. transportation funding in turmoil
(con’t)
Revenue Side
 Most funding for U.S. transportation comes
from per-gallon fuel taxes (in addition to tolls,
vehicle fees, etc.):
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Gasoline tax at both state and federal level (18.4
cents federal, 28.6 cents state average)
Historically, feds pay for 40%, state and local 60%
of highway costs
Gas tax revenue declines as fuel consumption
declines
U.S. transportation funding in turmoil:
Revenue Side (con’t)
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High gas prices causing changes in behavior:
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More fuel efficient cars (Hydrogen: Honda FCX
Clarity in California)
Less driving (VMTs declined most since 1942!)
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Moving closer to work
Car pooling, public transit, biking
U.S. policy encourages efficiency:
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C.A.F.E. standards increased
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Revenue from gas taxes declining
U.S. transportation funding in turmoil:
Revenue Side (con’t)
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Politically impossible to raise fuel taxes in United
States:
 Highly regressive tax
 Revenue viewed as wasted: “Bridge to
Nowhere,” 3,671 earmarks in last highway bill
 Fuel tax now “most hated tax”
Gas tax increases would ultimately further
reduce gas use: “policy at war with itself”
U.S. transportation funding in turmoil:
Revenue Side (con’t)
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States facing broader financial problems:
 State income tax (and other tax)
revenues down due to economic
weakness
 States facing higher costs for health
care, unemployment etc.
 Some states “raiding” transportation
funds for other uses!
U.S. transportation funding in turmoil:
Cost Side
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Cost of system (roads, bridges, tunnels) rising:
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Construction costs (steel, concrete, tar, etc.) rose
35 percent since 1998, more than twice as fast as
overall inflation
Construction activity (e.g. in India and China)
caused explosion in cost of construction materials
Rising costs of environmental mitigation
U.S. highway system is old: Interstate system
started in 1956, now end of original design life
System needs major refurbishment and expansion
U.S. transportation funding in turmoil:
The Perfect Storm
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American Society of Civil Engineers:
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U.S. public works infrastructure (overall) needs
$1.6 trillion investment over next 5 years
Where will funding come from??
United States turning to private investors for
financing via Public-Private Partnerships
(PPPs)
Estimated $400 billion of private
infrastructure investment available worldwide
Defining Transportation PPPs
General Accountability Office definition:
Highway PPPs refer “to highway-related
projects in which the public sector enters into
a contract, lease, or concession agreement
with a private sector firm or firms, and where
the private sector provides transportation
services such as designing, constructing,
operating, and maintaining the facility, usually
for an extended period of time.”
Defining U.S. Transportation PPPs:
Two Main Types
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Brownfield PPPs:
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Long-term leases of existing transportation
facilities (mostly toll roads) by private
concessionaires
Usually team of investment bank and operator
Investors bid for right to collect tolls/operate
road on basis of up-front concession fee
Defining Transportation PPPs
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Investor offering largest fee for a defined
contract (toll rate increases, quality of
service, expansion of road, etc.) wins
Government retains ownership of facility
Government controls operation of facility
through the concession agreement (or “lease”
or “contract”)
Examples of Brownfield PPPs in United
States: Chicago Skyway
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7.8 mile elevated toll road south of Chicago
Leased by Macquarie/Cintra group in 2005 for 99
years
Caps rate of toll increases
City received $1.8 billion in competitive bidding
About 70% of city’s annual budget; proceeds used
to:
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Pay off Skyway debt
Create reserve fund (generates as much in interest as
Skyway did in tolls)
Pay off City debt (debt rating improved)
Homeless shelters, senior citizen facilities, libraries
Examples of Brownfield PPPs in United
States: Indiana Toll Road
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157-mile toll road along the northern border of
Indiana
Connects to Chicago Skyway
Leased by Macquarie/Cintra group in 2006 for 75
years
Lease caps rate of toll increases to inflation
State of Indiana received $3.8 billion in concession
fee
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State used proceeds to fund a 10-year transportation plan
called Major Moves
Indiana only state with a fully funded transportation plan for
those 10 years
Examples of Brownfield PPPs in United States:
Pennsylvania Turnpike
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Proposed by Gov. Rendell (not yet finalized)
537 mile toll road from New Jersey to the Ohio border
May 2008: Albertis-Citigroup infrastructure fund offered
Pennsylvania up-front concession fee of $12.8 billion
Plus $5.5. billion of investment in renovating Turnpike
75-year lease; tolls capped at inflation
Proposed use of proceeds:
 $2.3 billion to pay off Turnpike debt
 Remainder invested by State: yields $1.1. billion in
annual interest payments
 Interest used to fund transportation in Pennsylvania
Some Benefits of Brownfield
Concessions: Raising Capital
 Allows citizens (i.e. highway owners) to realize
more value from facility, but still retain ownership
and control:
 Bond financing conservative approach
 Creates predictability in toll increases
 Length of concession longer than usual bond
term
 Private operator will keep costs down, usage
(and revenues) up
Some Benefits of Brownfield
Concessions: Transfers Risk
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Some risks associated with toll roads:
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Traffic risk
Changes in construction costs
Risk of tunnel, bridge failure, etc.
Currently (risk-averse) citizens bear risk
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PPP transfers risk to investors (professional risk
bearers)
Investors charge a “price” (rate-of-return) to
assume risk
Some Benefits of Brownfield
Concessions: Competition
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Bidding process injects competition into
provision of services
Currently toll roads operated by toll authority
or state’ department of transportation: no
competition
Ensures services provided more efficiently
Some Benefits of Brownfield
Concessions: Incentives
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Private operator has incentive to maximize
profit  keep revenues up, costs down
(given quality of service required in lease)
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Revenues Up?
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Will seek out customers (advertise)
Increase “throughput” of cars via electronic tolling, use
of congestion pricing
Remove accidents/dead animals/snow/ice quickly
Repair road quickly
Some Benefits of Brownfield
Concessions: Incentives (con’t)
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Costs down?
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Keep repair and construction costs down
Lower operating costs
Greenfield PPPs: Definition
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Private sector provides financing for
construction of new toll facility
Usually a DBFO (design, build, finance,
operate) contract
Competitive bidding
Example of Greenfield PPPs:
Dulles Greenway
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14 mile highway in Northern Virginia (near
Washington, DC)
Opened to traffic in 1995
Built for $350 million under a DBFO contract
Operation will revert to the State of Virginia
after 42.5 years
Initially financed by 10 U.S. institutional
investors
Purchased by Macquarie in 2005 for $617 m.
Additional Benefits of
Greenfield PPPs
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Additional risks associated with Greenfields:
Greater traffic risk, environmental risk, etc.
Benefits of risk transfer are greater
Initial construction costs incurred: Impact of
cost-minimizing incentives are greater
Additional Benefits of
Greenfield PPPs (con’t)
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Incentives to complete project faster
Project can be built without federal money: Is
not subject to federal regulations that slow
project down
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13 year time lag!
NEPA
Davis-Bacon
Lack of inter-agency coordination
Conclusions
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Fuel taxes should not be abandoned as a
funding source
Tolling and PPPs will play a larger role over
time as fuel tax revenue falls
Policy should focus on how to encourage
more private investment
U.S. transportation will come to resemble
other utilities, such as electricity, natural gas,
telecommunications
Additional Background on PPPs
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National Surface Transportation Policy and
Revenue Study Commission
http://transportationfortomorrow.org/
Entire commission supports increased use of
PPPs (pp. 48-51)
Minority report (green section, page 59):
suggests avoiding new federal restrictions on
PPPs