Reason Foundation

http://www.reason.org
http://www.reason.org/news/show/public-private-partnerships-in-1

Reason Foundation

Public-Private Partnerships in Transportation

Testimony to the Pennsylvania House Transportation Committee

Shirley Ybarra
July 28, 2008

Mr. Chairman and Members of the Committee.

My name is Shirley J. Ybarra. I am Senior Transportation Analyst at the Reason Foundation. Reason Foundation is a Los Angeles-based non-profit, non-partisan think tank that has researched and analyzed transportation policy for more than 35 years. Furthermore, we are among the leading national experts in public private partnerships and privatization research.

I am the former Secretary of Transportation for the Commonwealth of Virginia (1998-2002) for Governor Jim Gilmore. And I am the former Deputy Secretary of Transportation (1994-1998) for Governor George Allen. As Deputy Secretary, I coordinated the writing and passage of the Public Private Transportation Act of 1995, (PPTA) which is still considered the model legislation for public-private partnerships in the United States. I also served as Special Assistant to Secretary of Transportation, Elizabeth Dole, with whom I worked on the legislative initiative and implementation of the transfer of National and Dulles Airports to a Regional Authority. I have worked in the private sector as president of a division of a British company and Executive Vice President of two consulting firms.

I would like to provide a very brief history of public-private partnerships in the U.S., an overview of the latest developments in public private partnerships (PPPs), information on the Virginia initiative, some observations regarding partnerships in today's world, and specific thoughts on some principles of effective legislation for you to consider.

Brief History of PPPs in U.S. Transportation

There has been much written about the very early days of transportation, from the Colonial era through the middle of the 20th century, and the extensive involvement of the private sector during that time. Beginning after World War II, however, road and transit responsibilities in the United States became more and more concentrated in the hands of government. Passenger rail, transit systems, and virtually all highway construction and maintenance moved into the hands of the state and local governments.

Yet, public funds (federal, state, and local) were not keeping pace with the demand to maintain and improve the nation’s extensive network of roads, bridges, and transit systems. Beginning with the federal reauthorization bills of 1991, which made it easier to blend federal aid with private financing and authorized more flexible operating arrangements, Congress opened the door for the private sector to once again participate in transportation. Every reauthorization bill thereafter has continued to expand the possibilities for private sector participation. Presidents George W. Bush and William Clinton even issued executive orders (Executive Orders 12803 and 12893, respectively) to encourage private sector involvement in infrastructure investment. However, private sector involvement was not forthcoming, because the states had statutes on their own books that were aligned with the traditional funding and procurement mechanisms. These statutes needed to be addressed on a state-by-state basis. In addition, long-standing practices embedded in the federal and state bureaucracies, as well as in the contracting community, limited private sector participation.

The States' Legislative Actions

Most of the early legislation regarding public-private partnerships in the 1990’s authorized single projects or provided for a limited number of "demonstration" projects utilizing public private partnerships (PPP’s).

For example, the Dulles Greenway in Virginia was permitted by legislation that was enacted in 1988 for a single private road using a regulatory model. This means that the private entity had to be established as a public utility, and the State Corporation Commission regulated tolls and rates of return.

In 1989, California's AB680 authorized up to four projects in a franchise model - i.e., the construction phase was held by a franchise and then turned over to the state. The state then had the ability to lease each facility to the developers for up to 35 years. No state or federal money could be utilized in the project.

In Washington state, many proposals were submitted and five projects were authorized. However, when the majority party in the legislature changed, the bill was altered dramatically and all proposals were sent back to the drawing boards. Although one project survived, this setback undermined the private sector’s confidence in the Washington model.

Arizona enacted legislation in 1991 that combined aspects of both the Virginia utility model and the California franchise model. It allowed for privately-financed transportation facilities. Three projects were selected, but none were finally financed. Major local political opposition challenged a final toll road project, preventing it from moving forward.

Minnesota enacted legislation in 1993; however, the project was vetoed by a locality.

This brief summary is meant to demonstrate that the United States had a poor track record in the public-private partnership arena prior to 1995. In 1994, the Virginia General Assembly enacted legislation that looked like the 1988 legislation (public utility model) for any number of projects. Governor George Allen asked the Secretary of Transportation's office to rewrite the legislation using a market-based approach.

The Virginia Public Private Transportation Act of 1995

The Virginia Public Private Transportation Act (PPTA) took a more open approach to the idea of public private partnerships in transportation. For example, it ensured that project sponsors were not regulated like utilities, as was the case in the 1988 Greenway statute. The tolls, rates of return, and any revenue sharing were to be determined on a project-by-project basis and embodied in a comprehensive agreement for each project.

The PPTA streamlined the application and approval process by allowing for any number of projects. Further, the act did not limit the projects to highways but allowed for all modes of transportation. Finally, it included opportunities not only for capital projects, but also for operations and maintenance.

Using a market-based approach it allowed for both solicited and unsolicited proposals, thus permitting the private sector to select projects and propose solutions. The public sector maintained flexibility in setting the scope and terms of the project. The public sector maintained the responsibility for right-of-way acquisition. The PPTA created a competitive process by requiring unsolicited proposals to be posted for a period of time, during which others could offer competing proposals. At the same time, public support was needed to advance any project. The local officials had no "veto power."

The PPTA in Virginia provided an opportunity for the industry to initiate the planning, construction and maintenance process. This process encouraged the industry to share their knowledge with the agency regarding the building, operation, and maintenance of highways. Most importantly, it provided the opportunity for the taxpayers to get the best return on their investments.

Today, approximately two dozen states have adopted legislation authorizing the use of public private agreements for the design, construction, financing, and operation of transportation facilities. Workable legislation is generally needed to entice private sector investment. Funding for transportation projects goes to those states that have created the right conditions—where the law facilitates public private partnerships and where private investment and participation is embraced.

Public-private partnerships combine the capital and expertise of the private sector with the management and oversight of the government to provide public services. Public-private partnerships effectively finance, manage and operate roads while minimizing taxpayer costs and risks.

Public-private partnerships for complex, multi-billion dollar transportation projects have been used for decades in Europe, and more recently in Australia and Latin America. In fact, public-private partnerships have become the conventional way to provide new highway capacity in many countries. The private sector is financing, building, and operating most of the major new highways in countries as diverse as Canada, Britain, France, Spain, Italy, Greece, Poland, China, India, Indonesia, South Africa, Australia, Argentina, Brazil, Chile, and Jamaica.

During the 1990s, public-private partnerships began to develop in the United States and Canada. Public-private partnership toll projects are in operation in California, Texas, and Virginia, as well as several Canadian provinces. Large urban toll projects in excess of $1 billion are in operation or under construction in Melbourne, Sydney, Paris, Israel, Santiago, and Toronto.

Benefits of Public-Private Partnerships

Toll financing can help Pennsylvania close the financing gap for new infrastructure. In addition, the public-private partnership model has several advantages over the traditional model of transportation financing.

1. Access to large new sources of capital

Public-private partnerships are attractive to many different types of investors, including equity investors and lenders. More importantly, they open the door to institutional investments, such as pension funds. Infrastructure has become a fashionable asset class for a host of investors that don’t invest in toll-agency bonds. Billions of dollars of private investment is available, as we’ve seen in the well-publicized concession agreements for the Chicago Skyway and Indiana Toll Road. Less well known are the investments in several new roads underway in Texas, California, and Virginia, among others.

2. Ability to raise larger sums for toll projects

New highway capacity is far more costly these days than it was when the Interstates were built. Hence, rebuilding and modernizing our freeways and Interstates will be far more costly than most people realize. There is growing evidence that the long-term concession model can raise significantly more funding for a given toll project than the traditional toll agency financing model.

For a new toll road in Texas (SH-130 segments 5 and 6), for example, a toll traffic and revenue study estimated the ability to finance $600 million, but the project’s cost was $1.3 billion. The Texas Department of Transportation (TXDOT) turned to a long-term concession approach, in which the private sector financed the entire $1.3 billion project in exchange for a 50-year concession. Three factors seem to drive such results. First, the concession agreement adds certainty to future toll increases that we’ve never seen with toll agencies. Second, the private sector seems more aggressive in both attracting traffic and holding down costs. And third, the private sector can take depreciation as a tax write-off, and toll agencies can't.

3. Shifting risk from taxpayers to investors

Public-private partnerships distribute duties and risks to the parties best able to handle them. For example, the state is best equipped to handle right-of-way acquisition and environmental permitting, so those tasks and risks are assigned to the state. The private sector generally takes on the risks of construction cost overruns and possible traffic and revenue shortfalls. Given the poor track record of the public sector in large transportation projects, shifting construction and traffic/revenue risk to investors is a major advantage.

4. More businesslike approach

The typical U.S. toll agency and the typical European or Australian toll road company are miles apart in their approach to everyday business. Private toll road companies are less constrained by political pressure and are more customer service oriented. They are quick to adopt cost-saving and customer-friendly technology and specialized products and services to meet customer needs.

5. Major innovations

One of the most important advantages of public-private partnerships is the motivation that the private company has to innovate in order to solve difficult problems and to improve service to their customers.

6. Flexibility

Governments, of course, seek partnerships for a myriad of reasons and in order to achieve various goals. One of the undervalued benefits of public-private partnerships and concession arrangements is that they can be customized to fit the needs, goals, and desired outcomes of a community.

For example, a concession model or long term lease can be used to monetize existing assets (i.e., Chicago Skyway, Indiana Toll Road, etc.), but the same model has been adapted in a variety of ways to build new capacity and address difficult challenges. In Texas, for example, the private sector is developing a 40-mile extension of State Highway 130 from Austin to San Antonio and will share revenues with the state over the 50-year life of the agreement. Without the private sector, this road would not have been built—the state could have only generated half of the funding for the project on its own.

Similarly, you can structure a concession to add new capacity to an existing roadway. For example, in return for a 75-year concession, the private sector is adding the first new lanes to the Capital Beltway that encircles Washington, D.C., which again is something the government has been unable to implement through traditional funding approaches.

The partnership for the new South Bay Expressway that is set to open soon in San Diego, California, was tailored to meet a number of environmental and economic development goals. This roadway has been on the books since the late 1950s, but the funding was not there to advance it. The state partnered with a private venture to deliver the road through a 35-year concession. Not only did the private partner finance the $635 million project, but they also involved the public in the process, which led to the integration of features designed to meet a number of environmental and community goals, such as preserving 1,000 acres of habitat, restoring area wetlands, and building a number of parks and recreation facilities. Aside from its award-winning environmental innovations, the road will deliver a much needed, north-south corridor to reduce congestion and improve mobility, and it will fill in a major gap in the regional road network.

Another example of the flexibility of the public-private partnership approach is the increased interest in availability payment concessions, in which the private sector designs, builds, finances, and maintains the road, but the public sector collects all of the tolls and reimburses the private company over the life of the deal in return for having made the road "available." Some officials are seeing this as a more politically attractive structure than having the private partner collect tolls and retain revenues. Texas is currently exploring this model for 87 potential toll projects, and the proposed Port of Miami toll tunnel in Florida would use the same approach.

One of the more interesting public private partnership initiatives moving forward today is the Missouri Safe and Sound Bridge Program. Through this innovative project, the State of Missouri will partner with a private sector team to repair and rehabilitate 802 bridges throughout the state over a five-year period. The private firm will finance the half-billion dollar project upfront and will then maintain these bridges over a 25-year term. The state will pay nothing during the five years of construction work, followed by 25 years or more of annual availability payments that the state will treat as an operating expense using a portion of its federal bridge funds.

The above examples—all of which are moving forward today—demonstrate only a few of the types of approaches being used by innovative policy makers to capitalize on the flexibility inherent in public private partnerships.

7. Delivering Tomorrow's Infrastructure Today

Public-private partnerships allow necessary new capacity to be delivered much faster than is possible under the current pay-as-you-go funding system, which is ill-suited to delivering large-scale projects in a timely manner. Public-private partnerships offer a way to finance and build needed capacity now, when we need it, instead of decades from now or possibly never. Moreover, they free up resources to deliver other projects that will not have to wait for funding to become available. This is a win-win for taxpayers and drivers, as partnerships deliver projects to strategically connect the state, enabling greater mobility of goods and people.

Lessons Learned for Considering Legislation

Using the "advantages" discussion above, the legislation can be tailored to encourage public-private partnerships in the Commonwealth of Pennsylvania. The legislation should not be project specific, but should allow all modes of transportation to be eligible for private funding. This way, toll roads can be built, railroad stations or transit facilities can be enhanced, or the Port can take advantage of the authorization. Requiring project-by-project legislative approval can have a chilling effect on private sector interests. The legislation should permit new capital construction as well as operation and maintenance innovations.

Conclusion

Business as usual will not deliver the infrastructure that Pennsylvania needs to meet the transportation needs of the 21st century economy. Pennsylvania policymakers need to embrace a new paradigm for highway funding and operation.

The success of existing private sector participation in transportation services highlights the potential benefits for many transportation projects needed in the Commonwealth. Public-private partnerships offer some major advantages, such as relieving congestion and improving mobility.

While not a panacea, these partnerships have proven successful when done properly with a strong contract, continual oversight and strict accountability. The potential for Pennsylvania is tremendous. Global capital is already flowing into Texas, California, Georgia, Indiana and Virginia to invest in highways. Why shouldn't Pennsylvania also benefit?

The Commonwealth is at a crossroads. It can choose to open its doors to this novel approach or not. The overarching recommendation is that Pennsylvania law be changed to encourage the aggressive pursuit of private sector participation in transportation services, because the private capital is flowing to those states that have created the right conditions for investment. Without the proper legal framework, other states will continue to reap these benefits at the expense of Pennsylvania's economy and business climate.

As the think tank that has done the most research on public private partnerships and their applicability to transportation infrastructure, the Reason Foundation welcomes the opportunity to be of further assistance to this committee as you learn more about these new approaches. Please feel free to call upon us.


Shirley Ybarra is Senior Transportation Policy Analyst


Print This