Highways and Transit
Private Sector Sponsorship of and Investment in Major Projects Has Been Limited Gao ID: GAO-04-419 March 25, 2004Many in Congress, as well as many transportation experts, believe more money needs to be spent to keep up with the country's surface transportation needs. As Congress considers reauthorization of the nation's surface transportation laws, many observers believe increased private participation and investment in transportation can help meet these needs. GAO was asked to examine cases where state and local governments have used active private sector sponsorship and investment on major highway and transit projects where the private sector was the primary stakeholder in designing, financing, constructing, operating, and maintaining such projects. Among its objectives, GAO (1) identified the extent to which states have used active private sponsorship and investment to finance and build highway and transit projects; (2) identified some advantages, from the perspective of state and local governments, resulting from private sponsorship and investment and some tradeoffs;(3) determined challenges that the private sector faced in these projects; and (4) presented legislative proposals that could help increase private sponsorship and investment in highway and transit projects. We provided a draft of this report to the Department of Transportation (DOT) for its review and comment. DOT generally agreed with the information in the report.
Active private sector sponsorship and investment has been used to a limited extent to build and finance major highway and transit projects; thus the nation has had little experience with such sponsorship. We identified six such major projects--five toll road projects and one transit project. Three projects were for-profit ventures financed with equity and debt while three were non-profit ventures financed with tax-exempt debt. Private sector sponsorship and investment in major projects has resulted in advantages from the perspective of state and local governments--such as completing projects more quickly--and trade-offs--such as the political costs of relinquishing control over toll rates and the contractual constraints to improving competing publicly owned roadways. On one project, State Route 91 in California, this latter constraint motivated the county government to purchase the road from the private consortium. The private sector encounters many challenges to becoming more actively involved in highway and transit projects because of limited opportunities and barriers to financial success. Currently 23 states permit private participation while 20 of these allow it for highways. Where state and local governments have elicited such participation, it has occurred on mostly lower priority projects, such as toll roads built in anticipation of future development. State and local governments traditionally build and finance highway projects through their capital improvement programs including using federal funds that reimburse about 80 percent of the costs. While these governments could open higher priority projects to private sector partners, they might be wary of doing so since political costs such as the limited ability to improve competing publicly owned roads would likely be greater. While legislative proposals could encourage greater private participation, private sponsorship seem best able to advance a small number of projects--but seems unlikely to stimulate significant increases in funding for highways and transit.
GAO-04-419, Highways and Transit: Private Sector Sponsorship of and Investment in Major Projects Has Been Limited
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Report to Congressional Requesters:
March 2004:
HIGHWAYS AND TRANSIT:
Private Sector Sponsorship of and Investment in Major Projects Has Been
Limited:
GAO-04-419:
GAO Highlights:
Highlights of GAO-04-419, a report to congressional requesters
Why GAO Did This Study:
Many in Congress, as well as many transportation experts, believe more
money needs to be spent to keep up with the country‘s surface
transportation needs. As Congress considers reauthorization of the
nation‘s surface transportation laws, many observers believe increased
private participation and investment in transportation can help meet
these needs.
GAO was asked to examine cases where state and local governments have
used active private sector sponsorship and investment on major highway
and transit projects where the private sector was the primary
stakeholder in designing, financing, constructing, operating, and
maintaining such projects. Among its objectives, GAO (1) identified
the extent to which states have used active private sponsorship and
investment to finance and build highway and transit projects; (2)
identified some advantages, from the perspective of state and local
governments, resulting from private sponsorship and investment and
some trade-offs; (3) determined challenges that the private sector
faced in these projects; and (4) presented legislative proposals that
could help increase private sponsorship and investment in highway and
transit projects.
We provided a draft of this report to the Department of Transportation
(DOT) for its review and comment. DOT generally agreed with the
information in the report.
What GAO Found:
Active private sector sponsorship and investment has been used to a
limited extent to build and finance major highway and transit
projects; thus the nation has had little experience with such
sponsorship. We identified six such major projects”five toll road
projects and one transit project. Three projects were for-profit
ventures financed with equity and debt while three were non-profit
ventures financed with tax-exempt debt.
Private sector sponsorship and investment in major projects has
resulted in advantages from the perspective of state and local
governments”such as completing projects more quickly”and trade-offs”
such as the political costs of relinquishing control over toll rates
and the contractual constraints to improving competing publicly owned
roadways. On one project, State Route 91 in California, this latter
constraint motivated the county government to purchase the road from
the private consortium.
The private sector encounters many challenges to becoming more
actively involved in highway and transit projects because of limited
opportunities and barriers to financial success. Currently 23 states
permit private participation while 20 of these allow it for highways.
Where state and local governments have elicited such participation, it
has occurred on mostly lower priority projects, such as toll roads
built in anticipation of future development. State and local
governments traditionally build and finance highway projects through
their capital improvement programs including using federal funds that
reimburse about 80 percent of the costs. While these governments could
open higher priority projects to private sector partners, they might
be wary of doing so since political costs such as the limited ability
to improve competing publicly owned roads would likely be greater.
While legislative proposals could encourage greater private
participation, private sponsorship seem best able to advance a small
number of projects”but seems unlikely to stimulate significant
increases in funding for highways and transit.
www.gao.gov/cgi-bin/getrpt?GAO-04-419.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact JayEtta Hecker, (202)
512-2834, heckerj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Active Private Sector Sponsorship and Investment in Major Highway and
Transit Projects Has Been Limited:
Private Sector Sponsorship of and Investment in Major Projects Has
Resulted in Advantages for State and Local Governments As Well As Some
Trade-Offs:
Challenges to Private Sector Involvement in Transportation
Infrastructure Include Limited Opportunities and Barriers to Financial
Success:
Legislative Proposals Could Provide Incentives for Eliciting Private
Sector Participation:
Concluding Observations:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Methodology for Estimating Revenue Loss on Tax Exempt
Bonds for Three Projects:
Appendix III: Selected Privately Sponsored Projects:
Dulles Greenway, Virginia:
California State Route 91 Express Lanes:
California State Route 125:
Southern Connector, South Carolina:
Pocahontas Parkway, Virginia:
Las Vegas Monorail, Nevada:
Appendix IV: Active Private Sector Sponsorship and Investment in Other
Countries:
Appendix V: Private Participation through Financing with Revenues from
the Value Created by Projects:
States' Sales or Leases of Surplus Land:
Special Tax Districts:
Developer-Funded Interchanges:
Appendix VI: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Tables:
Table 1: Summary of Privately Sponsored Highway and Transit Projects:
Table 2: Financing Arrangements for Privately Sponsored Projects:
Table 3: Elements of Legislative Proposals That Could Increase Private
Sector Sponsorship of and Investment in Highway and Transit Projects:
Table 4: Summary of Selected Privately Sponsored Projects:
Table 5: Cost of Financing the Dulles Greenway:
Table 6: Cost of financing the SR 91 Express Lanes:
Table 7: Cost of Financing SR 125:
Table 8: Cost of Financing the Southern Connector:
Table 9: Cost of Financing the Pocahontas Parkway:
Table 10: Cost of Financing the Las Vegas Monorail:
Figures Figures:
Figure 1: Six Major Projects Built with Active Private Sector
Sponsorship and Investment:
[See PDF for image]
[End of figure]
Figure 2: Traffic on the Pocahontas Parkway, a Stand-Alone Toll Road
Built in Anticipation of Future Growth and Development, Has Not Met
Expectations:
Abbreviations:
AB: Assembly Bill:
Caltrans: California Department of Transportation:
CTV: California Transportation Ventures:
CPTC: California Private Transportation Company:
DOT: U.S. Department of Transportation:
FD/MK: Fluor Daniel/Morrison Knudsen:
FHWA: Federal Highway Administration:
FTA: Federal Transit Administration:
GAO: U.S. General Accounting Office:
ISTEA: Intermodal Surface Transportation Efficiency Act of 1991:
LVMC: Las Vegas Monorail Company:
NHS: National Highway System:
OCTA: Orange Country Transportation Authority:
PPA: Pocahontas Parkway Association:
RTC: Regional Transportation Commission:
SANDAG: San Diego Association of Governments:
SCDOT: South Carolina Department of Transportation:
SIB: State Infrastructure Bank:
TEA-21: Transportation Equity Act for the 21st Century:
TIFIA: Transportation Infrastructure Finance and Innovation Act of
1998:
TRIP II: Toll Road Investors Partnership II, L.P.
VDOT: Virginia Department of Transportation:
WMATA: Washington Metropolitan Area Transit Authority:
Letter March 25, 2004:
Congressional Requesters:
Many in Congress, as well as many transportation stakeholders, believe
that more money needs to be spent to keep up with the country's highway
and transit needs. Proponents of this view cite estimates from the
Federal Highway Administration (FHWA), for example, that the nation
will need to spend, on average, about $76 billion (in 2000 dollars)--or
18 percent more than it spent in 2000--each year through 2020 just to
maintain the condition and performance of the nation's highways and
bridges, and about $107 billion (in 2000 dollars) or 65 percent more
than it spent in 2000 to efficiently improve the nation's highways and
bridges. These projections raise concerns because many analysts believe
that, in the years ahead, federal and state governments will face
serious budget deficits and a demographic tidal wave where mandatory
spending for Social Security and Medicare will command a greater share
of the nation's resources, overwhelming the funding available for
discretionary programs such as transportation. Consequently, many
transportation stakeholders have begun to look for ways to bridge a
potential gap between currently available resources and the costs of
building, maintaining, and improving the nation's highway and transit
infrastructure.
Congress is considering legislation reauthorizing the nation's highway
and transit programs during 2004, and many observers have suggested
that increased private sector participation and investment in the
transportation system could potentially help bridge this gap. State and
local governments have traditionally sought and used private sector
participation and investment to meet their highway and transit
infrastructure needs--these governments routinely contract, for
example, with private construction companies to build and maintain
roads and transit systems. In addition, they have sold billions of
dollars in bonds to private investors to finance construction and
maintenance of transportation projects. In 2001, state and local
governments owed about $104 billion in debt to the private sector for
transportation infrastructure projects. However, many observers
believe that even greater private sector participation in the
transportation system is possible. In particular, some observers point
to cases where state and local governments have encouraged active
private sector sponsorship of and investment in major highway and
transit projects--cases where the private sector has been the primary
stakeholder in designing, financing, constructing, operating, and
maintaining such projects.
You asked us to examine these particular cases where state and local
governments have used active private sector sponsorship and investment
on major projects. Our objectives were to (1) identify the extent to
which states have used active private sector sponsorship and investment
to finance and build major highway and transit projects and how that
sponsorship and investment was accomplished; (2) identify some
advantages, from the perspective of state and local governments, that
resulted from private sector sponsorship and investment in these
projects and what some of the trade-offs were; (3) determine challenges
that the private sector faced sponsoring and investing in these
projects; and (4) present pending legislation that could help increase
private sector sponsorship and investment in highway and transit
projects. In addition to these objectives, we also collected
information on (1) private participation and investment in selected
other countries, including Australia, Canada, and in Europe, and (2)
cases where the private sector provided funding in projects without
taking a direct sponsorship role, in the form of strategies for
capturing increased land values from projects. This additional
information can be found in appendixes IV and V.
To meet these objectives, we reviewed published information on private
sector participation and investment in the transportation sector in the
United States and internationally and met with bond market analysts,
investment bankers, bond insurers, economists, associations, FHWA, the
Federal Transit Administration (FTA), and other industry
representatives to obtain their views. We focused on cases where active
private sector sponsorship and investment had been used to build and
finance "major" projects, which we defined as highway and fixed
guideway transit projects with an estimated total cost of $100 million
or more.[Footnote 1] We identified six such projects, and for each we
met with project officials and officials from state and local
governments and reviewed pertinent program documentation. We did not
evaluate the social benefits and costs of these projects nor determine
whether these were projects that should or should not have been built.
We excluded privately owned roadways used to access commercial
properties such as vacation areas and privately owned bridges. We did
not review projects that were publicly financed or projects where
states or public entities such as turnpike authorities obtained private
investment to build or expand their systems. We examined program
documentation of FHWA's innovative financing initiatives and reviewed
surface transportation reauthorization legislative proposals. Our work
was performed from February 2003 through February 2004 in accordance
with generally accepted government auditing standards. For more
detailed information about our scope and methodology, see appendix I.
Results in Brief:
Active private sector sponsorship and investment has been used to a
limited extent in the United States to fund, construct, and operate
major highway and transit projects; as a consequence, the nation's
experience with active private sector sponsorship and investment has
been limited. We identified only six such major projects that have been
completed or started in the last 15 years--five toll road projects and
one transit project--which are shown in figure 1. To accomplish these
projects, states enacted or used existing legislation to authorize
private sector participation and awarded a franchise to a private
consortium to build the project and to own and operate it for a limited
time. Three of these consortia were private, for-profit companies that
invested equity and issued commercial debt to finance the project; the
other three were nonprofit corporations formed by the public and
private sectors, that issued tax exempt bonds to fund the projects. The
franchise agreements that states had with each of the consortia ranged
in length from 30 to 50 years and included, in four of the five toll
road projects, noncompete clauses whereby, for a specified period, the
states agreed not to build new roads or improve existing roads that
would compete with the toll road.
Figure 1: Six Major Projects Built with Active Private Sector
Sponsorship and Investment:
[See PDF for image]
[End of figure]
Private sector sponsorship and investment in major projects has
resulted in advantages from the perspective of state and local
governments--such as completing projects more quickly without using
traditional funding sources--as well as some trade-offs, including
political and financial costs. The privately sponsored toll road
projects that we identified had all been on their respective federally
required state transportation plans from 7 to 30 years and still had a
fairly low priority for completion when the private sector undertook
them. By eliciting private sector participation rather than using
funding from their highway capital improvement programs as originally
planned, state and local governments conserved their federal grants and
state tax revenues for other projects. Moreover, the respective state
governments were not responsible for the debt incurred by private
consortia and thus did not expose the states to risks if toll revenues
proved insufficient to meet debt service requirements. Active private
sector sponsorship and investment involved trade-offs for these
governments, however, as some states relinquished political control
over their ability to set toll rates and to carry out infrastructure
improvements on competing publicly owned roadways. On one of the five
highway projects, SR 91 in California, this latter constraint proved to
be too significant a trade-off to the county government, motivating it
to purchase the road back from the private consortium. In addition,
state and local governments have been responsible for some project-
related costs on five of the six projects we identified, such as
designing projects, acquiring rights of way, conducting environmental
assessments, or establishing new public institutions or arrangements to
accommodate the private consortia. Federal funding was used on three of
the projects. In addition, the three projects financed with tax-exempt
debt have resulted in foregone tax revenues to the federal government-
-and to a lesser extent the state governments. For example, we estimate
that, in 2003, the federal government had foregone a total of between
$25 million and $35 million in tax revenues. Finally, states can be
liable for costs if private entities encounter financial difficulty,
and might be liable for some or all of the cost of operating and
maintaining the toll road if a consortium went out of business.
Private companies encounter many challenges to becoming more actively
involved in highway and transit projects because there are limited
opportunities and barriers to financial success. Currently, 23 states
have legal authority for private sector participation in transportation
projects, while 20 of these have the legal authority to utilize private
sector participation in highway projects. Additionally, there is
significant political and cultural resistance to toll roads--the most
common way that the private sector generates revenues. Moreover, state
and local governments traditionally build and finance highway projects
through their capital improvement programs; federal grant funds are
available for eligible projects and pay 80 percent of the costs on most
projects. This can provide a powerful incentive to build these as
untolled roads.[Footnote 2] Where state and local governments have
elicited private sector sponsorship and investment, it has usually been
on lower-priority projects, such as those built in anticipation of
future growth and development. Three of the privately sponsored toll
roads we identified that have opened to traffic met these criteria, and
each has struggled financially because it did not achieve the level of
traffic expected when the anticipated development did not occur. Only
SR 91 in California, which was built in an already congested corridor,
has generated a profit. Furthermore, toll road projects require a
substantial initial investment of time and capital before construction
can begin. According to industry and bond market analysts, once
construction is completed, it can take up to several years before
traffic and revenue levels build to a level that allows a toll road to
break even and, in the case of for-profit toll roads, make a profit. In
addition, each of the toll road projects faced additional risks because
they were "stand-alone" toll roads that did not have the benefit of
being part of a turnpike or toll road authority that could have helped
absorb early losses. These problems may affect investors' willingness
to invest in similar projects in the future.
The federal government cannot, under the current design of the federal-
aid transportation program, directly provide opportunities for private
sector participation and investment, but it can provide incentives to
state and local governments to do so. Legislative proposals offered by
the administration, approved by the Senate,[Footnote 3] and considered
by the House--such as expanding the mileage of federally aided roadways
eligible for tolling or encouraging states to study the feasibility of
using toll financing to add new capacity--might serve to encourage
state and local governments to open high-priority projects in
established corridors to private sector partners, increasing the
chances that these ventures could be financially viable and making
future projects more attractive to private sector investors. Other
proposals would provide private for-profit firms access to tax exempt
debt similar to those instruments currently available for privately
financed housing, water, and other projects. While these proposals
would lower the cost of borrowing for private consortia, this may not
be enough to make stand-alone toll roads financially attractive.
Existing projects financed entirely with tax-exempt debt have struggled
when traffic projections have not met expectations. Absent fundamental
changes to current federal transportation programs, states are likely
to continue to devote significant funding including federal funds to
building untolled roads. Thus, under current conditions and
circumstances, private sector sponsorship and investment seems best
able to finance a relatively small number of projects but seems
unlikely to stimulate significant increases in the funding available
for highways and transit.
We provided a draft of this report to DOT for its review and comment.
DOT representatives generally agreed with the information in the
report. They also provided technical comments, which we incorporated as
appropriate.
Background:
In 2001, state and local governments, with federal assistance, spent
about $125 billion to build and maintain the nation's highways and
bridges and about $19 billion to build and maintain the nation's
transit systems. Of the $125 billion spent on highways and bridges,
about $66 billion was spent on highway capital projects.
Of the $66 billion spent on highway capital projects in 2001, almost
$30 billion was federal funding, obtained mostly through a series of
formula grant programs collectively known as the federal-aid highway
program. These grant funds are derived from motor fuel and other taxes
deposited into the Highway Trust Fund and made available to the states
by the Federal Highway Administration (FHWA) for capital projects, such
as new construction, reconstruction, and many forms of capital-
intensive maintenance. These funds are available for eligible projects
and pay 80 percent of the costs on most projects. States prepare
periodic transportation improvement plans for federal approval in
coordination with metropolitan planning organizations. These plans
include both highway and transit projects. Unlike the federal highway
program and certain other transit programs, under which funds are
automatically distributed to states on the basis of formulas, major
transit projects are primarily funded through the FTA's New Starts
program. The New Starts program requires local transit agencies to
compete for project funds based on specific financial and project
justification criteria. FTA assesses the technical merits of a major
transit project proposal and its finance plan and then notifies the
Congress that it intends to commit, subject to appropriations, New
Starts funding to certain projects through full funding grant
agreements. The agreement establishes the terms and conditions for
federal participation in the project, including the maximum amount of
federal funds--which by law must be no more than 80 percent of the
estimated net cost of the project, but in practice is often less than
that percentage.
About 437,000 of the nation's 4 million miles of roads are arterial
highway mileage, much of which is generally eligible for federal-aid
funding. Among these 437,000 miles are 4,611 miles of publicly owned
toll roads, representing about one percent of the nation's arterial
highway mileage. There are also 15 privately owned toll roads,
representing about 111 miles--10 of these are roadways used to access
properties such as vacation areas. In addition, there are 15 privately
owned toll bridges.
Private sector participation and investment in highway and transit is
not new. In the 1800s, private companies built many roads that were
financed with revenues from tolls, but this activity declined due to
competition from railroads and greater state and federal involvement in
building tax-supported highways. Private sector involvement in highways
was relegated to contracting with states to build the roads. In the
absence of private toll roads, states and local governments were
responsible for road construction and maintenance. In the 1930s many
states began creating public authorities that built toll roads such as
the Pennsylvania Turnpike that relied on loans and private investors
buying bonds to finance construction.
In 1916, the federal government began programs to provide funds for
states to develop their highways with passage of the Federal-Aid Road
Act. In the 1930s and 1940s, proposals were made for a national
interstate system of limited access highways to meet mobility and
national defense needs. Early proposals for this system included
provisions to build the highways as toll roads and finance them with
bonds sold to private investors. However, those plans were abandoned
and the Federal-Aid Highway Act of 1944 authorized construction of the
interstate highway system. The Federal-Aid Highway Act of 1956
established a tax-supported road system with revenues from motor fuel
taxes rather than from tolls and prohibited tolling on newly
constructed interstate highways. The funding levels achieved through
federal-aid highway cost-sharing arrangements with the states precluded
the need for private sector investment other than through bonds issued
by states to pay for construction.
By expanding applications for tolling, federal programs have gradually
become more receptive to private sector participation and investment.
The Surface Transportation and Uniform Relocation Assistance Act of
1987 allowed tolling non-Interstate roads, and construction costs for
these projects were eligible for a 35 percent federal-aid
match.[Footnote 4] In 1991, the Intermodal Surface Transportation
Efficiency Act (ISTEA) raised the federal share of construction costs
on toll roads to 50 percent and specifically included privately
operated toll roads as eligible. The National Highway System
Designation (NHS) Act raised the match. ISTEA also included a
congestion pricing pilot program that allowed for tolling both
Interstate and non-Interstate roads to reduce highway congestion. The
pilot program allowed up to five projects to participate. The
Transportation Equity Act for the 21ST Century (TEA-21) renamed the
program as a value-pricing pilot and expanded the number of projects
allowed to participate to 15. Fifteen roads currently participate in
this pilot. TEA-21 also created a pilot program for tolling interstate
highways. Under this pilot, states can toll interstates if the purpose
is to reconstruct or rehabilitate the road and the state could not
adequately maintain or improve the road without collecting
tolls.[Footnote 5] The pilot is limited to three interstates that are
to be in three different states. Currently, no states are participating
in this project. Both of these pilots allow the private sector to
participate.
In addition, the Transportation Infrastructure Finance and Innovation
Act of 1998 (TIFIA) created a new federal program to assist in the
financing of major transportation projects, in part by encouraging
private sector investment in infrastructure. TIFIA authorized up to
$10.6 billion in credit assistance over the fiscal year 1999 through
2003 period to stimulate capital investment in transportation
infrastructure by providing credit rather than grants to projects. The
TIFIA program offers direct loans with flexible repayment terms; loan
guarantees; and standby lines of credit during the first 10 years of
operations. TIFIA limits the amount of assistance to no more than 33
percent of total project costs.
The original term for the current surface transportation program
authorization under TEA-21 expired in September 2003.[Footnote 6] The
U.S. Department of Transportation's (DOT) proposal to reauthorize the
program is based on a set of core principles articulated by the
Secretary of Transportation in May 2002, which includes encouraging
greater private sector investment in the transportation system.
Additionally, reauthorization bills were introduced in both the Senate
and the House of Representatives. The administration bill proposed to
increase funding for surface transportation to $256 billion, an
increase of $38 billion over the $218 billion authorized in TEA-21, and
the bill approved by the Senate (S. 1072) would increase funding to
$318 billion, an increase of $100 billion over TEA-21. A House bill
(H.R. 3550) was under consideration at the time we concluded our
review.
Active Private Sector Sponsorship and Investment in Major Highway and
Transit Projects Has Been Limited:
Active private sector sponsorship and investment has been used to a
limited extent in the United States to fund, construct, and operate
major highway and transit projects. We identified six major projects--
five toll road projects and one transit project--where this occurred
during the last 15 years. To accomplish these projects, the states in
which these projects are located enacted or utilized existing
legislation enabling private sector participation and awarded a
franchise to a private consortium to build the project and to own and
operate it for a limited time. Three of these consortia were private,
for-profit companies that invested equity and issued debt to finance
the project, while the other three were nonprofit corporations formed
by the public and private sectors, which issued tax exempt bonds to
fund the projects.
Six Projects Have Used Active Private Sector Sponsorship and Investment
during the Last 15 Years:
GAO identified five major private toll road projects and one transit
project in the United States that used active private sector
sponsorship and investment. The highway projects were: State Route (SR)
91 Express Lanes in Orange County, California; SR 125 in San Diego
County, California; the Dulles Greenway between Dulles International
Airport and Leesburg, Virginia; the Pocahontas Parkway in Richmond,
Virginia; and the Southern Connector in Greenville County, South
Carolina. The transit project was the Las Vegas Monorail in Las Vegas,
Nevada. (See appendix III for a description of each of these projects.)
These projects are summarized in table 1.
Table 1: Summary of Privately Sponsored Highway and Transit Projects:
Project; Highway projects: Dulles Greenway Virginia;
Mileage: 14;
Arrangement: For profit;
Financing: Equity, commercial debt.
Project; Highway projects: State Route 91 Express Lanes California;
Mileage: 10;
Arrangement: For profit;
Financing: Equity, commercial debt.
Project; Highway projects: State Route 125 California (not yet open);
Mileage: 10;
Arrangement: For profit;
Financing: Equity, commercial debt, federal credit assistance (TIFIA),
federal funds, local government.
Project; Highway projects: Southern Connector South Carolina;
Mileage: 16;
Arrangement: Non- profit;
Financing: Tax exempt debt.
Project; Highway projects: Pocahontas Parkway Virginia;
Mileage: 9;
Arrangement: Non-profit;
Financing: Tax exempt debt.
Project; Transit projects: Las Vegas Monorail Nevada (not yet open);
Mileage: 4;
Arrangement: Non-profit;
Financing: In-kind contribution, tax exempt debt.
Source: GAO.
[End of table]
The states in which these projects are located enacted enabling
legislation authorizing private sector participation. Nevada passed
legislation specifically authorizing a private consortium to construct
the Las Vegas Monorail. Virginia passed the Virginia Highway
Corporation Act of 1988 and the Public Private Transportation Act of
1995, which allowed the submission of proposals involving private
sector participation and investment. The Dulles Greenway was built
under the 1988 law, and the consortium that built the Pocahontas
Parkway did so under the 1995 law. In 1989, California passed enabling
legislation, Assembly Bill (AB) 680, which authorized four
demonstration projects to be developed, constructed, and operated at
private sector expense. Two of the projects that we reviewed--SR 91 and
SR 125--were authorized by this legislation.[Footnote 7] In 1976, South
Carolina passed enabling legislation, which later allowed the private
development of the Southern Connector. Virginia has received proposals
for four other projects that could also involve active private sector
sponsorship and investment;[Footnote 8] no such plans are currently
under way in South Carolina. California has repealed the enabling
legislation created by AB 680.
Institutional arrangements:
The private consortia fall into one of two different categories--for-
profit and nonprofit. In the first category, private sector
participants generally formed special-purpose corporations and limited
partnerships for the sole purpose of building and operating the
project. For example, a partnership formed by a property owner in
Virginia, a U.S. developer, and an Italian firm involved in private
toll roads overseas built the Dulles Greenway, while State Route 125 in
California is being built and financed through a limited partnership
comprised of a pool of investors whose principal member is an
Australian firm with experience developing private toll roads overseas.
In the second category, investors and other individuals formed private,
nonprofit corporations to build and finance the projects. For example,
the Pocahontas Parkway Association and the Connector 2000 Association
are nonprofit corporations with obligations that are considered issued
on behalf of a governmental unit pursuant to IRS Revenue Ruling 63-20
(and are called "63-20 corporations"). As nonprofit corporations, they
can collect tolls to pay debt service on the road but cannot make a
profit--any excess revenue must revert to the state. The Pocahontas
Parkway Association was formed as a partnership between the state and
the investors and has a board of directors appointed by the
association, the Virginia Department of Transportation (VDOT), and the
developer. Similarly, the Las Vegas Monorail Company was formed under
Section 501(c) (4) of the Internal Revenue Code[Footnote 9] in order to
obtain tax-exempt financing to build the Las Vegas Monorail. The
corporation has a special governing board whose members are appointed
by the state, county, and the local metropolitan planning organization.
For each of these projects, the private and public sector entities
developed a detailed agreement outlining the responsibilities of each
party involved. These agreements varied but generally awarded a
franchise or concession from the state government to design, build,
own, and operate the project and collect tolls or fares for a period of
time ranging from 30 to 50 years, at which time ownership of the
project will revert to the state. In some cases, the private sector
consortia are responsible for all aspects of the operation and
maintenance of the road and perform those functions directly. For
example, the consortium that owns the Dulles Greenway performs its own
maintenance, such as snow removal, while in other cases the consortia
reimburse the states for providing those services. The consortium that
owns the SR 125 franchise will reimburse the state of California for
police services, and the Connector 2000 Association reimburses South
Carolina for maintenance services.
In addition to the franchise agreement, noncompete clauses have been
key components of agreements between states and the consortia, under
which the public sector agrees to varying degrees not to build any new
roads or improve any of the existing roads that may result in
additional capacity within a predetermined distance of the newly
constructed road for a certain period of time. Four of the five toll
roads we examined included noncompete clauses within their contracts.
In contrast, an official with the Dulles Greenway's private consortium
said that while the consortium did not have a noncompete clause in its
franchise agreement with Virginia, it understood that the state would
not build a competing road. Subsequent to the opening of the Dulles
Greenway, however, VDOT made improvements to a nearby alternate road
earlier than the consortium expected. A VDOT official said that these
improvements were planned but the timing was uncertain because
construction was dependent on available funding. According to a bond
rating agency, these improvements adversely affected the level of
traffic projected to use the toll road.
Financial Arrangements:
Each of the five toll road projects and the Las Vegas Monorail were
financed differently. As table 2 indicates, the for-profit toll roads
relied primarily on a combination of equity investments, market rate
debt, and other debt. For example, the private consortium that is
building the SR 125 project invested $160 million, borrowed $321
million from banks in other countries, and received a $140 million
TIFIA loan to finance that project. In contrast, the nonprofit toll
roads relied primarily on tax-exempt financing, with relatively small
amounts of state funding. For example, the Pocahontas Parkway
Association issued $354 million in tax-exempt debt and obtained an $18
million loan from the state of Virginia. The Las Vegas Monorail, also a
nonprofit, relied on a combination of equity contributions and tax-
exempt debt. Toll revenues will be used to repay debt for the toll
roads, while farebox and advertising revenues will be used to repay the
monorail's debt.
Table 2: Financing Arrangements for Privately Sponsored Projects:
Dollars in millions.
Dulles Greenway Virginia;
Equity: $40;
Commercial debt: $298[A];
Tax-Exempt debt: [Empty];
Other financing: [Empty].
State Route 91 Express Lanes California;
Equity: $20;
Commercial debt: $100;
Tax-Exempt debt: [Empty];
Other financing: $5.6 subordinated debt[B].
State Route 125 California;
Equity: $160;
Commercial debt: $321;
Tax-Exempt debt: [Empty];
Other financing: $140 TIFIA loan,[C] $81 federal funding, $20 local
funding.
Southern Connector South Carolina;
Equity: [Empty];
Commercial debt: [Empty];
Tax-Exempt debt: $200;
Other financing: $17.5 state contribution.
Pocahontas Parkway Virginia;
Equity: $5[D];
Commercial debt: [Empty];
Tax-Exempt debt: $354;
Other financing: $18 state loan.
Las Vegas Monorail Nevada;
Equity: [Empty];
Commercial debt: [Empty];
Tax-Exempt debt: $649;
Other financing: $81.
Source: GAO analysis of project documentation.
[A] Original financing arangements--project financing was restructured
in 1999.
[B] Subordinate debt has a lower priority for repayment than other
(i.e., commercial) debt.
[C] TIFIA loans are subordinate to commercial debt for repayment.
[D] Revolving line of credit to be used as debt service reserve fund.
[End of table]
All but one of the six projects reviewed received some type of public
sector subsidy that aided in the planning, financing, or construction
of the project. In one case, SR 125 in San Diego, the local government
funded a $101 million interchange that links the toll road to other
state roads.[Footnote 10] This interchange was part of the project's
original scope and is critical to the success of the highway. The SR
125 consortium also received a federal TIFIA loan. The SR 91 Express
Lanes were constructed in the median of an existing road on publicly
owned land. The Southern Connector and Pocahontas Parkway received
federal funds from the state for preliminary engineering and design
costs. The Pocahontas Parkway, the Southern Connector, and the Las
Vegas Monorail each benefited from tax-exempt debt financing. The
Dulles Greenway was the only project of the six that did not receive
public sector assistance or subsidies or any other type of public
support.
Private Sector Sponsorship of and Investment in Major Projects Has
Resulted in Advantages for State and Local Governments As Well As Some
Trade-Offs:
Private sector sponsorship of and investment in major projects has
resulted in advantages from the perspective of state and local
governments as well as some trade-offs. Major projects were built
sooner than if the private sector had not become actively involved.
States and localities were able to build the five toll road projects
without using their highway capital improvement program funding as
originally planned--as a result, these governments were able to
conserve resources such as federal grants and state tax revenues.
Moreover, state governments were not responsible for the debt incurred
to construct these projects and thus did not expose the states to
financial risks if toll revenues proved insufficient to repay the
outstanding bonds. These advantages were not without trade-offs. States
have assumed certain political costs, such as relinquishing control
over toll rates and reducing their ability to carry out infrastructure
improvements on certain publicly owned roadways. Projects financed with
tax-exempt debt resulted in foregone tax revenue on the interest on
that debt. State and local governments have also been responsible for
costs related to acquiring rights of way, or establishing new public
institutions or arrangements to accommodate the private consortia.
Furthermore, states assumed certain risks and responsibilities if the
private consortia were to go out of business.
Advantages of Private Sector Sponsorship of and Investment from the
Perspective of State and Local Governments:
Major projects that state and local governments wanted to build--and
that the federal government approved for funding--were built sooner
than they would have been had the private sector not become actively
involved. For example, the five private sector toll road projects had
all been on their respective federally approved state transportation
plans for periods ranging from 7 to 30 years and still had a fairly low
priority for completion when the private sector undertook them. State,
local, and federal officials with whom we spoke characterized these
projects as needed and worthy but as projects that the state and local
governments were either unable or unwilling to undertake for some time
because of resource constraints. According to these officials, private
sector sponsorship and investment were critical to advancing these
projects. For example, South Carolina authorized a private consortium
in 1998 to build the Southern Connector, which had been on South
Carolina's transportation plans since 1968, after a proposal in the
General Assembly to increase the motor fuel tax did not pass.
California officials told us that the state approved legislation in
1989 enabling private sponsorship of the SR 91 and SR 125 projects
because the state's poor budgetary and economic conditions precluded
public funding. According to a California Department of Transportation
(Caltrans) official, the state had identified the need to add lanes to
SR 91 in 1983 and had proposed adding High Occupancy Vehicle lanes in
1988. The SR 91 Express Lanes opened in 1995 but would likely not have
been built until 2001 without private sector involvement.
In addition to the toll road projects, the Las Vegas Monorail project
had been included in the region's transportation planning for 3 years
before a private consortium began advancing it. It is currently
expected to open in 2004. Had this project been publicly financed, it
would have likely sought federal funding through FTA's New Starts
program. As we have previously reported, the New Starts Program is very
competitive because more state and local transit agencies than ever are
seeking Full Funding Grant Agreements from FTA.[Footnote 11] Had the
project sought a Full Funding Grant Agreement, it would have then been
subject to extensive federal requirements, including environmental,
public outreach, and strict project readiness, financial, cost-
effectiveness, and land use criteria prescribed in law. According to
FTA, meeting these requirements would likely have lengthened the
project's schedule. In addition, funding would have been subject to the
congressional appropriations process.
By relying on private sector sponsorship of and investment to build the
roads rather than financing them as originally planned, the states
conserved funding from their highway capital improvement programs for
other projects. Four of the five toll roads were originally planned as
untolled roads funded from states' highway capital improvement
programs. The states could have undertaken these projects as toll road
projects themselves, by borrowing to build the road and then charging
tolls to pay back the debt. However, by engaging the private sector,
the states avoided the up-front costs of borrowing needed to bridge the
gap until toll collections became sufficient to pay for the cost of
building the roads and paying the interest on the borrowed funds.
Moreover, none of the bonds that the private consortia have issued for
these projects counted against the legislative or administrative limits
that govern the amount of outstanding debt that states are allowed to
have. As such, to the extent that states were constrained by these
limits, engaging private sector sponsorship and investment also enabled
the states to devote more of their debt capacity to financing other
projects.
Finally, private sector sponsorship of and investment in these projects
had the advantage, from the perspective of state and local governments,
of limiting these governments' exposure to risks associated with
acquiring debt. The debt incurred by private consortia to construct
these six projects was not backed by their respective state
governments, and thus did not expose the states to liability for the
debt should toll revenues prove insufficient to meet the debt service
requirements on the outstanding bonds. For example, when the Dulles
Greenway defaulted on its debt in 1996, Virginia was not liable for the
debt, nor did the debt affect the state's credit rating. Similarly,
both the Pocahontas Parkway's and Southern Connector's bond ratings
have been lowered to below investment grade; however, this has had no
effect on either Virginia's or South Carolina's credit ratings.
Trade-offs from the Perspective of State and Local Governments of
Private Sector Sponsorship and Investment:
Projects involving private sector involvement have resulted in some
trade-offs for federal, state, and local governments. These trade-offs
include political costs that limited states' accountability and
flexibility. On the three projects owned and operated by for-profit
consortia, states generally relinquished control over toll rates. For
example, the consortium that owned the SR 91 Express Lanes had complete
control over the toll rates, as will the consortium that owns SR 125
when that road opens in 2006. In Virginia, while the Dulles Greenway
has a toll ceiling approved by the state, the toll road has been able
to adjust its tolls within that ceiling without state approval. The
goal of private entities is to maximize their profit, which could
conflict with state or local governments' desire to limit or control
the amount and frequency of toll increases.
States have also lost the flexibility to carry out infrastructure
improvements on some publicly owned roadways through noncompete clauses
contained in franchise agreements. In one project--the SR 91 Express
Lanes--this loss of flexibility eventually led the public sector to
purchase the road from the private consortium. The language in the
noncompete clause for the SR 91 Express Lanes in Orange County,
California, effectively prevented the state from improving the
nontolled freeway lanes of SR 91 until 2030--the term of the franchise
agreement--and was the subject of litigation and considerable public
outcry. As a result, the Orange County Transportation Authority bought
the road back from the private developer even though it was profitable.
California subsequently took steps on the SR 125 project to ensure that
the language in the noncompete clause allowed the state sufficient
flexibility to make needed improvements to other roads while also
protecting the private sector developer. If California makes any
improvements that are not in its current long term transportation plan,
the state will need to compensate the developer for lost revenues
caused by those improvements. According to state and private officials,
this agreement provides the state flexibility to make improvements
currently planned, but will require the state to pay the private
consortium for improvements beyond those that were already planned.
Projects involving private sector involvement have also resulted in
foregone tax revenue to the federal government--and to some extent
state governments. Three of the six projects were financed with tax-
exempt debt. In 2003, for example, the outstanding value of bonds that
were being used to finance the Pocahontas Parkway, Southern Connector,
and Las Vegas Monorail totaled about $1.2 billion. We estimated that in
2003 the tax exemption for the interest on these bonds likely cost the
federal government between $25 million and $35 million. In addition,
South Carolina's and Virginia's state tax exemptions for the interest
paid to in-state purchasers likely cost those two states a total of
approximately $1 million to $3 million in 2003. Nevada has no state
income tax.[Footnote 12]
State and local governments have also been responsible for some aspects
of projects' costs, such as acquiring rights of way, performing
environmental work, or taking on some other aspects of the project. For
example, Virginia completed the environmental work for the Pocahontas
Parkway before the private sector became involved in the project.
Orange County had completed the environmental work for the SR 91
Express Lanes before the private sector became involved, and California
owned the rights of way on which it was built. States also used federal
funding for the Southern Connector, Pocahontas Parkway and the
interchange for SR 125. The consortium building SR 125 also received a
TIFIA loan to help finance the project. In addition, state governments
have incurred costs to establish new institutions or arrangements
created to accommodate the private sector. Nonprofit corporations
formed for the tax-exempt toll roads required legal arrangements to be
separate from state governments and to ensure their tax-exempt status.
According to a former VDOT official involved with the Pocahontas
Parkway project, creating the nonprofit corporation was a complicated
process that took considerable time and effort. In California, billing
and accounting systems had to be established on the SR 125 project to
ensure that the state was properly reimbursed for property acquisition
and other work it did on behalf of the private consortium and that
public and privately funded segments of the project were kept separate.
According to California DOT officials, this was a costly, complicated,
and time-consuming process.
While private sector sponsorship and investment has limited state and
local governments' exposure to some risks, states can be liable for
costs if private entities encounter financial difficulty, particularly
on toll roads where traffic and revenue is less than expected. For
example, when the Pocahontas Parkway opened, Virginia agreed to pay for
the costs of operating and maintaining the road with the expectation
that the toll road would eventually have sufficient revenues to pay for
them itself, as well as reimburse Virginia for the costs it has paid to
date. The toll road has not generated sufficient revenues to reimburse
VDOT any of these costs, which totaled $2.8 million as of the state
fiscal year ending June 2003. In addition, if a consortium went out of
business before the franchise agreement expired, the state may be
liable for some or all of the cost of operating and maintaining the
toll road. Whether a state can recoup costs from tolls depends on the
terms of the franchise agreement. For example, in the case of the
Pocahontas Parkway, the state would have to use toll revenues to pay
debt service first, before operations and maintenance. Other projects
may have different arrangements. For example, in the case of the
Southern Connector, the toll revenues would have to be used to cover
items such as operating costs and debt service before expenses such as
maintenance costs. However, a state might be able to avoid incurring
additional costs by granting a franchise to operate the toll road to a
new consortium.
Challenges to Private Sector Involvement in Transportation
Infrastructure Include Limited Opportunities and Barriers to Financial
Success:
Private sector consortia have had limited opportunities to participate
in transportation infrastructure and have faced barriers to financial
success. Limited opportunities exist because only some states have the
legal authority to permit or encourage private sector sponsorship and
investment. Additionally, political and cultural resistance to tolls
has influenced states to avoid their use. Moreover, the projects
offered to private consortia were generally of a lower priority. When
the private sector had the opportunity to participate in projects, it
encountered barriers to financial success. These projects require a
substantial investment of time and capital many years before
construction begins and traffic and revenues are sufficient for the
roads to be financially successful. These toll roads can also compete
with tax-supported roads not subject to tolls. Further, investors were
at increased risk because all of the toll roads we reviewed were
"stand-alone" toll roads (roads that were not part of a turnpike or
toll road authority), and four of these were built or are being built
in anticipation of future development. For the three roads already
built, development has not occurred as expected and, consequently, the
roads have struggled financially. The problems faced by these stand-
alone toll roads may affect investors' willingness to invest in similar
projects in the future.
Limited Opportunities for Private Sector Participation:
The private sector has had limited opportunities to participate and
invest in highway infrastructure projects. For example, according to an
analysis prepared by a law firm that represents various state and local
transportation agencies involved in projects utilizing private sector
participation,[Footnote 13] 23 states currently have legal authority
for private sector participation in transportation projects. Of these
23 states, however, 20 have legal authority to utilize private sector
participation in highway projects.[Footnote 14] Among these, Washington
only allows six demonstration projects and in Arkansas, the law only
applies to projects along bodies of water. In Florida the state
legislature must specifically authorize each project. However, in most
states with this authority, state officials can, in general, approve
the projects through their normal processes and operations. For
example, the Pocahontas Parkway project was initiated when a consortium
submitted a proposal for the road to Virginia's transportation
department under the state law allowing private sector involvement in
transportation projects. In addition, the toll roads in California, SR
91 and SR 125, became private ventures through special legislation
authorizing four toll road projects.[Footnote 15] According to one
industry official, the lack of specific legislation authorizing private
sector participation requires any type of "special" project, such as a
private sector transportation project, to get approval through the
state legislature, which is difficult to do.
Other legal restrictions also limit opportunities for the private
sector. One contracting method, design-build,[Footnote 16] is favored
by consortia and, according to FHWA officials, promotes private sector
sponsorship and investment because it provides that the consortium that
designed the project will also construct it, thereby minimizing the
financial risks. Design-build--or a form of it--was used in all of the
projects we examined.[Footnote 17] Although FHWA allows the use of
design-build for federal projects, not all states allow its use for
highways. According to a study prepared by a law firm involved in
projects using design-build, 32 states have laws allowing the use of
design-build, and 28 of these allow its use in highway
projects.[Footnote 18] Moreover, the laws in 4 of these 28 states limit
the use of design-build to pilot programs or to a very small number of
projects.
Political and cultural resistance to tolls has also limited states'
willingness to use toll roads and, because toll roads are the most
common way the private sector recoups its investment in highways, this
resistance limits private entities' opportunities. Political
resistance to tolling is also reflected in the design of the federal-
aid highway program, which as early as 1916 prohibited the use of tolls
on federally funded roadways. Currently, tolling on the Interstate
Highway System is prohibited except for the two pilot programs that
allow tolling of interstates in limited situations--the value pricing
pilot established in 1991 and the Interstate tolling pilot authorized
in 1998. According to a 1997 Congressional Budget Office
report,[Footnote 19] while motorists are willing to pay tolls if they
see a clear benefit such as avoiding congestion or saving time, people
generally oppose tolls because they perceive that motor fuel taxes and
other fees should be sufficient to meet highway needs. According to
state and local officials we spoke with in California, the state has
very few toll roads because the popular opinion in California is that
roads should not be tolled. The few toll roads that exist have met with
strong public resistance, and most have struggled financially. The SR
91 Express Lanes in Orange County reached traffic and revenue
expectations and was successful, but the project had to overcome
considerable resistance from neighboring Riverside County because
residents believed that they were paying twice for the road--once
through their taxes and then again with the toll. In addition, the
Southern Connector in South Carolina has lower traffic than expected.
According to a local official, people in that area of the state are not
used to toll roads and consequently resist paying to use the road.
Opportunities for the private sector to participate and invest have
also been limited because states have generally offered the private
sector only certain projects--and generally these have been low-
priority projects where traffic growth is anticipated but not yet
realized. For example, all five of the private toll projects that we
examined had been in their respective state plans for 7 to 30 years
before they were turned over to private consortia. With one exception,
all of these roads were undertaken in anticipation of future
development. The one exception, the SR 91 Express Lanes, was built to
relieve congestion. On the other hand, states have traditionally
financed their high priority projects--such as those in heavily
traveled areas that could produce substantial toll revenues--with funds
from their own highway programs. States have chosen to give priority to
these projects and to dedicate funding from states' highway capital
programs, including the federal-aid highway program apportionments.
This apportionment has usually been used to pay 80 percent of a
project's cost and gives states the incentive to continue to fund their
high-priority projects through the federal-aid program because states
need to provide only 20 percent of the cost from state funds.
Barriers to Financial Success:
Even where opportunities for participation and involvement have
emerged, private consortia have faced additional barriers to achieving
financial success. For example, these projects require significant
investment in time and capital long before any revenues can be expected
or before there is even an assurance that the project will go forward
at all. For example, it took more than 10 years for the private sector
consortium originally involved in SR 125 to satisfy environmental
requirements. The environmental work had to be complete before
construction could begin--and before revenues were generated. For
another example, the private consortium that built the Dulles Greenway
acquired the right of way on its own. An official with the consortium
told us that this was much more costly than if the state had acquired
it because of the state's power of eminent domain. Furthermore, private
consortia run the risk that after significant expenditures, the project
still may not be authorized to go forward. For example, according to
FHWA and local officials, the first consortium for SR 125 spent more
than $30 million dollars over 10 years and had not obtained final
approval to proceed with construction. Little progress had been made,
and one of the members withdrew from the consortium, in part because of
the investment in time and money without any return. Consequently, when
another consortium made an offer to purchase the franchise, the first
group accepted their offer.
Once a toll road is built, it can take time for it to break even and,
in the case of for-profit toll roads, make a profit. Because a
substantial number of high-priority roads are built with state highway
capital program and federal money, private entities operating toll
roads have competed with tax-supported roads that the public generally
perceives as "free." For example, the Southern Connector has struggled
financially, and state and toll road officials attribute the low
revenues, in part, to the public's aversion to paying tolls. In order
for a toll road to attract enough motorists to be profitable, it must
offer them enough of a benefit, such as saving time, to overcome their
aversion to paying tolls. This situation is most likely to occur in
corridors that are already congested. In such cases, motorists are more
likely to be willing to pay tolls to benefit from the time savings that
a new road or new lanes could offer. Similarly, an official with the
Dulles Greenway indicated that traffic on that toll road declined after
Virginia improved a nearby road that was not tolled.
All five of the toll roads we reviewed are stand-alone toll roads,
which are not part of a turnpike or toll road authority. According to
bond rating agencies, toll road authorities are better able to absorb
the impact of a new toll road that needs to build traffic and revenue
levels because they can support the new road with revenues from several
different toll roads, many of which have been in existence for many
years. In contrast, stand-alone toll roads do not have the luxury of
being part of a system; they do not have other toll roads that can
absorb the low revenue levels during the early years of operation. As a
result, these toll roads have a limited source of revenue with which to
pay for debt service, as well as operations and maintenance.
Four of the five toll roads have faced an additional barrier to
financial success because they were or are being built in anticipation
of future growth and development. The Pocahontas Parkway, the Southern
Connector, and the Dulles Greenway are open to traffic, and each has
struggled financially because the expected level of traffic has not
been achieved. For example, the Pocahontas Parkway outside of Richmond,
Virginia, was built at a cost of $377 million and opened to traffic in
2002 with the expectation that additional industry--and corresponding
traffic--would develop along the James River. Such development has not
occurred, and the traffic along this road has been lower than expected,
resulting in lower than expected revenues. According to one of the bond
rating agencies, lower than expected regional economic growth has
negatively affected forecasted traffic. The Southern Connector has also
not achieved expected levels of traffic and revenue because development
along its rural route has been slow. As a result, bond-rating agencies
have downgraded ratings on both toll roads' bonds. Similarly, the
Dulles Greenway, a for-profit toll road that opened in 1995, has yet to
make a profit. The fourth road, SR 125, is also a stand-alone toll road
that is being built in anticipation of future growth and development
and is scheduled to open in 2006. According to an FHWA official, the
traffic studies for this project may be optimistic because, while they
are based on anticipated development in San Diego County, they are also
based on traffic from Mexico that may not materialize if anticipated
development south of the Mexican border does not occur. SR 91, the only
toll road that was built to relieve existing highway congestion, rather
than in anticipation of future development, has been profitable.
Figure 2: Traffic on the Pocahontas Parkway, a Stand-Alone Toll Road
Built in Anticipation of Future Growth and Development, Has Not Met
Expectations:
[See PDF for image]
Note: Photograph taken on August 21, 2003, at 12: 30 p.m.
[End of figure]
The problems faced by these stand-alone toll roads may affect
investors' willingness to invest in similar projects in the future.
When traffic projections and revenues do not meet expectations,
bondholders face the possibility of taking a loss on their investments
because the bondholders have no recourse to either state or local
governments. According to officials from a bond insurance company, when
projects such as stand-alone toll roads default on bonds, or experience
financial difficulty, the prospects for financing future projects of
that type can be uncertain. For example, according to a bond market
analyst, when the bond ratings for Pocahontas Parkway and the Southern
Connector were lowered, the value of the tax-exempt bonds used to
finance the projects dropped by more than 50 percent. Although any
investment carries risks, bond analysts indicated that the information
available to individual investors was limited, and they were unaware of
all of the circumstances surrounding these two toll roads. They said
that in the future, they would require much more information before
recommending investments in bonds for this type of project.
Legislative Proposals Could Provide Incentives for Eliciting Private
Sector Participation:
Legislative proposals offered by the administration, approved by the
Senate, and considered by the House during the 108TH Congress could
help provide incentives for state and local governments to seek private
sector sponsorship of and investment in highways and transit. (See
table 3.):
Table 3: Elements of Legislative Proposals That Could Increase Private
Sector Sponsorship of and Investment in Highway and Transit Projects:
Element of Proposal: Tolling;
Summary:
* Change the Interstate System Rehabilitation and Reconstruction Pilot
Program requirement that tolls be the only way to improve the highway
to a relaxed requirement that tolling be most efficient, economical,
or expeditious way to advance project;
* Authorize states to establish variable toll pricing programs for
specified highways and allow tolling interstate highways to manage
congestion or reduce emissions in any areas not meeting the air
quality standards of the Clean Air Act;
* Modify prohibitions on tolling Interstate Highways System to permit
states, or public or private entities designated by a state, to
collect fees to fund interstate highway expansion to reduce traffic
congestion;
* Require the Secretary of Transportation, for any federal-aid project
estimated to cost $50 million or more, to study the feasibility of a
toll road and the financial advisability of privatizing its
construction, maintenance, and operation.
Element of Proposal: Bonds;
Summary:
Provide private for-profit firms access to tax-exempt debt in the form
of qualified private activity bonds to finance highways.
Element of Proposal: Other assistance;
Summary:
* Relax TIFIA provisions to lower the project cost threshold from $100
million to $50 million and remove restrictions on when the TIFIA line
of credit can be accessed;
* Establish a Public Private Partnership Pilot Program to demonstrate
the advantages of public private partnerships for capital projects and
provide funding to assist in the development phase of 10 or more
projects.
Source: GAO.
[End of table]
The Interstate System Rehabilitation and Reconstruction Pilot Program,
established in 1998 under TEA-21, gave states the authority to toll
interstate highways to finance capacity or other major improvements for
three projects and allow private sector participation in those
projects. Currently no projects are participating in the pilot, but
Virginia has applied to participate. Changing the pilot program
requirements could stimulate additional private sector interest in
interstate toll roads because it makes it easier for states to justify
tolling interstate highways. However, the program is still limited to a
total of three projects. Because interstates have not been tolled
previously, and because the existing Interstate Tolling Pilot Program
has not been used yet, there is no evidence that states would avail
themselves of this opportunity and no track record to reliably predict
the potential success of private sector sponsorship and investment.
Political and cultural resistance could likely be high for an action
that would dramatically change long-standing policy.
Under other proposals, states would be authorized to establish variable
toll pricing programs for highways, bridges, and tunnels, including
interstates. These proposals would repeal the previous value pricing
pilot program, and many interstate highways could become eligible for
tolling. Interstate construction projects with a variable pricing
component could have a greater chance of financial viability--and thus
increase the incentive for the private sector to become involved--
because the purpose of tolling would be to relieve congestion.
Nevertheless, this proposal might not increase sufficient opportunity
to warrant private sector interest and investment nor would states
necessarily see an advantage to it.
Another proposal introduced during the 108TH Congress would authorize
fees to be collected on new lanes until the project was complete and
the construction, debt service, and other costs specified in the
proposal, including maintenance, were paid. Existing lanes could not be
tolled. This proposal could result in increased private sector
involvement in toll road projects because private sector investment
would be dependent on toll revenue and the traffic and revenue
projections would likely be predictable in a high-traffic corridor. A
further provision would require that states consider tolling in order
to receive federal funding. This could also provide states with an
incentive to consider involving the private sector in transportation
projects.
Other proposals would expand access to tax-exempt debt in the form of
qualified private activity bonds for financing highways. These
proposals would allow states to issue tax-exempt debt for projects
involving private consortia. Private activity bonds are currently
available for privately financed housing, water projects, rail, and
other qualified activities, but highway projects have not been
eligible. States currently have the ability to access the tax-exempt
market for highways by creating nonprofit entities such as turnpike
authorities or special purpose entities. These proposals would allow
private for-profit companies to benefit from tax-exempt debt, thus
lowering the costs of borrowing, compared with commercial debt, and
would, according to DOT, obviate the need for states to create special-
purpose entities such as the Pocahontas Parkway Association.
Nevertheless, lower interest rates may not be enough to make stand-
alone toll roads financially attractive. The Pocahontas Parkway and
Southern Connector, for example, were financed almost entirely with
tax-exempt bonds and still have struggled because traffic projections
have not met expectations. In addition, increasing the use of tax-
exempt bonds would result in lost federal tax revenue and would be an
indirect federal subsidy for the highway program. While this loss in
tax revenue could be offset by economic activity that generates new
revenue, it could also divert investment from another sector of the
economy, negating the new revenue generated.
Proposals made to relax some of the provisions of the TIFIA program
could make it more attractive to private sector investors. Lowering the
project threshold would allow more projects to become eligible for
TIFIA financing. Removing restrictions on accessing the TIFIA line of
credit would also give other lenders more security and could help
reduce the interest rates charged on senior debt for the projects.
However, allowing access to the line of credit sooner could allow a
project that is already struggling financially to incur additional
debt, thus exposing the government to greater losses should the project
ultimately fail.
Concluding Observations:
Opportunities for the private sector to participate in and invest in
funding, constructing, and operating major highway and transit projects
has been limited; as a consequence, the nation's experience with active
private sector sponsorship and investment has also been limited. For
any state or local government, the decision to involve the private
sector begins with an assessment of the benefits and costs of a
particular project and a decision, through the planning process, as to
whether that project should or should not be built. If a project is
deemed needed and worthwhile, governments will weigh, particularly in
the case of highway projects, whether to use federal grant funds and
finance these projects through their capital improvement programs, or
to undertake them as toll road projects. If they decide to take the
latter approach, they will also face a decision about whether to build
the road themselves, by borrowing the money and charging tolls to pay
back the debt, or to seek active private sector participation to fund,
construct, and operate the toll road. The decision to engage the
private sector would likely rest on whether state and local government
officials conclude that the advantages of engaging the private sector
are more appealing than the trade-offs, such as the political costs of
relinquishing control over toll rates and the ability to improve
publicly owned roadways.
The reality is that few state and local governments have come to that
decision. We identified only six such cases, and one of these, the Las
Vegas Monorail transit project, presents a special case that may never
be replicated because it is rare that expected farebox and advertising
revenues are sufficient to cover debt service, operations, and
maintenance costs. State and local governments traditionally build and
finance highway projects using their federal-aid grant funds that pay
around 80 percent of the costs of construction. These funds provide a
powerful incentive to build these projects as untolled roads. This is
reflected in the fact that fewer than 5,000 miles of the nation's
437,000 arterial road mileage--about one percent--is tolled. In four of
the five cases where decisions have been made to build toll roads and
to invite active private sector sponsorship and investment, state and
local governments offered lower-priority projects to the private sector
to be built in anticipation of future growth and development. When
growth and development did not occur as projected, the projects
struggled financially. As a result, taken collectively, the limited
record of privately sponsored highway projects has not been successful.
By opening high-priority projects in established corridors to private
sector partners, state and local governments could potentially increase
the chances that these ventures could be financially viable and make
future projects more attractive to private sector investors. These
projects in established corridors might also face less public
opposition to tolling if they provided motorists with tangible
benefits, such as avoiding traffic congestion and saving time. But
state and local government decision makers might be wary of eliciting
private sponsorship of such projects because the political costs of
relinquishing control over toll rates and the ability to improve
publicly owned roadways would likely be greater for higher-priority
projects. These decision makers might well conclude that it is simply
more advantageous for state and local governments to undertake these
projects as either untolled roads or to build toll roads through public
agencies such as turnpike authorities.
Under the current federal-aid program design, the federal government
cannot directly provide opportunities for the private sector to
participate. Therefore, expanding opportunities for private sector
participation would require legislative and executive action by a
multiplicity of federal, state, and local governments. The federal
government can provide incentives, however, and some legislative
proposals--such as expanding the mileage of federally aided roadways
eligible for tolling or encouraging states to study the feasibility of
using toll financing to add new capacity--might serve to encourage
state and local governments to look to the private sector when
addressing its critical highway infrastructure needs. However, absent
fundamental changes to current federal transportation programs, states
are likely to continue to devote significant funding, including federal
funds, to building untolled roads in local traffic corridors. Thus,
under current conditions and circumstances, private sector sponsorship
and investment seems best able to finance a relatively small number of
projects but seems unlikely to stimulate significant increases in the
funding available for highways and transit.
Agency Comments and Our Evaluation:
We provided a draft of this report to DOT for its review and comment.
In February and early March 2004, DOT provided comments from
representatives of FHWA, FTA, the Office of the General Counsel, the
Office of Budget and Financial Management, and the Office of the
Secretary of Transportation. In general, these representatives agreed
with the information presented in this report and provided other
technical comments, which we have incorporated as appropriate. FHWA
officials commented that while they agree with our discussion of active
private sector sponsorship and investment in highway and transit
projects, they believe that limited experience to date may not reflect
future interest on the part of some states. In particular, FHWA
officials believe that some states may be willing to explore
arrangements other than those that have been used to date, including
greater sharing of financial commitments between the public and private
sectors. FHWA officials also stated that highway spending and revenues
will be constrained in the future and that this may cause states to
look more closely at private sector participation.
We continue to believe that under current conditions and circumstances,
active private sector sponsorship and investment seems unlikely to
stimulate significant increases in the funding available for highways
and transit. While we agree that the limited experience to date may not
reflect future interest on the part of some states, the many barriers
and challenges we have cited in this report would still need to be
overcome in order for significantly increased private sector
sponsorship and investment to occur. While states may seek alternatives
in a financially constrained environment, we would note that surface
transportation spending has been constrained for some time when
compared to the investment needs outlined by DOT and that all
reauthorization proposals being considered in 2004--including the
administration's proposal--envision federal funding increases and real
growth over the amounts authorized in TEA-21. Therefore, we believe
that states are likely to continue to devote significant funding,
including federal funds, to building untolled roads. Finally, we
acknowledge that, in addition to the active sponsorship and investment
that was the focus of this report, many other models of private sector
participation exist, such as those where states or public entities such
as turnpike authorities issue bonds to obtain private investment to
build or expand their systems. These arrangements--and the present or
future interest of the states in them--were beyond the scope of this
review.
We are sending copies of this report to the Secretary of
Transportation. We also will make copies available to others upon
request. In addition, the report will be available at no charge on the
GAO Web site at [Hyperlink, http://www.gao.gov].
If you have any questions about this report, please contact me at
[Hyperlink, heckerj@gao.gov] or (202) 512-2834 or Steve
Cohen at [Hyperlink, cohens@gao.gov] or (202) 512-4864.
GAO contacts andacknowledgments are listed in appendix VI.
Signed by:
JayEtta Z. Hecker, Director, Physical Infrastructure:
List of Congressional Requesters:
The Honorable Charles E. Grassley:
Chairman:
Committee on Finance:
United States Senate:
The Honorable James M. Inhofe:
Chairman:
Committee on Environment and Public Works:
United States Senate:
The Honorable Max S. Baucus:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable James M. Jeffords:
Ranking Minority Member:
Committee on Environment and Public Works:
United States Senate:
The Honorable Don Young:
Chairman:
Committee on Transportation and Infrastructure:
House of Representatives:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
The objectives of this report were to 1) identify the extent to which
states have used active private sector sponsorship[Footnote 20] and
investment to finance and build major highway and transit projects and
how that sponsorship and investment was accomplished; 2) identify some
advantages, from the perspective of state and local governments, that
resulted from private sector sponsorship and investment in these
projects and what some of the trade-offs were; 3) determine challenges
that the private sector faced sponsoring and investing in these
projects; and 4) present pending legislation that would help increase
private sector sponsorship and investment in highway and transit
projects.
To identify the extent to which states have used private sector
sponsorship and investment to finance and build major highway and
transit projects, we examined program documentation of FHWA's
innovative financing initiatives and interviewed FHWA officials. We met
with officials from transportation industry associations and with bond
market analysts, investment bankers, bond insurers, and economists to
obtain their views on public/private partnerships in the transportation
sector in the United States and internationally. To identify projects
in the United States that involved private sector sponsorship and
investment, we met with officials from highway and public/private
partnership associations and FHWA, reviewed published literature and
FHWA reports, and searched the Internet. From this work we identified
five major toll road projects and one transit project. There is
currently no standard definition of what constitutes a "major" project.
This definition has been applied to projects with a total cost of as
little as $10 million and as much as $1 billion. DOT has recently
proposed using $100 million as the major project threshold for its
financial planning and reporting requirements under 23 USC 106, and
therefore we have used that threshold for this report. The projects
that met this threshold included the Dulles Greenway and the Pocahontas
Parkway in Virginia, the Southern Connector in South Carolina, the
State Route 91 Express Lanes and State Route 125 in California, and the
Las Vegas Monorail in Nevada. We omitted a private toll road in Texas,
the Camino Columbia toll road, because the construction cost ($50.1
million) did not exceed the $100 million threshold we had established
for selection. We also excluded privately owned roadways used to access
commercial properties such as vacation areas and privately owned
bridges. Because our focus was on private sector sponsorship and
investment, we did not review projects that were publicly financed or
projects where states or public entities such as turnpike authorities
issued bonds to obtain private investment to build or expand their
systems. To review and document the origins, scope, and financial and
institutional arrangements for each project, we contacted state and
local government officials, private sector project sponsors, and FHWA
or FTA officials as appropriate, and obtained project development and
financial plans. We also used this information to calculate the cost of
each project. For the purposes of this study, we included project
construction and development costs, including financing
costs,[Footnote 21] which would have to be repaid from revenues.
To identify advantages and trade-offs, we interviewed state and local
government transportation officials as well as bond market analysts,
investment bankers, bond insurers, and economists to obtain their views
on the advantages that accrued to state and local governments from
private sector participation and investment in highway projects. We
reviewed published reports and obtained documentation of federal
agencies' positions on pending proposals that could have an effect on
financing private transportation projects. We also performed an
analysis of the costs to the government when tax-exempt debt was used
to finance highway projects. We computed the potential loss in federal
and state tax revenues resulting from the use of tax-exempt debt to
finance three of the projects we reviewed--the Pocahontas Parkway, the
Southern Connector, and the Las Vegas Monorail. See appendix II for a
detailed discussion of this analysis. We did not evaluate the social
benefits and costs of these projects nor did we determine whether these
were projects that should or should not have been built. Moreover, we
did not conduct a comprehensive cost-benefit analysis to quantify the
benefits and costs, both public and private, of these projects and
their relationship to each other.
To determine challenges to private sector sponsorship and investment,
we reviewed federal legislation and regulations that affect private
sector involvement in transportation projects, as well as state laws
and published reports that identified states that had passed
legislation permitting private sector participation and investment in
transportation projects. We also interviewed officials from
transportation industry associations, bond market analysts, investment
bankers, bond insurers, and economists to identify and discuss
challenges that the private sector faced in the projects we reviewed.
We also raised the issue of challenges to sponsorship with project
developers and with state and local government officials at each of the
projects we visited. To identify states with legal authority to utilize
private sector financing and design-build construction, we relied upon
recent legal analyses by Nossaman, Gunther, Knox, and Elliott, LLP, a
law firm that represents various state and local transportation
agencies involved in projects utilizing private sector participation.
We verified the statutory references within the analyses provided to us
by the law firm, but we did not attempt to verify whether there were
any statutory omissions to those provided. We independently analyzed
the laws identified as to whether they could be applied to private
sector financing or design-build construction for highways.
Finally, we presented pending legislation proposals to reauthorize TEA-
21 that could help to increase private sector participation and
investment in highway and transit projects and discussed their
potential effects on private sector participation and investment.
In addition to our objectives, we gathered information on (1) private
sector sponsorship and investment overseas and (2) selected cases where
the private sector helped finance major projects but did not actively
sponsor their construction or operation and compared this participation
to similar private sector participation outside the transportation
sector. The selection of countries and individual projects was not
based on a comprehensive review of all private sponsorship of
transportation infrastructure projects, and the results cannot be
projected. For private sector sponsorship and investment overseas, we
selected and reviewed projects in Canada, Australia, and in European
countries such as the United Kingdom, France, the Netherlands, and
Italy based on the prevalence of publicly available literature. To
identify cases in which the private sector helped finance projects but
did not sponsor them, we reviewed literature and interviewed officials
with the FHWA, FTA, and association officials. We also interviewed
officials and reviewed documentation associated with specific highway
and transit projects, as well as other transportation and education
projects in Oregon, Nevada, Virginia, and Washington, D.C.
Our work was performed from February 2003 through February 2004 in
accordance with generally accepted government auditing principles.
[End of section]
Appendix II: Methodology for Estimating Revenue Loss on Tax Exempt
Bonds for Three Projects:
This appendix describes the methodology we used to estimate the revenue
losses to the federal and state governments in 2003 due to the issuance
of tax-exempt bonds for the Pocahontas Parkway, the Southern Connector,
and the Las Vegas Monorail. Given the uncertainty surrounding certain
assumptions that we needed to make, we performed a sensitivity
analysis, which leads us to present our results as ranges, rather than
as point estimates.
Following the practice used by prior analysts, we assumed that if the
tax-exempt bonds under review had not been issued, then the bond
purchasers would have, instead, invested equal amounts of money in
investments that yielded returns that are taxed by the federal
government and, in some cases, by the state governments.[Footnote 22]
The revenue loss to those governments is the amount of tax that they
would have been able to collect from those alternative taxable
investment returns. We assumed that the returns on those alternative
investments would have been approximately equal to the actual returns
paid on the project's bonds, on an after-tax basis.
To compute the actual returns paid on the project's bonds, we first
computed the total value of the tax-exempt bonds outstanding for these
projects in 2003 and computed a weighted average annual interest rate
for each issue of the projects' bonds.[Footnote 23] We then obtained
the amount of interest that each project paid in 2003 by multiplying
the value of the bonds by the weighted average interest rates. We then
estimated the returns on the alternative investments by dividing the
former by one minus the federal marginal tax rate of marginal bond
purchaser. (In our sensitivity analysis we allowed this tax rate to
range between 28 percent and 31 percent.) We then estimated the federal
revenue loss by multiplying these returns by the average federal
marginal tax rate of all of the bond purchasers. (In our sensitivity
analysis we allowed this tax rate to range between 28 percent and 34
percent.):
To estimate the amounts of revenue that Virginia lost on the Pocahontas
Parkway bonds and that South Carolina lost on the Southern Connector
bonds, we made assumptions regarding how many of those bonds would be
purchased by residents of the states in which they were
issued.[Footnote 24] (In our sensitivity analysis we allowed the
percentage of bonds purchased by residents of the same state in which
they were issued to range between 25 percent and 100 percent.) We also
assumed that all bond purchasers in Virginia and South Carolina were
subject to those states' top tax rates (of 5.75 percent and 7,
respectively) because the income floors for those top tax rate brackets
are relatively low. We computed the state revenue loss as the return on
the alternative investments, multiplied by the percentage of the bonds
sold to residents, then multiplied by the states' marginal tax rates.
As a final step, we adjusted the federal revenue loss estimate for the
fact that the taxpayers would have been able to deduct any state taxes
paid on those same returns from their federal tax liabilities. The
amount of the state tax deductions was equal to our estimate of the
state revenue losses on the alternative investments.
[End of section]
Appendix III: Selected Privately Sponsored Projects:
Table 4: Summary of Selected Privately Sponsored Projects:
Dollars in millions.
Highway project: Dulles Greenway, Virginia;
Cost: $338;
Arrangement: For-profit;
Financing: Equity, commercial debt;
Open: 1995.
Highway project: State Route 91 Express Lanes, California;
Cost: $126;
Arrangement: For-profit;
Financing: Equity, commercial debt;
Open: 1995.
Highway project: State Route 125, California;
Cost: $722;
Arrangement: For-profit;
Financing: Equity, commercial debt, TIFIA;
Open: 2006 (expected).
Highway project: Southern Connector, South Carolina;
Cost: $218;
Arrangement: Nonprofit;
Financing: Tax-exempt debt;
Open: 2001.
Highway project: Pocahontas Parkway, Virginia;
Cost: $377;
Arrangement: Nonprofit;
Financing: Tax-exempt debt;
Open: 2002.
Transit project: Las Vegas Monorail, Nevada;
Cost: $730;
Arrangement: Nonprofit;
Financing: In-kind contribution, tax exempt debt;
Open: 2004 (expected).
Source: GAO.
[End of table]
Dulles Greenway, Virginia:
The Virginia Highway Corporation Act of 1988 authorized the private
development of toll roads. In 1993, the Toll Road Investors Partnership
II, L.P. (TRIP II) was formed to build the Dulles Greenway. A
construction contract was awarded in 1993, and the road was opened to
traffic in 1995. The Dulles Greenway was built as a four-lane 14-mile
private toll road that extends from the Dulles Toll Road and Dulles
International Airport to Leesburg, in Loudoun County. It has seven
interchanges and is designed to accommodate expansion of up to six
lanes, as well as mass transit development in the median. In 2001, an
additional 5-mile lane was added in each direction on the eastern end
of the road. The road was built in anticipation of development in
Loudoun County. According to developers, travelers using the road can
reduce their travel time by as much as fifty percent compared to
alternative routes. The Dulles Greenway is the first private toll road
built in Virginia since 1816.
Institutional Arrangements:
The Dulles Greenway was developed as a private, for-profit venture.
TRIP II owns the franchise for the Dulles Greenway and consists of
three partners: a Virginia family, the AIE Limited Liability
Corporation, and Brown and Root of Houston, Texas. Brown and Root,
Inc., was the prime contractor for the construction of the toll road.
Autostrade, an Italian private toll road developer and operator, is
responsible for operations and maintenance. TRIP II was developed for
the sole purpose of building and operating the toll road and has a 42-
year franchise from the state. At the end of that period, the road
reverts to state control. The partnership handled and paid for all
aspects of developing the project, including acquiring the right of way
and conducting the environmental work, and the road falls under
regulatory control of the State Corporation Commission. TRIP II
acquired all of the land for the project and owns the right of way and
the road. Consequently, TRIP II also pays real estates taxes on the
property and has insurance to cover any liability that may occur (i.e.,
as the result of an accident). A TRIP II official said that the
Virginia Department of Transportation (VDOT) had oversight
responsibility during construction and inspected the road as it was
being built.
Under the franchise agreement, TRIP II is responsible for all costs
associated with operating and maintaining the road. TRIP II uses
Virginia state troopers specifically assigned to the toll road to
police the road and reimburses the state for this service. The Dulles
Greenway does not have a noncompete agreement with the state. According
to a TRIP II official, it was the company's understanding that the
state would not make improvements to competing roads ahead of schedule.
However, he said, VDOT made significant improvements to a competing
road, State Route 7, ahead of schedule. According to a bond rating
agency, these improvements adversely affected the traffic projected to
use the toll road. The improvements to State Route 7 were in the
state's plans in 1989 and, according to a VDOT official, the state did
not have a timetable in place for making those improvements. Rather,
once projects were in the state's plans, they made the improvements
when funding was available.
Financing:
The Dulles Greenway's construction cost was initially financed with
equity contributions from the partnership, bank loans, and long-term,
fixed-rate notes purchased by major institutional investors. According
to a Congressional Budget Office report, the project cost about $340
million, financed as shown in table 5.
Table 5: Cost of Financing the Dulles Greenway:
Source of financing: Long term fixed rate notes;
Amount (dollars in millions): $258.
Source of financing: Revolving credit;
Amount (dollars in millions): 40.
Source of financing: Equity;
Amount (dollars in millions): 40.
Source of financing: Total amount financed;
Amount (dollars in millions): $338.
Sources: Congressional Budget Office (data); GAO (analysis).
[End of table]
TRIP II went into default on its loans and note agreements in 1996 as a
result of revenue that was less than projected. In 1999, the
partnership refinanced its debt, which helped to enhance the project's
survivability and protection provided bondholders by allowing debt
service requirements to better match expected growth in toll revenues.
The refinancing paid off the outstanding debt, created project reserve
funds, and covered costs associated with the refinancing. As a result
of the refinancing, TRIP II issued approximately $370 million in senior
bonds and $76 million in subordinate bonds. The senior bonds are
privately insured, and the partnership must maintain a reserve equal to
one year of debt service payments. Subordinate bonds are not insured,
and debt service payments can only be made on subordinate bonds after
operating expenses, debt service on senior bonds, and required payments
to project reserves. The state has no liability for any of the debt.
The repayment of the debt was also extended 9 years and was configured
to keep debt service payments much lower than the original plan until
2011. According to a TRIP II official, the restructuring also resulted
in significantly lower interest rates.
Revenue Source:
The Dulles Greenway's revenue source is tolls. When the toll road
opened to traffic in 1995, TRIP II set the toll at $1.75. In 1996, the
State Corporation Commission set a $2.00 ceiling on the tolls that can
be charged for cars. TRIP II may set tolls within that ceiling without
additional state approval. TRIP II lowered the toll in 1997 to
encourage drivers to use the road. As of January 2004, there are two
different rates--a weekday rate of $1.90 and a lower weekend rate of
$1.50. Tolls are discounted for those paying electronically.
The project has struggled financially. Revenues have been less than
projected because traffic has been lower than projected. In the toll
road's first year of operation, it generated 20 percent of the
projected revenue; in its fifth year, the road generated 35 percent of
the revenue forecast. New toll roads are expected to experience a
period of several years during which the traffic ramps up to expected
levels. Before the road opened, traffic was projected to be about
33,000 vehicles per day in the first year and needed to reach 68,000
vehicles per day to meet its expenses, based on a $2.00 toll. However,
initially, traffic was about 10,500 vehicles per day. Residential and
economic growth has continued in the area and traffic has increased,
averaging 46,000 vehicles per day in 2000. According to a TRIP II
official, although the toll road's cash flow is positive, it still has
a negative income and has never made a profit for its investors.
Status:
According to a TRIP II official, the Dulles Greenway is hoping to
increase tolls during peak hours (i.e., rush hour). TRIP II has
requested the State Corporation Commission to approve a toll ceiling
increase to $3.00. However, a TRIP II official stressed that just
because TRIP II has an increased ceiling does not mean it would
increase tolls to the limit.
California State Route 91 Express Lanes:
In 1989, Assembly Bill 680[Footnote 25] authorized the California
Department of Transportation (Caltrans) to enter into agreements with
private entities for the development, construction, and operation of
four demonstration transportation projects. California's State Route 91
(SR 91) Express Lanes was one of these four public-private projects.
According to a Caltrans official, the state had planned to add lanes to
the SR 91 freeway in 1983. In 1988, the additional lanes were proposed
as High Occupancy Vehicle (HOV) lanes. However, the state authorized
the SR 91 private toll road project because public revenue for
transportation had not kept pace with California's transportation
needs. SR 91 is a four-lane, 10-mile toll road located within the
median of the pre-existing eight-lane freeway between SR 55 in Orange
County and the Riverside County line. The project connects large
residential areas in Riverside and San Bernardino counties, with major
employment centers in Orange and Los Angeles counties. The road was
built to reduce congestion on the existing freeway. The highway opened
to traffic in December 1995 and was the first toll road in the United
States to use variable congestion pricing. In addition, SR 91 was the
world's first fully automated toll road, utilizing electronic
transponders to collect tolls.
Institutional Arrangements:
The California Private Transportation Company (CPTC) developed SR 91 in
partnership with Caltrans. CPTC was an entity formed by subsidiaries of
Level 3 Communications, Inc., Compagnie Financiere et Industrielle des
Autoroutes (Cofiroute), and Granite Construction, Inc. CPTC signed a
franchise agreement with Caltrans in December of 1990. This agreement
leased SR 91 to CPTC for 35 years after the opening of the toll road.
These new lanes were officially designated a part of the California
State Highway System, and the California Highway Patrol (CHP) was
responsible for providing police services at CPTC's expense.
Maintenance and operational costs for the road were also the
responsibility of CPTC.
This project had a noncompete clause that created a 1.5-mile protection
zone along each side of SR 91, which precluded any improvements along
the corridor until the year 2030. An official with Cofiroute stated
that one of the conditions that lent itself to this project was the
existence of the median on which the toll lanes were built, which meant
that right of way did not have to be separately acquired for this
project. According to a Caltrans official, the Orange County
Transportation Authority (OCTA) prepared an environmental review
because the state had originally planned to build HOV lanes. OCTA
subsequently conducted a supplemental review on the express lanes to
augment the original review. CPTC purchased both reviews from OCTA when
it developed the toll road. Although CPTC held the franchise for the
toll road, the state of California retained the title to the land.
Financing:
SR 91 was privately financed at a cost of $125.6 million. According to
officials with Cofiroute, in July 1993 financing closed and consisted
of a combination of equity and bank and institutional debt. The debt on
this project carried a commercial rate of interest of about 12 percent.
The project's debt financing was provided by a group of commercial
banks and institutional lenders. Table 6 indicates the specifics of the
financing for SR 91.
Table 6: Cost of financing the SR 91 Express Lanes:
Source of financing: Bank loans (14-year);
Amount (dollars in millions): $65.
Source of financing: Other long term loans (24 years);
Amount (dollars in millions): 35.
Source of financing: Equity;
Amount (dollars in millions): 20.
Source of financing: OCTA (subordinated debt)[A];
Amount (dollars in millions): 5.6.
Source of financing: Total project cost;
Amount (dollars in millions): $125.6.
Source: GAO.
[A] Used to purchase previously completed engineering and environmental
work.
[End of table]
Construction of SR 91 was fully paid for by the private sector.
According to Caltrans officials, the financing was contingent upon
Caltrans assuming liability for injuries resulting from accidents. In
order for Caltrans to assume this liability, however, CPTC was required
to follow Caltrans' standards and guidelines for design, construction,
and operation of the road.
Revenue Source:
Lanes on SR 91 are tolled using congestion management pricing, which
means toll rates vary based on the time of day. OCTA officials reported
that volume on SR 91 has increased steadily from 7.3 million trips in
1999 to 9.5 million trips in 2002. They also reported total annual
revenue grew steadily over that same period, from $19.5 million in 1999
to $29 million in 2002. Growth is projected for both Orange and
Riverside counties over the next 25 years. Orange County is projected
to add over a half million jobs, while Riverside County's population is
projected to increase by one million people. Officials with both
Cofiroute and OCTA pointed out that a unique advantage of this project
is that mountains on both sides of the road effectively prevented any
alternative routes. Officials with Cofiroute and Caltrans stated that
there was a 17 percent profit cap on the project, tied to inflation.
However, there were also vehicle occupancy incentives to increase
carpooling that offered up to a 23 percent rate of return. If tolls
generated more money than this, the excess could be used to retire the
debt or it would go back to the state's general highway fund. The
franchise agreement gave CPTC sole authority to set and adjust tolls--
Caltrans approval was not needed for increases.
Status:
In April 2002, OCTA reached an agreement with CPTC to purchase SR 91
for $207.5 million. In September 2002, AB 1010 authorized OCTA to
purchase the toll road from CPTC, and OCTA took possession of the road
on January 3, 2003. OCTA officials said that the impetus for this
purchase was public pressure on Caltrans to make improvements to the
nontolled lanes of SR 91 that were prohibited by the noncompete clause.
The acquisition was contingent on state legislation (AB1010)
authorizing OCTA to buy and operate the toll road, dismissal of the
litigation that CPTC had initiated against Caltrans, and the
elimination of the noncompete clause from the franchise agreement that
OCTA would hold. To satisfy another condition of the sale, OCTA
contracted with Cofiroute to operate the toll road. OCTA paid the
$207.5 million--$135 million in taxable bonds and $72.5 million in
cash. The bonds will be retired with toll revenues.
California State Route 125:
In 1989, Assembly Bill 680[Footnote 26] authorized the California
Department of Transportation (Caltrans) to enter into agreements with
private entities for the development, construction, and operation of
four demonstration transportation projects. California's State Route
125 (SR 125) was one of these four public-private projects. The section
of SR 125 south of SR 54, now planned for a toll road, was included in
the state's transportation plan in the early 1960s but was not built
because state funds were not available and the need was not considered
high because the area had not been developed. However, the project was
incorporated into the county plan in 1984. Once constructed, SR 125
will be a 9.5-mile, four-lane toll road from just south of SR 54 to SR
905 near the international border with Mexico. The highway will be
located entirely within San Diego County and will run through the city
of Chula Vista. It is intended to increase capacity for future travel
between the United States and Mexico, serve the existing and future
development of communities along its right of way, and reduce
congestion locally and on Interstates 5 and 805. The project has been
planned to allow for expanding the highway to six to eight lanes as
development and traffic in the area increase.
Institutional Arrangements:
The private sponsor, California Transportation Ventures (CTV) is a
limited partnership selected by the state in 1991 to develop the
project. Macquarie Infrastructure Group, an international firm that has
built and operated toll roads in many countries, purchased a majority
interest in CTV in 2002. Caltrans entered into a franchise agreement
with CTV for 35 years, commencing from the time the road opens to
traffic. During that period, the state retains ownership of the land.
The franchise included a noncompete clause under which the state agreed
not to build any highway or make improvements that would compete with
the toll road and were not already contained in the state's 20-year
plan. The noncompete agreement contained a provision allowing the state
to build a competing road but required that CTV be reimbursed for the
lost revenues caused by the new road. At the end of the franchise
period, control over the road will revert to the state. As part of the
franchise agreement, Caltrans shepherded the project through the
environmental review process, acquired the right of way for the
project, and will provide police service on a reimbursable basis once
the toll road is open to traffic. In addition, several developers in
the Chula Vista area donated land for about 50 percent of the required
right of way. Although CTV is responsible for financing, building,
operating and maintaining the toll road, Caltrans is responsible--with
funding from the San Diego Association of Governments (SANDAG)--for an
interchange and a mile of road to connect to the northern end of the
toll road to SR 54. However, CTV will oversee the design-build
construction of the interchange and connecting roadway as well as the
toll road.
Financing:
Macquarie Infrastructure Group is a for-profit corporation that
obtained debt financing in the form of market-rate loans from European
banks and made a substantial equity investment. In addition, Macquarie
obtained a Transportation Infrastructure Finance and Innovation Act
(TIFIA) loan from the U.S. Department of Transportation (DOT). SANDAG
funded the $101 million construction of the SR 125 interchange with SR
54.[Footnote 27] The construction of the interchange and 1 mile of road
connecting SR 125 to SR 54 will be funded from the county's half-cent
sales tax that voters approved in 1988 to fund local transportation
projects, including the designated interchange. According to Caltrans
and SANDAG officials, the toll road and the locally funded project are
being administered as separate projects but are integral to each other
and the environmental review treated them as one project.[Footnote 28]
Table 7 indicates the financing for the SR 125 construction.
Table 7: Cost of Financing SR 125:
Source of financing: Macquarie Infrastructure Group; Amount (dollars in
millions): $160.
Source of financing: Bank loans;
Amount (dollars in millions): 321.
Source of financing: TIFIA loan;
Amount (dollars in millions): 140.
Source of financing: Total toll road cost;
Amount (dollars in millions): 621.
Source of financing: Federal funding for connector;
Amount (dollars in millions): 81.
Source of financing: SANDAG funding for connector;
Amount (dollars in millions): 20.
Source of financing: Total project cost;
Amount (dollars in millions): $722.
Source: GAO.
[End of table]
Revenue Source:
Tolls will provide the revenue to pay for the project and earn the
private partners a return on their investment. Under the franchise
agreement, CTV can set tolls without state approval. However, CTV's
return on investment will be limited to 18.5 percent. The company plans
to use variable pricing, with higher tolls charged during peak periods
and lower tolls when traffic is less congested. According to a CTV
official, one goal of the tolling will be to control congestion. For
example, after lanes are added, other improvements made, and capacity
is reached, tolls could be raised to discourage use, thus keeping
traffic from getting too heavy. Traffic volume is expected to range
from 20,000 to 70,000 vehicles per day during the first year of
operations and is projected to reach 200,000 vehicles per day once all
of the planned development takes place.
Status:
Litigation challenging the final record of decision on the
environmental impact statement for the project was resolved in favor of
Caltrans in March 2003. Construction started in July 2003. Construction
is expected to take 34 months, with the toll road completed and open to
traffic in 2006.
Southern Connector, South Carolina:
The Southern Connector is a 16-mile, four lane toll road linking
Interstates 85 and 385 in southern Greenville County--the road includes
six interchanges. The road begins at the I-185/I-85 interchange west of
Greenville, runs south of the Donaldson Center Industrial Park, and
ends at the I-385/US-276 interchange near Simpsonville. The toll road
was completed in February 2001 and uses electronic toll collection.
Officials involved in this project said the road was needed to lower
congestion on other highways and local roads, provide access to an area
previously served only by local roads, and stimulate industrial and
residential development in southern Greenville County.
The Greenville Area Transportation Study and the South Carolina
Department of Transportation (SCDOT) first identified the east-west
roadway project for Southern Greenville County in 1968 but lack of
available funding kept it on the planning list. In 1992, SCDOT received
federal funding and initiated the environmental and preliminary
engineering work. The location and environmental studies, public
hearings, and the environmental impact statement were successfully
completed. However, lack of funding once again put the project on hold.
In 1996, SCDOT issued a Request for Proposal, soliciting innovative
ways to finance, design, and build the project using a Public/Private
Partnership agreement. This was the first time that South Carolina had
attempted to use this type of arrangement. SCDOT officials considered
this arrangement beneficial because the state was able to conserve
resources and was not at risk for any financial obligations if revenues
were less than expected, other than the $17.5 million the state
contributed to the project.
Institutional Arrangements:
The Connector 2000 Association, a not-for-profit corporation comprised
of local business leaders, was established to finance and operate the
Southern Connector. In 1997, the state Department of Transportation
Commission passed a resolution authorizing SCDOT to enter into a
license agreement with the Connector 2000 Association based on
legislation passed in 1976. Signed in February 1998, the license
agreement gives Connector 2000 the right to own and operate the project
for the earlier of 50 years or until the bonds are paid off. Once the
bonds are retired, operation and ownership of the road will be
transferred to the state.
The license agreement granted Connector 2000 the right to acquire, in
the name of SCDOT, the appropriate rights of way necessary for
developing the project. Officials from SCDOT said that they also helped
acquire a portion of land for the right of way. Once construction was
complete, the Southern Connector was accepted into the South Carolina
State Highway System and therefore the state police patrol the toll
road. In addition, the association was responsible for operation of the
toll road. SCDOT maintains the road and is reimbursed by the
association. The Southern Connector does not have a comprehensive
noncompete clause. The Connector 2000 Association's license agreement
for the Southern Connector contains only limited protection from
competitive transportation activities such as a nontolled road. The
language is open-ended but indicates that SCDOT will refrain from
certain activities that would be competitive in nature. The state had
already completed the environmental impact statement for this project.
An attorney with Connector 2000 pointed out that South Carolina's
ownership of the right of way is an important feature of the license
agreement because it protects Connector 2000 from tort liability. He
said that if Connector 2000 owned the right-of-way, accident victims
could possibly sue it, which would have been an unacceptable risk.
Financing:
The financing for this project utilized the sale of tax-free toll
revenue bonds to be repaid by toll revenue over a 35-year term.
Connector 2000 issued the bonds on behalf of the state. The Connector
2000 Association received tax-free bond status by forming a nonprofit
corporation under Revenue Ruling 63-20 of the IRS tax code. The
specifics on the financing of the Southern Connector are shown in table
8.
Table 8: Cost of Financing the Southern Connector:
Source of financing: Tax-exempt senior current interest bonds;
Amount (dollars in millions): $66.2.
Source of financing: Tax-exempt rated senior capital appreciation
bonds;
Amount (dollars in millions): 87.4.
Source of financing: Tax-exempt unrated subordinate capital
appreciation bonds;
Amount (dollars in millions): 46.6.
Source of financing: SCDOT contribution;
Amount (dollars in millions): 17.5.
Source of financing: Total project cost;
Amount (dollars in millions): $217.7.
Source: GAO.
[End of table]
The state contributed $17.5 million to build the road linking the
Connector with I-85, but did not finance any cost of building the
project. The state of South Carolina has no responsibility for the
bonds and officials with SCDOT stated that the license agreement was
crafted to protect the state from any liability for the debt.
Revenue Source:
The Southern Connector's revenue source is its tolls, which are
collected through manual, automatic coin machine, and electronic
tolling. According to the license agreement, SCDOT set the rates for
the entire 50-year term of the agreement according to a preset
schedule. The first increase will occur in 2005--from $.75 to $1.00.
Because Connector 2000 is a 63-20 corporation, it cannot make a profit
from the toll revenues.
Revenues from tolls have been sufficient to cover operating costs but
only a portion of debt service payments because traffic projections for
the toll road have not met expectations. As a result, Connector 2000
has had to withdraw funds from its reserve accounts. The traffic
projections Connector 2000 received before the project was built
indicated that traffic would be about 28,000 vehicles per day. The
traffic has only reached a peak of about 15,000 vehicles per day and is
typically about 14,000 vehicles per day. Nevertheless, Connector 2000
can now cover operating expenses, and the payments that it made to the
state for highway maintenance in the first year of operation have been
more than enough to cover state costs for some time to come.
Status:
In January 2002, Standard & Poor's lowered the rating on the bonds
financing the Southern Connector project from "stable" to "negative."
That change was based on traffic performance that was significantly
lower than anticipated and the prospects of a longer ramp-up period
that would lead to reduced financial flexibility, as well as the need
to use the debt service reserve account to meet debt service
requirements. At the time Standard & Poor's changed its outlook,
average daily traffic was near 10,000 transactions (one trip between
toll booths), which was 45 percent of the 22,000 trips anticipated for
that stage of the ramp-up and 64 percent less than the originally
forecasted level of 28,000 trips for the first year. The Connector 2000
Association has had to notify investors that it has used reserve funds
to make its debt service payments.
Pocahontas Parkway, Virginia:
In 1995, the Public Private Transportation Act authorized the Virginia
Department of Transportation (VDOT) to enter into agreements with
private entities for the development, construction, and operation of
transportation projects. The law also allowed private consortia to
submit unsolicited proposals to develop specific projects. In 1995, a
limited liability company consisting of Fluor Daniel and Morrison
Knudsen submitted an unsolicited project to develop the Pocahontas
Parkway. The Pocahontas Parkway is a four-lane, 8.8-mile toll road
located south of Richmond. It connects the Chippenham Parkway in
Chesterfield County at I-95 with Laburnum Avenue and I-295 east of
Richmond International Airport in eastern Henrico County. The road was
built in anticipation of development along the James River, as well as
to relieve congestion. The eastbound lanes of the highway opened in May
2002, and the westbound lanes opened in September 2002. The road had
been included in Virginia's state plan since 1983 as an untolled road.
Before Fluor Daniel and Morrison Knudsen undertook the project, VDOT
had used federal funds for preliminary design and engineering costs.
Institutional Arrangements:
The Pocahontas Parkway was developed in partnership with VDOT by Fluor
Daniel/Morrison Knudson Limited Liability Company (FD/MK) and the
Pocahontas Parkway Association (PPA). The PPA is a nonprofit
corporation that was created in 1997 to finance the design,
construction, and operation of the Pocahontas Parkway. The PPA has a
seven-member board of directors. The PPA appoints three of the five
voting members, VDOT appoints the remaining two voting board members
and one nonvoting member, and FD/MK appoints a nonvoting member. In
June 1998, FD/MK entered into an agreement with the state that included
a design-build contract to construct the toll road. In July 2002, when
construction was nearly complete, VDOT and PPA reaffirmed the franchise
agreement and PPA took over operations. Under the franchise agreement,
PPA has the right to impose and collect tolls for 30 years. VDOT owns
the right of way as well as the road, and it operates and maintains it
with the understanding that the PPA will reimburse VDOT when the toll
road's revenues are sufficient to do so. PPA has been receiving an
operating budget from VDOT and will continue to do so until revenues
are sufficient to cover these expenses. VDOT expects to be reimbursed
for these expenses. Similarly, the Virginia State Police provide law
enforcement services under contract with VDOT; VDOT will pay this cost
until the PPA can do so. The state approved the route for the
Pocahontas Parkway in 1983, and VDOT completed the environmental work
in 1984. However, the project was put on hold because funds were not
available.
The Pocahontas Parkway does not have a comprehensive noncompete clause.
The franchise agreement contains only limited protection from
competitive transportation activities, such as a publicly funded road.
The language is open-ended but indicates that VDOT will refrain from
certain activities that would be competitive in nature. However, the
agreement does not provide for any remedies in the event that VDOT
opens a competing road.
Financing:
The Pocahontas Parkway was financed at a cost of $377 million. This
included a combination of tax-exempt bonds and a loan from Virginia's
State Infrastructure Bank (SIB). The state has no liability for the
bonds. The PPA was created as a nonprofit entity authorized under IRS
Revenue Ruling 63-20 to enable the corporation to issue tax-exempt
debt. Table 9 shows the specifics of the financing for the Pocahontas
Parkway.
Table 9: Cost of Financing the Pocahontas Parkway:
Source of financing: Tax-exempt bonds;
Amount (dollars in millions): $354.
Source of financing: VDOT SIB loan;
Amount (dollars in millions): 18.
Source of financing: FD/MK debt service reserve funds;
Amount (dollars in millions): 5.
Source of financing: Total project cost;
Amount (dollars in millions): $377.
Source: GAO.
[End of table]
Revenue Source:
The Pocahontas Parkway's revenue source is its tolls, about 40 percent
of which are collected through electronic tolling. The PPA sets toll
rates, and any increases must be made in conjunction with a toll
consultant's recommendation. Currently, the maximum toll is $1.50 for
cars. Because the PPA is a 63-20 corporation, it cannot make a profit
from the toll revenues. If revenues exceed expenses, VDOT would receive
the excess.
Revenues have been less than projected because traffic has been lower
than projected. Traffic projections indicated that for 2003, traffic
would be at about 840,000 transactions per month. Revenues were
projected to be about $1.4 million. However, as of January 2004,
traffic has been about 400,000 transactions per month, and revenue has
been about $630,000 per month. The PPA must use its revenues to pay its
debt service first because VDOT agreed to a gross revenue pledge, which
stipulates that the revenues are first used to pay debt service. This
type of pledge guarantees operation and maintenance of the toll road
because VDOT pays for the operations and maintenance of the road if the
toll road does not bring in sufficient revenue to pay for those
expenses.
Status:
In November 2002, Fitch placed its rating of the Pocahontas Parkway's
bonds on a negative watch. In December 2002, Standard and Poor's
lowered its rating of the bonds to below investment grade. The ratings
agencies took action based on traffic and revenue performance that was
significantly lower than anticipated and concerns that traffic levels
would not achieve forecasted levels. At the time, average daily traffic
was just under 10,000 transactions (a transaction is one trip through a
toll booth), which was 57 percent of the current projection of 17,300
transactions. As of January 2004, Fitch's and Standard and Poor's bond
ratings had not been changed.
Las Vegas Monorail, Nevada:
The Las Vegas Monorail is a 4-mile fixed-guideway system serving the
resort corridor along Las Vegas Boulevard in Clark County, Nevada, and
terminating on the north, at the city limits of Las Vegas. The system
was initiated because of increasing congestion in the resort corridor
along Las Vegas Boulevard and major arterial streets. In 1999, Las
Vegas had almost 34 million visitors and, according to a traffic
survey, 77 percent of them visited three or more casinos every day. The
project will have seven stations, connecting eight resorts and the
convention center. This system expands upon an earlier monorail that
was operated between two hotels, the MGM Grand and Bally's. In addition
to the stations and guideway, the system will include an operations and
maintenance facility for the nine fully automated, driverless trains,
each with four cars. The monorail company entered into a design-build
contract and construction on the expanded system began in August 2001.
Construction is expected to be completed and the system operating in
2004. When the system opens, the trains will operate 20 hours per day
at about 4-minute intervals.
The Las Vegas Monorail was one of the alternatives included in a major
investment study initiated in 1995 by the Regional Transportation
Commission of Southern Nevada (RTC), the local metropolitan planning
organization, to address congestion and resulting air quality problems
along the major resort corridor in Clark County, on Las Vegas
Boulevard, and on the surrounding arterial streets. Using a fixed-
guideway system such as the monorail as the focal point for this
program was one of several alternatives considered for development. In
1998, Clark County granted the Las Vegas Monorail Company (LMVC) a
franchise for a monorail system along the eastern side of the resort
corridor. A second phase is planned, extending north to the downtown
section of Las Vegas, as well as subsequent phases to connect the
system.
Institutional Arrangements:
The LVMC is a nonprofit public benefit corporation (501(c)(4)
corporation) that was created for the development of the monorail
because the project needed to be financed with tax-exempt debt. Because
the LVMC is a quasi-state agency created to provide oversight of the
project, the board of directors is appointed by the governor of Nevada.
Transit Systems Management, an affiliate of the original developer of
the project, serves as program and project manager for the nonprofit
corporation. The monorail will be operated under the same franchise
that Clark County granted to MGM Bally's Monorail, LLC, for the
original, two-station monorail. The station franchise is for 50 years
and was transferred to LVMC after financing for the project was in
place. Although area hotels and resorts made in-kind contributions and
helped fund station construction, they hold no ownership interest in
the project.
Financing:
The monorail was financed with tax-exempt revenue bonds issued through
the state of Nevada and with contributions from area hotels and
resorts. However, the state has no financial liability for the bonds.
The first tier bonds totaling $451 million are privately insured. In
order to use tax-exempt financing, a nonprofit corporation had to be
established. The seven hotels and resorts adjacent to stations
contributed about $27.5 million for construction of connecting walkways
to stations. They also contributed about $54 million in land easements
for the right of way and committed to provide operations and
maintenance costs for the connectors for 35 years. In addition, resorts
and contractors purchased $48.5 million in third tier bonds. Debt
service on the third tier bonds is only required after all other costs
have been met. The specifics of the financing for the monorail are
shown in table 10.
Table 10: Cost of Financing the Las Vegas Monorail:
Source of financing: Tax-exempt current interest and capital
appreciation bonds (1st tier);
Amount (dollars in millions): $451.4.
Source of financing: Tax-exempt project revenue bonds (2nd tier);
Amount (dollars in millions): 149.2.
Source of financing: Tax-exempt subordinated bonds (3rd tier);
Amount (dollars in millions): 48.5.
Source of financing: Hotel and resort in-kind contributions;
Amount (dollars in millions): 81.4.
Source of financing: Total project cost;
Amount (dollars in millions): $730.5.
Source: GAO.
[End of table]
Revenue Source:
The monorail's principal source of revenue will come from fares charged
to riders, with a secondary source of revenue from advertising. As of
December 2003, fares were to be $3 for a one-way ticket and $5.50 for a
round-trip ticket. The projected ridership is expected to be more than
53,000 per day and exceed 19 million per year in the first year of
operation. Based on the projected ridership and a $2.50 fare, farebox
revenues could be over $48 million in the first year. The farebox
revenue, combined with LVMC's projected advertising revenue of about
$6.5 million in the first year, would be needed to cover the costs of
operations and maintenance for the monorail.[Footnote 29] However,
company officials indicated that advertising revenues could
significantly exceed expectations. The company has already signed a
contract dedicating all advertising space on one train, including the
entire outside of the cars, for $1 million per year for the next 10
years and signed an additional contract that could generate another $4
million per year, well ahead of expectations.
The LVMC plans to use electronic systems to make it easy for people to
use the monorail: one way is to make monorail rides part of the
packages that visitors buy from hotels and resorts in the area; another
is to allow hotel guests to charge their fares to their hotels using
their room keys. To encourage hotel and resort employees to use the
system, the LVMC is exploring the possibility of employer subsidies.
Status:
Construction is on schedule to allow operations to begin in 2004. The
LVMC has reported that construction costs are under budget. Phase II of
the project, to extend the monorail to downtown Las Vegas, will also be
managed by Transit Systems Management. Construction of the publicly
funded $450 million extension project is expected to be completed by
2007.
[End of section]
Appendix IV: Active Private Sector Sponsorship and Investment in Other
Countries:
Active private sector sponsorship of and investment in transportation
infrastructure is more common in other countries than in the United
States. There are several reasons for this, including the use of
longer-term franchise agreements, lack of competition from untolled
highways, greater federal authority to enlist private participation as
a matter of policy, and greater public subsidies for highway projects
that have been undertaken by the private sector.
The franchise arrangements in other countries are generally longer in
duration than those in the United States, which generally range from 30
to 50 years. A longer franchise agreement allows private investors more
time to realize returns on their investments, which could make projects
more attractive to potential investors. For example, the consortium
building and operating Ontario's Highway 407 in Canada has a 99-year
concession, while a French consortium has contracted with the French
government to pay all building, operating, and maintenance costs for
the A86 West tunnels in Paris for a period of 70 years after the tunnel
opens. Additionally, a private company has obtained a government
concession to design, build, and run the M6 Toll in the United Kingdom
until 2054--a 53-year concession agreement. According to industry
experts, private toll roads in countries with established markets--such
as France and Italy--do not generally face public competition in the
form of state-funded untolled highways. However, in other countries,
particularly those in emerging markets, there is a greater risk that
the government could open a competing, nontolled road. Noncompete
clauses are more common in those countries.
According to industry experts, an advantage overseas is that, in other
countries, the central governments can make private sector
participation a matter of policy. In comparison, as the U.S. federal-
aid highway program is currently structured, only states and local
governments may enact the enabling statutes required to partner with
the private sector. Industry experts said a ministerial government such
as the one in the UK can simply decide to begin to use public-private
partnerships, as opposed to the United States, in which such a change
would have to go through the legislative and regulatory process. In
Australia, the Ministry for Transport produced a plan to improve
infrastructure in Sydney that detailed 25 rail, bus, and road projects
and specified which projects would be funded with private investment.
In Ireland, the national government adopted a program to overhaul the
country's decaying transport infrastructure--in part through private
participation. In addition, the National Roads Authority, which is
supported by Irish and international advisers, has launched 11 projects
requiring private finance. In addition, industry experts indicated that
other countries, such as the Netherlands and Italy, have established
central units for guiding the process to utilizing the private sector.
Public subsidies to privately sponsored highway projects overseas have
surpassed those in the United States in several instances. For example,
in Australia on the Melbourne City Link project, the public sector
accepted the risk of any impact of a native title claim by indigenous
Australians and agreed to indemnify the sponsor for most environmental
impact statement costs. On the Confederation Bridge project in Canada-
-a bridge between Prince Edward Island and the Canadian mainland built,
managed, and operated as a 35-year concession--the Canadian government
covers an annual subsidy that pays the debt service on the bonds that
were issued to finance the project. On the A86 Tunnel in Paris, the
European Investment Bank, the European Union's long-term financing
institution, approved a 200 million euro loan to the private consortium
at a below market interest rate.
[End of section]
Appendix V: Private Participation through Financing with Revenues from
the Value Created by Projects:
In addition to active private sector sponsorship and investment, the
private sector has taken a role in financing projects while not
participating in their construction or operations. These projects have
typically been sponsored by state or local governments and have
involved recouping or capturing some of the increased value of land
located near transportation or other public projects that had been
newly created or improved by a governmental entity. This method has
been used in three ways: (1) states' sales or leases of surplus land
that states had obtained when constructing projects; (2) special tax
districts, in which businesses paid increased taxes to help pay for
transportation improvements located near them; and (3) developer-funded
interchanges in which the private sector paid for new interchanges to
improve access to its property.
States' Sales or Leases of Surplus Land:
One way in which states have derived additional revenue has been by
acquiring and subsequently selling or leasing land that was not needed
for the construction of a highway right of way. This practice has
allowed states to capture any increase in the value of land states had
acquired that was not used for construction. States are permitted to
sell this land, but must use the federal share of the proceeds for
transportation projects that would be eligible for federal aid. FHWA
does not maintain data on how much revenue states have generated
through acquiring and subsequently selling or leasing land; however, in
2002 we calculated that, for fiscal years 1998 through 2002, 37 states
generated about $148 million from the sale or lease of land purchased
with federal-aid highway funds.[Footnote 30]
This approach to generating revenues has been used more aggressively in
transit and other sectors. For example, the Tri-Met Airport extension
in Portland, Oregon, was financed with a combination of revenue from
special tax districts and $28 million paid by a private sector partner
for a long-term lease to develop an industrial park adjacent to the new
rail line. The land for the industrial park had originally been
purchased to provide a noise buffer to keep residential development
from encroaching on the airport. The Washington Metropolitan Area
Transit Authority (WMATA) also capitalized on the value of a vacant 32-
acre site next to one of its Metro stations that had been purchased
when the system was being built many years ago. WMATA received over $50
million for its capital development fund by leasing the land to a
private sector developer for 95 years. Real estate assets have been
used to finance educational and transit infrastructure projects by
capturing the increased value of property that occurred since its
acquisition. For example, the Oyster Bilingual School in Washington,
D.C., was rebuilt at a cost of over $11 million by a private sector
developer. In exchange, the developer received title to land that had
previously been a little-used playground and built an apartment
building. The rents from the apartment building will be used to pay off
the bonds used to finance the school's construction.
Although transit and other sectors have financed projects by capturing
the increased value of land, this approach has limitations for
highways. First, it can only be used where land adjacent to a project
would be likely to be the subject of commercial or dense residential
development. Land adjacent to highways in rural areas would be less
likely to increase in value sufficiently to offset the costs of highway
construction. If a state acquires land by exercising its eminent domain
power, the acquisition must be for a public purpose, and the state must
pay adequate compensation. State highway departments and other public
agencies have realized some financial gain from the sale or lease of
excess property that was originally acquired during construction of
infrastructure projects such as highways. Moreover, the acquisition of
these properties was not part of a financing plan and was coincidental
to completing the original project.
The administration's reauthorization proposal would take the first
steps to expand existing practices by establishing a pilot program to
permit commercial operations at new or existing rest areas on
Interstate highways. Such commercial operations could be privately run
to provide goods, services, and information that benefit the traveling
public and could include state promotional or tourism-oriented items
and commercial advertising and displays within the rest areas. This
proposal could generate additional funds for highway and transit
projects because states would be required to use the profit derived
from these operations for transportation projects that would generally
be eligible for federal funding.
Special Tax Districts:
In another approach, localities applied taxes--in cooperation with
business owners--on property to pay for highways. For example, a group
of businesses in Virginia agreed to enter into a special tax district
to generate additional real estate taxes to raise funds to pay for a
significant portion of the cost of improvements to State Route 28 in
Fairfax and Loudoun counties. The businesses along the road wanted to
expedite the improvements to improve access to their businesses. They
sought and received legislative approval from the state to form the
special tax district to raise funds to pay for the construction. The
tax is applied at a rate based on the value of the land. As the land
value goes up, so does the revenue. The state used the funds to pay for
the project but is responsible for the operations and maintenance of
the road. The businesses in the tax district and VDOT agreed to pay 75
percent and 25 percent, respectively, of the project costs, which VDOT
estimates will total $341.5 million.
Special tax districts have also been used in other sectors. For
example, to finance a major rail project, the city of Reno, Nevada,
imposed a combination of local taxes to fund debt on a project to
eliminate railroad crossings in the city's downtown area by lowering
the railroad tracks below ground. The city is financing this project--
which will cost $283 million--with a combination of debt, contributions
from the Union Pacific Railroad, and a TIFIA loan. The debt on the
project will be repaid by a combination of local taxes imposed on
downtown businesses benefiting from the project. These include a sales
tax, a hotel room tax, and property taxes. In addition, lease income
from properties donated by Union Pacific will also be used to repay the
debt.
Developer-Funded Interchanges:
Developer-funded interchanges offer another variation of the value
capture method of financing highway improvements. According to FHWA
officials, although there is no data on the extent or dollar amount
spent, developers frequently pay for interchanges to improve access to
their businesses. In effect, such payments are impact fees paid by
developers, who recoup the costs from the profits they make from their
business ventures. For example, Nevada Department of Transportation
officials indicated that 50 percent of the interchanges have been
funded this way. In one case in Henderson, Nevada, an area was being
developed for numerous automobile dealerships and needed a new
interchange to provide access to interstate I-515. A private developer
and the city of Henderson shared the costs of the project and
reimbursed the state department of transportation for the construction.
For these types of projects, the developer could either do the work
directly or hire a contractor or the state could oversee construction
and be reimbursed for the cost. If the developer constructed the
interchange or hired a contractor, the state would oversee and inspect
the work. Developers have also funded several interchanges in Utah,
according to a former Utah Department of Transportation official.
[End of section]
Appendix VI: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
JayEtta Z. Hecker, (202) 512-2834 Steve Cohen, (202) 512-4864:
Staff Acknowledgments:
In addition, Jay Cherlow, Lynn Filla-Clark, Colin Fallon, Terence Lam,
Dedrick Roberts, Frank Taliaferro, Stacey Thompson, Tim Wexler, and
James Wozny made key contributions to this report.
(544063):
FOOTNOTES
[1] There is currently no standard definition of what constitutes a
"major" project. This definition has been applied to projects with a
total cost of as little as $10 million and as much as $1 billion. DOT
has recently proposed using $100 million as the major project threshold
for its financial planning and reporting requirements under 23 USC 106,
and therefore we have used that threshold for this report.
[2] For transit projects, the Las Vegas Monorail presents a special
case that may never be replicated because it is rare that projected
farebox and advertising revenues would be sufficient to cover debt
service and operations and maintenance costs.
[3] The Senate approved surface transportation reauthorization
legislation (S. 1072) on February 12, 2004.
[4] This was initially a pilot program for nine states that was
expanded to all states in 1991.
[5] Free bridges and tunnels that are being reconstructed may be tolled
as a part of their reconstruction.
[6] This program was extended to April 30, 2004.
[7] The other two projects were never constructed.
[8] These projects are the I-95 High Occupancy Toll (HOT) Lanes, the
Capital Beltway HOT Lanes, the Western Extension of the Powhite Parkway
(Route 76) near Richmond, and the Interstate 81 Widening Proposals.
[9] Unlike the Pocahontas Parkway and Southern Connector, the Las Vegas
Monorail was not formed as a corporation under IRS Revenue Ruling 63-20
because Nevada prohibits 63-20 corporations.
[10] The local government is also funding another small roadway that
connects the interchange to another state road and is a separate
project.
[11] Mass Transit: Status of New Starts Program and Potential for Bus
Rapid Transit Projects, GAO-02-840T (Washington, D.C.: June 20, 2002);
Mass Transit: FTA Could Relieve New Starts Program Funding Constraints,
GAO-01-987 (Washington, D.C.: Aug. 15, 2001).
[12] The sizes of the revenue losses depend upon the federal and state
marginal tax rates of bond purchasers and upon what proportion of the
total amount of bonds was purchased by in-state taxpayers. See appendix
II for details on our estimation methodology.
[13] States with Public Private Partnership Authority as of February
2004, prepared by Nossaman, Gunther, Knox, and Elliott, LLP, Los
Angeles, Calif.
[14] These are Alabama, Arizona, Arkansas, Colorado, Delaware, Florida,
Georgia, Louisiana, Maryland, Minnesota, Missouri, Nevada, North
Carolina, Oregon, South Carolina, Texas, Utah, Virginia, Washington and
Wisconsin. Massachusetts also has enabling legislation, but it only
applies to one project.
[15] California passed enabling legislation, Assembly Bill 680,
authorizing four projects in 1989. We reviewed two of these projects--
SR 91 and SR 125. The other two were never built. See appendix III for
additional information. This legislation was repealed in 2004.
[16] Design-build is a system of contracting under which one entity
performs both architecture/engineering--that is, design--and
construction under one single contract.
[17] In California, state law prohibits the use of design-build.
However, for the two California projects we examined, the legislation
allowing the private sector to build the SR 91 Express Lanes and SR 125
also authorized a procurement method similar to design build because
the projects were private ventures.
[18] 50-State Survey of Transportation Agency Design-Build Authority
(Nossaman Gunther Knox & Elliott, LLP, 2004)
[19] Congressional Budget Office, Toll Roads: A Review of Recent
Experience (February 1997).
[20] In this report, private sector sponsorship refers to projects in
which the private sector was the primary stakeholder in terms of
designing, financing, building, operating, and maintaining them.
[21] Financing costs include bond issuance fees, interest on
construction cost, and reserve funds for maintenance and debt service.
[22] See, for example, Harvey Galper and Eric Toder, "Modelling Revenue
and Allocation Effects of the Use of Tax-Exempt Bonds for Private
Purposes," in George G. Kaufman, (ed.), Efficiency in the Municipal
Bond Market: The Use of Tax Exempt Financing for "Private" Purposes,
JAI Press, Inc., Greenwich, Conn., 1981.
[23] Each project issued multiple series of bonds between 1998 and 2000
that remained outstanding as of 2003 (and will remain so for many more
years).
[24] There were no state revenue losses on bonds sold to nonresidents
because the states do not exempt interest paid to nonresidents. There
was no state revenue loss on the bonds for the Las Vegas Monorail
because Nevada does not have a state income tax.
[25] Assembly Bill 680 authorized four demonstration projects: Route
91, Route 125, Route 57, and the Mid-State Tollway. Only SR 91 and SR
125 went forward. According to a Caltrans official, SR 57 was not built
because of a lack of funding for the environmental impact study; this
official also indicated that the franchise for the Mid-State Tollway
was terminated in January 2001 because of a lack of local support.
[26] Assembly Bill 680 authorized four demonstration projects: Route
91, Route 125, Route 57, and the Mid-State Tollway. Only SR 91 and SR
125 went forward. According to a Caltrans official, SR 57 was not built
because of a lack of funding for the environmental impact study; this
official also indicated that the franchise for the Mid-State Tollway
was terminated in January 2001 because of a lack of local support.
[27] In addition, CTV is reimbursing Caltrans $1.3 million for
Caltrans' oversight of the project.
[28] SANDAG is also funding another small piece of road--with federal
funding--that connects the interchange to State Road 54 and is a
separate project covered by a separate environmental review.
[29] Debt service payments are not scheduled to start until 2005.
[30] U.S. General Accounting Office, Federal-Aid Highways: States Need
Guidance on Sales or Leases of Real Property Purchased with Federal
Funds, GAO-03-207 (Washington, D.C.: Dec. 13, 2002). Total includes
data from 37 state departments of transportation. The total represents
the amount generated from sales and leases but does not reflect the
increased value of the land from the original purchase price. Further,
the total does not include sales or leases of land purchased solely
with state funds. We converted nominal dollars to constant 2001
dollars.
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