Highway Public-Private Partnerships
More Rigorous Up-front Analysis Could Better Secure Potential Benefits and Protect the Public Interest
Gao ID: GAO-08-44 February 8, 2008
The United States is at a critical juncture in addressing the demands on its transportation system, including highway infrastructure. State and local governments are looking for alternatives, including increased private sector participation. GAO was asked to review (1) the benefits, costs, and trade-offs of public-private partnerships; (2) how public officials have identified and acted to protect the public interest in these arrangements; and (3) the federal role in public-private partnerships and potential changes in this role. GAO reviewed federal legislation, interviewed federal, state, and other officials, and reviewed the experience of Australia, Canada, and Spain. GAO's work focused on highway-related public-private partnerships and did not review all forms of public-private partnerships.
Highway public-private partnerships have resulted in advantages for state and local governments, such as obtaining new facilities and value from existing facilities without using public funding. The public can potentially obtain other benefits, such as sharing risks with the private sector, more efficient operations and management of facilities, and, through the use of tolling, increased mobility and more cost effective investment decisions. There are also potential costs and trade-offs--there is no "free" money in public-private partnerships and it is likely that tolls on a privately operated highway will increase to a greater extent than they would on a publicly operated toll road. There is also the risk of tolls being set that exceed the costs of the facility, including a reasonable rate of return, should a private concessionaire gain market power because of the lack of viable travel alternatives. Highway public-private partnerships are also potentially more costly to the public than traditional procurement methods and the public sector gives up a measure of control, such as the ability to influence toll rates. Finally, as with any highway project, there are multiple stakeholders and trade-offs in protecting the public interest. Highway public-private partnerships we reviewed protected the public interest largely through concession agreement terms prescribing performance and other standards. Governments in other countries, such as Australia, have developed systematic approaches to identifying and evaluating public interest and require their use when considering private investments in public infrastructure. While similar tools have been used to some extent in the United States, their use has been more limited. Using up-front public interest evaluation tools can assist in determining expected benefits and costs of projects; not using such tools may lead to aspects of protecting the public interest being overlooked. For example, while projects in Australia require consideration of local and regional interests, concerns by local governments in Texas that they were being excluded resulted in state legislation requiring their involvement. While direct federal involvement has been limited to where federal investment exists, and while the Department of Transportation has actively promoted them, highway public-private partnerships may pose national public interest implications such as interstate commerce that transcend whether there is direct federal investment in a project. However, given the minimal federal funding in highway public-private partnerships to date, little consideration has been given to potential national public interests in them. GAO has called for a fundamental reexamination of federal programs to address emerging needs and test the relevance of existing policies. This reexamination provides an opportunity to identify and protect potential national public interests in highway public-private partnerships.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
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GAO-08-44, Highway Public-Private Partnerships: More Rigorous Up-front Analysis Could Better Secure Potential Benefits and Protect the Public Interest
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entitled 'Highway Public-Private Partnerships: More Rigorous Up-front
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
February 2008:
Highway Public-Private Partnerships:
More Rigorous Up-front Analysis Could Better Secure Potential Benefits
and Protect the Public Interest:
Highway Public-Private Partnerships:
GAO-08-44:
GAO Highlights:
Highlights of GAO-08-44, a report to congressional requesters
Why GAO Did This Study:
The United States is at a critical juncture in addressing the demands
on its transportation system, including highway infrastructure. State
and local governments are looking for alternatives, including increased
private sector participation. GAO was asked to review (1) the benefits,
costs, and trade-offs of public-private partnerships; (2) how public
officials have identified and acted to protect the public interest in
these arrangements; and (3) the federal role in public-private
partnerships and potential changes in this role. GAO reviewed federal
legislation, interviewed federal, state, and other officials, and
reviewed the experience of Australia, Canada, and Spain. GAO‘s work
focused on highway-related public-private partnerships and did not
review all forms of public-private partnerships.
What GAO Found:
Highway public-private partnerships have resulted in advantages for
state and local governments, such as obtaining new facilities and value
from existing facilities without using public funding. The public can
potentially obtain other benefits, such as sharing risks with the
private sector, more efficient operations and management of facilities,
and, through the use of tolling, increased mobility and more cost
effective investment decisions. There are also potential costs and
trade-offs”there is no ’free“ money in public-private partnerships and
it is likely that tolls on a privately operated highway will increase
to a greater extent than they would on a publicly operated toll road.
There is also the risk of tolls being set that exceed the costs of the
facility, including a reasonable rate of return, should a private
concessionaire gain market power because of the lack of viable travel
alternatives. Highway public-private partnerships are also potentially
more costly to the public than traditional procurement methods and the
public sector gives up a measure of control, such as the ability to
influence toll rates. Finally, as with any highway project, there are
multiple stakeholders and trade-offs in protecting the public interest.
Highway public-private partnerships we reviewed protected the public
interest largely through concession agreement terms prescribing
performance and other standards. Governments in other countries, such
as Australia, have developed systematic approaches to identifying and
evaluating public interest and require their use when considering
private investments in public infrastructure. While similar tools have
been used to some extent in the United States, their use has been more
limited. Using up-front public interest evaluation tools can assist in
determining expected benefits and costs of projects; not using such
tools may lead to aspects of protecting the public interest being
overlooked. For example, while projects in Australia require
consideration of local and regional interests, concerns by local
governments in Texas that they were being excluded resulted in state
legislation requiring their involvement.
While direct federal involvement has been limited to where federal
investment exists, and while the Department of Transportation has
actively promoted them, highway public-private partnerships may pose
national public interest implications such as interstate commerce that
transcend whether there is direct federal investment in a project.
However, given the minimal federal funding in highway public-private
partnerships to date, little consideration has been given to potential
national public interests in them. GAO has called for a fundamental
reexamination of federal programs to address emerging needs and test
the relevance of existing policies. This reexamination provides an
opportunity to identify and protect potential national public interests
in highway public-private partnerships.
What GAO Recommends:
Congress should consider directing the Secretary of Transportation, in
consultation with Congress and other stakeholders, to develop objective
criteria for identifying potential national public interests in highway
public-private partnerships. The Department of Transportation raised
concerns and disagreed with several of the findings and conclusions, as
well as one of the recommendations. GAO clarified the report and
continues to believe more rigorous up-front analysis could better
protect public interests.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.GAO-08-44]. For more information, contact
JayEtta Z. Hecker at (202) 512-2834 or heckerj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Highway Public-Private Partnerships Can Potentially Provide Benefits
but also Entail Costs, Risks, and Trade-offs:
Highway Public-Private Partnerships Have Sought to Protect Public
Interest in Many Ways, but Use of Public Interest Criteria Is Mixed in
the United States:
Direct Federal Involvement with Highway Public-Private Partnerships Has
Generally Been Limited, but Identification of National Interests in
Highway Public-Private Partnerships Has Been Lacking:
Conclusions:
Matter for Congressional Consideration:
Recommendation for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Profile of GAO Public-Private Partnership Case Studies:
Appendix III: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Description of U.S. Highway Public-Private Partnerships
Reviewed by GAO:
Table 2: Potential Benefits, Costs, and Trade-offs Associated with
Highway Public-Private Partnerships:
Table 3: Selected Performance Mechanisms to Protect the Public
Interest:
Table 4: Selected Financial Mechanisms to Protect the Public Interest:
Table 5: Selected Noncompete Provisions:
Table 6: Highway Public-Private Partnerships with SEP-15 Approval, as
of June 2007:
Figures:
Figure 1: Total Capital Spending on Highways, by Level of Government,
Fiscal Year 2005:
Figure 2: Evolution of Private Sector Involvement with Highway
Projects:
Figure 3: Private Equity Investments in Highway Public-Private
Partnerships:
Figure 4: Worldwide Highway Infrastructure Projects Funded and
Completed Using Public-Private Partnerships, 1985 to October 2004, by
Region:
Figure 5: Change in Chicago Skyway Tolls, 1967 to 2047:
Figure 6: Various Stakeholder Interests Associated with Highway Public-
Private Partnerships:
Abbreviations:
CDA: comprehensive development agreement:
CPI: consumer price index:
DOT: Department of Transportation:
ETR: Express Toll Road:
FHWA: Federal Highway Administration:
GDP: gross domestic product:
ISTEA: Intermodal Surface Transportation Efficiency Act of 1991:
ITRCC: Indiana Toll Road Concession Company:
LOS: level of service:
NEPA: National Environmental Policy Act:
OMB: Office of Management and Budget:
OTIG: Oregon Transportation Improvement Group:
PAB: private activity bond:
PSC: public sector comparator:
RFP: request for proposals:
SAFETEA-LU: Safe, Accountable, Flexible, Efficient Transportation
Equity Act--A Legacy for Users:
SCC: Skyway Concession Company:
SEP: Special Experimental Project:
SR: State Road:
TEA-21: Transportation Equity Act for the 21ST Century:
TIFIA: Transportation Infrastructure Finance and Innovation Act of
1998:
TE-045: Innovative Finance Test and Evaluation Program:
TTC: Trans-Texas Corridor:
U.S.C.: United States Code:
VfM: Value for Money:
United States Government Accountability Office:
Washington, DC 20548:
February 8, 2008:
Congressional Requesters:
America's transportation system is the essential element that
facilitates the movement of both people and freight within the country.
Both economic activity and mobility are dependent upon an efficient
transportation system. The United States is at a critical juncture
regarding its ability to address demands on the transportation system.
The Safe, Accountable, Flexible, Efficient Transportation Equity Act--
A Legacy for Users (SAFETEA-LU) authorized about $286 billion for
highway, transit, and other transportation system spending for the 6-
year period ending in fiscal year 2009. However, the Highway Trust
Fund, the principal mechanism for providing federal funds for highway
programs, could have a negative balance as early as 2012.[Footnote 1]
More specifically, under current law, the Highway Account, which makes
up the majority of Highway Trust Fund receipts, is projected to have a
negative balance by 2009 due to a growing difference between projected
receipts--the federal excise tax on motor fuel and truck-related taxes
are primary sources of revenue for the Highway Account--and outlays.
Baring changes to the tax structure, the situation will likely be
further exacerbated by inflation and more fuel efficient vehicles that
will act to further erode the resources available to meet
transportation system demands. In 2005, the federal government
accounted for about 40 percent of highway program capital spending (see
fig. 1). State and local governments accounted for about 60 percent of
highway program capital spending.
Figure 1: Total Capital Spending on Highways, by Level of Government,
Fiscal Year 2005:
This figure is a pie chart showing the total capital spending on
highways, by level of government, during fiscal year 2005.
Federal government: 41.6%: $31.3 billion;
State governments: 32.1%: $24.1 billion;
Local governments: 26.3%: $19.8 billion.
[See PDF for image]
Source: Federal Highway Administration.
[End of figure]
The nation is also on an imprudent and unsustainable fiscal path. As
the baby-boomer generation retires, entitlement programs will grow and
require increasing shares of federal spending in the years ahead.
Absent significant changes to tax and spending programs and policies,
we face a future of unsustainable deficits and debt that threatens to
cripple our economy and quality of life. This looming fiscal crisis
requires a fundamental reexamination of all government programs and
commitments by reviewing their results and testing their continued
relevance and relative priority in the twenty-first century. This
reexamination offers the prospect of addressing emerging needs (1) by
weeding out programs and policies that are outdated or ineffective and
(2) by modernizing those programs and policies that remain relevant.
The federal programs for highways are particularly ripe for
reexamination. The Interstate Highway System has been completed, yet
the basic structure of the federal-aid highway program has not changed.
As we have reported, federal transportation programs do not have
mechanisms to link funding levels with the accomplishment of specific
performance-related goals and outcomes related to mobility, and most
highway grant programs are apportioned by formula, without regard to
the needs or capacity of recipients.[Footnote 2] Transportation and
other experts on a panel recently convened by the Comptroller General
stated that the nation's transportation policy has lost focus and that
the nation's overall transportation goals need to be better defined and
linked to performance measures that evaluate what the respective
policies and programs actually accomplish.[Footnote 3] There was broad
consensus among the participants on the need for a transformation of
our current approach to transportation policy to better meet current
and future mobility needs in a strategic, integrated, and sustainable
manner.
Finally, the nation faces increasing congestion on the nation's
highways. According to a February 2007 American Association of State
Highway and Transportation Officials report, Federal Highway
Administration (FHWA) has forecasted that over the next 50 years
highway vehicle miles of travel will more than double from 3 trillion
to 7 trillion.[Footnote 4] To meet the growing demand for new
transportation capacity, states and localities are looking for
alternatives to direct government provision of transportation
infrastructure and services. One of these alternatives is increased
private sector participation in delivering the infrastructure and
services that the public sector is struggling to keep up with.
The private sector has traditionally been involved as contractors in
the design and construction of highways. In recent years, the private
sector has become increasingly involved in assuming other
responsibilities including planning, designing, and financing. The
private sector has also entered into a wide variety of highway public-
private partnership arrangements with public agencies. According to
FHWA, the term "public-private-partnership" is used for any scenario
under which the private sector assumes a greater role in the planning,
financing, design, construction, operation, and maintenance of a
transportation facility compared to traditional procurement
methods.[Footnote 5] Under some of these alternative arrangements, the
private sector is increasingly being looked at to not only construct
facilities but also to finance, maintain, and operate such
infrastructure under long-term leaseholds--up to 99 years in some
cases. In some cases, this involves financing and constructing a new
facility and then operating and maintaining it over a specified period
of time, while in other cases it involves operating and maintaining an
existing toll road for a period of time in exchange for an up-front
payment provided to the public sector. Proponents of these forms of
highway public-private partnerships contend that they offer the
potential advantages of obtaining critical new or expanded
infrastructure sooner than if provided solely by the public sector, at
a potentially lower cost given the efficiencies and innovation of
market-driven private companies, and the use of private rather than
public funds. In addition, risks of major infrastructure projects, such
as risks associated with constructing highways and risks of generating
sufficient traffic and revenue for financial viability, can be shifted
from the public to the private sector. Since these arrangements are
often used in relation to toll roads, the private sector return is
achieved through the collection of future toll revenue. However,
highway public-private partnership arrangements are not "risk free,"
and concerns have been raised about how well the public interest has
been evaluated and protected. Concerns have also been raised about the
potential loss of public control over critical assets for up to 99
years.
In January 2008, the National Surface Transportation Policy and Revenue
Study Commission issued its report on the surface transportation
system.[Footnote 6] The commission was required, among other things, to
conduct a comprehensive study of the current condition and future needs
of the surface transportation system and develop a conceptual plan,
with alternative approaches, to ensure that the surface transportation
system continues to serve the needs of the United States. The report
made a number of recommendations for restructuring and financing the
nation's surface transportation programs, in order to align federal
leadership and federal transportation investments with national
interests in the areas of highways, transit, passenger rail, freight,
and other areas. The report also contained recommendations on tolling,
congestion pricing, and the use of public-private partnerships. These
recommendations included providing states and localities the
flexibility to use tolls to fund new capacity on the Interstate Highway
System and the flexibility to implement congestion pricing on this
system--on both new and existing capacity in metropolitan areas with
populations greater than 1 million. The report encouraged the use of
public-private partnerships, including concessions, for highways and
other surface transportation modes, and stated that "public-private
partnerships should play an important role in financing and managing
our surface transportation system." The commission recommended criteria
to be included in public-private partnership concessions, including
requirements that states cap toll rates (at the level of the consumer
price index (CPI) minus a productivity adjustment), prohibit the use of
revenues for nontransportation purposes, avoid toll rates that
discriminate against certain users, and fully consider the effect
tolling might have on diverting traffic to other facilities. The
commission also recommended that there be increased transparency and
adequate public participation in the decision to use public-private
partnerships, revenue sharing between states and private
concessionaires, and a demonstration that private sector financing
provides better value for money than if the concession were financed
using public funds.
To assist Congress as it assesses the future of federal surface
transportation and highway programs, you asked us to identify the
issues associated with increased use of private sector participation in
providing transportation infrastructure to the public. In response to
your request, this report addresses (1) the benefits, costs, and trade-
offs associated with highway public-private partnerships; (2) how
public officials have identified and acted to protect the public
interest in highway public-private partnership arrangements; and (3)
the federal role in highway public-private partnerships and potential
changes in this role.
For purposes of this report, we limited the term "highway public-
private partnerships" to highway-related projects in which the public
sector enters into a contract, lease, or concession agreement with a
private sector firm or firms, and where the private sector provides
transportation services such as designing, constructing, operating, and
maintaining the facility, usually for an extended period of time. This
definition included long-term concessions for toll roads in which the
private sector firm(s) receives some or all toll revenues over the life
of the lease or concession agreement with the public sector. There are
numerous other types of arrangements which the Department of
Transportation (DOT) classifies as "public-private partnerships" that
we did not include. For example, we did not include fee-for-service
arrangements in which effective ownership of a transportation facility
does not transfer to the private sector, nor did we include
arrangements where concessionaires are only paid for services provided
or public-private partnerships that might be used to allow the private
sector to improve federal real property. This report is focused on the
use of public-private partnerships in highways, although we recognize
that such public-private partnerships can be used to provide other
transportation (e.g., transit) and outside the transportation sector,
such as hospitals and prisons. We also recognize that there may be
other forms of highway public-private partnerships, such as shadow
tolling in which the public sector pays a private sector company an
amount per user of a roadway and there is no direct collection of a
toll by the private company, or availability payments in which a
private company is paid based on the availability of a highway to
users. We did not include any of these types of public-private
partnerships in the scope of our report, and the findings and
conclusions of this report cannot be extrapolated to those or other
types of public-private partnerships.
To address these issues, we reviewed pertinent federal legislation and
regulations, including SAFETEA-LU, as well as federal guidance and
relevant modifications of FHWA procedures to permit the use of highway
public-private partnerships on federally supported projects. We also
collected data and analyzed information related to one project in
Canada--the 407 Express Toll Road (ETR) near Toronto--and four projects
in the United States--two were leases of existing transportation
facilities and two were new construction projects--where such highway
public-private partnerships had been, or were expected to be, used: (1)
Chicago Skyway, Chicago, Illinois; (2) Indiana Toll Road, Indiana; (3)
projects in and around the Portland, Oregon, area; and (4) the Trans-
Texas Corridor (TTC), Texas. This included obtaining descriptions of
these projects, copies of the concession or development agreements, and
documentation related to the financial structure of such projects.
These projects were selected because they were recent examples of
highway public-private partnerships, were large dollar projects, or
used different approaches. We also interviewed other states that were
considering highway public-private partnerships for their highways,
including California, New Jersey, and Pennsylvania. Our work also
collected data and information on the use of highway public-private
partnerships in Australia, Canada, and Spain. Further, we collected
information on how public interest is evaluated in privately financed
initiatives in the United Kingdom. All of these countries are leaders
in using highway public-private partnerships to obtain transportation
infrastructure. Finally, we interviewed FHWA and other federal
officials, state and local officials associated with the three projects
we selected, and with private sector officials involved with U.S.
highway public-private partnership arrangements. We also conducted
extensive interviews with government and private sector officials in
Australia, Canada, and Spain. (See app. I for a more detailed
discussion of our scope and methodology.)
We conducted this performance audit from June 2006 to February 2008 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Results in Brief:
Highway public-private partnerships have the potential to provide
numerous benefits to the public sector as well as potential costs and
trade-offs. Highway public-private partnerships created to date have
resulted in advantages from the perspective of state and local
governments, such as the construction of new infrastructure without
using public funding and obtaining funds by extracting value from
existing facilities for reinvestment in transportation and other public
programs. For example, the state of Indiana received $3.8 billion from
leasing the Indiana Toll Road and used those proceeds to fund a 10-year
statewide transportation plan. Highway public-private partnerships
potentially provide other benefits, including the transfer or sharing
of project risks to the private sector. Such risks include those
associated with construction costs and schedules and having sufficient
levels of traffic and revenues to be financially viable. In addition,
the public sector can potentially benefit from increased efficiencies
in operations and life-cycle management, such as increased use of
innovative technologies. Finally, through the use of tolling, highway
public-private partnerships offer the potential to price highways to
better reflect the true costs of operating and maintaining them and to
increase mobility by adjusting tolls to manage demand, as well as the
potential for more cost effective investment decisions by private
investors. There are also potential costs and trade-offs to highway
public-private partnerships. There is no "free" money--while highway
public-private partnerships can be used to obtain financing for highway
infrastructure without the use of public sector funding, this funding
is a form of privately issued debt that must be repaid to private
investors seeking a return on their investment by collecting toll
revenues. Though concession agreements can limit the extent to which a
concessionaire can raise tolls, it is likely that tolls will increase
on a privately operated highway to a greater extent than they would on
a publicly operated toll road. To the extent that a private
concessionaire gains market power by control of a road where there are
not other viable travel alternatives that would not require
substantially more travel time, the potential also exists that the
public could pay tolls that are higher than tolls based on cost of the
facilities, including a reasonable rate of return. Furthermore, by
leasing existing facilities, the public sector may give up more than it
gains if the net present value of the future stream of revenues (less
operating and capital costs) given up exceeds the concession payment
received. Conversely, because the private sector takes on potentially
substantial risks, the opposite could also be true--that is, the public
sector might gain more than it gives up. Additionally, because large up-
front concession payments have in part been used to fund immediate
needs, it remains to be seen whether these agreements will provide long-
term benefits to future generations who will potentially be paying
progressively higher toll rates throughout the length of a concession
agreement. Highway public-private partnerships also potentially require
additional costs compared with traditional public procurement-
-for example, the costs associated with the need to hire financial and
legal advisors. Further, while risks can be shared in highway public-
private partnerships, not all risks can or should be shared, such as
environmental or political risks. Finally, as with any highway project,
there are multiple stakeholders and potential objectives and trade-offs
in protecting the public interest.
Public officials in the highway public-private partnership projects
that we reviewed identified and protected the public interest, largely
through terms contained in concession contracts, and in the United
States we found more limited use of more formal tools such as those
used in some other countries to evaluate and protect the public
interest. Most often the terms of the contract focused on ensuring the
performance of the facility (e.g., requirements for maintenance and
expansion) and dealing with issues such as toll rates, public sector
flexibility to provide future transportation services to the public,
and workforce issues. Furthermore, the terms contained oversight and
monitoring mechanisms to ensure that private partners fulfilled their
obligations. Financial analyses, such as public sector comparators
(PSC) that can be used to compare the costs of a proposed highway
public-private partnership project with expected costs of procuring the
project publicly, have also been used by some projects in the United
States. Governments in other countries, including Australia and the
United Kingdom have developed systematic approaches to identifying and
evaluating public interest before agreements are entered into,
including the use of public interest criteria, as well as assessment
tools, and require their use when considering private investments in
public infrastructure. For example, a state government in Australia
uses a public interest test to determine how the public interest would
be affected in eight specific areas, including whether the views and
rights of affected communities have been heard and protected and
whether the process is sufficiently transparent. While similar tools
have been used to some extent in the United States, their use has been
more limited. Not using such tools may lead to certain aspects of
protecting public interest being overlooked. For example, concerns by
local and regional governments in Texas resulted in statewide
legislation requiring the state to involve local and regional
governments to a greater extent in future highway public-private
partnerships. Elsewhere, in Toronto, Canada, the lack of a transparency
about the toll rate structure and misunderstanding about the toll
structure of the 407 ETR facility was a major factor in significant
opposition to the project. Using up-front public interest analysis
tools can also assist public agencies in determining the expected
benefits and costs of a project and an appropriate means to undergo the
project.
Direct federal involvement in highway public-private partnerships has
generally been limited to projects in which federal requirements must
be followed because federal funds have or will be used. While direct
federal involvement has been limited to date in the highway public-
private partnerships we reviewed, the administration and the DOT have
actively promoted highway public-private partnerships through policies
and practices, including the development of experimental programs that
waive certain federal regulations and encourage private investment.
Recent highway public-private partnerships have involved sizable
investments of funds and significant facilities and could pose national
public interest implications such as interstate commerce that may
transcend whether there is direct federal investment in a project. For
example, although the Indiana Toll Road is part of the Interstate
Highway System, minimal federal funds were used to construct it, and
those funds were repaid to the federal government. Thus, although over
60 percent of the traffic on the road (according to one study) is
interstate in nature, federal officials had little involvement in
reviewing the terms of this concession agreement, and FHWA did not
review any potential impacts on interstate commerce--or require the
state of Indiana to review these issues--before it was signed. Texas
envisions constructing new international border crossings and freight
corridors as part of the TTC, which may greatly facilitate North
American Free Trade Agreement-related truck traffic to other states.
However, no federal funding has been expended in the development of the
project to date. Given the minimal federal funding in highway public-
private partnerships to date, few mechanisms exist to consider
potential national public interests in them. For example, FHWA
officials told us that no federal definition of public interest or
federal guidance on identifying and evaluating public interest exists.
The absence of a clear identification and furtherance of national
public interests in the national transportation system is not unique to
highway public-private partnerships. We have called for a fundamental
reexamination of the federal role in highways, including a clear
identification of specific national interests in the system. Such a
reexamination would provide an opportunity to establish the national
public interest in highway public-private partnerships and form the
basis for how this interest can best be furthered. We also found that
highway public-private partnerships that have or will use federal funds
and involve tolling may be required by law to use excess toll revenues
(revenues that are beyond that needed for debt service, a reasonable
return on investment to a private party, and operation and maintenance
of a toll facility) for projects eligible for federal transportation
funding. However, the methodology for calculating excess toll revenues
is not clear.
To ensure that future highway public-private partnerships meet federal
requirements concerning the use of excess revenues for federally
eligible transportation purposes, we recommend that the Secretary of
Transportation direct the Federal Highway Administrator to clarify
federal-aid highway regulations on the methodology for determining
excess toll revenue, including a reasonable rate of return to private
investors in highway public-private partnerships that involve federal
investment. In order to balance the potential benefits of highway
public-private partnerships with protecting public and national
interests, Congress should consider directing the Secretary of
Transportation, in consultation with Congress and other stakeholders,
to develop and submit to Congress objective criteria for identifying
national public interests in highway public-private partnerships. In
developing these criteria, the Secretary should identify any additional
legal authority, guidance, or assessment tools required, as appropriate
and needed, to ensure national public interests are protected in future
highway public-private partnerships. The criteria should be crafted to
allow the department to play a targeted role in ensuring that national
interests are considered in highway public-private partnerships, as
appropriate.
We provided copies of the draft report to the Department of
Transportation for comment. The Assistant Secretary for Transportation
Policy and the Deputy Assistant Secretary for Transportation Policy
provided comments in a meeting with us on November 30, 2007. DOT raised
substantive concerns and disagreed with several of the draft report's
findings and conclusions, as well as one recommendation. We clarified
the report and made other changes, as appropriate. For example, we
revised the report to better clarify the potential benefits of pricing
and resource efficiencies of highway public-private partnerships that
DOT cited in its comments and added information about initiatives that
certain states have taken to identify and protect the public interest
in highway public-private partnerships. We recommended that the
Secretary of Transportation direct the Administrator of FHWA to clarify
federal-aid highway regulations on the methodology for determining
excess toll revenue, including a reasonable rate of return to private
investors in highway public-private partnerships. DOT said it would
reexamine the regulations and take appropriate action, as necessary, to
ensure the regulations are clear. Therefore, we made no change to the
recommendation. Our draft report also recommended that DOT develop a
legislative proposal containing objective criteria for identifying the
national public interests in highway public-private partnerships. DOT
disagreed with this recommendation, stating it would involve intrusion
by the federal government into inherently state activities and a more
expansive federal role. We believe the reexamination of federal
transportation programs, which we have previously called for, provides
an opportunity to identify national interests in the transportation
system and determine the most appropriate federal role. Once
established, we believe the federal government can play a more
targeted, not necessarily more expansive, role. We have, therefore,
deleted our recommendation and instead are suggesting that Congress
consider directing DOT to undertake this action. DOT and other agencies
(including state and foreign governments we spoke with) also provided
technical comments that were incorporated, as appropriate. DOT's
comments and our evaluation are discussed at the end of this report.
Background:
Private sector participation and investment in highways 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 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. The Federal-Aid Highway Act of 1956
established a federal tax-assisted National System of Interstate and
Defense Highways, commonly know as the Interstate Highway System.
Further, the federal Highway Revenue Act of 1956 established a Highway
Trust Fund to be funded using revenue from, among other sources, motor
fuel taxes. The Federal-Aid Highway Act of 1956 generally prohibited
the use of federal funds for the construction, reconstruction, or
improvement of any toll road.
States retain the primary responsibility for building and maintaining
highways. While states collect revenues to finance road construction
and maintenance from a variety of sources, including fuel taxes, they
also receive significant federal funding. For example, in 2005, of the
$75.2 billion spent on highways by all levels of government, about
$31.3 billion (about 42 percent) was federal funding. Federal highway
funding is distributed mostly through a series of formula grant
programs, collectively known as the federal-aid highway program.
Funding for the federal-aid highway program is provided through the
Highway Trust Fund--a fund that was used to finance construction of the
Interstate Highway System on a "pay as you go" basis. Receipts for the
Highway Trust Fund are derived from two main sources: federal excise
taxes on motor fuel and truck-related taxes. Receipts from federal
excise taxes on motor fuel constitute the single largest source of
revenue for the Highway Account. Funds are provided to the states 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.
Additionally, the responsibility for planning and selecting projects is
handled by the states and metropolitan planning organizations.
Over time, federal programs and legislation have gradually become more
receptive to private sector participation and investment. For example,
the Surface Transportation and Uniform Relocation Assistance Act of
1987 established a pilot program allowing federal participation in
financing the construction or reconstruction of seven toll facilities,
excluding highways on the Interstate Highway System. Construction costs
for these projects were eligible for a 35 percent federal-aid match.
The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA)
removed the pilot project limitation on federal participation in
financing the initial construction or reconstruction of tolled
facilities, including the conversion of nontolled to tolled facilities.
ISTEA raised the federal share of construction costs on toll roads to
50 percent and allowed federal participation in financing privately
owned and operated toll roads, provided that the public authority
remained responsible for ensuring that all of its title 23
responsibilities to the federal government were met. ISTEA also
included a congestion pricing pilot program that allowed the Secretary
of Transportation to enter into cooperative agreements with up to five
state or local governments or public authorities to establish,
maintain, and monitor congestion pricing projects.
In 1998, the Transportation Equity Act for the 21ST Century (TEA-21)
renamed the congestion pricing pilot, calling it a "value-pricing pilot
program," and expanded the number of projects eligible for assistance
to 15. TEA-21 also created a pilot program for tolling roads in the
Interstate Highway System. Under this pilot, up to three 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. Finally, 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. The
TIFIA program permits the Secretary of Transportation to offer secured
loans, loan guarantees, and lines of credit.
In 2005, SAFETEA-LU reauthorized appropriations to fund all of the
previously established toll programs. SAFETEA-LU also allowed the
combining of public and private sector funds, including the investment
of public funds in private sector facility improvements for purposes of
eligibility for TIFIA loans. SAFETEA-LU also created the Express Lanes
Demonstration Program, which authorizes the Secretary of Transportation
to fund 15 demonstration projects to use tolling of highways, bridges,
or tunnels--including facilities on the Interstate Highway System--to
manage high congestion levels, reduce emissions in nonattainment or
maintenance areas under the Clean Air Act, or finance highway expansion
to reduce congestion. Finally, SAFETEA-LU amended the Internal Revenue
Code to add qualified highway or surface freight transfer facilities to
the types of privately developed and operated projects for which exempt
facility bonds (also called private activity bonds, PABs) may be
issued.[Footnote 7] According to FHWA, passage of the PAB provisions
reflected the federal government's desire to increase private sector
investment in U.S. transportation infrastructure. SAFETEA-LU authorized
the Secretary of Transportation to allocate up to $15 billion in PABs
for qualifying highway and freight transfer facilities. As of January
2008, about $3.2 billion in PABs had been approved by DOT.
The private sector has historically been involved in the construction
phase as a contractor. Over time, the private sector has been
increasingly involved in other phases of projects serving as either
contractors or managers (see fig. 2). The private sector has become
more involved in a wide range of tasks, including design, planning,
preliminary engineering, and maintenance of highways. In addition,
contractors have been given more responsibility for project oversight
and ensuring project quality through increased use of contractors for
engineering and inspection activities, as well as quality assurance
activities. This increasing use of contractors can, in part, be
attributed to the need for staff and expertise by state highway
agencies. Existing surveys of state highway departments from 1996 to
2002 show an increase of tasks completely outsourced from about 26
percent to about 36 percent.[Footnote 8]
Figure 2: Evolution of Private Sector Involvement with Highway
Projects:
This figure is a chart showing the evolution of private sector
involvement with highway projects.
Types of private sector involvement: Construction historically
outsourced;
Project tasks;
Preplanning; (Task performed in-house):
Finance; (Task performed in-house):
Design; (Task performed in-house):
Construction (Outsourced); (Task outsourced to consultant or
contractor):
Operations and Maintenance; (Task performed in-house):
Upkeep and Improvements; (Task performed in-house).
Types of private sector involvement: Growth in outsourcing;
Project tasks: Preplanning and acquisition (Outsourced); (Task
outsourced to consultant or contractor):
Finance; (Task performed in-house):
Design (Outsourced); (Task outsourced to consultant or contractor):
Construction (Outsourced); (Task outsourced to consultant or
contractor):
Operations and maintenance (Outsourced); (Task outsourced to consultant
or contractor):
Upkeep and improvements (Outsourced); (Task outsourced to consultant or
contractor).
[See PDF for image]
Source: GAO.
Note: Dark shading indicates private sector involvement.
[End of figure]
Private sector participation can also involve highway public-private
partnerships. As highway public-private partnerships can be defined to
include any private sector involvement beyond the traditional
contracting role in construction, there are many types of highway
public-private partnership models. For example, design-build contracts,
in which a private partner both designs and then constructs a highway
under a single contract, is considered by DOT to be a highway public-
private partnership. Some highway public-private partnerships involve
equity investments by the private sector (see fig. 3). In construction
of new infrastructure, commonly called "greenfield projects," the
private sector may provide financing for construction of the facility
and then has responsibility for all operations and maintenance of the
highway for a specified amount of time. The private operator generally
makes its money through the collection of tolls. Private investments
have also been made in existing infrastructure through the long-term
leases of currently existing toll roads. These transactions, often
called "brownfield" projects, usually involve a private operator
assuming control of the asset--including responsibilities for
maintenance and operation and collection of toll revenues--for a fixed
period of time in exchange for a concession fee provided to the public
sector. The concession fee could be in the form of an up-front payment
at the start of the concession, or could be provided over time through
a revenue sharing arrangement, or both. While many long-term public-
private partnerships involve tolled highways, that is not necessarily
always the case. For example, under a "shadow tolling" arrangement, the
private sector finances, constructs, and operates a nontolled highway
for a period of time and is paid a predetermined fee per car by the
public sector.
Figure 3: Private Equity Investments in Highway Public-Private
Partnerships:
This figure is a flowchart showing private equity investments in
highway public-private partnerships.
Types of private sector involvement: Private equity investment; Design-
build-finance-operate;
Project tasks: Preplanning and acquisiton; (Task performed in-house):
Finance (Outsourced); (Task outsourced to consultant or contractor):
Design (Outsourced); (Task outsourced to consultant or contractor):
Construction (Outsourced); (Task outsourced to consultant or
contractor):
Operations and maintenance (Outsourced); (Task outsourced to consultant
or contractor):
Upkeep and improvements (Outsourced) (Task outsourced to consultant or
contractor).
Types of private sector involvement: Private equity investment; Long-
term lease for existing toll facility;
Project tasks: Preplanning and acquisiton; (Task performed in-house):
Finance (Outsourced); (Task outsourced to consultant or contractor):
Design; (Task performed in-house):
Construction; (Task performed in-house):
Operations and maintenance (Outsourced); (Task outsourced to consultant
or contractor):
Upkeep and improvements (Outsourced) (Task outsourced to consultant or
contractor).
[See PDF for image]
Source: GAO.
Note: Dark shading indicates private sector involvement.
[End of figure]
The projects included as part of our review primarily involved the long-
term concessions of toll roads involving private sector equity. This
model has seen strong interest in the past few years as many states
have considered using this model to construct new highway
infrastructure. For example, Texas is currently developing a number of
new highways through this model. In addition, many states have explored
private involvement for the long-term operation and maintenance of
existing toll roads. For example, the city of Chicago and the state of
Indiana recently entered into long-term leases with the private sector
for the Chicago Skyway and Indiana Toll Road, respectively. Since we
began our review, other states have begun exploring leasing existing
toll roads to the private sector. For example, Pennsylvania has
considered many options, including a long-term lease, for extracting
value from the Pennsylvania Turnpike. In 2006, Virginia entered into a
long-term lease agreement with a private company for the Pocahontas
Parkway in the Richmond area and, in 2007, the Northwest Parkway Public
Highway Authority entered into a long-term concession in the Denver
region.
The U.S. highway public-private partnership projects included in our
review were varied (see table 1). Two of the projects--the TTC and
Oregon--involved construction of infrastructure. The Texas project, in
particular, was envisioned as an extensive network of interconnected
corridors that involved passenger and freight movement, as well as
passenger and freight railroads. The Oregon projects were primarily in
the Portland area and involved capacity enhancement. Two of the
projects we reviewed also involved leases of existing facilities--the
Indiana Toll Road and the Chicago Skyway. In both instances, local or
state officials were looking to extract value from the assets for
reinvestment in transportation or other purposes. (See app. II for more
information about the highway public-private partnerships that were
included in our review.)
Table 1: Description of U.S. Highway Public-Private Partnerships
Reviewed by GAO:
Name and location: New construction: TTC, Texas;
Description: The TTC is envisioned in total to be a 4,000 mile
statewide network of interconnected corridors containing tolled
highways and separate tolled truckways, as well as freight, intercity,
and commuter rail lines and possible utility easements. In June 2002,
the Texas Transportation Commission adopted an action plan identifying
priority segments of the TTC. In 2005, the Texas DOT awarded a
comprehensive development agreement to a private consortium to develop
preliminary concept and financing plans for the first portion of the
TTC (TTC-35) from Oklahoma to Mexico. This agreement also allows the
concessionaire to bid on other projects known as "connecting
facilities." In 2007, the Texas DOT also awarded a 50- year concession
to the private consortium to develop State Highway 130, segments 5 and
6. This is expected to be a connecting facility to the TTC. State
Highway 130 is a new highway being built in segments between Austin and
San Antonio in central Texas;
Date leased or project initiated: June 2002.
Name and location: New construction: Oregon;
Description: In January 2006, the Oregon Transportation Commission
approved agreements with the Oregon Transportation Improvement Group (a
private sector partner) for predevelopment work on three proposed
projects--construction of roads east of Portland (Sunrise Corridor),
South I-205 widening, and construction of an 11-mile highway in the
Newberg-Dundee area;
Date leased or project initiated: January 2006.
Name and location: Chicago Skyway, Chicago, Illinois;
Description: The Chicago Skyway was originally built in 1958 and was
operated and maintained by the city of Chicago Department of Streets
and Sanitation. It is a 7.8 mile elevated toll road connecting I-94
(Dan Ryan Expressway) in Chicago to I-90 (Indiana Toll Road) at the
Indiana border. In October 2004, it was leased to a private
concessionaire under a 99-year lease for about $1.8 billion;
Date leased or project initiated: October 2004.
Name and location: Lease of existing facilities: Indiana Toll Road,
Indiana;
Description: The Indiana Toll Road has been operational since 1956 and
stretches 157 miles along the northern most border of Indiana. From
1981 to 2006, it was operated by Indiana DOT. Since June 2006, it has
been operated by a private concessionaire under a 75-year lease.
Indiana received $3.8 billion from the lease;
Date leased or project initiated: June 2006.
Source: GAO analysis of project data.
[End of table]
There has been considerable private participation in highways and other
infrastructure internationally. Europe, in particular has been a leader
in use of these arrangements. Spain and France pioneered the use of
highway public-private partnerships for the development of tolled
motorways in Europe. Spain began inviting concessionaires to build a
national autopista network in the 1960s, while private autoroute
concessions in France date from the 1970s. Public-private partnership
arrangements for infrastructure project financing or delivery of
highway-related projects is widespread among the regions of the
world.[Footnote 9] Highway public-private partnership initiatives
support continued economic growth in more developed parts of the world
or foster economic development in the less developed parts of the
world. Over the period 1985 to 2004, the highest investment in road
projects (includes roads, bridges, and tunnels) funded and completed
using public-private partnerships was in Europe ($58.1 billion)
followed by Asia ($44.5 billion) and North America ($32.2 billion).
(See fig. 4.) FHWA attributed the predominant role of Europe to the
absence of a dedicated funding source for highways and a rapid
transition in the 1990s from a largely public infrastructure system to
a more privately financed, developed, and operated system, among other
things.
Figure 4: Worldwide Highway Infrastructure Projects Funded and
Completed Using Public-Private Partnerships, 1985 to October 2004, by
Region:
This figure is a combination of two pie charts. They represent
worldwide highway infrastructure projects funded and completed using
public-private partnerships between 1985 and October 2004, by region.
Projects:
North America: 106 projects: 30%;
Europe: 91 projects: 25%;
Latin America: 83 projects: 23%;
Asia: 72 projects: 20%;
Africa: 7 projects: 2%.
Cost:
Europe: $58.1 billion: 37%;
Asia: $44.5 billion: 28%;
North America: $32.2 billion: 20%;
Latin America: $18.9 billion: 12%;
Africa: $3.7 billion: 2%;
[See PDF for image]
Source: FHWA.
Note: The term "highway infrastructure" includes roads, bridges, and
tunnels.
[End of figure]
Highway Public-Private Partnerships Can Potentially Provide Benefits
but also Entail Costs, Risks, and Trade-offs:
While highway public-private partnerships have the potential to provide
numerous benefits, they also entail costs and trade-offs to the public
sector. The advantages and potential benefits of highway public-private
partnerships, as well as their costs and trade-offs are summarized in
table 2. Highway public-private partnerships that involve tolling may
not be suited to all situations. In addition to potential benefits to
the public sector, highway public-private partnerships can potentially
provide private sector benefits as well through investment in a long-
term asset with steady income generation over the course of a
concession and availability of various tax incentives.
Table 2: Potential Benefits, Costs, and Trade-offs Associated with
Highway Public-Private Partnerships:
Advantages and potential benefits for the public sector: Finance the
construction of new highways without the use of public funding;
Potential costs/trade-offs for the public sector: Tolls paid by road
users, regardless of whether the collector is in the private sector or
the public sector;
Potentially higher tolls under private operation.
Advantages and potential benefits for the public sector: Obtain up-
front payments through the long-term lease of existing toll roads;
Potential costs/trade-offs for the public sector: Public may give up
more than it gains if tolls over time exceed the value of up-front
payments;
Use of proceeds for short-term compared with long-term uses;
Intergenerational inequities--future users might potentially pay higher
tolls to support current benefits.
Advantages and potential benefits for the public sector: Transfer and
sharing of project risks to the private sector:
* construction cost and schedule,;
* sufficient traffic and revenue levels, and;
* increased transparency of project costs; Potential costs/trade-offs
for the public sector: Not all risks can or should be shared:
* environmental risks, and;
* political risks; Potential loss of control:
* noncompete provisions, and;
* toll rate setting.
Advantages and potential benefits for the public sector: Secure private
sector efficiencies in operations and life-cycle management;
Potential costs/trade-offs for the public sector: Higher public sector
costs:
* costs of advisors,;
* costs of private finance, and: potential tax losses.
Advantages and potential benefits for the public sector: Obtain a
facility that better reflects the true costs of operating and
maintaining the facility in setting tolls and better acknowledges the
costs and impact to drivers of using the roadway system during times of
peak demand; Increase mobility through tolling, congestion pricing, and
more efficient decision making;
Potential costs/trade-offs for the public sector: Risk that the public
could pay tolls that are higher than tolls based on the costs of the
facilities, including a reasonable rate of return, should a private
concessionaire take advantage of market power gained by control of a
road for which there are few alternatives that do not require
substantially more travel time; Traffic diversion; User equity concerns
from tolling.
Source: GAO.
[End of table]
Highway Public-Private Partnerships Have Been Used to Provide New
Infrastructure and Funding for Transportation and Other Needs and Have
the Potential to Provide Other Benefits:
Highway public-private partnerships have resulted in advantages from
the perspective of state and local governments, such as the
construction of new facilities without the use of public funding and
extracting value--in the form of up-front payments--from existing
facilities for reinvestment in transportation and other public
programs. In addition, highway public-private partnerships can
potentially provide other benefits to the public sector, including the
transfer of project risks to the private sector, increased operational
efficiencies through private sector operation and life-cycle
management, and benefits of pricing and improved investment decision
making that result from increased use of tolling.
Finance New Construction and Receive Up-front Payments through Asset
Monetization:
In the United States and abroad, public-sector entities have entered
highway public-private partnership agreements to finance the
construction of new roadways. As we reported in 2004, by relying on
private sector sponsorship and investment to build the roads rather
than financing the construction themselves, states (1) conserved
funding from their highway capital improvement programs for other
projects, (2) 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, and
(3) avoided the legislative or administrative limits that governed the
amount of outstanding debt these states were allowed to have.[Footnote
10] All of these results were advantages for the states. For example,
the TTC is a project that Texas plans to finance, construct, operate,
and maintain through various private sector investors. The project is
based on competitive bidding and procurement processes, and it will be
developed in individual segments as warranted over 50 years.
While relatively new in the United States, leveraging private resources
to obtain highway infrastructure is more common abroad. Since the
1960s, Spain has been active in highway public-private partnerships,
using approximately 22 toll highway concessions to construct its 3,000-
kilometer[Footnote 11] (approximately 1,860 mile) national road network
at little cost to the national government.[Footnote 12] By keeping the
capital costs off the public budget, Spain mitigated budgetary
challenges and met macroeconomic criteria for membership in the
European Union's Economic Monetary Union. More recently, Australian
state governments have entered into highway public-private partnerships
with private sector construction firms and lenders to finance and
construct several toll highways in Sydney and Melbourne. Officials with
the state of Victoria, Australia, have said that government preferences
to limit their debt levels, particularly following a severe recession
in the early 1990s, would have made construction of these roads
difficult without private financing, even though some of the roads had
been on transportation plans for several years.
Some governments in the United States and Canada are also using highway
public-private partnerships to extract value from existing
infrastructure and raise substantial funds for transportation and other
purposes. For example, in 2005 the city of Chicago received about $1.8
billion by leasing the Chicago Skyway to a concession consortium of
Spanish and Australian companies for 99 years. The city used the lease
proceeds to fund various social services; pay off remaining debt on the
Chicago Skyway (about $400 million) and some of the city's general
obligation debt; and, create a reserve fund which, according to the
former Chief Financial Officer of Chicago, generates as much net
revenue in annual interest as the highway had generated in annual
tolls. By paying off the city's general obligation debt, the city's
credit rating improved, thus reducing the cost of debt in the future.
In another example of extracting value from existing infrastructure,
the state of Indiana signed a 75-year, $3.8 billion lease of the
Indiana Toll Road in 2006 with the same consortium of private sector
companies that had leased the Chicago Skyway. The proceeds will
primarily be used to fund the governor's 10-year statewide "Major
Moves" transportation plan. Indiana officials told us that Indiana was
the only state with a fully funded transportation plan for the next 10
years. Indiana also established reserves from the lease proceeds to
provide future funding. Finally, the Provincial Government of Ontario,
Canada, preceded both of these concession agreements in 1999 when it
entered into a long-term lease with a private consortium for the
Highway 407 ETR in the Toronto area in exchange for $3.1 billion
Canadian dollars (approximately $2.6 billion U.S. dollars in 1999, or
$3.2 billion U.S. dollars in 2007).[Footnote 13] According to Ontario
officials, proceeds from the 407 ETR lease were added to the province's
general revenue fund but were not dedicated to a long-term investment
or other specific capital projects.
Potential Benefits Associated with Transferring Risks:
The public sector may also potentially benefit from transferring or
sharing risks with the private sector. These risks include project
construction and schedule risks. Various government officials told us
that because the private sector analyzes its costs, revenues, and risks
throughout the life cycle of a project and adheres to scheduled toll
increases, it is able to accept large amounts of risk at the outset of
a project, although the private sector prices all project risks and
bases its final bid proposal, in part, on the level of risk involved.
The transfer of construction cost and schedule risk to the private
sector is especially important and valuable, given the incidence of
cost and schedule overruns on public projects. Between 1997 and 2003,
we and others identified problems with major federally funded highway
and bridge projects and with FHWA's oversight of them.[Footnote 14] We
have reported that on many projects for which we could obtain
information, costs had increased, sometimes substantially, and that
several factors accounted for the increases, including less than
reliable initial cost estimates. We further reported that cost
containment was not an explicit statutory or regulatory goal of FHWA's
oversight and that the agency had done little to ensure that cost
containment was an integral part of the states' project management.
Since that time both Congress and DOT have taken action to improve the
performance of major projects and federal oversight; however,
indications of continuing problems remain. In 2004, DOT established a
performance goal that 95 percent of major federally funded
infrastructure projects would meet cost and schedule milestones
established in project or contract agreements, or achieve them within
10 percent of the established milestones. While federally funded
aviation and transit projects have met this goal, federally funded
highway projects have missed the goal in each of the past 3
years.[Footnote 15]
Overseas, an example of a successful transfer of construction risk
involves the CityLink highway project in Melbourne, Australia. This
project faced several challenges during construction, including
difficult geological conditions and a tunnel failure, which caused
project delays and added costs. According to officials from the
government of Victoria, Australia, because construction risks were
borne by the private sector, all cost and schedule overruns came at the
expense of the private concessionaire, and no additional costs were
imposed on the government. Another benefit of highway public-private
partnerships related to the costs of construction is that because
highway public-private partnership contracts are public and cost and
schedule overruns are generally assumed by the private sector, there
can be more public transparency about project costs and timelines than
under public projects.
Traffic and revenue risks can also be transferred to the private
sector. In some highway public-private partnership projects, traffic
and revenues have been low, imposing costs on the private sector but
not leading to direct costs to the public sector. For example, the
Pocahontas Parkway opened to traffic in stages beginning in May 2002.
Revenues have been less than projected on this road because traffic has
been lower than projected. Virginia used public and private funds for
operating and maintaining the Parkway until it had sufficient revenue
to repay initial state funds used for construction and pay for the
operation and maintenance through tolls. Traffic projections for 2003
indicated there would be about 840,000 transactions per month (about
$1.4 million in revenue). However, as of January 2004, traffic was
about 400,000 transactions per month (about $630,000 in revenue). In
June 2006, under an amended and restated development agreement, a
private concessionaire that believed the road was a good long-term
investment assumed responsibility for the road for a period of 99
years. The private concessionaire is now responsible for all debt on
the Pocahontas Parkway and the risk that revenues on the highway might
not be high enough to support all costs. Similarly, in Australia,
construction of the Cross City Tunnel in Sydney was privately funded;
but, the project began to experience financial problems when actual
traffic and revenues were lower than forecasted. Within the first 2
years of operation, the private operator went into receivership. In
September 2007, the Cross City Tunnel project was sold to new owners
following a competitive tender process. Government officials from New
South Wales told us that, as of spring 2007, there had been no costs to
the government because the traffic and revenue risks were borne by the
private sector.
Potential Efficiencies in Operations and Life-Cycle Management:
Highway public-private partnerships may also yield other potential
benefits, such as management of assets in ways that may yield
efficiencies in operations and life-cycle management that may reduce
total project costs over a project's lifetime. For example, in 2004,
FHWA reported that, in contrast to traditional highway contracting
methods that have sometimes focused on costs of individual project
segments, highway public-private partnerships have more flexibility to
maximize the use of innovative technologies. Such technologies will
lead to increases in quality and the development of faster and less
expensive ways to design and build highway facilities. According to
DOT, highway public-private partnerships can also reduce project life-
cycle costs.[Footnote 16] For example, in the case of the Chicago
Skyway, the private concession company invested in electronic tolling
technologies within the first year of taking over management of the
Chicago Skyway. This action was taken because, in the long term, the up-
front cost of new technologies would be paid off through increased
mobility, higher traffic volumes, a reduced need for toll collectors,
and decreased congestion at the toll plaza by increasing traffic
throughput. According to the Assistant Budget Director for Chicago, the
high initial cost for installing electronic tolling was likely a
prohibiting factor for the city to make the same investment, based on
the city's limited annual budget. Foreign officials with whom we spoke
also identified life-cycle costing and management as a primary benefit
of highway public-private partnerships.
Highway public-private partnerships can also better ensure more
predictable funding for maintenance and capital repairs of the highway.
Under more traditional publicly financed and operated highways,
operations and maintenance and capital improvement costs are subject to
annual appropriations cycles. This increases the risk that adequate
funds may or may not be available to public agencies. However, under a
highway public-private partnership, concessionaires are generally held,
through contractual provisions, to maintain the highway up to a certain
level of standard (sometimes as good as or better than a state would
hold itself to) throughout the course of the concession, and the
concessionaire must fund all maintenance costs itself. Furthermore,
capital improvements, including possible roadway expansions, may also
be contractually required of concessionaires ensuring that such works
will be conducted as needed. Finally, the desire for a safe and well-
maintained roadway in order to attract traffic (and, therefore,
revenues) may incentivize a private operator to useful and efficient
operations and maintenance techniques and practices.
Potential Pricing and Investment Decision-Making Benefits:
Highway public-private partnerships can also potentially provide
mobility and other benefits to the public sector, through the use of
tolling. The highway public-private partnerships we reviewed all
involved toll roads. Highway public-private partnerships potentially
provide benefits by better pricing infrastructure to reflect the true
costs of operating and maintaining the facility and thus realizing
public benefits of improved condition and performance of public
infrastructure. In addition, through the use of tolling, highway public-
private partnerships can use tolling techniques designed to have
drivers readily understand the full cost of decisions to use the road
system during times of peak demand and potentially reduce the demand
for roads during peak hours. Through congestion pricing, tolls can be
set to vary during congested periods to maintain a predetermined level
of service. Such tolls create financial incentives for drivers to
consider costs when making their driving decisions. In response,
drivers may choose to share rides, use transit, travel at less
congested (generally off-peak) times, or travel on less congested
routes to reduce their toll payments. Such choices can potentially
reduce congestion and the demand for road space at peak periods, thus
allowing the capacity of existing roadways to accommodate demand with
fewer delays. For example, a representative of the government of
Ontario, Canada, told us that the 407 ETR helped relieve congestion in
Toronto by attracting traffic from a parallel publicly financed
untolled highway. In fact, advisors to the government said that the
officials established a tolling schedule for the 407 ETR based on
achieving predetermined optimal traffic flows on the 407 ETR.
Tolling can also potentially lead to targeted, rational, and efficient
investment decisions. National roadway policy has long incorporated the
user pays concept, according to which roadway users pay the costs of
building and maintaining roadways, generally in the form of excise
taxes on motor fuels and other taxes on inputs into driving, such as
taxes on tires or fees for registering vehicles or obtaining operator
licenses. Increasingly, however, decision makers have looked to other
revenue sources--including income, property, and sales tax revenues--to
finance roads in ways that do not adhere to the user pays principle.
Tolling, however, is more consistent with user pay principles because
tolling a particular road and using the toll revenues collected to
build and maintain that road more closely aligns the costs with the
distribution of the benefits that users derive from it. Furthermore,
roadway investment can be more efficient when it is financed by tolls
because the users who benefit will likely support additional investment
to build new capacity or enhance existing capacity only when they
believe the benefits exceed the costs. In addition, toll project
construction is typically financed by bonds sold and backed by future
toll revenues, and projects must pass the test of market viability and
meet goals demanded by investors, thus better ensuring that there is
sufficient demand for roads financed through tolling. However, even
with this test there is no guarantee that projects will always be
viable.
Potential Private Sector Benefits:
The private sector, and in particular, private investment groups,
including equity funds and pension fund managers, have recently
demonstrated an increasing interest in investing in public
infrastructure. They see the sector as representing long-term assets
with stable, potentially high yield returns. While these private sector
investors may benefit from highway public-private partnerships, they
can also lose money through a highway public-private partnership.
Although profits are generally not realized in the first 10 to 15 years
of a concession agreement, the private sector receives benefits from
highway public-private partnerships over the term of a concession in
the form of a return on its investment.[Footnote 17] Private sector
investors generally finance large public sector benefits early in a
concession period, including up-front payments for leases of existing
projects or capital outlays for the construction of new, large-scale
transportation projects. In return, the private sector expects to
recover any and all up-front costs (whether construction costs of new
facilities or concession fees paid to the public sector for existing
facilities), as well as ongoing maintenance and operation costs, and
generate a return on investment. According to investment firms with
whom we spoke, future toll revenue from tolled transportation projects
can provide reliable long-term investment opportunities. Furthermore,
any cost savings or operational efficiencies the private sector can
generate, such as introducing electronic tolling, improving maintenance
practices, or increasing customer satisfaction in other ways can
further boost the return on investment through increased traffic flow
and increased toll revenue.
The private sector can also receive potential tax deductions from
depreciation on assets involving private sector investment and the
availability of these deductions were important incentives to the
private sector to enter some of the highway public-private partnerships
we reviewed. Obtaining these deductions, however, may require lengthy
concessions periods. In the United States, federal tax law allows
private concessionaires to claim income tax deductions for depreciation
on a facility (whether new highways or existing highways obtained
through a concession) if the concessionaire has effective ownership of
the property. Effective ownership requires, among other things, that
the length of a concession be greater than or equal to the useful
economic life of the asset. Financial and legal experts, including
those who were involved in the Chicago and Indiana transactions, told
us that since the concession lengths of the Chicago Skyway and the
Indiana Toll Road agreements each exceed their useful life, the private
investors can claim full tax deductions for asset depreciation within
the first 15 years of the lease agreement.[Footnote 18] The requirement
to demonstrate effective asset ownership contributed to the 99-year and
75-year concession terms for the Chicago Skyway and Indiana Toll Road,
respectively. One tax expert told us that, in general, infrastructure
assets (such as highways) obtained by the private sector in a highway
public-private partnership may be depreciated on an accelerated basis
over a 15-year period.[Footnote 19]
Private investors can also potentially benefit from being able to use
tax-exempt financing authorized by SAFETEA-LU in 2005. Private activity
bonds have been provided for private sector use to generate proceeds
that are then used to construct new highway facilities under highway
public-private partnerships.[Footnote 20] This exemption lowers private
sector costs in financing highway public-private partnership projects.
As of January 2008, DOT had approved private activity bonds for 5
projects totaling $3.2 billion[Footnote 21] and had applications
pending for 3 projects totaling $2.2 billion. DOT said it expects
applications for private activity bond allocations from an additional
12 projects totaling more than $10 billion in 2008.
Finally, the private sector can potentially benefit through gains
achieved in refinancing their investments. Both public and private
sector officials with whom we spoke agreed that refinancing is common
in highway public-private partnerships. Refinancing may occur early in
a concession period as the initial investors either attempt to "cash
out" their investment--that is, sell their investment to others and use
the proceeds for other investment opportunities--or obtain new, lower
cost financing for the existing investment. Refinancing may also be
used to reduce the initial equity investment in highway public-private
partnerships. Refinancing gains can occur throughout a concession
period; as project risks typically decrease after construction, the
project may outperform expectations, or there may be a general decrease
in interest rates. In the case of the Chicago Skyway, the concession
company had to secure a large amount of money in a short period of time
to close on the agreement with the city. According to the Chief
Executive Officer of the Skyway Concession Company, the company
obtained a loan package with the best interest rates available at the
time and refinanced within 7 months of financial close on the
agreement. He said this refinance resulted in a better deal, including
better leverage and interest rates.[Footnote 22] An investment banker
involved in the Chicago Skyway concession told us that refinancing
plans are often incorporated into the original investment business case
and form an important part of each bidders' competitive offer. For
example, if the toll road is not refinanced, the investment will
underperform against its original business case. The investment banker
said that there was no refinancing gain on the Chicago Skyway because
the gain was already planned for as part of the initial investment case
and was reflected in the financial offer to the city of Chicago. In
some cases, refinancing gains may not be anticipated or incorporated
into the financial offer and may be realized later in a concession
period. The governments of the United Kingdom and Victoria and New
South Wales, Australia, have acknowledged that gains generated from
lower cost financing can be substantial, and they now require as a
provision in each privately financed contract that any refinancing
gains achieved by concessionaires--and not already factored into the
calculation of tolls--be shared equally with the government. For
example, the state of Victoria, Australia, shared in refinancing gains
from the private investor's refinancing of a highway public-private
partnership project in Melbourne called EastLink project.
Highway Public-Private Partnerships May Not Be Applicable to All
Situations:
Highway public-private partnerships may not be applicable to all
situations, given the challenges of tolling and the private sector's
need to make profits. While tolling has promise as an approach to
enhance mobility and finance transportation, officials face many
challenges in obtaining public and political support for implementing
tolling. As we reported in June 2006, based on interviews with 49 state
departments of transportation, opposition to tolling stems from the
contention that fuel taxes and other dedicated funding sources are used
to pay for roads, and thus tolling is seen as a form of double
taxation.[Footnote 23] In addition, concerns about equity are often
raised, including the potential unequal ability of lower-income and
higher-income groups to pay tolls, as well the use of tolling to
address the transportation needs in one part of a state while freeing
up federal and state funding in tolled areas to address transportation
needs in another part of a state.[Footnote 24] State officials also
face practical challenges in implementing tolling, including obtaining
the statutory authority to toll and addressing the traffic diversion
that might result when motorists seek to avoid toll facilities. Our
June 2006 report concluded that state and local governments may be able
to address these concerns by (1) honestly and forthrightly addressing
the challenges that a tolling approach presents, (2) pursuing
strategies that focus on developing an institutional framework that
facilitates tolling, (3) demonstrating leadership, and (4) pursuing
toll projects that provide tangible benefits to users.
Although highway public-private partnerships could conceivably be used
for reconstructing existing roadways, in practice this could be very
difficult, due, in part, to public and political opposition to tolling
existing free roads. Aside from bridges and tunnels, existing
Interstate Highway System roads generally cannot be tolled, except
under specific pilot programs. One such program, the Interstate System
Reconstruction and Rehabilitation Pilot Program, was authorized in 1998
to permit three states to toll existing interstate highways to finance
major reconstruction or rehabilitation needs. Two states applied for
and received preliminary approval to do so--Virginia in 2003 and
Missouri in 2005--and Pennsylvania submitted an application in 2007.
While Virginia's toll project is proceeding through environmental
review, Missouri's project remains on hold, and Pennsylvania's
application awaits approval. In addition, three other states submitted
applications and withdrew them, owing in part to public and political
opposition to tolls. A fourth state sent in an "Expression of Interest"
for this pilot program, but the state never formally submitted an
application. An official with the metropolitan planning organization
for Chicago said tolling highways is difficult in Illinois, especially
when the public is use to free alternatives, and an official with the
California DOT echoed this sentiment, saying that highway public-
private partnerships are not a substitute or final solution for ongoing
funding of transportation infrastructure. FHWA officials agreed that
highway public-private partnerships are not suitable in all situations.
Another reason highway public-private partnerships may not be
applicable to all situations is that the private sector has a profit
motive and is likely to only enter highway public-private partnerships
for new construction projects that are expected to produce an adequate
rate of return on investment. Therefore, highway public-private
partnerships appear to be most suited for construction of new
infrastructure in areas where congestion may be a problem and traffic
is expected to be sufficient to generate net profits through toll
revenues. For example, we found that Oregon has decided to forego a
highway public-private partnership for one possible highway public-
private partnership project in the Portland area because the forecasted
revenues were not high enough to make the route toll viable for private
investors. Similarly, Texas has concluded that not all segments of the
TTC are toll viable; these segments might not receive direct private
interest and might need to be subsidized with concession fees from
other segments or other funds, including public dollars, if they are
available. According to the Texas DOT, some projects will be partially
toll viable and may require both public and private funds. DOT
officials told us that, in both Oregon and Texas, funds are currently
not available to procure these projects through a public procurement.
Highway Public-Private Partnerships Also Come with Potential Costs and
Trade-offs to the Public Sector:
Highway public-private partnerships come with potential costs and trade-
offs to the public sector. The costs include the potential for higher
user tolls than under public toll roads and potentially more expensive
project costs than publicly procured projects. While the public sector
can benefit through the transfer or sharing of some project risks with
the private sector, not all risks can or should be transferred; and,
the public sector may lose some control through a highway public-
private partnership. Finally, because there are many stakeholders with
interests in a public-private partnership as well as many potential
objectives--and many governments affected--there are trade-offs in
protecting the public interest.
Potential Financial Costs and Trade-offs:
Although highway public-private partnerships can be used to obtain
financing for highway infrastructure without the use of public sector
funding, there is no "free money" in highway public-private
partnerships. Rather, this funding is a form of privately issued debt
that must be repaid. Private concessionaires primarily make a return on
their investment by collecting toll revenues. Though concession
agreements can limit the extent to which a concessionaire can raise
tolls, it is likely that tolls will increase on a privately operated
highway to a greater extent than they would on a publicly run toll
road. For example, during the time the Chicago Skyway was publicly
managed, tolls changed infrequently and actually decreased by
approximately 25 percent in real terms (2007 dollars) between 1989 and
2004 (see fig. 5). According to the former Chief Financial Officer of
Chicago, the Chicago Skyway had not historically increased its tolls
unless required by law, even though the Skyway had been operating at a
loss and had outstanding debt. On the other hand, under private
control, maximum tolls are generally set in accordance with concession
agreements and, in contrast to public sector practices, allowable toll
increases can be frequent and automatic. The concession agreements for
both the Chicago Skyway and Indiana Toll Road permit toll rates to
increase each year, based on a minimum of 2 percent and a maximum of
the annual change of either the CPI or per capita U.S. nominal gross
domestic product (GDP), whichever is higher.[Footnote 25] Based on
estimated increases in nominal gross domestic product and population,
the tolls on the Chicago Skyway will be permitted to increase in real
terms nearly 97 percent from 2007 through 2047--from $2.50 to $4.91 in
2007 dollars.[Footnote 26] This is also shown in figure 5. These future
toll projections reflect the maximum allowable toll rates, which have
been authorized by the public sector in the concession agreements.
Figure 5: Change in Chicago Skyway Tolls, 1967 to 2047:
This figure is a combination line graph showing change in Chicago
Skyway tolls between 1967 and 2047. The X axis is the year, and the Y
axis is the toll rate for passenger vehicles. The lines represent
historic nominal toll rates, projected nominal toll rates with growth
equal to growth in nominal per capita (GDP), projected nominal toll
rate with 2 percent growth per year, historic toll rates in 2007
dollars), projected toll rates in 2007 dollars with growth equal to
growth in nominal per capita GDP, and projected toll rates in 2007
dollars with 2 percent growth per year.
[See PDF for image]
Source: GAO analysis of Chicago and OECD data.
Note: Historical data are from 1986 to 2006; scheduled maximum toll
rates are from 2007 to 2017; and projected toll rates from 2008 to
2047. Projections to 2047 are based on 2 percent growth, or forecasted
per capita GDP growth, adjusted to 2007 dollars.
[End of figure]
Depending on market conditions, the potential exists that the public
could pay higher tolls than those that would more appropriately reflect
the true costs of operating and maintaining the facilities, including
earning a reasonable rate of return. Within the maximum allowable toll
rates authorized by the public sector in the concession agreements,
toll rate changes will be driven by such market factors as the demand
for travel on the road, which, in turn, will be influenced by the level
of competition that toll road concessionaires will face. This
competition will vary from facility to facility. In cases where an
untolled public roadway or other transportation mode (e.g., bus or
rail) is a viable travel alternative to the toll road, these competing
alternatives may act to constrain toll rates. In other instances, where
there are not other viable travel alternatives to a toll road that
would not require substantially more travel time, there may be few
constraints on toll rates other than the terms of the concession. In
such instances, a concessionaire may have substantial market power,
which could give the concessionaire the ability to set toll rates that
exceed the costs of the toll road, including a reasonable rate of
return, as long as those toll rates are below the maximum rates allowed
by the concession agreement. We have not determined the extent to which
any concessionaire would have substantial market power due to limited
alternatives, although this is an appropriate consideration when
entering possible highway public-private partnerships.
In addition to potentially higher tolls, the public sector may give up
more than it receives in a concession payment in using a highway public-
private partnership with a focus on extracting value from an existing
facility. Conversely, because the private sector takes on substantial
risks, the opposite could also be true--that is, the public sector
might gain more than it gives up. In exchange for an up-front
concession payment, the public sector gives up control over a future
stream of toll revenues over an extended period of time, such as 75 or
99 years. It is possible that the net present value of the future
stream of toll revenues (less operating and capital costs) given up can
be much larger than the concession payment received. Concession
payments could potentially be less than they could or should be. In
Indiana the state hired an accounting and consulting firm to conduct a
study of the net present value of the Indiana Toll Road and deemed its
value to the state to be slightly under $2 billion. This valuation
assumed that future toll increases would be similar to the past--
infrequent and in line with the road's history under public control. An
alternative valuation of the toll road lease performed by an economics
professor on behalf of opponents of the concession changed certain
assumptions of the net present value model and produced a different
result--about $11 billion. This valuation assumed annual toll rate
increases by the public authority of 4.4 percent, compared with the 2.8
percent used in the state's valuation.[Footnote 27] We did not evaluate
this study and make no conclusions about its validity; other studies
may have reached different conclusions; however, the results of this
study illustrate how toll rate assumptions can influence asset
valuations and, therefore, expected concession payments.
Similarly, unforeseen circumstances can dramatically alter the relative
value of future revenues compared with the market value of the
facility. In 1999, the government of Ontario, Canada received a $3.1
billion concession fee in exchange for the long-term lease for the 407
ETR. In the years following the concession agreement, as commercial and
residential development along the 407 ETR corridor exceeded initial
government projections, the value of the roadway increased. In 2002, a
valuation conducted by an investor in the concession estimated that the
market value of the facility had nearly doubled--from $3.1 billion
Canadian to $6.2 billion Canadian. This valuation included a new 40
kilometers that had been added to the 407 ETR since it was originally
built, as well as additional parking lots and increased tolls.
Using a highway public-private partnership to extract value from an
existing facility also raises issues about the use of those proceeds
and whether future users might potentially pay higher tolls to support
current benefits. In some instances, up-front payments have been used
for immediate needs, and it remains to be seen whether these uses
provide long-term benefits to future generations who will potentially
be paying progressively higher toll rates to the private sector
throughout the length of a concession agreement. Both Chicago and
Indiana used their lease fees, in part, to fund immediate financial
needs. Chicago, for example, used lease proceeds to finance various
city programs, while Indiana used lease proceeds primarily to fund its
"Major Moves" 10-year transportation program. However, Chicago also
used the proceeds to retire both Chicago Skyway and some city debt, and
both Chicago and Indiana established long-term reserves from the lease
proceeds. Conversely, proceeds from the lease of Highway 407 ETR in
Toronto, Canada, went into the province's general revenue fund, and
officials in the Ministry of Transport were unaware of how the payment
was spent. Consequently, it is not clear if those uses of proceeds will
benefit future roadway users.
Highway public-private partnerships also potentially require additional
costs to the public sector compared with traditional public
procurement. These costs include potential additional costs associated
with (1) required financial and legal advisors, and (2) private sector
financing compared with public sector financing. A June 2007 study by
the University of Southern California found that because the U.S.
transportation sector has little experience with long-term concession
agreements, state departments of transportation are unlikely to have in-
house expertise needed to plan, conduct, and execute highway public-
private partnerships. FHWA has also recognized this issue--in a 2006
report it noted that, in several states, promising projects have been
delayed for lack of staff capacity and expertise to confidently
conclude agreements. Furthermore, public sector agencies must also
exercise diligence to prevent potential conflicts of interest, if the
legal and financial firms also advise private investors. In addition,
highway public-private partnership projects are likely to have the
higher cost of private finance because public sector agencies generally
have access to tax-exempt debt, while private companies generally do
not.
Financial trade-offs can also involve federal tax issues. As discussed
earlier, unlike public toll authorities, the private sector pays income
taxes to the federal government and the ability to deduct depreciation
on assets involved with highway public-private partnerships for which
they have effective ownership for tax purposes can reduce that tax
obligation. The extent of these deductions and amounts of foregone
revenue, if any, to the federal or state governments are difficult to
determine, since they depend on such factors as the taxable income,
total deductions, and marginal tax rates of private sector entities
involved with highway public-private partnerships. Nevertheless,
foregone revenue can also amount to millions of dollars.[Footnote 28]
For example, there may be foregone tax revenue when the private sector
uses tax-exempt private activity bonds. As we reported in 2004, the
2003 cost to the federal government from tax-exempt bonds used to
finance three projects with private sector involvement--Pocahontas
Parkway, Southern Connector, and the Las Vegas Monorail--was between
$25 million and $35 million.[Footnote 29] There can also be potential
costs of highway public-private partnerships using public finance since
state and local debt is also tax deductible. Regardless of the tax
impact on government revenues, the availability of depreciation
deductions can be important to private sector concessionaires. As
discussed earlier, financial experts with whom we spoke said that
depreciation deductions associated with the Chicago Skyway and Indiana
Toll Road transactions were significant, and that it is likely that in
the absence of the depreciation benefit, the concession payments to
Chicago and Indiana would have been less than $1.8 and $3.8 billion,
respectively.
Potential Loss of Control:
In highway public-private partnerships the public sector may lose some
control over its ability to modify existing assets or implement plans
to accommodate changes over time. For example, concession agreements
may contain noncompete provisions designed to limit competition from or
elicit compensation for highways or other transportation facilities
that may compete and draw traffic from a leased toll road. The case of
SR-91 in California illustrates an early and extreme example of a
noncompete provision's potential effect. In 1991, the California DOT
used a highway public-private partnership to construct express lanes in
the middle of the existing SR-91. The express lanes were owned and
operated by a private concessionaire, and the public sector continued
to own the adjacent lanes. The concession contained provisions that
prevented improvements or expansions of the adjacent public lanes.
Eight years after signing the concession agreement, the local
transportation authority purchased the concessionaire's rights to the
tolled express lanes, thus enabling transportation improvements to be
made.[Footnote 30] It appears that noncompete clauses in projects that
followed SR-91 have generally provided more flexibility to modify
nearby existing roads and build new infrastructure when necessary. This
issue is discussed further in the next section of the report.
The public sector may also lose some control of toll rate setting by
entering into highway public-private partnerships. Highway public-
private partnership agreements generally allow the private operator to
raise tolls in accordance with provisions outlined in the concession
contract. The private operator may be able to raise tolls on an annual
basis, without prior approval. To the extent that the public sector may
want to adjust toll rates--for example, to manage demand on their
highway network--they may be unable to do so because the toll setting
capability is defined exclusively by the concession contract and the
private operator.
Not All Risks Can or Should Be Transferred in Highway Public-Private
Partnerships:
While the public sector may benefit from the transfer of risk in a
highway public-private partnership, not all risks can or should be
transferred and there may be trade-offs. There are costs and risks
associated with environmental issues, which often cannot or should not
be transferred to the private sector in a highway public-private
partnership. For example, if a project is to be eligible for federal
funds at any point throughout the project lifetime, a lengthy
environmental review process must be completed, as required for all
federally funded projects, by the National Environmental Policy Act
(NEPA). There can also be various federal permits and approvals
required. The financial risk associated with the environmental
assessment process (and whether the project will be approved) generally
resides with the public sector, in part, because the environmental
review process can add to project costs and can cause significant
project delays. In addition, the private sector may be unwilling to
accept the risk and project uncertainty associated with the publicly
controlled environmental review process. An example of the delay that
can be experienced in projects undergoing environmental review includes
the South Bay Expressway in California. The state selected a private
sponsor for this project in 1991. However, litigation challenging the
final record of decision on the environmental impact statement for the
project was not resolved until March 2003, and construction did not
begin until July 2003. In another example, private sector officials in
Texas have told us they are not involved with the environmental
assessment process for the TTC, given the added costs and the increased
project delivery times. According to the Texas DOT, environmental
review is a core function of government and a risk that to date appears
best suited to the public sector.
Finally, there may also be political trade-offs faced by the public
sector when involved in highway public-private partnerships. For
example, public opposition to the TTC and other highway public-private
partnerships in Texas remains strong. Although the governor of Texas
has identified a lack of funds as a barrier to meeting the state's
transportation needs, public outcry over the TTC and the lack of
involvement of local governments was so substantial that in June 2007
the state legislature enacted a 2-year moratorium on future highway
public-private partnerships in the state.[Footnote 31] In the case of
the 407 ETR in Toronto, a consultant to the Ontario Ministry of
Transportation told us the government was publicly criticized for the
transaction and road users had little understanding of the reasons the
government entered the agreements or what the future toll rates could
be. As a result, the government suffered public backlash. Similarly,
the New South Wales government, as part of its agreement with the
concession company of the Cross City Tunnel in Sydney, Australia,
closed some city streets in order to mitigate local congestion in the
downtown area as part of the tunnel project. Although the government's
intent was to alleviate congestion from downtown Sydney, many drivers
felt that they were diverted into the tolled tunnel, and the government
was criticized for its actions.
It Is Important to Consider the Opportunities of Highway Public-Private
Partnerships Against Public Objectives, Potential Costs, and Trade-
offs, as well as Public Interests:
The diversity and uncertainty of both the benefits and costs of highway
public-private partnerships of the type we reviewed--long-term
concessions--are complex and suggest that the merits of future
partnerships will need careful evaluation on a case-by-case basis. As
noted above, highway public-private partnerships have the potential to
provide benefits, such as construction of new facilities, without the
use of public finance, the transfer or sharing of project risks, and
achievement of increased operational efficiencies through private
sector operation and life-cycle management. However, also as discussed
earlier, there are costs and trade-offs involved, including loss of
public-sector control of toll setting and potentially more expensive
project costs than publicly procured projects. State and local
governments pursue highway public-private partnerships to achieve
specific public objectives, such as congestion relief and mobility or
increasing freight mobility. In some instances, the potential benefits
of highway public-private partnerships may outweigh the potential costs
and trade-offs, and the use of highway public-private partnerships and
long-term concessions would serve the public well into the future. In
other instances, the potential costs and trade-offs may outweigh the
potential benefits, and the public interest may not be well served by
using such an arrangement. In instances where public officials choose
to go with a highway public-private partnership accomplished through a
long-term concession, realizing potential benefits will require careful
structuring of the public-private partnership agreement and identifying
and mitigating the direct risks of the project.
From a public perspective, an important component of any analysis of
potential benefits and costs of highway public-private partnerships and
long-term concessions is consideration of the public interest. As with
any highway project, there can be many stakeholders in highway public-
private partnerships, each of which may have its own interests.
Stakeholders include regular toll road users, commercial truck and bus
drivers, emergency response vehicles, toll road employees, and members
of the public who may be affected by ancillary effects of a highway
public-private partnership, including users of nearby roads, land
owners, special interest groups and taxpayers, in general (see fig. 6).
Identification of the public interest is a function of scale and can
differ based on the range of stakeholders and the geographic and
political domain considered. At the national level, the public interest
may include facilitating interstate commerce, as well as meeting
mobility needs. State and regional public interest, however, might
prioritize new infrastructure to meet local demand or maximum up-front
payments to reduce debt or finance transportation plans above and
beyond national mobility objectives. With competing interests over the
duration of the concession agreement, trade-offs will be necessary. For
example, if mobility is an objective of the project, high toll rates at
times of peak travel demand may be necessary to deter some users from
driving during peak hours and thus mitigate congestion. But, if rates
are too high, traffic diversion to free alternate public routes may be
an unintended outcome that could adversely affect drivers on those
roads.
Figure 6: Various Stakeholder Interests Associated with Highway Public-
Private Partnerships:
This figure is an illustration of various stakeholder interests
associated with highway public-private partnerships.
[See PDF for image]
Source: GAO analysis of FHWA data.
[End of figure]
Highway Public-Private Partnerships Have Sought to Protect Public
Interest in Many Ways, but Use of Public Interest Criteria Is Mixed in
the United States:
The public interest in highway public-private partnerships can and has
been considered and protected in many ways. State and local officials
in the projects we reviewed heavily relied on concession terms. Most
often, these terms were focused on ensuring performance of the asset,
dealing with financial issues such as toll rates, maintaining the
public sector's accountability and flexibility to provide
transportation services to the public, addressing workforce issues, and
maintaining the ability to address these concession terms over the life
of the contract. Additionally, oversight and monitoring mechanisms were
used to ensure that private partners fulfill their obligations. In
addition to concession terms, certain financial analyses were used to
protect the public interest. For example, PSCs, which attempt to
compare estimated project costs as a highway public-private partnership
with undertaking a project publicly, have been used for some highway
projects. We found that some foreign governments have also used formal
public interest tools as well as public interest criteria tests.
However, use of these tests and tools has been more limited in the
United States. Not using formal public interest criteria and assessment
tools can potentially allow aspects of the public interest to be
overlooked and use of formal analyses before entering into highway
public-private partnerships can help lay out the expected benefits and
costs of the project.
Highway Public-Private Partnerships We Reviewed Have Used Concession
Terms to Protect the Public Interest:
The highway public-private partnerships we reviewed have used various
mechanisms to protect the public interest by holding concessionaires to
requirements related to such things as performance of an asset,
financial aspects of agreements, the public sector's ability to remain
accountable as a provider of public goods and services, workforce
protections, and concession oversight. Because agreeing to these terms
may make an asset less valuable to the private sector, public sector
agencies might have accepted lower payments in return for these terms.
Asset Performance Measures:
Public sector agencies involved in highway public-private partnerships
have attempted to protect the public interest by ensuring that the
performance of the asset is upheld to high safety, maintenance, and
operational standards and can be expanded when necessary (see table 3).
Operating and maintenance standards were incorporated in the Indiana
Toll Road and Chicago Skyway concession agreements. Based on documents
we reviewed, the standards on the Indiana Toll Road detail how the
concessionaire must maintain the road's condition, utility, and level
of safety with the intent to ensure that the public would not see any
reduction in the performance of the highway over the 75-year lease
term. The standards also detail how the concessionaire must address a
wide range of roadway issues, such as signage, use of safety features
such as barrier walls, snow and ice removal, and the level of pavement
smoothness that must be maintained. According to a Deputy Commissioner
with the Indiana DOT, the standards actually hold the lessee to a
higher level of performance than when the state operated the highway,
because the state did not have the funding to maintain the Indiana Toll
Road to its own standards. For the Chicago Skyway, the concessionaire
is required to follow detailed maintenance and operations standards
that are based on industry best practices and address maintenance
issues such as roadway maintenance, drainage maintenance, and roadway
safety features, as well as operational issues such as toll collection
procedures, emergency planning, and snow and ice control procedures.
According to an engineering consultant with the city of Chicago who was
involved in writing the standards used in the concession, when the
Chicago Skyway had been under public control, employees were not
required to follow formal standards.
Table 3: Selected Performance Mechanisms to Protect the Public
Interest:
Issue: Detailed operating and maintenance standards;
Project: Chicago Skyway;
Details: The concessionaire must follow detailed technical and
operational specifications based on industry best practices that
address maintenance issues such as roadway maintenance, drainage
maintenance, and roadway safety features, as well as operational issues
such as toll collection procedures, emergency planning, and snow
removal.
Issue: Expansion triggers;
Project: Indiana Toll Road;
Details: Concessionaire must act to improve Level of Service (LOS) on
Indiana Toll Road when Level of Service[A] forecasted to reach Level C
in rural areas or Level D in urban areas.
Source: GAO analysis of concession contracts.
[A] LOS is a measure of traffic congestion. In LOS C, the influence of
traffic density becomes marked and the ability to maneuver within the
traffic stream is affected by other vehicles. In LOS D, the ability to
maneuver is severely restricted due to traffic congestion and travel
speed is reduced by the increasing volume of traffic.
[End of table]
Concessions may include requirements to maintain performance in terms
of mobility and capacity by ensuring a certain level of traffic
throughput and avoiding congestion. Highway public-private partnerships
may also require that a concessionaire expand a facility once
congestion reaches a certain level and some agreements can include
capacity and expansion triggers based on LOS forecasts. LOS is a
qualitative measure of congestion; according to the concession
agreement, on the Indiana Toll Road, when LOS is forecasted to fall
below certain levels within 7 years, the concessionaire must act to
improve the LOS, such as by adding additional capacity (such as an
extra lane) at its own cost, to ease the future projected congestion.
Because the provisions call for expansions in advance of poor mobility
conditions, it appears this agreement aims to prevent a high level of
congestion from ever happening. According to Texas DOT officials, the
concessionaire for the State Highway 130, segments 5 and 6 project (see
table 1) will be required to add capacity through expansion, or better
manage traffic, to improve traffic flow if the average speed of
vehicles on the roadway falls below a predetermined level. According to
government officials in Toronto, Canada, the private operator of the
407 ETR is also required to maintain a certain vehicle flow and traffic
growth on the road or face financial penalties.
Financial Mechanisms:
Public sector agencies have also sought to protect the public interest
in highway public-private partnerships through financial mechanisms
such as toll rate setting limitations (see table 4). However, the toll
limitations used in U.S. highway public-private partnerships that we
reviewed may be sufficiently generous to the private sector that they
might not effectively limit toll increases. Toll limitations constrain
the high profit-maximizing toll levels that a private concessionaire
might otherwise set. As discussed earlier, tolls on the Chicago Skyway
can be increased at predetermined levels for the first 12 years of the
lease (rising from $2.50 to $5 per 2-axle vehicle). Afterward, tolls
can then increase annually at the highest of three factors: 2 percent,
increase in CPI, or increase in nominal per capita GDP. According to
the concession agreement, tolls on the Indiana Toll Road can be
increased at set levels until mid-2010 and then can rise by a minimum
of 2 percent or a maximum of the prior year's increase in CPI or
nominal per capita GDP. In general, these limitations are meant to
restrict the rate of toll increases over time. Since nominal GDP has
generally increased at an annual rate of between 4 and 7 percent over
the last 20 years, the restrictions may not effectively limit toll
increases.
Some foreign governments have taken a different approach to limiting
toll increases that may create more constraining limits. For example,
in Spain, we were told that concessionaires are limited to increasing
tolls by roughly the rate of inflation in Spain every year (although
slight adjustments may be made based on traffic levels). In contrast,
since the annual rate of inflation in the United States has typically
been lower than nominal GDP growth (except during years of negative
real GDP change), the maximum allowable toll increases in Chicago and
Indiana will likely exceed the U.S. inflation rate. We were told that
in the EastLink project in Australia, toll rates have been kept low by
having prospective bidders for a concession bid down the level of toll
rates; the contract is awarded to the bidder that agrees to operate the
facility with the lowest toll. Government officials told us that this
process resulted in the lowest per kilometer toll rate of any toll road
in Australia. However, using a process that constrains bidders to the
lowest tolls may involve government subsidies. Although no closure of
competing roads or government subsidies were involved with the EastLink
project in Victoria, Australia, the potential for government subsidies
was involved in the Cross City Tunnel project in Sydney, Australia. An
official with the New South Wales government said the government was
adopting a new policy in light of the Cross City Tunnel project
specifying that the government should be prepared to provide subsidies
on toll road projects to keep tolls at certain predetermined levels. In
commenting on a draft of this report, DOT officials said that different
government agencies may have different goals for highway public-private
partnerships besides keeping tolls low. These other goals could include
maximizing the number of new facilities provided, earning the largest
up-front payment or annual revenue sharing, or using higher tolls to
maximize mobility and choice.
Revenue-sharing mechanisms have also been used to protect the public
interest by requiring a concessionaire to share some level of revenues
with the public sector. For example, in Texas, revenues on the State
Highway 130, segments 5 and 6, concession will be shared with the state
so that the higher the return on investment of the private
concessionaire, the higher the share with the state. For example, after
a one-time, up-front payment of $25 million, if the annual return on
investment of the private concessionaire is at or below 11 percent,
then the state could share in 5 percent of all revenues. If it is over
15 percent, then Texas could receive 50 percent of the net revenues.
Higher returns would warrant higher revenue shares for the state.
Officials with the Texas DOT said they see revenue sharing, as opposed
to one large up-front payment at lease signing, as protecting the
public interest in the long run and ensuring that the public and
private sectors share common goals. Both Chicago and Indiana officials
told us there were no revenue sharing arrangements in either the
Chicago Skyway or Indiana Toll Road concessions.
Table 4: Selected Financial Mechanisms to Protect the Public Interest:
Type of control: Revenue sharing: Toll rate limitations;
Project: TTC: Indiana Toll Road;
Details: Based on return on investment of concessionaire: Fixed
increases until mid-2010, afterwards allowed annual increase of the
higher of 2 percent, nominal per capita GDP growth, or CPI growth.
Source: GAO analysis of Indiana and Texas data.
[End of table]
Foreign governments have also used other financial mechanisms, such as
controls on public subsidies to private projects and the sharing of
refinancing gains, to protect the public interest in highway public-
private partnerships. For example, in Spain, we were told that
concessionaires for highway projects that require public subsidies
often bid for the lowest subsidy possible to lower costs to the
government. In other highway projects, the government of Spain will
provide loans for private projects for which the interest rate on
repayment is based on traffic levels: the lower the traffic level the
lower the interest rate. According to documents we reviewed, in highway
public-private partnerships in both Victoria and New South Wales,
Australia, any profits the concessionaire earns by refinancing of the
asset must be shared with the government. In May 2007, the government
of New South Wales, Australia, issued guidance in relation to
refinancing gains.[Footnote 32] According to a New South Wales
official, the general position of the government on highway public-
private partnership refinancing is that all refinancings, other than
those contemplated at financial close, require government consent.
Government consent plays a fundamental role in project refinancing
since refinancing may increase project risk by increasing debt burden
and reducing investors' long-term financial incentives, among other
things. In Canada, federal policy requires that any federal funds used
to construct a road that is then leased to a private concessionaire
must be repaid to the federal government.
Accountability and Flexibility:
Governments entering into highway public-private partnerships have also
acted to protect the public interest by ensuring that they are not
fully constrained by the concession and are still able to provide
transportation infrastructure (see table 5). This flexibility has been
achieved in part by avoiding fully restrictive noncompete clauses.
Since Orange County bought back the SR-91 managed lanes because it was
no longer willing to be bound by the restrictive noncompete clause it
originally agreed to, governments entering into highway public-private
partnerships have sought to avoid such restrictive clauses.[Footnote
33] Some more recent noncompete clauses can be referred to as
"compensation clauses" because they require that the public sector
compensate the concessionaire if the public sector proceeds (in certain
instances) with an unplanned project that might take revenues from the
concessionaire's toll road. For example, for the State Highway 130
concession in Texas, both the positive and negative impacts that new
public roads will have on the toll road will be determined and,
potentially, Texas DOT will compensate the concessionaire for losses of
revenues on the concession toll road. However, that payment might be
counterbalanced by Texas DOT receiving credits for new publicly
constructed roads that are demonstrated to increase traffic on the
concession toll road. Additionally, according to the Texas DOT, on the
State Highway 130 concession, projects already on the state's 20-year
transportation plan when the concession was signed are exempt from any
such provisions. Certain other projects are also exempt, such as
expansions or safety improvements made to I-35 (a parallel existing
highway on the Interstate Highway System); any local, city, or county
improvements; or, any multimodal rail projects. According to the Texas
DOT, in no case is it, or any other governmental authority, precluded
from building necessary infrastructure. A noncompete clause lowers
potential competition from other roadways for a private concessionaire,
thereby increasing their potential revenues. Therefore, a contract
without any noncompete provisions, all else equal, is likely to attract
lower concession payments from the private sector.
Table 5: Selected Noncompete Provisions:
Project/site: Texas;
Details: Compensation clause--State must compensate concessionaire for
loss of revenues resulting from new construction;
projects on existing transportation plans are exempt.
Project/site: Indiana;
Details: Clause prevents state from building a highway of 20 or more
miles in length that is within 10 miles of the Indiana Toll Road;
all other work is allowed.
Project/site: Chicago Skyway;
Details: No noncompete clause.
Source: GAO analysis of selected highway public-private partnership
contracts.
[End of table]
According to an Indiana official, a noncompete clause for the Indiana
Toll Road requires the state to compensate the concessionaire an amount
equal to the concessionaire's lost revenue from a new highway if the
state constructs a new interstate quality highway with 20 or more
continuous miles within 10 miles of the Indiana Toll Road. Indiana
officials told us that the concession agreement for the Indiana Toll
Road does not prevent the state from building competing facilities and
provides great latitude in maintaining and expanding the state's
transportation network around the toll road and that they do not expect
this restriction to place serious constraints on necessary work near
the toll road. Others have suggested that the state could face
difficulties if toll rates on the Indiana Toll Road begin to divert
significant levels of traffic to surrounding roads. In such a case, the
state could be constrained in making necessary improvements or
constructing new facilities to handle the additional traffic. City of
Chicago officials did not sign a noncompete provision in the Chicago
Skyway contract. While city officials decided not to have a noncompete
provision in order to keep their options open for future work they
might find necessary, city officials told us that the concessionaire
agreed to a lease agreement without such a provision because geographic
limitations (the Chicago Skyway being located in a very heavily
developed urban area and close to Lake Michigan) make construction of a
competing facility very unlikely.
Spanish officials told us that they preserve flexibility by retaining
the ability to renegotiate a concession agreement if it is in the
public interest to do so. They referred to this as "rebalancing" a
concession agreement. For example, if the government believes that
adding capacity to a certain concession highway is in the public
interest, it can require the concessionaire to do so as long as the
government provides adequate compensation for the loss of revenues.
Likewise, the government may rebalance a contract with a concessionaire
if, for example, traffic is below forecasted levels, to help restore
economic balance to the concession. In this case, the government might
offer an extension to the concession term to allow the concessionaire
more time to recover its investments. An executive of one
concessionaire in Spain told us that it is important for the government
to have that ability of renegotiation and concessionaires generally
agree to the government's requests.
Workforce:
Protection of the public interest has also extended to the workforce,
and concession provisions have been used in this area as well. In some
cases, public sector agencies entering into highway public-private
partnerships with existing toll roads have contractually protected the
interest of the existing toll road workforce by ensuring that workers
are able to retain their jobs, or are offered employment elsewhere.
Some public sector agencies have also addressed benefits issues. For
example, in the Chicago Skyway concession there were 105 city employees
when the concession began. According to the concession agreement, the
city required the concessionaire to (1) comply with a living wage
requirement;[Footnote 34] (2) pay prevailing wages for all construction
activities; and (3) make its best effort to interview (if requested),
though not necessarily offer employment to, all Chicago Skyway
employees for jobs before the asset was transferred. A Chicago official
told us that once the concessionaire commenced operation five employees
chose to maintain employment with the Chicago Skyway, while 100 took
other city jobs.[Footnote 35] Those employees that took other city jobs
retained their previous benefits.
The state of Indiana also used concession provisions to help protect
the workforce on the Indiana Toll Road. According to the concession
agreement, these provisions required the concessionaire to follow
certain laws such as nondiscrimination laws and minority-owned business
requirements. Indiana officials told us that, prior to the lease
agreement, the Governor of Indiana had made a commitment that each
Indiana Toll Road employee would either be offered a job with the
private concession company or with the state without a reduction in pay
or benefits occurring with the new job. According to the Indiana DOT,
all employees of the Indiana Toll Road (about 550 employees at the time
the lease agreement commenced) were interviewed by the concessionaire;
and about 85 percent of the employees transitioned to the private
operator, but did so at equal or higher pay. According to an official
with the toll road concessionaire, the average wages of an Indiana Toll
Road employee increased from $11.00 per hour to between $13.55 and
$16.00 per hour. Indiana officials indicated about 115 employees were
offered placement with the state of Indiana and those that retained
employment with merit or nonmerit state agencies maintained all
outstanding vacation and sick time. Those toll road employees that left
state agencies (including moving to the concessionaire) were paid for
outstanding vacation time they had accrued, up to 225 hours. Indiana
officials also indicated that, although those employees that left state
agencies no longer are part of the state's pension plan, their
contributions and their vested state contributions were preserved, and
these employees are now offered a 401(k) plan by the concessionaire.
Another highway public-private partnership we examined, the TTC,
involved new construction and, at the time of our review, had not yet
reached the point of a concession. Oregon also involved new
construction and was not at the point of a concession. Unlike existing
facilities, new construction does not involve an existing workforce
that could lose its jobs or face significantly different terms of work
when the private sector takes over operations. However, concession
terms can be used to protect the future workforce that is hired to
construct and operate a highway built with a highway public-private
partnership. For example, in a different highway public-private
partnership project in Texas that has signed a concession, State
Highway 130, segments 5 and 6, the concession agreement states that
prevailing wage rates will be set by the Texas DOT and that the
concessionaire should meet goals related to the hiring of women,
minorities, and disadvantaged business enterprises. According to the
Texas DOT, the concessionaire is also required to establish and
implement a small business mentoring program.
Other countries have also acted to protect employees in highway public-
private partnerships. For example, the United Kingdom has taken actions
to ensure that the value gained in its highway public-private
partnership projects is not done so at the expense of its workforce.
According to the United Kingdom's Code of Practice on workforce
matters, new and transferred employees of private concessionaires are
to be offered "fair and reasonable" employment conditions, including
membership in a pension plan which is at least equivalent to the public
sector pension scheme that would apply. According to an official with
the United Kingdom Treasury Department, this Code of Practice has been
agreed to by both employers and trade unions and was implemented in
2003.
Oversight and Monitoring of Concessions:
The public sector also undertakes oversight and monitoring of
concessionaires to ensure that they fulfill their obligations to
protect the public interest. Such mechanisms can both identify when
requirements are not being met, and also provide evidence to seek
remediation when the private sector does not do so. In Indiana, an
Indiana Toll Road Oversight Board was created as an advisory board
composed of both state employees and private citizens to review the
performance and operations of the concessionaire and potentially
identify cases of noncompliance. This Oversight Board meets on at least
a quarterly basis and has discussed items dealing with traffic
incidents, concerns raised by state residents and constituents, and the
implementation of electronic tolling on the facility. The Chicago
Skyway concession also incorporates oversight. Oversight includes
reviewing various reports, such as financial statements and incident
reports filed by the concessionaire, and hiring independent engineers
to oversee the concessionaire's construction projects. In both Indiana
and Chicago the concessionaire reimburses the public sector for
oversight and monitoring costs--in Indiana up to $150,000 per year
adjusted for inflation.
Oversight and monitoring also encompass penalties if a concessionaire
breaches its obligations. For example, the highway public-private
partnership contracts in Chicago and Indiana allow the public sector to
ultimately regain control of the asset at no cost if the concessionaire
is in material breach of contract. Additionally, the public sector has
sometimes retained the ability to issue fines or citations to
concessionaires for nonperformance. For example, according to the Texas
DOT, in Texas an independent engineer will be assigned to the TTC
concessionaire who will be able to issue "demerits" to the
concessionaire for not meeting performance standards. These demerits,
if not remedied, could lead to concessionaire default.
Foreign governments have also taken steps to provide oversight and
monitoring of concessionaires. In Spain, the Ministry of Public Works
assigns public engineers to each concession to monitor performance.
These engineers not only monitor performance during construction to
ensure that work is being done properly, but also monitor performance
during operation. They do so by recording user complaints and incidents
in which the concessionaire does not comply with the terms of the
concession. Accountability and oversight mechanisms have also been
incorporated in Australian concessions. In both Victoria and New South
Wales, projects must demonstrate that they incorporate adequate
information to the public on the obligations of the public and private
sectors and that there are oversight mechanisms. In some instances, a
separate statutory body, which may be chaired by a person outside of
government, provides oversight, as was done on the CityLink toll road
in Melbourne, Australia.[Footnote 36] Officials with a private
concessionaire in Australia told us that they generally meet monthly
with the state Road and Traffic Authority to review concession
performance. In addition, both the Victoria and New South Wales Auditor
Generals are also involved with oversight. In both states the Auditor
General reviews the contracts of approved highway public-private
partnerships. In New South Wales, the law requires publication of these
reviews and contract summaries. In Victoria, government policy requires
publication of the contracts, together with project summaries,
including information regarding public interest considerations.
Financial Analyses and Bidding Processes Have Also Been Used to Protect
the Public Interest:
Governments have also used financial analyses, such as asset
valuations, and procurement processes to protect the public interest.
We found that states and local governments entering into the two
existing highway public-private partnerships that we reviewed largely
limited their analyses to asset valuation. For example, both the city
of Chicago and the state of Indiana hired consultants to value the
Chicago Skyway and the Indiana Toll Road, respectively, before signing
concessions for these assets. In Indiana, the state's consultant
performed a net present valuation of the toll road that determined that
the toll road was worth about $2 billion to the state. Because the
winning bid of $3.85 billion that the state received was far more than
the consultant's assessed value, Indiana used that valuation to justify
that the transaction was in the public interest. The assistant budget
director for Chicago told us that in Chicago an analysis showed the
city could leverage only between $800 and $900 million from the toll
road. The officials then compared that amount to the $1.8 billion that
the city received from the winning bidder and determined that the
concession was in the public interest. Both valuations assumed that
future toll rates would increase only to a limited extent under public
control.
Additionally, steps have been taken to protect the public interest
through procurement processes. Both Chicago and Indiana used an auction
bidding process in which qualified bidders were presented with the same
contract and bid on the same terms. This process ensured that the
winning bidder would be selected on price alone (the highest concession
fee offered) since all other important factors and public interest
considerations--such as performance standards and toll rate standards-
-would be the same for all bidders. Texas has also taken steps to
protect the public interest through the procurement process for the
TTC. While the Texas DOT signed the comprehensive development agreement
with a private concessionaire for the TTC-35, it does not guarantee
that the private firm will be awarded the concession for any segment of
the TTC. All segments may be put out for competitive procurement; and,
while the master development concessionaire has a right of first
negotiation for some segments, it must negotiate with Texas and present
a detailed facility plan. Additionally, according to the Texas DOT, the
concessionaire is required to put together a facility implementation
plan that, among other things, analyzes the projected budget and
recommends a method for project delivery.
Foreign Governments Have Developed Public Interest Criteria and
Assessment Tools:
Some foreign governments have recognized the importance of public
interest issues in public-private partnerships and have taken a
systematic approach to these issues. This includes developing
processes, procedures, and criteria for defining and assessing elements
of the public interest and developing tools to evaluate the public
interest of public-private partnerships. These tools include the use of
qualitative public interest tests and criteria to consider when
entering into public-private partnerships, as well as quantitative
tests such as Value for Money (VfM) and PSCs, which are used to
evaluate if entering into a project as a public-private partnership is
the best procurement option available. According to a document from one
state government in Australia (New South Wales), guidelines for private
financing of infrastructure projects (which includes the development of
public interest evaluation tools) supports the government's commitment
to provide the best practicable level of public services by providing a
consistent, efficient, transparent, and accountable set of processes
and procedures to select, assess, and implement privately financed
projects.
Some governments have laid out elements of the public interest in
public-private partnerships and criteria for how those elements should
be considered when entering into such agreements. These steps help
ensure that major public interest issues are transparently considered
in the public-private partnerships from the outset of the process,
including highway public-private partnerships. For example, the state
of Victoria in Australia requires all proposed public-private
partnership projects to evaluate eight aspects of the public interest
to determine how they would be affected.[Footnote 37] These eight
aspects include the following:
* Effectiveness. Whether the project is effective in meeting the
government's objectives. Those objectives must be clearly determined.
* Accountability and transparency. Whether public-private partnership
arrangements ensure that communities are informed about both public and
private sector obligations and that there is oversight of projects.
* Affected individuals and communities. Whether those affected by
public-private partnerships have been able to effectively contribute
during the planning stages and whether their rights are protected
through appeals and conflict resolution mechanisms.
* Equity. Whether disadvantaged groups can effectively use the
infrastructure.
* Public access. Whether there are safeguards to ensure public access
to essential infrastructure.
* Consumer rights. Whether projects provide safeguards for consumers,
especially those for which the government has a high level of duty of
care or are most vulnerable.
* Safety and security. Whether projects provide assurance that
community health and safety will be secured.
* Privacy. Whether projects adequately protect users' rights to
privacy.
Similarly, the government of New South Wales, Australia, also formally
considers the public interest before entering into public-private
partnerships. Public interest focuses on eight factors that are similar
to Victoria's: effectiveness in meeting government objectives, VfM,
community consultation, consumer rights, accountability and
transparency, public access, health and safety, and privacy. The public
interest evaluation is conducted up front prior to proceeding to the
market and is updated frequently, including prior to the call for
detailed proposals, after finalizing the evaluation of proposals, and
prior to the government signing contract documents.
Additionally, foreign governments have also used quantitative tests to
identify and evaluate the public interest and determine if entering
into a project as a public-private partnership is the best option and
delivers value to the public. In general, VfM evaluations examine total
project costs and benefits and are used by some governments to
determine if a public-private partnership approach is in the public
interest for a given project. VfM tests are often done through a PSC,
which compares the costs of doing a proposed public-private partnership
project against the costs of doing that project through a public
delivery model. VfM tests examine more than the financial value of a
project and will examine factors that are hard to quantify, such as
design quality and functionality, quality in construction, and the
value of unquantifiable risks transferred to the private sector. VfM
tests are commonly used in Australia, the United Kingdom, and British
Columbia, Canada.
PSCs are often used as part of VfM tests. Generally speaking, a PSC
test examines life-cycle project costs, including initial construction
costs, maintenance and operation costs, and additional capital
improvement costs that will be incurred over the course of the
concession term. A PSC can also look at the value of various types of
risk transfer to the private sector, whereby the more risk transferred
to the private sector the more value to the public sector. For example,
in the United Kingdom, use of the PSCs is mandated for all public-
private partnership projects at both the national as well as local
levels. British Columbia, Canada, also conducts a PSC for all public-
private partnership proposals that compares the full life-cycle costs
of procuring the proposed project as a public-private partnership,
compared with a traditional design-bid-build approach. The British
Columbia PSC not only compares the project costs but also evaluates the
value of various risks. According to a Partnerships British Columbia
official, the more risk transferred from the public to the private
sector in a public-private partnership proposal, all else being equal,
the better the value for the public. For example, this official said
that the PSC they use will value a certain level of construction risk
and determine the value (based on the costs and probability of that
risk occurring) to the public sector of having the private sector
assume that risk through a public-private partnership. The Partnerships
British Columbia official also told us that the values of risks
occurring are often not included in traditional public cost estimates,
which is a reason that cost overruns are so common in public sector
infrastructure projects. British Columbia uses the results of PSCs to
help determine a project's procurement method. An official with British
Columbia told us that many projects have been done through a
traditional public procurement rather than privately because the
results of the PSCs indicated that there was not enough value for money
in the private approach.
Although PSCs can be helpful in identifying and evaluating the public
interest, they have limitations. According to officials in Australia,
Canada, and the United Kingdom, PSCs are composed of numerous
assumptions, as well as projections years into the future. PSCs may
have difficulty modeling long-term events and reliably estimating
costs. Additionally, discount rates used in PSCs to calculate the
present value of future streams of revenue may be arbitrarily chosen by
the procuring authority if not mandated by the government. Officials
with the Audit Office of New South Wales, Australia, raised similar
concerns and said the volume and volatility of assumptions raise
questions about the validity and accuracy of PSCs.[Footnote 38] A
government official with the U.K. told us that a limitation of its PSC
is that it is a generic tool that applies to all privately financed
projects, from transportation to hospitals, and therefore, there are
some standard assumptions built into the model that may not be accurate
for a transportation project. The official added that the government is
considering working on creating a sector-specific PSC. However, despite
these concerns there was general agreement among those with whom we
talked that PSCs are useful tools.
While foreign governments may have extensive experience using PSCs and
other public interest assessment tools, these tools continue to evolve
based on experience and lessons learned. The use of formal tools and
processes also does not guarantee that highway public-private
partnerships will not face significant challenges and problems. For
example, although a document we reviewed indicated that a formal
assessment process and PSC was used to evaluate the Cross City Tunnel
in Sydney, Australia, before it was built and operated through a
concession agreement, this evaluation did not prevent the problems of
low traffic, public opposition to the toll road, and bankruptcy that
were discussed earlier in this report. The problems experienced led to
changes in how public-private projects will be handled and evaluated in
the future. According to the Director of the New South Wales Department
of Treasury and Finance, one of the big lessons learned from the Cross
City Tunnel experience was the importance of public outreach and
communication. Documents from the New South Wales government also
showed that public interest tools were strengthened. For example, in
December 2006, the New South Wales guidelines for public-private
partnerships were updated to, among other things, strengthen VfM tests
by conducting them from the perspective of the user or taxpayer and
requiring updates of the tests through the tender process. In addition,
the New South Wales Department of Treasury and Finance issued new
guidance on how to determine appropriate discount rates--an important
component of PSCs. Evolution of tools has occurred in other countries
as well. According to an official with British Columbia, the
methodology of their PSC tests is reviewed by an independent auditor,
and improvements to the methodology are continually made. Change in
public interest evaluation tools has also occurred elsewhere. According
to an official with the United Kingdom Treasury Department, after
criticism about potential VfM benefits and the use of PSC models
developed by consultants, the United Kingdom has moved from an advisor-
driven PSC to a Treasury-driven two-part, four-stage VfM model that
involves a simple spreadsheet and qualitative assessment. Even this new
model is being considered for change due to complex contracting issues.
Use of Formal Public Interest Processes and Tools in the United States
Are More Limited:
We found a more limited use of systematic, formal processes and
approaches to the identification and assessment of public interest
issues in the United States. Both Oregon and Texas have used forms of
PSCs. For example, Oregon hired a consultant to develop a PSC that
compared the estimated costs of the private sector proposal for the
Newburg-Dundee project with a model of the public sector's undertaking
the project, using various public financing sources, including
municipal debt and TIFIA loans. According to the Innovative
Partnerships Project Director in the Oregon DOT, the results of this
model were used to determine that the added costs of undertaking the
project as a public-private partnership (given the need for a return on
investment by the private investors) were not justifiable given the
limited value of risk transfer in the project. While this PSC was
conducted before the project was put out for official concession, the
PSC was prepared after substantial early development work was done by
private partners.
Similar to a PSC, Texas has developed "shadow bids" for two highway
public-private partnerships in the state. These shadow bids included
detailed estimates of design and construction costs, as well as
operating costs and a detailed financial model, the results of which
were compared against private sector proposals. While the model used by
Texas is unique to each individual project, the methodology used (such
as the estimation of future costs) is similar. In addition, the
Director of the Texas Turnpike Authority of the Texas DOT told us that,
while there are no statutory or regulatory provisions defining the
public interest in public-private partnerships, when procuring public-
private partnerships, the department develops specific evaluation
procedures and criteria for that specific procurement, as well as
contract provisions that are determined to be in the interests of the
state. Public-private partnership proposals the department receives are
then evaluated against those project criteria. However, these criteria
are project-specific, and there are no standard criteria that are
equally applied to all projects.
Neither Chicago nor Indiana had developed public interest tests or used
PSCs prior to leasing of the Chicago Skyway or the Indiana Toll Road.
Instead, analyses for these deals were largely focused on asset
valuation and development of specific concession terms. Other state and
local governments we spoke with said they have limited experience with
using formal public interest criteria tools and tests. For example, the
Chief Financial Officer of the California DOT told us that while the
department is currently working with the California Transportation
Commission to develop guidelines for public interest issues, this
effort has not been finalized. Additionally, officials in New Jersey
and Pennsylvania, two states that are exploring options, including
private involvement, to better leverage existing toll roads, said that
they have not yet created any formal public interest criteria or
assessment tools such as PSCs. An official with the Illinois DOT also
said that his state had not yet developed public interest criteria or
assessment tools.
Not using formal public interest tests and tools means that aspects of
the public interest can potentially be overlooked. For example, because
VfM tests can allow the government to analyze the benefits and costs of
doing a project as a public-private partnership, as opposed to other
more traditional methods, not using such a test might mean that
potential future toll revenues from public control of toll roads are
not adequately considered. Neither Chicago nor Indiana gave serious
consideration to the potential toll revenues they could earn by
retaining control over their toll roads. In contrast, Harris County,
Texas, in 2006 conducted a broad analysis of options for its public
toll road system. This analysis was somewhat analogous to a VfM test.
The analysis evaluated and conducted an asset valuation under three
possible scenarios, including public control and a concession. This
analysis was used by the county to conclude that it would gain little
through a long-term concession and that through a more aggressive
tolling approach, the county could retain control of the system and
realize similar financial gains to those that might be realized through
a concession.
Since public interest criteria and assessment tools generally mandate
that certain aspects of the public interest are considered in public-
private partnerships, if these criteria and tools are not used, then
aspects of public interest might be overlooked. These aspects include
such things as the following:
* Transparency. According to documents we reviewed, both Victoria and
New South Wales, Australia, require transparency in public-private
partnership projects so that communities and the public are well
informed. Officials in Toronto, Canada, however, told us there was no
such requirement and a lack of transparency about the 407 ETR
concession--including information about the toll rate structure--meant
that some people did not understand the objectives of the concession,
as well as the tolling structure, and led to significant opposition to
the project. The former Director of the Indiana Office of Management
and Budget (OMB) told us that the Indiana legislature, as well as
others, complained that the Indiana Toll Road lease was done in
"secrecy."
* Consideration of communities and affected interests. Local and
regional governments believe that there was limited coordination with
them as well as the public on the TTC project. This lack of
consideration of local and regional interests and concerns led to
opposition by local and regional governments. That reaction helped
drive statewide legislation that requires the state to involve local
and regional governments to a greater extent in public-private
partnerships. While Chicago considered the city's interests in the
Chicago Skyway lease, it did not necessarily consider the interests of
other parties, such as regional mobility. The Executive Director of the
Chicago Metropolitan Agency for Planning (the metropolitan planning
organization for the greater Chicago area) told us that regional
interest issues, such as the traffic diversion onto local streets that
might occur as a result of higher tolls on the Chicago Skyway, were not
addressed in consideration of the lease. He added that, as a result,
other routes near the Chicago Skyway might not be able to absorb the
diverted traffic, causing regional mobility problems.
The use of formal public interest tests can also allow public agencies
to evaluate the projected benefits, as well as the costs and trade-
offs, of public-private partnerships. In addition, such tests can help
determine whether or not the benefits outweigh the costs and if
proceeding with the project as a partnership is the superior model, or
if conducting the project through another type of procurement and
financing model is better.
Direct Federal Involvement with Highway Public-Private Partnerships Has
Generally Been Limited, but Identification of National Interests in
Highway Public-Private Partnerships Has Been Lacking:
Direct federal involvement in highway public-private partnerships has
generally been limited to projects in which federal requirements must
be followed because federal funds have or will be used. While federal
funding in highway public-private partnerships to date has been
limited, the administration and DOT have actively promoted such
partnerships through policies and practices, including developing
experimental programs that waive certain federal regulations and
encourage private investment. Although federal involvement with highway
public-private partnerships is largely limited to situations where
there is direct federal investment, recent highway public-private
partnerships may, or could, have implications on national interests
such as interstate commerce and homeland security. However, FHWA has
given little consideration of potential national public interests in
highway public-private partnerships. We have called for a fundamental
reexamination of federal programs, including the highway program to
identify specific national interests in the transportation system to
help restructure existing programs to meet articulated goals and needs.
This reexamination would provide an opportunity to define any national
public interest in highway public-private partnerships and develop
guidance for how such interests can best be protected. The increasing
role of the private sector in financing and operating transportation
infrastructure raises potential issues of national public interest. We
also found that highway public-private partnerships that have, or will,
use federal funds and involve tolling may be required by law to use
excess toll revenues (revenues that are beyond that needed for debt
service, a reasonable return on investment to a private party, and
operation and maintenance) for projects eligible for federal
transportation funding. However, the methodology for calculating excess
toll revenues is not clear.
Direct Federal Involvement in Highway Public-Private Partnerships Has
Generally Been Limited to Projects in Which Federal Funds Have Been
Invested:
Direct federal involvement in highway public-private partnership
projects is generally determined by whether or not federal funds were
or will be involved in a highway project. As a result, FHWA has had a
somewhat different involvement in each of the four U.S. highway public-
private partnership projects we reviewed.
Indiana Toll Road:
Since June 2006, the Indiana Toll Road has been operated by a private
concessionaire under a 75-year lease. The Indiana Toll Road was
constructed primarily with state funds and then incorporated into the
Interstate Highway System. Although about $1.9 million in federal funds
were used to build certain interchanges on the highway, Indiana
subsequently repaid these funds. FHWA officials told us they did not
review the lease of the highway to the private sector because there
were no federal funds involved and no obligation on FHWA under title 23
of the U.S.C. to do so.
Chicago Skyway:
The Chicago Skyway was leased in October 2004 to a private
concessionaire. FHWA officials told us that they did not review the
Chicago Skyway lease agreement before it was signed. Only a limited
amount of federal funding was invested in the Chicago Skyway. According
to FHWA, the state of Illinois received about $1 million in 1961 to
construct an off-ramp from the Chicago Skyway to Interstate 94. In
addition, about $14 million in federal funds were received in 1991
through an earmark in ISTEA. The Assistant Budget Director for Chicago
told us the latter was for painting and various other improvements.
FHWA officials stated that since the lease transaction did not involve
any new expenditure of federal funds, there was no requirement that
FHWA review and approve the lease before it was executed. According to
FHWA officials, FHWA's primary role in the transaction was the
modification of a 1961 toll agreement to allow Chicago to continue
collecting tolls on the facility.
However, because federal funds were involved, FHWA did determine that
two portions of federal law were applicable, one governing how proceeds
from the lease of the asset--the up-front payment of $1.8 billion--were
used and the other governing use of toll revenues.
* Use of lease proceeds. Proceeds from the lease of property acquired,
even in part, with federal funds would be governed by section 156 of
title 23 U.S.C. This section requires that states charge fair market
value for the sale or lease of such assets and that the percentage of
the income from the proceeds obtained from a sale or lease that
represents the federal share of the initial investment (about $15
million in this case) be used by the state for title 23 eligible
projects. Title 23 eligible projects can include construction of new
transportation infrastructure. According to FHWA, the federal share in
the Chicago Skyway ranged between 0.88 percent and 2.95 percent,
depending on whether money from the ISTEA earmark was considered an
addition to the real property or not and assuming control over the I-94
connector had been transferred to the contractor.[Footnote 39] Title 23
of the U.S.C. covers a broad range of activities that are eligible for
federal-aid highway funds, including reconstruction, restoration,
rehabilitation, and resurfacing activities and the payment of debt
service for a title 23 eligible project. FHWA determined that Chicago
met its obligations under title 23 section 156 merely by retiring the
Chicago Skyway debt ($392 million or nearly 25 percent of the lease
proceeds).
* Use of toll revenue. When tolling is allowed on federally funded
highways, the use of toll revenues is generally governed by section 129
of title 23 U.S.C. Under section 129, toll revenue must first be used
for (1) debt service, (2) to provide a reasonable return on investment
to any private party financing a project, and (3) the operations and
maintenance of the toll facility. If there are any revenues in excess
of these uses, and if the state or public authority certifies that the
facility is adequately maintained, then the state or public authority
may use any excess revenues for any title 23 eligible purpose.
According to FHWA, since federal funds were expended in the Chicago
Skyway, a toll agreement has been executed between FHWA, the Illinois
DOT, city of Chicago, and Cook County providing that the toll revenues
will be used in accordance with title 23 section 129.
Although FHWA determined that provisions governing excess toll revenues
were met, it did not independently determine whether the rate of return
to private investors would be reasonable. The rate of return is a
critical component in determining whether excess revenues exist or not.
According to FHWA officials there is no standard definition of what
constitutes a "reasonable rate of return." Therefore, FHWA concluded it
had no basis to evaluate the reasonableness of the return. In addition,
FHWA officials stated that under guidance issued by the agency's
Executive Director in 1995, the reasonableness of rate of return to a
private investor is a matter to be determined by the state. FHWA
officials said they relied on assurances from the city of Chicago that
the rate of return was reasonable. According to DOT officials, FHWA
determined that since the value of a concession was established through
fair and open competitive procedures, the rate of return should be
deemed to be reasonable. A review of the concession agreement indicates
that the lease agreement was expected by the city of Chicago to
"produce a reasonable return to the private operator" and that the city
pledged "not to alter or revoke that determination" over the 99-year
period of the lease. The Assistant Budget Director for Chicago also
told us that the rates of return will be reasonable because a
competitive bid process was used prior to signing a lease and that the
concession agreement contains limitations of how much tolls can change
over time--an important limitation since toll levels can significantly
affect rates of return.
FHWA officials have recognized that concession arrangements governing
facilities paid for largely with federal funds face a more difficult
time meeting the requirements of sections 156 and 129 of title 23. For
example, if a state received a $1 billion up-front payment to lease a
highway built with 80 percent federal funds, the state would be
required to invest $800 million of that payment in other title 23
eligible projects.
Trans-Texas Corridor:
According to the Director of the Texas Turnpike Authority Division of
the Texas DOT, Texas's intent is to make all transportation
infrastructure projects eligible for federal aid whenever possible.
While at the time of our review no federal funds had been expended on
the Trans-Texas Corridor (TTC-35) project, Texas is considering using
federal funds to complete parts of the corridor.
For the project to be eligible for federal funds, unless otherwise
specified by FHWA, it must meet all federal requirements, including the
environmental review process required under NEPA. The TTC-35 project is
currently undergoing a two-tiered review process under NEPA. In Tier I,
the Texas DOT has identified a potential 10-mile wide corridor through
which the actual corridor will run, completed a draft environmental
impact statement, which evaluates the impact of the project on the
local and regional environment, and is awaiting federal approval
through a record of decision. The record of decision, among other
things, identifies the preferred alternative and provides information
on the adopted means to avoid, minimize, and compensate for
environmental impacts. The Tier I process is expected to be completed
by early 2008. Tier II of the process will be used to determine the
actual alignment of the road or rail line and will be completed in
several parts for each facility, or unique segment of the facility.
This process, like Tier I, includes identification of specific corridor
segments, solicitation of public comments for each segment, and final
approval, which will authorize construction. As we reported in 2003,
environmental impact statements on federally funded highway projects
take an average of 5 years to complete, according to FHWA.[Footnote 40]
The state of Texas has also entered into a Special Experimental Project
No. 15 (SEP-15)[Footnote 41] agreement with FHWA for the TTC-35.
According to FHWA, under this agreement FHWA has permitted the Texas
DOT to release a request for proposals (RFP) and award the design-build
contract prior to completion of the environmental review process. This
sequence would not have been allowed under federal highway regulations
existing at the time.[Footnote 42] In accordance with the SEP-15
agreement, Texas entered into a contract with a private sector
consortium to prepare a Master Development Plan for the TTC-35 and to
assist in preparing environmental documents and analyses. The Master
Development Plan is intended to help the state identify potential
development options for the TTC-35 and to begin predevelopment work
related to the project. The Master Development Plan also allows the
private consortium to develop other highway facilities. In conjunction
with this agreement, in March 2007, the private consortium was awarded
a 50-year concession to construct, finance, operate and maintain State
Highway 130, segments 5 and 6 (a highway that is expected to connect to
the TTC-35).
Oregon:
Similar to Texas, the Oregon Innovative Public-Private Partnerships
Program is a program for the planning, acquisition, financing,
development, design, construction, and operation of transportation
projects in Oregon using the private sector as participants. Three
projects have been identified under this program: (1) a potential
widening of a 10-mile section of Interstate 205 (I-205) in the Portland
area, (2) development of highways east of Portland serving existing
industrial development and future residential and commercial
development (called the Sunrise Corridor), and (3) construction of an
11-mile highway in the Newberg-Dundee corridor.
Oregon sought and received an FHWA SEP-15 approval for these projects.
According to FHWA, the SEP-15 approval was to provide the Oregon DOT
the flexibility to release an RFP and award a design-build contract
prior to completion of the environmental review process, which was not
permitted under federal highway regulations at the time. As discussed
above, this requirement has changed. Subsequent to the SEP-15 approval,
in October 2005, the state entered into an Early Development Agreement
with FHWA that also permitted the state to engage the private sector in
predevelopment activities prior to completion of the environmental
review process. In January 2006, Oregon entered into preliminary
development agreements with a private sector partner (Oregon
Transportation Improvement Group) to proceed with predevelopment work
on the three proposed projects. As of January 2007, Oregon had decided
not to pursue the Sunrise Corridor project because it determined that
projected toll revenue was not enough to cover the cost of operation or
construction. Rather, Oregon plans to seek traditional funding sources.
In July 2007, the state announced that it and the Oregon Transportation
Improvement Group had ceased pursuing public-private development of the
Newberg-Dundee project. According to the Oregon Department of
Transportation, as of November 2007, the third project (I-205 lane
widening) was not yet in the regional transportation plan but was
expected to be added to the plan without difficulty. As of May 2007,
federal funding ($20.9 million) had been used for such things as
environmental assessment, planning, and right-of-way acquisition on the
Newberg-Dundee project.
Federal Government Encourages and Promotes Highway Public-Private
Partnerships through Policy and Practice:
Although federal involvement with highway projects and highway public-
private partnerships is largely governed by whether there is a direct
federal investment in a project or not, the administration and DOT have
actively encouraged and promoted the use of highway public-private
partnerships. This effort has been accomplished through both policies
and practices such as developing SEP-14 and SEP-15 procedures and
preparing various publications and educational material on highway
public-private partnerships.
Administration and DOT Actively Encourage and Promote Highway Public-
Private Partnerships:
Encouraging highway public-private partnerships is a federal
governmentwide initiative articulated in the President's Management
Agenda and implemented through the Office of Management and Budget
(OMB). OMB promotes, among other things, increasing the level of
competition from the private sector for services traditionally done by
the public sector. DOT has followed this lead by incorporating highway
public-private partnerships into its own policy statements. Its May
2006 National Strategy to Reduce Congestion on America's Transportation
Network states that the federal government should "remove or reduce
barriers to private investment in the construction or operation of
transportation infrastructure."[Footnote 43]
FHWA has used its administrative flexibility to develop three
experimental programs to allow more private sector participation in
federally funded highway projects. The first, SEP No. 14, or SEP-14,
has been in place since 1990 to permit contracting techniques to be
employed that deviate from the competitive bidding provisions of
federal law required for any highway built with federal funds.[Footnote
44] As those techniques have been approved for widespread use by FHWA
since its enactment, the program has changed to allow other alternative
contracting techniques, such as best value contractor
selection[Footnote 45] and the transfer of construction risk to the
private construction contractor. States have used the techniques
allowed under SEP-14 to allow more private sector involvement in
building and maintaining transportation infrastructure than under
traditional procurement methods. For example, states used design-build
contracting[Footnote 46] in almost 300 different construction and
maintenance projects that were approved by FHWA between 1992 and 2003,
including repavement of existing roads, bridge rehabilitation and
replacement, and construction of additional highway lanes.
The second experimental program, the Innovative Finance Test and
Evaluation Program (TE-045), was established in April 1994. This
program was initially designed and subsequently operated to give states
a forum in which to propose and test those concepts that best met their
needs. Since TE-045 did not make any new money available, its primary
focus was to foster the identification and implementation of new,
flexible strategies to overcome fiscal, institutional, and
administrative obstacles faced in funding transportation projects.
States were encouraged to consider a number of areas in developing
proposals under the program, including income generation possibilities
for highway projects and alternative revenue sources, which could be
pledged to repay highway debt. States were also encouraged to consider
the use of federal-aid to promote highway public-private partnerships.
According to FHWA, several types of financing tools were proposed by
states and tested under TE-045. These included tools that provided
expanded roles for the private sector in identifying and providing
financing for projects, such as flexible matches and section 129
project loans.
The third experimental program, SEP No. 15, or SEP-15, is broad in
scope and was designed to facilitate highway public-private
partnerships and other types of innovation in the federal-aid highway
process. SEP-15 allows for the modification of FHWA policy and
procedure, where appropriate, in four different areas: contracting,
compliance with environmental requirements, right-of-way acquisition,
and project finance. According to FHWA, SEP-15 enables FHWA officials
to review state transportation projects on a case-by-case basis to
"increase project management flexibility, encourage innovation, improve
timely project construction, and generate new revenue streams for
federal-aid transportation projects."[Footnote 47] While this program
does not eliminate overall federal-aid highway requirements, it is
designed to allow FHWA to develop procedures and approaches to reduce
impediments to states' use of public-private partnerships in highway-
related and other transportation projects. Table 6 summarizes the
highway projects in which FHWA has granted SEP-15 approvals.
Table 6: Highway Public-Private Partnerships with SEP-15 Approval, as
of June 2007:
Project: TTC-35, Texas;
Date of SEP-15 approval: February 2004;
Description: Proposed development of a new north-south highway, rail
and public utilities corridor from the Mexican to Oklahoma borders in
Texas.
Project: Oregon Innovative Partnerships Program, Oregon;
Date of SEP-15 approval: May 2005;
Description: An umbrella highway public-private partnership program
under which three projects--South I-205 Corridor, Sunrise Project and
Newberg-Dundee Transportation Improvement Project-
-have been identified for implementation.
Project: Texas Toll Roads Statewide Open-Road Toll Collection System
Project (Texas Toll Collection System), Texas;
Date of SEP-15 approval: May 2005;
Description: Approval for contractor to design, build, operate, and
maintain a statewide open-road tolling system.
Project: Waiver of TIFIA requirements for several Texas DOT projects,
Texas;
Date of SEP-15 approval: February 2006;
Description: Approval for a private entity to develop, design,
construct, finance, operate, maintain, and charge user fees for I-635
in the Dallas/Fort Worth metropolitan area, U.S. 281/Loop 1604 Toll
Project in San Antonio, and the State Highway 161 project through
Irving and Grand Prairie.
Project: TTC-69, Texas;
Date of SEP-15 approval: April 2006;
Description: Establishment of a new transportation corridor from
northeast Texas to the United States-Mexico border, including tolled
truck and car lanes, commuter, freight and high-speed passenger rail
tracks, utilities and intermodal facilities.
Project: Pocahontas Parkway, Virginia;
Date of SEP-15 approval: August 2006;
Description: For the operation, maintenance, and toll collection for
the existing Pocahontas Parkway and for the construction, maintenance,
and operation of the new Richmond Airport Connector.
Project: U.S. Highway 290, Texas;
Date of SEP-15 approval: September 2006;
Description: Conversion of existing four-lane highway into a tolled
highway with nontolled frontage roads in Travis County, Texas.
Project: Connecting Idaho, Idaho;
Date of SEP-15 approval: May 2007;
Description: Provision of Grant Anticipation Revenue Vehicle bonds to
advance 260 miles of roadways located on 13 corridors in the state.
Project: Knik Arm Crossing, Alaska;
Date of SEP-15 approval: June 2007;
Description: Crossing links the municipality of Anchorage with the
Matanuska-Susitna Borough.
Source: GAO analysis of FHWA data.
[End of table]
The SEP-15 flexibilities have been pivotal to allowing highway public-
private partnership arrangements we reviewed in Texas and Oregon to go
forward while remaining eligible for federal funds. For example, until
August 2007, federal regulations did not allow private contractors to
be involved in highway design-build contracts with a state department
of transportation until after the federally mandated environmental
review process under NEPA had been completed. The Texas DOT applied for
a waiver of this regulation under SEP-15[Footnote 48] for its TTC
project to allow its private contractor to start drafting a
comprehensive development plan to guide decisions about the future of
the corridor before its federal environmental review was complete. FHWA
approved this waiver, which allowed the contractor's work to proceed
during the environmental review process and which could ultimately
shorten the corridor's project time line. According to the Texas DOT,
at all times, it and the FHWA maintain control over the NEPA decision-
making process. The developer's role is similar to other stakeholders
in the project. Similarly, Oregon used the SEP-15 process to experiment
with the concept of contracting with a developer early in the project
development phase for three potential projects in and around Portland,
Oregon. Like Texas, Oregon wanted to involve the private sector prior
to completion of the NEPA process.
FHWA and DOT Practices Also Promote Highway Public-Private
Partnerships:
FHWA and DOT have reinforced its legal and policy initiatives with
promotional practices as well. These activities include the following:
* Developing publications. Publications include a public-private
partnership manual that has material to educate state transportation
officials about highway public-private partnerships and to promote
their use. The manual includes sections on alternate federal financing
options for highway maintenance and construction and outlines different
federal legal requirements relating to highway public-private
partnerships, including the environmental review process.[Footnote 49]
It also includes a public-private partnership user guide.[Footnote 50]
The user guide describes the many participants, stages of development,
and factors (such as technical capabilities and project prioritization
and selection criteria and processes) associated with developing and
implementing public-private partnerships for transportation
infrastructure projects.
* Drafting model legislation for states to consider to enable highway
public-private partnerships in their states. The model legislation
addresses such subjects as bidding, agreement structure, reversion of
the facility to the state, remedies, bonds, federal funding, and
property tax exemption, among other things.
* Creating a public-private partnership Internet Web site. This Web
site serves as a clearinghouse of information to states and other
transportation professionals about public-private partnerships,
pertinent federal regulations, and financing options.[Footnote 51] It
has links to FHWA's model public-private partnership legislation,
summaries of selected highway public-private partnerships, key DOT
policy statements, and the FHWA public-private partnership manual,
among other things.
* Making public presentations. DOT and FHWA officials have made public
speeches and written at least one letter to a state in support of
highway public-private partnerships. For example, when Texas was
considering modifying its public-private partnership statutes, FHWA's
Chief Counsel, in a letter to the Texas DOT, warned that if Texas lost
its initiative on highway public-private partnerships that "private
funds flowing to Texas will now go elsewhere." DOT has also provided
congressional testimony in support of highway public-private
partnerships. For example, in a recent testimony to Congress, DOT's
Assistant Secretary of Transportation for Policy stated that highway
public-private partnerships are "one of the most important trends in
transportation" and that DOT "has made expansion of public-private
partnership[s] a key component" in DOT's on-going initiatives to reduce
congestion and improve performance.[Footnote 52]
* Making tolling a key component of congestion mitigation. Such a
strategy could act to promote highway public-private partnerships since
tolls provide a long-term revenue stream, key to attracting investors.
One major part of DOT's May 2006 national strategy to address
congestion is the Urban Partnership Agreement. Under the Urban
Partnership Agreement, DOT and selected metropolitan areas will commit
to aggressive strategies to address congestion. The key component of
these aggressive strategies is tolling and congestion pricing.
Congestion pricing could involve networks of priced lanes on existing
highways, variable user fees on entire roadways, including toll roads
and bridges, or area-wide pricing involving charges on all roads within
a congested area.
National Interests in Highway Public-Private Partnerships Need to Be
Identified:
Although federal involvement with highway public-private partnerships
is largely limited to situations where there is a direct federal
investment, highway public-private partnerships can have implications
on broader national interests, such as interstate commerce. FHWA
officials told us that various federal laws and requirements that
states must follow to receive federal funds are designed to protect
national and public interests--for example, federally funded projects
must receive environmental approval through the NEPA process. In
addition, TIFIA loans must be investment grade and meet policy
considerations they have some public interest criteria. However, FHWA
officials told us that no specific federal definition of national
public interest or federal guidance on identifying and evaluating
national public interest exists. Thus, when federal funds are not
involved in a project, there are few mechanisms to ensure that national
public interests are identified, considered and protected. As a result,
given the minimal federal funding in highway public-private
partnerships we reviewed, little consideration has been given to
potential national public interests in these partnerships.
Recent highway public-private partnerships have involved sizable
investments of funds and significant facilities and suggest that
implications for national public interests exist. For example, both the
Chicago Skyway and the Indiana Toll Road are part of the Interstate
Highway System; the Indiana Toll Road is part of the most direct
highway route between Chicago and New York City and, according to one
study, over 60 percent of its traffic is interstate in nature. However,
federal officials had little involvement in reviewing the terms of
either of these concession agreements before they were signed. In the
case of Indiana, FHWA played no role in reviewing either the lease or
national public interests associated with leasing the highway nor did
it require the state of Indiana to review these interests. Similarly,
development of the TTC may greatly facilitate North American Free Trade
Agreement-related truck traffic nationwide. Although the TTC is going
through the NEPA process, to date, no federal funding has been expended
in the development of the project. In commenting on a draft of this
report, DOT correctly noted that many of these same issues could be
raised if the states involved had undertaken major projects with
potential implications for national interests as publicly funded
projects, using only state funds. Nevertheless, both state and DOT
officials have also asserted that without a public-private partnership,
these projects would not have advanced. In addition, public-private
partnerships may present distinct challenges because they can and have
involved long-term commitments of up to 99 years and the loss of direct
public control--issues that are not present in state financed projects-
-and the fact that private entities are not accountable to the public
in the same way public agencies are.
The absence of a clear definition of national public interests in the
national transportation system is not unique to highway public-private
partnerships. We have called for a fundamental reexamination of the
federal role in highways and a clear definition of specific national
interests in the system, including in such areas as freight mobility. A
fundamental reexamination of federal surface transportation programs,
including the highway program, presents the opportunity to address
emerging needs, test the relevance of existing policies, and modernize
programs for the twenty-first century. The growing role of the private
sector in both financing and operating highway facilities raises the
question of what role the private sector can and should play in the
national transportation system and whether the presence of federal
funding is the right criteria for federal involvement or whether other
considerations should apply. For example, DOT has recognized the
national importance of goods movement and the challenges of large,
multimodal projects that cross state lines by establishing a "Corridors
of the Future" program to encourage states to think beyond their
boundaries in order to reduce congestion on some of the nation's most
critical trade corridors. DOT plans to facilitate the development of
these corridors by helping project sponsors reduce institutional and
regulatory obstacles associated with multistate and multimodal corridor
investments. Whether such corridors, which could be seen as being in
the national interest, could be developed if portions of them were
under effective private ownership is just one of many questions that
could be addressed in identifying national public interests in general
and public-private partnerships in particular. Once the national
interest in highway public-private partnerships is more clearly
defined, then an appropriate federal role in protecting and furthering
those defined interests can be established.
The recent report by the National Surface Transportation Policy and
Revenue Study Commission illustrates the challenges of identifying
national public interests both in general and in public-private
partnerships in particular. The report encouraged the use of public-
private partnerships as an important part of financing and managing the
surface transportation system as part of an overall strategy for
aligning federal leadership and federal transportation investments with
national interests. As discussed earlier, the commission recommended
broadening states' flexibilities to use tolling and congestion pricing
on the Interstate system but also recommended that that the public
interest would best be served if Congress adopted strict criteria for
approving public-private partnerships on the Interstate Highway System,
including limiting allowable toll increases, prohibiting non-compete
clauses, and requiring concessionaires to share revenues with the
public sector. This definition of the public interest stands in sharp
contrast to the dissenting views of three commissioners and to comments
provided by DOT on a draft of this report. In their minority report,
the dissenting commissioners stated that the Commission's
recommendations would replace negotiated terms and conditions with a
federal regulation and subject private toll operators to greater
federal scrutiny than local public toll authorities. In commenting on a
draft of this report, DOT stated that national interests are served by
limiting federal involvement in order to allow these arrangements to
grow and provide the benefits of which they are capable. These sharply
divergent views should assist Congress as it considers the appropriate
national interests and federal role in highway public-private
partnerships.
Conclusions:
Highway public-private partnerships show promise as a viable
alternative, where appropriate, to help meet growing and costly
transportation demands. The public sector can acquire new
infrastructure or extract value from existing infrastructure while
potentially sharing with the private sector the risks associated with
designing, constructing, operating, and maintaining public
infrastructure. However, highway public-private partnerships are not a
panacea for meeting all transportation system demands, nor are they
without potentially substantial costs and risks to the public--both
financial and nonfinancial--and trade-offs must be made. While private
investors can make billions of dollars available for critical
infrastructure, these funds are largely a new source of borrowed funds,
repaid by road users over what potentially could be a period of several
generations. There is no "free" money in highway public-private
partnerships.
Many forms of public-private partnerships exist both within and outside
the transportation sector, and conclusions drawn about highway public-
private partnerships--those involving long-term concession agreements-
-cannot necessarily be drawn about partnerships of other types and in
other sectors. Highway public-private partnerships are fairly new in
the United States, and although they are meant to serve the public
interest, it is difficult to be confident that these interests are
being protected when formal identification and consideration of public
and national interests has been lacking, and where limited up-front
analysis of public interest issues using established criteria has been
conducted. Consideration of highway public-private partnerships could
benefit from more consistent, rigorous, systematic, up-front analysis.
Benefits are potential benefits--that is, they are not assured and can
only be achieved by weighing them against potential costs and trade-
offs through careful, comprehensive analysis to determine whether
public-private partnerships are appropriate in specific circumstances
and, if so, how best to implement them. Despite the need for careful
analysis, the approach at the federal level has not been fully
balanced, as DOT has done much to promote the benefits, but
comparatively little to either assist states and localities weigh
potential costs and trade-offs, nor to assess how potentially important
national interests might be protected in highway public-private
partnerships. This is in many respects a function of the design of the
federal program as few mechanisms exist to identify potential national
interests in cases where federal funds have not or will not be used.
The historic test of the presence of federal funding may have been
relevant at a time when the federal government played a larger role in
financing highways but may no longer be relevant when there are new
players and multiple sources of financing, including potentially
significant private money. However, potential federal restrictions must
be carefully crafted to avoid undermining the potential benefits, such
as operational efficiencies, that can be achieved through the use of
highway public-private partnerships. Reexamining the federal role in
highways provides an opportunity to identify the emerging national
public interests, including the national public interests in highway
public-private partnerships.
Finally, in the future, states may seek increased federal funding for
highway public-private partnerships or seek to monetize additional
assets for which federal funds have been used. If this occurs, then it
is likely some portion of toll revenues may need to be used for
projects that are eligible for federal transportation funding.
Clarifying the methodology for determining excess toll revenues and
reasonable rates of return in highway public-private partnerships,
would give clearer guidance to states and localities undertaking
highway public-private partnerships and help reduce potential
uncertainties to the private sector and the financial markets.
Matter for Congressional Consideration:
A reexamination of federal transportation programs provides an
opportunity to determine how highway public-private partnerships fit in
with national programs as well as an opportunity to identify the
national interests associated with highway public-private partnerships.
In order to balance the potential benefits of highway public-private
partnerships with protecting key national interests, Congress should
consider directing the Secretary of Transportation to consult with them
and other stakeholders to develop and submit objective criteria for
identifying national public interests in highway public-private
partnerships. In developing these criteria, the Secretary should
identify any additional legal authority, guidance, or assessment tools
required, as appropriate and needed, to ensure national public
interests are protected in future highway public- private partnerships.
The criteria should be crafted to allow the department to play a
targeted role in ensuring that national interests are considered in
highway public-private partnerships, as appropriate.
Recommendation for Executive Action:
To ensure that future highway public-private partnerships meet federal
requirements concerning the use of excess revenues for federally
eligible transportation purposes, we recommend that the Secretary of
Transportation direct the Federal Highway Administrator to clarify
federal-aid highway regulations on the methodology for determining
excess toll revenue, including the reasonable rate of return to private
investors in highway public-private partnerships that involve federal
investment.
Agency Comments and Our Evaluation:
We provided copies of the draft report to DOT for comment prior to
finalizing the report. DOT provided its comments in a meeting with the
Assistant Secretary for Transportation Policy and the Deputy Assistant
Secretary for Transportation Policy on November 30, 2007. DOT raised
substantive concerns with several of the draft report's findings and
conclusions, as well as one of the recommendations. Specifically, DOT
commented that the draft report did not analyze the benefits of highway
public-private partnerships in the context of current policy and
traditional procurement approaches. DOT stated that highway public-
private partnerships are a potentially powerful response to current and
emerging policy failures in the federal-aid highway program that both
DOT and GAO have identified over the years. For example, DOT asserted
that the current federal-aid program (1) encourages the misallocation
of resources, (2) does not promote the proper pricing of transportation
assets, including the costs of congestion, (3) is not tied to achieving
defined results and (4) provides weak incentives for innovation. DOT
also stated that--in addition to supplying large amounts of additional
capital to improve U.S. transportation infrastructure--public-private
partnerships are responsive to a crisis of performance in government
stewardship of the transportation network and traditional procurement
approaches. DOT noted that highway public-private partnerships can
bring discipline to the decision-making process, result in more
efficient use of resources, and produce lower capital and operating
costs, resulting in lower total costs of projects than under
traditional public procurement approaches. DOT stated that traditional
procurement approaches produce comparatively inferior results.
We agree with DOT that highway public-private partnerships have the
potential to provide many benefits and that a number of performance
problems characterize the current federal-aid highway program. Our
draft report discusses the potential benefits cited by DOT, although we
revised our draft report to better clarify the potential benefits of
pricing and resource efficiencies of highway public-private
partnerships that DOT cited in its comments. However, we also believe
that all the benefits DOT cited are potential benefits--they are not
assured and can be achieved only through careful, comprehensive
analysis to determine whether public-private partnerships are
appropriate in specific circumstances and, if so, how best to structure
them. Among the benefits that DOT cited was the ability of highway
public-private partnerships to supply additional capital to improve
transportation infrastructure. As our report states, this capital is
not free money but is rather a form of privately issued debt that must
be repaid to private investors seeking a return on their investment by
collecting toll revenues. Regarding DOT's comment about policy failures
in the federal-aid highway program, we believe the most direct strategy
to address performance issues is to reexamine and restructure the
program considering such factors as national interests in the
transportation system and specific performance-related goals and
outcomes related to mobility. Such a restructuring would help (1)
better align and allocate resources, (2) promote proper pricing, (3)
achieve defined results, and (4) provide incentives for innovation. We
believe our report places highway public-private partnerships in their
proper context as viable potential alternatives that must be considered
in such a reexamination and, therefore, made no further changes to the
report.
Regarding DOT's characterization of a crisis of performance in
government stewardship of the transportation network and assertion that
the traditional procurement approaches produce comparatively inferior
results, our past work has recognized concerns about particular
projects and public agencies, as well as improvements that are needed
to public procurement processes in general. It was not within the scope
of our review to systematically compare the results of projects
acquired through public-private partnerships with those acquired
through traditional procurement approaches. Nevertheless, we believe
neither our work--nor work by others--provides a foundation sufficient
to support DOT's sweeping characterization of public stewardship as a
"crisis," or its far-reaching conclusion that traditional procurement
approaches produce inferior results compared with public-private
partnerships. We, therefore, made no further changes to our report.
DOT also disagreed with much of our discussion concerning protection of
the public interest in highway public-private partnerships. DOT stated
that many federal and state laws govern how transportation projects are
selected and delivered, including highway public-private partnerships,
and that the draft report did not explain why highway projects
delivered through public-private partnerships pose additional
challenges to protecting the public interest, or why there should be a
greater interest in such projects than in highways built and operated
by state and local governments. In response to DOT's comments, we added
additional information to the final report about initiatives that
certain states have taken to identify and protect the public interest
in highway public-private partnerships. We agree that federal and state
laws governing traditional highway procurement contain mechanisms to
protect the public interest and that many of the public interest
concerns are the same regardless of how the project is delivered.
However, we continue to believe that additional and more systematic
approaches are necessary with highway public-private partnerships given
the long-term nature of concession agreements (up to 99 years in some
cases), the potential loss of public control, and the fact that private
entities are not accountable to the public in the same way public
agencies are.
Similarly, DOT disagreed with our discussion of national public
interests and stated that our draft report did not explain why highway
projects undertaken through highway public-private partnerships raise
issues of potential national interests more so than if a state or local
government undertook them. DOT stated that the report did not
adequately explain how highway public-private partnerships impact
national interests, such as interstate commerce, that would allow
policy makers to clearly understand the nature of those concerns and
assess what actions are needed to address them. As stated above, we
agree that highway projects delivered through state and local
governments raise many of the same concerns but that additional and
more systematic approaches are necessary with highway public-private
partnerships. Furthermore, it was not the objective of our report to
define what the national interest concerns were on particular projects
or to suggest what actions were needed to address such concerns.
Rather, our report illustrates that such projects may have implications
for national interests, and that it is important to consider such
interests and their implications up-front as part of the decision-
making process in order to ensure that any potential concerns are
identified, evaluated, and resolved. At the current time, there is
little mechanism to allow such consideration when federal funds are not
involved with a project. As discussed in our report, the reexamination
of federal transportation programs, which we have called for in
previous reports, provides an opportunity to determine the most
appropriate structure of these federal programs, where highway public-
private partnerships fit into this structure, and the identification of
national interests associated with highway public-private partnerships.
Finally, DOT indicated that the scope of our work focused primarily on
a subset of public-private partnerships involving long-term concession
agreements and, as a result, our conclusions cannot be generalized to
other types of public-private partnerships. We agree with DOT that the
scope of our work only focused on a subset of all types of public-
private partnerships. Our report acknowledges that there are also
public-private partnerships in nontransportation areas, as well as in
other modes of transportation (such as mass transit). We also
acknowledge that there are other types of highway public-private
partnerships, such as availability payments, that are not included in
our scope. In response to DOT's comments, we made these scope
limitations clearer in our report and acknowledged that the findings
and conclusions of our report cannot necessarily be extrapolated to
other types of public-private partnerships.
Our draft report recommended that DOT develop and submit to Congress a
legislative proposal that establishes objective criteria for
identifying national public interests in highway public-private
partnerships, including any additional legal authority required by the
Secretary of Transportation necessary to develop regulations, guidance,
and assessment tools, as appropriate, to ensure such interests are
protected in future highway public-private partnerships. DOT disagreed
with this recommendation, stating that the draft report did not provide
sufficient evidence to explain why the federal government should
intrude on inherently state activities or to justify a more expansive
federal role. Instead, DOT stated that federal involvement should be
limited in order to allow these arrangements to grow and provide the
benefits of which they are capable. As discussed in our report, the
reexamination of federal transportation programs provides an
opportunity to determine the most appropriate structure of these
federal programs, where highway public-private partnerships fit into
this structure, and the identification of potential national interests
that are associated with highway public-private partnerships. We
believe that once these specific national interests have been
established, instead of necessarily leading to a more expansive federal
role, the federal government can play a more targeted role--including
ensuring that identified national interests in highway public-private
partnerships are considered by states and localities, as appropriate.
We have, therefore, deleted our recommendation but have instead
suggested that Congress consider directing DOT to undertake these
actions.
We also recommended that the Secretary of Transportation direct the
Administrator of FHWA to clarify federal-aid highway regulations on the
methodology for determining excess toll revenue, including a reasonable
rate of return to private investors in highway public-private
partnerships. DOT indicated, in response to this recommendation, that
it would reexamine the regulations and take appropriate action, as
necessary, to ensure the regulations are clear. Therefore, we made no
change to the recommendation.
DOT also provided technical comments that were incorporated, as
appropriate. We also obtained comments from states, localities, and
organizations in the foreign countries included in our review. In
general, these comments were technical in nature and were incorporated
where appropriate.
We are sending copies of this report to appropriate congressional
committees; the Secretary of Transportation; the Administrator of the
Federal Highway Administration; and the Director, Office of Management
and Budget. 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 or your staff have any questions concerning this report, please
contact me at (202) 512-2834 or heckerj@gao.gov. Contact points for our
Office of Congressional Relations and Public Affairs Office may be
found on the last page of this report. GAO staff that made major
contributions to this report are listed in appendix III.
Signed by:
JayEtta Z. Hecker:
Director Physical Infrastructure Issues:
Congressional Requesters:
The Honorable James M. Inhofe:
Ranking Member:
Committee on Environment and Public Works:
United States Senate:
The Honorable Peter A. DeFazio:
Chairman:
Subcommittee on Highways and Transit:
Committee on Transportation and Infrastructure:
House of Representatives:
The Honorable Richard J. Durbin:
United States Senate:
[End of section]
Appendix I: Scope and Methodology:
Our work was focused on federal surface transportation and highway
programs and the issues associated with use of private sector
participation in providing public transportation infrastructure. In
particular, we focused on (1) the benefits, costs, and trade-offs
associated with highway public-private partnerships; (2) how public
officials have identified, evaluated, and acted to protect the public
interest in public-private partnership arrangements; and (3) the
federal role in highway public-private partnerships and potential
changes needed in this role. Our scope was limited to identifying the
primary issues associated with using public-private partnerships for
highway infrastructure and not in conducting a detailed financial
analysis of the benefits and costs of specific arrangements. We
selected recent projects to review, such as the lease of the Chicago
Skyway and the Indiana Toll Road and planning for the Oregon and Trans-
Texas Corridor (TTC), to understand decision-making processes. These
projects were selected because they were recent examples of highway
public-private partnerships, were large dollar projects, or used
different approaches to highway public-private partnerships. We also
spoke with states that were considering highway public-private
partnerships, including California, New Jersey, and Pennsylvania.
It was not our intent to review all highway public-private partnerships
in the United States. We also did not review all types of highway
public-private partnerships. For example, we did not review highway
public-private partnerships involving shadow tolling or availability
payments. In shadow tolling, the public sector pays a private sector
company an amount per user of a roadway as opposed to direct collection
of a toll by the private company. In availability payments, a private
company is paid based on the availability of a highway to users. These
were not included in our scope and the findings and conclusions of this
study cannot necessarily be extrapolated to those or other types of
public-private partnerships. In reviewing highway public-private
partnerships, it was not our intent to either endorse or refute these
projects but rather to identify key public policy issues associated
with using public-private partnerships to provide highway
infrastructure.
To identify the benefits, costs, and trade-offs associated with public-
private partnerships for tolled highway projects, we collected and
reviewed relevant documents including concession agreements, planning
documents, toll schedules, guidance, and academic, corporate, and
government reports. We obtained toll schedule data from the Chicago
Skyway concession company and used them to project a range of future
maximum toll rates using Congressional Budget Office estimates of
future growth rates for gross domestic product (GDP) and the consumer
price index (CPI) and Census Bureau forecasts for population growth (in
order to determine forecasted per capita GDP). We also conducted
interviews with public-sector representatives from state departments of
transportation; elected officials; public-interest groups; municipal
planning organizations; Federal Highway Administration (FHWA)
representatives; and other representatives at municipal, state, and
federal levels. We also spoke with foreign government representatives
in the United Kingdom, and we visited relevant public-and private-
sector representatives in Canada, Spain, and Australia to understand
the foreign perspective and to identify common benefits, costs, and
trade-offs experienced in other countries. The countries we visited to
obtain information on highway public-private partnerships was based on
those countries that had a history of using highway public-private
partnerships to obtain highway infrastructure, had highway public-
private partnerships in place for a period of time so lessons learned
could be determined, or had developed tools to assess public interest
issues. These foreign public-private partnership experiences were
compared with experiences in the United States. We conducted interviews
with the private-sector concessionaires, financial investors, and
legal, technical and financial advisors to the public and private
sectors. Finally, we visited public-private partnership projects,
including the Chicago Skyway, the Indiana Toll Road, and the 407
Express Toll Road (ETR) in Toronto, Canada.
To assess the reliability of the Chicago Skyway historic toll data, we
(1) reviewed sources containing historic toll information, including
the city's request for qualifications from potential concession
companies, an academic paper, and a relevant journal article and (2)
worked closely with the Assistant Budget Director for the city of
Chicago to identify any data problems. We found a discrepancy in the
toll rates and brought it to the official's attention and worked with
him to determine the correct historic toll rates. We determined that
the data were sufficiently reliable for the purposes of this report. To
estimate each year's population in order to estimate annual GDP per
capita, we used the Census Bureau's interim population projections,
which were created in 2004, and which project population growth in 10-
year increments. We computed the average annual rate of increase in
estimated population for every 10-year period and then used each 10-
year period's annual average rate of increase to estimate the
population for each year in that period. As a base population estimate,
we used the Census Bureau's population estimate of just over 303
million on January 1, 2008. We divided the forecasted nominal GDP for
every year by the projected population in that year to determine the
forecasted per capita nominal GDP. We determined the Census Bureau data
were reliable for use by checking for obvious errors or omissions, as
well as anomalies such as unusual data points. We used the CPI to
convert past and projected toll rates to 2007 dollars. To convert
amounts denominated in foreign currencies, we converted to 2007 U.S.
dollars using the Organization for Economic Cooperation and
Development's purchasing power parities for GDPs. To obtain information
on the value of concession agreements and the use of lease proceeds, we
obtained financial information from the concession companies and state
representatives.
To determine how public officials have identified, evaluated, and acted
to protect the public interest in public-private partnership
arrangements, we conducted site visits of highway public-private
partnerships and visited selected foreign countries with long-term
experience of conducting highway public-private partnerships. We
visited the state of Oregon to examine three potential public-private
partnership projects in the metropolitan Portland region. We also
conducted site visits for the Chicago Skyway and Indiana Toll Road, as
well as the TTC in Texas, and the 407 ETR in Toronto, Canada. We also
conducted visits to Spain, the states of New South Wales, and Victoria
in Australia. For each site visit, we met with relevant officials from
public sector agencies, such as state departments of transportation and
state financial agencies, consultants and advisors to the public
sector, including legal, financial, and technical advisors; the private
sector operators; and other relevant stakeholders, such as users
groups. Interviews covered a wide range of topics, including a
discussion of how the public interest was defined, evaluated and
protected in the relevant public-private partnership project. In
addition to conducting interviews, we collected relevant documents,
including legal contracts, public interest assessment tool guidance,
procurement documents, financial statements, and reports, and analyzed
them as necessary. Where appropriate, we reviewed contracts for certain
public interest mechanisms. In addition to those site and country
visits, we met with officials from British Columbia, Canada, and the
United Kingdom to discuss their processes and tools for evaluating and
protecting the public interest. We also held interviews with officials
of FHWA and collected and analyzed policy and legal documents related
to public interest issues.
To address the federal role in highway public-private partnerships, we
reviewed pertinent legislation; prior GAO reports and testimonies; and
other documents from FHWA, state department of transportation (DOT),
and foreign national and provincial governments. This included policy
documents from DOT, the public-private partnership Internet Web site
developed by FHWA, model legislation prepared by FHWA, the FHWA public-
private partnership manual, and various public presentations made by
FHWA officials about highway public-private partnerships issues. We
also obtained data from FHWA on the use of the SEP-14 and SEP-15
processes, including a list of projects approved to use these
processes. Further, we obtained data from FHWA on the use of private
activity bonds in the context of highway-related projects. After
checking for obvious errors or omissions, we deemed these data reliable
for our use. We discussed federal tax issues, including deduction from
income of depreciation for highway public-private partnerships, with
both FHWA and a tax expert associated with the Chicago Skyway lease.
Our discussion of national interests in highway projects was based on a
review of DOT's fiscal years 2006 to 2011 strategic plan, documentation
of the Department of Defense Strategic Highway Network, and pertinent
legislation related to the National Highway System. We also interviewed
FHWA officials, officials from state DOTs and local governments,
officials from private investment firms, and officials from foreign
national and provincial governments that have entered into highway and
other public-private partnerships. Discussions with FHWA included
clarifying how it determines such things as reasonable rates of return
on highway projects where there is private investment and the use of
proceeds when there is federal investment in a highway facility that is
leased to the private sector. Where feasible, we corroborated these
clarifications with documents obtained from FHWA.
We conducted this performance audit from June 2006 to February 2008 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of section]
Appendix II: Profile of GAO Public-Private Partnership Case Studies:
Case Study: Chicago Skyway, Chicago, Illinois:
Project description: The Chicago Skyway is a 7.8-mile elevated toll
road connecting Interstate 94 (Dan Ryan Expressway) in Chicago to
Interstate 90 (Indiana Toll Road) at the Indiana border. Built in 1958,
the Skyway was operated and maintained by the city of Chicago
Department of Streets and Sanitation. In March 2004, the city of
Chicago issued a request for qualifications from potential bidders
interested in operating the facility on a long-term lease basis. It
received 10 responses and in May 2004 invited five groups to prepare
proposals. Bids were submitted in October 2004, with the long-term
concession awarded to the Skyway Concession Company (SCC) that included
Cintra and Macquarie on October 27, 2004. This was the date the
contract was signed.
Project concession fee: Cintra/Macquarie bid $1.83 billion.
Concession term: 99 years.
Institutional arrangements: Cintra is a part of Grupo Ferrovial, one of
the largest infrastructure development companies in Europe and
Macquarie Infrastructure Group, a subsidiary of Macquarie Bank Limited,
Australia's largest investment bank. SCC assumed operations on the
Chicago Skyway on January 24, 2005. SCC is responsible for all
operating and maintenance costs of the Chicago Skyway but has the right
to all toll and concession revenue. This agreement between SCC and the
project sponsor, city of Chicago, was the first long-term lease of an
existing public toll road in the United States.
Financing: Original financial structure was: Cintra equity---$485
million; Macquarie equity--$397 million; and bank loans--$1 billion
(approximately). SCC subsequently refinanced the capital structure in
2005, which reduced the equity holdings of Cintra and Macquarie to
approximately $500 million. Originally financed by European banks, the
$1.550 billion refinancing also included Citgroup. The refinancing
involved capital accretion bonds ($961 million) with a 21-year maturity
with an interest rate equivalent to 5.6 percent. There is an additional
$439 million in 12-year floating rate notes, and $150 million in
subordinated bank debt provided by Banco Bilbao Vizcaya Argentaria and
Santander Central Hispano of Spain, together with Calyon of
Chicago.[Footnote 53]
Revenue sources: Based on tolls: up to $2.50 until 2008; $3.00 until
2011, $3.50 until 2013, $4.00 until 2015, $4.50 until 2017, $5.00
starting in 2017.
Lease proceeds: Proceeds from the agreement paid off $463 million of
existing Chicago Skyway debt; $392 million to refund long-and short-
term debt and to pay other city of Chicago obligations; $500 million
for long-term and $375 million for a medium-term reserve for the city
of Chicago, as well as a $100 million neighborhood, human, and business
infrastructure fund to be drawn down over 5 years.
Case Study: Indiana Toll Road, Northern Indiana:
Project description: The Indiana Toll Road stretches 157 miles across
the northernmost part of Indiana from its border with Ohio to the
Illinois state line, where it provides the primary connection to the
Chicago Skyway and downtown Chicago. The Indiana Toll Road links the
largest cities on the Great Lakes with the Eastern Seaboard, and its
connections with Interstate 65 and Interstate 69 lead to major
destinations in the South and on the Gulf Coast. For the past 25 years,
the Indiana Toll Road has been operated by the Indiana DOT. In 2005,
the Governor of Indiana tasked the Indiana Finance Authority to explore
the feasibility of leasing the toll road to a private entity. A Request
for Toll Road Concessionaire Proposals was published on September 28,
2005. Eleven teams submitted proposals by the October 26 deadline. The
lease concession was awarded to Indiana Toll Road Concession Company
LLC (ITRCC) comprised of an even public-private partnership between
Cintra and Macquarie.
Project concession fee: ITRCC submitted the highest bid of $3.8
billion.
Concession term: 75 years.
Institutional arrangements: ITRCC is composed of a 50/50 public-private
partnership between Cintra, which is part of Grupo Ferrovial, and
Macquarie Infrastructure Group. The Indiana Toll Road lease transaction
was contingent upon authorizing legislation. House Enrolled Act 1008,
popularly known as "Major Moves," was signed into law in mid-March
2006. On April 12, 2006, the Indiana Toll Road and the Indiana Finance
Authority executed the "Indiana Toll Road Concession and Lease
Agreement." Pursuant to its terms, the Indiana Finance Authority agreed
to terminate the current operational lease to the Indiana DOT. A 10-
member board of directors oversees ITRCC and its operations of the
Indiana Toll Road. ITRCC formally assumed operational responsibility
for the toll road on June 29, 2006.
Financing: The financing structure is Cintra Equity--$385 million;
Macquarie Equity--$385 million; and bank loans--$3.030 billion. Loans
were provided by a collection of seven European banks: (1) Banco Bilbao
Vizcaya Argentaria SA; (2) Banco Santander Central Hispano SA; and (3)
Caja de Ahorros y Monte de Piedad de Madrid, all of Spain; BNP Paribas
of France; DEPFA Bank of Germany; RBS Securities Corporation of
Scotland, and Dexia Crédit Local, a Belgian-French bank.
Revenues: Based on tolls: $8.00 through June 30, 2010, for two-axle
vehicles with higher tolls for three-to seven-axle vehicles. From June
30, 2011, tolls can be based on 2 percent or the percentage increase of
the CPI or per capita nominal GDP whichever is greater.
Lease proceeds: The concession fee will provide funding for the Major
Moves program, which will support about 200 new construction and 200
major preservation projects around the state, including beginning
construction of Interstate 69 between Evansville and Indianapolis. The
proceeds will also fund projects in the seven toll road counties and
provide $150 million over 2 years to all the state's 92 counties for
roads and bridges.
Case Study: Trans-Texas Corridor, Texas:
Project description: The TTC program is envisioned to be a 4,000-mile
network consisting of a series of interconnected corridors containing
tolled highways for automobile traffic and separate tolled truckways
for motor carrier traffic; freight, intercity passenger, and commuter
rail lines; and various utility rights-of-way. The Texas Transportation
Commission formally adopted a TTC action plan in June 2002, which
identified four priority segments of the TTC, which roughly parallel
the following existing routes: Interstate 35 from Oklahoma to San
Antonio and Interstate 37 from San Antonio south to the border of
Mexico; Interstate 69 from Texarkana to Houston to Laredo and the lower
Rio Grande Valley; Interstate 45 from Dallas-Fort Worth to Houston; and
Interstate 10 from El Paso in the west, to the border of Louisiana at
Orange. Plans call for the TTC to be completed over the next 50 years
with routes prioritized according to Texas' transportation needs. Texas
DOT, the state transportation agency, will oversee planning,
construction, and ongoing maintenance although private vendors can
deliver the services including daily operations.
In 2005, the Texas DOT selected a consortium led by Cintra and Zachry
Construction Corporation under a competitively procured comprehensive
development agreement (CDA) to develop preliminary concept and
financing plans for TTC-35, including segments comprising the 600-mile
Interstate 35 corridor in Texas. Included in this plan are facilities
adjacent to Interstate 35 between Dallas and San Antonio consisting of
a four-lane toll road that could eventually include separate truck toll
facilities, utilities, and freight, commuter, and high-speed rail
lines. Under the terms of the CDA, Cintra-Zachry produced the master
development and financial plan for TTC-35. Once the master plan is
complete, individual project segments--be they road, rail, utilities,
or a combination of these--may be developed, as specified in the
separate facility implementation plans as part of the master plan.
Cintra-Zachry will have the right of first negotiation for development
of some facilities developed in the master plan subject to Texas DOT's
approval. According to the Texas DOT, the contract only required the
department to negotiate in good faith for possible concession contracts
valuing at least $400 million. The award of the State Highway 130,
segment 5 and 6 agreement discussed above fully meets the requirements
of the CDA. However, Cintra-Zachry is eligible for consideration on
future TTC-35 facilities.
Project cost: Initial cost estimates for the full 4,000 mile TTC
project range from $145 billion to $184 billion in 2002 dollars, as
reported in the Texas DOT's June 2002 TTC Plan. According to the Texas
DOT, this would include all highway and rail modes fully built as
envisioned in the 2002 plan. The Texas DOT acknowledges that many of
the proposed facilities or modes may not be needed. Implementation of
this plan includes the flexibility to build only what will be needed.
Institutional arrangements: The consortium Cintra-Zachry, LP is 85
percent owned by Cintra Concesiones de Infraestructuras de Transporte,
S.A. and 15 percent owned by Zachry Construction Corporation. Zachry
Construction Corporation is a privately owned construction and
industrial maintenance service company located in San Antonio, Texas.
The Cintra-Zachry team produced the master development plan and
financial plan for TTC-35. This plan was accepted by the Texas DOT in
2006. The team may opt to perform additional activities such as
financing, planning, design, construction, maintenance, and toll
collection and operation of segments of the approved development plan
for the corridor, as approved by the Texas DOT and FHWA.
Project financing: To be determined for entire TTC program. The final
Cintra-Zachry TTC-35 proposal called for a capital investment of $6
billion in a tollroad linking Dallas and San Antonio, and $1.2 billion
in concession payments to Texas DOT for the right to operate the
facility for 50 years. According to the Texas DOT, the current Master
Development Plan shows approximately $8.8 billion and $2 billion,
respectively.
Revenue sources: Tolls. The CDA between Cintra-Zachry and Texas DOT
does not specify how toll rates will be set and adjusted or the term of
any toll concessions for the corridor. According to the Texas DOT,
state statute and department policy require the Texas DOT to approve
all rate setting and rate escalating methodologies. The CDA requires
Cintra-Zachry to be compliant with these regulations. The State Highway
130 agreement specifically sets toll rates and the formula for future
adjustments.
Lease proceeds: To be determined.
Case Study: Oregon:
Project descriptions: In January 2006, the Oregon Transportation
Commission approved the Oregon DOT agreements with the Oregon
Transportation Improvement Group (OTIG) for predevelopment work on
three proposed public-private partnership highway projects--Sunrise
Corridor, South Interstate 205 Widening, and Newberg-Dundee
Transportation Improvement Projects. The proposed Sunrise Corridor is
construction of a new four-lane, limited access roadway facility to SE
172nd (segment 1) and additional transportation infrastructure to serve
the newly incorporated city of Damascus (segment 2). The proposed South
Interstate 205 Corridor Improvements project is a widening of this
major north-south freight and commuter route in the Portland
metropolitan region. The proposed Newberg-Dundee project is an
identified alternative corridor (bypass) that is approximately 11 miles
long, starting at the east end of Newberg and ending near Dayton at the
junction with Oregon 18.
Under an agreement with Macquarie, Macquarie will do the predevelopment
work for all three projects as three separate contracts and will
internalize the predevelopment costs for each project if that project
proceeds into implementation. If the project does not proceed, then
Oregon DOT will reimburse Macquarie for the predevelopment work for
that project.
Project updates:
Sunrise corridor: OTIG and Oregon DOT determined that the Sunrise
Corridor would not be toll-viable, and decided to indefinitely postpone
the project. This decision was based on the project not offering
substantial time savings to other alternative routes in the area and
the predictability of traffic on the proposed project was uncertain.
According to an Oregon DOT official, the project will be put on hold
and may be reconsidered in the future, but it is not considered a
priority at this time. Oregon DOT paid Macquarie $500,000 for the
study.
South Interstate 205 widening: According to an Oregon DOT official,
this project is not yet listed in the regional transportation plan but
the environmental review process has already begun. Final decisions on
whether this project will proceed will not occur until the
environmental assessment is completed.
Newberg-Dundee: In July 2007, OTIG and Oregon DOT agreed to cease
pursuing public-private development of a Newberg-Dundee tolled bypass
after an independent analysis confirmed that the plan to charge a toll
on the bypass alone would not produce sufficient revenue to finance the
planned project under a public-private concession agreement. Instead,
according to an Oregon DOT official, the project will likely be
continued under a traditional public sector procurement approach using
the private sector as contractors. According to this official, the road
is still expected to be tolled.
Case Study: Highway 407 ETR, Toronto, Canada:
Project description: Highway 407 ETR stretches 108 kilometers through
the Greater Toronto Area. In 1998, as part of the largest privatization
project in Canadian history at that time, the Province of Ontario put
out a tender for the operation of the original 68 kilometers of highway
and the requirement to build the remaining 40 kilometers. Following an
international competition, the 407 ETR consortium led by Cintra of
Grupo Ferrovial, SNC-Lavalin and Capital D'Amerique CDPQ was awarded
the 99-year contract in 1999.
Project cost: $3.1 billion Canadian dollars for a 99-year lease.
Institutional arrangements: The 407 ETR consortium was initially led by
Cintra of Grupo Ferrovial, SNC-Lavalin and Capital D'Amerique CDPQ. In
2002, Macquarie Infrastructure Group purchased all of Capital
D'Amerique CDPG's interest in the toll road.
Revenue sources: Tolls are based on level of traffic flow. Toll rates
are guaranteed to increase at 2 percent per year for the first 15 years
and by an amount set by the concessionaire if traffic exceeds certain
traffic levels.
Lease proceeds: Most of the proceeds were deposited into a general
consolidated revenue fund and each resident of Ontario received a $200
check from the government for the sale.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
JayEtta Z. Hecker, (202) 512-2834 or heckerj@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, Steve Cohen, Assistant
Director; Jay Cherlow; Colin Fallon; Greg Hanna; John Healey; Carol
Henn; Bert Japikse; Richard Jorgenson; Maureen Luna-Long; Teague Lyons;
Matthew Rosenberg; Michelle Su; Richard Swayze; and James Wozny made
key contributions to this report.
[End of section]
Footnotes:
[1] GAO, Performance and Accountability: Transportation Challenges
Facing Congress and the Department of Transportation, GAO-07-545T
(Washington, D.C.: Mar. 6, 2007). The Highway Trust Fund is made up of
two accounts, the Highway Account and the Mass Transit Account. In
fiscal year 2005, the Highway Trust Fund had total receipts of about
$37.9 billion of which the Highway Account represented $32.9 billion
and the Mass Transit Account about $5.0 billion.
[2] GAO-07-545T.
[3] GAO, Highlights of a Forum Convened by the Comptroller General of
the United States: Transforming Transportation Policy for the 21st
Century, GAO-07-1210SP (Washington, D.C.: Sept. 19, 2007).
[4] American Association of State Highway and Transportation Officials,
Transportation - Invest in Our Future: Future Needs of the U.S. Surface
Transportation System (February 2007).
[5] For example, FHWA views "design-build" contracting, under which a
single contractor designs and constructs a facility under the same
contract, as a public-private partnership.
[6] National Surface Transportation Policy and Revenue Study
Commission, Report of the National Surface Transportation Policy and
Revenue Study Commission, Transportation for Tomorrow, December 2007.
This commission was created under SAFETEA-LU.
[7] Qualified PABs are tax-exempt bonds issued by a state or local
government, the proceeds of which are used for a defined qualified
purpose by an entity other than the government that issued the bond.
[8] See GAO, Federal-Aid Highways: Increased Reliance on Contractors
Can Pose Oversight Challenges for Federal and State Officials, GAO-08-
198 (Washington, D.C.: Jan. 8, 2008), for more information about
contracting of highway work.
[9] U.S. Department of Transportation, Federal Highway Administration,
Synthesis of Public-Private Partnership Projects for Roads, Bridges &
Tunnels From Around the World-1985-2004, Aug. 30, 2005. This report was
prepared by AECOM Consult Team. According to FHWA, the data used for
this report was based on information developed and maintained by the
editor of Public Works Financing, a periodical that provides
information and views regarding financing issues, trends, methods, and
projects involving public-use infrastructure, and should be considered
approximate.
[10] GAO, Highways and Transit: Private Sector Sponsorship of and
Investment in Major Projects Has Been Limited, GAO-04-419 (Washington,
D.C.: Mar. 25, 2004).
[11] As of April 2007.
[12] Spain did not pursue new public-private partnerships during the
period 1985 to 1995 because the government in power during that period
pursued toll-free roads instead.
[13] This amount has been converted to U.S. dollars from Canadian
dollars using the Organization for Economic Cooperation and
Development's purchasing power parities for gross domestic products.
[14] GAO, Transportation Infrastructure: Cost and Oversight Issues on
Major Highway and Bridge Projects, GAO-02-702T (Washington, D.C.: May
1, 2002); GAO, Federal-Aid Highways: FHWA Needs a Comprehensive
Approach to Improving Project Oversight, GAO-05-173 (Washington, D.C.:
Jan. 31, 2005).
[15] Seventy-four percent of highway projects met the goal in 2004; 79
percent met the goal in 2005; and 82 percent met the goal in 2006.
[16] U.S. Department of Transportation, Report to Congress on Public-
Private Partnerships (December 2004).
[17] However, profits are not always guaranteed and bankruptcies have
resulted, as discussed earlier.
[18] According to the Chief Executive Officer of the Chicago Skyway,
"concession rights" is treated as an Internal Revenue Code section 197
intangible and is amortized in 15 years, regardless of the lease term
or the useful life of the asset. However, costs allocated to "tangible
assets" are subject to the normal depreciation rules. This official
also told us that about $1.5 billion of the Chicago Skyway lease amount
was for concession rights, and $334 million was allocated to the
tangible asset.
[19] Depreciation is the accounting process of allocating against
revenue the cost expiration of tangible property, plant, and equipment.
Under straight-line depreciation, an equal amount of depreciation
expense is taken annually over the life of the asset. Under accelerated
depreciation, a depreciation expense is taken that is higher than
annual straight-line amount in the early years and lower in later
years.
[20] Prior to the passage of SAFETEA-LU in 2005, only public agencies
could issue federal tax-exempt bonds.
[21] FHWA has approved another private activity bond for $1.866 billion
for SH-121 in Texas. However, Texas is currently awarding that contract
to the North Texas Toll Authority, a public toll authority, which has
stated that it will not use private activity bonds for this project.
[22] This official also told us that the refinancing occurred to reduce
the initial equity investment in the project (which was nearly 50
percent) and increase the debt investment. Investment officials told us
that typically private investment in highway public-private
partnerships is 40 percent equity and 60 percent debt.
[23] GAO, Highway Finance: States' Expanding Use of Tolling Illustrates
Diverse Challenges and Strategies, GAO-06-554 (Washington, D.C.: June
28, 2006).
[24] According to FHWA officials, some states have dealt with toll
equity and income levels with various assistance packages for low-
income users.
[25] In Chicago, tolls are subject to scheduled increases until 2017
and, in Indiana, until mid-2010.
[26] Potential future tolls on the Chicago Skyway in this analysis were
limited to a 40-year horizon due to the unreliability of GDP
projections beyond this time period. See appendix I for further
information on toll projections used for this analysis.
[27] As discussed earlier, under terms of the concession agreement and
estimated increases in nominal GDP, our analysis shows that tolls on
the Chicago Skyway will be permitted to increase in real terms nearly
97 percent (about 1.7 percent annually) from 2007 to 2047. In nominal
terms, this is a total increase of nearly 397 percent (or about an
average annual increase of just over 4 percent).
[28] GAO-04-419.
[29] According to DOT officials, these projects were financed through
models different than the public-private partnerships that are the
focus of this report.
[30] The Chief Financial Officer of the California DOT noted that the
cost of buying back the road was still below what it would have cost
the public sector to build it and that the road has proven to be a
valuable asset.
[31] The Texas DOT noted that the moratorium included a number of
exceptions.
[32] As discussed earlier in this report, refinancing may occur early
in a concession period as the initial investors either attempt to "cash
out" their investment--that is, sell their investment to others and use
the proceeds for other investment opportunities--or obtain new, lower
cost financing for the existing investment. Refinancing may also be
used to reduce the initial equity investment in public-private
partnerships.
[33] As discussed earlier, the Orange County Transportation Authority
purchased the rights to operate the SR-91 managed lanes so it would no
longer be constrained by the noncomplete clause preventing it from
conducting needed work on the adjacent untolled publicly operated
lanes.
[34] A living wage is a wage that is above federal or state minimum
wage requirements and is considered the wage needed for a full-time
worker to support a family at some level above the federal poverty
line.
[35] According to the Skyway Concession Company, none of the five
employees stayed with the concessionaire.
[36] The Melbourne City Link Authority was initially responsible for
oversight of the CityLink toll road. This organization was ultimately
absorbed into VicRoads, the public agency responsible for all of
Victoria's roads.
[37] For more information, see Public-Private Partnerships Victoria,
Information Brochure, Government of Victoria, [hyperlink,
http://www.vic.gov.au/treasury] (undated).
[38] An official with the New South Wales Department of Treasury stated
that New South Wales has a well-established methodology for determining
discount rates, which is based on the Capital Asset Pricing Model. In
addition, in February 2007, the New South Wales government released a
technical paper to assist in the determination of appropriate discount
rates in evaluating private financing proposals for public sector
projects.
[39] According to a concessionaire official, the connector ramp from
the Chicago Skyway to Interstate 94 was not transferred as part of the
lease.
[40] GAO, Highway Infrastructure: Stakeholders' Views on Time to
Conduct Environmental Reviews of Highway Projects, GAO-03-534
(Washington, D.C.: May 23, 2003).
[41] Under SEP-15, FHWA allows a waiver of certain federal regulations
to permit private sector involvement in projects prior to completion of
the environmental review process. A more detailed discussion of SEP-15
can be found later in this report.
[42] FHWA officials told us that, since the FHWA's SEP-15 approval of
this project, Congress enacted section 1503 of SAFETEA-LU requiring
FHWA to revise its design-build regulations to permit the release of an
RFP and the award of a design-build contract prior to the completion of
the environmental review process. On August 14, 2007, the FHWA
published a final rule implementing the new regulations.
[43] U.S. Department of Transportation, National Strategy to Reduce
Congestion on America's Transportation Network (May 2006).
[44] These alternative techniques include cost-plus-time bidding, lane
rental, design-build contracting, and warranty clauses.
[45] In best value contracting, the selection of a contractor is based
on a combined technical score and price.
[46] In design-build contracting, the contracting agency specifies the
end result, and the design criteria and the prospective offerors submit
proposals based on their selection of design, materials, and
construction methods. The design-build contracting approach results in
one award for both the design and construction of a project, thus
eliminating the need for a separate bidding process for the
construction phase.
[47] DOT, FHWA, Manual, p. 36.
[48] Texas originally applied under SEP-14 but was transferred by FHWA
to the SEP-15 program.
[49] Federal Highway Administration, Department of Transportation,
Manual for Using Public-Private Partnerships on Highway Projects.
[50] U.S. Department of Transportation, Federal Highway Administration,
Office of Policy and Governmental Affairs, prepared by AECOM Consult
Team, User Guidebook on Implementing Public-Private Partnerships for
Transportation Infrastructure Projects in the United States, Final
Report Work Order 05-002 (July 7, 2007).
[51] This Web site can be found at [hyperlink,
http://www.fhwa.dot.gov/ppp/].
[52] Statement of Tyler Duvall, Assistant Secretary of Transportation
for Policy, U.S. Department of Transportation, Before the Committee on
Transportation and Infrastructure, Subcommittee on Highways and
Transit, U.S. House of Representatives, February 13, 2007.
[53] According to the SCC, some of the interest rates are based on the
London Interbank Overnight Rate plus various percentages.
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