Highway Public-Private Partnerships
Securing Potential Benefits and Protecting the Public Interest Could Result from More Rigorous Up-front Analysis Gao ID: GAO-08-1052T July 24, 2008The private sector is increasingly involved in financing and operating highway facilities under long-term concession agreements. In some cases, this involves new facilities; in other cases, firms operate and maintain an existing facility for a period of time in exchange for an up-front payment to the public sector and the right to collect tolls over the term of the agreement. In February 2008 GAO reported on (1) the benefits, costs, and trade-offs of highway 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 highway public-private partnerships and potential changes in this role. The Senate Finance Committee asked GAO to testify on this report and to highlight its discussion of tax issues. GAO reviewed the experience of projects in the U.S. (including the Chicago Skyway and Indiana Toll Road agreements), Australia, Canada, and Spain.
Highway public-private partnerships provide potential 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 are also financial trade-offs. Unlike public toll authorities, the private sector pays federal income taxes and can deduct depreciation on assets for which they have effective ownership. The extent of these deductions and the amount of foregone revenue, if any, to the federal government is difficult to determine. Demonstrating effective ownership may require lengthy concession periods and, according to experts involved in the lease of the Chicago Skyway and Indiana Toll Road, contributed to the 99-year and 75-year concession terms on these two facilities, respectively. Experts also told us that in the absence of the depreciation benefit, the concession payments to Chicago and Indiana would likely have been less than $1.8 billion and $3.8 billion, respectively. Highway public-private partnerships in the U.S. that GAO reviewed sought to protect the public interest largely through concession agreement terms prescribing performance and other standards. While these protections are important, 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. Similar tools have been used to some extent in the United States, but their use has been more limited. Using up-front tools can also assist public agencies in determining the expected benefits and costs of a project and an appropriate means to deliver the project. Not using such tools may lead to certain aspects of protecting the public interest being overlooked. While direct federal involvement has been limited to where federal investment exists and while the DOT 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 our surface transportation policies, including creating well-defined goals based on identified areas of national interest. This reexamination provides an opportunity to identify emerging national public interests (including tax considerations), the role of the highway public-private partnerships in supporting and furthering those national interests, and how best to identify and protect national public interests in future highway public-private partnerships.
GAO-08-1052T, Highway Public-Private Partnerships: Securing Potential Benefits and Protecting the Public Interest Could Result from More Rigorous Up-front Analysis
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Testimony:
Before the Subcommittee on Energy, Natural Resources, and
Infrastructure, Committee on Finance, U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 2:00 p.m. EDT:
Thursday, July 24, 2008:
Highway Public-Private Partnerships:
Securing Potential Benefits and Protecting the Public Interest Could
Result from More Rigorous Up-front Analysis:
Statement of JayEtta Z. Hecker, Director: Physical Infrastructure
Issues:
GAO-08-1052T:
GAO Highlights:
Highlights of GAO-08-1052T, a testimony before the Subcommittee on
Energy, Natural Resources, and Infrastructure, Committee on Finance,
U.S. Senate.
Why GAO Did This Study:
The private sector is increasingly involved in financing and operating
highway facilities under long-term concession agreements. In some
cases, this involves new facilities; in other cases, firms operate and
maintain an existing facility for a period of time in exchange for an
up-front payment to the public sector and the right to collect tolls
over the term of the agreement. In February 2008 GAO reported on (1)
the benefits, costs, and trade-offs of highway 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 highway public-private partnerships and potential changes in
this role. The Senate Finance Committee asked GAO to testify on this
report and to highlight its discussion of tax issues. GAO reviewed the
experience of projects in the U.S. (including the Chicago Skyway and
Indiana Toll Road agreements), Australia, Canada, and Spain.
What GAO Found:
Highway public-private partnerships provide potential 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 are also financial trade-offs.
Unlike public toll authorities, the private sector pays federal income
taxes and can deduct depreciation on assets for which they have
effective ownership. The extent of these deductions and the amount of
foregone revenue, if any, to the federal government is difficult to
determine. Demonstrating effective ownership may require lengthy
concession periods and, according to experts involved in the lease of
the Chicago Skyway and Indiana Toll Road, contributed to the 99-year
and 75-year concession terms on these two facilities, respectively.
Experts also told us that in the absence of the depreciation benefit,
the concession payments to Chicago and Indiana would likely have been
less than $1.8 billion and $3.8 billion, respectively.
Highway public-private partnerships in the U.S. that GAO reviewed
sought to protect the public interest largely through concession
agreement terms prescribing performance and other standards. While
these protections are important, 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. Similar tools have been
used to some extent in the United States, but their use has been more
limited. Using up-front tools can also assist public agencies in
determining the expected benefits and costs of a project and an
appropriate means to deliver the project. Not using such tools may lead
to certain aspects of protecting the public interest being overlooked.
While direct federal involvement has been limited to where federal
investment exists and while the DOT 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 our surface
transportation policies, including creating well-defined goals based on
identified areas of national interest. This reexamination provides an
opportunity to identify emerging national public interests (including
tax considerations), the role of the highway public-private
partnerships in supporting and furthering those national interests, and
how best to identify and protect national public interests in future
highway public-private partnerships.
What GAO Recommends:
This testimony makes no new recommendations. In February 2008, GAO
recommended that Congress 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, in order to allow the
Department of Transportation (DOT) to play a targeted role in ensuring
that national interests are considered.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-1052T]. For more
information, contact JayEtta Hecker at (202) 512-2834 or
heckerj@gao.gov.
[End of section]
July 24, 2008:
Mr. Chairman and Members of the Subcommittee:
We appreciate the opportunity to testify on public-private partnerships
and their role in the surface transportation system. As you know,
America's transportation system is the essential element that
facilitates the movement of both people and freight within the country.
Nevertheless, the current federal approach to addressing the nation's
surface transportation problems is not working well. Despite large
increases in expenditures in real terms for transportation, the
investment has not commensurately improved the performance of the
nation's surface transportation system, as congestion continues to grow
and looming problems from the anticipated growth in travel demand are
not being adequately addressed. We have called for a fundamental
reexamination of our surface transportation policies, including
creating well-defined goals based on identified areas of national
interest, incorporating performance and accountability into funding
decisions, and more clearly defining the role of the federal government
as well as the roles of state and local governments, regional entities,
and the private sector.
The private sector has long been involved in surface transportation 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.
Under some of these arrangements, the private sector is being looked to
not only to construct facilities, but also to finance, maintain, and
operate facilities under long-term concession agreements--up to 99
years in one case. In some cases, this involves financing and
constructing a new facility and then operating and maintaining it over
a specified period of time. In other cases, this 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 and the right to
collect tolls over the term of the agreement.
We recently issued a report on public-private partnerships in the
highway sector. For this hearing, you asked us to discuss this report-
-in particular, the financing and tax issues it raised. My remarks
today are based on this February 2008 report[Footnote 1] and focus on
(1) the benefits, costs, and trade-offs to the public sector associated
with highway public-private partnerships; (2) how public officials have
identified and acted to protect the public interest in highway public-
private partnerships; and (3) the federal role in highway public-
private partnerships and potential changes in this role. We performed
our work 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.
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 classified 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. We also recognize that there
may be other forms of highway public-private partnerships. We did not
include these types of public-private partnerships in the scope of our
work, and the findings and conclusions of our work cannot be
extrapolated to those or other types of public-private partnerships.
In summary:
* 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.
They are potentially more costly to the public 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.
There are also financial trade-offs. Unlike public toll authorities,
the private sector pays federal income taxes and can deduct
depreciation on assets for which they have effective ownership for tax
purposes. The extent of these deductions and the amount of the foregone
revenue, if any, to the federal government is difficult to determine.
Obtaining these deductions may also require lengthy concession periods.
According to experts involved in the lease of the Chicago Skyway and
the Indiana Toll Road, demonstrating effective ownership contributed to
the 99-year and 75-year concession terms for the two facilities,
respectively. Financial experts also told us that in the absence of the
depreciation benefit, the concession payments to Chicago and Indiana
would likely have been less than the $1.8 billion and $3.8 billion,
respectively.
* Highway public-private partnerships in the U.S. we have reviewed
sought to protect the public interest largely through concession
agreement terms prescribing performance and other standards. While
these protections are important, 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. 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 deliver the project. Not using such tools may lead to certain
aspects of protecting the public interest being overlooked.
* 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, the Department of Transportation
(DOT) has done much to promote highway public-private partnerships, but
comparatively little to either assist states and localities in weighing
potential costs and trade-offs, or to assess how potentially important
national interests might be protected in such arrangements. Given the
minimal federal funding in highway public-private partnerships to date,
little consideration has been given to potential national public
interests in 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. 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. We have called for a fundamental reexamination of
federal programs to address emerging needs and test the relevance of
existing policies. Such a reexamination provides an opportunity to
identify emerging national public interests (including tax
considerations), the role of highway public-private partnerships in
supporting and furthering those national interests, and how best to
identify and protect national public interests in future public-private
partnerships. We believe DOT has the opportunity to play a targeted
role in ensuring that national interests are considered, as
appropriate, and have suggested that Congress consider directing the
Secretary of Transportation to develop and submit objective criteria
for identifying national public interests in highway public-private
partnerships, including any additional legal authority, guidance, or
assessment tools that would be appropriately required. We recognize
this is no easy task--any potential federal restrictions on highway
public-private partnerships must be carefully crafted to avoid
undermining the potential benefits that can be achieved.
Highway Public-Private Partnerships Can Potentially Provide Benefits
but Also Entail Costs, Risks, and Trade-offs:
Highway public-private partnerships have the potential to provide
numerous benefits to the public sector. There are also potential costs
and trade-offs.
Potential Benefits:
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. As we reported in 2004, by relying on private-
sector sponsorship and investment to build roads rather than financing
the construction themselves, states (1) conserve funding from their
highway capital improvement programs for other projects, (2) avoid 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) avoid the
legislative or administrative limits that govern the amount of
outstanding debt these states are allowed to have.[Footnote 2] All of
these results are advantages for the states.
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. Various government officials told us that because
the private sector more reliably 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. In addition, the public sector can potentially benefit from
increased efficiencies in operations and life-cycle management, such as
increased use of innovative technologies.
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. These benefits include better pricing of
infrastructure to reflect the true costs of operating and maintaining
the facility and thus improved condition and performance of public
infrastructure, as well as the potential for more cost effective
investment decisions by private investors. In addition, through
congestion pricing, tolls can be set to vary during congested periods
to maintain a predetermined level of service, creating incentives for
drivers to consider costs when making their driving decisions, and
potentially reducing the demand for roads during peak hours.
Potential Costs, Risks, 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. 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 public sector may lose control over
its ability to influence toll rates, and there is also the risk of
tolls being set that exceed the costs of the facility, including a
reasonable rate of return if, for example, a private concessionaire
gains market power because of the lack of viable travel alternatives.
In addition, highway public-private partnerships also potentially
require additional costs to the public sector compared with traditional
public procurement, including the costs associated with (1) required
financial and legal advisors, and (2) private-sector financing compared
with public-sector financing.
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. 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. 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.
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. Both also 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.
Financial Trade-offs:
Trade-offs from the public perspective can also be financial, as
highway public-private partnerships have implications for federal tax
policy. Private firms generally do not realize profits in the first 10
to 15 years of a concession agreement. However, 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. 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, as well as ongoing maintenance and
operation costs, and generate a return on investment. 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.
Unlike public toll authorities, private-sector firms pay federal income
tax. Current tax law allows private sector firms to deduct depreciation
on assets involved with highway public-private partnerships for which
they have "effective ownership." Effective ownership of assets
requires, among other things, that the length of a concession agreement
be equal to or greater than the useful economic life of the asset.
According to financial and legal experts, including those who were
involved in the lease of the Chicago Skyway in Chicago, Illinois, and
the Indiana Toll Road, the useful economic life of those facilities was
lengthy. The requirement to demonstrate effective asset ownership thus
required lengthy partnership concession periods and contributed to the
99-year and 75-year concession terms for the Chicago Skyway and Indiana
Toll Road, respectively. These financial and legal experts told us that
as effective owners, the private investors can claim full tax
deductions for asset depreciation within the first 15 years of the
lease agreements.[Footnote 3]
Determining the extent of depreciation deductions associated with
highway public-private partnerships, and the extent of foregone revenue
to the federal government, if any, from these deductions is difficult
to determine because they depend on such factors as taxable income,
total deductions, and marginal tax rates of private-sector entities
involved with highway public-private partnerships. Financial experts
told us that in the absence of the depreciation benefit, the concession
payments to Chicago and Indiana would likely have been less than the
$1.8 billion and $3.8 billion paid, respectively.
However, foregone revenue to the federal government from tax benefits
associated with transportation projects can potentially amount to
millions of dollars.[Footnote 4] For example, as we reported in 2004,
foregone tax revenue when the private-sector used tax-exempt bonds to
finance three projects with private sector involvement--the Pocahontas
Parkway, Southern Connector, and Las Vegas Monorail--were between $25
million and $35 million.[Footnote 5]
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 U.S. projects we reviewed heavily relied on concession terms.
Most often, these terms were focused on, among other things, ensuring
performance of the asset, dealing with financial issues, and
maintaining the public sector's accountability and flexibility.
Included in the protections we found in agreements we reviewed were:
* Operating and maintenance standards: These standards are put in place
to ensure that the performance of the asset is upheld to high safety,
maintenance, and operational standards and can be expanded when
necessary. For example, based on documents we reviewed, the standards
on the Indiana Toll Road require the concessionaire to maintain the
road's condition, utility, and level of safety including 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.
* Expansion trigger requirements: These triggers require that a
concessionaire expand a facility once congestion reaches a certain
level. Some agreements can be based on forecasts. For example, on the
Indiana Toll Road, when service is forecasted to fall below certain
levels within 7 years, the concessionaire must act to improve service,
such as by adding additional capacity at its own cost.
* Revenue-sharing mechanisms: These mechanisms require a concessionaire
to share some level of revenues with the public sector. For example, on
one Texas project, 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, the state could
receive as much as 50 percent of the net revenues.
While these protections are important, 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. These tools
include the use of qualitative public interest tests and criteria to
consider when entering into public-private partnerships. 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. These tools also include quantitative tests such as Value
for Money and public sector comparators, which are used to evaluate if
entering into a project as a public-private partnership is the best
procurement option available.
While similar tools have been used to some extent in the United States,
their use has been more limited. For example, Oregon hired a consultant
to develop public-sector comparators to compare the estimated costs of
a proposed highway public-private partnership with a model of the
public sector's undertaking the project. 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 study was
conducted before the project was put out for official concession, it
was prepared after substantial early development work was done by
private partners. Neither Chicago nor Indiana had developed public
interest tests or other tools prior to the leasing of the Chicago
Skyway or the Indiana Toll Road.
Using up-front public interest analysis tools can assist public
agencies in determining the expected benefits and costs of a project
and an appropriate means to undertake the project. 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 helped drive 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 Highway 407 ETR facility was a major factor
in significant opposition to the project.
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. At the time of
our February 2008 report, minimal federal funding has been used in
highway public-private partnerships. While direct federal involvement
has been limited, 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. For example,
until August 2007, federal regulations did not allow private
contractors to be involved in highway contracts with a state department
of transportation until after the federally mandated environmental
review process had been completed. Texas applied for a waiver 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. These flexibilities were
pivotal to allowing highway public-private partnership arrangements in
both Texas and Oregon to go forward while remaining eligible for
federal funds. The Federal Highway Administration (FHWA) and DOT also
promoted highway public-private partnerships by developing publications
to educate state transportation officials about highway public-private
partnerships and to promote their use, drafting model legislation for
states to consider to enable highway public-private partnerships in
their states, creating a public-private partnership Internet Web site,
and making tolling a key component of DOT's congestion mitigation
initiatives.
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, 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. Texas envisions constructing new international border
crossings and freight corridors using highway public-private
partnerships, which may greatly facilitate North American Free Trade
Agreement-related truck traffic to other states. However, no federal
funding had been expended in the development of the project. 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 nations surface transportation policies, including
creating well-defined goals based on identified areas of national
interest, incorporating performance and accountability into funding
decisions, and more clearly defining the role of the federal government
as well as the roles of state and local governments, regional entities,
and the private sector. Such a reexamination provides an opportunity to
identify emerging national public interests (including tax
considerations), the role of the highway public-private partnerships in
supporting and furthering those national interests, and how best to
identify and protect national public interests in future public-private
partnerships.
Concluding Observations:
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.
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. We have suggested that Congress consider
directing the Secretary of Transportation to develop and submit
objective criteria for identifying national public interests in highway
public-private partnerships, including any additional legal authority,
guidance, or assessment tools that would be appropriately required. We
are pleased to note that in a recent testimony before the House, the
Secretary indicated a willingness to begin developing such criteria.
This is no easy task, however. The recent report by the National
Surface Transportation Policy and Revenue Study Commission illustrates
the challenges of identifying national public interests as the Policy
Commission's recommendations for future restrictions--including
limiting allowable toll increases and requiring concessionaires to
share revenues with the public sector--stood in sharp contrast to the
dissenting views of three commissioners.[Footnote 6] We believe any
potential federal restrictions on highway public-private partnerships
must be carefully crafted to avoid undermining the potential benefits
that can be achieved. Reexamining the federal role in transportation
provides an opportunity for DOT, we believe, to play a targeted role in
ensuring that national interests are considered, as appropriate.
Mr. Chairman, this concludes my prepared statement. I would be pleased
to respond to any questions that you or other Members of the
Subcommittee might have.
GAO Contact and Staff Acknowledgment:
For further information on this statement, please contact JayEtta Z.
Hecker at (202) 512-2834 or heckerj@gao.gov. Individuals making key
contributions to this testimony were Steve Cohen (Assistant Director),
Bert Japikse, Richard Jorgenson, Carol Henn, Matthew Rosenberg, and
James White.
[End of section]
Footnotes:
[1] GAO, Highway Public-Private Partnerships: More Rigorous Up-front
Analysis Could Better Secure Potential Benefits and Protect the Public
Interest, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-44]
(Washington, D.C.: Feb. 8, 2008).
[2] GAO, Highways and Transit: Private Sector Sponsorship of and
Investment in Major Projects Has Been Limited, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-04-419] (Washington, D.C.: Mar.
25, 2004).
[3] 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.
[4] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-419].
[5] According to DOT officials, these projects were financed through
models different than the public-private partnerships that are were the
focus of our February 2008 report.
[6] Transportation for Tomorrow, National Surface Transportation Policy
and Revenue Study Commission, Dec. 2007.
[End of section]
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