Funding infrastructure with private capital,Â a practice widely usedÂ abroad,Â has hadÂ its tentativeÂ beginningsÂ here at home, but its domestic long-term futureÂ is still clouded. We interviewedÂ a diverse group of individuals of varying political persuasion, on public-private partnerships in U.S. surface transportation. They includedÂ state legislators, congressional staffers, senior U.S. DOT officials, state and local transportation officials, members of the two congressionally-chartered transportation commissions,Â executives of trade and professional associations, and analysts on Wall Street,Â in think tanks,Â academia and private consulting firms.
Support for Public-Private Partnerships is Growing
Total reliance on public resources and the fuel tax to fund future investments in transportationÂ infrastructure is no longer a realistic option. Such, in essence, is the considered judgment of a great majority of participants in our survey.
State officials tell us they are embracing private sector financing and tolling not because of any ideological commitment to "privatization" or a philosophic attachment to market-driven solutions but out of sheer fiscal necessity. Increasingly, state departments of transportationÂ are obliged to commit a major part of their tax-supported transportation budgets to preserving,Â modernizing and replacing existing infrastructure, leaving little money for new construction.
"We are struggling to have enough money to hold together what we have, let alone be able to think about the level of investment that would be needed to provide new infrastructure," Allen Biehler, Secretary of PennDOT toldÂ state legislatorsÂ recently.Â Â
Influential political leadersÂ on Capitol Hill, inÂ state capitals and in the Bush Administration have taken note of the growing need forÂ private investment in infrastructure.Â Â HouseÂ Speaker Nancy PelosiÂ (D-CA)Â (below, left) stated approvingly in an address to the American Public TransportationÂ Association thatÂ "Private investment is playing an increasingly larger role in public infrastructure. Innovative public-private partnerships are appearing around the country, bringing much-needed capital to the table."
Texas Governor Rick Perry (above, right), in a keynote speech at the annual meeting of the Texas Transportation Forum, observedÂ "I am convinced that private dollars, administered through public-private partnerships, are a significant part of the answer to our transportation infrastructure challenge."
As another high-rankingÂ state official told us, "since Congress is not likely to come up with adequate resources to help us meet our future infrastructure needs, we have no option but to move on our own and find new ways of funding our capital needs." TheÂ official in question reflected a widespread sense among state officials and lawmakers we have talked to thatÂ there is little prospect for a substantial increase in federal aid. This judgmentÂ was also sharedÂ by Sen. Chuck Hagel (R-NE) at a recent congressional hearing. "The Federal Government," he said, "does not and will not have the resources to meet our future national infrastructure needs."
USDOT and a range of blue-chip advocacy groups have been contributing to the dialogue on infrastructure and PPP. So are many states. In Colorado, Iowa, Massachusetts, Michigan, Minnesota, Oregon, South Carolina, and Texas, governors and local authorities have convened special commissions to identify new revenue sources for infrastructure investments. In other states, such as Arizona, Nevada, North Carolina, Oklahoma, WashingtonÂ and Wyoming, special legislative committees are studying "revenue enhancements"Â to supplement existing transportation funds.Â
"A Coalition Of Change Agents"
"A coalition of change agents at state level will bring about a fundamental reorientation in the way we approach transportation funding," one senior state financial official told us, adding thatÂ tolling and private investment will play an increasingly prominent role.
By our count, a total of 22 states are contemplating the use of tolls to support road capacity expansion.Â Some of them, such as Florida, Pennsylvania and Texas may resort to long-term concession-based PPPs, while others will choose the more traditional approach of usingÂ tax-exempt debt, design-build contracts, and operation through stateÂ departments of transportation orÂ regionalÂ public toll authorities.Â
Municipal Bond Market Has Limited Potential
However,Â survey participants pointed outÂ that many state and local governments will beÂ precluded from usingÂ the municipal bond marketÂ as a financing mechanism because they have reached their statutory debt ceiling or becauseÂ voters have refused to approve further bond issues.Â Moreover, pension funds, a potentially major source of investmentÂ capital for infrastructure, Â do not participate in the municipal bond marketÂ because they do not benefit from the munis' Â tax-exempt status.
Is Private Capital Really Necessary?
Not allÂ of our survey participants wereÂ convinced thatÂ future infrastructure investments will require private capital. Some of those we consultedÂ suggested that the nation's future transportationÂ needs could be met by raisingÂ the federal fuel tax or through new federal financingÂ initiatives.Â The formerÂ option, they said, has never been taken offÂ the table and will most likely figure inÂ the transportation reauthorization proposal shepherded by Rep. Jim Oberstar (D-MN). The latterÂ option includes the National Infrastructure Bank (S. 1926 and HR 3401) championedÂ by Sens. Christopher Dodd (D-CT) and Hagel, and the "Build America Bonds" programÂ (S. 2021)Â proposed by Sens. John Thune (R-SD) andÂ Ron Wyden (D-OR, below at left). Both initiativesÂ would create a de factoÂ national capital budgetÂ Â that could be usedÂ Â to fund "qualified public works projects ofÂ regional or national significance."Â
The NIBÂ proposal hasÂ gainedÂ political traction by receivingÂ the support of presidential candidate Barack ObamaÂ and House MajorityÂ Leader Pelosi.Â Â
But many survey participants pointed out that the extra revenue generated by a gas tax increase - even assuming thatÂ such aÂ tax increaseÂ wouldÂ pass muster withÂ theÂ tax-writing congressional committees and obtain a filibuster-proof majority support in the Senate - would be largely consumedÂ by demands for preservation and reconstruction of the existing highway network and byÂ escalating construction costs, leaving littleÂ capital for new construction.Â
Besides, theÂ federal program contributes only about 40 percent of the capital cost of transportation infrastructure. The remaining 60 percentÂ comes from state and local budgets, and there is no guarantee that local jurisdictions would be able toÂ meet their part of the bargain.Â
As for the new federal financingÂ initiatives, theirÂ revenue - $60 billion over 10 years in the case of the National Infrastructure Bank andÂ $50 billion in the case of the Build America BondsÂ program - would hardly suffice to make up for decades of underinvestment.
These billsÂ could only fund a small fraction of the infrastructure deficit - a deficit thatÂ the American Society of Civil EngineersÂ estimates atÂ $1.6 trillion.Â "A federal-centric approach does not offer an adequate long- term solution to closing the hugeÂ infrastructure funding gap," Â summed upÂ one respected think tank analyst.Â Â
Overall Verdict For PPPs Is Positive
Overall, our survey participants thought thatÂ tolling,Â privateÂ equity capitalÂ and long-term concession-based public-private partnerships will play aÂ significant roleÂ in Â the nation's efforts to expand infrastructure capacity. The circumstancesÂ which they believe are driving states to partner with the private sectorÂ are largely fiscal in nature. TheyÂ includeÂ declining tax revenues flowing into the Highway Trust Fund due toÂ Â improvements in vehicle fuel economy and a possible slowdown in the growth of vehicle-miles traveled (VMTs);Â public opposition to higher fuel taxes;Â and the sheer magnitude of the infrastructure deficit which overwhelmes the bondingÂ capacity of state and local governments.Â But motivationÂ to partner with the private sectorÂ also includes recognition of some positive benefits of private sector involvement,Â suchÂ as willingnessÂ ofÂ private concessionairesÂ Â to contributeÂ equity capital,Â do the job faster, introduceÂ innovation and assume operating and financialÂ risks. Â
As severalÂ electedÂ officials have pointed out to us,Â engagingÂ the private sectorÂ in the task of modernizing the nation's infrastructureÂ may be the bestÂ way to ensure the continued growth of the nation's transportation capacityÂ without imposing an unacceptable fiscal burden onÂ American taxpayers or burdening future generations with further debt.
The viability of theÂ partnership model depends, of course, on the willingness of the private sector to invest in public infrastructure assets. On that score there appears to be little doubt. Our inquiry has revealed an impressive number of private equity funds (72 by one count) dedicated to investments in infrastructure. In the aggregate, they are estimated to have raised in excess of $120 billion. After leveraging the estimated equity capital pool through bank loans and the capital markets, the infrastructure funds could support investments in the range of $340 to $600 billion.
Skepticism About PPPs Persists
Skepticism about PPPs and questions about the proper role of the private sector in infrastructure development persist. The two-year moratorium on PPPs in Texas and strong opposition to the "monetization" of the Â New Jersy TurnpikeÂ have beenÂ vivid reminders of the continued opposition to tolling and private sector involvement. Â A more recent example has been the failure ofÂ two bills in the California legislature to establish an Office of Public-Private Partnerships to promote PPPs among local agencies (AB 2278),Â and to authorize state agencies to enter intoÂ public private partnerships to supportÂ infrastructure development (AB 2600).
Further evidence ofÂ anti-PPP sentiments comes fromÂ public employee unions.Â The Service Employees International Union (SEIU) has been particularly aggressive in itsÂ campaign to policeÂ the authorityÂ ofÂ states' employee pension funds toÂ investÂ in private equity companies - a majorÂ source ofÂ investment capital for public-private partnerships.Â HavingÂ failed in this effort in California, the union has switched its attentionÂ to the state of Washington. Among the union's demands is thatÂ the State Investment Board (SIB) which manages public pension money,Â weighÂ the private equity companies'Â "corporate behavior" before it could invest in them. By prevailing in its demands,Â the union would, for all practical purposes, depriveÂ public-private infrastructure partnerships of a major source of investment capital. Â Â
Opposition to PPPs Has Many Faces
Much of the opposition toÂ public-private partnerships isÂ motivated by a belief that the public interest demands strong public oversight over investment decisions relating to public infrastructure. Advocates of this point of view in Congress and elsewhere argue that the national road system is "a public good" that should be provided and maintained by the public sector to serve the public interest. They contend that a series of private toll concessions would lead to "cherry picking," resulting inÂ a patchwork of uncoordinated facilities that wouldÂ undermine the integrity and connectivity of aÂ Â national highway network. PPP opponentsÂ are particularly critical ofÂ contractual "non-compete" provisions,Â diversion ofÂ upfront lump-sum lease payments to non-transportation purposes andÂ long-term leasesÂ of existing toll facilities. Referring to the 99-year lease of the Chicago Skyway and the 75-year lease of the Indiana Toll Road, Sen. Jeff Bingaman (D-NM, at right), chairman of the Subcommittee on Infrastructure of the Senate Finance Committee Â observed,Â "I think we ought to reconsider the perverse incentive that the tax code creates for such long leases...If current depreciation rules lead to forms of investment that we judge to contravene public policy, then the Finance Committee should consider changing those rules...".
These concerns areÂ legitimate andÂ need to be addressed, observed the participants in our survey, noting that recent concession proposals provide for strong safeguards to protect the public interest.Â ButÂ opposition to private sector involvement isÂ motivated by more than just an altruistic desire "to protect the public interest." Rather, we have found that it is fueled by aÂ complex mix of motives. Some people are concerned that a widespread use of PPPs would shift more power over infrastructure development to the states and weakenÂ the federal role in transportation.Â
Congressional lawmakers are opposed to PPPs because they suspectÂ private sector involvementÂ would lead to an erosion of congressional control over public investmentÂ decisions and reduceÂ opportunities for earmarking.Â
Public employeeÂ unions worry that transportation facilitiesÂ under private managementÂ would lead to a loss of union jobs and prevent unions from organizing workers at those facilities.Â The trucking industry fears that private road concessions would lead to rapidly escalating tolls.
AndÂ someÂ Beltway interest groups and lobbyistsÂ are concerned that private sector involvementÂ would decentralize decisionmaking to the states and lessen their ability to influenceÂ the transportation program at the federal level.Â To the extent thatÂ many of the public-private partnerships are likely to involve foreign entities, there is also concern - justified or not - about foreign controlÂ of strategicÂ transportation assets.Â
PPPs atÂ the Crossroads
There are well founded speculations that CongressÂ mayÂ attemptÂ to assertÂ oversight over public-private partnerships and place conditions on long-termÂ toll road concession agreements, ostensibly "to protect the public interest."Â The House Transportation and Infrastructure Committee is rumored to consider establishing a regulatory commission to oversee public private partnerships.Â Â An influential member ofÂ the Senate Finance Committee has raised the possibility of amendingÂ the federalÂ tax code to prohibit "excessively long" concession lease terms.Â Some interest groups inÂ the trucking industry and public employee unions may be expected to vigorously applaud congressionalÂ moves to assert oversightÂ and impose regulatory restraints onÂ PPPs.Â There are indications that the National Transportation Infrastructure Finance Commission also willÂ recommend certain legislative restrictions on private toll road concessions.
Whether efforts to rein in PPPs will come to pass,Â and if they do, how onerousÂ the restrictions will be, remains an open question.Â So far, there have been few signs of any organized attempts by PPP proponentsÂ to change congressional minds.Â Ongoing advocacy efforts ofÂ variousÂ PPP coalitions appearÂ fragmented and uncoordinated. This may change as we draw closer to theÂ reauthorization deadlineÂ and as theÂ House Transportation and Infrastructure Committee makes its intentions better known by releasing a preliminary legislative proposal (next February, we are told). Of particular importance at that time will be the postureÂ ofÂ the governors and state legislatures.Â Will they go along with recommendations forÂ federal controls overÂ PPPs or will they assert the right to determine for themselves the conditions ofÂ Â locally negotiated partnership agreements?Â Above all, will the current level of experience with long-term concession-based public-private partnerships offer state officials and legislatorsÂ sufficient confidence and comfort level to championÂ this novel approachÂ in the face of determined congressional and labor union opposition?
How this complex interplay of politicalÂ forcesÂ will eventually play out in the post-election environment may ultimatelyÂ determine whetherÂ the private sectorÂ will become a majorÂ partnerÂ in theÂ efforts toÂ renewÂ the country'sÂ transportation infrastructure.Â Or willÂ private capital (especially foreign capital), faced with mounting legal restrictions and regulatory barriersÂ in the U.S.,Â turn its attention toÂ investment opportunitiesÂ abroad andÂ depriveÂ fiscally strapped state and local governments ofÂ much neededÂ resources to modernize and expand America'sÂ infrastructure? That is the bottom-line question.Â Â Â Â Â