"A Coalition Of Change Agents At The State Level" Will Boost P3s August 25, 2008
Ken Orski
Cascadia Prospectus
Copyright 2008
Funding infrastructure with private capital, a practice widely used abroad, has had its tentative beginnings here at home, but its domestic long-term future is still clouded. We interviewed a diverse group of individuals of varying political persuasion, on public-private partnerships in U.S. surface transportation.
They included state legislators, congressional staffers, senior U.S. DOT officials, state and local transportation officials, members of the two congressionally-chartered transportation commissions, executives of trade and professional associations, and analysts on Wall Street, in think tanks, 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 transportation 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 transportation are obliged to commit a major part of their tax-supported transportation budgets to preserving, 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 told state legislators recently.
Influential political leaders on Capitol Hill, in state capitals and in the Bush Administration have taken note of the growing need for private investment in infrastructure. House Speaker Nancy Pelosi (D-CA) (below, left) stated approvingly in an address to the American Public Transportation Association that "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, observed "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-ranking 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." The official in question reflected a widespread sense among state officials and lawmakers we have talked to that there is little prospect for a substantial increase in federal aid. This judgment was also shared 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, Washington and Wyoming, special legislative committees are studying "revenue enhancements" to supplement existing transportation funds.
"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 that 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. 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 using tax-exempt debt, design-build contracts, and operation through state departments of transportation or regional public toll authorities.
Municipal Bond Market Has Limited Potential
However, survey participants pointed out that many state and local governments will be precluded from using the municipal bond market as a financing mechanism because they have reached their statutory debt ceiling or because voters have refused to approve further bond issues. Moreover, pension funds, a potentially major source of investment capital for infrastructure, do not participate in the municipal bond market because they do not benefit from the munis' tax-exempt status.
Is Private Capital Really Necessary?
Not all of our survey participants were convinced that future infrastructure investments will require private capital. Some of those we consulted suggested that the nation's future transportation needs could be met by raising the federal fuel tax or through new federal financing initiatives. The former option, they said, has never been taken off the table and will most likely figure in the transportation reauthorization proposal shepherded by Rep. Jim Oberstar (D-MN). The latter option includes the National Infrastructure Bank (S. 1926 and HR 3401) championed by Sens. Christopher Dodd (D-CT) and Hagel, and the "Build America Bonds" program (S. 2021) proposed by Sens. John Thune (R-SD) and Ron Wyden (D-OR, below at left). Both initiatives would create a de facto national capital budget that could be used to fund "qualified public works projects of regional or national significance."
The NIB proposal has gained political traction by receiving the support of presidential candidate Barack Obama and House Majority Leader Pelosi.
But many survey participants pointed out that the extra revenue generated by a gas tax increase - even assuming that such a tax increase would pass muster with the tax-writing congressional committees and obtain a filibuster-proof majority support in the Senate - would be largely consumed by demands for preservation and reconstruction of the existing highway network and by escalating construction costs, leaving little capital for new construction. 
Besides, the federal program contributes only about 40 percent of the capital cost of transportation infrastructure. The remaining 60 percent comes from state and local budgets, and there is no guarantee that local jurisdictions would be able to meet their part of the bargain.
As for the new federal financing initiatives, their revenue - $60 billion over 10 years in the case of the National Infrastructure Bank and $50 billion in the case of the Build America Bonds program - would hardly suffice to make up for decades of underinvestment.
These bills could only fund a small fraction of the infrastructure deficit - a deficit that the American Society of Civil Engineers estimates at $1.6 trillion. "A federal-centric approach does not offer an adequate long- term solution to closing the huge infrastructure funding gap," summed up one respected think tank analyst.
Overall Verdict For PPPs Is Positive
Overall, our survey participants thought that tolling, private equity capital and long-term concession-based public-private partnerships will play a significant role in the nation's efforts to expand infrastructure capacity. The circumstances which they believe are driving states to partner with the private sector are largely fiscal in nature. They include declining tax revenues flowing into the Highway Trust Fund due to improvements in vehicle fuel economy and a possible slowdown in the growth of vehicle-miles traveled (VMTs); public opposition to higher fuel taxes; and the sheer magnitude of the infrastructure deficit which overwhelmes the bonding capacity of state and local governments.But motivation to partner with the private sector also includes recognition of some positive b enefits of private sector involvement, such as willingness of private concessionaires to contribute equity capital, do the job faster, introduce innovation and assume operating and financial risks.
As several elected officials have pointed out to us, engaging the private sector in the task of modernizing the nation’s infrastructure may be the best way to ensure the continued growth of the nation’s transportation capacity without imposing an unacceptable fiscal burden on American taxpayers or burdening future generations with further debt.
The viability of the 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 New Jersy Turnpike have been vivid reminders of the continued opposition to tolling and private sector involvement. A more recent example has been the failure of two bills in the California legislature to establish an Office of Public-Private Partnerships to promote PPPs among local agencies (AB 2278), and to authorize state agencies to enter into public private partnerships to support infrastructure development (AB 2600).
Further evidence of anti-PPP sentiments comes from public employee unions. The Service Employees International Union (SEIU) has been particularly aggressive in its campaign to police the authority of states' employee pension funds to invest in private equity companies - a major source of investment capital for public-private partnerships. Having failed in this effort in California, the union has switched its attention to the state of Washington. Among the union's demands is that the State Investment Board (SIB) which manages public pension money, weigh the private equity companies' "corporate behavior" before it could invest in them. By prevailing in its demands, the union would, for all practical purposes, deprive public-private infrastructure partnerships of a major source of investment capital.
Opposition to PPPs Has Many Faces
Much of the opposition to public-private partnerships is 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 in a patchwork of uncoordinated facilities that would undermine the integrity and connectivity of a national highway network. 
PPP opponents are particularly critical of contractual "non-compete" provisions, diversion of upfront lump-sum lease payments to non-transportation purposes and long-term leases 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 observed, "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 are legitimate and need to be addressed, observed the participants in our survey, noting that recent concession proposals provide for strong safeguards to protect the public interest. But opposition to private sector involvement is motivated by more than just an altruistic desire "to protect the public interest." Rather, we have found that it is fueled by a 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 weaken the federal role in transportation.
Congressional lawmakers are opposed to PPPs because they suspect private sector involvement would lead to an erosion of congressional control over public investment decisions and reduce opportunities for earmarking.
Public employee unions worry that transportation facilities under private management would lead to a loss of union jobs and prevent unions from organizing workers at those facilities. The trucking industry fears that private road concessions would lead to rapidly escalating tolls.
And some Beltway interest groups and lobbyists are concerned that private sector involvement would decentralize decision making to the states and lessen their ability to influence the transportation program at the federal level. To the extent that many of the public-private partnerships are likely to involve foreign entities, there is also concern - justified or not - about foreign control of strategic transportation assets.
PPPs at the Crossroads
There are well founded speculations that Congress may attempt to assert oversight over public-private partnerships and place conditions on long-term toll road concession agreements, ostensibly "to protect the public interest."
The House Transportation and Infrastructure Committee is rumored to consider establishing a regulatory commission to oversee public private partnerships. An influential member of the Senate Finance Committee has raised the possibility of amending the federal tax code to prohibit "excessively long" concession lease terms.
Some interest groups in the trucking industry and public employee unions may be expected to vigorously applaud congressional moves to assert oversight and impose regulatory restraints on PPPs. There are indications that the National Transportation Infrastructure Finance Commission also will recommend certain legislative restrictions on private toll road concessions.
Whether efforts to rein in PPPs will come to pass, and if they do, how onerous the restrictions will be, remains an open question. So far, there have been few signs of any organized attempts by PPP proponents to change congressional minds. Ongoing advocacy efforts of various PPP coalitions appear fragmented and uncoordinated. This may change as we draw closer to the reauthorization deadline and as the 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 posture of the governors and state legislatures. Will they go along with recommendations for federal controls over PPPs or will they assert the right to determine for themselves the conditions of locally negotiated partnership agreements? Above all, will the current level of experience with long-term concession-based public-private partnerships offer state officials and legislators sufficient confidence and comfort level to champion this novel approach in the face of determined congressional and labor union opposition?
How this complex interplay of political forces will eventually play out in the post-election environment may ultimately determine whether the private sector will become a major partner in the efforts to renew the country’s transportation infrastructure. Or will private capital (especially foreign capital), faced with mounting legal restrictions and regulatory barriers in the U.S., turn its attention to investment opportunities abroad and deprive fiscally strapped state and local governments of much needed resources to modernize and expand America's infrastructure? That is the bottom-line question.
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