In this era of declining revenues, more states are turning to the private sector to complete transportation projects.
By James B. Reed
We've heard it for years. The nation’s bridges are crumbling, our roads are peppered with potholes, Congress won’t pass a comprehensive transportation funding plan, and gas tax revenue isn’t cutting it.
There’s just not enough money to fix the millions of miles of roads and the tens of thousands of bridges spanning the country. What we need is some $134 billion to $262 billion each year for the next 20 years. What we have: 40 percent to 70 percent less.
What’s even more alarming is that one in nine bridges in the United States—and the average is 42 years old—is structurally deficient, according to the American Society of Civil Engineers’ 2013 Infrastructure Report Card. And to fix them, we need $8 billion more each year than we already spend.
Wisconsin plans on about $2.5 billion in state and federal transportation money each year, but it needs $480 million more to maintain, improve and modernize its existing roads and bridges.
In 2013, 5,540 of Pennsylvania’s bridges—24 percent—were structurally deficient. Today, that number has dropped to 4,200, thanks to an aggressive program and a not-so-new idea with a new twist: public-private partnerships (P3s or PPPs).
The fuel taxes drivers pay at the pump have paid for most transportation projects, but that money is decreasing every year. And without “the political will to raise the revenue necessary to pay for what is needed,” says Minnesota Senator Scott Dibble (DFL), P3s may be one solution.
Sharing the Risk
The concept is simply a new take on an old idea: Fund and finance complex projects by cobbling together a variety of local, state, federal and private sources, but change the stakes. These public-private partnerships bring new money and shift some of the risks to the private partner, so a state’s department of transportation can do what it does best—plan the project and obtain environmental permits and rights-of-way.
This is the key feature distinguishing P3s from conventional government projects: Through a performance-based, long-term service contract with a government agency, the private entity takes on what has typically been the responsibility of the public sector—financing, design, construction, operation and maintenance, even toll revenue collection.
There is a public cost to transferring risk to the private side.The bigger the risk assumed by the private sector, the greater the cost to the state because of its guarantee of return on private investments. But the private party also has “skin in the game” in terms of its financial investment, so keeping up operation standards on its side is pretty much guaranteed.
“Giving a private partner an equity stake in a project, as well as control over the project’s execution, generally encourages more efficient management than the traditional approach affords,” the Congressional Budget Office (CBO) stated in testimony to Congress in March 2014. The contracts specify that when finished, the private side must hand back projects to the public side in improved condition.
P3s are viable for “some, but certainly not all infrastructure projects,” says Representative Ed Soliday (R), chair of the Indiana House transportation committee, whose state has embarked on a number of these projects. “There are many types of P3s. The key is having a state revenue source to make payments to the private entity as project phases are completed.”
This is the key caveat. P3s do not free up or create new public funds. They may reduce some of the initial upfront public debt, but revenues from tolls or other state transportation tax revenues are needed to pay back the private investment.
In 2006, 23 states allowed public-private transportation partnerships and that number grew to 33 states by 2013. The trend continued, and last year 22 states considered at least 70 bills to allow P3s or tweak existing laws. Some $61 billion is committed to P3 projects over the past 25 years—half in the last five years.
The Promise of P3s
The new P3 approach is an effort to provide high quality roads and bridges in an era of diminishing gas taxes, as well as uncertainty and lack of growth in the federal transportation program, which pays for about 25 percent of the average state’s transportation costs. By providing additional capital through private-sector financing, P3s can help bring about projects that otherwise might have been delayed or not built at all because of declining revenue and debt limit ceilings.
Projects costing more than $100 million reduced design and construction time by as much as a year under the P3 approach, according to the CBO. “The research has found that, compared with the traditional approach, public-private partnerships have slightly reduced the time required to complete the design and construction phases of road projects and lowered construction costs by a small amount, on average.”
Well-executed P3s, according to a recent study by the Eno Foundation, a transportation think tank, can control costs, allocate risks properly, accelerate project construction, and develop essential infrastructure that might otherwise not have been built.
The P3 model that offers the “largest potential gains in terms of risk sharing and efficiency is one that includes a private role in all phases of a project: design, build, finance, operate and maintain, and hand back, commonly referred to as a DBFOM,” the report states. This model incorporates private financing and retains public ownership, and the private entity is paid with revenues generated by the tolls or payments made by the state’s annual transportation budget. Other P3 arrangements include design-build, whereby a single contractor designs and constructs the project in a seamless process, rather than though multiple separate contracts with separate companies.
The Concerns About P3s
When the private sector is involved in transportation projects, it raises a series of concerns: loss of public control and flexibility; private profits at public expense; assignment of future public revenues; risk of project bankruptcy by the private partner; the degree of accountability and transparency in the procurement and contracting process; adherence to environmental regulations; labor issues; the involvement of foreign companies; controversies surrounding public acceptance of tolls; and specific contract terms.
P3s “speed up construction of large facilities that would otherwise languish,” says Dibble, chair of the Minnesota Senate transportation committee, but there are disadvantages. “Without additional revenues, financing is merely borrowing. As well, there is perception that wealthier areas are being advantaged, that labor is being undermined, that otherwise public assets are owned and controlled by corporations, or that private interests are profiting from transportation operations. All are politically problematic.” Dibble authored legislation in 2013 allowing the transportation commissioner to establish a joint program office to oversee and coordinate activities to develop, evaluate and implement public-private partnerships involving public infrastructure investments.
P3s are clearly not a panacea. In the past several months reviews have been mixed. In Indiana, the concession consortium leasing the Indiana Toll Road went bankrupt. The revenues anticipated in 2006 when the deal was initiated didn’t materialize due to the Great Recession, but the agreement insulated the state and taxpayers from loss and the state retained the upfront $3.8 billion payment it received from the private entity. In the meantime, the road is open, a bankruptcy sale is scheduled and a new toll operator will be named soon. Despite all this, the driving public has not been inconvenienced.
In Virginia, two toll road projects with signed P3 contracts are under review. There have been delays in getting project permits and concerns over tolling and certain contractual payment provisions to the private partner. In response, the Virginia Department of Transportation recently issued revised guidelines for the state P3 program. Nevada considered a P3 for its NEON highway project, but determined that a traditional procurement would be more cost-effective.
The bottom line is that no P3 project is the same as the one before and each one can have both uniquely successful and problematic elements. P3s are complex and entail significant transaction costs. And, they are new enough that the public doesn’t fully understand how they will function, how the public’s interest in these contracts is protected, and how the governmental agency interacts with the private company.
So what’s the best approach to reap the benefits of P3s?
- A clear, transparent legislative framework with adequate funding to implement a P3 program.
- An understandable procurement process that gives business interests confidence that preparing bids is a worthwhile investment.
- Open and timely communication to address potential controversies that may arise because the process is new.
Indiana’s Soliday believes states need to “clearly define what the expectations are for the maintenance of the current infrastructure, to sustain a certain level of quality, and how that will be measured. In addition, the state needs to spell out how it plans to evaluate the potential economic contribution of new projects in order to set new construction priorities.”
What’s the Federal Role?
There are several federal tools to aid states in pursuing P3s. The Transportation Infrastructure Finance and Innovation Act is a credit assistance program that helps make projects more feasible by lowering the cost of capital by providing lower cost debt, but it is not a grant.
The 2014 Build America Transportation Investment Center—housed at the Department of Transportation—is a one-stop shop for cities and states seeking to use innovative financing and partnerships with the private sector for transportation infrastructure.
In September 2014, the U.S. House Transportation and Infrastructure Committee issued a report on P3s that recommended creating a procurement office in the U.S. Department of Transportation to work with state DOTs in defining a set of best practices for the various elements of P3s, including procurement and contracts.
The Issue of Transparency
One lesson learned is the importance of keeping the public informed. A Colorado project serves as a good example of how important transparency of the process can be. A few years ago, the state decided to improve U.S. 36 between Denver and Boulder, home of the University of Colorado, and create a toll lane in each direction. (It was a toll road in the 1950s and ’60s.) But the announcement elicited a vociferous and lightning-fast public outcry through social media as the contract was about to be approved. Citizens believed they had not been sufficiently informed about a change that would affect their pocketbooks decades after the highway had been paid for. They didn’t fully understand the tolling elements of the project, and many thought a free highway should not be turned into a toll road.
In response, the legislature approved a bill requiring additional public hearings at various junctures as well as online posting of contract terms, a practice followed in many states. But Governor John Hickenlooper vetoed the bill, primarily over a provision requiring legislative approval for contracts exceeding 35 years. He did, however, approve the transparency provisions by executive order. The Colorado Department of Transportation is now following these transparency guidelines to conduct more public meetings based on milestones reached and improve outreach through social media.
The World Bank has weighed in with suggestions about sharing P3 project data to keep the public informed.
- Publish the P3 contract, along with a summary of it in plain language.
- State how much the government will pay over time.
- Report on the project’s performance regularly.
- Create a way to validate information, perhaps through an audit.
Public-private partnerships hold the promise—within the correct legislative framework—to enhance a state’s ability to fund and expand all kinds of transportation projects while providing incentives and benefits to business. They don’t work in every instance and they need strong oversight, but they are a tool for states to consider.
The Transportation Funding Crisis
From 2002 to 2011, state spending on surface transportation fell by $20 billion, a decline of 20 percent in real terms, according to a recent study by The Pew Charitable Trusts. Since states pay for at least 40 percent of annual highway and transit construction, operations and maintenance, this trend is sobering. Operations and maintenance tend to get cut when budgets are tight, and this in turn decreases the value and condition of transportation infrastructure.
Certainly the Great Recession and its aftermath of slow economic growth dampened appetites for spending at the state level. This has led to underinvestment, just when an aging infrastructure needs it desperately.
Most transportation funding comes from fuel taxes, but declining gas tax revenue is the new reality. Why? The federal gas tax has not increased in more than 20 years, people are driving less and cars are being designed to be more fuel efficient. Add to that the persisting political reluctance to raise any kind of tax, including fuel taxes, and the result is less money to pay for new construction or maintenance of current infrastructure.Another concern is the continuing uncertainty of federal funding. Declining gas tax revenue has also hurt the financially unstable federal Highway Trust Fund. It will need annual infusions of at least $15 billion going forward, unless more federal revenue is found. Current authority for the federal surface transportation program expires in May 2015.
Pennsylvania Attempts to “Bridge” the Funding Gap
Pennsylvania lawmakers worked cooperatively in 2012 to pass House Bill 3 to create a viable P3 solution to their state’s transportation funding crisis. Today, policy experts and private entities alike are praising the law as the state readies to jumpstart its aggressive plan to replace or repair 558 bridges in four years.
PennDOT awarded a single P3 contract to Plenary Walsh Keystone Partners, a team including at least 11 Pennsylvania firms that will serve as subcontractors on its huge Rapid Bridge Replacement Project. By streamlining much of the process, the state hopes to replace bridges faster and more cheaply, with less of an impact on drivers, than through traditional methods.
The 28-year agreement includes a 36-month construction phase followed by a 25-year operation and maintenance contract. The replacement project will cost $899 million. Average cost savings over the contract period are estimated at $400,000 per bridge, or nearly $225 million in total.
The 2012 legislation created a Public-Private Transportation Partnership Board to oversee and advise on P3 projects in the state, with four of the six representatives appointed by the General Assembly.
It took less than a year for PennDOT to create the Rapid Bridge Replacement Project.
Kentucky P3 Bill Hits Roadblock
Public-private partnerships are not a new or unusual tool for Kentucky. Current state statute allows for P3s to be used in nearly every area of procurement, except for transportation. This year the legislature overwhelmingly approved a bill to authorize the use of P3s for transportation projects as well, but the governor vetoed it.
Although Governor Steve Beshear said he supports expanding P3s in the state generally, he vetoed this bill because he said portions of the legislation could have put the Brent Spence Bridge project in jeopardy by limiting any possibility to use tolls down the road. The vital bridge provides access to I-75 and I-71 between Northern Kentucky and Greater Cincinnati and is slated for replacement at a cost estimated to exceed $2 billion.
The bill would have required approval by the General Assembly of any P3 project involving “bi-state authority with the state of Ohio.” In addition, an amendment introduced by Representative Arnold Simpson (D) would have prohibited tolls on any interstate highway project connecting Kentucky and Ohio.
The legislation passed with supermajority support, but lawmakers were unable to override the governor’s veto.
Jim Reed directs the NCSL Environment, Energy and Transportation Program.