Reason Foundation - Authors > Matthew Brouillette

Leasing the Pennsylvania Turnpike: Frequently Asked Questions and Answers

info@reason.org (Matthew Brouillette) leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 01 May 2008 00:00:00 EDT

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Preventing Overseas Firms From Leasing Roads Is Costly

leonard.gilroy@reason.org (Leonard Gilroy) info@reason.org (Matthew Brouillette) — Wed, 27 Feb 2008 00:00:00 EST

Philadelphia Inquirer

With transportation funding from last year's Act 44 looking increasingly unlikely to materialize, Gov. Rendell is wisely continuing to push for a private-sector lease of the Pennsylvania Turnpike as part of the solution to the state's transportation woes.

Yet, as discussions over the turnpike move forward, a protectionist undercurrent is rearing its ugly head. Some legislators want to ban foreign firms from leasing and operating the turnpike. These ill-advised efforts ignore the increasingly global nature of business and will hurt the commonwealth's economy.

Several firms bidding to operate the turnpike are U.S. subsidiaries of international companies, primarily from Spain and Australia. Private financing for multibillion-dollar toll-road projects has been used around the world for decades, but it is relatively new in the United States, where most toll roads have been run by government authorities. Hence, international firms are the most experienced private-sector, toll-road operators. Anyone interested in getting the best deal for taxpayers should surely consider experience and track record when choosing a partner for a multibillion-dollar deal.

U.S-based firms such as Goldman Sachs, JPMorgan and Merrill Lynch are also among the bidders, but even they get much of their capital from foreigners. Today, Americans regularly invest in international firms. For example, the New Jersey Teachers' Pension Fund is a major shareholder in the Spanish toll-road operator Cintra. Australia-based Macquarie, one of the biggest international toll-road firms, has received significant investments from the Mid-Atlantic Carpenters Pension Fund and the Midwest Operating Engineers Pension Fund. Therefore, restricting the participation of foreign firms actually threatens the investments of hard-working Americans - union members, public employees and individual investors alike.

When our friends, family and neighbors are invested in these companies, are they really foreign? And when Goldman Sachs of New York teams with Transurban of Australia and two Canadian public pension plans to compete for the turnpike lease, is that really a domestic venture?

In the case of the turnpike, we are talking about international companies that would operate permanent roads and create jobs in Pennsylvania. They can't pick up and ship the turnpike overseas. Their investment and all of that concrete would stay in the commonwealth.

Pennsylvania should welcome companies interested in creating job opportunities and investing billions of dollars in the state. This is the reverse of outsourcing - it's "insourcing" - and it's good for the economy.

Macquarie, for example, employs nearly as many people in North America as in its home of Australia. In its lease of the Indiana Toll Road, Macquarie and Spanish partner Cintra hired local citizens and are using local contractors for road work. That's on top of the $3.8 billion the firms paid the state for the lease itself, which was double the highest bid made by an American-led team. Had Indiana restricted competition to domestic firms, the state would have left billions on the table.

Those fostering foreign fears need a reality check. We drive foreign cars and strap our kids into foreign-made car seats every day. Most people watch the news on foreign-made televisions and surf the Internet on computers filled with foreign-made parts. We routinely fly on foreign-made Airbus planes. But somehow we don't want to drive on asphalt poured by a foreign company?

Pennsylvania is in desperate need of funding to repair, maintain and expand its roads and bridges. Leasing the turnpike offers a great opportunity to catch up on repairs and finally start tackling future road needs. But preventing many of the world's top road operators from working in Pennsylvania just because they aren't based exclusively here in the States does a huge disservice to taxpayers. That also all but guarantees the state won't get the best possible deal. That is bad business in any country.

New Life for Pennsylvania Turnpike Lease Plan

leonard.gilroy@reason.org (Leonard Gilroy) info@reason.org (Matthew Brouillette) — Mon, 12 Nov 2007 16:39:00 EST

Philadelphia Inquirer

Pennsylvania lawmakers should reconsider the money they left on the table earlier this year after rejecting Gov. Rendell's initial plan to lease the Pennsylvania Turnpike to a private-sector partner. Such an agreement could generate billions of dollars needed for transportation infrastructure and transit systems without raising taxes, adding tolls, or incurring more taxpayer debt.

Amid increasing doubts about the viability of Act 44 of 2007 - the law that permitted the Pennsylvania Turnpike Commission to raise money by putting tolls on Interstate 80 - the governor will soon announce a short list of teams that will make multi-billion-dollar bids for a potential turnpike lease.

Last month, 34 financial, engineering and management companies submitted 14 proposals to the Pennsylvania Department of Transportation, for operating the turnpike. If Rendell obtains a high-enough bid, he plans to take that offer to the General Assembly for consideration. The legislature would do well to give the idea serious thought this time around.

Increasing public backlash to Act 44 has prompted Rendell to revive his turnpike-lease plan. To begin with, Act 44 fails to address the identified annual transportation funding need of $1.7 billion. Despite billions in new bonded debt, higher turnpike fees, new tolls on I-80, and no plan to achieve meaningful congestion relief, Act 44 provides less than half the money needed to repair and maintain transportation infrastructure.

Additionally, Act 44 is predicated on federal approval for tolls on I-80, an outcome in doubt given recent communications from federal officials to the turnpike commission, and Act 44's failure to comply with federal rules on adding tolls to interstates. If the turnpike commission is denied permission to add tolls to the 311-mile road, then the shortfall in revenue for infrastructure only grows. And the people of Pennsylvania will be on the hook for the billions in bonded debt incurred by the turnpike commission.

Lastly, from a "good government" perspective, it doesn't make sense to reward the turnpike commission with even more power, size and authority. The commission is hardly a model of transparency, accountability and efficiency. Indeed, its long history as a patronage playground for the Pennsylvania Senate is well-documented.

By contrast, a properly written lease of the 514-mile Pennsylvania Turnpike under a public-private partnership would drive out the corruption and waste of the turnpike commission while generating a large infusion of privately raised capital, eliminating the need for more debt, more fees and more taxes. Under a lease agreement, the state could hold its private-sector partner to high and rigorous standards through a performance-based contract. If the company failed to comply with the terms of the agreement - whether related to snow or road-kill removal, maintenance requirements, or road-widening projects triggered by high traffic volumes - it could be financially penalized or even stripped of its contract.

Projections suggest that a lease could generate at least $1.7 billion annually - the amount needed to close the long-term funding gap. The final amount, of course, will not be known until the bids are in.

Indiana decided it wanted to fully fund its long-range transportation plans through a public-private partnership on the Indiana Toll Road. After reaping nearly $4 billion for the lease of the 157-mile highway, the state reinvested that money into transportation infrastructure projects. Today, the Hoosier State is the only one in the nation with a fully funded, statewide transportation plan. Because of this one public-private partnership, Indiana will be able to expand and modernize its transportation network and confront its major challenges in moving people, businesses and goods into, out of, and around the state.

Regardless of how the Act 44 issue plays out, Pennsylvania is at a crossroads. Business as usual - higher taxes, higher fees and higher debt - will not deliver the infrastructure that could meet the transportation needs of the 21st-century economy. Policymakers need to embrace a new paradigm for highway funding and operation, and teaming with the private sector offers that. Even better, it does so without more debt or tolls on I-80.

The Emerging Paradigm: Financing and Managing Pennsylvania's Transportation Infrastructure and Mass Transit

Thu, 01 Mar 2007 00:00:00 EST

In November 2006, Governor Ed Rendell’s Pennsylvania Transportation Funding and Reform Commission identified a $1.7 billion annual shortfall in funding for the Commonwealth’s transportation infrastructure and mass transit services. The Commission suggested an additional $900 million for state highways and bridges, $65 million for local highways and bridges, and $700 million for mass transit is needed on an annual basis to sufficiently meet Pennsylvania’s transportation funding needs.

In order to fill this funding gap, the Commission recommended multiple tax increases, including increases in the gas (Oil Company Franchise) tax, higher license and vehicle fees, and an increase of the Realty Transfer Tax. The Commission also proposed increases in local taxes for mass transit funding, including a higher local sales tax, a higher local Earned Income Tax, or a higher local realty transfer tax.

In addition, the Commission identified $180 million in savings by improving efficiencies ($120 million in highways, $60 million in transit) and recommended the utilization of Public- Private Partnerships (P3s) in both road and transit services. P3s are a means of leveraging private capital and expertise to provide a public service.

Governor Ed Rendell delivered his fiscal year 2007-08 budget proposal to the General Assembly in February 2007 in which he proposed a new 6.17% Oil Company Gross Profits Tax (to generate $760 million in new revenue) to fund mass transit in Pennsylvania, and a possible lease of the Pennsylvania Turnpike to a private contractor to generate $965 million per annum for roads and bridges.

The decision to explore the potential lease of the Pennsylvania Turnpike represents the emergence of a new funding paradigm in transportation. Instead of relying solely on traditional revenue sources—gas and vehicle taxes—state and local transportation agencies are increasingly looking to supplement those sources with private investment through Public-Private Partnerships (P3s). P3s can build new infrastructure, maintain existing infrastructure, and operate existing services, particularly mass transit.

The Emerging Paradigm explores these options for funding and managing Pennsylvania’s transportation infrastructure and mass transit services by considering the P3 experiences of other states and cities. For example, in 2005, leases of two toll roads—the 99-year lease of the 7.8-mile Chicago Skyway and the 75-year lease of the 157-mile Indiana Toll Road—garnered the City of

Chicago nearly $2 billion and the State of Indiana more than $3.8 billion. The upfront payment to Indiana is generating more than $500,000 in interest per day to fund its transportation needs without raising taxes or fees.

Pennsylvania could also utilize P3s in mass transit through “competitive contracting.” Pennsylvania’s two major public transit agencies—the Philadelphia-based Southeastern Pennsylvania Transportation Authority (SEPTA) and the Pittsburgh-based Port Authority Transit (PAT)—are facing a financial crisis. However, the crises at SEPTA and PAT are cost, not revenue-driven. Despite the fact that only 1% of all travel in Pennsylvania is done via mass transit, it receives 25% of all transportation subsidies.

American cities like San Diego, Denver, Los Angeles, San Francisco and Boston, as well as foreign cities such as London, Copenhagen, Stockholm, Melbourne and Tokyo, have successfully embraced “competitive contracting” of transit services whereby private contractors take over the operation of transit services through a contract with the government entity. The City of London has reduced bus costs by approximately 50% since 1985, and Stockholm has reduced bus, subway, and commuter rail costs approximately 20% since the early 1990s.

The experience of the City of San Diego—which has contracted out its bus system—compared to PAT is revealing. If SEPTA would have controlled costs as well as the San Diego Transit Bus System, the 2002 operating costs would have been 57.8% lower ($432.5 million less). And if PAT would have controlled costs as well as the San Diego Transit Bus System, the 2002 operating costs would have been 62% lower ($167.9 million less).

The Emerging Paradigm also explores additional opportunities for P3 utilization in transportation. The report concludes with a discussion about the benefits of P3s and addresses the common concerns about Public-Private Partnerships.