Public Works Financing

What We’ve Learned From 25 Years of Highway Public-Private Partnerships

In our political climate, public-private partnerships are much more feasible than private toll roads

Long-term concessions for highway projects now have a 25-year history. The enabling legislation for the Dulles Greenway was enacted in 1988, followed by Assembly Bill 680 in California in 1989. I recently completed a chapter on this history for my forthcoming book on 21st century highway policy. Preparing that capsule history led me to draw some tentative lessons learned, which I will share with you in this column.

The original concept of pioneers such as the late Ralph Stanley and Caltrans’ Carl Williams, which I shared, was of private toll lanes and highways. Many people were skeptical, but when both Dulles Greenway and the Express Lanes on SR 91 reached financial close and got built, the highway design and construction industry, the financial community, and legislators in fast-growing states all expected the dawn of a new era. That led to a proliferation of state "private toll road” enabling acts, mostly modeled after California’s long-term toll concession model rather than Virginia’s investor-owned utility model.

Three states with such new laws—Arizona, Minnesota, and Washington—proceeded to call for proposals from the private sector, with their state department of transportation (DOT) in each case selecting the best projects, as Caltrans had done in 1990. Unfortunately, the DOTs and legislators were far ahead of public opinion, and out of all the projects selected in the three states, only the new Tacoma Narrows Bridge survived politically—and only as a state-financed, design-build project (albeit with tolls). The idea of companies making profits by charging what people viewed as high prices for new toll roads was a hard sell, when it came time to approve specific tollways in specific locations. In addition, some of the projects’ proponents had made aggressive assumptions about costs (low) and revenues (high), which might have made their projects impossible to finance.

The most important lesson I draw from this first era is that purely private toll roads would likely be few and far between: partly due to the high costs of getting from concept to final approval (Record of Decision) and partly due to political and popular concern over what was perceived as a mismatch between private profits and the public good.

For that reason, Virginia’s Public-Private Transportation Act (PPTA) of 1995 was a major breakthrough. First, it rejected the public utility regulation model under which the Dulles Greenway had been authorized in favor of European-type long-term concession agreements, with control over pricing or rate of return built into the concession agreement. And second, it bowed to the reality that most projects would require some degree of state funding support, given the very high costs of getting new highway projects approved and complying with extensive Department of Transportation requirements.

Over the next decade, dozens of states either replaced their unused private tollway legislation with public-private partnership (P3) enabling acts or enacted their first such legislation on the Virginia PPTA model. Ironically, the first new toll road project developed in Virginia itself under the new legislation sought to deal with the high cost of taxable revenue bonds by using a nonprofit corporation to issue tax-exempt revenue bonds. Both Virginia’s Pocahontas Parkway and the similar Southern Connector in Greenville, SC, worked well for their designers and builders, but not for their bondholders. Traffic and revenues were far below forecast, leading both projects into bankruptcy. Unlike in a “real” concession, in which the concession company has a long-term interest in the toll project as a business (acting as its de-facto owner), there was no such “owner” in the case of these nonprofit models. Their boards, of well-meaning citizens, were not in a position to do due diligence on the traffic & revenue studies or to ensure that the construction costs were realistic compared with the projected revenues.

Fortunately, Congress took two very welcome steps to address the disparity between taxable and tax-exempt interest rates, enacting the low-interest Transportation Infrastructure Finance and Innovation Act (TIFIA) loan program (for subordinated debt) in 1998 and tax-exempt private activity bonds for P3 projects in 2005. Those measures helped significantly in the new wave of toll concession projects that made their debuts in the early years of the 21st century. And the controversial long-term leases of the Chicago Skyway (2004) and Indiana Toll Road (2006) focused a global spotlight on the United States as a promising venue for major P3 infrastructure investment. That spurred the creation of US-based infrastructure investment funds, whose targets included well-vetted greenfield toll mega-projects in Texas, Virginia, and increasingly in other states.

The newest trend is, of course, availability-payment concessions. In a few cases where tolling would conflict with the project’s purpose--like the Port of Miami Tunnel--a pure availability payment (AP) model still provides for major life-cycle cost savings by creating owner-type incentives to build the project right to begin with, since the concession company is responsible for its operation for 30 to 40 years. Most recent highway AP concessions are based on a hybrid model, with tolls as the principal revenue source but with the state taking the traffic and revenue risk. More companies are willing to bid on mega-projects if traffic and revenue (T&R) risk is borne by somebody else, but the downside of this is the potential approval of projects that are clearly not toll-feasible, saddling taxpayers with somewhat open-ended liabilities. Still, compared with the traditional design-bid-build model, hybrid toll/AP concessions do represent a major advance toward minimizing life-cycle costs via better design and serious asset management—factors that were never priorities under the 20th century design–bid–build (D-B-B) status quo.

Summing up, what have we learned over 25 years? Here is my take on the major lessons:

• Public-private partnerships are far more feasible than “private toll roads”;
• Investors love brownfields, but many will accept greenfield risks;
• Construction companies love greenfields, but many are leery of traffic and revenue risks;
• Availability payment-toll hybrid concessions are an attractive option for many companies and governments;
• Toll concessions more directly address America’s large highway funding shortfall;
• Reconstructing and modernizing aging Interstate highways offers a blend of brownfield and greenfield that offers a huge opportunity for toll concession projects.

Robert Poole is director of transportation at Reason Foundation. This column first appeared in Public Works Financing.

Robert Poole is Searle Freedom Trust Transportation Fellow and Director of Transportation Policy





;