Time to Defend Transportation Public-Private Partnerships

Why tolling and public-private partnership provisions are a must for the transportation reauthorization bill

Now that the Senate has approved its surface transportation bill, the action moves to the House. Because the clock was running out on the current law as of March 31, the House faced a choice between either rubber-stamping the Senate measure or bringing about another several-month extension. Fortunately for the future of public-private partnerships (PPPs), the House opted for an extension.

Were the Senate bill S.1813 to be adopted, the growth of transportation PPPs would likely be stopped in its tracks. That’s because S.1813 includes several provisions intended by their author, Sen. Jeffrey Bingaman (D-NM), to make PPPs unattractive. One provision would forbid the use of accelerated depreciation on PPP projects; another would forbid the use of tax-exempt private activity bonds (PABs) for such projects; and a third would penalize states that embrace PPPs by excluding the miles of privatized highway from the calculation of the state’s federal highway funds. The first two provisions aim at making PPPs less attractive to investors; the third, added as an amendment at the last minute, is intended to make them less attractive to states.

In addition, the Senate failed to pass the bipartisan amendment, sponsored by Sens. Tom Carper (D-Del.), Mark Kirk (R-Ill.) and Mark Warner (D-Va.), that would have expanded states’ access to tolling by removing the numerical limits from four tolling and pricing pilot programs enacted as part of previous reauthorization measures. In a last-minute deal, proponents of Sen. Kay Bailey Hutchison’s (R-TX) anti-tolling amendment agreed to withdraw it in exchange for the withdrawal of the pro-tolling Carper-Kirk-Warner amendment. If the final bill goes forward without broadening these pilot programs, no additional states besides Missouri, North Carolina and Virginia may use toll financing to reconstruct and modernize a worn-out Interstate highway since they now hold the only three slots in this pilot program. And there is currently no House counterpart of Carper-Kirk-Warner amendment.

Hence, advocates of tolling and PPPs need to concentrate their efforts on the House, and especially on members of the Transportation and Infrastructure Committee which is drafting the House reauthorization bill. Expanding states’ options to use toll finance for Interstate reconstruction should be the number one priority on the revenue side. And mainstreaming the existing pilot programs (which were debated and approved by previous Congresses) is the best way forward on that issue.

As for PPPs, the real focus of Sen. Bingaman’s several provisions is brown-field leases such as that of the Indiana Turnpike. Since there have been only three major leases (Chicago Skyway, PR 22, and Indiana), some PPP advocates may be tempted to go along with Sen. Bingaman’s restrictions, seeing brown-field leases as a niche market compared with the “real” action in new lanes and new toll roads. That would be a big mistake for several reasons.

First, even if not a single other city or state planned to lease any existing toll road, what about the need to rescue failing toll projects? Here in the United States, we have seen four PPP toll projects file Chapter 11 bankruptcies due to toll revenues coming in far below projections. In two of these cases (Camino Columbia in Texas and South Bay Expressway in California), a government agency purchased the assets and continues to operate the toll roads. But in the other two cases (Pocahontas Parkway in Virginia and Northwest Parkway in Colorado), private concessionaires stepped in and rescued the failing projects via long-term leases. Do we want to exclude this kind of valuable investment? Tolled mega-projects are inherently risky, as we have seen with the bankruptcy and subsequent private sector rescue of three toll tunnels in Australia. Rescuing struggling start-up toll projects-whether government or private – should not be overlooked as an important category of brown-field lease.

Second, the political backlash against brown-field leases rests on the premise that this kind of transaction is about nothing but money-a greedy government conspiring with greedy investors to sock it to the hapless motorist and trucker. It’s a version of the trucking industry characterization that Interstate tolling is nothing more than “erecting toll booths on the Interstate.” By that phrase, opponents imply that the only result of a brown-field lease is to charge captive customers a lot more to use the same old highway.

Yet that claim is falsified by the very nature of a long-term lease (50 years, 75 years, and sometimes longer). Under any realistic scenario, during that long a period of time, the concessionaire will have to engage in significant capital spending, not merely on proper ongoing maintenance, but on (1) lane additions due to continued economic growth, (2) adding interchanges and/or on and off-ramps as development occurs, and (3) complete reconstruction of worn-out sections (which over 50 or more years likely means all of it). Thus, the only difference between a green-field PPP and a brown-field PPP is the timing of the large capital investments.

Third, if PPP advocates fail to defend brown-field transactions, they will be handing opponents a victory that those people will use in the future to argue against green-field transactions. Underlying the opposition by groups such as the Public Interest Research Group, trucking organizations and public employee unions is the premise that it is wrong for companies and investors to be making a profit by providing high-quality highway infrastructure. In fact, there is a powerful case that limited-access highways are and ought to be seen as a kind of network utility. And most such network utilities in this country are investor-owned and operated (electricity, gas, telephone, cable, and some water). Hardly anyone argues that investor-owned electric utilities are wrong in principle because it’s just not right that someone should make a profit by delivering such a vital service.

My friends on Capitol Hill are worried that tolling and “privatization” could easily be demonized to freshman members of Congress, especially Tea-Party Republicans. It would be foolish to assume that because those Congress members support free markets and limited government that they will obviously support tolling and PPPs. By mischaracterizing tolls as “taxes” and PPPs as profiteering, opponents will appeal to the populist streak among Tea Party advocates.

Getting strong tolling and PPP provisions into the House bill is the only hope we have for this year’s reauthorization to at least preserve the status quo on these issues. With strong educational efforts, the House bill could be made toll-friendly and PPP-friendly. If such a bill passes, then everything will hinge on preserving those gains during the House-Senate Conference Committee.

This column originally appeared in Public Works Financing.

Robert Poole is director of transportation policy and Searle Freedom Trust Transportation Fellow at Reason Foundation.