What Role Should Public-Private Partnerships Play In Transportation?

At National Journal’s Transportation Experts blog, Lisa Caruso asks:

Regardless of whether Congress follows Transportation Secretary Ray LaHood’s lead and rejects the idea of increasing the gasoline tax, it will likely have to come up with several answers to the question of how to finance the next surface transportation bill. What role should public-private partnerships play in the future of the U.S. transportation system?

How big a role public-private partnerships (PPP) can or will play in the U.S. transportation system is an open question. There are two major highway system needs where PPPs can play a significant role: rebuilding the aging Interstate highway system over the next two decades as much of it reaches its design life and providing urban express toll lanes and tollways to relieve congestion.

Both long-haul Interstates and urban expressways are limited-access facilities; that makes them relatively easy to charge tolls for (as opposed to say urban arterials and neighborhood streets). And the ability to charge tolls makes them candidates for development (or reconstruction) as public-private partnership projects. A recent white paper from the Federal Highway Administration found that over the past decade, tolls financed between 1/3 and ½ of all of new limited-access roadway centerline miles each year. It predicts a significantly greater role for toll roads in coming decades, with a growing share involving PPPs. But how much public-private partnership activity will actually occur will depend on how many states enact PPP-friendly enabling legislation (as California did in February) or refrain from crippling existing legislation (asseems possible in Texas), and whether the federal government continues to support public-private partnerships as a viable alternative.

Caruso also asks:

“what can lawmakers learn from two new studies on them: the Pew Center on the States’ report on the debate over leasing the Pennsylvania Turnpike to a private firm and the U.S. PIRG Education Fund’s report on protecting the public from bad deals?”

Three reports have appeared in recent weeks, offering advice to state policymakers on making use of the public-private partnership approach to highway infrastructure. The highly negative report from PIRG contrasts sharply with the reports put out by the Pew Center on the States and the Transportation Research Board.

As I’ve previously mentioned, PIRG continues to attack public-private partnership toll roads, presenting a very misleading picture of what is actually going on. In particular, their report blurs the distinction between leasing existing toll roads (“brownfields”) and creating new toll roads via PPP mechanisms (“greenfields”). Reporting the total amount committed to various PPP projects (including relatively uncontroversial design-build projects), the report says that $21 billion was “paid for 43 highway facilities” between 1994 and 2006. The context and the wording make it appear that 43 existing highways have been long-term leased during this period. In fact, a grand total of four toll roads have been leased in the United States. All the rest of the PPP activity has involved the financing of much-needed new capacity.

PIRG’s report also makes it sound as if most of these projects involved 75 to 99-year leases, such as those involved in the four brownfield projects. In fact, most new PPP toll roads are being developed under 35 to 50-year concessions. And large up-front payments, another PIRG target, are relatively uncommon on the growing number of greenfield projects. Why? Because these projects are challenging to finance solely based on their projected toll revenues. In the event that traffic and revenues turn out to be more than originally forecast, the trend now is to include revenue-sharing provisions in the concession agreements.

The other two reports take a far more careful look at the pros and cons of PPP mechanisms, generally concluding that they have an important role to play in bridging the enormous funding gap between transportation needs and available public-sector funding sources. Obviously, the public interest needs to be carefully protected in long-term PPP agreements—and that is what most states are already doing. The Pew report draws useful lessons from the politically charged debate over leasing the Pennsylvania Turnpike, but does not pretend that leasing existing toll roads is the main arena for PPP activity. It offers a number of useful guidelines for states pursuing both brownfield and greenfield projects.

The TRB report is a product of the National Cooperative Highway Research program, in which transportation researchers work on topics proposed by state DOTs, with careful peer review from both academics and practitioners. NCHRP Synthesis 391 is by far the most comprehensive overview of “Public Sector Decision Making for Public-Private Partnerships,” its formal title. Anyone looking for a comprehensive treatment of the subject, including useful guidelines for protecting the public interest, should consult this report.

By contrast, the public-interest recommendations of the PIRG report are either platitudes (“the public should retain control over decisions about transportation planning and management”) or unrealistic. Two examples of the latter:
1. No deal should last longer than 30 years.
2. The legislature must approve each negotiated PPP agreement.

The first would rule out many projects that would pencil out at 40 or 50 years, thereby reducing the scope for the private sector to help close the funding gap. And the second is a proven deal-killer. The few states that have included such a provision in their enabling legislation have received exactly zero proposals. Why? Because the cost and time involved in winning a competition for a billion-dollar project and then negotiating a 300-page concession agreement are too large to be risked on the whim of a legislative vote. The workable approach, which both California and Florida figured out after trying the PIRG way, is to enact legislation spelling out the parameters within which deals can be negotiated, and leaving the details to their state DOT or transportation commission.

Reason’s Public-Private Partnership and Toll Roads Research and Commentary