Public-Private Partnerships in Transportation: Opportunities for Massachusetts


Public-Private Partnerships in Transportation: Opportunities for Massachusetts

Testimony to the Massachusetts Joint Committee on Transportation

Thank you, Mr. Chairman and members of the Joint Committee on Transportation, for the opportunity to speak to you today. My name is Leonard Gilroy, and I am the Director of Government Reform at Reason Foundation. Reason is a national non-profit, non-partisan think tank that has researched and analyzed transportation policy for more than 35 years. Furthermore, we are among the leading national experts in public-private partnerships and privatization research, and our experts have advised numerous governors, legislators, and state departments of transportation on these issues.

A. Introduction

The global environment of transportation is entering a new paradigm. Like many states, Massachusetts finds itself at the convergence of several intersecting trends that demand fiscal attention. First, growing transportation needs are outstripping available capacity. Second, the growing need for maintenance and renovation of existing systems is eating up available resources; indeed, the Massachusetts Transportation Finance Commission’s 2007 report found that over the next 20 years, the cost just to maintain the state’s current transportation system exceeds the anticipated resources available by $15-19 billion. Both of these have led to the current transportation “crisis” in Massachusetts and will lead to even greater congestion in various forms and lowered relative reliability of service in the future. By any measure, these realities impact Massachusetts’s economic competitiveness and its citizens’ quality of life.

Additionally, the current “perfect storm” of growing budget shortfalls, declining tax revenues, and recessionary conditions in the larger economy has placed severe stress on state and local government budgets. And with the nation in the grip of a financial crisis that has tightened municipal credit markets, cities and counties are facing mounting pressure to seek new solutions to manage their infrastructure and real estate assets.

To keep Massachusetts moving, the state will need to “think outside the box.” The challenge isn’t as difficult as some perceive, but some fundamental reforms and innovative thinking will be necessary to help the state achieve its desired ends. How? If we take a global perspective, the answer becomes more clear-government cannot do it alone, and we should seek greater private sector participation and investment in providing for our transportation needs.

While the vast majority of transportation projects around the country continue to be funded from traditional sources-gas and vehicle taxes-a new funding paradigm is rapidly emerging. More often state and local transportation agencies are increasingly looking to supplement these sources with private investment. While public-private partnerships are just one “tool in the tool box,” they remain a promising and valuable tool available to policymakers that has been relatively untapped in Massachusetts.

B. What is a Public-Private Partnership?

Public-private partnerships are contracts formed between public agencies and private companies that facilitate greater private sector participation in the delivery of a public function. In transportation, such partnerships involve the investment of private risk capital to design, finance, construct, operate, and/or maintain a roadway for a specific term during which a private toll company collects toll revenues from the users. When the contract expires, the government can take over the facility at no cost.

Public-private partnerships leverage the capital and expertise of the private sector with the management and oversight of the government to provide public services, and they are an effective way of financing, managing and operating roads while minimizing taxpayer costs and risks.

Public-private partnerships for complex, multi-billion dollar transportation projects have been used for decades in Europe, and more recently in Australia and Latin America. In fact, Public-private partnerships have become the conventional way to provide major new highway capacity in many countries. The private sector is financing, building, and operating most of the major new highways in countries as diverse as Britain, France, Spain, Italy, Greece, Poland, China, India, Indonesia, South Africa, Australia, Argentina, Brazil, Chile, and Jamaica.

During the 1990s, public-private partnerships began to be used in the United States and Canada as well. Public-private partnership toll projects are currently in operation or under development in California, Virginia, Texas, Florida and Georgia, as well as several Canadian provinces.

When looking at the types of transportation partnerships we’re seeing around the country, and indeed the world, there are three basic arrangements:

  • Outsourcing highway maintenance, design, or other services.
  • Allowing the private sector to develop and operate new toll roads, and
  • Leasing existing public-sector toll roads.

It is the latter on which I will concentrate my remarks today.

1. Leasing Existing Toll Roads

Long term leases of existing public-sector toll roads can help governments unlock some of the inherent value in their assets that are diminished or lost under public operation and ownership. The extra, “unlocked” value can be gained by government owners through upfront lease fees or in revenue-sharing arrangements written into the contracts.

Toll road leases had not previously been part of the U.S. transportation policy debate until the end of 2004, when the city of Chicago announced that it had reached agreement with a global consortium for a $1.8 billion, 99-year lease of the Chicago Skyway. The winning bid from the Cintra/Macquarie investor-operator team dwarfed the other two bids, both of which were less than $1 billion. Over the course of the 99-year lease, toll rate increases are contractually capped to the rate of inflation. The city paid off $825 million in outstanding debt, established a $500 million rainy day fund, set up a $375 million mid-term annuity to help cover city operating costs, and directed the remaining $100 million to a multi-year infusion for various human services and community investment programs.

The Chicago Tribune recognized the benefits of the Skyway lease in an October 2, 2008 editorial: “The city’s deal to lease the Chicago Skyway to a Spanish-Australian consortium for 99 years has demonstrated the benefits of leasing public assets judiciously. Chicago got a $1.8 billion windfall […] [t]hat raised the city’s credit rating and lowered its borrowing costs.” Indeed, Moody’s Investor Service upgraded Chicago’s bond rating to its highest level in 25 years soon thereafter, citing the “vital infusion” of lease proceeds as a key factor.

The Skyway lease was a groundbreaking deal that prompted public sector toll road operators across the nation to pursue similar opportunities for leasing arrangements. In the three years since the Skyway lease was finalized, Indiana entered a similar $3.8 billion lease of its Indiana Toll Road, and private sector investor-operators struck similar deals to rescue troubled public-sector toll road projects in Virginia (Pocahontas Parkway) and Colorado (Northwest Parkway). Most recently, in October 2008, a private sector team withdrew a record $12.8 billion bid for a 75-year lease of the Pennsylvania Turnpike after the state legislature failed to approve a bill authorizing the lease.

The Indiana Toll Road lease merits further discussion. In 2006, the investor-operator team of Cintra and Macquarie Infrastructure Group paid the state of Indiana $3.8 billion for the rights to run the road, and those upfront proceeds were “siloed” in a dedicated, interest-bearing account to ultimately create the state’s Major Moves transportation program. Under Major Moves, the state is undertaking hundreds of new construction and highway preservation projects, and annual state highway spending will quadruple from $213 million in 2006 to $874 million in 2015. Every county in the state has or will receive additional funds for local transportation projects. Since Major Moves would not have been fully funded without the Indiana Toll Road lease, it’s quite accurate to say that the lease proceeds are funding permanent assets to serve the needs of current and future Hoosiers.

Without the toll road lease, these projects would likely have never materialized, or they would have necessitated tax increases to move forward. And as of September 2008, Indiana had earned over $360 million in interest on the upfront payment in just two years (over $185,000 per day, at current rates), which will be used to fund additional state and local transportation projects for decades.

This sort of fiscal stewardship was a key factor in Standard & Poor’s recent decision to award the state of Indiana its first-ever AAA bond rating in July, indicating top-notch financial conditions and management. Indiana’s excellent credit rating means it will save millions of taxpayer dollars in interest payments when it issues bonds to fund capital construction projects and the like.

In a recent editorial, the Indianapolis Star noted that the S&P rating “has validated several difficult, controversial decisions that Gov. Mitch Daniels and the General Assembly made to bring Indiana’s budget back into balance. […] [T]he $3.8 billion in capital leveraged through the [ITR] deal has enabled the state to make much-needed improvements in infrastructure while handing off management of an underperforming asset.”

Before the lease, it cost more to collect each toll than the actual toll amount itself under government operation. Gov. Daniels wrote in Reason Foundation’s 2006 Annual Privatization Report:

“Tolls had not been raised in twenty years; at some booths the charge was 15 cents. (As the new governor, I innocently inquired what it cost us to collect each toll. This being government, no one knew, but after a few days of study the answer came back: ’34 cents. We think.’ I replied, only half in jest, that we’d be better off going to the honor system.) With politicians in charge, neither sensible pricing nor businesslike operational practices were likely, ever.”

Even in today’s tough economic times, the state comes out a winner. Indiana’s budget director recently announced a decline in traffic on the Indiana Toll Road. Fortunately for Indiana, the $3.8 billion upfront payment they received from the concessionaire is already in the bank earning interest and funding new transportation infrastructure, and the revenue risk was shifted from government to the concessionaire. If future toll revenues fall short of expectations, it is the concessionaire-not taxpayers-that will bear that risk.

2. Best Practices in Toll Road Leases

Like anything else, public-private partnerships can be done well or poorly. This is true of any type of partnership, from simple operational contracts to concession agreements for new and existing roads. Fortunately, while these arrangements may be new to Massachusetts, they are not new to the rest of the world. A long history has established best practices and guidelines to ensure that quality is delivered and that taxpayers are protected.

The model that has worked best around the world is to use a long-term concession agreement as the basis for protecting the interests of both parties in the partnership. In any case, the concession should be structured to mitigate any concerns, and adequate protections for the public interest should be detailed in the terms of the agreement. These agreements tend to be several hundred pages long, spelling out all kinds of “what-ifs” and establishing well-defined performance levels that the contractor is legally required to meet or face penalty. These standards dictate everything from future maintenance and road condition expectations to the time it takes to remove dead animals. The contract also establishes toll rates and possible increases over the term-tolls are usually capped and indexed to some inflation measure-as well as any revenue sharing or limits on the concessionaire’s return on investment.

From a risk side, perhaps the most important aspect, the state can revoke the contract at any time. The concession agreement and lease sets the conditions for the state to cancel the contract and resume operations of the road should the contractor fail to perform. The structure of the agreement also spells out which risks are allocated to the contractor and which to the public sector.

The public sector’s key role is setting the agenda-outlining expectations, goals, and desired outcomes. They set the standards and performance requirements. Once a private partner has been selected and a contract is signed, the role of the public sector shifts to that of oversight and evaluation. The government should never sign a contract and walk away. Rather, strong reporting, evaluation, and auditing components should be in place.

Diligence and transparency are important in toll road leases. For example, the city of Chicago and the state of Indiana went through an exhaustive process of assembling and publishing the financial history and obtaining forecasts, hiring financial and legal advisers, soliciting expressions of interest, vetting potential concessionaires, requesting bids from bidders they had qualified, obtaining competing proposals, selecting their proposed partners, negotiating a detailed contract, and gaining necessary legislative support. They published materials on open Web sites, issued press releases, and-where there was a demand-spoke at public forums. Texas, Virginia, Oregon and other states granting toll concessions for new projects have done the same.

Privatizing an asset worth half a billion dollars or more is not a process to be taken lightly, and a city or state undertaking such a process will nearly always require the services of specialist advisory firms, to ensure that the state or city has expertise on its side of the table as experienced and as competent as that likely to be on the private sector side of the table. The two most critical types of ongoing expertise are legal and financial. The legal and finance departments of a city or state will almost certainly not possess the kind of specialized knowledge of long-term toll road concessions that is necessary. Therefore, the state or city must be prepared to contract for such advisory services, typically using a national law firm with expertise in infrastructure finance and an investment banking firm with mergers-and-acquisitions expertise. In addition, it will need one of the several highly specialized firms that do toll road traffic and revenue studies for that particular step in the process.

C. Benefits of Public-Private Partnerships

The public-private partnership model has several advantages over the traditional model of transportation financing.

1. Access to large, new sources of capital

Infrastructure has become a fashionable asset class for a host of investors that would not likely invest in traditional public toll-agency bonds, including infrastructure investment funds, insurance companies, and pension funds (e.g., CalPERS, NJ Teachers Pension Fund, etc.). Hence, policymakers have the opportunity to tap a new pool of funding, distinct from the tax, bond and fee revenue traditionally used to fund transportation projects.

Nearly $100 billion has been raised on the private capital markets over the last three years. And since concessions tend to involve a mixture of debt and equity in their financing (typically at an 80/20 ratio), this $100 billion could leverage far more than that amount. Even at a 50/50 debt/equity ratio, these equity funds could support nearly $200 billion worth of infrastructure projects.

2. Efficiency improvements

Toll road concessions offer considerable opportunities for cost savings and efficiency improvements due to the proper alignment of incentives and greater flexibility to innovate. Private companies often bring in better and more specialized management and equipment that helps cut down expenses and improve operations. In long-term leases, contractors have the incentive to adopt life-cycle approaches to asset management that will minimize operations and maintenance costs and capital expenditures over the life of the lease. Private contractors are also not burdened by government civil service rules and can hire a more flexible and specialized work force using lower wage or part time workers in conjunction with higher skilled workers when necessary. Also, private companies often have incentive pay packages that encourage managers to achieve their performance goals at lower costs.

The Massachusetts Turnpike Authority’s present level of operating cost leaves plenty of scope for a private operator to add value by means of increased efficiencies. An excellent measure of efficiency is the fraction of toll revenues consumed by operating and maintenance costs, known as the “cost-take.” Earlier this year, one of my colleagues at Reason Foundation analyzed cost data on some 35 toll facilities, mostly U.S. public toll facilities, but also a number of privately-operated and overseas toll roads. Collectively, they had an average cost take of 39.4 percent. Breaking that down further, domestic public toll authorities had an average cost-take of 42.6 percent, while private concessionaires had a far lower average of 23.4 percent.

In our analysis, the Massachusetts Turnpike Authority ranked first among all facilities with the highest cost take-a whopping 79 percent ($203 million in costs out of $253 million revenue). That’s double the average for all 35 facilities and over triple the average for private concessionaires. If the Turnpike Authority’s cost-take were the average for public and private toll facilities, its costs would be $100 million instead of $203 million, an annual savings of $103 million (50.7 percent). If its cost-take were the same as the sample of private toll roads, then its annual costs would be $59 million, a savings of $144 million (70.9 percent).

3. Transferring risk from taxpayers to investors

Public-private partnerships involve parceling out duties and risks to the party best able to handle them. In a lease, the concessionaire nearly always takes the risks of future traffic and revenue shortfalls, as well as performance and maintenance risks. Should worse come to worst and the company enter bankruptcy, standard provisions in the concession agreement would cause the Turnpike to revert to state control, unencumbered by the company’s debts. The state could then re-bid the project again in another concession, while keeping the upfront payment from the first deal.

4. More business-like approach

The notion that toll road enterprises are not core functions of government is one of the underlying rationales behind asset leases. Public toll authorities simply conduct a business. If they provide a high-quality piece of road space, motorists will find the advantages of the speedy, reliable and safe ride sufficiently attractive relative to other means of transportation to pay the tolls, which will support the maintenance and service the capital tied up in the toll road. This enterprise has all the elements of a business-the need for sensitivity to customer needs, marketing skills, financing of capital expenditures, bill collection, and all the rest. In the end, businesses are simply better at operating business enterprises than government.

Chicago Mayor Richard Daley reflected this sentiment in explaining the Chicago Skyway lease: “Running a toll road is not a core function of City government. And as you all know, the City faces financial challenges this year and for the next several years.” He called the sale to investors “a great result for the taxpayers of the City.”

In the end, government-owned toll authorities are mainly answerable to those governments and therefore to political exigencies. By contrast an investor-owned company answers to its shareholders for whom it has to generate income and wealth long-term. It generates that income not by catering to special interests and lobbyists but by single-minded attention to its customers, the motorists in the case of a toll road.

The promise of privatization is that it offers the opportunity to set a toll road up as a comprehensive business unit with the opportunity to serve customers free of political distraction, and so long as it maintains prescribed standards of service, it is secure to plan for the full term of the concession.

5. Flexibility

One of the undervalued benefits of public-private partnerships and concession arrangements is that they are customizable-you can tailor each particular initiative or project to meet your needs, goals, and desired outcomes. For example, Indiana received an upfront $3.8 billion payment for a 75-year lease of the Indiana Toll Road. The entire payment was placed in an interest bearing account (earning over $300 million in interest alone in the first 1.5 years) and dedicated entirely to transportation. In fact, the proceeds from the privatization deal allowed to state to launch a 10-year road construction program involving hundreds of needed road projects that the state simply couldn’t have afforded otherwise.

D. Responses to Common Concerns

1. “Sale” vs. lease

Long-term concessions are leases-not sales-and the government remains the owner at all times, with the private sector partner carrying out only the tasks spelled out for it within the concession agreement and according to the terms set by the state.

2. Uncontrolled tolls

There are concerns that public-private partnerships deals will lead to sky-high toll rates in future years, leaving the impression that tolls are uncontrolled. That is not the case in any actual or proposed toll road that I’m aware of. Most concession agreements, to date, have incorporated annual caps on the amount that toll rates can be increased, using various inflation indices. It is important to note that those caps are ceilings; the actual rates a company will charge depend on market conditions. Before entering into any toll road project, a company (or a toll agency) does detailed and costly traffic and revenue studies. A major goal of such studies is to determine how many vehicles would use the toll road at what price; too high a toll rate means fewer choose to use the toll road, which generally means lower total revenue. So the toll road must select the rate that maximizes total revenue. That rate may well be lower than the caps provided in the concession agreement, especially in recession years.

3. Use of proceeds

The prospect of a multi-billion dollar “windfall” to government can present problems for public officials with divergent ideas on how the new money should best be spent. There are several acceptable uses of proceeds from privatization:

  • Interest earning trust fund: Lump-sum payments can be invested in a dedicated trust fund, either through a financial institution or within a public pension system, which would provide annual interest payments to cover ongoing infrastructure operation and maintenance needs, as Indiana did in the lease of its state toll road. Similarly, the city of Chicago used $375 million from the lease of the Chicago Skyway to establish a mid-term annuity to help cover ongoing city operating costs.
  • Invest in hard infrastructure: In the Commonwealth as in many other states, the gap between projected transportation revenues and projected needs will only grow over the next decades, so opportunities to “expand the pie” through the use of public-private partnerships should be seriously considered by policymakers. The state could invest the proceeds from privatization back into other road and highway projects to address immediate needs, relieve congestion and improve long term economic competitiveness. Again, the Indiana Toll Road lease is emblematic of this approach-leveraging existing assets to help pay for the new ones that have no other viable funding source.
  • Pay off existing debt. States and local governments pay billions in interest every year on their bonded debt, and paying this debt off early reduces the tax burden and creates a better fiscal picture. The choices could be understood as public debt for everyone or private capital investment and private risk for assets owned by the public in either case. In fact, it’s very accurate to say that asset leases offer governments a very attractive choice: earning interest, rather than paying it. A lease of the Mass Pike system, for example, could potentially generate enough funding to allow the Commonwealth to pay off the entire $2.2 billion Big Dig debt, while still reserving a significant amount to invest in other priorities.
  • Pension fund modernization. Concession proceeds could be used to fund a shift in the public pension system from defined benefit to defined contribution. Unfunded pension liabilities represent a large and looming threat to state and local fiscal health, and taxpayers as a whole benefit when governments find creative ways to shore up pensions without resorting to dramatic service cuts or tax increases.

4. Infrastructure investment in the wake of the financial crisis

In the wake of the fall 2008 financial crisis, some observers have wondered whether the turmoil on the financial markets would dampen the private sector’s enthusiasm for infrastructure asset leases. Broadly speaking, the answer is a definite no. As the global financial markets experience a massive credit crunch, one of the few categories in which there appears to be increasing interest among investors is revenue-producing infrastructure. There is a general consensus in the finance community that infrastructure remains a very attractive investment in the “flight to quality” seen in the markets more generally (capital flowing to solid, safe, and tangible investments with steadier returns and relatively lower risk profiles).

Despite economic ups and downs, people are still going to drive, fly and consume goods. That means roads, airports, water systems and other types of brick and mortar assets remain good investment prospects over the long term. Industry analysts expect that while debt is going to be more expensive and more conservatively invested, it will definitely be available for good projects. What is likely to change is the leverage in these deals. Instead of debt/equity ratios of 80/20 or 70/30 (as seen prior to the crisis), in the future we are likely to see much larger percentages of equity, at least in the near term.

There is strong evidence that the major providers of equity-infrastructure investment funds, insurance companies, and pension funds-continue to be strongly interested in infrastructure. Financial firms and public pension funds raised approximately $100 billion to invest specifically in infrastructure over the last two years, and a recent article noted that infrastructure investment funds are trying to raise another $100 billion in 2009. Swiss financial services giant UBS announced in November 2008 that its new International Infrastructure Fund had raised an unexpectedly high $1.5 billion in committed capital, and the company is considering launching another similar fund in 2009.

Chicago is the “proof in the pudding.” On September 30, 2008-in the thick of the credit freeze-Mayor Richard Daley announced a landmark agreement with a Citi-led consortium for a 99-year lease of Midway Airport in return for $2.5 billion in upfront cash. Then just yesterday, Daley announced the winning $1.1 billion bid for a 75-year lease of the city’s downtown parking meter system. The fact that Daley announced two billion-plus dollar bids in the thick of the financial crisis and economic downturn says something extremely relevant-infrastructure deals are still getting done in this economic climate. New York and South Carolina policymakers have taken notice, having both created state commissions in October 2008 to mine their balance sheets and identify potential divestiture opportunities.

5. Losing control

One of the prevalent myths about asset leases is that somehow government would be “losing control” of the asset as part of the deal. This really involves a fundamental misunderstanding of the nature of concession contracts-namely, that their entire legal foundation is a strong, performance-based contract that spells out all of the responsibilities and performance expectations that the government partner will require of the concessionaire. And the failure to meet any of thousands of performance standards specified in the contract exposes the concessionaire to financial penalties, and in the worst-case scenario, termination of the contract (with government keeping any upfront payment the concessionaire may have paid).

Concession agreements typically run to several hundred pages and may incorporate other documents (e.g., detailed performance standards) by reference. The public interest is protected by incorporating detailed provisions and requirements into the contract to cover such guidelines as:

  • who pays for future expansions and rebuildings;
  • how decisions on the scope and timing of those projects will be reached;
  • what performance will be required of the toll road and the concessionaire;
  • how the contract can be amended without unfairness to either party;
  • how to deal with failures to comply with the agreement;
  • provisions for early termination of the agreement;
  • what protections (if any) will be provided to the company from state-funded competing routes; and
  • what limits on toll rates or rate of return will be.

In the end, government never loses control-in fact, it can actually gain more control of outcomes-through asset leases. For example, state officials in Indiana have testified that they were able to require higher standards of performance from the concessionaire on the Indiana Toll Road than the state itself could even provide, precisely because they specified the standards they wanted in the contract and can now hold the concessionaire financially accountable for meeting them.

6. Foreign Ownership

In the early years of U.S. adaptation of the concession model, states want to deal with firms that have extensive experience as toll road providers. The simple fact is that the United States has no such industry yet, because we have used only public-sector agencies to build and operate toll roads. Meanwhile, European and Australian companies have decades of experience as world-class toll road providers. Thus, a responsible state government, wanting to ensure that the toll road is in experienced, professional hands, will weight prior experience very heavily in its selection criteria.

As the U.S. market matures, we will see the emergence of a U.S. industry. Already, joint ventures between U.S. and global companies are bidding on such projects-Fluor/Transurban, Zachry/Cintra, Kiewit/Macquarie, to name several recent examples. In fact, in a recent proposal in Colorado several of the bids were from domestic firms. In addition, U.S. union pensions are attracted to investing in infrastructure because those investments create jobs for union members. Unions have already contributed to investment funds like the Australia-based Macquarie, blurring the line between foreign and domestic interests.

With that said, it would be unwise to ignore foreign operators-and their experience and expertise-simply because they are foreign. It’s important to remember that even deals that involve 100 percent non-U.S. companies are very good for the U.S. economy. Attracting billions of dollars in global capital (and expertise) to modernize America’s vital highway infrastructure is a large net gain for this country-rather than investment and jobs going overseas; foreign entities are willing to invest their money domestically, creating jobs here in the U.S. The further build-out and investment in our transportation infrastructure only makes the U.S. more competitive in the global marketplace.

In effect, foreign investment in our nation’s infrastructure represents the reverse of outsourcing-it’s more properly viewed as “insourcing.”

7. Non-compete clauses

Whether public or privately-owned, bond investors will not buy bonds for assets with unregulated competition from entities with the power to tax, and build competing facilities. Contractual clauses designed to protect toll road operators from the construction of new, parallel “free” roads have evolved over the years. The approach has changed from an outright ban on competing facilities to a wider definition of what the state may build-generally, everything in its current long-range transportation plan-without compensating the toll road developer/operator. And for new roadways the state builds that are not in its existing plan and which do fall within a narrowly-defined competition zone, the current approach is to spell out a compensation formula. The idea is to achieve a balance between, on one hand, limiting the risk to toll road finance providers (of potentially unlimited competition from taxpayer-provided “free” roads) and, on the other hand, the public interest.

Two recent long-term lease transactions provide a useful illustration. For the Chicago Skyway, there were no protections for the private-sector lessee. For the Indiana Toll Road, the agreement set up a narrow competition zone alongside the toll road. The state may add short, limited-access parallel roads (e.g., local freeways), but if it builds a long-distance road within the competition zone, there’s a formula for compensating the private sector for lost toll revenue.

F. Conclusion

Business as usual will not deliver the infrastructure Massachusetts needs to compete in the 21st century economy. Massachusetts policy makers need to embrace a new paradigm for highway funding, operation, and maintenance.

The success of existing private sector participation in transportation services highlights the potential benefits for many transportation projects needed in the state. While not a panacea, these partnerships have proven successful when done properly with a strong contract, continual oversight and strict accountability. The potential for Massachusetts is tremendous. As global capital is already flowing into Indiana, Virginia, Texas, California, Georgia and other states to invest in highways, why shouldn’t Massachusetts also benefit?

Massachusetts is at a crossroads. It can choose to open its doors to this capital and a new way of doing business, or it can turn its back on this opportunity. The overarching recommendation is that policymakers encourage the aggressive pursuit of private sector participation in transportation services, because the private capital is flowing to those states that have embraced private investment in infrastructure. Otherwise, other states will continue to reap these benefits at the expense of Massachusetts’ economy and business climate.

As the think tank that has done the most research on public-private partnerships and their applicability to transportation infrastructure, the Reason Foundation welcomes the opportunity to be of further assistance this committee as you learn more about these new approaches. Please feel free to call upon us.