The money road: a lack of resources is causing states to look at privatization to fund transportation projects.

It's not that often that state lawmakers can debate the pros and cons of adding billions of dollars in new revenue to the state coffers. But that's the scenario playing out in many state capitols this year and it may be coming soon to a state near you.

What's the subject for such lofty discussions? It's the idea that states now may be able to turn existing government-owned assets into cash that can be used to pay for transportation budget shortfalls or other needs.

The monetization of transportation assets--commonly referred to as privatization agreements, public-private partnerships, or more simply as P3s--is attracting a lot of attention as lawmakers grapple with concerns about a lack of resources for transportation.

"It allowed us to pay for our entire 10-year transportation plan," says Indiana Senator Tom Wyss about a 2006 agreement to privatize the Indiana Toll Road. "Other states wish they could have the same thing," he says.

But the concept has as many critics as supporters. "It's a state yard-sale," counters New Jersey Assemblyman John Wisniewski of a proposal to privatize several toll roads in his state. "Roads are a state asset that give people freedom of movement and are essential to national security. They want to turn it over to a private entity that's in it for the money, not the public interest," says Wisniewski, who chairs the Assembly Transportation Committee.

So, what is this new funding mechanism that's generating so much heated discussion, and is it appropriate for your state?

FUNDING ALTERNATIVES

Across the country, states are experiencing significant shortfalls in surface transportation funding. A 2005 report by the National Chamber Foundation of the U.S. Chamber of Commerce predicted that by 2015, all levels of government would collectively need to spend more than $295 billion each year to maintain and improve the nation's aging network of highways, bridges, tunnels, rail lines and waterways. But governments are woefully behind this target, and the National Chamber Foundation estimated that by 2015 the United States will reach a $1 trillion cumulative shortfall between what needs to be spent and what actually is spent on transportation.

Not surprisingly, such gloomy national projections have translated into ominous forecasts for individual states. In November 2006, for example, the Pennsylvania Transportation Funding and Reform Commission released a report revealing that the average state-owned bridge was 50 years old and estimating that 23 percent of bridges in the state some 5,900--were structurally deficient. The report also found that more than 8,500 miles of state-owned roads, including 32 percent of secondary roads, were in poor condition. Given the needs, the commission identified a $1.7 billion funding shortfall, including an annual gap of $965 million for highways and more than $760 million for transit.

Much of the difficulty in Pennsylvania and elsewhere can be traced to the decline in revenues from motor fuel taxes. A funding staple in most places, gas taxes have not grown rapidly enough to match needs. Some have speculated that such declines can be traced to hybrid cars and more fuel-efficient vehicles. A more likely culprit is a failure to raise motor fuel tax rates. With fuel prices soaring, gas tax increases are a difficult sell in most states, and rates have not kept pace with inflation. Experts estimate that the federal gas tax, for example, has lost nearly 30 percent of its value against inflation in the last 10 years. Pennsylvania's commission report estimated a $350 million loss in purchasing power against inflation during the same span.

Other traditional funding resources have their own shortcomings. State general funds are increasingly consumed by the big ticket items--Medicaid, corrections and education--leaving less available for transportation. Various transportation-related fees and taxes, such as motor vehicle registration fees, face their own political hurdles and may not be significant enough to meet needs. So lawmakers are seeking alternatives, and in a growing number of states, are looking at public-private partnerships as a potential funding solution.

"We've got to look into alternative means of generating revenue instead of always going to the taxpayers," says Pennsylvania Representative Rick Geist, minority chair of the House Transportation Committee. Geist, co-sponsor of a bill to authorize a broad range of funding alternatives including privatization of the 530-mile Pennsylvania Turnpike, believes Pennsylvania needs new options. "We are now in the 21 st century, and state government should keep up with the times," he says.

HOW DO PPPS WORK?

Privatization agreements are commonly mischaracterized as a sale of state assets. In fact, each agreement is a lease. The state or governmental entity that owns the asset--usually a toll road or other toll facility--sells the rights to operate it to a private entity called the concessionaire. Under these arrangements, the state still officially owns the asset. But the private entity owns a lease interest that allows it to collect all revenues the asset generates during a specific period.

Such agreements for transportation are fairly common outside the United States. Italy, for example, sold the rights to operate approximately 2,000 highway miles for more than $6 billion. France reached an agreement with a private entity for more than $17 billion to operate nearly its entire highway network, and other deals have been made in Canada, Portugal and Spain.

Only recently, however, have privatization agreements made their way into this country. Chicago officials signed a 99-year, $1.8 billion lease in 2005 that grants a private consortium the right to operate and collect tolls from the 8-mile long Chicago Skyway. In 2006, Indiana lawmakers authorized a similar $3.85 billion, 75-year lease with the same consortium to operate the 157-mile long Indiana Toll Road.

The Chicago and Indiana transactions were similarly constructed. In each case, the government identified an under-performing asset, advertised and accepted bids for the concession to operate the facility, and in both examples awarded the lease to the Spanish- and Australian-based Cintra-Macquarie Consortium. The consortium agreed to pay the entire lease sum at the beginning of each agreement, allowing both jurisdictions to invest the revenue immediately.

Extensive contracts govern the terms of the Chicago and Indiana agreements. In both examples, the contracts limit the concessionaire's ability to raise toll rates. The concessionaire has the right to collect revenue from restaurants operated along the Chicago Skyway, but all other revenue rights, such as billboard revenue, the sale of naming rights and revenue from utilities remain with the governments. The contracts in both jurisdictions also cover maintenance, operating standards, rights to inspection, reporting and insurance requirements. In both cases, the government must continue to provide law enforcement on the toll road, but the concessionaire must reimburse for law enforcement expenses.

THE BENEFITS AND CHALLENGES

Clearly, the prospect of adding significant upfront revenue from a privatization agreement seems appealing. The $3.85 billion that Indiana received from the Indiana Toll Road deal allowed the state to completely fund its ambitious "Major Moves" transportation investment plan, paying for approximately 200 needed projects throughout the state. The state also retired more than $225 million in debt, and deposited the remaining $3 billion, earning approximately $500,000 in interest every day. Over time, both Chicago and Indiana will likely receive a better financial return on their asset than they did before the agreement. And now, neither jurisdiction will be required to pay for needed improvements to the leased toll roads.

Supporters also see privatization agreements as a mechanism that can solve funding problems without tax increases. "It shouldn't be a political decision, it should be a policy decision," says Indiana's Wyss. "This needs to be done if states don't want to put a tax burden on individuals."

Indiana and Chicago drivers may also benefit from privatization. Theoretically, the concessionaire will have greater incentive to streamline operations, improve road conditions, remove snow and ice promptly, limit traffic congestion and install other enhancements such as electronic toll collection systems that will make motorists more willing to drive on their road.

"The bill is a win-win for the state and taxpayers," says Pennsylvania's Geist. "Private industry has access to the latest technology in design and construction, which would provide a transportation system that meets the needs of Pennsylvania and its motorists."

Not everyone, however, agrees that privatization agreements are good for the state or the driver. New Jersey's Wisniewski and other opponents worry that the money initially gained by the state in the early years of a lease will be spent long before the end of agreement. Even supporters agree that future lawmakers will be tempted to spend the money generated by each agreement immediately. With a limited number of marketable assets, long-term leases might hamstring a state's future funding options.

"The economics don't make sense," says Wisniewski. "They're looking for a silver-bullet to solve our debt, but all they're doing is trading a 30- to 40-year obligation for a 75-year obligation. Twenty-five years from now when the money is all spent, how do you fund transportation and other state programs?"

Critics also question awarding the leases in Chicago and Indiana to foreign-owned consortiums. Other concerns for future projects include potential job cuts for tollway workers, a lack of effective maintenance standards, potential toll hikes, and the possibility that privatization contracts could inhibit future roadway construction and maintenance. Opponents also worry that private firms will "cherry pick" only the most profitable assets, leaving responsibility for failing facilities to the states. And if many states seek private ventures, it could fragment the national highway transportation system with states pursuing different

policies with their private partners.

HERE TO STAY?

Despite these concerns, it's clear there's plenty of interest in transportation privatization. Although early agreements involved bids from mostly foreign-owned entities, more large investors--such as Goldman Sachs, the Carlyle Group, Merrill Lynch and Morgan Stanley--are reportably forming funds to capitalize on the emerging market for transportation infrastructure. And coincidentally, the privatization debate has made its way to a growing number of state capitols.

Pennsylvania lawmakers are currently debating ways to privatize the Pennsylvania Turnpike. A bi-partisan proposal supported by Governor Edward Rendell has already generated preliminary revenue estimates for the state ranging from $10 billion to as much as $30 billion.

New Jersey's governor, former Goldman Sachs chairman Jon Corzine, is pushing several measures that could privatize the Garden State Parkway, the New Jersey Turnpike and other state highways. Intended to help the state eliminate substantial transportation debt, the measures face stiff legislative opposition.

Other states debating the issue in varying degrees include Delaware, Hawaii, Illinois, Kentucky, North Carolina, Tennessee, Texas and Virginia. Additionally, a secondary effect from the discussion about privatizing existing assets has been more interest in the use of publicprivate partnerships for new construction. Although such mechanisms have already been used extensively, new proposals are percolating in Colorado, Florida, Georgia, Indiana, Texas, Virginia and elsewhere. The privatization debate has also drawn interest from federal lawmakers. In February, the U.S. House Highways and Transit subcommittee conducted hearings about the role of public-private partnerships in financing transportation infrastructure. Administration officials included privatization efforts in its Congestion Initiative and have actively spoken in support of such initiatives before Congress and in other forums.

Texas May Roll Back Privatization

The Texas Legislature this session may partially roll back landmark legislation passed in 2003 that allows significant private sector participation in building new highways and authorizing the Trans-Texas Corridor (TTC).

Public opposition to tolls, concern about private control and the wrath of angry landowners have caught the attention of key transportation legislators, particularly Senator John Carona of Dallas, chair of the Senate Transportation and Homeland Security Committee. His committee is considering several bills to slow what some consider a hasty rush to a build a network of privatized toil roads. Carona wants, among other things, to limit the length of concession agreements to 30 years and eliminate "nocompete" clauses in such agreements.

A mid-session public hearing before his committee attracted hundreds of Texans who voiced their disapproval of tolls and elements of the TTC, a proposed, $184 billion, 4,000 mile 1,200 foot wide, multi-use transportation corridor. Much attention has focused on SB 1267 sponsored by Senator Robert Nichols which imposes a two-year moratorium on private entity toll projects, so-called comprehensive development agreements. Senator Nichols' bill is sponsored by three-quarters of the Senate and its companion in the Texas House has over 100 sponsors in the 150-member body. Throw in turf battles among toll agencies, clashes between legislators and the Texas Transportation Commission, and arguments over how to handle the large sums of money expected from concession agreements like the recent State Highway 121 deal with Cintra/JP Morgan and this drama has all the intensity of the Texas--Texas A&M rivalry.

Senator Carona has the big picture in mind. He says the Nichols moratorium bill doesn't address the fact that Texas has mobility problems to solve now. "There are things we need to accomplish this session," Carona says, "such as stopping or reducing diversion of transportation revenues and indexing the motor fuels tax" to make additional funding available for transportation.

Representative Mike Krusee, House Transportation Committee chair and the prime mover of the privatized approach to transportation projects four years ago, is concerned that this is the wrong time to be taking tools away from Texas cities to address the mobility crisis. "The federal government has just alerted Texas that another rescission, this time for $288 million, is coming our way. We have nothing left to cut except asphalt," he says. Krusee wants to shore up existing transportation revenue sources by curtailing non-transportation uses of the State Highway Fund and indexing the gas tax to inflation. He has also proposed the creation of "transportation infrastructure services districts" to give local governments another tool to fund solutions to traffic congestion in areas adjacent to controlled access highways.

Texas faces the same dilemma most states do--declining transportation revenue in the face of rapid growth of transportation needs. Seeking to overcome their differences, both transportation leaders and representatives of Governor Rick Perry are in negotiations behind the scenes seeking a balanced and long-term state transportation policy by combining elements of the numerous bills under consideration.

--Jim Reed, NCSL 

Matt Sundeen covers transportation issues for NCSL.