Renegotiation of Transportation
Public-Private Partnerships:
The U.S. Experience

16

Discussion Paper 2014 • 16

Jonathan Gifford, Lisardo Bolaños,
Nobuhiko Daito
George Mason University,
Arlington, VA, USA

Renegotiation of Transportation Public-Private
Partnerships: The US Experience
Discussion Paper No 2014-16

Prepared for the Roundtable:
Public Private Partnerships for Transport Infrastructure:
Renegotiations, how to approach them and economic outcomes
27-28 October 2014,
George Mason University, Washington D.C., USA

Jonathan Gifford
Lisardo Bolaños
Nobuhiko Daito
Center for Transportation Public-Private Partnership Policy
School of Policy, Government, and International Affairs
George Mason University
Arlington, VA.
USA

December, 2014

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RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Abstract

Public-private partnerships (P3s) typically rely on long-term contracts between participants. When conditions
arise that fall outside the expectations embodied in the contract, one party may seek to renegotiate the contract
terms. Globally, the frequency of P3 contract renegotiations has been sufficient to raise questions regarding why
these events occur and what their consequences are for the projects and society. The literature highlights four
relevant causes behind renegotiation occurrences: unexpected exogenous changes, the complexity of thecontractual relationship, winner´s curse and rent seeking behavior. This study examines the US experience withhighway P3 renegotiations, including four types of event: contract modifications, defaults, bankruptcies andbuyouts. While the US highway P3 market has grown gradually, failure to understand renegotiations and theirpotential consequences may dampen the market and adversely affect national infrastructure investment efforts.
The analysis finds that insufficient evidence exists to disentangle the drivers of renegotiation in the US, althoughexogenous changes and contractual relationship complexity appear to be paramount. The analysis highlights thedistinct political and institutional environment that shapes highway P3 renegotiations in the US, suggesting theneed for continuing and sensible analysis to effectively manage the undesirable consequences of renegotiations.

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RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Table of Contents

Abstract ......................................................................................................................................................... 3
1. Introduction ............................................................................................................................................... 5
2. Literature Review ...................................................................................................................................... 7
Drivers of renegotiation: Theory ............................................................................................................... 7
A survey of empirical literature ................................................................................................................ 8
3. Case Studies ............................................................................................................................................ 10
Dulles Greenway ..................................................................................................................................... 10
Pocahontas Parkway................................................................................................................................ 11
Elizabeth River Crossings ....................................................................................................................... 12
California State Route 91 Express Lanes ................................................................................................ 12South Bay Expressway ............................................................................................................................ 13
Indiana Toll Road .................................................................................................................................... 14
4. Discussion ............................................................................................................................................... 15
Opportunism ............................................................................................................................................ 15
Exogenous changes ................................................................................................................................. 16
Complexity .............................................................................................................................................. 18
Winner’s curse......................................................................................................................................... 19
5. Conclusion............................................................................................................................................... 19
Acknowledgements ..................................................................................................................................... 21
Bibliography ................................................................................................................................................ 22
Appendix: Tables and Figures..................................................................................................................... 28

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RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

1. Introduction

Contract renegotiation allows contract participants to accommodate changes brought on by unexpected statechanges not accounted for in original (incomplete) and often long-term contract relationships (Hart and Moore
1988). While parties to a contract might desire agreements that account for every contingency and preclude
future renegotiations, such contracts would be prohibitively expensive to develop. As a result, compromises are
required. However, this often enables contract parties to behave opportunistically with asset specificity,necessitating sometimes costly renegotiations of earlier contractual agreements (Klein, Crawford, and Alchian
1978; Williamson 1996).
This study focuses on contract renegotiation within the US highway public-private partnership (P3) market.
Contract renegotiation is common in the private sector, especially in finance (Roberts and Sufi 2009) and labor
contracts facing unexpectedly high inflation (Rich and Tracy 2013). Considering infrastructure P3s’ long-term
nature, inherent uncertainty, and need for sophisticated expertise, one may expect contract renegotiations to form
an important component of the P3 contract process (Saussier, Staropoli, and Yvrande-Billon 2009). However, anumber of unique complexities arise when contractual renegotiations involve the public sector. In addition,
when renegotiation possibilities emerge in the infrastructure P3 context, public perceptions can be very negative.
Observers may suspect that such renegotiations result from poor planning or opportunistic behavior by parties
seeking rent at the cost of users and taxpayers. All these factors make P3 contract renegotiations a fruitful topic
for research.
In addition, a deeper understanding of P3s may provide particular assistance for policymakers, especially in thetransportation sector. Alternative procurement mechanisms for transportation infrastructure investment haveexperienced growing interest in the US (US Department of the Treasury 2014), and P3s in particular havebecome increasingly popular as severe budgetary and financial constraints drive governments to employ project
equity and debt to access private sector funding and financing (Engel, Fischer, and Galetovic 2006; Small 2010).
Figure 1 shows the growing trend in US P3s reaching financial closure each year between 1986 and 2013, acrossfour infrastructure sectors. The number of deals closing annually increased rapidly during the mid-1990s andhas fluctuated since then. The transportation sector in particular included increasing numbers of projects during
this period, especially since 2010, despite some dips in the 2000s. In total, 512 P3 projects reached financial
closure across all four sectors by the end of 2013. While the number of US transportation-sector P3s remains
relatively small compared to other world regions, the highway and tolled highway subsectors have provided thelargest proportion of P3s in recent years.
Despite P3s’ growing popularity, an inadequate understanding of what drives renegotiation may affect theapproach’s future viability. Several notable US highway P3 renegotiation and bankruptcy cases have received
wide attention, and analyzing why these occurred, and drawing policy conclusions, may inform future P3
implementation. The existing literature focuses on Latin American and European experience with P3 contract
renegotiations, but it lacks an adequate analysis of the US context. Knowledge of foreign market experiences isvaluable, but the US P3 market’s unique characteristics, like its combination of common law, a federal system ofgovernment and its bankruptcy law, may have practical implications for how economic institutions evolve andhow renegotiations proceed (Beck, Demirgüç-Kunt, and Levine 2003; Katsivela 2007; La Porta, Lopez-deSilanes, and Shleifer 2008; Qian and Weingast 1997, Cirmizi, Klapper and Utamchandani, 2012).
As a result, this study explores the US P3 renegotiation experience by addressing the following researchquestions: (1) How has the US experienced highway P3 renegotiations? (2) Does the US market demonstrate any
distinct characteristics with regard to the drivers of renegotiation?

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RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

While the term “P3” may refer to a variety of contracts between public agencies and private firms, our interests
reflect the Organisation for Economic Cooperation and Development’s (OECD) definition:“an agreement between the government and one or more private partners (which may include the operators andthe financiers) according to which the private partners deliver the service in such a manner that the service
delivery objectives of the government are aligned with the profit objectives of the private partners and where
the effectiveness of the alignment depends on a sufficient transfer of risk to the private partners (ITF 2008)."

In the context of this study, we employ the term “P3” when referring to infrastructure projects and facilities
delivered through arrangements where private firms partner with a public agency in delivering and providing aservice, including Design-Build-Finance (DBF), Design-Build-Operate-Maintain (DBOM) and Design-BuildFinance-Operate-Maintain (DBFOM), but not Design-Build (DB).
Turning next to renegotiation, the theoretical literature often defines the term broadly to include any
modifications to P3 concession contracts (Guasch 2004; Guasch, Laffont, and Straub 2008). The empiricalliterature, in contrast, tends to consider only major revisions to contractual agreements that the original contracts
did not account for (Guasch, Laffont, and Straub 2008). Given this study’s case study approach, we require amore broad definition to help us understand the nuances of the US P3 market. Consequently, in this paper wewill analyze under the definition of renegotiation, the following events: contract modification, defaults,
bankruptcies and buyouts (RDBBs). We define P3 contract modification to include modifications to P3
contractual agreements involving associated legal processes. Defaults occur when the private partner fails tomeet the debt service requirements. Bankruptcies occur when the corresponding legal process is used for an
illiquid or insolvent firm to pay its debts. Buy-outs of the private consortium occur when the new owners buy theP3 project. We believe our definition does not substantially alter the literature’s conventional view, although we
acknowledge that our perspective is motivated primarily by historical events in the US P3 market 1.
Due to the small the number of P3 renegotiation cases in the US highway sector -- see Figure 2 where we
accounted for 18 projects -- we explore the research questions through a series of case studies. Ultimately, theanalysis highlights several unique characteristics of the US P3 market. First, the 2008 financial crisis acted as anexternal shock to a number of US highway P3s, directly and indirectly affecting demand for these facilities.
Second, contractual complexities may explain why some P3 projects, particularly early ones, underwent
renegotiations. Third, partner inexperience, both public and private, as well as underdeveloped institutional
environments, influenced several cases. Overall, we find that the factors driving P3 contract renegotiations arevery complex. Attributing a renegotiation case to any single factor or cause would be naive. Furthermore,
empirically validating several theoretical explanations proved difficult (e.g. opportunism and the “winner’s
curse” effect). Often, only circumstantial evidence is available. To conclude, we suggest some directions forfurther analysis.

1

We provide two examples. First, the US has a very active tax-exempt municipal bond market which makes
buy-out a relevant event to take into consideration. In the case of a negative, exogenous shock, a contract
modification may be avoided if a new private partner is willing to take a higher risk or is willing to introduce
new management that may be able to manage the impact of the shock. This would be a renegotiation in thesense that the private partner's asset ownership has changed. Second, the US has a different legal frameworkin terms of bankruptcy procedures. While in the US the bankruptcy framework primarily serves to protect the
debtors, aiming to help companies survive liquidity events, in the EU the institutional framework is morelender-friendly (Cirmizi, Klapper and Utamchandani, 2012). The former favors the debtor to keep control of
the company during the bankruptcy event and even allows the debtor to acquire additional debt to restructure
the company. The latter focuses on paying back the debtor as soon as possible, implying an emphasis on
quick liquidation of the company. This difference has practical implications in the highway P3 market, as
pointed out recently by a leader in the US market (Nicolás Rubio, US President, Cintra, personalcommunication, November 20, 2014).

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RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

The remainder of the paper develops as follows. The next section summarizes the theoretical and empiricalliterature regarding P3 renegotiation, and the following section presents six case studies. The final section
discusses the case study findings and offers concluding remarks.

2. Literature Review

Drivers of renegotiation: Theory
Renegotiations can occur for several reasons. Economists, for example, have focused on the inherent
incompleteness of P3s’ contractual agreements (Guasch 2004). Given infrastructure projects’ complexity anduncertain environments, contracts between public agencies and private partners cannot account for every
contingency. As a result, incomplete contracts may cause renegotiations due to both strategic and non-strategic
factors.
The perception that renegotiations produce negative consequences for the public arises from literature focusedon opportunistic behavior by the private and the public sectors (Guasch 2004). For instance, P3 actors might
pursue contract renegotiation as a strategic or opportunistic response to rent extraction opportunities, even at theexpense of other parties in the deal. Both, government and private actors can behave opportunistically, against
each other or against the public. In the government case, incumbent politicians might use P3s as an off-balance
sheet mechanism to increase debt for infrastructure (Engel, Fischer, and Galetovic 2001; Engel, Fischer, andGaletovic 2009), expecting increases in infrastructure investment to produce favorable political outcomes.
Alternatively, private partners might behave opportunistically by winning P3 contracts with low offers, only tohold up the government later by asking for higher compensation via renegotiations (Guasch 2004). Given theoften-prohibitive financial and political costs associated with soliciting new firms, the sponsoring public agency,
at a disadvantage, may succumb, agreeing to change the terms as demanded.
The Mexican highway case offers a well-known example of such bidder opportunism. The Mexican
Government granted 52 highway projects to private contractors during the 1990s, but many bids employed
extremely optimistic forecasts. As a result, the government was forced to refinance the highways in 1997 at the2cost of $3.3 billion.
Public and private partners involved in a P3 project may also pursue contract renegotiation in order to defend
themselves against potentially negative outcomes. The literature suggests three causes of non-strategic
renegotiation: a) exogenous changes; b) inadequate preparation for complex contractual relationships; and c)
ruinous agreements generated by excessive competition during the bidding process (known as the “winner’s
curse”).
In the first case, renegotiations can help adapt the original contracts to current environment when unexpected
exogenous events like macroeconomic shocks occur (De Brux 2010; Guasch, Laffont, and Straub 2008). Abrupt
fluctuations in supply prices, interest rates, or regional economic activity can profoundly affect a P3 project’s
financial performance. In these instances, the project’s financial equilibrium changes without inducement byeither the public agencies or the private firms. Similarly, before using force majeure clauses after events likeearthquakes, storms, or riots, the parties may try to maintain the relationship through renegotiations.

2

All references are in nominal US dollars unless otherwise indicated.

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RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

The financial crisis in 2008, for example, likely triggered a number of US highway P3 renegotiations. Suchshocks can have direct effects given the close association between macroeconomic output and travel demand.
Intuitively, a highway project’s travel demand decreases during a recession, lowering the facility’s revenue. In
addition, the 2008 financial crisis’ impacts in the housing sector undermined travel demand. Several highway
P3s appeared financially viable given assumptions regarding increasing regional demand. During the crisis
however, many development projects stalled, lowering demand for transportation facilities. Looking
internationally, Guasch and co-authors highlight the 2001 Argentinean currency devaluation and Brazil’s similar
experience in 1999 (Guasch, Laffont and Straub, 2003). The authors suggest that uncertainty surrounding such
events and the lack of guiding principles for readjustment introduce regulatory risk for P3 projects.
The second case involves situations with very complicated contract development, especially when adequate
bureaucratic capabilities are lacking (Saussier, Staropoli, and Yvrande-Billon 2009). For example, publicagencies may authorize P3 executions without adequate project management, legal, and/or financial staff. The
private sector might also lack adequate staff or P3 experience. Confusion often emerges under thesecircumstances, motivating either or both partners to consider renegotiation. Which party initiates the processdepends on which party the ambiguity favors.
The third case, referred to as the winner’s curse, develops when bidding processes produce ruinous agreements.
This situation may occur, for instance, when a public agency puts an existing toll road concession out for bid.
The winner would make a financial arrangement to pay the government upfront to operate and maintain thefacility for a pre-determined period. Subsequent toll revenues would cover the debt obligation as well as thefacility’s operation and maintenance costs. Since the facility’s physical condition and future demand are often
unknown, firms submit bids based on limited information with respect to the asset’s true value. Auction
processes favor the highest bids, potentially selecting a firm who overestimated the asset value. In such cases,
unexpectedly low profits or even losses may result. After executing the contract, the winner may discover theconcession’s financial unsustainability and may request a contract renegotiation to continue operating the facility(Thaler 1988)3.

A survey of empirical literature
While the literature lacks a clear-cut test to determine why any particular renegotiation takes place, several
empirical studies have investigated P3 renegotiations outside the US Although far from comprehensive, thissection reviews some of the findings.
A number of studies have summarized statistics pertaining to P3 renegotiations in the Latin Americantransportation sector. An analysis of 218 Latin American transport concessions between 1989 and 2000 showedthat 45% of the concessions underwent a renegotiation process. Fifty percent of these were initiated by theprivate partners (Guasch, Laffont, and Straub 2008). Similarly, an earlier study of the Latin America andCaribbean region from 1985 to 2000 found that 55% of transportation concessions faced renegotiation, compared
to 9.7% for electricity concessions and 74% for water and sanitation (Guasch 2004). The study also found thaton average across all sectors, renegotiation occurred two years after the contract award. In the transportation
sector however, renegotiation occurred after three years on average, usually during the construction process, an
unexpected result that usually is linked to private opportunism, as the private partner has the upper hand and the
public sector may not be able to find an adequate substitute company to take over the project. In addition,
renegotiation occurred more frequently after competitive bidding (46% of concessions) than after bilateralnegotiations (8%), offering some support for the winner’s curse theory. Renegotiations were also more prevalent
under lowest tariff award criteria (60%) and under requirements for private partner investment in the contract’s

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Another potential explanation was discussed during the ITF Roundtable where a draft of this research waspresented. Renegotiations may be Pareto-enhancing to all the parties involved. This could happen with an
unexpected high tax collection that is used to lower toll rates, permanently or temporarily.

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RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

underlying asset (70%) and occurred more frequently under price caps (83%), probably because they made theprivate sector more vulnerable to external shocks. Table 1 summarizes additional findings.
Guasch and co-authors developed a model for contract renegotiations initiated by private contractors, empiricallyestimating factors associated with 307 P3 renegotiations in five Latin American countries’ transportation andwater sectors (Guasch, Laffont, and Straub 2008). The authors found that having an established P3 regulatoryenvironment reduced the probability that a P3 project would undergo renegotiations. The regulatory framework
helped prevent mistakes, decreased the risk of disruptive modifications to contractual agreements, and provided
a means for both partners to address contingencies. The authors also found an association between price cap
provisions4 and higher renegotiation probabilities; the greater risk to private partners under price caps increased
agreement fragility. Private investment was also associated with significantly higher renegotiation probabilities,
as were minimum revenue guarantees introduced to protect private partners. The authors argue that revenue
guarantees lower efficiency incentives while raising incentives for strategically aggressive bidding. In addition,
the authors found that most of the statistically significant variables, namely regulator existence, price cap
regulation, concession duration, elections, economic growth, etc., generated the same directional effects for bothgovernment-initiated and firm-initiated renegotiations.
As regards government-initiated P3 renegotiations, the literature has also found links between institutional
instability and politically motivated renegotiations initiated by public agencies to extract rent from private firms(De Brux 2010). Guasch et al. discuss a “typical” case where a newly elected political authority, seeking voter
approval, unilaterally decides either to dishonor the initial contract’s toll increases or to lower existing tolls(Guasch, Laffont, and Straub 2006). The authors formalize such renegotiations, finding that contract designs,
inadequate regulatory frameworks, deficient institutional environments, and external shocks all increase theprobability of government-initiated concession renegotiations. These findings support the public sector
opportunism and the exogenous shocks and complexity arguments. The authors argue that these factors havedistinct effects for public agency-initiated renegotiations compared to renegotiations initiated by private partners.
In contrast, private financing and investment requirements decreased the likelihood of government-initiatedrenegotiations, but increased the likelihood of renegotiations initiated by private partners. Higher corruption
levels, conversely, increased government-initiated renegotiations while decreasing renegotiations led by private
partners.
The literature also finds institutional effects for private partner opportunism. Athias and Nuñez empiricallyinvestigated 49 toll road concessions around the world, focusing on the relationship between competition levels
during initial bidding and renegotiation likelihoods (Athias and Nuñez 2009). Analyzing differences between
original traffic forecasts, as included in winning bids, and actual traffic levels, the authors find an association
between higher numbers of bidders in toll road concession auctions (more competition) and aggressive bids.
This finding supports the winner’s curse explanation for renegotiation. The analysis shows a stronger effectwhen public procuring agencies withhold their traffic forecasts when soliciting bids. The authors also
demonstrate a stronger winner’s curse effect when the public agency has limited experience with P3s (civil law
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countries or countries lacking stable institutions) . In other words, bidders behave strategically and the winner’s
curse effect is stronger when renegotiations are easier.

4.

Price-capping refers to a regulation developed “to squeeze out inefficiencies (…) by forcing transportindustries to provide their services at increasingly lower real prices” (Button 2010, 470).

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According to the authors, renegotiation is easier in civil law countries because legislation is the primarysource of law. The court system must ponder and evaluate different codes, many of which may containcontradictory principles. In contrast, legal cases provide the primary source of law in common law
countries, so contradictory statutes are less common (Athias and Nuñez 2009, 18-19).

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RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

3. Case Studies

Table 2 shows the geographic dispersion of highway P3 projects with financial close in the US (45) and thosethat have had renegotiations (17). Out of these 17 projects, 7 had contract modification, 6 defaulted, 5 wentbankrupt and 12 were bought up. We examine the renegotiation experiences of six US highway P3s, or a third of
the total to date. The six cases are: Dulles Greenway (Virginia), Pocahontas Parkway (Virginia), Elizabeth River
Crossings (ERC, also known as Midtown and Downtown Tunnels, Virginia), State Route 91 Express Lanes (SR91, California), South Bay Expressway (SBX, California), and Indiana Toll Road (Indiana). We selected thesecases to encompass the diversity of US experiences with P3 highway renegotiations, especially across different
geographies and years. We are including two cases from the West coast, one from the Midwest and three fromthe East coast. While the two cases from California originate from efforts done at the end of the 1980s, one of
the Virginia cases, ERC, had its financial close in 2012. We included three cases from Virginia to understand theevolution of a state that is particularly active in the P3 market and plans to pursue this further 6.
As shown in Tables 3 and 4 the six projects were developed in the two decades between 1993 and 2012 and theyvary across several metrics: design characteristics, road length, road opening date, and the time of financial
closure. Newly constructed roadway lengths range from relatively minor new construction (the Indiana Toll
Road was a brownfield project) to 14 miles (22.5km, Dulles Greenway). Some projects, like the Otay River
Bridge (SBX) and the new Midtown Tunnel (ERC), include sophisticated technical designs. Others do not. The
following sections briefly describe each case in turn, with an emphasis on renegotiations.

Dulles Greenway
The Dulles Greenway is located in Loudoun County, Virginia and covers 14 miles (22.5km) connecting theWashington Dulles International Airport with Leesburg. As Virginia’s first modern toll road, it was built in1993 and opened in 1995 using the state’s Highway Corporation Act of 1988. The project began with anunsolicited proposal from the Toll Road Corporation of Virginia (TRCV) that convinced legislators thatapproving the act would provide private funds for unfunded infrastructure projects (Wang 2010).
The project’s original construction cost estimate came to $350 million, and the Toll Road Investors Partnership
II, L.P. (TRIP II), owned by the Shenandoah Group, Autostrade International, and Kellogg Brown & Root,provided $40 million in equity. The remaining funding derived from private debt involving CIGNA
Investments, Prudential Power Funding Associates, John Hancock Mutual Life Insurance Company, Barclays,
NationsBank, and Deutsche Bank AG (FHWA 2014a). The project was financed purely by the private sector
and the TRCV even acquired most of its right of way without using condemnation through eminent domain.
After 42.5 years, facility ownership would revert to the Commonwealth of Virginia.
The initial contract closed in 1993, but after the facility opened in 1995, traffic volumes were lower than
expected. Revenues during the first years amounted to only 20 to 35% of initial expectations. TRIP II thensought to increase facility usage, including a toll reduction during the first year of operation that required
approval from the state. Revenue did not grow to financially sustainable levels, and the project went into default
the next year. In 1997, the partners increased toll rates and raised the speed limit to 65 miles per hour(104.5km/h). Two years later, the project restructured its debt and reached an agreement to increase the number

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See, for example, its project pipeline here: http://www.vapota.org/projects.asp
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RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCEof lanes from four to six. In 2001, TRIP II obtained a 20-year concession extension (to 2056) and three years
later, they introduced variable toll rates adjusted for distance and time of the day.
In 2005, Macquarie Infrastructure Group (now Macquarie Atlas Roads) bought TRIP II, with 50% of it
eventually purchased by Macquarie Infrastructure Partners (Macquarie Atlas Roads 2009). In 2013, Virginia
granted TRIP II the right to increase tolls annually by one percentage point above the consumer price index(Samuel 2008). That same year, and following California’s South Bay Expressway experience (see below), an
effort commenced to have the Commonwealth of Virginia “buy back” the toll road to lower the toll rates (Tanner2013).

Pocahontas Parkway
The Public-Private Transportation Act (PPTA) of 1995 increased the flexibility provided by the Highway
Corporation Act of 1988. It allowed Virginia to evaluate unsolicited proposals from private entities and employ
financing tools like tax-free bonds (Commonwealth of Virginia 2012). Fluor Daniel and Morrison Knudsen(FD/MK) submitted a proposal to VDOT seeking a P3 agreement to design and build State Route 895, also
known as Pocahontas Parkway. The road had been planned and approved by VDOT since 1983, but no funds
were available for construction (Wang 2010). The Pocahontas Parkway Association (PPA) formed as a nonprofit 63-20 corporation to raise tax-exempt revenue bonds to finance the project’s $354 million construction
7
cost. The remaining financing consisted of an $18 million State Infrastructure Bank loan and $9 million infederal funding for roadway design (FHWA 2014c). FD/MK provided an additional $5 million in equity. The
agreement included a four-lane toll road with an 8.8-mile (14km) extension, including a 0.3-mile (500m) bridgeconnecting Chesterfield and Henrico south to Richmond. When the facility opened to traffic in 2002, revenue
came to 45% of expectations (USGAO (US Government Accountability Office) 2004, 51).
In 2006, facing a PPA default, VDOT received an unsolicited proposal from Transurban LLC regarding the
project (Samuel 2006). As a result, the contract }with FD/MK was terminated and a new agreement was signedwith Transurban LLC. The new agreement included rights to enhance, manage, operate, maintain, and collecttolls from the roadway for 99 years. However, the agreement also included an obligation to construct the 1.85
mile (3km) Richmond Airport Connector (RAC), with the expectation that the extension would increase demand
for the Parkway. The agreement’s financial structure included $141 million in private equity, $55 million insubordinated debt, a $150 million Transportation Infrastructure Finance and Innovation Act (TIFIA) loan, and$420 million in bank debt (FHWA 2014c). Three banks participated in the deal: Depfa Bank, Banco Espirito
Santo de Investimento, and Bayerische Hypo- und Vereinsbank.
After 2009, facility usage diminished due to toll increases and declining regional travel demand after the 2008
financial crisis. Even the airport connector’s completion did not increase demand enough to cover debt service.
In 2012, Transurban completely wrote off its project equity of and planned to turn the toll facility over to its
lender before becoming insolvent (Samuel 2013). In May 2014, DBi Services, a private company, took controlof the road (Martz 2014).

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In the US, public agencies may issue tax-exempt municipal bonds, enabling more cost-effective financingof public projects. Under the Internal Revenue Service Rule 63-20 and Revenue Proclamation 82-26,
nonprofit public benefit corporations (“63-20 corporations”) are also allowed to issue tax-exempt bonds.
As a result, groups can establish 63-20 corporations that then form concession agreements with private
firms to deliver, for instance, design-build-operate-maintain stages of an infrastructure facility. While theprivate partner usually arranges financing, the 63-20 corporation issues the debt (FHWA 2014b).

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Elizabeth River Crossings
Using the PPTA legal framework for unsolicited projects, VDOT approved an agreement with Elizabeth River
Crossings OPCO, LLC (ERC) to design build, finance, operate, and maintain (DBFOM) the Downtown
Tunnel/Midtown Tunnel/MLK Extension, also named the Elizabeth River Crossings project. The project will
increase the connection capacity between Norfolk and Portsmouth and includes a) a new two-lane tunnel next tothe existing Midtown Tunnel, b) improvements to the Downtown Tunnel, and c) improvements to a 0.8-mile(1.3km) stretch of US Route 58. Construction began in 2012 with a concession length of 58 years and costestimates of $2.1 billion, not including costs related to renegotiations. ERC, a joint venture of Skanska
Infrastructure Development and the Macquarie Group, invested $272 million in project equity. Additional
funding derived from a $465 million TIFIA loan, $408 million in public funds, $675 million in private activity
bonds, and $268 million in toll revenue from the existing tunnels (FHWA 2014d).
The project underwent a public-sector-initiated renegotiation in 2012 to delay tolling in exchange for agovernment payment of $100 million (Samuel 2012). Then, in 2014 when tolls were set to begin, a new
governor renegotiated the contract terms to lower tolls during the first revenue-generating years. The
renegotiation cut toll rates in exchange for $82.5 million (Office of Governor 2014). Toll collection at the newrates commenced February 1, 2014. The public had severely objected to the original plan involving tolls on theexisting tunnels in advance of the project’s completion. Opponents claimed that such tolls were effectively taxes
rather than user fees since users saw no viable free alternative (Reinhardt, W. G 2012). Danny Meeks, a residentof Portsmouth, filed a lawsuit contending that VDOT unlawfully imposed the toll charges. Eventually, theSupreme Court of Virginia ruled in VDOT’s favor (Meeks v. Elizabeth River Crossings OPCO, LLC andVirginia Department of Transportation, 2013 VA App. 2013).

California State Route 91 Express Lanes
In the 1980s many believed that Southern California needed a billion dollar investment in its road infrastructure(RoadTraffic-Technology 2012). To address this need, the state enacted Assembly Bill No. 680 allowing P3 use
in four demonstration projects (Giuliano et al. 2012). The four projects were selected through a competition
organized by the State Department of Transportation, one of which included a project building express toll lanes
8in the existing State Route 91’s median. In 1990, the state signed a build-transfer-operate (BTO) franchise
agreement with the California Private Transportation Company (CPTC) as the private partner. The companies
forming this entity included Level 3 Communications, Inc., Compagnie Financiere et Industrielle des Autoroutes(Cofiroute), and Granite Construction Inc. (Caltrans (California Department of Transportation, 2009). The
private partner provided $20 million in equity with additional funding coming from a $7 million subordinatedloan from the Orange County Transportation Authority (OCTA) and $100 million in bank loans from Citicorp
USA, Banque National de Paris, Societe Generale, Deutsche Bank and CIGNA Investments (FHWA 2014e).
The toll lanes opened in 1995, connecting Orange County to Riverside County through a four-lane, 10-mile(16km) extension. The operation agreement was to last 35 years. In addition, it was the first US road to relycompletely on electronic toll collection and congestion management pricing, that is, prices adjusted to trafficflow.
Given the growing transportation infrastructure needs in the area, the OCTA faced citizens' discontent regarding
the lack of additional investment in transportation infrastructure. Of particular concern was the original franchise
agreement’s “non-compete” clause constraining Caltrans and OCTA’s ability to add “competing” or“complementary” road capacity. First, OCTA attempted to abrogate the clause but was prevented from doing so
in court, as it was attempting to overcome the non-compete clause by arguing, without support, that the

812

The criteria used by Caltrans included: the importance of the transportation need served, the ease of
implementation, the experience of the consortium, the promotion of economic development and how
innovative it was (Wang, 2010).
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additional infrastructure was to be built for safety reasons. Finally, the OCTA bought out CPTC in 2003 in orderto reduce traffic congestion. As a result, OCTA issued $195 million in toll revenue bonds (Metro ExpressLane2014), purchasing the project for $207.5 million.

South Bay Expressway
The South Bay Expressway (SBX), like the State Route 91 Express Lanes, grew out of Assembly Bill no. 680.
The project was designed as a design-build-operate-transfer (DBOT) agreement lasting 35 years and covering a
9.4-mile (15km) extension connecting Spring Valley to Otay Mesa in southern San Diego County, California.
The goal was to serve anticipated development generated by growing trade with Mexico (Wang 2010). The statesigned an agreement in 1991 with California Transportation Ventures, Inc. (CTV), originally owned by Parsons
Brinckerhoff, Egis Projects, Fluor Daniel and Prudential Bache, although the first two partners left after 1992. In
1997 Koch Industries bought 29% of the stock (Giuliano et al. 2012) and in 2002 CTV was bought completely
by Macquarie Infrastructure Group.
The project experienced several delays. First, the private firm had agreed to manage the project’s environmental
permits. However, it did not obtain the requisite permits until 2001 despite the franchise agreement having beensigned in 1991. Government environmental agencies including the US Fish and Wildlife Service, the Army
Corps of Engineers, and the US Environmental Protection Agency imposed permit requirements including
wetlands restoration, protected habitats for endangered species, and recreational improvements in nearby
communities.
Second, Parsons Brinckerhoff decided to sell its stake to Macquarie Infrastructure Group in 2002 after thepermitting delay. This change in the agreement allowed Macquarie to access public funds to offset costs
associated with the construction delays and environmental permitting. This included $140 million from the US
Department of Transportation (USDOT) via the Transportation Infrastructure Finance and Innovation Act(TIFIA) (FHWA 2014f). Additional funding came from private equity ($130 million) and bank debt ($400
million) from Banco Bilbao Vizcaya Argentaria, Depfa Bank plc, Allied Irish, Bank of Ireland, BNP Paribas,
Commonwealth Bank, DVB Bank, DZ Bank, and HSH Nordbank (Fretz 2010).
Third, design changes to reduce environmental impacts complicated the Otay River Bridge construction,requiring a “top-down” approach using precast segmental structures to build the 19-story bridge (Soule andTassin 2007). Ultimately, the contract between CTV and the bridge constructor, Otay River Contractors (ORC),
involved a schedule that could not be fulfilled (according to ORC) due to requirements by Caltrans, the City of
Chula Vista and the County of San Diego. This eventually led to litigation. Ultimately, the bridge-related issues
delayed the project’s opening by over 15 months and raised the estimated cost from $400 million in 1990 to$635 million when the project opened in 2007.
In addition, the project opened just as the subprime mortgage crisis hit San Diego, reducing demand to about athird of expectations (Chapter 11. Case No. 10-04516-LA11. Declaration of Anthony G. Evans, Chief Financial
Officer of South Bay Expressway, L.P., in support of the debtor´s chapter 11 petitions and first day motions.
2010). This situation eventually led CTV to file for bankruptcy in March 2010. After a settlement between thecreditors, the US Bankruptcy Court created the New SBX Equity owned by all the creditors (Samuel 2011).
USDOT claims were reduced from $170 million to $99 million and the banks’ claims were reduced from $361.4
million to $210 million. Finally, the San Diego Association of Governments (SANDAG) bought the New SBX
Equity, paying the banks $247.5 million in cash, and extinguishing the private sector participation in the project.
Of the original $172 million owed to USDOT (capital plus $32 million in capitalized interest), the department
will receive an estimated of $93 million from toll revenues and will keep 32% of the project ownership, sharing
any of the operation’s surpluses (Hawkins 2011; Jensen 2011; FHWA 2014f). Following its acquisition,
SANDAG decreased toll rates by 40%, decreasing revenues by 20% (Poythress 2012).

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Indiana Toll Road
The Indiana Toll Road (ITR) provides particularly valuable insights for policy debates regarding toll road P3s(Wee 2012). The project, originally named the Indiana East-West Toll Road, was funded by tolls through a legal
framework established in 1951. The road opened in 1956 as part of the US Interstate Highway System, covering
156.28 miles (251.5km) and connecting Chicago, Indiana, and Ohio. The Indiana Toll Road Commission
managed the road until 1981, after which the road became part of the Department of Highways. In 1983, thenewly created Indiana Toll Finance Authority, later the Indiana Transportation Finance Authority, took over the
highway, giving it political and financial independence from the state (Levy 2011).
In 2006, under Governor Mitch Daniels, Indiana awarded the rights to maintain, operate, and collect tolls fromthe Indiana Toll Road to ITR Concession Co. LLC for the following 75 years. The ITR agreement included an
operations and maintenance (O&M) contract covering the 156-mile (251 km), four-lane highway, and theconstruction of additional lanes along 10 of those miles. Four companies submitted proposals and ITR
Concession Co. LLC, a joint venture between Cintra Concesiones de Infraestructuras de Transporte (acquired by
Ferovial in 2009) and Macquarie Atlas Roads, won the bid, offering to pay $3.8 billion up front. The deal
included $748 million in equity and $3,248 million in debt from Santander, Bankia, Dexia, The Royal Bank of
Scotland plc, BNP Paribas, Banco Bilbao Vizcaya Argentaria and Depfa Bank (InfraDeals 2014). The deal
allocated $255 million to the seven counties adjacent to the toll road, $250 million to the third-lane expansion,and $40 million to introduce electronic toll collection. An additional $150 million went to Indiana’s 92 counties
for road improvements (Gilroy and Aloyts 2013).
The deal raised much opposition arguing that the state would see short-term gains in exchange for private firms
profiting at the expense of citizen welfare over the long term. However, the joint venture faced a $260 million
loss in 2010, with expectations for debt service default by 2012 (Holeywell 2011). The recession and gas prices
offer possible explanations. Given growing debt service concerns in 2013 and 2014, the participants began
renegotiations with their lenders. In March 2014, for example, the project partners sold $500 million of theirdebt to investment firms “for around 60 cents on the dollar” (Glazer 2014).
In total, five renegotiations have occurred between the Indiana Toll Road’s public and private actors (IFA
2013a). First, in exchange for state reimbursement ($60 million), the private actors agreed to a “toll freeze” in2006 until electronic tolling was in place. Second, that same year, the state agreed to an investment obligation
reduction. Third, in 2007 the state agreed to delays on certain investments until 2010. Fourth, it agreed toreimbursements in 2008 due to lost revenue connected to the electronic tolling ($60 million). Finally, in 2010
the state agreed to additional delays on certain investments until 2011. In September 2014, ITR Concession Co.
LLC announced it would file for bankruptcy, as the project’s interest rate swaps, a condition imposed by thelenders, worked against its financial position by increasing its debt by $2.15 billion (Benman 2014).

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4. Discussion

The cases of P3 contractual renegotiations in the US in the previous section demonstrate the unique characteristics ofthe market distinct from other regions of the world. Table 5 summarizes our overall assessment of these cases andTable 6 which follows Guasch (2004) on Latin American concessions compares the consequences of therenegotiations. These cases can be categorized with respect to the sector that initiated the renegotiation process,while highlighting some of the consequences. Among the cases we analyzed, the public sector started therenegotiation process in two of the six cases. In the Elizabeth River Crossings case, toll deferral was the maininterest; while in the State Route 91 Express Lanes case, the OCTA repurchased the concession to overcome the noncompete clause that was preventing the expansion of the general purpose lanes. In the other cases, the private sector
initiated renegotiations. The Dulles Greenway case involved tariff changes, additional investments and the extensionof the concession term. The Pocahontas Parkway project involved additional investments and extending the term of
the concession. The Indiana Toll Road case resulted in a reduction of the investment obligations and compensation
for toll freezes. The private partner changed in three of these four projects, while the Indiana Toll Road may
9
undergo further changes, as the concessionaire filed for bankruptcy recently in September 2014.
In the absence of a clear test to determine the cause of each renegotiation in a robust manner from competing
hypotheses, we will instead discuss circumstantial evidence that may provide insight for our analysis in the US. We
focus on the four theoretical explanations discussed above – opportunism, exogenous changes, complexities and thewinner’s curse effect.

Opportunism
Determining opportunistic motives (Williamson, 1996) of one party or the other requires careful evaluation. In thecase of the SR-91 Express Lanes project, the opportunism hypothesis sheds light on the interesting mix of claims onopportunistic behaviors of both the public and private partners (Vining, Boardman, and Poschmann 2005). On the
one hand, the private party obtained substantial profits, $29 million in just one year, which some may consider as
substantial compared to the project's construction cost of $130 million. The contractual agreement also included a
non-compete clause, protecting the concession from possible competition with expanded general-purpose lanes. On
the other hand, the government attempted to bypass the non-compete clause in expanding the capacity of generalpurpose lanes (citing safety reasons), but was eventually forced to settle in court. Furthermore, the government
attempted to acquire the Express Lanes legislatively through condemnation. Therefore, one may find it difficult toreject opportunistic motives of the public sector more so than the private partner, although the final purchaseagreement implicitly indicates satisfactory outcomes for both parties.
Elections have been considered to provide insights with respect to the public sector's opportunism (Guasch, Laffont,and Straub 2007). As already discussed above, changes in public leadership may trigger attempts to gain political

9South Bay Expressway here tariff decrease occurred after the local government took charge of the road.
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10advantage, or to protect oneself from the accusation of gaining political advantage. Facing the threat of losing inupcoming elections, incumbents may resort to renegotiation of P3s for popular policies (e.g. lower tolls, add capacity
for low public cost). An incoming public official may attempt similar policies for the same reason. We identify shifts
in political party control since 1992 in one or more state government branches – governor and both legislative
chambers, although we recognize that the executive branch is the primary decisionmaker with respect to P3
renegotiations.
As Table 7 shows, Indiana demonstrates the lowest contestability in its Senate (no party shifts) and governorship(one shift), but the highest contestability in its House of Representatives (four shifts). The renegotiation began undercomplete Republican Party control (2006) and lasted when Democrats took control of the State House (2007). No
further renegotiation occurred since the Republicans recovered complete control in 2010, until the Indiana Toll Road
filed for bankruptcy in 2014. We cannot conclude in this case that public opportunism motivated the renegotiation inIndiana.
Over the study period, California experienced no changes in its Senate’s party control, two changes in its House, andthree changes in its governorship. The state’s purchase of State Route 91 took place in 2003, one year before
Democrats lost the executive branch. Similarly, the significant South Bay Expressway renegotiation took placewhen the Democratic party controlled the governorship and both legislative houses, but the party had either justgained or was about to lose that control. This may favor the hypothesis of public opportunism but the evidence
remains insufficient.
Virginia shows the highest political contestability across the governorship and both legislative chambers. The
Pocahontas Parkway renegotiation coincided with changes in party control across all three bodies. Similarly, theElizabeth River Crossings renegotiations took place as the Senate and the executive branch experienced changes inparty control. Although one may argue from these cases that this state is more prone to renegotiations by public
sector opportunism, in the absence of information regarding their motives, the evidence is insufficient.
It is difficult to detect private opportunism. However, we can show whether the companies behind the deal have
faced other renegotiations (see Table 8). Previous renegotiation experiences might familiarize a company withrenegotiation procedures, aiding them when complexity or exogenous shocks overwhelm subsequent projects. From
this table, we see that, as of 2012, Macquarie, Fluor, Skanska Infrastructure Development, and Ferrovial all
participated in highway P3 projects around the world that experienced renegotiation at some point. However, mostcompanies active in the P3 industry are likely to have some experience with renegotiation. Further research isnecessary to understand the implication of these measures11.

Exogenous changes
In the presence of exogenous shocks, renegotiations may help both parties accommodate unexpected changes. In thecase of highway P3s, we need to consider macroeconomic risks as potentially significant exogenous changes. To
evaluate whether exogenous changes drive US renegotiations, we investigate five macroeconomic variables found in

10

The former makes reference to the differences in the incentives faced by the roving and the stationary bandit(Olson 2000). The latter makes references to third-party opportunism and political contestability explored for
public contracts (Moszoro and Spiller 2012).

11

The evidence of private sector renegotiation experience is inconclusive because not only the private companies
have it; the lenders do also, as most of the banks involved in the highway P3 market in the US are foreigners.
As lenders lose from private opportunism this would help diminish its occurrence.

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the literature: inflation rate, economic growth, unemployment rate, input prices, and interest rate (Guasch, Laffont,and Straub 2007).
To capture negative demand shocks we focus on changes in the inflation rate, economic growth, and theunemployment rate. First, we consider whether sudden increases in the inflation rate, measured through theConsumer Price Index (CPI), indicate negative real income shocks. If toll road usage presents positive incomeelasticity, then sudden increases in the inflation rate should decrease available income and the revenue generated bytransportation P3s. Figure 3 shows no inflationary spike since 1992. In fact, the most significant shifts reflect theGreat Recession’s deflationary period spanning March 2009 through October 2009. This suggests that inflation
shocks could not have triggered the case study renegotiations.
Second, declines in economic growth, measured through gross domestic product (GDP), may diminish the income
available to spend on toll roads. Figure 4 shows that California and Virginia experienced negative growth in 2009.
In addition, both states experienced almost zero growth between 2001 and 2002, potentially affecting the Dulles
Greenway and South Bay Expressway renegotiations. Indiana, by contrast, experienced four years of negative
growth (2001, 2005, 2008, and 2009). While these GDP declines were important in the state, the Indiana Toll
Road’s financial close (2006) and its renegotiations (2012 and 2014) do not coincide with these economic
downturns. However, the recessions’ effects may have persisted over several years despite rapid recoveries in
economic growth. For example, the 2009 recession may not have immediately influenced the projects, but its effects
may have rather accumulated in the following years, affecting government budgets and elevating unemployment. It
appears that the evidence linking shocks to the economic growth to renegotiations is mixed.
Third, a surge in unemployment may also have decreased demand for toll roads. We include unemployment inaddition to economic growth because unemployment rates can rise or remain high despite recovery to economic
growth. Figure 5 shows the unemployment rate from January 1992 through April 2014. Unemployment showed adecreasing trend until the economic downturn of 2001, increasing by almost 2% in the states under analysis.
Unemployment rates declined again starting in 2003, but with the exception of California, they did not reach theirprevious lows. Unemployment increased again with the recession, peaking between 2009 and 2010 before slowly
declining. The persistently high unemployment rates seen after 2009 may help explain the demand risk-related
renegotiations occurring after the recession (e.g., Pocahontas Parkway and South Bay Expressway).
A different perspective considers how changes to input prices and interest rates may have affected the supply oftransportation infrastructure by altering project profitability. Using the Producer Price Index (PPI), we first consider
two potential sources of cost increases: construction machinery manufacturing and iron and steel mills. Figure 6
shows PPI changes for both sources starting in 1992. Inflation for construction machinery manufacturing has
remained constant under 10%. Iron and steel mills’ production costs however have shown much more volatility,
particularly between 2002 and 2011. Cost changes during this period ranged from 45% inflation in November 2004
to 40% deflation in June 2009. These unexpected fluctuations in steel costs may have driven the South Bay
Expressway’s renegotiation.
Interest rate shifts may also have affected the project’s perceived profitability. Partners may prefer to invest theirmoney under variable market rates rather than in a P3 project. Figure 7 shows the bank prime loan rate from 1992 to2014, noting how debt service increased 50% between 1993 and 1994 and increased 100% between 2003 and 2005.
These high interest rates may have affected the Dulles Greenway renegotiations (1994 to 2000, 2005). The
combination of financial practices and persistent market conditions may also affect P3 projects. In the case of the
Indiana Toll Road, in 2007, banks conditioned their funds on the acquisition of an interest rate swap which would
protect the project in case of raising interest rates. However, interest rates fell below the 2007 levels, instead of

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rising, as a consequence of the recession, which put the project under financial stress and eventually drove theproject to bankruptcy in 201412.
Considering this evidence, it appears that economic growth, unemployment rates, input prices, and interest rates may
have had important effects on the renegotiation of the cases, although more robust analysis is necessary to be more
conclusive.

Complexity
The political environment of P3s can also increase complexity that decision makers need to account for in reaching adeal or to respond when circumstances change, requiring renegotiation with the partner at any point through the
project life. In the US, the politics of not only the P3s but also public infrastructure investment in general haveexperienced political backlash on the basis of civil rights, environmental protection, opposition to tolls, and so forth.
Opposition to the rapid growth of the Interstate highway network nationwide during the 1960s to 1970s emerged inurban regions across the nation, significantly influencing the outcome of some of the planned facilities. For example,
the Washington D.C. region once embraced the plan of a 38-mile interstate highway network. Many of the planned
links were to pass through predominantly black neighborhoods. After 22 years of fierce political battles, only 10
miles were ever built, and the issue of race played a considerable role in shaping the limited highway network in theDistrict of Columbia today (Levey and Levey 2000). As such, one may therefore argue that the civil rights issues
have played an important role in the politics of highways at all levels in the US
Intuitively, toll charges on freeways would face equivalent political challenges, especially when a given toll scheme
may be perceived to disproportionally affect particular neighborhoods. The Elizabeth River Crossings project
predominantly serves cross-river commuters and businesses in port-related industries in Hampton Roads. It is in thiscontext of the US politics that tolling free facilities resulted in persistent opposition, conceivably leading the publicdecision makers to delay the imposition of tolls and to lower the toll levels during the ramp up period (VDOT 2014).
Resonating with the political dynamics of the Elizabeth River Crossings Project, the literature on ethnic, linguistic,
and religious fractionalization and fragmentation of communities have suggested that population diversity may
complicate implementation of public goods projects (Alesina, Baqir, and Easterly 1999; Alesina and La Ferrara
2000; Alesina, Glaeser, and Sacerdote 2001). We investigate the potential of public disagreement on particularpolicy or projects, through estimating an ethnic fractionalization index using census information from 2010. Table
10 shows that fractionalization is the highest in California (0.77), high in Virginia (0.58), and relatively low in
13
Indiana (0.37). When compared worldwide data as summarized in Table 11, California and Virginia show a highproportion of ethnic diversity. Accordingly, the renegotiation experiences of P3s in these states can be partiallyexplained on this basis, although obviously more rigorous and across-the-board analysis would be necessary to draw
conclusive insights in this regard.
Looking next at the public partners, we evaluate whether each state had previous experience with P3s. Governmentswith limited P3 experience may struggle to manage such innovative projects. Five of the case study projects wereamong the first in their state. Indiana Toll Road was the first P3 in Indiana, while the SR-91 Express Lanes project
was the first in California. South Bay Expressway, despite its construction a decade after State Route 91, was part of

12

The interest rate swap is a financial instrument used for hedging the risk of rising interest rates. In the case of
ITR, if the interest rates had increased, it would have been protected. However, as the interest rates decreased
instead of increased, it put the project under stress.

13

2
The fractionalization index follows this formula: 𝐹𝑅𝐴𝐶𝑇𝑗 = 1 − ∑𝑁
𝑖=1 𝑠𝑖𝑗 , where sij is the proportion that any
particular racial group has in state j. This index follows the work by (Alesina et al. 2003).

18

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California’s initial 1989 experiment under Assembly Bill No. 680. Dulles Greenway was Virginia’s first private tollroad since the 1800s, a project constructed under the Highway Corporation Act of 1988 (VDOT 2006). Similarly,
Pocahontas Parkway was the first project to take advantage of the state’s Public-Private Transportation Act of 1995,
and was the first 63-20 corporation for highways. As a result, government inexperience offers a possible explanation
for these project’s renegotiations, as governments had neither the appropriate expertise nor human resources with theexperience to deal with some of the uncertainties in handling these agreements. The Elizabeth River Crossings
project, however, cannot possibly be considered as novel. The financial close in 2012 and the state’s two-decade
experience with P3s prior to the deal indicate that inexperience of the state agency may not be able to explain thisproject’s renegotiation.
Finally, states’ institutional environment can also contribute to relational complexity of P3 deals. Even with decadesof P3 experience, a firm or government may not have the technocratic capacity to manage a P3 contract. We review
state management capacity using the State Management Report Card, funded by The Pew Charitable Trusts
14
evaluating state performance, focusing our attention on the infrastructure component (summarized in Table 12 for
1999, 2005, and 2008) (Barrett and Greene 2008; Government Performance Project 2005; King, Zeckhauser, andKim 2004). According to these ratings, Virginia demonstrates the strongest infrastructure performance during theanalysis period. Indiana falls in the middle of the table, with California showing one of the lowest scores. In thisregard, one would expect Virginia to have the strongest institutional quality of the states under consideration. The
case results do not reflect this expectation, so government management capacity may not necessarily be a factor
driving US P3 renegotiations.
In addition, since Guasch et al. find evidence that regulatory bodies diminish renegotiation probabilities in highly
corrupt environments, we analyze whether state regulatory bodies oversee the P3 contract process (Guasch, Laffont,and Straub 2007). Virginia has the Office of Transportation Public-Private Partnership (OTP3) whose objective is toensure the timely delivery of Public-Private Transportation Act (PPTA) projects addressing priority transportationneeds. The OTP3 operates under the Secretary of Transportation, and while outside VDOT, it receives
administrative support from the agency (Virginia Office of Transportation Public-Private Partnerships 2014).15 In
addition, the multimodal PPTA Steering Committee reviews the OTP3 recommendations. In contrast, California andIndiana both rely on their Departments of Transportation to oversee their P3 projects (KPMG 2013). These
institutional differences suggest that OTP3’s independence and dedicated resources should reduce the number ofnegotiations in Virginia. The case results do not reflect this expectation, suggesting that the presence of dedicatedregulatory agencies may not reduce renegotiation occurrences for these cases.

Winner’s Curse
Finally, we discuss of the possibility that the winner’s curse effect may have been in place in any of these cases. Thiseffect, in the context of brownfield concessions, would take the form of unreasonably high bids, generating profit
shortfalls that necessitate contract renegotiations (Athias and Nuñez 2009). In contrast, in the context of greenfield

14

This component evaluates states based on five dimensions (Barrett and Greene 2008): a) The state regularly
conducts a thorough analysis of its infrastructure needs and has a transparent process for selecting infrastructure
projects; b) the state has an effective process for monitoring infrastructure projects throughout their design andconstruction; c) the state maintains its infrastructure according to generally recognized engineering practices; d) thestate comprehensively manages its infrastructure; e) the state creates effective intergovernmental and interstate
infrastructure coordination networks. The evaluation takes into consideration academics and journalists expert
knowledge of the area and the states.
15

In November 2014 the OPT3 changed its name to the Virginia Office of Public-Private Partnerships.
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P3 projects, this effect would be reflected in unreasonably low bid, which would then require renegotiation to ensure
construction completion and continuing operation by the private partner. To investigate whether this “winner’s
curse” effect influenced any of the study cases, we evaluate the award processes and the numbers of bidders
involved. Only two of the case projects involved bidding processes: the Indiana Toll Road and Elizabeth River
Crossings. The winning Indiana bid by Cintra Concesiones de Infraestructura de Transporte and Macquarie Atlas
Roads offered $3.8 billion up front. In contrast, Indiana Road Company LLC offered $2.8 billion, Itinere
Infraestructuras S.A. offered $2.5 billion, and Indiana Toll Road Partners LLC offered $1.9 billion (IFA 2013).
Given that the competing bids were lower than the winning bid at least by $1.0 billion, it is difficult to reject theclaim that “winner” over-bid, leading to the renegotiations that the concession eventually underwent 16.
In contrast, the Elizabeth River Crossings’ renegotiations appear to be unrelated to the winner’s curse. While threecompanies submitted statements of interest, only one pursued the project. As a result, a bilateral negotiation process
between the public and private actors established the deal’s final elements, including the price.

5. Conclusion

This paper investigated the US highway P3 market experience, focusing on contractual renegotiations. Beginningwith a theoretical framework derived from a brief literature review, we conducted six case studies of tolled highway
P3 renegotiations. These cases vary considerably with respect to their contract types, engineering characteristics, andpolitical and economic circumstances. Moreover, in contrast to E.U. or Latin American markets, these US projects
inhabit distinct, state-based institutional and regulatory environments. However, US P3 renegotiation has notexperienced the same level of analysis as international markets. The relatively few US P3s and scarce data
availability might explain this situation, while they present considerable difficulty in employing econometric analysis
methods for addressing the research questions. This paper serves as a foundation to bridge this gap in the literature.
The six case studies presented in this paper raise a few distinct characteristics of the US highway P3 market.
Regarding the renegotiations initiated by the private partners, we found that public agencies in the US havedemonstrated their willingness to let their private partners default, go bankrupt, or be bought out when the facilities
are performing poorly in terms of the usage. Notably, these events did not involve risking the public sector funds
except in one case (South Bay Expressway and TIFIA). With respect to the renegotiations initiated by the public
sector, we find that the changes to the P3 schemes have often been claimed to be beneficial for the society, whencareful evaluation is actually necessary to make such claims. The critical issue that we find is the need for public
education to promote sound understanding of how P3s work and what the implications of each renegotiation to the
public may be.
Rather than jumping to conclusions, we need to recognize that the cases reviewed in this study demonstrate the effectof multiple factors in leading to unexpected contractual renegotiations. The existing body of literature provides poor

16

During the ITF Roundtable where a draft of this research was presented it was argued that this behavior could also
be interpret as “aggressive bidding” a form of private opportunism, where a company bids to obtain the contract,hoping to obtain better conditions afterwards, via renegotiations. In that regard, SBX had not occurred, so there was
not a highly publicized highway P3 bankruptcy case showing that the U.S. public sector would behave differently
than that of Latin America.
20

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RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

guidelines to disentangle the complexity behind each renegotiation case and to be able investigate the effect of one
hypothesis from another. Therefore, the analysis in this study highlights the need for scholars to continue developing
analytical frameworks by which such insight can be effectively drawn from the experiences. It is equally important
to emphasize the need for policy makers to ensure reasonable degree to disclose P3s’ information to allow theseanalyses.
The US infrastructure P3 market is relatively new and still growing. The experience of P3 renegotiations may be areflection of the learning curve that the policy makers are climbing before a robust market with reasonable returns toboth public and private partners emerges. One may find in the literature a number of proposals to manage
undesirable consequences of P3 renegotiations (e.g., Engel, Fischer, and Galetovic 2006). Yet, the analysis in thisstudy points to the need for continuing evaluation of managing P3s and their renegotiations, in a manner that issensitive the unique characteristics of US

Acknowledgements

The research and writing of this paper was supported in part by the International Transport Forum and theGeorge Mason University Center for Transportation Public-Private Partnership Policy. The Center receives support
from the Office of Transportation Public-Private Partnerships of the Commonwealth of Virginia. Porter Wheeler
provided insightful comments. Morghan Transue substantially edited the manuscript and Susan Woods provided
invaluable administrative support. The authors would like to express their gratitude to the valuable comments fromthe participants of the ITF Roundtable. This paper represents the views of the authors, who are responsible for any
errors or omissions.

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RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

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Appendix: Tables and Figures

Table 1. Outcome of renegotiations in Latin America and the Caribbean,
1985-2000
Percentage ofRenegotiated Concession
Contracts with the Given
OutcomeRenegotiation Outcome

Delays on investment obligations targets

69

Acceleration of investment obligations

18

Tariff increases

62

Tariff decreases

19

Increase in the number of cost components with an automatic pass-throughto tariff increases

59

Extension of concession period

38

Reduction of investment obligations

62

Adjustment of canon – annual fee paid by operator to government:
favorable to operator

31

Adjustment of canon – annual fee paid by operator to government:
unfavorable to operator

17

Changes in the asset-capital base: favorable to operator

46

Changes in the asset-capital base: unfavorable to operator

22

Source: Guasch, 2004.

28

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RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Table 2. Geographic distribution of US P3s, renegotiations, and our case studies

1
2

P3 Highways Facing Renegotiations
State
AlaskaCalifornia
Colorado
FloridaGeorgia
Indiana
Massachusetts
Michigan
New Mexico
North Carolina
South Carolina
Texas
Virginia
TOTAL

3

P3
Highways
1
4
2
13
1
2
1
1
1
1
1
10
6
45

Contract
modification
0
1
0
0
0
1
0
0
1
0
0
1
3
7

Default

Bankruptcy Buy-out
0
1
0
0
0
1
0
0
0
0
1
1
2
6

0
1
0
0
0
1
0
0
0
0
1
1
1
5

Cases Under Analysis
Total
Projects

Contract
modification

Default

Bankruptcy

Buy-out

Total
Projects

0
2
1
1
0
1
0
1
1
0
1
4
5
17

0
1
0
0
0
1
0
0
0
0
0
0
2
4

0
1
0
0
0
1
0
0
0
0
0
0
2
4

0
1
0
0
0
1
0
0
0
0
0
0
1
3

0
2
0
0
0
1
0
0
0
0
0
0
1
4

0
2
0
0
0
1
0
0
0
0
0
0
3
6

0
2
1
1
0
1
0
1
0
0
0
3
3
12

Sources: Public Works Financing Newsletter 2014, InfraDeals 2014.

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29

RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Table 3. Summary of US P3 renegotiation cases(1995-2013)17
Contract
Type

Original Cost
Estimate

Final
Construction
Cost

Purchase
Price From
Original
PrivatePartners

Project

State

Main
Revenue
SourceDullesGreenway

Virginia

Toll

DBFOM

350 million(1993)

338 million

617.5 million(2005)

Pocahontas
Parkway

Virginia

Toll

DBFOM

381 million(1998)

314 million(2002)

611 million(2006)

Elizabeth
River
Crossings

Virginia

Toll

DBFOM

2 089 million

n/a

n/a

State Route91

California

Toll

DBFOM

88.3 million(1990)

130 million(1995)

207.5 million(2003)South Bay
Expresswaya

California

Toll

DBFOM

400 million(1990)

722 million(2007)

351.7 million(2011)

Indiana Toll
Roadc

Indiana

Toll

DBFOM +
OM

n/a

n/a

n/a

Source: Compiled by authors from multiple sources.

17

DBFOM: Design, Build, Finance, Operate and Maintain. OM: Operate and Maintain.

a.
b.
c.
30

Includes the construction of non-toll 3.2 miles (5 km).
Construction of 1.2 miles (1.9 km) of tunnel and 1 mile (1.6 km) of highway. Maintenance of 50 lanemile.
Acquisition required the construction of 10 miles (16.1 km). The upfront payment was USD 3 778 million.
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RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Table 4. Complexity in the design and construction of P3 cases18
Project

State

Constructed Length
miles (km)BridgesTunnels

Dulles Greenway

Virginia

14 (22.5)

Yes

No

Pocahontas Parkway

Virginia

8.8 (14.1)

Yes

No

Elizabeth River Crossings

Virginia

2.2 (3.5)

Yes

Yes

State Route 91

California

10 (16.1)

No

NoSouth Bay Expressway

California

12.7 (20.4)

Yes

No

Indiana Toll Road

Indiana

10 (16.1)*

NoNo

Source: Compiled by authors from multiple sources.

18

Indiana Toll Road includes the operation and maintenance of the originally constructed 2+2 lanes for 156 miles(251km). In addition it includes the design, construction, finance, operation and maintenance of a third line, ineach direction, for 10 miles (16.1km).
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RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Table 5. Summary of P3 Renegotiation cases (1993-2013)
Project

Dulles Greenway

ReturnFrom 30% down
to 14%

Tolls

Problems

Tolls regulated by
Virginia State
Demand lower thanCorporation
expected
Commission

Demand lower than
expected
Pocahontas Parkway

Originally not-forprofit

First 2 years incontract. VDOT
adjusts afterwards

Dates
1993
1993
1995
1995
1997
1999
2001
2004
2005
2013
1998
1998
2002
2006

2012
2014
2012
2012
Elizabeth River
Crossings

Revenue-sharing
after threshold

Highest of 3.5% or
CPI

Community
opposition

2012
2014
2017

32

Relevant dates
Financial close
Construction starts
Opening year
Tolls decreased. Owners default on debt.
Tolls increased. Speed limit increased (65 mph)
Debt restructured. Project modified: from 2*2 lanes to 3*3.
Extension of concession period (20 years)
Variable peak and discounted off-peak point-to-point rates
Macquarie Infrastructure Group purchases P3
Tolls (2013-2020): the higher of CPI plus 1%, real GDP, or 2.8%.
Financial close
Construction starts
Opening year
Transurban USA purchases the contract for: Lease Develop-Operate
Extension of concession period (to 99 years)
Additional investments: 1.6-mile (2.6km), four-lane (Airport Connector),and electronic tolling
Transurban USA writes off its equity on the parkway to zero.
Transurban USA transfers the operation to DBi Services
Financial close
Construction starts
Delays tolling until 2014 in exchange for $125 million. Private partners
increased equity by $207 million.
Tolls are decreased. Compensation USD 82.5.
Expected opening

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RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Table 5. (continued) Summary of P3 Renegotiation cases (1993-2013)
Project

ReturnTolls

Problems
Non-compete clauseState Route 91

17%

South Bay
Expressway

18.50%

-

Dates
1993
1993
1995
2003
2002
2003
2007
2010
2011
2006
2006
2006

Indiana Toll Road-

Inflation cap

-

2006
2007
2007
2008
2010
2014

Relevant dates
Financial close
Construction starts
Opening year
Orange County (OCTA) purchases it to eliminate non-compete clause
Macquarie Infrastructure Group (MIG) purchases CTV
Financial close
Opening year
Files for bankruptcy
Exits Chapter 11 as San Diego Association of Governments (SANDAG)
purchases it. Tolls are decreased.
Financial close
Opening year
"Toll freeze" until electronic tolling is in place. State reimbursement
amounts to USD 60 million
Reduction on investment obligations
Construction starts
Delays in certain investments until 2010
State reimbursement amounts to USD 60 million due to lost revenue
Delays in certain investments until 2011
Filed for bankruptcy

Source: Compiled by authors from multiple sources.

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33

RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Table 6. Outcome of renegotiations in the US highway P3 cases (1995-2013)19
Renegotiation Outcome

DullesGreenway

Pocahontas
Parkway

Midtown and
Downtown
Tunnels

State Route91

South Bay
Expressway

Indiana Toll Road

Delays on investment obligations targets

No

No

No

No

No

Yes

Acceleration of investment obligations

No

No

No

No

No

No

Tariff increases

Yes

No

No

No

No

No

Tariff decreases or freeze or delay

Yes

No

Yes

No

Yes

Yes

Increase in the number of cost components
with an automatic pass-through to tariffincreases

No

No

No

No

No

No

Extension of concession period

Yes

Yes

No

No

No

No

Reduction of investment obligations

No

No

No

No

No

Yes

Adjustment of canon –annual fee paid byoperator to government: favorable tooperator

No

No

No

No

No

No

Adjustment of canon –annual fee paid byoperator to government: unfavorable tooperator

No

No

No

No

No

No

Changes in the asset-capital base: favorable
to operator

No

No

No

No

No

No

19

34

Designed based on Guasch, 2004.
J. Gifford et al. — Discussion Paper 2014-16 — © OECD/ITF 2014

RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Table 6. (continued) Outcome of renegotiations in the US highway P3 cases (1995-2013)
Renegotiation Outcome

DullesGreenway

Pocahontas
Parkway

Midtown and
Downtown
Tunnels

State Route91

South Bay
Expressway

Indiana Toll Road

Changes in the asset-capital base:unfavorable to operator

No

No

Yes

No

No

No

Other: increase speed

Yes

No

No

No

No

No

Other: private partner changes

Yes

Yes

Yes

Yes

No

Other: additional investment

Yes

Yes

No

No

No

No

Other: decrease in investment

No

No

No

No

No

Yes

Other: eliminate non-compete clause

No

No

No

Yes

No

No

Renegotiation initiated by

PrivatePrivatePublicPublicPrivatePrivateSources: IFA, 2014; Levy, 2011; FHWA 2014; Wang, 2010.

J. Gifford et al. — Discussion Paper 2014-16 — © OECD/ITF 2014

35

RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Table 7. Changes in the majority party, state executive and legislative branches

State

Years of changes in
Governor’s Party

Years of changes in State
Senate Majority Party

Years of changes in State
House Majority Party

Virginia

1993, 2002, 2009

1995, 2008, 2011

1997

California

1999, 2003, 2011

None

1995, 1997

Indiana

2004

None

1994, 1999, 2004, 2010

Source: Lucy Burns Institute. 2014; Ballotpedia, 2014.

36

J. Gifford et al. — Discussion Paper 2014-16 — © OECD/ITF 2014

RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Table 8. Primary private owners and their road asset portfolio facing renegotiations
Project

Asset Portfolio of Other Roads of Stockholders (2012)

Asset Portfolio of Other Roads Facing renegotiation(2012)

Shenandoah Group, Kellog Brown & Root

None

None

Macquarie Infrastructure Group (nowMacquarie Atlas Roads)

B103, Indiana Toll Road, M6 Motorway Toll, Societes desAutoroutes Paris-Rhin-Rhone

Indiana Toll Road, M6 Motorway Toll, Societes desAutoroutes Paris-Rhin-Rhone

Macquarie Infrastructure Group and
Macquarie Infrastructure Partners

B103, Indiana Toll Road, M6 Motorway Toll, Societes desAutoroutes Paris-Rhin-Rhone, Autoroute A25

Indiana Toll Road, M6 Motorway Toll, Societes desAutoroutes Paris-Rhin-Rhone

Fluor Daniel and Morrison Knudsen

A59 Motorway Project, I-495 Capital Beltway HOT Lane
Project, I-95 HOV/HOT Lanes Project, Windsor-Essex
Parkway

A59 Motorway Project

2012

Transurban DRIVe (owned by TransurbanGroup and Capital Partners, now CP2)

I-495 Capital Beltway HOT Lane Project, I-95 HOV/HOT
Lanes Project

None

2014

Dbi Services

None

None

1993

Level 3 Communications, Inc., Compagnie
Financière et Industrielle des Autoroutes(Cofiroute owned by Vinci Autoroute), andGranite Construction Inc.

None

None

2003

N/A

None

None

Dates

Main Private Stockholders Behind the
Project

1993
1995
1997
1999
Dulles Greenway

2001
2004
2005

2006
2013
1998
Pocahontas
Parkway

2006

State Route 91

J. Gifford et al. — Discussion Paper 2014-16 — © OECD/ITF 2014

37

RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Table 8. (continued) Primary private owners and their road asset portfolio facing renegotiations
Project

Main Private Stockholders Behind the Project

Asset Portfolio of Other Roads of Stockholders (2012)

Asset Portfolio of Other Roads Facing Renegotiation(2012)

Skanska Infrastructure Development,
Macquarie Infrastructure Partners II, andMacquarie Mercer Infrastructure Trust

A1 Motorway, Antofagasta Regional Highway, M25
Widening Scheme,

A1 Motorway, Antofagasta Regional Highway

Parsons Brinkerhoff, Egis Projects, Fluor
Daniel and Prudential Bache

A59 Motorway Project, HSL/Zuid, I-495 Capital Beltway
HOT Lane Project, I-95 HOV/HOT Lanes Project,
Windsor-Essex Parkway, A2 Motorway PPP Phase 1,
A24/IP3 Viseu-Chaves, A28 Rouen-Alencon Motorway,
A63 Highay, A8, A88 Motorway Falaise-Sées, L2 Bypass
Marseille, M25 Widening Scheme, M6 Motorway Phase
III, North Luzon Expressway, Ostregion PPP Package 1

A59 Motorway Project

1992

Parsons Brinkerhoff, and Egis Projects

A2 Motorway PPP Phase 1, A24/IP3 Viseu-Chaves, A28
Rouen-Alencon Motorway, A63 Highay, A8 (AugsburgMunich), A88 Motorway Falaise-Sées, L2 Bypass
Marseille, M25 Widening Scheme, M6 Motorway Phase
III, North Luzon Expressway, Ostregion PPP Package 1

A2 Motorway PPP Phase 1, A24/IP3 Viseu-Chaves, A8(Augsburg-Munich),

1997

Parsons Brinkerhoff, Egis Projects, and Koch
Industries

A2 Motorway PPP Phase 1, A24/IP3 Viseu-Chaves, A28
Rouen-Alencon Motorway, A63 Highay, A8, A88
Motorway Falaise-Sées, L2 Bypass Marseille, M25
Widening Scheme, M6 Motorway Phase III, North Luzon
Expressway, Ostregion PPP Package 1

A2 Motorway PPP Phase 1, A24/IP3 Viseu-Chaves, A8(Augsburg-Munich),

Macquarie Infrastructure Group

B103, Indiana Toll Road, M6 Motorway Toll, Societes desAutoroutes Paris-Rhin-Rhone

Indiana Toll Road, M6 Motorway Toll, Societes desAutoroutes Paris-Rhin-Rhone

Dates

2012
Elizabeth River
Crossings

2012
2014

1991

South Bay
Expressway

2002
2003
2010

38

J. Gifford et al. — Discussion Paper 2014-16 — © OECD/ITF 2014

RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Table 8. (continued) Primary private owners and their road asset portfolio facing renegotiations
Project

Dates

Main Private Stockholders Behind the
Project

Asset Portfolio of Other Roads of Stockholders (2012)

Asset Portfolio of Other Roads Facing
Renegotiation (2012)2011

Banks: DEPFA Bank plc, Allied Irish, Bankof Ireland, BNP Paribas, CommonwealthBank, DVB Bank, DZ Bank, and HSH
Nordbank

None

None

2006
2006
2006
2007

2008
Indiana Toll Road

A-22 Algarve Shadow Toll Road, A-27/28 Norte Litoral Shadow
Toll Road, A-66 Motorway - Benavente to Zamora, Acores
Shadow oll Road, AP-36 Ocana-La Roda Highway, C-16 Sant
Cugat-Terrassa-Manresa Highway, Central Greece E-65 Highway
Project, Costa del Sol Hghway - Ausol II, Costa del Sol Highway Cintra Concesiones de Infraestructuras de
Ausol I, Highway 407, Highway 407 East to Highway 35/115,
Transporte, Macquarie Infrastructure Partners, I-635, Ionian Roads Project, M-203 Alcalá O´Donnell Highway,
and Macquarie Atlas Roads
M-30 Ring Road PPP, M3 Clonee-Kells, Madrid-Ocaña Highway
Concession, N4/N6 PPP, North Tarrant Expressway, North Tarrant
Expressway Segments 3A and 3B, Trans-Texas Corridor SH130
SEg 5&6, B103, Dulles Greenway, M6 Motorway Toll, Societes
des Autoroutes Paris-Rhin-Rhone, Autoroute A25, Dulles
Greenway

A-22 Algarve Shadow Toll Road, A-27/28 Norte
Litoral Shadow Toll Road, AP-36 Ocana-La
Roda Highway, C-16 Sant Cugat-TerrassaManresa Highway, Highway 407, M-203 Alcalá
O´Donnell Highway, Madrid-Ocaña Highway
Concession, Dulles Greenway

A-22 Algarve Shadow Toll Road, A-27/28 Norte Litoral Shadow
Toll Road, A-66 Motorway - Benavente to Zamora, Acores Shadow
oll Road, AP-36 Ocana-La Roda Highway, C-16 Sant CugatTerrassa-Manresa Highway, Central Greece E-65 Highway Project,
Costa del Sol Hghway - Ausol II, Costa del Sol Highway - Ausol I,
Highway 407, Highway 407 East to Highway 35/115, I-635, Ionian
Roads Project, M-203 Alcalá O´Donnell Highway, M-30 Ring Road
PPP, M3 Clonee-Kells, Madrid-Ocaña Highway Concession, N4/N6
PPP, North Tarrant Expressway, North Tarrant Expressway
Segments 3A and 3B, Trans-Texas Corridor SH130 SEg 5&6, B103,
Dulles Greenway, M6 Motorway Toll, Societes des Autoroutes
Paris-Rhin-Rhone, Autoroute A25, Dulles Greenway

A-22 Algarve Shadow Toll Road, A-27/28 Norte
Litoral Shadow Toll Road, AP-36 Ocana-La
Roda Highway, C-16 Sant Cugat-TerrassaManresa Highway, Highway 407, M-203 Alcalá
O´Donnell Highway, Madrid-Ocaña Highway
Concession, Dulles Greenway

2009

2010
Ferrovial, Macquarie Infrastructure Partners,
and Macquarie Atlas Roads

2014

Source: InfraDeals, 2014.

J. Gifford et al. — Discussion Paper 2014-16 — © OECD/ITF 2014

39

RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Table 9. Contract complexity of P3 cases20

Original
Contract
Duration(years)Is the contract
available
online?

Original
Contract Length(pages without
exhibits)

Project

State

Type ofContract

Dulles Greenway

Virginia

DBFOM

40

Yes

61

Pocahontas Parkway

Virginia

Original:
DBOT.
Modified:
BOT

30

Yes

96

Elizabeth River
Crossings

Virginia

DBFOM

75

Yes

160

State Route 91

California

BTO

35

No

*

South Bay
Expressway

California

BTO

35

No

*

Indiana Toll Road

Indiana

DBFOM +
OM

58

Yes

112

Source: Compiled by authors from multiple sources.

20

No information was available on the California P3 highway contracts.

40

J. Gifford et al. — Discussion Paper 2014-16 — © OECD/ITF 2014

RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Table 10. Fractionalization Index for
the United States (2010)
US State
Maine
West Virginia
North Dakota
Minnesota
Wisconsin
Ohio
Missouri
IndianaPennsylvania
Tennessee
Utah
OregonArkansas
Massachusetts
AlabamaWashington
Mississippi
South Carolina
Louisiana
Connecticut
DelawareColorado
North Carolina
Virginia
AlaskaIllinois
Georgia
FloridaMaryland
Arizona
Texas
NevadaHawaii
California

Ethnic Fractionalization
0.11660.13910.22140.34310.34640.34950.35640.37330.40180.43640.44330.46310.47170.47900.51130.53980.54390.5456
0.55470.55480.57590.58120.58290.58310.59150.6362
0.63700.64510.65110.70410.72380.74400.75210.7665

Source: US Census Bureau, 2013.

J. Gifford et al. — Discussion Paper 2014-16 — © OECD/ITF 201441

RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Table 11. Ethnic fractionalization of select countries
Country

Ethnic Fractionalization

Maximum value

Uganda0.9302

Percentile 90

Gambia0.7864

Percentile 75

Nepal

0.6625Percentile 50

Palau0.4342

Percentile 25

El Salvador

0.1984

Percentile 10

Cyprus

0.0938Minimum value

Comoros

0.0000Source: Alesina et al., 2003.

42

J. Gifford et al. — Discussion Paper 2014-16 — © OECD/ITF 2014

RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Table 12. The State Management Report Card: Infrastructure Grade,States with P3 Enabling Legislation
US States

1999

2005

2008

Alabama
AlaskaArizona
Arkansas
California
Colorado
Connecticut
Delaware
FloridaGeorgia
Illinois
IndianaLouisiana
Maine
Maryland
Massachusetts
Minnesota
Mississippi
Missouri
NevadaNorth Carolina
North Dakota
Ohio
OregonPennsylvania
South Carolina
Tennessee
Texas
Utah
Virginia
Washington
West Virginia
Wisconsin

1
6
3
5
4
5
6
8
5
5
7
5
8
4
10
9
10
8
10
9
9
9
8
7
8
7
7
5
10
11
11
6
10

2
6
7
6
5
6
6
9
9
6
6
7
6
8
10
4
8
6
7
9
6
7
10
8
9
6
7
7
11
10
8
5
5

6
4
7
6
7
6
6
9
10
8
5
9
6
6
9
3
6
6
9
7
7
7
7
6
7
4
8
8
11
9
9
4
7

Source: Compiled by authors from multiple sources.

J. Gifford et al. — Discussion Paper 2014-16 — © OECD/ITF 201443

RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Figure 1. Number of DB & P3s Financial Closes in the US by Sector, 1986-201321
25

20

15

Building
Misc.

10

Transportation
Water

5

Sources:

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

0

Public Works Financing Newsletter, 2014.

Figure 2. Cumulative Highway P3 Financial Closes, Total & Renegotiations, 1993-2014
50
45
40
35
30
25
20
15
10
5

P3 financial close

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

0

P3 financial close with RDBB

Sources: Public Works Financing Newsletter, 2014.

21

P3s of all contract types, including concessions, management contracts and Design-Build contracts.

44

J. Gifford et al. — Discussion Paper 2014-16 — © OECD/ITF 2014

RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Figure 3. Consumer Price Index – All urban consumers (1992-2014)

Source:Bureau of Labor Statistics. 2014.

Figure 4. Real GDP growth in select states (1992-2014)

12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%

1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

-8.0%

US

California

Indiana

Virginia

Source: Bureau of Economic Analysis, 2014a; Bureau of Economic Analysis, 2014b.

J. Gifford et al. — Discussion Paper 2014-16 — © OECD/ITF 201445

RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Figure 5. Unemployment rates in States with highway P3 renegotiations, 1992-2014
14
12
10
8
6
4
2

Feb-13

Sep-13Jan-12

Nov-12Mar-11

May-10Jul-09Sep-08Nov-07

Jan-07Mar-06

Jul-04

May-05

IndianaMar-12

California

Sep-03

Nov-02Jan-02Mar-01

May-00Jul-99

Sep-98Jan-97

Nov-97

Mar-96May-95

Jul-94

Sep-93

Nov-92Jan-920

Virginia

Source: Bureau of Labor Statistics. 2014.

Figure 6. PPI (construction machinery & iron and steel mills), 1992-2014

PPI - Construction machinery mfg

Jan-14Apr-11

May-10

Jun-09Jul-08Aug-07

Sep-06

Oct-05

Nov-04

Dec-03Jan-03

Feb-02Mar-01

Apr-00May-99Jun-98

Jul-97

Aug-96

Sep-95Oct-94

Nov-93Dec-92Jan-92

50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
-10.0%-20.0%-30.0%-40.0%-50.0%

PPI - Iron an steel mills

Source: Bureau of Labor Statistics, 2014.

46

J. Gifford et al. — Discussion Paper 2014-16 — © OECD/ITF 2014

RENEGOTIATION OF TRANSPORTATION PUBLIC-PRIVATE PARTNERSHIPS: THE US EXPERIENCE

Figure 7. Prime Bank Loan Rate, not seasonally adjusted (1992-2014)
10.00
9.00
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
Sep-13Aug-12

Jul-11

Jun-10

May-09Apr-08Mar-07

Jan-05

Feb-06

Dec-03

Nov-02Oct-01

Sep-00Aug-99Jul-98

Jun-97May-96

Apr-95Mar-94Jan-92

Feb-930.00

Source: Federal Reserve Bank of St. Louis. 2014.

J. Gifford et al. — Discussion Paper 2014-16 — © OECD/ITF 201447

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