CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

CBO

Using

Public-Private

Partnerships to

Carry Out 

Highway Projects

JANUARY 2012
Pub. No. 4041
The Congress of the United States O Congressional Budget Office

A

STUDY

CBO

Using Public-Private Partnerships to 

Carry Out Highway Projects

January 2012
CBO
Preface

CBO

The demands on the network of public highways in the United States have increased 

rapidly since the initial authorization of the Interstate Highway System in 1956. Specifically, 

the number of vehicle miles traveled has quadrupled, and congestion within the system has 

grown. Currently, the federal government and state and local governments face calls for more 

and better highways but confront budgetary constraints in providing them. Some analysts 

have suggested that public-private partnerships might supply at least a portion of that capacity 

by providing additional financing for road projects and improving the efficiency of a highway’s construction and operation over the life of the road.

This Congressional Budget Office (CBO) study, which was prepared at the request of the 

Chairman of the Senate Committee on the Budget, assesses the role of public-private 

partnerships in providing highway infrastructure. In particular, the study focuses on whether 

such partnerships might provide additional financing for highways and build them more 

quickly or at a lower cost. In keeping with CBO’s mandate to provide objective, impartial 

analysis, the report contains no recommendations. 

The study was written by Alan van der Hilst of CBO’s Microeconomic Studies Division 

under the supervision of Joseph Kile and David Moore (formerly of CBO). Perry Beider, 

Sheila Campbell, Wendy Kiska, Damien Moore, Nathan Musick, Sarah Puro, Felix Reichling, 

and Chad Shirley, all of CBO, provided helpful comments, as did Eduardo Engel of 

Yale University, R. Richard Geddes of Cornell University, David Lewis of HDR Inc., 

Deborah Lucas of the Massachusetts Institute of Technology, and Robert Poole of the 

Reason Foundation. (The assistance of external reviewers implies no responsibility for the 

final product, which rests solely with CBO.)

Leah Mazade edited the study, and Loretta Lettner proofread it. Jeanine Rees prepared the 

report for publication, and Maureen Costantino took the cover photo and designed the cover. 

Monte Ruffin printed the initial copies, and Linda Schimmel coordinated the print distribution. The study is available on CBO’s Web site (www.cbo.gov).

Douglas W. Elmendorf

Director

January 2012

Contents

CBO

Summary vii

1 Approaches to Providing Highways 1

The Traditional Approach 2

Public-Private Partnerships 3

2 Private Financing of Highways 9

The Availability of Financing 9

Measuring the Cost of Financing 10

How Financing Can Affect Participants’ Incentives 12

Experience with Private Financing of Highway Projects 12

3 Private Provision of Highways 19

Managing Risks Through Contracts 19

Experience with Public-Private Partnerships for Highway Projects 22

A Public-Private Partnerships in Other Countries 27

B Two Case Studies of Long-Term Lease Agreements for Highway 

Operations and Maintenance 29
VI USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS

CBO

Tables

1-1. Stages and Types of Activities Involved in Providing Highways 3

1-2. Value of Contracts Covering Public-Private Partnerships for Highway Projects, 

January 1989 to June 2011 4

2-1. Completed Highway Projects That Used Public-Private Partnerships with 

Private Financing 14

2-2. Ongoing Highway Projects That Use Public-Private Partnerships with 

Private Financing 16

Figures

1-1. Miles of Public Roads in the United States and Vehicle Miles Traveled, 1960 to 2009 2

B-1. Public Versus Private Costs per Lane Mile to Operate and Maintain the 

Chicago Skyway 30

B-2. Operations and Maintenance Costs per Lane Mile for the Indiana Toll Road and 

Selected State Turnpikes 31

Box

1-1. Deciding Whether to Undertake Public-Private Partnerships 6
CBO

Summary

The United States has a network of over 4 million 

miles of public roads. That system has faced increasing 

demands over time: The number of vehicle miles traveled 

(both passenger and commercial) rose from approximately 700 billion in 1960 to just under 3 trillion in 

2009. In 2010, the federal government and state and 

local governments spent about $160 billion to build, 

operate, and maintain roads. (This study adopts the practice of the Federal Highway Administration in using the 

words “highway” and “road” synonymously.) Almost all 

of those infrastructure projects were undertaken using a 

traditional approach in which a state or local government 

assumes most of the responsibility for carrying out a project and bears most of its risks, such as the possibility of 

cost overruns, delays in the construction schedule, and, in 

the case of toll roads, shortfalls in the road’s revenues. 

Some observers assert that an alternative approach, using 

a public-private partnership, could increase the money 

available for highway projects and complete the work 

more quickly or at a lower cost than is possible through 

the traditional method. Specifically, such a partnership 

could secure financing for a project through private 

sources that might require more accountability and could 

assign greater responsibility to private firms for carrying 

out the work. For example, a private business might take 

on the responsibility for specific tasks, such as operations 

and maintenance, and their accompanying risks. 

In this study, the Congressional Budget Office (CBO) 

finds that private financing will increase the availability 

of funds for highway construction only in cases in which 

states or localities have chosen to restrict their spending 

by imposing legal constraints or budgetary limits on 

themselves. The reason is that revenues from the users 

of roads and from taxpayers are the ultimate source of 

money for highways, regardless of the financing mechanism chosen. The cost of financing a highway project 

privately is roughly equal to the cost of financing it 

publicly after factoring in the costs associated with the 

risk of losses from the project, which taxpayers ultimately 

bear, and the financial transfers made by the federal 

government to states and localities. Any remaining difference between the cost of public versus private financing 

for a project will stem from the effects of incentives and 

conditions established in the contracts that govern 

public-private partnerships.

CBO also finds, on the basis of evidence from a small 

number of studies, that such partnerships have built 

highways slightly less expensively and slightly more 

quickly, compared with the traditional public-sector 

approach. The relative scarcity of data on public-private 

partnerships for highway projects, however, and the 

uncertainty surrounding the results from the available 

studies make it difficult to apply their conclusions definitively to other such projects.

Approaches to Providing Highways

The traditional approach to providing roads, known as 

the design-bid-build approach, is used nearly uniformly 

across the United States. It is mainly a public-sector 

endeavor, in which state or local governments pay for 

projects with some combination of their own funds, 

funds provided by the federal government, and borrowed 

funds that are ultimately repaid by revenues from taxes 

or tolls. Once funds are secured, a public manager—

generally a state department of transportation or other 

public authority—either designs the highway project 

itself or contracts with a private firm to design it. A different private entity, which is usually selected on the basis of 

the lowest-cost bid, then carries out the project. A public 

agency manages the longer-term operations and maintenance of the highway, although that public entity may, 

again, contract with a private firm to perform some of 

those tasks.
VIII USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS

CBO

Under the traditional approach to highway projects, private firms that have signed contracts to construct a road 

or perform other project-related tasks take on only a limited amount of risk. For example, they retain the ability 

to pass on to the public agency any increase in their costs 

as a result of unforeseen changes in the scope or details of 

the project, a feature of the traditional approach that 

increases the chances that the private firm’s costs will 

exceed its bid price. For its part, the public sector retains 

a high degree of control over the highway during its 

useful life.

The term “public-private partnership” refers to a variety 

of alternative arrangements for highway projects that 

transfer more of the risk associated with and control of 

a project to a private partner. That transfer is achieved in 

part by bundling some of the elements of providing a 

highway. Among the most extensive public-private partnerships are those in which a private firm provides 

financing for a highway project, designs and builds it, 

and then, in exchange for the right to charge tolls, operates and maintains it over its useful life. The most common type of public-private partnership, however, is the 

more limited “design-build” agreement in which one 

contractor agrees to both design and build a highway 

rather than having the public sector manage each of those 

steps independently.

In a partnership, the contractor assumes greater risks than 

it would under the traditional approach because the 

terms of the partnership’s contract generally limit the private firm’s ability to renegotiate the contract in the event 

of higher costs. Nevertheless, that advantage to the public 

sector of transferring the risk and control of a project to a 

private firm may have a downside: It may limit the government’s ability to respond to changing conditions or to 

achieve other objectives that might improve the welfare of 

the state’s or locality’s citizens but reduce the private partner’s profits. 

The use of such partnerships for providing highway infrastructure is limited in the United States. Between 1989 

and 2011, the value of contracts for all projects whose 

costs exceeded $50 million was only about $41 billion, 

representing a little more than 1 percent of the approximately $3 trillion (in 2010 dollars) that was spent on 

highways during that period by all levels of government. 

The use of public-private partnerships is increasing, 

however, and by one estimate accounted for between 

30 percent and 40 percent of all new miles of urban 

limited-access highways built between 1996 and 2006.1

This study addresses the potential role of the private sector in two aspects of building highways: the financing of 

projects and the provision (that is, the design, construction, operation, and maintenance) of highways.

Private Financing of Highways 

Most highway projects are paid for with current state or 

federal revenues and are not financed through borrowing. 

But sometimes a project is large enough that the state or 

local government, or other public authority, must borrow 

money to move the project forward. When that is the 

case, the public entity can provide financing either 

through traditional public borrowing—by issuing government bonds, on which investors are generally willing 

to accept a relatively low rate of return because the bonds 

are backed by the taxing authority of the public entity—

or by joining with a private partner to obtain private 

financing. Private financing can provide the capital necessary to build a new road, but it comes with the expectation of a future return, the ultimate source of which is 

either taxes or tolls. 

The total cost of the capital for a highway project, 

whether that capital is obtained through a government or 

through a public-private partnership, tends to be similar 

once all relevant costs are taken into account. In general, 

the overall rate of return demanded by investors depends 

on their perception of the risk of losses associated with 

the project. A construction project is never without such 

risk, even when a government guarantees repayment of 

any debts incurred to finance construction. Someone 

always bears that risk: That is, some form of explicit or 

implicit equity investment is necessary to absorb potential cost overruns or revenue shortfalls.2

 For highways that 

are financed by public debt, taxpayers play the role of 

equity investors, bearing the risk that revenues might be 

less (or more) than the payments that have been promised 

1. Urban limited-access highways exclude rural and suburban roads, 

where tolls are unlikely to yield sufficient revenues, and roads that 

have lower traveling speeds and numerous intersections, where toll 

operations would be more difficult and costly. 

2. Equity and, more specifically, equity investments refer to the 

funds provided by the class of investors that, after all liabilities are 

discharged, is the last to receive payments in the event of a default 

or bankruptcy. Those investors bear the greatest risk of not receiving a return on their investment and therefore invest only when 

they expect a rate of return large enough to compensate them for 

that added risk. 
SUMMARY USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS IX

CBO

on the debt. A comprehensive measure of the cost of 

financing a highway project will account for the cost of 

both equity and debt financing, even when the equity is 

provided indirectly by taxpayers. 

The choice between public and private financing may 

affect the incentives to manage the project efficiently and 

hence the project’s costs and schedule. Private investors 

who make equity investments receive payments only after 

all other claimants to the project’s revenues (such as holders of debt, suppliers, and workers) have received what is 

owed them; those equity investors thus have an incentive 

to minimize costs and delays if they are granted control 

over the project. Debt holders generally are not given 

such control and have little incentive to work to improve 

how the project is carried out because they are insulated 

from the effects of most cost overruns and other risks. By 

itself, however, the incentive to control costs and meet 

schedules is not sufficient to guarantee the project’s effective execution. In cases in which private financiers have 

limited control, they may not be able to influence the 

efficiency with which the project is carried out. 

How a project is financed may also affect who bears its 

costs. Financing a project with bonds whose interest is 

exempt from federal taxation or with funds that reflect 

other subsidies from the federal government shifts the 

project’s costs from state taxpayers to federal taxpayers. 

It does not, however, reduce the total cost of the project’s 

financing.

To date, investors in the small number of public-private 

partnerships that have financed and built highways in 

the United States have in most cases overestimated 

the toll receipts from the completed roads. Thus, the 

projects have not produced large enough returns to justify those investments. Such a record is evidence that 

those investors assumed significant risk in that they built 

the highways and did not receive the payments they 

expected. Their losses may explain why more-recent partnership agreements for highway projects have reduced the 

private partners’ exposure to the risk of lower-thanexpected toll revenues by guaranteeing payments (from 

the public partners) regardless of how much the roads are 

used. In addition, more-recent agreements have reduced 

private partners’ debt-service payments—that is, interest 

payments on any money borrowed to finance the 

projects—by increasing the share of financing provided 

by the state or locality or by the federal government. 

Accordingly, financing provided by the federal TIFIA 

(Transportation Infrastructure Finance and Innovation 

Act) program and tax-exempt private activity bonds 

issued by municipalities (to finance projects of private 

users) have become increasingly prominent sources of 

funds for highway projects. 

Private Provision of Highways 

If a public-private partnership arrangement is chosen for 

a highway project, the government involved must design, 

implement, and monitor contracts that allocate risk and 

control between the public and private partners. 

Although contracts of that kind are difficult to create 

because the parties involved cannot anticipate all contingencies, they are essential to establishing the right incentives to perform the work efficiently and manage the 

project’s associated risks. In particular, they may help 

reduce the total cost of the project by bundling tasks that 

under the traditional approach would be performed by 

separate entities. 

A drawback of a partnership arrangement for the public 

sector, however, can be its loss of control of a project. 

Contracts for public-private partnerships may in some 

cases turn over some toll-setting authority to the private 

sector. Higher tolls are likely to result, an outcome that 

may conflict with other public-sector goals. A loss of control may also lead to conflicts about and renegotiations of 

the terms of the contract, which may be costly for the 

public sector. More generally, less control of a project by 

the public partner over the long run may make attainment of the government’s future objectives more costly; 

it may also complicate efforts to adhere to a contract 

written many years—or even decades—earlier and still 

protect the public’s interests.

Assessments of whether public-private partnerships can 

provide highway infrastructure more efficiently than traditional methods are challenging, in large part because of 

limited data and research. Only a few studies have 

focused on the private provision of a highway project—

that is, on design and construction as well as on operations and maintenance. That research found that the use 

of the design-build type of public-private partnership 

slightly reduced the cost of building highways relative to 

the cost under the traditional approach and slightly 

reduced the amount of time required to complete the 

projects. The studies typically estimated that the cost of 

building roads through design-build partnerships was a 

few percentage points lower than it would have been for 
X USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS

CBO

comparable roads provided in the traditional way. (However, estimates of such savings are quite uncertain, and 

the effect on costs of using design-build arrangements in 

the future could differ significantly from what the estimates in those studies imply.) Moreover, under such partnerships, many of the roads were built more quickly. 

Studies found that for projects with contracts valued at 

more than $100 million, the total time required to design 

and build the road declined by as much as a year on some 

projects—in part because the public-private partnership 

bundled the design and construction contracts and so 

eliminated a second, separate bidding process for the 

additional tasks. 

Information about using public-private partnerships to 

operate and maintain roads is limited. In recent years, 

two older highways built in the traditional way, the 

Chicago Skyway and the Indiana Toll Road, have been 

converted to private management, making them subject 

to control by the private sector. Comparing the cost of 

operations and maintenance for those highways under 

public and private management indicates that both roads 

experienced reductions in costs after a private firm 

assumed control. A variety of factors in addition to the 

transfer of control, such as the recent recession and the 

associated reduction in traffic, probably contributed to 

that result. 
CHAPTER

CBO

1

Approaches to Providing Highways

The United States has a network of over 4 million 

miles of public highways, according to the Federal Highway Administration (FHWA).1

 Those roads are used to 

move individuals and transport freight throughout the 

country and thereby play a key role in people’s lives 

and in the economy. (This study follows the FHWA’s 

practice of using the words “roads” and “highways” synonymously.) Over time, the demands on the highway 

system have increased. Since 1960, the total number of 

miles traveled by commercial and personal vehicles has 

quadrupled, rising from 718 billion in 1960 to just under 

3 trillion in 2009, an average increase of about 3 percent 

per year.2

 During the same period, the highway network 

has grown more slowly, expanding from 3.5 million miles 

in 1960 to 4.1 million miles in 2009, an average increase 

of about 0.3 percent per year (see Figure 1-1). The 

increase in vehicle miles traveled relative to the number 

of miles of public roads has led to more congestion and 

renewed interest in expanding the capacity of the highway system.

In the United States, highway projects are carried out primarily by governments and paid for by taxpayers and 

users. Such projects include the building, widening, and 

resurfacing of roads as well as the construction and rehabilitation of bridges and tunnels. In some cases, private 

firms may carry out those projects as contractors on 

behalf of the public sector. However, state and local governments typically determine which projects to undertake 

and how much to spend on them, although the federal 

government may influence those decisions through the 

funds it provides for certain types of projects. In 2010, 

those governments together spent an estimated $160 billion to build, operate, and maintain roads; the federal 

government’s share amounted to about one-quarter of 

that amount.3

 (Data on actual spending in that year by 

state and local governments are not yet available.)

Other than as contractors, private firms have played only 

a very small role in the provision of highways, for several 

reasons:

 Highways display, at least to some degree, characteristics of “public goods.” Usually, such goods are not 

profitable for the private sector to provide because 

once they have been built, it can be difficult and costly 

to keep consumers from using them or to charge for 

their use. In addition, the use of a public good by one 

consumer may not alter the benefits it can provide to 

another consumer. 

 It is not practical to have competing networks of roads 

because they are costly to build although relatively 

inexpensive to operate and maintain. In many 

instances of such “natural monopolies,” governments 

directly provide the goods or services or closely regulate the providers. 

 The benefits of a highway—for instance, in promoting commerce—may extend beyond the place where it 

is built and beyond the people who travel on it. However, because private firms cannot easily charge for 

such benefits, the private sector often ignores them in 

deciding whether to invest in particular projects. 

Budgetary constraints at all levels of government in recent 

years have sparked interest in the use of new—that is, 

1. Department of Transportation, Federal Highway Administration 

and Federal Transit Administration, 2008 Status of the Nation’s 

Highways, Bridges, and Transit: Conditions and Performance—

Report to Congress, www.fhwa.dot.gov/policy/2008cpr/pdfs/

cp2008.pdf.

2. Department of Transportation, Federal Highway Administration, 

Highway Statistics Series (various years), www.fhwa.dot.gov/

policyinformation/quickfinddata/qftravel.cfm.

3. For more information on that spending, see Congressional Budget 

Office, Public Spending on Transportation and Water Infrastructure

(November 2010).
2 USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS

CBO

Figure 1-1.

Miles of Public Roads in the United 

States and Vehicle Miles Traveled, 

1960 to 2009

(Millions) (Trillions)

Source: Congressional Budget Office based on data from the 

Federal Highway Administration.

private—sources of financing and control of highway 

projects. In particular, some observers have suggested that 

public-private partnerships—in which private firms take 

on joint responsibility with governments for several elements of the projects, such as design and construction or 

operations and maintenance—might increase the 

resources available for financing roads. Similarly, they 

have argued that additional private involvement will 

make the projects more efficient by allowing them to be 

completed more quickly or at a lower cost. This Congressional Budget Office (CBO) study assesses those claims 

by addressing two main issues: whether public-private 

partnerships can increase the amount of financing available for highway projects (discussed in Chapter 2) and 

whether such partnerships can provide highways more 

efficiently than the traditional public-sector approach 

(examined in Chapter 3).

The Traditional Approach

Highway projects comprise five major stages of activity—

typically referred to as design, build, finance, operate, and 

maintain—that either the public or the private sector can 

carry out (see Table 1-1). The traditional approach to 

such projects, sometimes called the design-bid-build 

method, is the most common means used to provide 

highways in the United States.4

 Under that approach, a 

government agency—for example, a state department of 

transportation or other public authority—may design 

the highway, provided that the agency has the necessary 

experience and capabilities, or it may contract with a private company for such services. In most cases, the agency 

then contracts with a different private business, chosen 

through a bidding process, to construct the road. Subsequently, the public agency is responsible for operating 

and maintaining the highway, although, again, many 

state and local governments contract with private businesses for those purposes.

Under the traditional approach to providing highway 

infrastructure, the public sector manages the project and 

bears nearly all of the risks associated with it. Most contracts for highway projects provide for payments based on 

the contractor’s costs rather than on a fixed price; as a 

result, governments retain the risk of cost overruns, delays 

in the construction schedule, problems with the quality 

of the design or with the road’s construction, and, in the 

case of toll roads, shortfalls in the road’s revenues. Correspondingly, contractors have only limited control over 

the characteristics of a project—for example, the design 

of a bridge or the depth of a road’s pavement—and the 

public agency retains the right to make changes to such 

features even after work has begun. In such instances, 

contractors typically do not bear the risk of an increase in 

their costs from the changes but instead pass on the 

increase to the public agency. 

For highway projects carried out through the traditional 

approach, the federal government and state and local governments provide financing from a variety of sources. 

The funds that the federal government allocates to highway projects come primarily from taxes on gasoline and 

diesel fuel (18.3 cents and 24.3 cents per gallon, respectively). Receipts from those taxes and from others, such as 

taxes on truck tires and on motor vehicles heavier than 

55,000 pounds (which cause the most damage to highways), are credited to the Highway Trust Fund, an 

1960 1968 1976 1984 1992 2000 2008

0

1

2

3

4

5

0

1

2

3

4

5

Miles of Public Roads

(Left scale)

Vehicle Miles Traveled

(Right scale)

4. In the early years of the 20th century, federal law required that 

each phase of a highway project be carried out through a separate 

contract. In the ensuing decades, state and local governments took 

up that approach, and it became the nearly universal method of 

providing highways in the United States.
CHAPTER ONE USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS 3

CBO

Table 1-1. 

Stages and Types of Activities Involved in Providing Highways

Source: Congressional Budget Office.

account in the federal budget that tracks certain highwayrelated revenues and expenditures.5

 Since 2008, however, 

those tax receipts have not been sufficient to cover 

spending from the trust fund, and lawmakers have supplemented them with an additional $34.5 billion in other 

funds from the Treasury.6

States (and, in some cases, localities) combine federal 

funds with their own to pay for highway projects.7

 States 

differ in the types of funds they use for highways and how 

they determine which projects they will carry out. All 

states collect revenues from gasoline taxes, which range 

from 8 cents per gallon in Alaska to about 50 cents per 

gallon in California. (The average state and local gasoline 

tax is 31 cents per gallon.)8

 Some states also use vehicle 

license fees, highway tolls, and other taxes (such as 

driver’s license fees) to pay for highway projects. Whenever current revenues are insufficient to finance the 

construction of new roads, as is often the case for large 

projects, states finance that construction through borrowing—specifically, by issuing bonds. Repayment of that 

debt is typically backed by states’ general revenues, 

although in some instances, tolls or other kinds of revenues may be used unless a state’s laws prohibit that 

approach. 

Public-Private Partnerships

In public-private partnerships, the role of and the risk 

borne by private firms are greater than they are under the 

traditional approach. Such arrangements bundle certain 

elements of the project (for example, financing, operations, and maintenance) and transfer responsibility for 

implementing them, together with the risks those tasks 

entail, to a private partner; the partner then receives compensation in the form of direct payments from the public 

Stage Activities

Design Completing plans for the project, which includes producing architectural drawings and selecting construction materials 

and the construction site.

Build Constructing the road, which includes reviewing conditions at the building site, providing construction staff and 

materials, selecting equipment, and, when necessary, amending the design to address problems discovered during the 

construction phase. 

Finance Providing capital for the project, which may include issuing debt or equity and verifying the feasibility of plans for 

repaying debt or providing returns on investment.

Operate Ensuring the continuing performance and availability of the highway, which includes removing debris and snow and 

collecting tolls and data on traffic.

Maintain Keeping the project in a state of good repair, which includes filling potholes, repaving or rebuilding roadways, and 

ensuring the integrity of bridges and highways. 

5. For additional details, see Congressional Budget Office, Alternative Approaches to Funding Highways (March 2011). 

6. Government Accountability Office, Highway Trust Fund: Nearly 

All States Received More Funding Than They Contributed in 

Highway Taxes Since 2005, GAO-10-780 (June 2010), 

www.gao.gov/new.items/d10780.pdf.

7. Under the Federal-Aid Highway program, most of the federal 

money provided to states must be matched by money from state 

or local governments—typically at a 20 percent matching rate. 

(For each dollar of highway spending, at least 20 percent must be 

from state or local sources; 80 percent at most comes from the federal government.) In some instances, such as for safety programs, 

the matching rate for states is lower than 20 percent. 

8. CBO’s calculation of that average is based on American Petroleum 

Institute (API), “Gasoline Taxes: Combined Local, State, and 

Federal (Cents per Gallon)” (May 2011). The institute’s estimate 

of the average tax per gallon in each state includes the federal tax 

of about 18 cents per gallon; CBO excluded that amount in calculating the average. API’s estimate also includes gasoline taxes, sales 

taxes, and other levies imposed by state or local governments. 

Taxes on gasoline are calculated on a cents-per-gallon basis. Sales 

taxes and other levies, which are calculated as a percentage of the 

purchase price, were converted by API to a cents-per-gallon basis. 
4 USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS

CBO

Table 1-2.

Value of Contracts Covering PublicPrivate Partnerships for Highway 

Projects, January 1989 to June 2011

(Billions of 2010 dollars)

Source: Congressional Budget Office based on “U.S. Transportation P3 Projects, 1989–2011,” Public Works Financing, 

vol. 261 (June 2011), pp. 22–24.

Notes: Only projects with a value greater than $50 million are 

included in the table.

iROX = interstate roadway expansion; HOT = high occupancy/toll.

a. Covers projects with and without a warranty in which 

the contractor guarantees the integrity and quality of 

the finished product.

sector—usually a state government—or the right to collect tolls. In accepting those risks, the private partner 

expects that the compensation it has been promised will 

be sufficient to provide a rate of return on its investment 

that is as good as or better than the rate it would receive 

from alternative investments. 

Some observers apply the term “public-private partnerships” only to projects that include capital from private 

sources. For this study, however, CBO has adopted a 

broader definition of the term to include any contractual 

arrangement that transfers more risk from the public 

sector to the private sector than is the case under the 

traditional (design-bid-build) approach. That definition 

allows consideration of potential increases in efficiency 

from the private sector’s involvement in ways that do not 

include private financing.

Three main types of public-private partnerships have 

been used for highway projects in the United States: 

 Design-build projects, the most common type of 

public-private partnership, are set up as fixed-price 

contracts between one private entity and a public 

agency to jointly manage the design and construction 

of a new road. Under such an arrangement, the private 

party accepts most or all of the risk of increases in 

costs associated with the project.9

 Financing comes 

from tax revenues or tolls, and the public partner 

retains ownership of the highway and control of its 

financing, operations, and maintenance. According to 

Public Works Financing, a monthly newsletter that has 

reported on public-private partnerships for roughly 

25 years, private firms and government agencies 

jointly undertook 55 design-build projects with a 

value of $50 million or more between July 1989 and 

June 2011 (see Table 1-2).

10

25.0

0.5

Largest Projects

I-15 Reconstruction (Utah) 1.8

State Highway 130, Segments 1 to 4

(Texas) 1.6

Alaska Way Viaduct (Washington) 1.4

3.1

0.3

Largest Projects

I-75 Collier/Lee County

(Florida) 0.5

Route 3 North (Massachusetts) 0.5

I-75 iROX (Florida) 0.4

12.7

1.3

Largest Projects

I-635 LBJ Freeway (Texas) 2.6

North Tarrant Express (Texas) 2.1

I-495 HOT Lanes (Virginia) 2.0

40.8

Average 0.5

All Projects

Average

All Projects

Average

All Projects

Projects (Number: 10)

Operate-Maintain

Design-Build-FinanceProjects (Number: 76)

Total Public-Private 

Projects (Number: 11)

Design-Build-Finance

Value of Contract

Design-Build Projectsa

(Number: 55)

All Projects

Average

9. In some projects, the private partner also provides a warranty 

guaranteeing the integrity and quality of the finished product. 

10. See “U.S. and Canadian Transportation Projects Scorecard,” 

Public Works Financing (June 2011). The scorecard reports only 

projects whose value exceeds $50 million.
CHAPTER ONE USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS 5

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 The same type of contract that is used for a designbuild effort can be used in a design-build-finance 

arrangement except that in this case, the private partner provides the necessary up-front capital and is 

generally repaid through tolls or by a state or local 

government in a series of installments. Between July 

1989 and June 2011, public-private partnerships 

undertook 11 design-build-finance projects with a 

value of $50 million or more.

 The broadest private role encompasses the elements of 

the design-build-finance structure but also includes 

operations and maintenance performed by private 

firms. Those types of partnerships, known as designbuild-finance-operate-maintain arrangements, use the 

same kind of contract as that used for design-buildfinance projects except that in this case, the private 

partner agrees to perform operations (such as the 

removal of snow and debris and the collection of tolls) 

and carry out maintenance on the highway for a specific period. The contract spells out how the private 

partner is to be repaid for up-front and ongoing 

expenses through future tolls or other fees imposed on 

users of the road or through “availability payments” 

from state or local governments, which are financed by 

receipts from income or other taxes that are not linked 

to the use of the road. (Such projects may also be 

called build-own-operate-transfer partnerships 

because the private partner initially builds and owns 

the road but then transfers ownership to the public 

partner.) Between July 1989 and June 2011, publicprivate partnerships undertook 10 privately financed 

projects with a value of $50 million or more involving 

private responsibility for operations and maintenance.

The type of organization that serves as the private partner 

in a public-private partnership varies widely depending 

on the size of the project and the scope of the private sector’s role. For design-build public-private partnerships, 

the private partner in many cases is a joint venture 

between a design firm and one or more construction 

firms; occasionally, one firm provides both services. In 

many partnerships that include private financing, those 

joint-venture entities contract with banks or other private 

lenders to provide capital. For highway projects that 

include operations and maintenance, the private partner 

is generally a consortium of firms, led by a project development and management company that in many 

instances is a large multinational corporation. That company delegates such tasks as construction, operations, and 

maintenance to subsidiary firms or other parties and 

bears most of the risks associated with the project. 

When a public-private partnership is in place, the private 

partner has a greater incentive to manage any risk that it 

bears—such as the chance that aspects of the project will 

be more expensive than it had anticipated—because it 

cannot pass the costs on to the public partner. In return 

for bearing that additional risk, the private firm requires 

more control over the project; it also has an incentive to 

expend more effort in controlling costs and avoiding 

delays in the schedule than it would have as a contractor 

working under the traditional approach. (See Box 1-1 for 

a discussion of ways to evaluate the efficacy of using a 

public-private partnership.)

Public-private partnerships have a greater chance of being 

successful if the public partner can foster substantial 

competition among private firms for the partnership 

contracts. Competition among firms, through a bidding 

process to receive a contract for the right to serve a market, for example, conveys many of the same advantages 

(such as lower prices) that may accompany competition 

among multiple firms in any market. In particular, competition among firms for contracts for highway projects 

encourages those businesses with a “production advantage”—for example, those with the greatest capability to 

carry out the bundled tasks that are part of the project—

to offer a bid that shares any possible benefits of a 

partnership arrangement (such as lower costs) with the 

public partner or risk losing the bid.11

The use of public-private partnerships for highway projects has become more widespread in the United States in 

recent years, but other countries have been using the 

approach regularly for such projects for at least the past 

20 years (see Appendix A). In the United States, state and 

local governments have also used public-private partnerships for other kinds of infrastructure projects—for 

example, for public buildings, such as schools, hospitals, 

and prisons; rail systems; and water and wastewater projects. Between 1985 and 2010, the value of the contracts 

for those U.S. projects totaled about $36 billion (in 2010 

dollars), an amount similar to the value of contracts 

11. R. Richard Geddes, The Road to Renewal: Private Investment in 

U.S. Transportation Infrastructure (Washington, D.C.: AEI Press, 

2011), p. 54.
6 USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS

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Continued

Box 1-1.

Deciding Whether to Undertake Public-Private Partnerships

A government that embarks on a highway project 

faces a choice between the traditional approach, in 

which a state or local government assumes most of 

the responsibility for carrying out the project and 

bears most of its risks (for example, of cost overruns), 

and an alternative method such as a public-private 

partnership, which may secure financing for a project 

through private sources and require a private firm to 

assume greater responsibility than under the traditional approach for carrying out the work. For a 

public-private partnership to be successful, the public 

and private partners should both be better off having 

entered the partnership than they would have been if 

they had chosen an alternative approach or project. 

In practice, that means that the private partner 

receives a return from its investment in the project 

that is better than the return from other potential 

investments carrying similar risks; it also means that 

the public partner procures the highway more 

quickly, more cheaply, or with less risk than it would 

by using the traditional approach and still meets its 

other goals. The path to those outcomes is laid out in 

the partnership contract, which allocates the project’s 

risks and responsibilities to the various partners. 

To decide whether to undertake a public-private 

partnership, some states have used a public-sector 

comparator (PSC). A PSC is a process for estimating 

the full cost of providing a highway in the traditional 

manner, which a state can then use as a basis of comparison with the cost of providing it through alternative methods. The PSC involves calculating the net 

present value of the costs for the road during its entire 

life cycle—an approach that includes assigning 

explicit costs to the risks associated with the project 

(for example, the risk of unforeseen conditions at the 

highway site), which the traditional method of estimating a project’s costs often ignores.1

 That can be a 

complicated process: Projected costs must be estimated and discounted to provide a calculation that is 

comparable for the traditional and alternative 

approaches. When implemented correctly, a PSC aids 

in evaluating the potential efficacy of a public-private 

partnership. It can also be used to test the financial 

viability of the project beforehand, eliminating from 

consideration projects whose revenues would be 

insufficient to attract a private partner.

Gathering data for a PSC can be costly and timeconsuming, however—taking as long as several 

months, depending on the specifics of the project, 

and sometimes requiring the help of outside experts.2

As a result, states and local governments do not 

always make use of such a tool. Estimating the cost of 

a highway relatively early in a project’s development 

requires many assumptions to be made and makes the 

1. The present value is a single number that expresses a flow of 

current and future income (or payments) in terms of an 

equivalent lump sum received or paid today. PSCs are discussed in Organisation for Economic Co-operation and 

Development (OECD), “The Economics of Public-Private 

Partnerships: Is the PPP Route the Best Alternative?” in 

Public-Private Partnerships: In Pursuit of Risk Sharing and 

Value for Money (Paris: OECD, 2008), p. 72.

2. Kevin Davis, “PPPs and Infrastructure Investment,” Australian Economic Review, vol. 38, no. 4 (December 2005), 

pp. 439–444.
CHAPTER ONE USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS 7

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Box 1-1. Continued

Deciding Whether to Undertake Public-Private Partnerships

process more complex, costly, and uncertain than it 

would be if the calculations were done later, when 

more information (such as the bids submitted for carrying out the project) was available. But if the estimated cost of providing the highway is calculated 

later in the development process, and if the conclusion reached from the PSC is different from the initial choice for managing the highway project, then 

some expenses (such as those associated with analyzing the project and formulating proposals) would 

already have been incurred and could not be 

recouped. Given the extra expenses associated with 

implementing a PSC, its use seems to be more costeffective with larger projects than with smaller ones.

In addition, the calculations involved in a PSC are 

not always straightforward, and errors are possible. 

For example, the agency might choose an incorrect 

discount rate for future costs, which could lead to 

misleading conclusions. The agency might also mistakenly exclude or poorly measure the cost of certain 

risks or double-count some benefits (such as a savings 

in time) or costs. Although tools such as the PSC can 

help guide decisions, their results are sensitive to 

a variety of assumptions about the project (for 

example, which partner bears certain risks and the 

transferability of risk between partners), which makes 

sensitivity analyses particularly valuable. Thus, if a 

certain type of risk is hard to measure and the results 

of a completed PSC suggest that a particular type of 

approach to a project is preferable, a sensitivity analysis can show whether that outcome (which type of 

approach is preferable) changes when different estimates of that risk are used. 

But assessing which approach is preferable for a 

project does not necessarily indicate whether the 

project itself is worthwhile or more worthwhile 

than alternative projects. That judgment requires 

measuring the benefits and costs of a project, evaluating not only its local effects but also its effects across 

the entire highway network. The broader focus of a 

benefit-cost analysis can be an advantage. A criticism 

of public-private partnerships is that they will be 

most applicable to projects with the greatest potential 

for profit, not necessarily those of the greatest social 

value. If decisionmakers relied too heavily on profitability as a criterion and by extension on publicprivate partnerships to execute infrastructure projects, they might select only profitable projects and 

ignore those that could deliver broader benefits for 

the highway network or the economy. 

Even so, benefit-cost analyses of highway projects 

have drawbacks as well and are little used by states 

and local governments except for large or otherwise 

prominent projects. In particular, they require a substantial amount of information that is difficult to 

gather, especially that concerning a project’s potential 

benefits for the private sector and for society over 

long periods. Much of that information may be 

unavailable or difficult to develop. But even in cases 

in which relevant data exist, the estimates produced 

from those data are necessarily uncertain because 

even small changes in demographics and patterns of 

travel can significantly affect such findings. 
8 USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS

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for public-private partnerships for highways during that 

period.12

The number and costs of the public-private partnerships 

used in the United States during that period have varied 

by the type of infrastructure involved. The most common 

application of the public-private approach has been in the 

construction of buildings, including schools, courthouses, and corrections facilities. Since 1985, 158 of 

those projects have been undertaken as public-private 

partnerships, with an average contract value of just under 

$60 million. Measured in terms of costs, contracts for 

partnerships for transit and rail projects have generally 

been larger than partnerships for projects in other categories of infrastructure: From January 1985 to October 

2010, 20 rail projects were undertaken as public-private 

partnerships with contracts averaging slightly more than 

$660 million each. Water and wastewater projects—

141 projects over the period—involved smaller contracts, 

averaging about $100 million. 

12. “2010 Roads, Rail, Water, Buildings PPPs by Region (Cumulative 

Since 1985),” Public Works Financing (October 2010), p. 2.
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2

Private Financing of Highways

Under the traditional approach to highway projects, a state or local government uses some combination 

of its own tax receipts, any federal grants that it receives, 

and money that it borrows—usually by issuing bonds—

to provide financing for a road. In contrast, a publicprivate partnership that includes private financing 

borrows money in private capital markets or raises equity 

from investors, with the expectation that the project’s revenues, provided either by a state or local government or 

through tolls on the road, will cover the project’s costs.1

Those costs include a competitive rate of return to the 

holders of debt and equity—that is, a rate of return as 

good as or better than what those investors could receive 

on alternative investments of comparable risk. 

The case is sometimes made that using funds from private capital markets to finance roads can increase the 

resources available to build, operate, and maintain roads. 

But the sources of revenues available to pay for the cost of 

a highway project—whether it uses the traditional financing approach or a public-private partnership—are the 

same: specifically, tolls paid by users or taxes collected 

by either the federal government or by state and local 

governments. Therefore, absent restrictions on governments’ ability to borrow, there is no difference between 

the amount those governments could raise themselves 

and the sums that public-private partnerships could raise 

because the same resources are available to remunerate 

investors in either case. Even so, the type of financing 

used for a project can affect the cost of obtaining that 

financing as well as the total expenditures on the road. 

In order to properly assess the difference in costs between 

securing financing through the traditional approach (generally as public debt) and obtaining it by private means, it 

is necessary to account not only for the interest paid on 

money borrowed for the project but also for the costs 

associated with the risks borne by taxpayers and the costs 

of financial transfers—in the form of subsidized interest 

rates and advantageous tax treatment—from the federal 

government to states and localities. If such a comprehensive measure is used, the costs of private and public 

financing are roughly comparable.2

 Any differences in 

costs, then, between traditional and private financing 

would stem from the impact of incentives and specific 

conditions in the contract governing a project, factors 

that would affect the actions and decisions of both public 

agencies and private firms.

The Availability of Financing

Private financing is unlikely to increase the availability 

of funds for highway projects because revenues from taxpayers and from users of the highway are the source of 

repayment regardless of the financing mechanism chosen 

for the project. However, in some cases, private financing 

could allow states and localities to overcome certain legal 

constraints and budgetary practices that may restrict their 

ability to carry out such projects. Many of those governments have statutory or constitutional limits on how 

much they can borrow. Although some of those limits are 

informal or easily bypassed, others are enforced more 

stringently by, for example, restricting the amount of 

debt that a state may incur without the approval of voters 

or requiring a supermajority in the legislature to bypass 

the limit. The state of Maryland, for example, uses debtmanagement guidelines that its legislature can bypass 

relatively easily. In contrast, states such as Idaho and Iowa 

1. Equity and, more specifically, equity investments refer to the 

funds provided by the class of investors that, in the event of the 

project’s default and only after all liabilities are discharged, is the 

last to receive payments. Those investors bear the greatest risk of 

not receiving a return on their investment and therefore only 

invest when they expect a rate of return large enough to compensate them for that added risk.

2. Tim Jenkinson, “Private Finance,” Oxford Review of Economic 

Policy, vol. 19, no. 2 (2003), pp. 323–334.
10 USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS

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are less able to borrow money because they require voters’ 

approval to issue general-obligation debt backed by the 

full faith and credit of the state. 

When those limits would constrain state and local governments from carrying out highway projects, alternative 

approaches that relied on private debt or equity might 

become more attractive. For example, the rules governing 

a state’s budgetary practices may require that funds provided through the traditional approach—that is, by issuing bonds—be counted against such limits. But those 

rules may not require that a comparable obligation taken 

on by a public-private partnership be similarly counted—

even though, as discussed later, taxpayers or users of the 

highways have similar liabilities in either case.

Measuring the Cost of Financing

A fundamental question about public-private partnerships that use private financing is whether the private 

approach can reduce the cost of a project’s financing, and 

thus its total costs, when compared with traditional 

financing. Answering that question requires a comprehensive measure of the cost of financing, which should 

encompass the following:

 The cost of the risk borne by taxpayers, including the 

required returns on the investments of all claimants to 

the revenues from the project, whether they be debt 

holders or equity holders (the taxpayers, in the case of 

publicly financed projects); 

 The cost of interest subsidies provided when interest 

rates are lower than they would otherwise be, either 

because the federal government provides financing at 

lower-than-market rates or because the interest paid 

on municipal debt is tax-exempt; 

 The forgone revenues from depreciation allowances 

that allow the private partner to reduce its federal 

income tax liability; and 

 Transaction costs, such as the cost to issue bonds, the 

cost of monitoring and enforcing the terms of contracts, and any legal costs associated with obtaining 

the financing. 

Broadly speaking, the comprehensive cost of financing a 

highway project privately is usually about equal to the 

cost of financing it through the traditional public 

approach if the cost of providing taxpayers with a fair 

return on their equity investment is taken into account. 

The Cost of the Risk Borne by Taxpayers

In evaluating projects that are financed in the traditional 

way, many analysts have assessed only the cost of the 

interest to be paid on bonds issued by the state or local 

government. But the interest rates on those bonds typically do not incorporate the cost of the risks inherent in 

the project that the bonds are being used to finance. The 

rates tend to be low because the bonds are backed by the 

general taxing authority of the government; investors 

generally do not require higher returns to compensate 

them for the project’s risk of default because the cost of 

that risk is borne by taxpayers rather than the lender. (In 

addition, as discussed later, because the interest on many 

such bonds is tax-exempt, the rate of interest that bondholders receive can be lower than what they would 

require to lend in the private markets.) 

However, the cost of financing a project that has risks 

associated with it can never be measured entirely by the 

cost of debt whose repayment is guaranteed by a government. Revenues from a project might exceed the promised payments on the project’s debt, and those revenues 

would become available to finance other public purposes 

or reduce taxes. But revenues might also fall short of 

promised payments on the debt, in which case the government would have to raise taxes or reduce spending to 

make up for the shortfall. Thus, some form of explicit or 

implicit equity investment is necessary to absorb the difference between the cash flows that are expected and 

those that will be realized. For investments in highway 

construction that are financed by public debt, taxpayers 

play the role of equity holders, benefiting from greaterthan-expected revenues but also absorbing the risk of 

shortfalls in receipts. A comprehensive measure of financing costs takes into account the cost of such equity 

financing, even when it is provided indirectly by taxpayers. That cost is equivalent to the return that a private 

investor would require to finance such a project. 

Interest Subsidies

In general, the interest rate that a private lender charges, 

among other things, compensates for the risk that the 

borrower might default on the loan—the greater the 

perceived risk, the higher the rate charged. Whenever a 

government lends funds to other governmental entities or 

to the private sector at interest rates lower than those that 

would be offered on investments of similar risk in com-
CHAPTER TWO USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS 11

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petitive private markets, it is providing taxpayer-funded 

subsidies. For instance, the federal Transportation Infrastructure Finance and Innovation Act (TIFIA) program 

allows state and local governments as well as private entities to obtain financing for up to a third of a qualifying 

project’s cost from the federal government in the form of 

loans or loan guarantees. Those loans are made at the 

interest rate paid on Treasury securities, despite the fact 

that such projects are considerably more likely than the 

Treasury to default.3

The federal income tax exemption for interest on municipal bonds is another way in which projects’ interest costs 

can be subsidized. The cost of that exemption should be 

part of a comprehensive measure of financing costs but is 

not always included in such calculations. The interest 

rates that states and localities pay on the municipal bonds 

they issue understate the full cost of that method of 

financing. Rates on those bonds are lower than on private 

debt that is otherwise comparable because investors 

accept the tax advantage in lieu of a higher interest rate. 

Tax-exempt debt thus creates savings for the state or local 

government, but it creates costs for the federal government in the form of forgone revenues.4

Such subsidies distort decisions about which projects to 

finance and what approach to use in doing so. For riskier 

projects, the difference between the rate at which a 

governmental entity can borrow and the rate a private 

borrower must pay—which reflects default risk as well as 

the federal tax exemption—is larger. When a government 

lends funds to project managers at its (lower) cost of borrowing, it is accepting those greater risks, basically by 

providing larger subsidies on riskier loans, which creates 

an incentive for investments in riskier projects. 

Moreover, in many cases, the different approaches to 

financing a project are evaluated at least in part by 

comparing the interest rates that a state would have to 

pay to borrow money with the rates that a private 

partner would have to pay. Subsidies conveyed through 

government-provided financing discourage the use of 

private financing because those who lend to a private 

partner will require a rate of return that reflects the 

unsubsidized cost of a project’s risk. Such subsidies are 

particularly distorting in cases in which it would be more 

efficient to use private financing. For instance, private 

financing, with its heightened exposure to the risk of 

losses, might improve the incentives for a private firm to 

carry out a project in the most efficient way possible.

Depreciation

Another factor that may not be considered in measuring 

the cost of financing stems from the way the tax code 

treats depreciation in the value of assets. A private 

partner that leases a road for a long period—for example, 

99 years—owns the road for tax purposes. The tax code 

allows that private entity to reduce its federal income tax 

liability by depreciating the value of the highway (the 

asset) over a period of years.5

 Under such an arrangement, 

the tax treatment of depreciation reduces federal revenues 

compared with what they would have been if the road 

had been under traditional public ownership, a loss that 

should also be included when comprehensively measuring the cost of financing for a highway project. The tax 

advantage that depreciation represents cannot be claimed 

by a state or local government; however, the private partner may share the tax benefit with the state or locality by 

offering larger payments when bidding on a project, so as 

to win the contract. 

3. The TIFIA program provides credit assistance to finance surface 

transportation projects of national and regional significance. Eligible applicants include state departments of transportation, transit 

operators, special authorities, local governments, and private entities. TIFIA loans have parity with other “senior debt” (that is, the 

debt first in line for repayment) in cases of bankruptcy, insolvency, 

or liquidation, but they are “junior” in their claim on cash flows 

from projects in default. To keep the subsidy relatively low, the 

TIFIA program is restricted to investment-grade projects (those 

for which the ratings agencies have rated the senior debt obligations at or above a certain grade—BBB- from Standard & Poor’s 

or Baa3 from Moody’s). TIFIA is found at 23 U.S.C. §§ 601 et 

seq. (2006); 112 Stat. 241; 119 Stat. 1239, 1246–1247; 120 Stat. 

1338; 122 Stat. 1577.

4. Not all of the gains accrue to the state. Bondholders in higher tax 

brackets can lower their tax liability by holding tax-exempt bonds. 

According to several studies, about 20 percent of the revenues that 

the federal government forgoes accrues to bondholders instead of 

to the state or locality that issues the bond, thereby costing the 

federal government more than the aid that is provided to the state 

or local government. See Congressional Budget Office and Joint 

Committee on Taxation, Subsidizing Infrastructure Investment with 

Tax-Preferred Bonds (October 2009), p. 34.

5. Most assets lose their value over time—in other words, they depreciate—and must be replaced once the end of their useful life is 

reached. In accounting terms, depreciation is a noncash expense 

that reduces the value of a company’s asset as a result of wear 

and tear, age, or obsolescence. Because it is a noncash expense, 

depreciation lowers the company’s reported earnings but does not 

diminish its cash flow. 
12 USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS

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Transaction Costs

Financial transactions such as the issuing of bonds also 

involve costs, which may differ depending on whether a 

project is publicly or privately financed. Some states, for 

example, enjoy administrative economies of scale because 

they issue large volumes of bonds on a continuing basis. 

(Among the most frequent issuers in 2010 was the state 

of California, with 76 different bond issues valued at 

about $38 billion in total; in those transactions, the state 

made use of the experienced staff and debt-issuing capabilities of the state treasurer’s office.)6

 Even so, some 

private companies, particularly large ones, might incur 

lower transaction costs for financing debt than state and 

local governments would incur. That is because municipal bond markets are subject to less-stringent regulation 

and weaker disclosure requirements than are the markets 

for private debt. As a result, risk is less transparent, and 

lenders in many cases protect themselves against unforeseen losses by demanding higher interest rates than they 

might ordinarily require. That caution has led to periods 

in which governments paid a premium, compared with 

what private firms would pay, to issue municipal bonds.

States that choose private financing through a publicprivate partnership may also pay higher monitoring and 

legal costs than they would have paid had they chosen 

traditional financing, although such costs generally 

account for only a small portion of total expenditures on 

a project.7

 Contracts that establish public-private partnerships are likely to contain many more provisions than do 

contracts for traditionally financed projects, especially 

when private financing is involved. Stipulations about 

competing roadways and limits on the value of tolls pose 

some of the larger complications involved in partnership 

contracts and have in some cases (for example, the SR-91 

Express Lanes project in California, discussed later) led 

to protracted legal battles that increased the costs associated with a project. A comprehensive measure of a project’s financing costs should take those transaction and 

contract-related monitoring costs into account. 

How Financing Can Affect Participants’ 

Incentives 

Although the comprehensive costs of financing a highway 

project with private capital or with public borrowing are 

largely the same, the incentives associated with private 

financing may encourage the partners in the project to 

reduce its costs and shorten its schedule. In particular, 

giving a private partner an equity stake in a project as well 

as control over the project’s execution generally encourages more efficient management than the traditional 

approach affords. Under the traditional approach, a contractor may have only a limited incentive to control costs 

because cost increases in many cases can be passed on to 

the government. In contrast, holders of equity claims 

usually have more of an incentive to control a project’s 

costs because they are the last to be paid on a project and 

will receive a payment only if the cash flows—from the 

state or local government directly or from toll revenues—

are sufficient to cover costs. (Chapter 3 further examines 

the effects of incentives in controlling the costs and speed 

of completion of highway projects.) 

However, equity financing is not the only way to provide 

incentives to contractors to manage projects efficiently. 

Governments can use the traditional approach in conjunction with other mechanisms to achieve the same 

ends. Alternatives include incentive payments or penalties 

that are contingent on the private contractor’s meeting 

specific milestones regarding costs or the project’s 

completion. 

Experience with Private Financing of 

Highway Projects

Only a small number of highway projects in the United 

States have involved public-private partnerships that 

included private financing. Assessments of those projects 

indicate that such partnerships may accelerate the provision of financing—for example, by circumventing states’ 

financing limits—but they do not generally result in 

additional financing. Of the projects that have been completed, most of those that were financed through tolls 

have failed financially because the private partners overestimated the revenues that the project would generate 

and were thus unable to fully repay the project’s debt. 

Perhaps in response to that history, projects that are still 

under construction rely less on tolls for revenue; more 

commonly now, private partners are compensated 

through a state’s general revenues, thus limiting their risk 

6. California State Treasurer’s Office, Public Finance Division, Investor Relations, “California Transactions by Issuer: January 1, 2010, 

Through December 31, 2010.”

7. Such costs might include fees paid to consulting firms and third 

parties (sometimes law firms) to measure traffic and review 

regional development plans to determine their effect on toll 

revenues. In cases in which payments are not made on time, those 

costs might comprise legal representation as well.
CHAPTER TWO USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS 13

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of not being repaid. Public-private partnerships have also 

increasingly replaced the funds obtained through private 

means (at market rates) with tax-exempt bonds or bonds 

that provide a credit against taxes owed. That change has 

brought the projects more in line with the traditional 

approach, lowering the private partners’ costs at the 

expense of federal taxpayers and increasing the amount of 

the government’s implicit equity and risk. In doing so, 

newer projects may have diminished the incentives associated with private financing to control costs and complete the project quickly. 

The history of privately financed roads in the United 

States encompasses 21 projects that have either been 

under way or completed during the past 20 years. The 

value of the contracts for those projects totals $16 billion, 

a little more than one-half of 1 percent of the approximately $3 trillion that all levels of government spent on 

highways over the period. (Both of those amounts are in 

2010 dollars.) On the basis of data from a study done for 

the Federal Highway Administration, researchers have 

estimated that between 1996 and 2006, 50 to 75 miles 

per year of new urban limited-access highways were privately financed through public-private partnerships that 

relied on tolls to provide returns on investments.8

 That 

volume of construction accounted for between 30 percent and 40 percent of new capacity for such highways. 

In the past few years, the number of partnerships for road 

projects that have private financing has increased; almost 

70 percent of the $16 billion in contracts has been committed since January 2008.

Some of the arrangements that are considered to be private financing are, however, fundamentally forms of public financing. For example, of the 21 privately financed 

public-private partnership projects, 7 are part of a designbuild-finance program in Florida. Under that program, 

private firms finance each project entirely with private 

debt, which is to be repaid over a predetermined time—

usually five years—with future grants from the federal 

government and the state and with revenues from tolls 

paid by users of the completed road. The guaranteed 

repayments through the state eliminate much of the 

transfer of risk that takes place with other projects that 

use private financing. Thus, the financing for those projects is essentially public, and the public-private partnership structure of the 7 projects is similar to that of the 

design-build approach.

In the remaining 14 privately financed projects, the 

amount of risk that was transferred to the private partner 

varied from project to project. In some instances, the 

financial risk was still borne primarily by taxpayers, who 

were responsible for repaying debt incurred by the private 

partner. In other instances, the private partner bore all of 

the risk of the investment—specifically, that its money 

might be lost if the project did not produce the revenues 

that were expected. Over the past 20 years, 8 of the projects, which vary in size but which all involve contracts of 

more than $50 million, have been completed. Six such 

projects are still under construction.

Completed Projects

A review of the eight completed projects offers little evidence that public-private partnerships provide additional 

resources for roads except in cases in which states or localities have chosen to restrict their spending by imposing 

legal constraints or budgetary limits on themselves (see 

Table 2-1). To varying degrees, all eight projects that 

made use of private financing took place in states in 

which legislatures could have issued bonds to finance the 

work through traditional means. In some cases, however, 

the use of a public-private partnership accelerated the 

project’s access to financing by circumventing restrictions 

that some states have imposed on themselves and that 

limit their ability to issue additional debt. (Earlier financing of a road project adds value when it allows the public 

to enjoy the benefits of the new road sooner than would 

otherwise be possible.) 

63-20 Corporations. Three early projects (financed 

between 1998 and 2002) that have been completed used 

a financing structure similar to the traditional public 

approach in that the projects used bonds issued by a 

semipublic agency—a so-called 63-20 corporation.9

Under such an arrangement, a nonprofit entity—jointly 

8. See Benjamin Perez and Steve Lockwood, Current Toll Road Activity in the U.S.: A Survey and Analysis” (prepared for the Office of 

Transportation Policy Studies, Federal Highway Administration, 

August 2006), www.fhwa.dot.gov/ipd/pdfs/toll_survey_0906.

pdf; and Robert Poole, “Tolling Is the Key to Adding Highway 

Capacity,” Surface Transportation Innovations, No. 31 (Los Angeles: Reason Foundation, May 1, 2006), reason.org/news/show/

surface-transportation-innovat-30. Urban limited-access highways 

exclude rural and suburban roads, where tolls are unlikely to yield 

sufficient revenues, and roads that have lower traveling speeds and 

numerous intersections, where toll operations would be more difficult and costly. 

9. The corporations were established on the basis of the Internal 

Revenue Service’s 1963 revenue ruling 63-20 (Rev. Rul. 63-20, 

1963-1 C.B. 24).
14 USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS

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Table 2-1. 

Completed Highway Projects That Used Public-Private Partnerships with 

Private Financing

Source: Congressional Budget Office.

Note: DBF = design-build-finance; DBFO = design-build-finance-operate; TIFIA = Transportation Infrastructure Finance and 

Innovation Act.

a. A 63-20 corporation is a nonprofit entity that is allowed to issue tax-exempt bonds to finance tangible public assets.

b. The Atlantic City-Brigantine project relied on a casino’s future contribution to the Casino Reinvestment Development Authority as well as 

on funds from the South Jersey Transportation Authority and the New Jersey Transportation Trust Fund Authority. 

managed by the public and private sectors—is set up to 

issue tax-exempt bonds (63-20 corporations have no 

equity) to “finance tangible public assets.” Projects 

financed through 63-20 corporations must repay the corporation’s bondholders from a stream of revenues (either 

tolls or other state funds) in the same manner that states 

must repay bondholders who purchase municipal debt. 

Given the governmental involvement in the formation 

and management of 63-20 corporations and the ways in 

which they are used, it is questionable whether their borrowing should necessarily be considered “private financing,” especially in cases in which states are ultimately 

responsible for servicing the debt. 

The 63-20 mechanism was initially of interest to some 

state legislators because the bonds’ tax exemption (like 

that for municipal bonds) allowed bondholders to take 

advantage of a federal subsidy and because in many states 

such debt was not constrained by regulations or limits on 

borrowing. The Southern Connector in South Carolina, 

the Pocahontas Parkway in Virginia, and Route 3 North 

in Massachusetts were all financed through 63-20 corporations. The source of repayment for the bonds for the 

first two projects was revenue from tolls; the source for 

the third was annually appropriated state funds.

However, since those projects were undertaken, the 63-20 

corporate structure has not been used, for several reasons. 

Because the corporations do not have an equity stake in 

any project, bondholders retained the risk associated with 

the project but had no ability to control the project’s outcome. Conversely, the private firms that managed the 

projects had only weak incentives to perform the work 

efficiently because they were not exposed to the risk of 

439 153 91 147 247 655 481 400

56 31 18 0 0 0 0 209

0 0 0 0 0 0 0 165

0 0 0 285 0 0 0 0

Total Project Cost 495 184 109 432 247 655 481 774

Pocahontas Expressway

No

No

Yes

No

Yes

No

Financial Structure and History

Tolls

Yes

No

No

South Bay

DBFO

10

Colombia Route 3

2002

Va.

DBF

16

Lanes Bypass Tunnel Connector Parkway 

2007

Calif.

Tolls

DBFO

10

Taxes

DBF

21

Tolls/Taxes

DBF

Tolls

DBFO

9

Yes

Tolls

DBFO

22

No

Yes

Tolls

(S. Section)

1995

Va.

1995

Calif.

2000

Tex.

2001

S.C.

2001

N.J.

2005

Mass.

Greenway North

Description of the Project

Otherb

Public Buyout of Private Partners 

Bankruptcy Declared

Private

Public

Debt

Equity

TIFIA program

Atlantic CityBrigantine

2

No

No

Express

Sources of Financing (Millions of 2010 dollars)

No No No

No

No

No

No

No

Yes

Southern

63-20 Corporationa

Date of Opening

Location

Sources of Revenues

Type of Public-Private Partnership

Length of the Road (Miles)

Yes

Camino

Dulles

DBFO

14

Tolls

SR-91
CHAPTER TWO USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS 15

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shortfalls in revenue (only the bondholders faced that 

risk). Bondholders on the Southern Connector project, 

for example, have borne the full risk that revenue from 

tolls might not meet expectations. Thus, when toll 

collections were less than anticipated, the state of South 

Carolina provided no assistance to supplement the 

revenues that went to the 63-20 corporation, and the 

bondholders bore the cost of the revenue shortfall. In 

contrast, the bondholders on the Route 3 North project 

have borne no such risk because the project’s financing 

structure makes it similar to that used in the traditional 

approach: The repayment of bondholders is contractually 

set and annually apportioned by the Massachusetts legislature from the state’s general fund. (In that case, the 

63-20 corporation effectively circumvents the state’s limits on debt.) Another reason for the recent lack of use of 

the 63-20 structure is that, as special entities, the corporations incur additional costs for issuing and managing 

debt, compared with costs under the traditional approach 

to financing. 

Projects Financed with Private Equity. Of the remaining 

five completed projects with private financing, four made 

use of private equity financing, transferring the risks 

related to their schedules and costs to the private sector. 

The three earliest projects—the Dulles Greenway, the 

SR-91 Express Lanes project in California, and the 

Camino Colombia Bypass in Texas—transferred the most 

risk by using a mix of private debt and equity rather than 

public funds. Financing for the South Bay Expressway, in 

San Diego, comprised mainly private equity and debt but 

also took advantage of the federal subsidy inherent in 

using funds from the TIFIA program. (The Atlantic 

City-Brigantine Tunnel project in New Jersey transferred 

even less risk to the private partner because its financing 

approach included no private equity; instead, the project 

was financed partly through private debt and partly 

through taxes.)10

The four projects that involved private equity have not 

been successful in managing the risks of private financing, especially when returns to investors were based on 

toll revenues. The SR-91 Express Lanes project has been 

the most financially successful but only after an extensive 

legal fight that centered on the public partner’s desire to 

add lanes without tolls (which would have affected the 

private partner’s revenues from the lanes with tolls). The 

road was built in 1995 for about $135 million ($183 million in 2010 dollars); the controversy over the additional 

lanes subsequently led to the road’s being sold to the 

Orange County Transportation Authority, a public 

agency, in 2003 for $208 million ($244 million in 2010 

dollars).11 The other projects—the Dulles Greenway, the 

Camino Colombia Bypass, and the South Bay Expressway—also relied exclusively on tolls to repay their financing, and they have all experienced traffic and revenues 

that were less than projected by as much as 50 percent, 

leading to bankruptcy for the South Bay Expressway and 

the Camino Colombia Toll Road and periods of losses for 

the Dulles Greenway. The South Bay Expressway, which 

had received some financing from the federal TIFIA program, illustrates what can happen to taxpayers as the ultimate equity holders. The project filed for Chapter 11 

bankruptcy in March 2010, finally emerging in May 

2011. The new financing and ownership structure 

required by the bankruptcy court imposed a loss of 

42 percent on federal taxpayers, replacing the original 

TIFIA investment with a package of debt and equity 

worth only 58 percent of the original investment.12

With the exception of the SR-91 Express Lanes, private 

equity investors’ expectations of profitability for the projects have been unfulfilled. That outcome may partially 

explain why, since 2002, no major highway projects in 

the United States have been financed exclusively through 

private sources. 

Ongoing Projects

New public-private partnerships have sought to reduce 

their borrowing costs by relying on publicly subsidized 

borrowing through the TIFIA program and through private activity bonds (PABs) issued by local municipalities 

10. The Atlantic City-Brigantine Connector project relied on a 

casino’s future contribution to the Casino Reinvestment 

Development Authority as well as funds from the South Jersey 

Transportation Authority and the New Jersey Transportation 

Trust Fund Authority.

11. Robert W. Poole Jr., Orange County’s 91 Express Lanes: A Transportation and Financial Success, Despite Political Problems, Policy 

Brief 39 (Los Angeles: Reason Foundation, no date).

12. Randall Jensen, “Tollway Exits Chapter 11: TIFIA Ends Up Taking a Haircut,” Bond Buyer (May 6, 2011).
16 USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS

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Table 2-2. 

Ongoing Highway Projects That Use Public-Private Partnerships with 

Private Financing

Source: Congressional Budget Office.

Note: HOT = high occupancy/toll; DBFO = design-build-finance-operate; DBFOM = design-build-finance-operate-maintain; TIFIA = Transportation Infrastructure Finance and Innovation Act.

a. A private activity bond is a bond issued by or on behalf of a local or state government to finance the project of a private business. 

b. Mostly loans or grants from states or localities. 

(see Table 2-2).13 All of the six ongoing projects have 

made use of federal subsidies through TIFIA. That choice 

of financing constitutes a return to some features of the 

traditional approach in which the public sector retains 

greater risks, especially the risk of default, as in the South 

Bay Expressway bankruptcy. Ongoing projects have 

secured nearly a third of their financing from the TIFIA 

program, just short of the maximum share that the program allows. In addition, all but one of the projects have 

secured loans or grants from states or localities as part of 

their financing. 

Three of the six ongoing projects have covered some of 

their financing needs by using PABs, whose tax advantages lower the private partner’s debt-service payments. In 

the other three cases, though, project managers responsible for a project’s financing have had to take out bank 

loans. That source of private capital had become more 

attractive than usual for project managers because during 

the recent economic downturn, the yields for bonds in 

municipal bond markets, including those of PABs, greatly 

increased relative to those on alternative investments, 

making it more costly to finance projects by using bonds. 

At the peak of the financial market’s troubles in late 

2008, the interest rate offered on municipal bonds had 

increased by nearly 4 percentage points relative to the 

TIFIA program’s financing, which is perceived to be a 

safer alternative. That rise in rates reflected people’s concerns about the ability of state and local governments to 

pay off the bonds they were issuing. 

Expected Completion Date

0 787 700 0 344 0

357 219 216 429 81 677

601 608 439 655 344 857

601 0 0 401 0 611

417 234 0 578 312 494

Total Project Cost 1,976 1,848 1,355 2,064 1,081 2,639

2009

Otherb

Private Financing

Start of Construction

Location

Sources of Revenues

Type of Public-Private Partnership

Length of the Road (Miles)

Debt

Equity

Public Financing

TIFIA program

Private activity bondsa

DBFO

14

2008

2013

I-495

Description of the Project

2014

Fla.

Tolls/Taxes

HOT Lanes Lanes

Va.

Tolls

5 and 6) Tunnel Freeway

I-595 North

Managed

SH-130

(Segments

40

Port of

Miami I-635 LBJ

13

2010

2015

Tex.

Tolls

DBFOM

2010

2014

Fla.

Taxes

Express 

Tarrant

Sources of Financing (Millions of 2010 dollars)

DBFO

1

2011

2015

Tex.

Tolls

DBFO

13

DBFO

11

2009

2012

Tex.

Tolls

DBFO

13. A private activity bond is a bond issued by or on behalf of a local 

or state government to finance the project of a private business. By 

giving some PABs tax-preferred status—generally by making the 

bonds’ interest tax-exempt—the federal government provides a 

form of credit assistance.
CHAPTER TWO USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS 17

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Holders of private equity remain the residual claimants 

on those ongoing projects, but the equity contributions 

are probably too small to insulate bondholders from the 

risk of default—and its accompanying losses—should 

the project fail. Unlike completed projects, for which private financing was a primary avenue of securing funds, 

projects currently under construction appear to use less 

private financing and to limit the use of private equity to 

a relatively small portion of the project’s total financing, 

probably as an incentive for controlling costs and completing the project on time. For example, in the Port of 

Miami Tunnel project, the equity component has shrunk 

to as little as 8 percent. The project is mainly financed by 

availability payments, in which the state takes on the risk 

that use of the road and tolls will be insufficient to repay 

investors and provides the private partner with a series of 

lump-sum payments from the state that have been determined in advance. For other ongoing projects, the equity 

component generally has remained at between 15 percent 

and 25 percent of a project’s financing. 

Another recent project in Florida, the I-595 Managed 

Lanes project, has moved to the use of availability payments to repay debt, which reduces the risk borne by the 

private sector (particularly the risk of insufficient road 

use). That project has instead employed contractual 

clauses, such as performance bonuses and penalties, to 

provide incentives to the private firm to manage the 

project in the most efficient way possible. 

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3

Private Provision of Highways

Under the traditional approach to highway projects—in which a state or local government completes a 

design for a project and then, after a bidding process, 

contracts with a private company to build the road—the 

government retains control over all elements of the project and bears the risks (for example, of cost overruns) that 

necessarily come with such an arrangement. That greater 

degree of control under the traditional approach allows 

the government to be flexible in responding to changing 

circumstances, such as greater-than-anticipated demand, 

that may affect costs of the project that are not generally 

considered by the private sector (including the costs to 

third parties, such as users of the road, who would face 

delays if the road was built with insufficient capacity). 

But the government’s control also increases the potential 

for inefficiency—for example, in the form of problems in 

transferring information, say, from the designer to the 

builder. 

In contrast, a public-private partnership can reduce the 

risk borne by the government on a project by shifting a 

substantial portion of that risk from the government to 

the private entity. Through contracts that bundle two or 

more elements of the work, the project may be completed 

more quickly or more cheaply if the greater control 

afforded the private partner through such arrangements 

gives it stronger incentives than the traditional approach 

offers to constrain costs and meet established schedules. 

But partnership contracts that achieve those goals can be 

challenging to formulate, especially in light of the lengthy 

period over which many of the contracts extend. 

A few studies have looked at the use of public-private 

partnerships as an approach to designing, building, 

operating, and maintaining highways. The research has 

found that, compared with the traditional approach, 

public-private partnerships have slightly reduced the time 

required to complete the design and construction phases 

of road projects and lowered construction costs by a small 

amount, on average. However, little attention has been 

devoted to the use of partnerships (versus the use of 

traditional contracting by the public sector) to operate 

and maintain highways. The Congressional Budget 

Office examined two highways with comparable, albeit 

limited, data on operations and maintenance provided at 

different times by public and private partners and found 

some reductions in costs under the private entities’ 

management. 

Managing Risks Through Contracts

A primary difference between using a public-private partnership to carry out a highway project and using the traditional approach is the nature of the contracts that establish the relationship between state or local governments 

and the private sector. Those contracts lay out the responsibilities of the parties as well as budgetary, legal, or other 

constraints and any required payments. They also implicitly or at times explicitly allocate the risks associated with 

a project that might lead to cost overruns and assign control for activities that might mitigate those and other 

types of risk. Under the traditional approach, with different firms providing each element of a highway project 

(design, construction, operations, and maintenance), 

the contracts that set out those responsibilities give contractors only limited incentives to consider the effects of 

their actions on the providers of the other elements. By 

comparison, the bundling of elements that characterizes 

public-private partnerships leads to contracts that reallocate the project’s risk and control and try to better align 

the contractors’ incentives with the government’s goals of 

lowering costs and completing the road quickly.

If a public-private partnership contract is to properly 

balance risk and control for the various parties, information is required about the risks that the private firm faces 

and its ability to mitigate them. That information, however, may be known only to the firm because it may be 
20 USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS

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proprietary; alternatively, it may be unknown in advance 

to any of the parties. Properly allocating control over the 

tasks necessary to complete a project is tied to the allocation of risk; more specifically, a private firm is generally 

willing to accept additional risk only if it can limit that 

risk and is granted sufficient control to do so. But such 

transfers of control may raise concerns about a state or 

local government’s ability to protect the public’s interests. 

Thus, in creating a contract that effectively aligns private 

incentives with the project’s public goals, the public and 

private partners face two primary areas of concern: issues 

related to information and incentives and issues related to 

control.

Information and Incentives

A common problem with the traditional method of providing highways is that it does a relatively poor job of 

addressing the risks that arise from privately held or 

incomplete information. Information known to one participant but not another may mean that a project will 

pass up the use of production options and methods that 

can reduce costs or ensure that schedules are met. An 

example is a case in which a contractor is selected before 

the design is completed. If the contractor did not share 

information about its construction capabilities—say, its 

ability to use large prefabricated building components—

the designer of a highway might forgo a lower-cost design 

that made use of such components. Conversely, if contractors competing for a job were not informed about all 

of the specific details of a design beforehand, they would 

have an incentive to build in extra charges as a cushion 

against the cost of unforeseen design features. 

Discovering such relevant information about a project 

carried out through the traditional approach can be difficult because the project’s participants may strategically 

withhold information to gain an advantage in their 

contract negotiations. A private firm that revealed its 

production capabilities and approaches might be at a 

competitive disadvantage in relation to other firms in its 

industry and find itself in a weakened bargaining position 

in relation to the government. With such information, 

the government could determine the private firm’s costs 

for completing a project and then use that information to 

pay the lowest amount at which the private firm would 

still accept the job. That advantage for the government 

would limit the private firm’s potential profits on the 

initial contract and on any additional long-term arrangement it might agree to. 

One way to address the problem of privately held 

information is to consolidate design, construction, operations, and maintenance under the control of one project 

manager. In that case, nothing would be gained by strategically withholding or misrepresenting information 

because all the potential benefits from the project would 

accrue to one party. Consolidating multiple tasks would 

also help in the coordination of a project whenever full 

and reliable information was necessary for a smooth 

transition from one task to another (such as the transition 

from the design to the construction stage). The managing 

party could be held responsible for any problems that 

arose during a transition and then work to eliminate 

them. 

The drawbacks of a lack of consolidation and coordination are laid out in a study by the National Cooperative 

Highway Research Program published in 2006. Researchers suggest that using two separate contracts (one for 

design and the other for construction of a road) imposes 

“constructability risk” on the project’s owner (the publicsector partner).1

 In other words, the owner shoulders the 

risk that the design produced for the builders is not the 

most efficient option or may not match the builder’s abilities. If such a mismatch occurs, the owner of the project 

must first pay the builder to fix the resulting problem 

and then attempt to collect any added costs from the 

designer—which may be difficult because the owner 

must first prove that the designer has legal liability stemming from a design that became more difficult and costly 

to complete than had been expected. 

A contract that consolidates responsibility for a project’s 

design, construction, operations, and maintenance in 

the hands of one contractor may also better align that 

contractor’s incentives with the project’s goals over the 

long term. Separate contracts for construction and 

maintenance may encourage the private builder to con1. See Sidney Scott III and others, Best-Value Procurement Methods 

for Highway Construction Projects, National Cooperative Highway 

Research Program Report 561 (Washington, D.C.: Transportation 

Research Board of the National Academies, National Cooperative 

Highway Research Program, 2006). The National Cooperative 

Highway Research Program, created in 1962, conducts research 

in acute problem areas that affect highway planning, design, 

construction, operation, and maintenance nationwide. It is 

administered by the Transportation Research Board and sponsored by the members (state departments of transportation) of the 

American Association of State Highway and Transportation Officials, in cooperation with the Federal Highway Administration. 
CHAPTER THREE USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS 21

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struct the road at the lowest possible cost but offer no 

incentive to consider and potentially improve the highway’s long-term performance (for example, by initially 

using more expensive but longer-lasting materials). A 

more transparent exchange of information about the 

project—specifically, the disclosure of expected long- and 

short-term project costs—between the private firm and 

the public partner might reduce the cost of operating and 

maintaining the road in the future. One study found that 

for every dollar spent on preventive maintenance, 

between $4 and $10 was saved (depending on how soon 

the maintenance was undertaken) when the road eventually had to be rehabilitated.2

 Thus, assigning the risk of 

higher long-term costs for maintenance to the builder 

through a public-private partnership contract would provide the incentive to use whatever materials or methods 

would minimize such costs over the entire life of the 

highway and not just during the construction phase. 

Indeed, using a public-private partnership to complete a 

highway project may be most cost-effective in instances 

in which potentially large savings can be gained by managing the risk of higher-than-expected costs over the life 

of the road.

Control

Transferring control of a highway project to the private 

sector, which occurs under public-private partnership 

contracts that assign responsibility for more than one 

element of a project to a single private entity, places a premium on reducing costs and meeting schedules, which in 

some cases may come at the expense of the government’s 

other goals. A prominent issue in ceding control of a 

project to the private sector is determining which partner 

should have the authority to set tolls. Transferring that 

authority to the private partner, which in many cases 

depends on toll revenues for a return on its investment, 

could result in higher toll rates that might have a disproportionately negative effect on some motorists—for 

example, low-income drivers, for whom any given toll 

represents a larger percentage of income than it does for a 

higher-income driver.3

 Even so, low-income motorists 

could gain from the more reliable travel times that higher 

tolls might induce when the value of motorists’ time was 

greatest—for example, when an individual was running 

late on the way to work or to pick up children.4

The experience of the Chicago Skyway, a highway that 

shifted from public to private control, suggests what may 

happen when toll setting is under the control of the private entity. During a period of public management, not 

only did tolls on the Chicago Skyway change infrequently 

but they actually decreased by about 25 percent in real 

(inflation-adjusted) terms between 1989 and 2004.5

 In 

contrast, under private control of the roads, tolls have 

risen by nearly 60 percent in real terms since 2005. Additional increases are scheduled to occur in the future as 

part of the agreement to transfer all authority for tolls to 

the private sector.6

 The higher tolls may have encouraged 

more efficient use of the roads, lowered the cost of operations and maintenance (by reducing the volume of traffic), and boosted revenues. Nevertheless, the transfer of 

control may have made some motorists worse off.

Transfers of control via a public-private partnership can 

end up costing the government more than it anticipates. 

For example, when conflicts over control lead to renegotiation of provisions of the public-private partnership 

contract, the government generally ends up bearing 

greater costs than those it had assumed under the original 

contract.7

2. Gilbert Y. Baladi and others, “Cost-Effective Preventive Maintenance: Case Studies,” Transportation Research Record: Journal of the 

Transportation Research Board, vol. 1795 (2002), pp. 17–26.

3. Government Accountability Office, Highway Public-Private 

Partnerships: More Rigorous Up-Front Analysis Could Better Secure 

Potential Benefits and Protect the Public Interest, GAO-08-44 

(February 2008).

4. For a discussion of that issue, see Congressional Budget Office, 

Using Pricing to Reduce Traffic Congestion (March 2009), 

pp. 12–13.

5. Government Accountability Office, Highway Public-Private 

Partnerships.

6. The public-private partnership contracts for the Skyway and for 

the Indiana Toll Road, which also shifted from public to private 

control during approximately the same period, built in a minimum increase of 2 percent but tied additional annual increases in 

tolls to the consumer price index or the nominal rate of growth of 

gross domestic product, whichever is greater. See Government 

Accountability Office, Highway Public-Private Partnerships, p. 31.

7. According to a study of eight project renegotiations in the United 

States, as of early 2011, six had been settled in favor of the private 

partner, and two were unsettled. See Eduardo Engel, Ronald 

Fischer, and Alexander Galetovic, Public-Private Partnerships to 

Revamp U.S. Infrastructure (Washington, D.C.: Brookings Institution, The Hamilton Project, February 2011), p. 11, www.

hamiltonproject.org/papers/public-private_partnerships_to_

revamp_u.s._infrastructure.
22 USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS

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Another issue in transferring greater control of a project 

to a private partner is that the public partner may reduce 

its ability to achieve other public goals. The SR-91 

Express Lanes project in Orange County, California, 

illustrates how a project’s profitability may conflict with 

the public’s interests. The contract for the project 

included “non-compete” provisions that did not allow 

competition from additional lanes without tolls (which 

would have reduced the value of the private partners’ toll 

lanes). But concerns about congestion and drivers’ safety 

led to a proposal by the California Department of Transportation to expand the number of lanes on the road that 

did not have tolls. After turning to the courts, the parties 

settled the dispute by having the Orange County Transportation Authority buy out the private partner. 

Some analysts have suggested that the terms of publicprivate partnership contracts could be designed to reduce 

the likelihood of renegotiations. One suggestion is for the 

use of present value of revenue (PVR) contracts.8

 Under a 

PVR contract, the government sets the discount rate and 

the schedule of user fees (tolls), and the potential private 

partners then submit bids for the present value of user 

fees that they are willing to accept in order to enter into 

the arrangement. The lowest bid wins, and that amount 

becomes part of the contract.9

 Such an arrangement limits renegotiations because the structure of the contract 

makes it difficult to increase the transfer of funds from 

the public to the private partner. The length of the agreement, for example, cannot be extended because it is by 

definition variable—the contract ends when the private 

firm has received the amount it had bid. Increasing user 

fees simply shortens the length of the contract without 

increasing its value. If the public-private partnership is 

profitable in the long run, PVR contracts can reduce the 

incentives of both partners to renegotiate their original 

agreement, thus constraining their legal and monitoring 

expenses for the project. 

Experience with Public-Private 

Partnerships for Highway Projects

Because public-private partnerships have played a small 

role in providing U.S. highway infrastructure over the 

past 20 years, only limited data are available about their 

effectiveness in reducing costs and providing roads more 

quickly by comparison with the traditional approach. 

Federal agencies collect little information about whether 

highway projects are completed on-budget and on time, 

and states vary in the kinds of data they collect. The discussion that follows relies on the best available evidence: 

data from the limited number of ongoing projects; evaluations by private-sector analysts and by federal, state, and 

local transportation officials who work closely with the 

projects; assessments by other experts; and published 

studies that have analyzed public-private partnerships. 

However—owing to the small number of projects in the 

studies’ samples and the difficulty in modeling what 

would have happened if a public-private partnership had 

not been used—this analysis cannot present definitive 

conclusions about the effectiveness of implementing the 

approach on a wide scale.

Providing highways through such partnerships is generally done in two stages, which can be combined in a joint 

contract but may also be carried out separately by either 

the public or the private partner: the initial design and 

construction (design-build) stage and the subsequent 

longer-term operations and maintenance stage. 

Design-Build Stage

The design-build method—involving a fixed-price contract between one private entity and a public agency to 

jointly manage the design and construction of a new 

road—is the most common framework for the various 

forms of public-private partnerships. According to the 

limited data that are available, use of the design-build 

approach appears to slightly lower the cost of highway 

projects, relative to use of the traditional approach, and 

allow their quicker completion. 

One of the larger studies on the design-build method was 

carried out for the Federal Highway Administration and 

used data from 62 design-build projects completed 

between 1990 and 2002. Managers supplied estimates of 

costs for 48 of the projects (the estimates do not appear to 

factor in the transfer of risk to the private sector); they 

also provided information about the timing of all of the 

projects’ completion. On the basis of those data, research8. The present value is a single number that expresses a flow of current and future income (or payments) in terms of an equivalent 

lump sum received (or paid) today. The present value depends on 

the rate of interest—known as the discount rate—that is used to 

translate future cash flows into current dollars. (For example, if an 

investment that will yield $100 one year in the future is discounted at 5 percent, its value today is $95.)

9. For more information on PVR contracts, see Engel, Fischer, 

and Galetovic, Public-Private Partnerships to Revamp U.S. 

Infrastructure, p. 18.
CHAPTER THREE USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS 23

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ers found that, on average, this type of public-private 

partnership reduced costs by 2.6 percent relative to managers’ assessments of what costs would have been under 

the traditional approach.10 For several reasons, however, a 

sizable amount of uncertainty surrounds that estimate: It 

depends on managers’ judgments; the sample on which it 

is based is small; and it includes findings that indicate a 

wide range of outcomes (one project was judged to be 

65 percent more expensive than if it had been provided 

through the traditional approach, whereas another was 

judged to be 62 percent less expensive). Researchers 

determined that of the 48 projects, 20 cost less than they 

would have if they had been provided through the traditional approach, 11 cost more, and 17 were completed 

for about the same cost as under the traditional method.

The study’s authors also concluded that the design-build 

approach reduced the time required to complete a project 

by 14 percent, on average, compared with the project 

managers’ estimates of how long the projects would have 

taken using the traditional approach. Of the 62 projects 

whose managers provided information about schedules, 

45 were completed more quickly than if they had been 

provided through the traditional method, 10 were 

completed in about the same amount of time, and 7 took 

longer. 

Another study, by Arizona’s Department of Transportation, found that public-private partnerships in the form 

of design-build projects had better on-time and marginally better on-budget performance compared with similar 

projects that used the traditional approach. The study 

examined 16 projects in Arizona, ranging in cost from 

$12 million to $184 million, that were undertaken 

between 1999 and 2004. Compared with outcomes 

under the traditional method, researchers found an 

average reduction of 22 percent in the duration of the 

contract and an average cost savings of 4 percent.11

Those estimated savings stemmed from fewer cost overruns under the design-build method and reductions in 

the public agency’s costs for managing and inspecting the 

project as well as from lower costs to the road’s users, in 

the form of delays and congestion (to which researchers 

assigned dollar values).

The authors took care to compare similar projects provided through the different methods, but the small 

sample made a statistically rigorous analysis impossible. 

In reporting their findings, the authors cautioned that 

not all design-build or traditional projects follow exactly 

the same procedures, pointing out that the details of how 

and when certain steps in the project take place—such as 

when the project managers receive feedback from the 

construction team—may vary even within the same type 

of approach. If, for example, the construction team for a 

bridge project is brought in during the early stages of 

design, it can suggest large-scale changes that affect the 

type of bridge to be built or the choice of materials, 

among other considerations. But if builders are brought 

in when the design is nearly completed, the range of 

changes they might suggest is necessarily more limited. 

Both projects would be considered “design-build” in 

structure, but the details of how that framework was 

implemented would affect the project’s success in controlling or reducing costs and completing the work on time. 

Those details can be a significant source of uncertainty in 

attempts to apply the results of one analysis to a broader 

group of projects. 

The savings in costs from the design-build method relative to costs under the traditional approach appear to be 

concentrated among larger, more complex projects, for 

which the problems posed by privately held or incomplete information are likely to be greater. A study by two 

large engineering firms looked at 152 highway projects 

carried out in California between 1981 and 2006.12

Researchers found that costs for 26 projects that were valued at over $100 million and used the traditional 

approach exceeded the initial cost estimates by an average 

of 25 percent. Costs for the 126 smaller, less complex 

projects that used the traditional approach came in, on 

average, below their initial projections. The FHWA study 

of public-private partnerships discussed above found that, 

according to the project managers, the design-build 

10. SAIC, AECOM Consult Inc., and University of Colorado at 

Boulder, Design-Build Effectiveness Study—As Required by TEA-21 

Section 1307(f): Final Report (prepared for the Department of 

Transportation, Federal Highway Administration, January 2006).

11. Jim Ernzen, Ron Williams, and Debra Brisk, “Design-Build vs. 

Design-Bid-Build: Comparing Cost and Schedule” (paper 

presented at the annual meeting of the Transportation Research 

Board of the National Academies, Washington, D.C., January 15, 

2004).

12. ARUP/Parsons Brinckerhoff, Analysis of Delivery Options for the 

Presidio Parkway Project (prepared for the California Department 

of Transportation and the San Francisco County Transportation 

Authority, February 2010), p. 29, www.presidioparkway.org/

project_docs/files/presidio_prkwy_prjct_bsnss_case.pdf.
24 USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS

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method produced better results for larger (more than 

$100 million in value), more complex projects than for 

smaller, less complex projects. Such results suggest that 

the incentives in a public-private partnership contract 

do more to help control costs as the size of a project 

increases, compared with outcomes under the traditional 

method. 

One reason cited for the better results from the designbuild approach was a reduction in the number of “change 

orders” that amended or added to the original scope of a 

project. In many projects that used the traditional 

approach, change orders stemmed from missing or 

incomplete information about a project’s design and were 

a significant source of cost overruns. Researchers for the 

FHWA study indicated that the move to the design-build 

approach reduced the average number of change orders 

on a project from 22 to 16.13 They attributed approximately 5 percent of the cost of a design-build project to 

change orders. Similarly, a 2009 review of in-state projects by the Utah Department of Transportation found 

that among projects that used the design-build method, 

change orders accounted for 6.5 percent of costs, versus 

14 percent of costs in projects that used the traditional 

approach. The Utah study concluded that, on average, 

the projects conducted using the traditional approach 

had overruns of approximately 11 percent in their total 

project costs—overruns that were generally borne by the 

state—whereas projects carried out using the design-build 

method had no cost overruns charged to the state.14

Whether those outcomes would be replicated among all 

highway projects, however, is unclear. If the group of 

completed public-private partnership projects differed in 

significant ways—larger volumes of traffic, for example—

from other potential projects, the above outcomes would 

probably not be repeated. Moreover, the projects already 

provided through public-private partnerships may have 

been selected on the basis of unique but unobserved characteristics that made those projects well-suited to the use 

of that method. If future projects did not share similar 

characteristics, public-private partnerships could not be 

expected to yield the same results that previous studies 

have reported.

Operations and Maintenance Stage

Studies of the operations and maintenance portion of 

highway projects have been scarce, with little analytical 

research devoted to the potential differences in efficiency 

between the traditional approach and public-private partnerships. A number of problems complicate such 

research: 

 An operations and maintenance schedule is flexible, 

so charges for operations and maintenance can be 

deferred or accelerated during a project’s lifetime. For 

example, repairs to pavement may occur yearly—or 

every two, three, or more years—yet still keep the road 

in a state of good repair. To adequately compare operations and maintenance under the design-build and 

traditional approaches would require information 

about the entire schedule (that is, over the life of the 

road). Partial data could be misleading if significant 

repairs took place before or after the period for which 

data were available. 

 The costs arising from operations and maintenance 

are determined by various factors, such as use of the 

road (especially by heavy trucks, which cause most of 

the damage to highway pavement), terrain, population 

density, and weather.15 If studies of the same highway 

under different management regimes lacked detailed 

data on traffic and other factors over a long period, 

they could produce misleading results. 

 The difficulty of assessing differences in the quality of 

the operations and maintenance activities provided 

under traditional and public-private partnership 

approaches may also lead to inaccurate or incomplete 

findings.

Two highway projects in the United States have a history 

of both public and private ownership that is long enough 

and offers sufficient data to compare costs for operations 

and maintenance. In 2005, the Chicago Skyway, built in 

1958, switched to a public-private partnership arrangement in which the private partner provides operations 

13. SAIC, AECOM Consult Inc., and University of Colorado at and maintenance; the Indiana Toll Road, built in 1956, 

Boulder, Design-Build Effectiveness Study.

14. Utah Department of Transportation, “Change Order Cost 

Percentages per Project and Cost Overruns per Project” (draft, 

Utah Department of Transportation, June 24, 2009).

15. For a discussion of the costs of pavement damage by type of vehicle, see Congressional Budget Office, Alternative Approaches to 

Funding Highways (March 2011).
CHAPTER THREE USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS 25

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switched to such an arrangement in 2006. Available data 

on the projects cover 10 years and 9 years, respectively. 

Comparing costs for operations and maintenance in the 

periods before and after the transfer of ownership, CBO 

found that by comparison with public management, 

private managers were able to reduce average annual 

expenditures by about 10 percent on both the Skyway 

and the Indiana Toll Road. (Expenditures were measured 

as the average cost per lane mile before and after the 

transfer.) Moreover, another study that assessed only the 

costs for operations on the Skyway found a decrease of 

11 percent in those costs under private management.16

(See Appendix B for details of CBO’s analysis of the two 

projects.)

Much of the reduction in costs for the projects since the 

transition to a public-private partnership structure 

appears to have come from lower labor costs: The private 

managers eliminated or reassigned many workers and 

replaced them with new employees who earned between 

25 percent and 40 percent less. Although the histories of 

both projects seem to indicate that private control may 

reduce some costs of operations and maintenance, more 

data are needed to support that result. Other factors, such 

as a reduction in the volume of commercial traffic and a 

different frequency of maintenance work, may have 

contributed to the findings. The Chicago Skyway and 

Indiana Toll Road have experienced reductions in overall 

traffic of 13 percent and 21 percent, respectively, since 

their transition to private control. Those drops probably 

reflect weak economic conditions and the increase in toll 

rates that occurred under private control.

16. Engel, Fischer, and Galetovic, Public-Private Partnerships to 

Revamp U.S. Infrastructure.

APPENDIX

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A

Public-Private Partnerships in Other Countries

International experience with public-private 

partnerships may offer some lessons regarding such 

arrangements in the United States. However, the 

approach that allows for more efficient delivery of a 

project—that is, faster delivery at a lower cost—has varied, depending on the national environment and the 

characteristics of the project. 

In the late 1980s and early 1990s, governments in Australia and the United Kingdom began to use public-private 

partnerships to systematically provide private financing 

for road and railway projects. The programs were known 

as private-finance initiatives. Once they were well established, they became the prototypes for subsequent initiatives for the construction of schools, public housing, and 

prisons and for water and waste management projects. 

The approach has become fairly common: In 2009, for 

example, local and regional governments as well as other 

public entities in the United Kingdom entered into 

52 public-private partnership contracts for projects worth 

about $8 billion.1

Partnerships in the United Kingdom and Australia have 

generally been successful in not exceeding their projected 

costs. The National Audit Office (NAO) in the United 

Kingdom studied 37 privately financed public-private 

partnerships for different types of projects and found that 

none exceeded the costs budgeted for the original scope 

of work. However, for 22 percent of those projects, costs 

were higher than anticipated because the public agency 

requested additional work that was not in the original 

specification. In contrast, an earlier NAO study found 

that 73 percent of projects provided through the traditional public approach (which is similar to that in the 

United States in its design-bid-build framework) had cost 

overruns.2

 In addition, an Australian study of 67 projects, 

which included 23 highway projects, found that publicprivate partnerships exceeded their projected costs by 

4 percent, on average, whereas traditional projects 

exceeded them by an average of 18 percent, once the contractual commitment was in place.3

The frequent use of such partnerships in those two countries has spurred the establishment of regulatory agencies 

and legislative precedents that have helped guide additional projects. In Australia, the national government set 

up Infrastructure Australia, an agency whose mission is to 

identify priorities for infrastructure projects, help secure 

private investment, and improve guidelines for the partnerships.4

 In the United Kingdom, the Treasury established a public-private partnership policy team inside 

Infrastructure UK, the national advisory entity on infrastructure. (That entity provides guidance on major projects and programs.) In addition, the private sector and 

1. Dealogic, “Dealogic Project Finance Review” (press release, 

January 11, 2010), www.legalmediagroup.com/iflr1000/gifs/doc/

DealogicGlobalProjectFinanceRev-2009.pdf. According to data 

from the U.K. National Audit Office, infrastructure spending in 

the United Kingdom is about $46 billion per year. However, that 

total is not directly comparable with the value of contracts for 

public-private partnerships because such arrangements include 

multiyear or even multidecade projects. For more information, see 

National Audit Office, Financing PFI Projects in the Credit Crisis 

and the Treasury’s Response, HC 287, Session 2010–2011 (London: 

National Audit Office, July 27, 2010). 

2. National Audit Office, PFI: Construction Performance, HC 371 

(London: National Audit Office, February 5, 2003), 

www.nao.org.uk/publications/0203/pfi_construction_

performance.aspx.

3. Colin Duffield, National PPP Forum—Benchmarking Study, Phase 

II: Report on the Performance of PPP Projects in Australia When 

Compared with a Representative Sample of Traditionally Procured 

Infrastructure Projects (University of Melbourne, December 2008), 

www.infrastructureaustralia.gov.au/publications/files/National_

PPP_Forum_Benchmarking_Study_Ph2_dec08.pdf.

4. Infrastructure Australia, “Infrastructure Australia Functions as 

Set Out in the Infrastructure Australia Act 2008” (April 2011), 

www.infrastructureaustralia.gov.au/about/functions.aspx.
28 USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS

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the government jointly provided resources to create 

Partnerships UK, a nonprofit organization meant to supplement the public sector’s efforts.

International experience with public-private partnerships 

extends beyond Australia and the United Kingdom. 

Between 1985 and 2010, about 1,500 major publicprivate partnership projects (excluding those in the 

United States) valued at nearly $653 billion were funded 

worldwide. Of that total, 580 were road projects valued 

at over $327 billion. Projects in Europe accounted for 

about half that amount—$177 billion; projects in Mexico, Latin America, and the Caribbean accounted for a 

little more than $68 billion; and projects in Asia and Australia accounted for $64 billion. Most of the rest were in 

Canada ($13 billion).5

A study that looked at public-private partnerships in a 

variety of countries found that those nations had varying 

degrees of success in establishing an entity to identify and 

prioritize projects that could benefit from the use of a 

public-private partnership approach.6

 The keys to successful functioning of such an entity, according to that 

study, were that it possessed strong support from the 

government and had the ability to keep the public and 

private partners committed to working to fulfill the 

duties they had agreed upon as parties to the partnership 

contracts. 

5. “International Major Projects Survey,” Public Works Financing, 

vol. 253 (October 2010), p. 2.

6. Apurva Sanghi, Alex Sundakov, and Denzel Hankinson, Designing 

and Using Public Private Partnership Units in Infrastructure: Lessons 

from Case Studies Around the World, Gridlines Note No. 27 (Washington: Public Private Infrastructure Advisory Facility, September 

2007), www.ppiaf.org/ppiaf/sites/ppiaf.org/files/publication/

Gridlines-27-PPP%20Units%20in%20Infra%20-%20ASanghi

%20A%20Sundakov%20DHenkinson.pdf.
APPENDIX

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B

Two Case Studies of Long-Term Lease Agreements for 

Highway Operations and Maintenance

Long-term lease arrangements are a type of publicprivate partnership that can provide operations and 

maintenance for previously completed highways through 

a private partner. Under such agreements, a private firm 

gives a state or local government an up-front payment in 

exchange for compensation in the form of a future stream 

of revenues from tolls. The private partner then assumes 

control of the project—that is, the public road—and 

takes on the responsibility for and the costs of operating 

and maintaining it. At the end of the lease period (sometimes as long as 99 years), the private partner returns 

control of the road to the government in accordance with 

the terms of the lease. Because the highway project has 

already been completed, the private partner has had no 

effect on decisions about the design of the road or its 

original construction, both of which may affect costs for 

operations and maintenance over the longer term. The 

private partner, however, having been granted responsibility for operations and maintenance and control over 

the project, has the incentive to reduce those costs going 

forward. 

Expenditures for a highway’s operations and maintenance 

may differ under public versus private control. Those differences have two primary explanations. 

 Public project managers may choose an approach to 

and schedules for maintaining the highway that differ 

from those a private project manager would employ, 

which will affect costs. For example, in many cases, 

smaller, more regular repairs are a more cost-effective 

approach to road maintenance than are larger, irregular repairs, but they may be less common when a road 

is under public control because of states’ and localities’ 

budgeting practices. Some of those governments 

primarily allocate the limited funds they have available 

for operations and maintenance to major reconstructions at the expense of small annual repairs. 

 Public project managers might choose a different 

approach to setting and collecting tolls than a private 

manager would, which will affect how many drivers 

use the road and when they do so. For example, if the 

private entity increased tolls, drivers would be encouraged to use alternative roads. That would reduce 

traffic on the toll road (thus lowering the cost of operations) and also lessen wear and tear (lowering the cost 

of maintenance)—but some of those lower costs 

would come at the government’s expense because they 

would be shifted to other roads. 

Analyses of the potential differences in the cost of operations and maintenance when a road is under public versus 

private control are limited by a lack of data. Few roads 

in the United States are operated and maintained by a 

private entity, and even fewer have been under private 

control long enough to have amassed a number of years 

of operations and maintenance data. Information is available for only two projects, the Chicago Skyway and the 

Indiana Toll Road. Both were originally operated and 

maintained by public-sector agencies and then shifted to 

private control. That change provides a unique opportunity to compare operations and maintenance performed 

by public and private managers on the same highway.

The Chicago Skyway

The Chicago Skyway—an eight-mile toll bridge that 

connects a major urban expressway to the Indiana 

Toll Road—was built in 1958; its operations and 
30 USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS

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Figure B-1.

Public Versus Private Costs per 

Lane Mile to Operate and 

Maintain the Chicago Skyway

(Thousands of 2010 dollars)

Source: Congressional Budget Office based on City of Chicago, 

Chicago Skyway: Comprehensive Annual Financial 

Report (2001 to 2004); and Macquarie Atlas Roads, 

“Chicago Skyway: Financials” (2005 to 2010);

www.macquarie.com/mgl/com/mqa/asset-portfolio/

chicago-skyway. 

Notes: Lane miles are a measure of road length that reflects the 

number of miles in each driving lane. For example, two miles 

of a four-lane highway equal eight lane miles.

The data for 2004 include one-time additional operating 

costs, such as auditing and legal fees, relating to the transfer 

of ownership.

maintenance were initially managed by a public authority. In 2005, the city of Chicago entered into a long-term 

lease agreement with a private partner to operate and 

maintain the Skyway. That agreement was the first longterm lease of an existing toll road in the United States. 

Between 2001 and 2003—a period for which data are 

available and during which the Skyway was publicly managed—average annual expenditures for operations and 

maintenance per lane mile totaled $261,000 (in 2010 

dollars).1

 During the 2005–2010 period, after the private 

company took over, such expenditures were an average of 

10 percent lower, at $234,000 (in 2010 dollars), than 

they were from 2001 to 2003 (see Figure B-1).2

Some of the decline in average annual costs under the 

private managers—specifically, for the years 2008 to 

2010—could be explained by the recent economic downturn. Passenger traffic accounts for the majority of transactions on the Skyway (a transaction occurs each time a 

toll is levied); between 2006 and 2010, those transactions 

fell by 13 percent, from 16.2 million to 14.1 million. 

Commercial traffic, which includes pavement-damaging 

heavy trucks, saw a 40 percent decrease in transactions, 

from 2.2 million to 1.3 million. In addition, operational 

changes were made, such as technological improvements—a more modern toll-processing system—and a 

reduction in the number of employees, which could have 

reduced expenditures for operations and maintenance.

The Indiana Toll Road

The Indiana Toll Road, which was completed in 1956 

and is 157 miles long, runs along the northern border of 

the state, connecting the Chicago Skyway in Illinois to 

the Ohio Turnpike. In 2006, the state of Indiana entered 

into a long-term lease agreement with a private firm to 

operate and maintain the Indiana Toll Road. That transfer of management allows a comparison of costs under 

public and private control. 

Unlike the Chicago Skyway, the Indiana Toll Road has a 

number of comparable public roads for which data are 

readily available—specifically, state turnpikes.3

 That 

second set of data could shed some light on broader economic trends that may affect operations and maintenance 

costs; it may also help prevent the incorrect attribution 

2001 2003 2005 2007 2009

-0

150

200

250

300

350

Skyway Concession

Company LLC (Private)

City of Chicago

Skyway (Public)

1. Lane miles are a measure of road length that reflects the number 

of miles in each driving lane. For example, two miles of a fourlane highway equal eight lane miles.

2. Macquarie Atlas Roads, “Chicago Skyway: Financials” (2005 

to 2010), www.macquarie.com/mgl/com/mqa/asset-portfolio/

chicago-skyway. The calculations presented here exclude data 

from 2004 because of the one-time additional operating costs—

such as auditing and legal fees relating to the transfer of 

ownership—which were borne by the public managers. Those 

additional costs drove up expenditures for operations and maintenance for that year to $298,000 per lane mile, according to annual 

reports for the Skyway produced by the city of Chicago.

3. The Chicago Skyway, which is basically an intracity freeway 

bridge, has a cost structure different from that of turnpikes, which 

may comprise hundreds of lane miles of road built mostly overland.
APPENDIX B USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS 31

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Figure B-2.

Operations and Maintenance Costs per Lane Mile for the Indiana Toll Road and 

Selected State Turnpikes

(Thousands of 2010 dollars)

Source: Congressional Budget Office.

Note: Lane miles are a measure of road length that reflects the number of miles in each driving lane. For example, two miles of a fourlane highway equal eight lane miles.

a. The public authority for the Indiana Toll Road was the Indiana Toll Finance Authority; the private partner is Statewide Mobility 

Partners LLC. In 2006, the Indiana Toll Road shifted from public to private management. 

of outcomes to public or private management when those 

outcomes actually stem from other factors.

Costs Under Public and Private Management

From 2002 through 2005, a period of public ownership 

of the toll road, average annual costs for operations and 

maintenance were about $65,500 (in 2010 dollars) per 

lane mile. After the shift to a private manager in 2006, 

average annual costs for the road between 2007 and 2010 

dropped to $59,200 per lane mile, a reduction of almost 

10 percent (see Figure B-2). That calculation excludes 

data for 2006, which marked the transition from public 

to private management and during which the state paid 

many of the costs for collecting tolls (such as the costs of 

labor and of operating and maintaining tollbooths) for 

the private partner. The calculation also excludes costs for 

a series of projects, undertaken before the transition year, 

which widened sections of the roadway from four to six 

lanes.4

The difference in the toll road’s costs for operations and 

maintenance under public and private control, as was the 

case for the Chicago Skyway, may be due in part to a 

0

20

40

60

80

100

Indiana Toll Roada

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0

20

40

60

80

100

Oklahoma

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0

20

40

60

80

100

Kansas

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0

20

40

60

80

100

Ohio

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

4. The costs associated with those expansions fall into the category of 

major-expense repairs and renovations, which can be considered a 

subset of more general operations and maintenance (O&M) activities. Because the expenditures for the expansions were not routine 

O&M charges, they would skew the figures upward, a common 

problem when evaluating O&M costs without using data on the 

project’s entire life cycle. 
32 USING PUBLIC-PRIVATE PARTNERSHIPS TO CARRY OUT HIGHWAY PROJECTS

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greater volume of traffic during the period of public 

control. The discrepancy may also result from higher 

toll rates during the period of private control as well as 

economywide factors, such as the recession in 2008 and 

2009. 

Comparison with Turnpikes

The Ohio Turnpike probably affords the best comparison 

with the Indiana Toll Road, for several reasons. It adjoins 

the Indiana road and, like that highway, is mostly rural, 

crosses similar terrain, and is subjected to similar weather. 

One substantial difference, however, between the Indiana 

Toll Road and the Ohio Turnpike is that the latter 

encompasses nearly twice as many lane miles.

The United States has many turnpikes, but some are not 

comparable with the Indiana and Ohio highways—for 

example, because of terrain (West Virginia), population 

density (New Jersey), or weather (Florida). Others, such 

as the Pennsylvania, Kansas, Oklahoma, and Maine 

Turnpikes, are somewhat different but can nevertheless 

provide grounds for comparison. 

Since the transfer to private ownership, the Indiana Toll 

Road has seen a gradual drop in its costs for operations 

and maintenance per lane mile: Costs were $66,300 (in 

2010 dollars) in 2005, the last year under public control, 

and dropped to $54,000 in 2010—a decrease of 19 percent. Over the same period, operations and maintenance 

costs for the Ohio Turnpike were essentially unchanged 

($85,200 per lane mile in 2005 and $85,500 in 2010; see 

Figure B-2). When results are averaged over four-year 

periods to smooth out the effects of a potentially abnormal year, the 10 percent decrease in operations and 

maintenance costs for the Indiana Toll Road under 

private control compares favorably with costs for the 

Ohio road, which remained virtually unchanged. Other 

comparable roads, such as the Pennsylvania, Kansas, 

Oklahoma, and Maine Turnpikes, also experienced fairly 

consistent or even increasing average annual costs for 

operations and maintenance during the 2006–2010 

period. 

To consider that result a conclusive argument for private 

operations and maintenance would be premature, however, because other factors—such as a larger decrease in 

traffic on the Indiana road than on comparable turnpikes—may also have had an effect. Since 2006, the 

annual number of transactions on the Indiana Toll Road 

has fallen by 21 percent. By comparison, transactions on 

the Ohio Turnpike have fallen by approximately 6 percent; the Pennsylvania Turnpike has had nearly the same 

number of annual transactions; and the number of transactions on the Kansas Turnpike has increased by almost 

2 percent. On the Oklahoma Turnpike, transactions went 

up by 14 percent; on the Maine Turnpike, they went 

down by 3 percent. Higher toll rates instituted by the private partner probably account at least to some degree for 

the relatively large drop in the number of transactions on 

the Indiana road, which has most likely led to a decrease 

in expenses for operations and maintenance. The reduction in such expenses cannot therefore be conclusively 

linked to efficiencies resulting from the transfer of control 

of the turnpike to the private sector.