Office of Inspector General

FINANCIAL ANALYSIS OF 

TRANSPORTATION-RELATED PUBLIC 

PRIVATE PARTNERSHIPS

Federal Highway Administration 

Report Number: CR-2011-147

Date Issued: July 28, 2011
U.S. Department of

Memorandum

Transportation

Office of the Secretary

of Transportation

Office of Inspector General

 

 

Subject: INFORMATION: Financial Analysis of

Transportation-Related Public Private Partnerships 

Federal Highway Administration 

Report No. CR-2011-147 

Date: July 28, 2011

From: Mitchell Behm

Assistant Inspector General for Rail, Maritime and 

Economic Analysis

Reply to 

Attn. of: JA-50 

To: Federal Highway Administrator

Between 2004 and 2006, two toll roads built in the 1950's—a 157-mile road in 

Indiana and a shorter road in Illinois known as the Chicago Skyway—were leased 

to Cintra/Macquaire, a private consortium. These leases were established through 

unique financing mechanisms known as Public Private Partnerships (PPPs). 

Under these agreements, Cintra/Macquarie made multibillion dollar payments to 

the State of Indiana and the City of Chicago, and obtained control of the Indiana 

Toll Road and the Chicago Skyway for 75 and 99 years, respectively. 

In general, PPPs create contractual arrangements between public agencies and 

private companies, and lead to greater private-sector participation in the financing 

and delivery of public projects than traditional public financing arrangements. 

These arrangements have spurred debate among stakeholders. Some question 

whether PPPs serve the public interest, while others point to PPPs as a means to 

address the nation's infrastructure funding problems. In February 2009, the 

National Surface Transportation Infrastructure Financing Commission reported 

that the nation’s surface transportation system is in “physical and financial crisis” 

due to shortfalls in Government infrastructure spending, and estimated that the 

annual average shortfall, or funding gap, from 2008-2035 would be approximately 

$138 billion.1

 

 

1

 This represents the total funding necessary to both maintain and improve the highway and transit systems, expressed 

in 2008 dollars, under the Commission's baseline revenue forecast.
2 

This report presents the results of our financial analyses of transportation-related 

PPPs. Our objectives were to: (1) identify financial disadvantages to the public 

sector of PPP transactions compared to more traditional public financing methods; 

(2) identify factors that allow the public sector to derive financial value from PPP 

transactions; and (3) assess the extent to which PPPs can close the infrastructure 

funding gap. 

To conduct our analyses, we worked with a team of contractors led by Charles

River Associates International and financial consultants, Scott Balice Strategies. 

We based our analyses on representative examples of projects that illustrate 

features of typical transportation infrastructure projects. We patterned these 

examples after, but did not exactly replicate, seven proposed or implemented PPP 

highway projects–six in the United States and one in Europe. We compared the 

cost of financing our example projects through PPPs and traditional financing. We 

conducted our analysis from the perspective of a state or local government 

decision maker selecting a financing alternative However, our analyses did not 

consider the impacts of factors such as risk sharing arrangements or the ability of 

the private sector to deliver a project more expeditiously, which can be significant, 

and are necessary to arrive at an effective financing decision. We also developed a 

flowchart of our analysis for decision makers to consider in choosing between PPP 

financing and traditional financing. Exhibit A describes our scope and 

methodology in more detail. 

RESULTS IN BRIEF

PPPs have several financial disadvantages when compared to traditional public 

sector financing. Specifically, PPPs have a higher cost of capital than traditional 

public financing, and they incur certain tax obligations that do not exist for public 

entities. PPPs experience higher costs of capital because interest on PPP debt is 

taxable while interest on municipal bonds, used by public agencies to pay for 

infrastructure projects, is tax exempt. Consequently, bond purchasers will accept 

lower returns on municipal debt in exchange for the advantages they gain from the 

tax exemptions. PPPs also face higher costs of capital because, unlike public 

financing, they involve equity investors who own stakes in the projects, share in 

the profits, and expect to earn higher rates of return for the risk they undertake. 

The private sector also must pay Federal, state and local taxes on certain assets 

and net revenues that the public sector generally does not. Our analysis found that 

the impact of these taxes on the relative value of a PPP can be as significant as the 

higher cost of capital. 

Certain private sector efficiencies can meaningfully offset PPPs' cost 

disadvantages. Principal among these efficiencies are those which lower new 
3 

facility2

 

design and construction costs, and efficiencies in revenue generation such 

as toll rate increases, decreases in toll evasions, and more profitable rest stop 

concessions. Innovative financing mechanisms may also improve PPPs' financial 

attractiveness. Two Federal programs provide access to these mechanisms—a 

program established under the Transportation Infrastructure Finance and 

Innovation Act (TIFIA), and the Department of Transportation's (DOT) Private 

Activity Bonds (PABs). The TIFIA program offers secured direct loans, loan 

guarantees and lines of credit. PABs are tax-exempt bonds issued by public 

entities to provide low-cost financing for private projects that serve a public 

purpose. Both programs can significantly lower PPPs' costs of capital, making 

them more competitive with traditional financing. In contrast, another means for 

improving the attractiveness of PPP's—efficiency in operations and maintenance 

(O&M) activities—generally does not produce savings of sufficient magnitude to 

overcome PPPs' cost disadvantages. Overall, the difference in the relative values 

that PPP financing and conventional public financing can provide must be 

determined on a project-by-project basis after careful consideration of all factors. 

We found that PPPs are not likely to significantly decrease the infrastructure 

funding gap because private sector investment in transportation through PPPs 

generally does not entail new or incremental funds. Rather, the funds paid upfront 

to the public sector under a PPP are paid in exchange for future revenues, often in 

the form of tolls. In other words, a PPP primarily changes the timing with which 

funds become available, not the amount of the funds. A PPP only provides 

additional funds to the extent that the private sector is willing to pay more for a 

project—a roadway, for example—than the public sector expects to earn from the 

project over time. According to our analysis, only two of the seven example PPP 

projects we examined would provide incremental funds directly. Our analysis also 

showed how another project could provide incremental funds through the use of 

innovative financing mechanisms. 

BACKGROUND

PPPs establish contractual arrangements between a public agency and a private 

entity. However, each agreement may assign responsibility and allocate risk 

differently. A PPP may assign the private sector responsibility for the design and 

construction of a highway link or only require the private sector to operate and 

maintain the link. Risks that may require allocation include potential construction 

cost overruns and insufficient toll receipts to pay for operations and 

maintenance (O&M). Contracts under which the private sector assumes 

responsibility for both the design and construction of a transportation facility, 

 

2

 In this report, the term “facility” refers to all types of transportation infrastructure (e.g. a bridge or road).
4 

often along with the risk of associated cost overruns, have become fairly common 

in the U.S. Apart from these contracts, at least 30 surface transportation PPPs have 

been negotiated in the U.S. in the last decade. 

States and localities currently fund over 55 percent of the investments in surface 

transportation infrastructure, either by constructing facilities on their own or by 

providing matching shares for Federal investments. Under traditional financing 

methods, state and local governments typically fund transportation investments 

with municipal bonds, which are repaid through tolls and state taxes. The Federal 

shares of highway and transit investments are paid out of the Highway Trust Fund, 

which is supported primarily by Federal fuel and related excise taxes. Large 

surface transportation facilities are frequently financed, built, maintained, and 

operated by facility-specific public entities, such as turnpike authorities, which 

have access to municipal bond markets and collect tolls. 

Our analyses compared PPPs to traditional financing and operating methods by 

performing financial valuations of representative projects under alternative 

scenarios. Specifically, we compared the value of each project when implemented 

with a PPP to its value when implemented through a public, facility-specific 

agency. Our vantage point during these calculations was that of a state or local 

government seeking to determine which financing option to use. While our general 

approach could be applied to a variety of transportation projects, we focused on 

highway infrastructure projects. We performed our analyses on example projects 

that illustrate different aspects of actual highway infrastructure projects, such as 

contract length and patterns of revenues and costs. The examples include both 

greenfield projects, which involve the construction of new facilities, and 

brownfield projects, which involve existing facilities. All examples resemble 

implemented or proposed PPP highway projects, but do not replicate them exactly. 

We did not analyze specific detailed proposals, or render judgment on them. Our 

example projects are as follows: 

1. A 40-year greenfield toll road project modeled after a proposed two billion 

dollar toll road of about 30 miles in length near Austin, Texas; 

2. A 50-year brownfield toll road project of about 550 miles in length, 

patterned after the Pennsylvania Turnpike; 

3. A 90-year brownfield toll road project under 10 miles in length, patterned 

after the Chicago Skyway; 

4. A 75-year brownfield toll road project, involving 157 miles of roadway and 

patterned after the Indiana Toll Road; 
5 

5. A 25-year brownfield toll road project involving a 1,370-mile network of 

highways in eastern France, modeled after the French highway known as 

the Autoroutes Paris Rhin-Rhone; 

6. A 50-year greenfield project involving multiple segments, and patterned 

after a proposed toll road in the Houston area; and 

7. An 80-year greenfield highway expansion project, patterned after Virginia's 

I-495 Capital Beltway and involving the addition of variably priced HOT 

lanes. 

PPPs HAVE INHERENT COST DISADVANTAGES

PPP financing faces higher costs than traditional public financing primarily for 

two reasons. First, PPPs pay higher costs for capital which results, in part, from 

the differential tax treatment of PPP and public debt. PPPs also typically 

incorporate equity financing, and equity investors generally require higher rates of 

return than are paid to debt holders. Second, the private sector must pay Federal, 

state and local taxes from which the public sector is typically exempt. 

PPPs Pay Higher Costs for Capital

PPP financing has a higher cost of capital than traditional public financing because 

interest on the debt that a PPP issues is taxable. Conversely, interest payments on

municipal bonds that public sector entities use to finance projects are exempt from 

Federal taxation and sometimes from state taxation. Bond purchasers accept lower 

returns on municipal debt than on private bonds because of the tax exemptions. 

PPP financing also has a higher cost of capital because PPPs typically incorporate 

equity financing in which investors own stakes in the projects and share in the 

profits. Investors generally expect to earn higher rates of return on equity 

investments than on debt investments. Consequently, the larger the equity 

component in a PPP's financing structure, the higher the cost of capital compared

to public financing. For example, for the 50-year brownfield project in Project 

Example 2, we calculated the cost of capital of PPP financing to be 7.16 percent 

and 6.29 percent for public sector financing.3

 

3

 We incorporated multiple factors in our derivations of these estimates. For PPP options, these factors included 

shares of debt and equity, debt structure, and likely ratings of project bonds. For public sector options, they included 

availability of junior versus senior debt, presence or cost of bond insurance, and yield on municipal bonds.
6 

The disadvantage of the cost of capital in PPP financing has a greater impact on 

greenfield projects than on brownfield projects, primarily because of the 

greenfield projects' more uncertain revenue streams. This uncertainty leads equity 

investors to demand even higher rates of return. For example, using similar market 

transactions as a guide, we imposed a 16.0 percent cost of equity on the 40-year 

greenfield project in Project Example 1. This cost was much higher than the 12.5 

percent cost of equity we assumed for the 50-year brownfield project in Project 

Example 2. With the same financing structure, this difference resulted in a cost of 

capital of 8.21 percent for the greenfield project compared to 7.16 percent for the 

brownfield project. 

The valuations of greenfield projects are also more sensitive to the cost of capital 

than those of brownfield projects.4 A greenfield project's construction costs occur 

early on, and consequently are discounted relatively little. The revenue stream, on 

the other hand, is comparatively small in any given year and stretches out over the 

life of the project, so its present value is significantly affected by discounting. 

Increases in the cost of capital translate into increases in the discount rate. 

Increases in the discount rate reduce the present value of a greenfield project's 

revenue stream much more than the present value of the project's construction 

costs. By comparison, a brownfield project's costs, primarily O&M expenditures, 

are spread out over time, so discounting reduces them in a manner similar to 

revenues. 

The impact of a PPP's cost of capital on its valuation also increases with the length 

of the project contract. The farther in the future that revenues and costs occur, the 

more discounting affects their present values. Because of the difference in 

discount rates, future net revenues are discounted more heavily for PPPs than for 

public sector financing. As a result, long-term PPP projects face larger 

disadvantages than short-term PPP projects in providing the value when compared 

to the value available through traditional public sector financing.

The Private Sector Pays Taxes That the Public Sector Does Not 

The Federal, state and local taxes on certain assets and net revenues that the 

private sector must pay constitute another cost disadvantage for PPP financing 

compared to traditional financing. The public sector is typically exempt from such 

taxes. In Figure 1 on the next page, we illustrate the impact of different tax rates 

on the values of two PPP projects compared to the values of their publically-

 

4

 To see this difference in sensitivity, it is necessary to understand the basis of project valuation. Valuations of 

multi-year projects are quoted in terms of "present values"—their lump-sum worth today—in order to make them 

comparable. In financial analyses, the determination of today's value of a revenue or expense occurring in the future 

is accomplished by discounting the revenue or expense at a rate equal to the cost of capital. Since interest, or the cost 

of capital, compounds over time, revenues and expenses are discounted more heavily the further in the future they 

occur. See the Scope and Methodology section for further discussion of present value.
7 

-0.5

0.0

0.5

1.0

1.5

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Net Contribution Ratio

 

50-Year Brownfield (Example 2)

-0.5

0.0

0.5

1.0

1.5

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Net Contribution Ratio

 

50-Year Greenfield (Example 6)

financed alternatives. To do this comparison, we use a measure called the net 

contribution ratio. We calculate this ratio by dividing each PPP's value by the 

value that we would obtain using the public sector financing alternative. A net 

contribution ratio greater than one for a PPP means that the PPP yields greater 

value than the public sector option, whereas a net contribution ratio of less than 

one indicates that the PPP yields less value than the public sector option. Figure 1 

shows that the PPP projects' net contribution ratios, and consequently their relative 

values, decline rapidly as tax rates increase. 

Figure 1. Private Tax Rate Sensitivity

Source: OIG analysis

The PPP tax disadvantage is greater at lower costs of capital. Taxes constitute a 

stream of expenses incurred only by the private sector. When these future costs are 

discounted less heavily, they contribute more substantially to the difference 

between the present values of the PPP and public sector alternatives. Figure 2 on 

the next page illustrates this effect using net contribution ratios in which the 

denominator is the value of a public sector alternative with a fixed cost of capital 

(the public sector base case). In this instance, we also calculate the net 

contribution ratios for public sector options with different costs of capital. As the 

cost of capital falls, the valuations of both the PPP and the public sector option 

increase relative to the public sector base case. However, the PPPs' net 

contribution ratios rise more slowly than those of the public sector options. This 

slower rise is caused by an increase in the impact of the tax streams on the PPP 

project's valuations, an increase that results from the decline in the discount rate. 

This effect visibly expands the wedge between the relative valuations of each 

project undertaken with the different financing methods. 

Tax Rate Tax Rate
8 

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

4% 5% 6% 7% 8% 9% 11% 12% 14% 16% 20% 30%

Net Contribution Ratio

40-Year Greenfield (Example 1)

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4% 5% 6% 7% 8% 9% 11% 12% 14% 16% 20% 30%

Net Contribution Ratio

50-Year Brownfield (Example 2)

 

Private Sector Public Sector

 

Private Sector Public Sector

Figure 2. Cost of Capital Sensitivity

Source: OIG analysis

Note: Figure 2 assumes a 5% base cost of capital and residual cost of capital for the public sector base case, and a 

35% total tax rate on private sector taxable income.

EFFICIENCIES AND INNOVATIVE FINANCING PROGRAMS CAN 

OVERCOME PPPs' DISADVANTAGES, BUT NEITHER PPP NOR 

TRADITONAL FINANCING IS ALWAYS PREFERABLE

Efficiencies in the construction of greenfield projects can overcome PPPs' cost 

disadvantages, as can efficiencies in revenue generation. Innovative financing 

programs—in particular, the options available under TIFIA and PABs—can also 

offset PPPs' cost disadvantages by providing them with less costly and more 

flexible sources of capital. However, generalizations about which approach—a 

PPP or traditional financing—is more advantageous to the public sector cannot be 

made as each project has its own unique characteristics. We developed a flowchart 

of our analysis that could guide a decision maker in his or her financing choice. 

Cost Efficiencies in New Construction Projects Can Offset PPPs' Cost 

Disadvantages 

Private-sector efficiencies in new construction can sufficiently increase the 

valuation of a project undertaken with a PPP to make the PPP financing 

preferable. PPPs could be particularly preferable for greenfield projects due to the 

magnitude of new construction costs and the fact that these costs occur during the 

greenfield project's' early years.5

 

5

 The costs’ occurrence in early project years means they are not significantly discounted.

Figure 3 on the next page illustrates these 

Cost of Capital Cost of Capital
9 

effects.6 For each project shown, Figure 3 maps the changes in the net contribution 

ratio of the PPP alternative against the percentage of the public sector alternative's 

construction costs incurred by the PPP. The greater the construction cost 

efficiencies associated with the PPP, the smaller the percentage of the public 

sector alternative's construction costs it incurs, and the higher the PPP's net 

contribution ratio. The 40-year greenfield project of Project Example 1 is shown to 

achieve a net contribution ratio of one—which means it provides the same value 

as the public sector alternative—when its construction costs are 75 percent of the 

public sector alternative's construction costs. 

Figure 3. Sensitivity of PPP Valuation to Construction Cost 

Efficiencies

Source: OIG analysis

Interestingly, private sector operating cost efficiencies, even when large as a share 

of total O&M, are not major value drivers for PPP projects because heavy 

maintenance7

 and O&M costs are small relative to total project costs and revenues, 

and occur over time rather than in the early years. Consequently, O&M cost 

efficiencies have little effect on bottom line net contributions, as illustrated by the

analyses of two brownfield PPPs shown in Figure 4 on the next page.

8

 

6

 The difference between the public sector alternative and the PPP alternatives in this Figure results from the 

assumption that the PPPs face a total tax rate of 35 percent. The cost of capital is assumed not to differ between the 

public and private alternatives.

The net 

contribution ratios change very little as operating cost efficiencies increase and, in 

any case, fail to achieve a value of one over the range of efficiencies examined. 

Even the reduction of heavy maintenance or O&M costs to half their levels in the 

7

 Heavy maintenance costs are costs that are typically not part of routine maintenance costs, such as the costs of

resurfacing a road. 8

 The difference between the public sector alternative and the PPP alternatives in this Figure results from the 

assumption that the PPPs face a total tax rate of 35 percent. The cost of capital is assumed not to differ between the 

public and private alternatives.

-1.0

0.0

1.0

2.0

3.0

50% 60% 70% 80% 90% 100%

Net Contribution Ratio

40-Year Greenfield (Example 1)

0.0

0.3

0.6

0.9

1.2

1.5

50% 60% 70% 80% 90% 100%

Net Contribution Ratio

50-Year Greenfield (Example 6)

Share of Public Sector Costs Share of Public Sector Costs
10

0.6

0.7

0.8

0.9

1.0

1.1

1.2

50% 60% 70% 80% 90% 100%

Net Contribution Ratio

75-Year Brownfield (Example 4)

 

0.6

0.7

0.8

0.9

1.0

1.1

50% 60% 70% 80% 90% 100%

Net Contribution Ratio

90-Year Brownfield (Example 3)

 

 

Heavy Maintenance Cost O&M Cost

 

Heavy Maintenance Cost O&M Cost

public sector alternative is insufficient to raise PPP valuations to equal the value of 

the public sector alternative. 

Figure 4. Sensitivity of PPP Valuation to Heavy Maintenance and 

O&M Efficiencies

Source: OIG analysis

Efficiency in Revenue Generation Can Overcome PPPs’ Cost 

Disadvantages 

Efficiency in revenue generation, an important driver of the valuations of both 

brownfield and greenfield projects, can make PPP financing preferable to 

traditional financing. Efficient revenue generation may result from reductions in 

toll collection leakage,9 toll rate increases,10 or increased revenues from other 

sources, such as rest area concessions. 

Based on interviews with analysts familiar with PPP transactions and a review of 

recent PPP transactions, we assumed that private sector operators could generate 

25 percent more in annual gross revenues than public sector operators under 

similar circumstances. Under this assumption, our comparison of PPP financing to 

traditional financing for Project Example 1, a 40-year greenfield project, showed 

the PPP alternative to be preferable, and that its significant increase in the project's 

gross revenues helped to overcome the public sector’s financing cost advantage. 

The private sector’s ability to generate substantially greater toll revenues also 

contributed to PPP financing being the preferable alternative for the 50-year 

brownfield project in Project Example 2. 

 

9

 Collection leakage occurs when toll road users evade toll fees. 10 Transportation PPP projects in the U.S. are relatively new and the ability of the private sector entity to maintain a 

steady increase in toll rates over an extended period remains untested.

Share of Public Sector Costs Share of Public Sector Costs
11

Innovative Financing Can Also Reduce PPPs' Cost Disadvantages 

Innovative financing programs, which have been developed to fill market gaps and 

reduce the costs of capital associated with private investment in transportation 

projects, can reduce PPPs' cost disadvantages. The programs provide private sector 

entities with tools to raise additional funds and increase the flexibility with which 

they can use these funds. Possibilities for innovative financing exist under two 

Federal programs—the options available under TIFIA, and PABs, which are taxexempt bonds that public entities issue to provide low-cost financing for private 

projects that serve public purposes. 

TIFIA offers a number of different financing options that can help the private 

sector reduce its cost of capital, including secured direct loans, loan guarantees, 

and lines of credit. A line of credit, unlike a direct loan, allows its holder to 

borrow funds as needs arise. A loan guarantee secures a promise from a third party 

that the party will assume a debt obligation if the borrower defaults. These 

guarantees reduce investors' risks and, consequently, the interest rates they require. 

However, TIFIA credit assistance is limited to 33 percent of project costs. To 

increase private sector investment in U.S. infrastructure, the PAB program 

provides access for private developers and operators to financial products that 

offer the same tax advantages as municipal bonds, which ultimately reduce the 

private entities' costs of capital. 

These innovative financing mechanisms can significantly improve a project’s net 

earnings through their access to capital on more favorable terms. For example, in 

the 80-year greenfield project in Project Example 7, which incorporated the use of 

innovative finance techniques, the PPP's cost of capital fell to 6.28 percent 

compared to 7.61 percent without innovative financing. In this instance, the PPP 

financing alternative's capital structure included 25 percent TIFIA loans, 

25 percent PABs, 25 percent long-term corporate debt, and 25 percent equity. In 

comparison, the public sector alternative without innovative financing had a cost 

of capital of 6.29 percent. 

Figure 5 on the next page illustrates the potential impact of innovative financing 

on the net contribution ratio of PPP financing compared to traditional private 

financing for Project Example 7. The two charts show that progressive increases 

of either TIFIA or PAB financing as part of overall project financing can 

significantly increase the net contribution ratio. Moreover, as shown in Figure 6, 

also on the next page, use of TIFIA financing and PABs together increases the 

asset's valuation even more.
12

-1.00 -0.50 0.00 0.50 1.00

Traditional financing

5% TIFIA ( 6.16% WACC)

10% TIFIA ( 6.10% WACC)

15% TIFIA ( 6.04% WACC)

20% TIFIA ( 5.97% WACC)

25% TIFIA ( 5.91% WACC)

30% TIFIA ( 5.85% WACC)

35% TIFIA ( 5.78% WACC)

With innovative financing

Net Contribution Ratio

Private Financing (18% Equity - 82% Debt)

TIFIA Sensitivity

-1

-0.5

0

0.5

1

Net Contribution Ratio

Private Financing (18% Equity - 82% Debt)

TIFIA/PAB Sensitivity

1.00 0.50 0.00 -0.50 -1.00

Traditional financing

5% PAB ( 6.19% WACC)

10% PAB ( 6.14% WACC)

15% PAB ( 6.10% WACC)

20% PAB ( 6.06% WACC)

25% PAB ( 6.02% WACC)

30% PAB ( 5.97% WACC)

35% PAB ( 5.93% WACC)

With innovative financing

Net Contribution Ratio

Private Financing (18% Equity - 82% Debt)

PAB Sensitivity

Figure 5. TIFIA/PAB Sensitivity: 80-Year Greenfield (Example7) 

Source: OIG analysis

 Note: Base case debt composition: TIFIA–37%; PAB–37%; senior debt–26%. In other words, we use the full 

innovative finance option as our base to illustrate the effects of decreasing amounts of innovative finance. 

We recognize that TIFIA financing cannot exceed 33% of project costs and it does not in our analysis. 37% 

TIFIA in our base case means 37% of the 82% of total financing comprised of debt, resulting in 30% TIFIA 

assistance in terms of total project financing costs (i.e. 37% of 82%).

Figure 6. Combined TIFIA/PAB Sensitivity: 80-

Year Greenfield (Example 7)

Source: OIG analysis

Note: Base case same as in Figure 5
13

Whether PPP or Traditional Public Sector Financing is Preferable 

Depends on Project Specifics 

Generalizations about which financing approach is more advantageous to the 

public sector cannot be made because project specifics determine which approach 

is preferable.11 The impact of input variables on net contribution ratios for PPP 

transactions in our examples illustrates this point. Figure 7 on the following pages 

shows the results of sensitivity analyses with respect to key input variables: 

concession term; toll revenues; construction cost efficiency; O&M efficiency; and, 

cost of capital.12 We varied each factor and then measured the effect on the net 

contribution ratio. Large changes in the magnitude of the Figure's bars indicate 

large effects from changes in the input variables' values. 

Figure 7 also illustrates the following points about PPPs and traditional financing: 

• Each set of variables and each variable's impact magnitudes differ 

according to project; 

• Private sector efficiencies with respect to facility O&M costs are not 

important value drivers, and, except in Project Example 2, construction cost 

efficiencies are not primary value drivers for brownfield projects; 

• Toll revenues and concession terms are important value drivers for both 

greenfield and brownfield projects, but concession terms are significantly 

less important for brownfield projects; 

• Cost of capital is a primary value driver in all our examples, except Project 

Example 5, in which the short contract term reduces its impact, and is 

especially important in greenfield projects. 

• Brownfield projects are less sensitive to changes in variables than 

greenfield projects, substantiating the fact that greenfield projects contain 

greater operational, capital and financial risks. 

 

11 The National Surface Transportation Infrastructure Financing Commission came to a similar conclusion: “[T]here is 

no overarching guide to the appropriateness of private sector financial participation. Each project’s specific 

circumstance will determine the suitability of private sector involvement.” Paying Our Way: A New Framework for 

Transportation Finance, Report of the National Surface Transportation Infrastructure Financing Commission, 

Washington, D.C., February 26, 2009, p. 177. 12 The differences between the public sector base cases and the PPP alternatives in this figure results from the 

assumption that the PPPs face a total tax rate of 35 percent. The cost of capital is assumed to not differ.
14 

-6.00

-4.00

-2.00

0.00

2.00

4.00

Net Contribution Ratio

Example 3: Brownfield, 90 yrs

Term of Concession Toll Revenues Construction Cost Efficiency

Operation and Maintenance Efficiency Weighted Cost of Capital

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

Net Contribution Ratio

Example 1: Greenfield, 40 yrs

Term of Concession Toll Revenues Construction Cost Efficiency

Operation and Maintenance Efficiency Weighted Cost of Capital

 

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

Net Contribution Ratio

Example 2: Brownfield, 50 yrs

Term of Concession Toll Revenues Construction Cost Efficiency

Operation and Maintenance Efficiency Weighted Cost of Capital

Figure 7. Sensitivity of Input Variables
15 

-6.00

-4.00

-2.00

0.00

2.00

4.00

Net Contribution Ratio

Example 4: Brownfield, 75 yrs

Term of Concession Toll Revenues Construction Cost Efficiency

Operation and Maintenance Efficiency Weighted Cost of Capital

-6.00

-4.00

-2.00

0.00

2.00

4.00

Net Contribution Ratio

Example 5: Brownfield, 25 yrs

Term of Concession Toll Revenues Construction Cost Efficiency

Operation and Maintenance Efficiency Weighted Cost of Capital

Example 6: Greenfield, 50 yrs

-20.00

-10.00

0.00

10.00

20.00

30.00

Net Contribution Ratio

Term of Concession Toll Revenues Construction Cost Efficiency

Operation and Maintenance Efficiency Weighted Cost of Capital

Source: OIG analysis 

Figure 7. Sensitivity of Input Variables (cont.)
16

Does 

Proposed 

Project 

Involve 

NEW

Construction?

NO

YES Are Construction 

Efficiencies Available?

See Figure 9 NO

YES Do Construction 

Efficiencies 

Make PPP

More 

Attractive than 

Public Funding? NO

YES

Consider Use of 

Innovative Finance to 

Further Maximize Value

Choose PPP 

Agreement *

Would Combining 

Construction Efficiencies With 

Revenue Generation 

Efficiencies make PPP more 

attractive than Public Funding?

YES

Would Combining 

Construction 

Efficiencies With 

Innovative Finance 

make PPP more 

attractive than Public 

Funding?

NO

NO

YES

Choose Public 

Financing *

Choose PPP With 

Innovative 

Financing *

Decision Makers Can Use Our Analysis to Assist in Their Selections 

of Financing Methods 

The determination of which financing method, a PPP or traditional financing, best 

meets a project's needs can be translated into a flowchart, which we developed for 

decision makers, as depicted in Figures 8 and 9. The first point of comparison, 

shown in Figure 8, concerns whether or not a project involves new construction. 

If so, the decision maker must determine whether or not a PPP will provide 

construction efficiencies. If construction efficiencies exist, then the question 

becomes whether or not they are large enough to make the PPP more attractive 

than the public alternative. If they are of sufficient scale, then the PPP is the 

preferable solution. However, if they are not large enough to overcome the

inherent advantages of the traditional option, then the PPP's construction 

efficiencies and any efficiencies in revenue generation should be considered, since

the combined efficiencies may make the PPP the better choice. 

Figure 8. PPP vs. Traditional Financing: New Construction

* Consideration of all other factors, including risk allocation, is critical before making a sound final 

project delivery method decision. 

Source: OIG analysis
17

If the combination of construction and revenue efficiencies does not outweigh the 

public option's advantages, then the addition of innovative financing could make 

the PPP more attractive. If the combination of efficiencies and innovative 

financing cannot achieve the value that the traditional public financing alternative 

can, then public financing provides the more cost advantageous approach. 

If no efficiencies in construction are available, then the question becomes whether 

efficiencies in revenue generation can be found under a PPP. Figure 9 illustrates 

the decision making process in this situation. If existing efficiencies are sufficient 

to make the PPP option more attractive than the public sector alternative, the PPP 

should be chosen. When efficiencies in revenue generation are present but are not 

of sufficient size to make the PPP a better value, then the addition of innovative 

financing should be considered. If the combination cannot overcome the

traditional option's value, then public financing is the best choice. 

Figure 9. PPP vs. Traditional Financing: Revenue Efficiencies

* Consideration of all other factors, including risk allocation, is critical before making a sound final project 

delivery method decision.

Source: OIG analysis

It is important to emphasize that decision makers should always consider various 

innovative financing tools when implementing a PPP arrangement. These tools 

may further enhance a PPP's value through reductions in the cost of capital. 

Are Revenue 

Efficiencies 

Available?

YES

NO

Are Efficiencies 

Enough to Make PPP

More Attractive?

YES

NO

Would Innovative 

Finance Make the 

PPP More Attractive 

than Public Funding?

YES NO

Choose Public 

Financing * Choose PPP With 

Innovative 

Financing *

NO YES

Choose PPP 

Agreement *

Consider Use 

of Innovative 

Finance to 

Further 

Maximize 

Value

Would Combining Revenue 

Generation Efficiencies with 

Innovative Finance Make the 

PPP More Attractive than 

Public Funding?
18

Our analysis is purely financial, and the preceding flowcharts illustrate that 

financial analysis. A determination of whether to use a PPP or public financing 

ultimately needs to incorporate a broader range of factors than we considered in 

our analyses. Principal among these additional factors are different risk allocations 

and the possibility of more expedient project delivery. These factors can 

significantly affect a project's ultimate value. 

PPPs ARE NOT LIKELY TO SIGNIFICANTLY REDUCE THE 

INFRASTRUCTURE FUNDING GAP 

PPPs are not likely to significantly reduce the infrastructure funding gap because 

they change the timing with which funds become available, but generally do not 

increase overall funding levels. Only to the extent that a PPP achieves efficiencies 

that the public sector cannot achieve does the PPP provide funding greater than the 

amount the public sector could receive through traditional financing. The fact that 

PPPs have limited roles in the growth of infrastructure investment funding is 

illustrated by our examples. In only two of the seven, Project Examples 1 and 2, 

did we determine that PPP financing would directly deliver a superior net financial 

contribution to the public sector entity than traditional financing methods. We 

show how Project Example 7 could do so, but only with the addition of innovative 

financing. 

When a PPP pays funds up front to the public sector, the payments are in exchange 

for future revenues associated with the asset, usually in the form of tolls.13 In these 

instances, States and other project sponsors must obtain the legal authority to levy 

tolls for the PPP. However, if tolling or toll rates are not politically expedient, the 

PPP is less attractive. Furthermore, despite their functioning as important system 

links, many components of the national transportation system will never fully selffund from users and direct beneficiaries because the traffic on them is too 

low-density. 

CONCLUSION

PPPs offer an alternative means for the completion of transportation infrastructure 

projects. However, PPPs can only provide additional funds for transportation 

investments to the extent that the private sector can achieve efficiencies large 

enough to offset the disadvantages of PPP financing. For highway projects, 

 

13 Such PPPs differ from arrangements found in other countries. In Canada, for example, some PPPs incorporate 

provisions, such as availability payments or shadow tolls, that require the government to pay the private entity for its 

operation and maintenance of a facility on the basis of the facility's meeting certain usage standards or levels.
19

efficiencies in construction and revenue generation are potentially of sufficient 

scale to provide such an offset. The determination of whether PPP or traditional 

financing offers greater value must be made on a case-by-case basis because of 

each project's unique properties. Our analysis focused exclusively on the financial 

trade-offs between PPPs and traditional financing. Any decision about whether to 

use a PPP or a traditional public project delivery method should include 

consideration of factors such as risk allocation and expediency of project delivery. 

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE 

Although we made no recommendations, we provided copies of this report to the 

FHWA Administrator on May 24, 2011. On July 21, 2011, we received FHWA's 

response which is included in its entirety as an appendix to this report. In its 

response, FHWA emphasized the need to consider factors outside of our analysis, 

especially the valuation of risk, in the PPP decision making process. However, 

FHWA stated that based on a full consideration of risk valuation, innovative 

financing options, and the potential to leverage public investment, PPPs offer 

viable options for the advancement of transportation solutions. We agree. As we 

noted in our report, our analyses did not consider the impacts of other factors, 

including risk sharing arrangements, which can be significant. Instead, our report 

clarifies and provides guidance on a number of factors that enter into a financial 

analysis of PPPs which we recognize constitutes only a portion of the 

comprehensive assessment required for an effective PPP decision. 

If you have any questions concerning this report, please call me at (202) 366-9970, 

or Betty Krier, Program Director, at (202) 366-1422. 

# 

cc: Audit Liaison, OST, M-1 

Audit Liaison FHWA, HAIM-13 
20

Exhibit A. Scope and Methodology

EXHIBIT A. SCOPE AND METHODOLOGY

The objectives of our analyses were to: (1) identify financial disadvantages to the 

public sector of PPP transactions compared to traditional financing methods; 

(2) identify factors that allow the public sector to derive financial value from PPP 

transactions; and (3) assess the extent to which PPPs can close the infrastructure 

funding gap. Our quantitative comparison of PPP financing to conventional 

municipal bond financing involves a purely financial valuation of projects under 

alternative scenarios. 

We worked with a team of contractors led by Charles River Associates 

International and financial consultants, Scott Balice Strategies. We used published 

literature to establish a foundation for our work. We constructed representative 

examples of infrastructure projects to provide a basis for our analyses. We based 

those representative examples on actual proposed or implemented projects 

selected to illustrate various features of highway infrastructure projects. We used 

interviews with investors and other market participants along with data on actual 

projects and market conditions to help construct the representative examples. In 

our selection of these examples, we sought coverage of a range of infrastructure 

finance issues. Some of the key considerations in example selection were:

• Mix of greenfield and brownfield projects—our representative examples 

include three greenfield and four brownfield projects, a proportion that 

reflects the U.S. market;

• Variation of evaluation periods—evaluation periods in our examples range 

from 25 to 90 years;

• Revenue and cost variation—our examples exhibit considerable variation in 

revenue and cost streams;

• Availability of innovative federal financing mechanisms—we developed 

one example specifically to illustrate the use of federal innovative financing 

mechanisms. 

The PPP greenfield projects we analyzed are all of the design, build, finance and 

operate (DBFO) type, meaning that the private partners are responsible for the 

design, construction, operation, maintenance, and finance of the facilities. The 

brownfield projects are all long-term lease concessions in which the public sector 

leases a facility to a private partner who then assumes responsibility for facility 

operations and maintenance (O&M). Under a DBFO or a lease concession PPP, 

the private partner pays a lump sum upfront to the public sector to obtain control 
21

Exhibit A. Scope and Methodology

of a highway for a certain time period, and collects some or all of the revenues 

associated with the highway during that period. 

To value multi-year projects, we used present values. The present value of a cash 

flow due at some date in the future is the amount which, if it were on hand today, 

would grow to equal the amount expected at the future date. For example, if one 

could earn 5 percent interest, $1,000 now would be worth $1,050 a year from now, 

and $1,000 is the present value of $1,050 next year. The determination of the 

present value of a future cash flow is known as "discounting," and the interest rate 

used in the calculation is called the "discount rate." The higher the discount rate or 

the farther in the future a cash flow occurs, the smaller the present value of a 

particular cash flow or, in other words, the greater the degree to which the future 

cash flow is discounted. In our analyses, we used the after tax weighted average 

cost of capital to discount future cash flows. 

We created a discounted present value cash flow valuation model to quantitatively 

compare the investment value of the representative infrastructure projects using 

traditional financing with tax-exempt debt and as a PPP using private financing. 

We treated the choice of project financing mechanism as an investment decision. 

In other words, we asked the question: “what is the value of the transportation 

asset in terms of its financial contribution to the public sector?” The model 

quantified the cost of traditional municipal financing as compared to PPP 

financing. To obtain revenues, costs, and other financial inputs for the model, we 

gathered data from relevant financial documents, annual reports, published and 

unpublished project documents, existing databases, and assumptions in the 

absence of any other information. 

One critical model input derived from our assumptions was the revenue growth 

rate. For all the U.S. based examples, the base case public sector alternative 

assumed an annual revenue growth of 5 percent. With gross domestic product 

growth averaging 4.2 percent between 1999 and 2007, and annual traffic growth in 

the country usually estimated at about 1 percent, an overall revenue growth rate of 

5 percent annually was considered to be a reasonable value for the base case 

scenarios. The annual growth rate for the French example, Project Example 5, was 

assumed to be 2.2 percent because the toll setting formula in France is much more 

conservative than in the U.S., and toll increases usually are pegged to a fixed 

percentage, usually 70 percent, of the consumer price index. Similarly, in all the 

examples, the base case also assumed an annual growth in O&M and heavy 

maintenance of 3.89 percent, which was the producer price index annual 

escalation rate for maintenance and repair construction between 1999 and 2007. 

The valuation model compared the net contributions—derived from the project's

gross contributions—provided to a state or local government entity from the 
22

Exhibit A. Scope and Methodology

project under the two financing alternatives. The gross contribution of a project 

consists of the monetization of its future cash flows less its financing costs. For a 

public financing, this consists of the proceeds from the primary debt offering, such 

as senior lien bonds, that could be financed plus the present value of any residual 

cash flow available to the government after payment of debt service through the 

financing term. Subordinate financing, such as junior lien bonds, served as a proxy 

for this residual. In PPP financing, the monetization of future cash flows consists 

of the total amount of capital that can be raised by the private sector, from both 

debt and equity, which would be used to make an upfront payment to the 

government. In a PPP arrangement, our model assumed that the equity financing 

component was subordinate financing. In either type of financing, the total gross 

contribution included the present value of the debt service reserve fund14 that 

would be available at the end of the valuation period. However, the initial cost of 

funding the debt service reserve was included as a cost item with the financing 

costs. 

Subtracting the present values of construction, expansion, and heavy maintenance 

costs from the gross contribution produced the net contribution. Construction costs 

were broadly defined. They included general contractor and overhead costs, 

architectural and engineering fees, preliminary engineering, final engineering, 

environmental mitigation, right-of-way, utility relocation, construction 

engineering and inspections costs necessitated by the construction of the facility. 

Expansion costs included the construction costs of any additional lanes and other 

associated expenses, such as construction or expansion of toll facilities. Heavy 

maintenance costs consisted of non-routine maintenance costs, such as resurfacing 

costs. 

We also used our model to conduct sensitivity analyses—assessments of how 

much project values change when some factor is changed—of each example 

project. For example, we evaluated the effects of changes in the cost of capital and 

the length of the agreement on project values under the competing implementation 

methods. 

Although debt markets were under stress during the time we conducted our 

analyses, we did not focus on those market conditions, but emphasized general 

principles of market function and ways to incorporate market conditions into 

financial valuations. However, our analyses acknowledged both current and 

recent, but less constrained, market conditions when we applied the valuation 

model to representative examples in order to compare the relative efficacy of 

public and private financing approaches. 

 

14 The debt service reserve fund is a set aside of debt proceeds for the benefit of the debt investor in the event that funds 

from operation are insufficient to pay debt service.
23

Exhibit A. Scope and Methodology

While we considered the value of the transportation asset from the perspective of a 

state or local government, we did not consider the case in which a PPP transaction 

is used as a vehicle to generate funds for some other purpose outside of 

transportation infrastructure. Such an analysis might take into account financial 

benefits that are outside the transaction, such as the use of proceeds or revenue 

share. These considerations are potentially relevant factors in decision analyses of 

PPPs, but we did not incorporate them in our analyses. 

We compiled the information and results in this report between January 2008 and 

April 2011. We believe that the data and information we collected, the sources 

from which we obtained them, and the ways in which we used them, provide 

reasonable basis for our findings and conclusions based on our stated objectives. 
24

Exhibit B. Major Contributors to This Report

EXHIBIT B. MAJOR CONTRIBUTORS TO THIS REPORT 

Betty Krier Supervisory Economist/ Program 

Director 

Name Title 

Michael Day Economist 

Keith Klindworth Economist 

Susan Neill Writer/Editor 
25

Appendix. Agency Comments

APPENDIX. AGENCY COMMENTS

Memorandum

Subject: INFORMATION: Response to the 

Office of Inspector General Draft 

Report on “Financial Analysis of 

Transportation-related Public Private 

Partnerships” 

Date: July 21, 2011

From: Victor M. Mendez In Reply Refer To:

Administrator HIN-1/HAIM-10

To: Calvin L. Scovel III

Inspector General (J-1)

Public Private Partnerships (P3), which offer an alternative and innovative 

means to leverage Federal funding on transportation projects, are highly 

complex and dependent on project specific variables. As a result, the 

applicability of P3s to any given project must be determined on a case-bycase basis. While the Office of Inspector General (OIG) report provides 

some insights on financial metrics, as recognized in the OIG report, it is not 

a comprehensive analysis of applicable factors for P3 decisionmaking. 

Large projects are unique and complex and require each public sponsor to 

carefully review the financial and policy implications of its delivery options 

– from traditional design-bid-build through a long-term concession such as a 

P3. A key and often decisive element not addressed by the OIG report 

involves the valuation of risk. Absent these specific valuations, it is 

impossible to draw any definitive conclusions regarding the comparative 

financial merits of a P3 option. 

A comprehensive analysis of P3 financial viability must evaluate risk versus 

reward. Starting with the premise that the private sector will have a higher 

cost of capital, the public sponsor must place a dollar value on the risks a 
26

Appendix. Agency Comments

private partner would be willing to assume. While the OIG report 

recognizes the private sector’s added value as a combination of 

“efficiencies” in construction and revenue collection, it does not explicitly 

recognize the key financial elements of valuing risk, both from a public cost 

reduction perspective and from the perspective of the private partner. For 

example, toll road revenue projections depend largely on estimates of future 

regional economic performance and growth that cannot be precisely 

determined at the time the project is being financed. As experience has 

shown, both public and private operators can be overly optimistic when 

estimating potential revenue, but when the private sector has taken this risk, 

it is equity investors that absorb any financial loss. 

A more comprehensive approach that is being increasingly employed by 

public sponsors of P3s is project-by-project Value for Money (VfM) 

analysis of total costs and benefits. A VfM analysis will evaluate the public 

delivery option directly against the P3 option, establishing a threshold for 

private firms to meet or exceed. These studies require an analysis of a more 

comprehensive and project-specific set of detailed factors than is included 

within the OIG analysis. Since the OIG report does not offer a 

comprehensive review of the factors associated with P3 decisions, 

particularly the key consideration of risk valuation in the financial analysis 

associated with P3s, the reader is cautioned against drawing any larger 

conclusions from the OIG’s analysis. For example, the report’s flowcharts 

are not general decision tools, but simply an illustration within the limited 

domain of the analysis. 

It is also important for the OIG report to recognize that projects are not 

equally likely to advance under either public or P3 based financing. The 

availability of innovative financing methods could be a determining factor 

over whether a project proceeds. A key reason that State and local 

governments consider P3s is that public financing is often constrained by 

statutory or policy limits on debt amounts, maturities, and offering terms. 

Recognizing that public debt financing capacity might be inadequate to 

undertake the project under consideration, States and localities may face the 

choice between delivering the project as a P3, or not at all. 

While a noteworthy share of P3 development in the United States was 

essentially the monetization of preexisting highway assets,15

 

15 Examples include the Chicago Skyway and the Indiana Toll Road transactions in which the public sector leased 

existing highways to private concessionaires in exchange for a lump sum payment.

 these types of 

agreements may represent a smaller share of P3 opportunities in the United 

States compared to new development and investment. Recognition of this 
27

Appendix. Agency Comments

potential is based on the Agency’s experience with the Transportation 

Infrastructure Finance and Innovation Act (TIFIA) credit program, which 

has since 2003 executed loans for seven P3 projects, each of which meets 

the report’s definition of a “greenfield” facility, in California, Texas, 

Florida, and Virginia. The “brownfield” projects that the report examines 

(two of which are patterned after Chicago and Indiana) would be ineligible 

for TIFIA or private activity bonds, the innovative finance tools that the 

report notes are available for lowering the private sector’s cost of capital to 

the benefit of the public owner. These programs require new capital 

investment and cannot help finance a mere change of control. 

Based on a full consideration of risk valuation, innovative financing options, 

and the potential to leverage public investment, P3s offer a viable option for 

advancing transportation solutions. Under the right circumstances with a 

well-structured arrangement for sharing risk, a P3 can offer the potential to 

accelerate project delivery, provide capabilities not affordable under public 

finance options only, and provide a viable investment for the private sector.