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28–290 PDF 2006

UNDERSTANDING CONTEMPORARY

PUBLIC PRIVATE HIGHWAY TRANSACTIONS: THE FUTURE OF INFRASTRUCTURE FINANCE?

(109–75)

HEARING

BEFORE THE

SUBCOMMITTEE ON

HIGHWAYS, TRANSIT AND PIPELINES

OF THE

COMMITTEE ON

TRANSPORTATION AND

INFRASTRUCTURE

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MAY 24, 2006

Printed for the use of the

Committee on Transportation and Infrastructure

(
COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

DON YOUNG, Alaska, Chairman

THOMAS E. PETRI, Wisconsin, Vice-Chair

SHERWOOD L. BOEHLERT, New York

HOWARD COBLE, North Carolina

JOHN J. DUNCAN, JR., Tennessee

WAYNE T. GILCHREST, Maryland

JOHN L. MICA, Florida

PETER HOEKSTRA, Michigan

VERNON J. EHLERS, Michigan

SPENCER BACHUS, Alabama

STEVEN C. LATOURETTE, Ohio

SUE W. KELLY, New York

RICHARD H. BAKER, Louisiana

ROBERT W. NEY, Ohio

FRANK A. LOBIONDO, New Jersey

JERRY MORAN, Kansas

GARY G. MILLER, California

ROBIN HAYES, North Carolina

ROB SIMMONS, Connecticut

HENRY E. BROWN, JR., South Carolina

TIMOTHY V. JOHNSON, Illinois

TODD RUSSELL PLATTS, Pennsylvania

SAM GRAVES, Missouri

MARK R. KENNEDY, Minnesota

BILL SHUSTER, Pennsylvania

JOHN BOOZMAN, Arkansas

JIM GERLACH, Pennsylvania

MARIO DIAZ-BALART, Florida

JON C. PORTER, Nevada

TOM OSBORNE, Nebraska

KENNY MARCHANT, Texas

MICHAEL E. SODREL, Indiana

CHARLES W. DENT, Pennsylvania

TED POE, Texas

DAVID G. REICHERT, Washington

CONNIE MACK, Florida

JOHN R. ‘RANDY’ KUHL, JR., New York

LUIS G. FORTUN ̃ O, Puerto Rico

LYNN A. WESTMORELAND, Georgia

CHARLES W. BOUSTANY, JR., Louisiana

JEAN SCHMIDT, Ohio

JAMES L. OBERSTAR, Minnesota

NICK J. RAHALL, II, West Virginia

PETER A. DEFAZIO, Oregon

JERRY F. COSTELLO, Illinois

ELEANOR HOLMES NORTON, District of

Columbia

JERROLD NADLER, New York

CORRINE BROWN, Florida

BOB FILNER, California

EDDIE BERNICE JOHNSON, Texas

GENE TAYLOR, Mississippi

JUANITA MILLENDER-MCDONALD,

California

ELIJAH E. CUMMINGS, Maryland

EARL BLUMENAUER, Oregon

ELLEN O. TAUSCHER, California

BILL PASCRELL, JR., New Jersey

LEONARD L. BOSWELL, Iowa

TIM HOLDEN, Pennsylvania

BRIAN BAIRD, Washington

SHELLEY BERKLEY, Nevada

JIM MATHESON, Utah

MICHAEL M. HONDA, California

RICK LARSEN, Washington

MICHAEL E. CAPUANO, Massachusetts

ANTHONY D. WEINER, New York

JULIA CARSON, Indiana

TIMOTHY H. BISHOP, New York

MICHAEL H. MICHAUD, Maine

LINCOLN DAVIS, Tennessee

BEN CHANDLER, Kentucky

BRIAN HIGGINS, New York

RUSS CARNAHAN, Missouri

ALLYSON Y. SCHWARTZ, Pennsylvania

JOHN T. SALAZAR, Colorado

JOHN BARROW, Georgia

(II)
SUBCOMMITTEE ON HIGHWAYS, TRANSIT AND PIPELINES

THOMAS E. PETRI, Wisconsin, Chairman

SHERWOOD L. BOEHLERT, New York

HOWARD COBLE, North Carolina

JOHN J. DUNCAN, JR., Tennessee

JOHN L. MICA, Florida

PETER HOEKSTRA, Michigan

SPENCER BACHUS, Alabama

STEVEN C. LATOURETTE, Ohio

SUE W. KELLY, New York

RICHARD H. BAKER, Louisiana

ROBERT W. NEY, Ohio

FRANK A. LOBIONDO, New Jersey

JERRY MORAN, Kansas

GARY G. MILLER, California

ROBIN HAYES, North Carolina

ROB SIMMONS, Connecticut

HENRY E. BROWN, JR., South Carolina

TIMOTHY V. JOHNSON, Illinois

TODD RUSSELL PLATTS, Pennsylvania

SAM GRAVES, Missouri

MARK R. KENNEDY, Minnesota

BILL SHUSTER, Pennsylvania

JOHN BOOZMAN, Arkansas

MARIO DIAZ-BALART, Florida

JON C. PORTER, Nevada

TOM OSBORNE, Nebraska

KENNY MARCHANT, Texas

MICHAEL E. SODREL, Indiana

DAVID G. REICHERT, Washington

JEAN SCHMIDT, Ohio

DON YOUNG, Alaska

(Ex Officio)

PETER A. DEFAZIO, Oregon

NICK J. RAHALL II, West Virginia

JERROLD NADLER, New York

GENE TAYLOR, Mississippi

JUANITA MILLENDER-MCDONALD,

California

ELIJAH E. CUMMINGS, Maryland

EARL BLUMENAUER, Oregon

ELLEN O. TAUSCHER, California

BILL PASCRELL, JR., New Jersey

TIM HOLDEN, Pennsylvania

BRIAN BAIRD, Washington

SHELLEY BERKLEY, Nevada

JIM MATHESON, Utah

MICHAEL M. HONDA, California

RICK LARSEN, Washington

MICHAEL E. CAPUANO, Massachusetts

ANTHONY D. WEINER, New York

JULIA CARSON, Indiana

TIMOTHY H. BISHOP, New York

MICHAEL H. MICHAUD, Maine

LINCOLN DAVIS, Tennessee

BEN CHANDLER, Kentucky

BRIAN HIGGINS, New York

RUSS CARNAHAN, Missouri

ALLYSON Y. SCHWARTZ, Pennsylvania

JAMES L. OBERSTAR, Minnesota

(Ex Officio)

(III)

(V)

CONTENTS

TESTIMONY

Page

Daniels, Hon. Mitch, Governor of the State of Indiana ........................................ 4

Florian, Mark, Managing Director, Goldman, Sachs & Co. ................................. 26

Foote, John, Senior Fellow, Kennedy School of Government, Harvard University ......................................................................................................................... 26

Garrett, Hon. Matthew, Director, Oregon Department of Transportation ......... 26

Gribbin, D.J., Director, Macquarie Holdings (USA) Inc. ...................................... 26

Grote, Bryan, Principal, Mercator Advisors, LLC ................................................. 26

Hedlund, Karen J., Partner, Nossaman, Gunther, Knox, Elliot, LLP ................ 26

Kaine, Hon. Tim, Governor of the Commonwealth of Virginia ............................ 4

PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

Carnahan, Hon. Russ, of Missouri ......................................................................... 51

Costello, Hon. Jerry F., of Illinois .......................................................................... 52

Cummings, Hon. Elijah E., of Maryland ............................................................... 63

Pascrell, Hon. Bill, Jr., of New Jersey ................................................................... 142

Porter, Hon. Jon, of Nevada ................................................................................... 146

PREPARED STATEMENTS SUBMITTED WITNESSES

Daniels, Hon. Mitch ................................................................................................. 70

Florian, Mark ........................................................................................................... 75

Foote, John ............................................................................................................... 82

Garrett, Hon. Matthew ............................................................................................ 86

Gribbin, D.J .............................................................................................................. 94

Grote, Bryan ............................................................................................................. 104

Hedlund, Karen J .................................................................................................... 114

Kaine, Hon. Tim ...................................................................................................... 126

(1)

HEARING ON UNDERSTANDING CONTEMPORARY PUBLIC PRIVATE HIGHWAY TRANSACTIONS: THE FUTURE OF INFRASTRUCTURE FINANCE?

Wednesday, May 24, 2006

HOUSE OF REPRESENTATIVES, COMMITTEE ON TRANSPOR- TATION AND INFRASTRUCTURE, SUBCOMMITTEE ON

HIGHWAYS, TRANSIT AND PIPELINES, WASHINGTON, D.C.

The subcommittee met, pursuant to call, at 9:30 a.m., in Room

2167, Rayburn House Office Building, Hon. Thomas E. Petri [chairman of the subcommittee] presiding.

Mr. PETRI. Good morning. The Subcommittee will come to order.

I would like to welcome all of our members and our witnesses to

today’s hearing on ‘‘Understanding Contemporary Public Private

Highway Transactions: The Future of Infrastructure Finance?’’

We have a joint session of Congress, as I think everyone is

aware, with the Prime Minister of Israel, which begins at 11 this

morning, so we had to move the starting time for the hearing up

to 9:30 from 10:00, which I think has inconvenienced a number of

our members who will be arriving shortly, but who had other meetings scheduled.

In the interest of getting through our first panel before the joint

session begins, I encourage members to submit their opening statements for the record, which will be kept open for submissions by

members and others for 30 days. And they can also give their opening statements after the session, if they would prefer.

In the interest of hearing from the Governors and allowing

enough time for members to ask questions, I have abbreviated this

opening statement.

The hearing is intended to provide members of the Subcommittee

with information regarding contemporary public-private highway

transactions. Recent high-profile lease agreements for highway toll

facilities in Indiana, Virginia, and Chicago have brought these

issues to the forefront of the debate on the future of infrastructure

financing. Our witnesses will explain why State and local governments may find private involvement in highway financing attractive. They will also focus on how a particular method, namely, longterm lease of existing non-Federal toll facilities to private operators, is structured.

This hearing will be the first in a series of hearings on publicprivate partnership. We have two very interesting panels for today’s hearing. Our first panel is comprised of two Governors who
2

have first-hand experience with public-private highway transactions, Governor Mitch Daniels from Indiana, Governor Kaine

from Virginia. Indiana is in the process of finalizing a long-term

lease agreement on the Indiana Toll Road. Virginia has public-private partnerships on highway projects in Richmond and in Northern Virginia.

The second panel is comprised of experts on how these public-private partnerships are structured. I encourage all of our members

to return for the second panel, after the joint session, as these witnesses will provide valuable insight on this new transportation financing concept.

And that second panel will begin at what time? Right after the

session, around 11:30 today.

Now I yield to Mr. DeFazio for an opening statement.

Mr. DEFAZIO. Thank you, Mr. Chairman. Mr. Chairman, the subject matter is, indeed, fascinating and this is an important day.

The Commission that we created in SAFETEA-LU to look at future

and alternate sources of funding will hold its first meeting today,

unfortunately, at the same time as we will be meeting here. We are

on parallel tracks, I guess. But this is, as you said, the first of a

number.

There are a number of questions that are raised by the privatepublic partnerships. Basically, I break it down into two areas. One

would be investments in projects that have not made State or Federal priority lists for whatever reason, whether there is just inadequate funds and they are high priorities or they are projects that

don’t meet the highest priorities in those States, but they are still

desirable to move forward. These projects are new construction.

And then, as we are going to hear today, questions about assuming

the obligations to operate existing assets and monetizing those assets up front.

The questions that pertain to these projects I think are somewhat different, but in the end what we need to know is what sort

of net public benefit we are creating and how we are going to continue to have a coordinated and integrated national transportation

network when these projects are constructed, because obviously the

private companies want to optimize their investment. Sometimes it

requires up-front restrictions on the public bodies in terms of noncompete clauses regarding alternate routes.

My State was looking at tolling existing routes in order to try

and have a neutral—you know, make a neutral playing field for the

newly constructed project. I think that will be very objectionable to

my State legislature.

But there are a host of questions like that, and in the interest

of hearing from the panel and directing more specific questions, I

will suspend with my opening statement at this point.

Mr. PETRI. Thank you very much.

We will now turn to the first panel, comprised of the Honorable

Tom Kaine, Governor of Virginia, and the Honorable Mitch Daniels, Governor of Indiana.

I think, before we turn to you, gentlemen, I would like to recognize a very active, aggressive, and effective member of Congress

and of this Committee representing Southern Indiana, Mike Sodrel,
3

who wanted to present to the Committee his Governor, Governor

Daniels.

Mr. SODREL. Thank you, Mr. Chairman.

Welcome, Governor, my governor.

Mr. Chairman and members of the Subcommittee, it is a great

pleasure to introduce to you Indiana’s 49th Governor. He has been

serving as our Governor since January 2005 and has brought a lot

of changes to Indiana in his short tenure as chief executive of our

State. I think members of this Subcommittee are familiar with the

service he performed as Director of the Office of Management and

Budget under President Bush, but Governor Daniels has a distinguished resume in both the public and private sector. He has been

successful in both walks of life because of his strong Hoosier values

and hard work.

During his career in public service, he was an advisor to former

Indianapolis Mayor Richard Lugar and later became his chief of

staff when Senator Lugar was elected to the U.S. Senate. In addition, Governor Daniels was a senior advisor to President Ronald

Reagan.

His success carried over into the private sector. Governor Daniels

served as president for North American Operations of an Indianabased company, Eli Lilly and Company. He also served as CEO of

the Hudson Institute.

Mr. Chairman, Governor Daniels has a wealth of experience to

offer this Subcommittee today to discuss an issue not just facing

Hoosiers, but America as a whole: financing the construction of our

transportation infrastructure. The Highway Trust Fund is set to go

into a deficit situation by 2010. There are many reasons for this

trend, but instead of focusing on why we face the problem, I think

we should focus on how we solve it. That is why Governor Daniels

is here today. He will be able to share a unique experience he recently spearheaded back home that offers an alternative to solving

the infrastructure crisis we face as a Nation.

Indiana was experiencing a shortfall in its highway trust fund

before he entered office. Governor Daniels had basically three options: you can raise taxes substantially, you can do without the infrastructure, or you can find an alternative that did not raise taxes

and still allowed roads and bridges to be built. He was able to accomplish the last item by seeking a public-private partnership, and

Indiana will begin investing this year almost $4 billion for infrastructure development and create jobs for Hoosiers.

As many of you know, I was a truck driver and was in the trucking industry before serving in Congress, and I can tell you I am not

a big fan of tolls or fuel taxes. The drivers and operators of heavy

duty vehicle already pay user fees and excise taxes to move goods

over our highways. The thought of asking them to pay increased

tolls is not a pleasant one.

However, I believe this debate is as much about credibility in

government as it is financing our infrastructure. If we raise fuel

taxes and tolls, we must guarantee those receipts are used only for

its intended purposes: to build and maintain roads and bridges. We

should not be raising tolls or fuel excise taxes to spend later on

community pools, horse trails, city parks, or other unrelated transportation projects. Governor Daniels’ Major Moves Program en-
4

sures that proceeds of the lease agreement are used solely for

transportation infrastructure development.

The U.S. highway system is vital to our economy and our national security. If you want to see what a country looks like without adequate transportation infrastructure, I suggest you visit Afghanistan. I visited the country, and I can tell you the roads are

in sad shape. It can take almost an hour to drive 10 or 15 miles,

holding up transportation of goods and restricting their economy,

and it is very difficult to have a robust economy if you don’t have

adequate transportation.

If we don’t find a more successful way to fund our future infrastructure needs, our economy can face similar challenges.

With that said, Mr. Chairman, I want to thank you for having

this hearing and for inviting my Governor to testify on his experience, and I yield back the balance of my time.

Mr. PETRI. Thank you.

Gentlemen, we appreciate the prepared statements that you have

submitted, and we ask you to summarize them for approximately

five minutes, beginning with Governor Daniels.

TESTIMONY OF THE HONORABLE TIM KAINE, GOVERNOR OF

THE COMMONWEALTH OF VIRGINIA; THE HONORABLE

MITCH DANIELS, GOVERNOR OF THE STATE OF INDIANA

Governor DANIELS. Mr Chairman and Congressman DeFazio, I

appreciate the opportunity. I will summarize the material I have

sent you, and I will start just by venturing to say that I imagine

everyone in the room agrees about the nature of the problem and

probably its dimension. It is a national problem ultimately requiring national action. I think that you have invited Governor Kaine

and me here today to talk about ways in which we have wrestled

with it and attempted to address this very practical dilemma of a

transportation shortfall at the State level.

Indiana’s share of the national shortfall we reckon to be around

$3 billion over the next 10 years. Our State has been filled with

empty promises over the recent decades. We have had necessary

and important projects on the books, money spent sometimes to

plan and certainly to talk about them, and no action and none in

prospect. This is especially important to a State like ours. The

State nickname is ‘‘The Crossroads of America.’’ Located where we

are and with more interstate highways intersecting in our State

than anywhere else, transportation logistics and distribution are a

critical part of our hopes for an economic resurgence.

We looked at every option to address our shortfall, more than 30,

as I recall, the conventional ones of taxing and borrowing, and also

some fee-based revenue sources. None of them remotely came close

to closing the gap that we found on our arrival in office, and that

is what led us to look at the public-private partnership, or P3, approach. We secured passage in our legislature of, first of all, permission to build our largest single project, which is the completion

of I-69 from northeast to southwest in our State through a partnership, if one can be reached.

Secondly, as already has been mentioned, we went and asked the

market if anyone was interested in operating our existing toll road

under contract, under a long-term lease. I looked at this toll road,
5

in a business sense, as an underperforming asset. It had lost

money five of the last seven years; never paid off its long-time debt;

tolls were at the levels—had not changed since 1985; we had tolls

as low as 15 cents in booths where it cost 34 cents to collect the

toll; and it was by every measure the least expensive toll road in

America.

We did ask the market. The result was that we received four

bids. The winning, our highest bid, was $3.8 billion, and I should

say it includes commitments that will lead to a much better toll

road, additional billions invested over the years in upgrades and

technology that are long overdue. We reckon this bid to be approximately three times the net present value of the road in State hands

and run by public authorities in the way it has been run in the

past.

What is the result? I like Congressman DeFazio’s question about

net public value or net public benefit. When the transaction closes,

we will deposit a check for $3.8 billion. We will begin collecting interest, parenthetically, at the rate of a half a million dollars a day.

All of this will be reinvested. We considered it a cardinal principle

from the beginning that, if we were to do such a transaction, we

would be liberating capital value from an underperforming capital

asset, and that should not be spent on any priority of the moment,

however high, but should be reinvested in the long-term future of

our State, in hard, public assets that we will leave to our children

and grandchildren.

And last week, with the benefit of this program, and only because of this project, which we call Major Moves, we announced a

regular road building year in Indiana this year. We will break that

record next year and every year for the next ten. Twelve billion dollars in total, a quadrupling of new construction over the previous

record, more than 70 years of acceleration of projects that were already scheduled to be built, and other projects that might never

have been built will now happen.

We don’t know what single step we could have taken to create

more long-term jobs and hope in our State. The value of infrastructure and its necessity to a modern economy is well known in this

room, and I thank the Committee for raising this question to the

level you have. I certainly want to say how grateful I am to be here

with the Governor of Virginia. We studied his State, Mayor Daley’s

actions in Chicago, and others very carefully before taking the

steps we did.

Mr. PETRI. Thank you.

Governor Kaine.

Governor KAINE. Thank you, Mr. Chairman, members of the Subcommittee. It is an honor to be here today talking about this critical issue. I think Virginia is a logical choice to be here because we

now have two decades of experience in private financing of transportation infrastructure.

Just briefly, background. The Governor of Virginia is responsible

for the third largest highway system in the United States, 70,000

miles; the fastest growing port on the east coast; some of the fastest growing airports and public transit systems in the Country. I

was formerly the mayor of Richmond and had local roads, toll

roads, bus system, port, airport, and passenger rail under my juris-
6

diction. Obviously, we have to work very closely together. The responsibilities require a constant stream of very difficult decisions,

all very much in the public eye, and all subject to review by Federal agencies, local governments, advocacy groups and the legislative branches of government.

If I can give you a single message today about two decades of experience in Virginia dealing with public-private financing of transportation structure, it would be that no one size fits all. What

works in Northern Virginia or Richmond is different than what

works in Southwest or Southern Virginia, and certainly wouldn’t

automatically apply to Indiana or Illinois or any other State. These

are business deals that have a very specific quality to them.

I will focus a little bit on the highway issue because I know that

is the main concern of the Committee, but some of the most exciting public-private partnerships we have now in Virginia are in nonhighway programs: port expansion, airport expansion, private landowners paying the first quarter of a Metrorail extension to Dulles

Airport, and freight railroads meeting defined public benefits as a

condition of State capital investment.

With this sort of broader context out of the way, let me now get

into what we have learned in two decades of public-private financing. First, public-private partnerships in the road area are not free;

someone has to pay a toll or a tax, share in the risk of a project,

or dedicate private funds that might otherwise go to private profitability. So there are sometimes discussions about public-private as

if it is a way to avoid paying the piper. There is a piper to be paid,

and the only question is how, if you want to invest in infrastructure.

Second, the public sector has got an obligation to ensure that a

public-private partnership addresses a very specific public need.

For example, we believe that public-private partnerships—and we

are pushing them vigorously in Virginia, primarily through tolling,

but through some other mechanisms as well—could address about

20 percent of Virginia’s unmet transportation need. However, we

can’t, and shouldn’t, ignore the remaining 80 percent of the unmet

transportation need.

Third, the benefits of public-private partnerships should accrue

to the toll payers or the taxpayers or the risk takers in proportion

to their contributions, and that is what makes all these deals special: you have got to have a serious business model. Not the customary method that we sometimes use of making everybody a little

bit happy, but real-life business decisions that are different for

each project.

And then, fourth, the decision to enter into a public-private partnership, as well as implementation, has to be open to the public.

This can be a challenge because you have to protect bargaining

rights and proprietary information of private providers, but at the

same time you have to do that in an overall framework that promotes transparency and accountability.

Finally, even within public-private financing of highway projects,

it is really important to be innovative and look at multi-modal opportunities, which we are focused on. Just to give you a couple of

examples: our private partnership programs on the roadside are

starting to integrate a number of very innovative land use mecha-
7

nisms to make sure that we are planning the right way before we

implement projects; a Pocahontas Parkway, which is our first highway concession, and the third in the Country, in the Richmond

area provided for access to the Richmond airport, linking road and

airport improvements; we are working on HOT Lane projects on I95, I-395, and I-495 in Northern Virginia. Some of you may have

had the pleasure of using those corridors or experienced challenges

there, and we are going to integrate the different transportation

modes in those projects. We have got a current solicitation for a

highway in Southeastern Virginia, Route 460, that will bring together, hopefully, as we reach a deal, highway infrastructure,

freight rail improvements, and intermodal service to the Port of

Virginia, the Atlantic Fleet in Norfolk, and metropolitan areas of

Richmond and Hampton Roads; and, then, finally, the Dulles Corridor program we are working on right now, a large and complicated and very exciting project, brings together and funds connections among Metrorail, the Dulles Airport, and the Dulles Toll

Road, which is a significant element in the national highway system and the economic fate of this region. Finally, we have a transportation opportunity loan fund that we are using to capitalize and

incentivize private participation in projects such as Route 28 here

in Northern Virginia.

I will just conclude in the opening by acknowledging that Virginia has a special relationship with the Federal Government and

your projects. Like all States, we are stewards of Federal funds,

transit systems funded by the Federal Government. We are home

to the Atlantic Fleet, the Pentagon, and the majority of the Federal

workforce in Washington, and we take our stewardship and partnership role with you very seriously and appreciate the chance to

be with you today.

Mr. PETRI. Thank you.

We will begin questioning with my colleague, Mr. DeFazio from

Oregon.

Mr. DEFAZIO. Thank you, Mr. Chairman.

Governor Daniels, I guess the question that overshadows all this

is why wouldn’t the public, the State of Indiana, undertake this on

its own? Why wouldn’t you use—this is not a new development, so

there is no risk. You have been operating it successfully; it is a

known entity.

Macquarie, a foreign entity, has come in and they expect that

they can give you this rather large up-front payment and still get

an investment rate of return between 12.5 percent and 13.5 percent, which means if the government were operating it and you

could borrow the money at the same rate, and you didn’t want the

excess profits that they are getting, you could have lower tolls.

So I guess the question is why wouldn’t the State do it and continue to operate a coordinated system? Why wouldn’t the State use

the asset to go out and borrow the money and set up a fee schedule

that would show the investors that there would be no risk, that is,

the toll increases that you have granted to Macquarie?

Governor DANIELS. First, I like collecting interest better than

paying interest.

Mr. DEFAZIO. You what?
8

Governor DANIELS. I like collecting interest better than paying

interest.

Mr. DEFAZIO. Well, how about profits? They are going to get 12.5

percent profit a year. Wouldn’t you like to collect that?

Governor DANIELS. Not a dirty word in our State, Congressman.

Let me just say you—

Mr. DEFAZIO. No, I know, but, I mean, what if that benefit accrued to the public, Governor?

Governor DANIELS. Well, first of all, the entire history of the Indiana toll road documents that we would never achieve this level

of benefit—

Mr. DEFAZIO. If I could. So you are saying that there is no political will to raise the tolls, but if you enter into a binding contract

which gives a private entity the right to infinitely raise tolls, then

it will happen, but politically you couldn’t go out and say we are

going to raise the tolls, you can say we have contracted to a foreign

entity, they have the right of 2 percent CPI or GDP, whatever is

higher, and that is better? And they get 12.5 percent profit on top

of it?

Governor DANIELS. Well, you are a busy man, Congressman. I

don’t expect you to understand our State, but since 19—

Mr. DEFAZIO. No, sir, I am just asking a question. Is it

outsourcing political will?

Governor DANIELS. I am trying to give you an answer.

Mr. DEFAZIO. Are we outsourcing political will to a private entity

here?

Governor DANIELS. Well, it is not a partisan statement, it is a

statement of fact.......

Mr. DEFAZIO. I didn’t say anything partisan. What do you say?

Governor DANIELS. No, no, the one I am about to make, if you

will give me that chance.

Mr. DEFAZIO. Okay. Sure.

Governor DANIELS. Governors of both parties declined to raise

tolls by 1 cent since 1985. You make an assumption about human

nature that all future governors will be different than all past governors, and—

Mr. DEFAZIO. But didn’t you raise the tolls before you entered

into the agreement with Macquarie?

Governor DANIELS. We were going to raise the tolls whether

there was a suitable offer or not.

Mr. DEFAZIO. All right.

Governor DANIELS. This is a very important point. We could no

longer go on with a road that was deteriorating, that was becoming

congested, that had no new technology, of the kind that is now the

rule in American toll roads. So we put into motion a modernization,

I am going to say, of these antique tolls before we had any idea

whether we would receive the kind of offer that we did. By any calculation, the most generous calculation anybody made, assuming

changes in future political behavior, was not half as much money

as we were offered.

Now, you say excess profits, which is a—

Mr. DEFAZIO. No, I didn’t say excess. They are expecting a rate

of return of 12.5 percent. That is a pretty nice rate of return on

that investment.
9

Governor DANIELS. Well, you used the word excess, but I will just

indicate that I have no idea if they will make any profit at all, and

I don’t much care. The point is that we have locked in and limited

their ability to raise prices. The only way they will make money

on that road is by building a road that pleases its customers and

that increases volume there, and the risk has been entirely transferred to them.

Mr. DEFAZIO. Right. But if I could, to that point, they say interurban road, minimal bypass risk. That kind of speaks—you know,

they feel there is a monopoly or a near monopoly so that they can

raise rates, and you reference that. I don’t know if you are familiar

with—and, granted, what they did in Chicago is really outrageous,

because they have diverted the money to other purposes, and I congratulate you on using the money for transportation infrastructure.

But in an analysis of that, a gentleman by the name Charles

Foote—excuse me—well, Northwest Financial Group—since these

are very long-term agreements, they looked for something they

could use as a parallel. They went back to the construction of the

Holland Tunnel, 1927. They applied the same rents that Macquarie

is demanding. They have an identical agreement with Chicago that

they have with you, 2 percent GDP or CPI. And under that, if you

used, with the minimum floor, the dollar toll would have escalated,

using the minimums, to 185.13. If you use CPI only, it 11.42, and

GDP would be 49.45.

So I don’t think it is much of a limit that we are putting in here,

unless our economy isn’t going to grow or we are not going to have

inflation. It is going to be quite a potentially high escalation if you

look at what happened with the Holland Tunnel analysis.

Governor DANIELS. Well, you are overlooking the fact that the

tolls on our toll road are less than half of those today on competing

roads. Even after the increase is phased in over the next several

years, we will still be cheaper. The inflationary increases you are

talking about, the limits you are talking about, wouldn’t even be

available until then.

Mr. DEFAZIO. Well, starting in 2010 they apply this new factor,

is that correct?

Governor DANIELS. Yes, but in 2010 we will still be cheaper than

the tolls on competing roads are today, let alone what they may be

by then. So it will all come down ultimately to value to the motorist. If people charge too much, folks will find other ways of getting

around.

Mr. DEFAZIO. But they don’t seem to think there are competing—

minimal bypass risk, they are saying. So they don’t seem to think

there are real competing routes. What are—

Governor DANIELS. Well, in order to maintain a minimal risk,

they will have to build a road that doesn’t take four days to travel

across, and I believe, in pursuit of future customers, they will do

that.

You know, but your whole question I think misses an enormous

point, which is that even if—which is ludicrous—we could have

captured this much value over time in our State, we could not have

achieved, we would have missed the opportunity to build roads we

need today, roads that are decades overdue, and bridges in our

State that we have been waiting for for far too long. And I am just
10

not willing to wait 10 years or 20 or 30, even assuming that future

governors magically are transformed into good businessmen.

Mr. DEFAZIO. Okay, just one other, Mr. Chairman. In Ohio, when

truck tolls were increased to 18 cents a mile, there was a huge diversion of truck traffic onto secondary roads, and the State was

able to roll back those tolls. In this case you won’t control the tolls,

and in 2010 your truck charge will be 20.04 cents per mile. So if

there is a huge diversion of traffic onto secondary roads, how are

you going to get Macquarie to roll back their tolls?

Governor DANIELS. First of all, 20 cents five years from now will

still be dramatically less than in Illinois, for instance, or in most

States in the Country. The Indiana toll road at that level will still

be a bargain. But—

Mr. DEFAZIO. Well, you are assuming there won’t be competition

and other people might not lower their tolls. But, in any case, just

if you could, I mean, does the State have a contingency if there is

something you didn’t anticipate that happens because of the private ownership? I am worried about the coordination between the

private and the public sector. They are there to make money; you

are there to benefit the public and minimize congestion. And if

those two come in conflict, do you have a way to control what they

do or revisit anything they might have caused inadvertently?

Governor DANIELS. The three-inch document that binds them requires them to maintain a traffic flow which is equal to or better

than today’s, in other words, add lanes and maybe other technology

to make this road better than it is today.

Mr. DEFAZIO. But does it require traffic or just capacity?

Mr. PETRI. I think—

Mr. DEFAZIO. Okay, thank you, Mr. Chairman.

Mr. PETRI. We will attempt to have another round, but time is

limited and there are a number of members who would like to ask

questions as well.

Mr. Sodrel.

Mr. SODREL. Thank you, Mr. Chairman.

Based on your experiences, what are the biggest obstacles in putting together these public-private partnerships? I might ask of both

our witnesses. Governor Kaine, if you want to start.

Governor KAINE. Good question. Finding routes that have significant enough volume to entice the private sector to be interested,

that is a key one. A number of parts of the State we have transportation needs, but we don’t have traffic volumes that would be sufficient to get the private sector involved. So that is always a key

issue up front.

When you have corridors where there is sufficient volume just

weighing the decision about public investment that you might be

able to make versus a private participant that is going to expect

a profit motive. Those are hard business decisions. One of the

things we have to weigh is debt limitations. Limitations on State

debt that sometimes, theoretically, we might like to do a project on

State debt, but if we have a debt imitation problem, that is one

where we then look to the private sector to try to come in and advance us.

So I would say probably the biggest challenge that we have next

to the volume of traffic challenge is capturing the right deal. There
11

are things we want to do in rural parts of Virginia to help economic

development, where we just don’t have a volume that would support tolls, but in areas like Northern Virginia, where there is the

volume, it is just the kind of hard business decision about what is

the right way to do it. We don’t have any project that looks like

any other project, even in Virginia, the particulars are all varied,

and being able to make a smart business decision about, yes, this

makes sense, let us go down this path and do it.

I authorized a loan recently out of a transportation capitalization

fund we have to complete a public-private partnership to construct

interchanges on Route 28 out near Dulles. One of the reasons for

that loan is we had the private sector there doing some of the

interchanges and they were at a critical mass, and rather than

have them go away and then try to get them back after construction costs had gone up a lot, we felt like a loan that would enable

them to stay working and taking advantage of their current working conditions would be helpful.

But I would say the biggest obstacle is just kind of knowing what

the right deal is at the time and not having a one-size-fits-all approach.

Mr. SODREL. Governor Daniels?

Governor DANIELS. I think that says it well. In our case, I think

maybe the novelty. Virginia is a 20-year, I think the Governor said,

veteran of these approaches, and it was new in our case. And this

probably led to some folks misunderstanding the size of the opportunity or the long-term value. I think what our comments reflect

is we are simply trying to solve a practical problem here.

In our State, there was never an alternative proposed—zero—

and there has not been to this day to closing the gap we had. And

I don’t know what options at the national level the Committee may

consider, but they are not easy to identify. As you say, there is

some limit to what fuel taxes ought to be, or other fees, and that

is what I think leads folks like us to look for these alternatives and

in some cases, selectively, they apply.

Mr. SODREL. Thank you, Mr. Chairman.

Mr. PETRI. Thank you.

Ms. Schwartz?

Ms. SCHWARTZ. Thank you, Mr. Chairman.

And I am from Pennsylvania, so we just heard an announcement

from our Governor that he is interested in looking at this. It is sort

of as open as that. So my interest in this is to really find out from

you—and I think the questions tried to be asked in a way is, one,

what is the downside? And if you could be a little more specific

about this.

I mean, I understand the upside: you are going to be able to get

private investment to do the capital improvements, create roads in

high-volume, profitable areas, which then, of course, leaves the

public sector to take care of areas that are not profitable. So you

are still going to have a problem at the State level. How are you

going to find the capital dollars to improve the roads in areas that

are not profitable?

So one of my questions is does that just put a greater burden on

the State, leaving only the areas that are really problematic, if you

want to put it that way, at least from a financial point of view?
12

And, secondly, what happens when it doesn’t work out so well?

When in fact the profits don’t come the way they might, or the tolls

go up so much that they don’t get the profits they want to, and you

are in a 99-year deal here. So can you just give us some advice a

little bit on the downside, what isn’t working, what we ought to be

looking out for, ways in which we at the Federal level ought to be

watching this a little more carefully if we should at all?

My guess is that you might have different answers on that, but

if you could give us a little guidance on it, it would be helpful.

Governor KAINE. I think one of the down sides, Congresswoman,

is there are those who beliee public-private partnership could be

kind of a magic language. I see this from a political standpoint

where it makes some that I deal with in Virginia government and

the public think, well, we can do it all by public-private partnership.

And that is a little bit of a political downside and we don’t think

that that is accurate. The U.S. Chamber of Commerce did a study.

They are favorable to the notion of public-private partnerships, but

they believe that the tolling and other financing mechanisms in

these partnerships could address about 20 percent of our unmet

need, but not the remaining 80 percent. You used the example earlier in a high-density corridor with a lot of traffic, much tougher

in a rural part of the State.

So public-private partnership isn’t a magic word that you can

just say and then it solves all the transportation financing challenges. You know, I am dealing with my legislature much as Congress is now, trying to find long-term funding solutions. We are aggressive on public-private partnerships. We also believe that we

need more core revenue into our transportation funding so that we

can take care of our other needs, particularly some of the rural

parts of the State.

So I think that that is a political downside. But I don’t believe

that that political downside outweighs the fact that these can be

very good deals. They can help you deal with limitations on State

debt capacity, they can get you the creative energies of financing

partners that you don’t have at the State level. But you just have

to know when a deal works and when it doesn’t.

We have had experience with doing public-private deals where

the scenario you raised as the second half of your question came

to pass, that the ridership projections didn’t pan out. This was on

a piece of new infrastructure, so there were other options for people

to travel around the Richmond metropolitan area. They chose not

to take this new infrastructure because the tolls were too high. And

we had to then step in, get involved in that deal. We refinanced

it with another private partner, put some pretty significant limitations on tolls. We also put in a walkaway clause for convenience

that we could use if we needed to. We learned a lot from the first

deal, so that the second deal was a lot better negotiated. So that

is a downside.

Ms. SCHWARTZ. But you really raise a very important point,

which is the tolls can go too high and the market isn’t interested

in paying those kind of tolls, they go elsewhere. So they either put

more of a burden on other public roads that are not so that we end

up seeing this beautiful new road that isn’t getting used, they can
13

say, fine, companies do that all the time, and you walk away. They

walk away. We see that. But it is a bigger problem, it seems to me,

that if we have actually sanctioned this project and they walk away

from a large road that is not being used. So I think your point that

it has got to be an opportunity for oversight for renegotiation so

that, in fact, your role as Governors, our role, of course, in protecting the public’s interest. I mean, the whole issue here is these are

now private roads.

People still, I think, our constituents would perceive a problem

not being able to get on our roads. So if we end up having this two

system of nice fancy roads, too expensive, maybe, for most of us to

use, and other roads that are still not well maintained, is it a question of political will that we just haven’t created the political will

in the State level to make the kind of—or the Federal level to make

the kind of investments to have roads people can afford that are

well maintained?

Governor KAINE. I think political will, being willing to invest is

a huge issue, certainly is in my State, certainly is federally. That

is a big piece of it. It is a little bit easier in dealing with a project

that you are not as ′′concerned are the tolls going to be too high′′

if it is in an area where there are clear, other viable ways that people can get around, that the pay private option isn’t the only way

that they can get from point A to point B. That makes you feel a

little more comfortable in doing a deal on a new piece of infrastructure. Hey, if folks want to use it, they can; they will have to pay

to use it, but if they don’t, they can continue to use the road network that we have that we are trying hard to maintain.

Ms. SCHWARTZ. I think my time is up, but sort of interesting

challenges. I think it is a whole new world out there that you are

suggesting, and I think there are a lot of lessons to be learned from

that we ought to keep a careful on at the Federal level.

Mr. PETRI. The reason we are having this hearing, in part, the

Indiana toll road exists not to serve Indiana, really. I mean, you

would not have a toll road across Northern Indiana if there was not

an Ohio on one side and Illinois and the whole national economy.

So this is an opportunity Indiana has to upgrade that, extract some

money from it and improve infrastructure across Indiana. It is an

opportunity other States don’t necessarily have, and other regions,

so that becomes a national concern.

And I guess I have a couple of questions. One is if Federal policy

changes or laws change or we do different things in the infrastructure area that may impact this contract, are there escape clauses,

or is this in any way a constraint on what we are doing, a risk that

Indiana is assuming? How does the Federal program interface with

this private contract that Indiana has entered into with—as far as

this public facility is concerned?

Governor DANIELS. In no way I can foresee right now, Mr. Chairman. This road was constructed by the State of Indiana with bonds

that the State of Indiana let and is still paying off. We will finally

retire them because of this latest transaction. So I don’t foresee

that happening. It is an important point to us that two-thirds of

the traffic on the road, two-thirds of the tolls paid on the road are

paid by out-of-State motorists today. That is another reason we
14

found this effective from our State standpoint, an effective way to

close our gap.

Mr. PETRI. We have a lot of transportation hot spots all around

the United States. One of the areas of greatest demand actually is

out in California, which has particular problems because of Proposition 13 and a variety of other constraints on their ability to raise

revenue. So we have had, repeatedly, regions in California coming

out here, talking about how they have convinced their voters, despite the anti-tax climate and everything else, to impose taxes upon

themselves by two-thirds votes for billions of dollars in just one individual county, Riverside County, California, for example. And

they not only do it once, they do it every four or five years. But

they do it through very painful, difficult, complicated political leadership involving building coalitions, meeting a variety of needs,

and, finally, achieving enough of a consensus to go forward, something that was attempted in Northern Virginia. It is very complicated and they are still working toward that.

But it is a good model as to what—and the bottom line, though,

is—and I would like your comments on this—that when you go

through that process, you end up with public support and understanding of the need for this infrastructure. If you short-circuit

that, despite the interim pain, you may, over a very long period of

time, be undermining our economy because there is not real public

support for infrastructure, you are extracting it from the private

sector, using it at sort of cheap because they are not paying for it

as it is going forward directly, and the public understanding and

appreciation of this role of government is gradually being diminished, and it could make us less vital as a polity, so to speak.

Could either of you comment on that? Is this an expedient that

is necessary in the short-run but unwise in the long-run, or is this

the way of the future?

Governor DANIELS. Well, that is an interesting question. I don’t

deny the importance of abstractions like public appreciation. I am

trying to build it all the time. I think it is fairly obvious to most

citizens of a State like ours, but I am constantly talking, and have

long before this transaction, about the central importance of public

assets, transportation infrastructure of all kinds, to the future success of our State.

I wasn’t prepared to wait years to try to build this. We had coalitions, all right. We had every group that spoke on this subject, including strong support of building trades unions, for instance, all

of local government, and we will continue trying to rally people to

this notion, because as Governor Kaine says, this is not a complete

solution, and we have many other hurdles to cross to have the kind

of transportation network that we want.

But, again, to return to what I said again, people keep asking

about risks and so forth. Does no one notice the risk of inaction,

the enormous cost of inaction? And we had already paid it for decades in our case, waiting for an I-69, waiting for a north central

to northern corridor we call 31, waiting for a transverse road we

call the Hoosier Heartland Corridor. And no one seems to have calculated the cost, the lost jobs and the economic activity, that Indiana paid for sitting around waiting for a miracle under the old system.
15

So I support strongly, and I hope to contribute in my days in this

job, to an ever-stronger appreciation by people about the importance of roads and bridges and about the fact that they are never

free. We are only talking about which way to pay for them, and the

extent to which users should pay more directly or spread it to everyone. And that is a useful debate, but I didn’t want to have it

for years and leave office leaving the same empty promises behind.

Governor KAINE. Mr. Chair, if I could just answer the same question. It could be a matter of political expediency if we promote the

notion that public-private partnerships are going to be the full answer, because they are not. And one of the things that I find frustrating is that, you know, there are some who will talk about public-private partnerships as if that means that the State doesn’t

have to be a leader.

I am involved in a very, very difficult special session now about

State funding for transportation, but I still have some real optimism that we will get there. The timing is up in the air. But public-private partnerships are part of the solution; local empowerment

is part of the solution; coming, hat in hand, to the Federal Government is part of the solution. But the State also has to make some,

you know, hard decisions about the level of our investment.

And if we push the notion that public-private partnerships are

going to be the salvation of it and that no one else has to make

any hard political decisions, then we will have used an expediency

that is inaccurate. It can solve a very important chunk of our problem, but much of the problem will still be on our shoulders in

terms of making some hard political calls.

Mr. PETRI. Thank you.

Mr. Pascrell?

Mr. PASCRELL. Thank you, Mr. Chairman. Mr. Chairman, I find

it interesting when we are—to find out what is the best way we

can get the most out of a public asset. I think that is at the core

of what we are talking about, whether we are talking about

privatizing a road or privatizing a water system. I want to know

what the public is going to get out of this. I think that is the rub

in all of this.

I believe in a market economy, but privatization of the infrastructure, to me, is very serious business. If we privatize the road,

would that road be eligible for Federal dollar directly? What form

of subsidizing does this take?

You know, New Jersey has looked at a very similar plan. At this

point, has rejected it, for the most part. You are having on the gubernatorial level. We have problems on the Federal level dealing

with our trust fund. The trust fund, by 2009, will be in the red by

$2.3 billion. We have a very serious problem, on the Federal level,

maintaining our leverage here. And, as you see, we are really anxious to deal with it.

On top of that, States are facing severe constraints with their

own budgets. My home State of New Jersey toll roads have been

ubiquitous since 1950s. The Turnpike and the Garden State Parkway bring the State $829 million from tolls annually. These are

temporary tolls, at least they were supposed to be—like the tolls

on the George Washington Bridge. Temporary tolls on the George
16

Washington Bridge. But they have become a staple for transportation financing.

The Federal-State partnership I believe has been a productive

one for financing and planning our Nation’s roads. Privatization

roadways may result in a loss of control over management and the

operation of the facilities, like toll rate setting or even the improvement of the other roads in the geographic proximity. So we are a

long way from resolving, and this is an option.

In the biggest highway privatization deal in U.S. history, Indiana

signed an agreement last month, as you know, to turn the 157-mile

Indiana toll road over to a foreign consortium—ah, that rings a

bell—and it will operate for a profit for the next 75 years. Under

the lease, the Spanish-Australian consortium, Cintra Macquarie,

will pay the State $3.8 billion up front and will be responsible for

operating and maintaining the highway. It will get to keep the toll

revenue it collects. It is my understanding that this is already a

toll road, so the initial construction of the road is presumably already paid for.

I have a couple of questions. Will the lease make up for lost revenue, toll revenue normally received by the State? How about the

Federal Highway matching funds? What plans are there to ease

congestion, since this is going to be a private road owned by a foreign consortium; was this a motivating factor? What steps, if any,

have been taken to ensure our homeland security when contracting

with a foreign interest on a vital piece of our Nation’s infrastructure? Governor Daniels, I would ask you to respond to that. That

is four questions I asked.

Governor DANIELS. I don’t know if I counted four, but let me deal

with some of them. First of all, we need construction today; our toll

road loses money fairly accounted for. And the second benefit in—

I think you said earlier on what does the public get. Our public

gets $5 billion of new roads and bridges it wouldn’t have had otherwise. That is what we get. We get a quadrupling of the new construction from current levels; we get projects that have been on the

drawing boards of our State for a long time. That is what—

Mr. PASCRELL. Now, Governor, when you say the public gets $5

billion—

Governor DANIELS. Four billion dollars plus interest.

Mr. PASCRELL. Yes. What do you mean the public gets it? The

State treasury gets it, correct?

Governor DANIELS. Well,—

Mr. PASCRELL. And then are we supposed to use that money, the

money that you get, how are you supposed to use that money, is

that categorical money, is it universal money?

Governor DANIELS. You weren’t here for the opening, Congressman, but I said—

Mr. PASCRELL. I read your statement.

Governor DANIELS. And I said that it was a cardinal principle for

us that the money would not be spent on any purpose other than

reinvestment in, we hope, the highest priority and the best chosen

projects we can leave—

Mr. PASCRELL. Is that defined in the contract—

Governor DANIELS. Yes, it is.
17

Mr. PASCRELL. Is that defined in the contract that you established with the private company that—

Governor DANIELS. Well, they have nothing to do with that. It is

defined in the law that we passed in the general assembly of our

State. There was only one exception which I did agree to, and that

was to immunize passenger cars from any increase. Think of it as

a dividend back. So in 2016, the passenger motorists of Indiana

will pay the same toll they paid in 1985. Pretty good deal; 15 cents

at least at certain toll booths.

Mr. PASCRELL. And that toll money goes to the private consortium, correct?

Governor DANIELS. They will collect the tolls, and if there is

any—and they may make money, they may not, but, again, the risk

of that is entirely on them.

You asked about congestion. Good question, important to us. We

have been struggling to prevent congestion from building on that

road, haven’t been able to do the maintenance and expansion that

we like. They are bound to do that; they have committed to billions

over the course of the lease. And as I frequently reminded people,

that is written into the agreement. There is a definition of traffic

flow, an A through E system, as I recall, and they are required to

add capacity or to maintain or improve the speed with which traffic

moves across that road. But I think it is important to note that

that is really the State’s second line of defense. The first line of defense is if that road becomes undrivable or less tolerable, they lose

money, and they will be driven, in my opinion, by their own requirement, the market’s requirement, to please their customers, to

see that that never happens.

Mr. PASCRELL. Governor, just respond, in conclusion, about the

Federal Highway matching funds. How about those funds?

Governor DANIELS. Well, I am not sure how they are—

Mr. PASCRELL. They are our tax dollars.

Governor DANIELS. Well, the toll road was built with Indiana dollars, and not Federal dollars; it was built with bonds. And maybe

New Jersey’s was the same, I don’t know. But I am sorry if I am

missing a point here, but I don’t believe there is an implication

with regard to, for instance, the return of dollars or anything like

that. They were built with bonds the State borrowed against its

own full faith and credit, and has continued to pay interest on all

these years.

Mr. PASCRELL. When I talked about matching funds, you are

changing ingresses and egresses along the highways constantly for

safety reasons, etc., etc. Whose responsibility is that, and will there

be matching Federal dollars you will seek, the company would

seek, the consortium would seek?

Governor DANIELS. No. If you are talking about the toll road it

is their responsibility out of their pocket.

Mr. PASCRELL. So they will not have the ability to seek Federal

dollars?

Governor DANIELS. I guess anybody can come down here and ask,

but that is not a question—

Mr. PETRI. We will have another round. Thank you.

Mr. Duncan.
18

Mr. DUNCAN. Well, thank you, Mr. Chairman, and I will be very

brief. I have got just a couple of questions.

I was in a congressional delegation chaired by Chairman Rogers

about two and a half years ago, and one of the places we went was

Australia, and we met with one of the companies that is going to

testify in the next panel, and I am a little bit curious. Do either

one of you see a problem or have a concern about foreign companies leasing some of our major roads or investing in that way, and

do you think the public would accept that type of thing if it was

shown it was pretty good financial deal? I know they are doing that

in some other countries. Have either one of you looked into that or

considered that?

Governor KAINE. Congressman Duncan, we have, in Virginia,

wrestled with that question. We have kind of a uniform principle

that if we are dealing with an investment group that is foreign

owned, that we require them to incorporate in the United States

and have a U.S., on-the-ground presence that is incorporated here.

That is at a minimum of what we look for.

One of the principles that we feel very strongly about—and,

again, this is—this kind of changes deal to deal, because there are

not just cookie cutters on these deals. But we want the value that

is generated in a corridor to stay in that corridor, so we are not

spending the money in the corridor on general fund activities it is

for transportation; we are not spending it in other parts of the

State, we want to keep it in the corridor. And even the notion will

there be a profit margin that will go somewhere else, we weigh

that issue and sometimes decide not to go with a private investor

or even a foreign investor if there was a way we could keep every

dollar of value in the corridor where the project takes place. But

we resolve that question somewhat differently depending on the

deal and who is coming to the table to offer it or participate. Sometimes you have a lot of interest, sometimes you have a little bit of

interest, and we have to tailor it depending on the project.

Mr. DUNCAN. Is that similar to the way you handle it, Governor

Daniels?

Governor DANIELS. Yes. I mean, this consortium is an American

corporation that will have a board and there will be local representation on that. As I understand it, we will put an oversight commission in place at the State level to make sure that this very thick

agreement is lived up to scrupulously. I personally insisted on a

‘‘buy Indiana’’ requirement on the consortium so that virtually all

of their—certainly all of their hiring, but virtually all of their goods

and services will be bought in our State.

And I guess, lastly, I am at a loss to know what to say about this

concern about foreigners. For openers, Congressman, Australians

have fought beside us in every war and died for the same freedoms

we cherish, and I think it is an insult to them to suggest that

somehow they would—some company from there, not a country, it

is not a public entity we are dealing with—would in any way undermine that, not to mention it would undermine their own business interest to do something injurious to the interest of this Country.

I mean, I will just tell you on behalf of our State—and I bet New

Jersey is no different—I consider a significant part of my job to
19

successfully compete for foreign investment. We are proud to have

hundreds of companies in our State from Europe, from Japan, and

elsewhere, and I consider it a victory for Indiana when those dollars come here and put Hoosiers to work, as opposed to go somewhere else. So maybe the mind could conjure some situation that

ought to be guarded against, but it is not this one.

Mr. DUNCAN. Well, I think those are very good answers. Let me

quickly ask you about something else.

I chaired the Aviation Subcommittee for six years and we found

that, well, the worst example was the main runway at the Atlanta

Airport took 14 years from conception to completion, but only 99

days of actual construction, and we found that highway projects

and all these projects take three or four times as long as they

should because of all these environmental laws and rules and regulations. We tried to put some environmental streamlining in the

last highway bill, but do any of you—have you seen problems like

that and do you have any specific suggestions about how we could

speed those processes up?

Governor KAINE. Congressman, I have to admit I am still pretty

new on the governor job; I have just been in for four months, so

I haven’t experienced problems yet that would give me suggestions.

You know, we do have one significant public-private partnership

under consideration dealing with Interstate 81 in the western half

of Virginia, and there are some serious environmental issues raised

by the citizenry in that area concerning that infrastructure we are

having to work through in public comment. Thus far, it has seemed

to me that the environmental issues are significant enough that we

ought to be considering them, but I don’t have any particular suggestions about that here today.

Mr. DUNCAN. All right. All right, my time is up. Thank you very

much.

Mr. PETRI. Ms. Carson.

Ms. CARSON. Thank you very much, Mr. Chairman, and thank

you very much, Ranking Member DeFazio, for holding this hearing.

Welcome to the two Governors who are here to enlighten the

Committee on this public-private partnership and explain in detail

what all these toll roads are going to do for America once they are

turned over to private enterprise.

Indiana is the crossroads of America, and, like the rest of America, Indiana is in dire need of transportation investment. I personally feel like transportation is one of the greatest investments that

any public entity could make on behalf of its citizens. I have my

reservations about leasing all of our toll roads to private investors

to raise money, but we in Indiana can certainly all agree that we

have some critical projects that need funding and that will provide

high-paying jobs, hopefully, with excellent results for Hoosiers. And

while I have the floor, because I probably won’t ever get it again

from the Chairman, with the contract contains a clause that prohibits Indiana to build or improve roads that might compete with

the Indiana toll road, will the contract do that? According to the

GAO report, all previous public-private and toll leasing partnerships range on that from 30 to 50 years. Why is Indiana on a 75-

year contract, so much longer than the rest? And if this 75-year

deal goes through, it will earn $3.8 billion for the State, but the
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total cost of your 10-year plan is $11.8 billion. Doesn’t that even

come close to funding the project, or does it?

I know you thought I was going to be mean to you, but I am not,

I am welcoming my Governor here, and appreciate very much you

taking the time. And I will yield back and let you answer my questions.

Governor DANIELS. Thank you, Julia. Always fun to see you.

The answers are, yes, we have a non-compete clause. I think they

are fairly typical. Ours is pretty narrow, it says no interstate quality road within 10 miles of the toll road. There is nothing on the

books, in the plans, in the dreams of Indiana. In fact, the only road

that could be used or corridor that could be used conceivably to

touch that clause, every mayor along it is determined will never be

expanded; it would bulldoze through the middle of their towns. So

we don’t believe we gave up a thing in the non-compete clause.

The 75-year question is a good and frequent question, and the

answer has to do with tax law, frankly. We still own this road, and

always will; this is a lease, not a sale. And for the tax advantages

in various jurisdictions of a lease to pass along to investors, as I

understand it, depreciation and interest costs and other deductions,

that lease has to be of a certain term. The Chicago lease is 99

years, which struck me, as it would anyone, as an extraordinary

time period. We were told by counsel that they were nervous at

anything less than—at 50 years or less, and opted for a midpoint.

I don’t know, and you would have to ask an expert, whether something shorter than 75 could still achieve the value for Indiana that

we achieved. But I know that if the lease had been much shorter

than that, it wouldn’t have been 3.8, it might not have been 2.8 or

1.8 or anything really worth accepting.

Lastly, yes, 3.8 is less than 12 billion, but that is the gap we

were talking about. Somewhere I even brought a chart, I don’t

know. Without that money, Congressman Carson, we would have

continued, as we have in Indiana, limping along, funding less than

half the new construction we need. We are going to quadruple new

construction as we catch up. And we have done less of the maintenance we need, less of the preservation we need, just continued to

sort of put patches on a system that really needed to be rebuilt. So

it makes all the difference in the world between the hand-to-mouth

world we have been living in and actually funding—in advance, I

should say—the plans that we have always dreamed about.

Mr. PETRI. Thank you.

Mr. Coble.

Mr. COBLE. Thank you, Mr. Chairman.

Governors, good to have you all with us.

Mr. Chairman, I apologize. I had two other meetings, so I am a

belated arrival.

My colleague, my friend from Tennessee, read my mind. I was

going to ask you all about the foreign transportation operators, but

I think you all adequately responded to that. That appears to be

hot copy now.

Let me ask you this, gentlemen. How realistic or fair is it—strike

that. Let me say it a different way. Advocates of toll roads oftentimes say the good future is that you realize revenue from out-ofState motorists, which, of course, is realistic. Opponents, of course,
21

won’t know toll roads at all to be in existence. How realistic or fair,

Governors, is it to have a toll road in one portion of the State and

use the proceeds therefrom to construct projects in other portions

of the State? In other words, you are having motorists on the eastern end of Virginia or Indiana paying the toll, and then you divert

those monies to the western end of Virginia or Indiana to construct

new projects. How realistic and fair is it, (a); and, (b), is it difficult

to sell to the public taxpayers?

Governor DANIELS. I will give you our experience. A very realistic

and fair question, one of the first ones we asked. In our case, we

committed 34 percent of the value that we are going to receive to

7 counties out of 92, those 7 being the ones the toll road passes

through. Thirty-four percent is the amount of tolls paid by all Indiana motorists from all 92 counties. I am up there frequently, and

the tolls that I might pay or a motorist from anywhere else might

pay would be in the 34 percent figure.

And with just your question in mind, we said that the areas

which have been host to and supported this road these years ought

to come first, and we gave them every penny of value that any Indiana motorist created in this arrangement. Actually, it is far more

than that, because some of the major projects that will directly

benefit that part of our State will connect it to other parts of the

State, and I am not even counting that in the calculation.

So that is the way we addressed it. It was batted around extensively in the legislature, how much is fair, and that, I think, became the consensus point of view.

Governor KAINE. Congressman, in Virginia we have a very fixed

rule that we don’t take any value out of the corridor where it is

raised. We have to use it for transportation in the corridor where

it is raised. All the transportation investments do not have to be

highway, they can be transit or rail, but the value has to stay in

the corridor.

And we are involved in a complicated one right now, the discussion about the Dulles Toll Road and rail to Dulles. That may well

be the most valuable corridor, in terms of its density of use, in Virginia, and there would be opportunities to use revenues from that

corridor to do projects elsewhere in the State, but I have taken the

position that Northern Virginia commuters shouldn’t be paying

tolls and then not getting the benefit of the tolls they are getting.

So we, by law, do not ship value to any other part of the State

other than the corridor where it is raised.

Mr. COBLE. Gentlemen, do you see that this is a partisan issue

for either one of you, I mean, Democrat and Republican?

Governor DANIELS. I think it definitively is not. This is—

Mr. COBLE. I would think it would not be either.

Governor DANIELS. This is a debate, as I see it, between—about

a practical solution to a problem, and, frankly, I find the objections

to it ideological and not pragmatic. I think it is a debate between—

I think governors tend to be fairly pragmatic because that is the

nature of our job, it really permits nothing else.

I will say it did become partisan in our State, and I am sorry it

did, and I tried hard to prevent that. But aside from some members of our Black Caucus who voted for the bill, it did become partisan, but I don’t think other debates need to be. I just simply look
22

around. Most of the activity has happened under Democratic governors and mayors; Mayor Daley in Chicago, the last couple governors of Virginia, and now in Illinois and now in Pennsylvania.

So honest people can differ about the practicalities of this approach. I think well done; they speak loudly for themselves. But

this whole matter of solving our national infrastructure problem I

would hope would be the least partisan of our debates. The need

for it is something that affects us all and we are simply talking

about the best way to get to a good outcome.

Mr. COBLE. Governor?

Governor KAINE. Congressman, if I could say I would agree with

what Governor Daniels says. I do not think it is partisan. I think

it can be ideological, though, because, again, the one danger I see

in this discussion—and I am a proud proponent of using these partnerships when they are right. There can be an ideological danger

because there are some who say public-private partnerships are

going to solve 100 percent of our transportation financing challenges, and that is an ideological position that some advance that

is just wrong.

I believe that these partnerships have the capacity to solve a

healthy percentage, 20, 25 percent of our challenges. They are not

going to solve challenges in rural parts of the State or places where

there is not sufficient density of traffic. And so there is no substitute, then, for State leaders and Federal leaders having reliable

sources of infrastructure funding in addition to public-private. So

it can be ideological that way, but I agree, the Dems and Republicans mayors and governors, you know, we are deal makers and

we are going to look for the best way to advance a need to serve

our citizens, and in some cases this is the best way.

Mr. COBLE. Well, you all have sought employment, as have we,

where the word partisan is not unknown, and I thought that was

a pertinent question. Gentlemen, thank you all for being with us.

Thank you, Mr. Chairman.

Mr. PETRI. Thank you.

Mr. Michaud.

Mr. MICHAUD. Thank you very much, Mr. Chairman and Ranking Member, for having this hearing.

I want to welcome both Governors here. I have several questions

for both of you, if you can answer them. My first is I understand

that while there has been controversy related to project labor

agreements, I believe that they are effective at keeping project

costs down and ahead of schedule, in a timely manner. Where can

we as a Committee find an analysis of project labor agreements as

it relates to highway and bridge construction as far as the cost-effectiveness?

My second question is what happens to the Davis-Bacon Act

when you look at public-private sector investment?

The third question is, Governor Daniels, you had mentioned

about working with the building trades, and I assume that has

been successful, you moved forward.

I guess my question to Governor Kaine would be have you

worked with the building trades as you move forward on these public-private sector agreements?
23

My next question is on weight limits on public-private sector

roads. What is the weight limits on those roads?

And my last question is, Governor Kaine, you had mentioned

that they are paid primarily through tolling and other ways. My

question would be what are the other ways.

Thank you.

Governor KAINE. Just to tackle the specific questions directed,

other than tolling, what are ways we pay for public-private partnerships? We have a significant project near the Dulles Toll Road,

it is Route 28; 10 interchanges, a sizeable project. The way we have

done that in a public-private venture without tolls is that adjoining

landowners, the value of whose land would be benefitted by the

project, have agreed to pay an enhanced property tax assessment,

with the guarantee that all those monies would go into corridor improvements.

And that will be a feature of funding the rail expansion to Dulles

as well. There will be tolls, but there will also be property owners

who, by a vote, have agreed to have a special assessment that they

would be assessed to help with the infrastructure improvements.

On some of the labor related questions, we have not done project

labor agreements in Virginia. Our PPTA projects tend to be on Federal roads where the Davis-Bacon Act applies, so that law does

apply to most of the PPTAs that we have looked at.

And then, finally, in terms of our working relationship with the

building trades on some of these projects, the one that I am very

involved in now is the rail expansion to Dulles, and we have made

a decision, after a fairly careful review, that the right project manager for that project is the Metropolitan Washington Airports Authority, and they have a long history of working with building

trades on capital construction projects at the two airports under

their jurisdiction. So while we are still working on the details,

there is a comfort level, I think, among the labor community with

the way that the deal is being structured and the big picture, because it is a known relationship; they are doing work at the airport

right now.

Governor DANIELS. Quickly, no PLA required on the transaction

we did, and, as a practical matter, I think it is all but certain, it

is just the nature of the marketplace in our State, that this work

will be done by union contractors; if not every penny of it, very

close.

Davis-Bacon will apply whenever Federal dollars are involved.

That will be most of the projects we do. We will certainly take

these proceeds and, as I explained, fill out the huge gap that we

faced. But in most cases it will be a mix of funds, as I understand

it or it will be on a Federal road directly, so Davis-Bacon should

apply in virtually every case, if not all.

And on weight limits and all other such things, Congressman, we

specified at least the current standards, whether it is congestion,

traffic flow, everything down to snow removal and how long it

takes to get a dead animal off the road is covered, and we specified

at least today’s standards, which we have been struggling to maintain because the road is, at today’s toll levels, is not really covering

its full cost.

Mr. MICHAUD. So is that 100,000 pounds or 80,000 pounds?
24

Governor DANIELS. You are above my pay grade now.

Governor KAINE. Yes, I am not sure either. I am sorry, I can’t

answer that, Congressman Michaud.

Mr. MICHAUD. Okay. On the Davis-Bacon, so you said it applies

for where Federal dollars are used. But on these public-private

partnerships, are all those agreements that both States have, are

there any Federal dollars involved in that or are they primarily

just private sector dollars? And if they are, do you apply DavisBacon to that?

Governor DANIELS. Well, of course, today we have not constructed one, so we have not encountered this yet. The one we are

looking at and have authority for would absolutely have DavisBacon involved, for both reasons: it would be a Federal corridor, I69, and we don’t imagine that tolls could defray more than a significant fraction of the cost. So there would be a lot of Federal dollars used on the project, and Davis-Bacon absolutely would be required.

Governor KAINE. And the projects that we are looking at are all

part of the Federal system as well, and Davis-Bacon applies to

them.

Mr. MICHAUD. Okay. Thank you very much.

Mr. PETRI. Thank you. We are going to have to wrap the hearing

up fairly shortly, but Mr. Shuster.

Mr. SHUSTER. Thank you, Mr. Chairman.

And thank both you Governors for being here today. And I

thank, Governor Daniels, you are correct in your statement that infrastructure shouldn’t be a partisan issue. In this Committee we

try not to make it that way.

The question I have for Governor Kaine, congestion is why we

are—and I know, driving down here to Washington from Pennsylvania, I deal with it every week. My question is, though, about alternatives to building roads. Does the railroad offer—and I know

here in Virginia you have talked about that 81 corridor rail line

running along there; there are discussions going on. How much of

an impact do you think that will have and is that a real relief to

getting freight off of highways onto the railroad tracks?

Governor KAINE. Certainly. Thank you for the question, Congressman. We do believe rail offers two very important solutions

for us as we tackle congestion. The first, in some of the high-density corridors—Richmond, Washington, and ultimately Richmond to

the Virginia Beach-Hampton Roads area—instead of more congestion on Interstate 64 and Interstate 95, there is rail corridor there.

We do have a State-funded rail system, the Virginia Railway Express in the I-95 corridor down to Fredericksburg, and we will continue to expand that so that passengers will have some option

other than being on the road.

And, second, with respect to the freight rail systems in Virginia,

Congress, in the transportation bill last year, did a significant

amount of funding for the Heartland Corridor project, which is an

upgrade of the freight rail system essentially from the Port of Virginia all the way out to Chicago, allowing double stacking of freight

containers, and we are very engaged in that; just announced an

intermodal facility in the Roanoke area, because every double stack

we can put on takes about three trucks off Interstate 64 through
25

the tunnel in Hampton Roads, and so we believe east to west along

that corridor. And then also potentially north to south along Interstate 81, the dedicated rail fund that we have put into our budget

for the first time in Virginia history will enable us to make some

capital investments for guaranteed investments and returns by our

freight rail partners, and that we can then use those investments

to reduce congestion.

So we do see, you know, these things all tying together, and enhancing rail, both passenger and freight, is going to be one of our

strategies to congestion reduction.

Mr. SHUSTER. Well, thank you for insight on that.

Governor Daniels, I know that selling or leasing assets, infrastructure assets I think is something we need to be looking at, and

I know you have done that in Indiana. The question I have is in

Ohio they raised the rates on the Ohio Turnpike by about 18 cents

and truck traffic significantly went onto the secondary roads, and

I guess Ohio had to go back and adjust those to get them back on

the Ohio Turnpike. In your lease agreement do you have a clause

in there that will—because I understand in 2010 Indiana is going

up by 20 cents. If that same kind of diversion goes on, what can

you do to address that in your lease?

Governor DANIELS. Well, obviously, we studied the issue of diversion very carefully and, of course, so did the investor. If people divert, it comes out of their hide and they lose money. So they have

every interest—their interest is exactly aligned with the State’s in

trying to have a road which is free-flowing and encourages people

and seems to be a bargain at the price.

Congressman, our tolls are antiquated, they haven’t changed

since 1985, they are a fraction of the tolls in Ohio, Pennsylvania,

Illinois. Even after the increase they will be well below those. Even

after—even a few years from now they will be below the level that

I understand Ohio is about to return to. And we visited very carefully with every sector of the trucking industry and, in fact,

changed our initial proposal. We had put a proposal in the regulatory process—incidently, you don’t have to pass a bill in our State

to change the tolls, this could have been done any time in 20 years

administratively. And we put a rule in the process, which we subsequently modified, to guard against diversion, and we have been

told by the leaders of the trucking industry they are quite comfortable starting with this very low base and then stepping in over

the course of years, tolls which will still, as I say, make us, we

think, very competitive.

I look at this as an issue of competitive pricing. You only shoot

yourself in the foot if you—as perhaps some other States have. If

you raise the price of something too far, your customers find another option at some stage, and I hope we have been careful to

avoid that.

Mr. SHUSTER. Well, thanks for the answer, and appreciate your

being here today and look forward to working with both of you as

we move forward on these issues. Thank you.

Thank you, Mr. Chairman.

Mr. PETRI. Governor Kaine, Governor Daniels, thank you for

your leadership in helping to meet our Nation’s vital infrastructure

needs. We are looking to your experience and example, and that of
26

others, as we struggle at the national level to maintain our competitiveness and provide for our population going forward.

I thank you for your flexibility as well in adjusting the schedule

of this hearing.

The hearing is recessed until 12:30. Well, we will start 15 minutes after the Prime Minister of Israel concludes.

[Recess.]

A F T E R N O O N S E S S I O N

Mr. PETRI. The Subcommittee will come to order.

We will now introduce our second panel. We will hear today from

Bryan Grote, a Principal with Mercator Advisors, LLC; D.J.

Gribbin, who is the Director of Macquarie Holdings, USA, Inc.;

Mark Florian, Managing Director of Goldman, Sachs and Company;

Karen J. Hedlund, a partner with Nossaman, Guthner, Knox, Elliot; John Foote, Senior Fellow at the Kennedy School of Government; and the Honorable Matthew Garrett, Director, Oregon Department of Transportation.

We welcome you all. We thank you for the prepared statements

that you and your organizations have prepared and submitted for

the record. They will make a real contribution. And, as you know,

our Committee puts them out; they are available for public review,

and this is a subject that a lot of people are studying and reviewing

all around our Country, and we appreciate that effort doubly as

well.

I think, if it is all right, we will start with the Director of the

Oregon Department of Transportation, Mr. Garrett.

TESTIMONY OF BRYAN GROTE, PRINCIPAL, MERCATOR ADVISORS, LLC; MARK FLORIAN, MANAGING DIRECTOR, GOLDMAN, SACHS & CO.; D.J. GRIBBIN, DIRECTOR, MACQUARIE

HOLDINGS (USA) INC.; KAREN J. HEDLUND, PARTNER,

NOSSAMAN, GUTHNER, KNOX, ELLIOT, LLP; JOHN FOOTE,

SENIOR FELLOW, KENNEDY SCHOOL OF GOVERNMENT, HARVARD UNIVERSITY; THE HONORABLE MATTHEW GARRETT,

DIRECTOR, OREGON DEPARTMENT OF TRANSPORTATION

Mr. GARRETT. Chairman Petri, Ranking Member DeFazio, Chairman Young, I am Matthew Garrett. I am the Director of the Oregon Department of Transportation, and I truly appreciate the opportunity to share some thoughts with you on our efforts related

to public-private partnerships.

I will tell you Oregon has engaged in the public-private partnership conversation out of necessity. We are challenged on many levels. We are challenged by growth in our major metropolitan areas,

we are challenged by the congestion and the economic implications

that it brings—and this was validated by a study done by the Portland Business Alliance called ‘‘The Cost of Congestion,’’ businesses

actually saying they are having to make business decisions affecting where they build their warehouses, where they and how they

staff their various shifts. Bottom line, issues that, in the end, have

implication to their bottom line. So the cost of congestion is much

more than just a transportation conversation, it is an economic conversation.

We are challenged by an aging infrastructure and we are challenged financially. And this was validated by our current Oregon
27

Transportation Plan. That plan is our 25 year policy and vision

document that has identified an annual $1.3 billion shortfall that

is needed in order for us just to properly maintain and grow the

State’s transportation system.

Simply put, Oregon’s transportation infrastructure needs far exceed our revenues. These realities demand that we look beyond the

traditional funding mechanisms we have available at the State.

Our approach has taken two pathways. The first—and this is a

conversation that has already played in front of this Committee,

the road user finance fee. Our efforts to look into the future, to look

at an alternative to the gas tax and move toward a per mile tax,

a true user fee. This pilot project is engaged, we are about a month

into a year-long trial where we have identified 280 folks who have

placed transponders in their cars. We have identified two gas stations in the greater Portland Metro area that have transponders on

their equipment, and we are starting to tally the vehicle miles traveled between fill ups, so to speak. Look forward to sharing these

thoughts about a year from now, as the report and the assessment

plays itself out come April of 2007.

The second pathway we are walking down is indeed our focus

today, public-private partnerships. In 2003 we received legislative

authority or direction to be much more aggressive in engaging the

private sector in terms of innovative design, innovative delivery, financing. Bottom line, speed, delivery, leveraging private sources of

capital to expand the highway system was the direction and the

tenor and tone of the conversation from our State legislature.

We have been somewhat strategic in our approach. Oregon has

focused on three public-private projects. They are major capacity

projects, projects that would be considered mega-projects to Oregon

having costs associated into about the half billion dollar price

range. They have been on project lists for decades. Just our financial streams haven’t been robust enough to fund these type of

projects..

Thus, we are looking at reintroducing tolling. We are looking at

value capture, as well as access to private equity capital to help

augment the existing revenue streams, thus allowing us to fully

fund and construct these type of projects. We are currently engaged

in the pre-development phase with a consortium of companies led

by the Macquarie Infrastructure Group. This effort is to evaluate

the financial and the technical feasibility of the various options to

build these projects. Their work in this pre-development phase will

bring the projects to a point where they can secure private sector

funding.

In addition to demonstrating the technical and feasibility or, excuse me, financial feasibility, it must be shown that it is acceptable

to the public. This is extremely important to my commission, to my

Governor, that third leg of the stool: what is the feeling of the public at large and how does that influence the conversation, because,

when all is said and done, the public will tell us whether the need

for the projects are compelling enough to walk down this new avenue for funding.

Now, should this be accomplished, playing out a scenario that we

move through this first phase, our private partner would earn the

exclusive right to enter negotiations with ODOT to implement a
28

contract to build and perhaps operate the facility. Those are negotiations that will take place into the future.

Now, even turning to public-private partnerships, we are not giving up our role as the stewards of the public interest. ODOT would

retain control over the direction of the projects. All these projects

will comply with all the Federal and State requirements. We will

not lower the bar on land use issues, on environmental issues, on

labor issues.

Let me conclude by saying that I have mentioned the challenges

of feeding this transportation appetite. It is formidable, to say the

least, and we see the public-private partnership as a strategic and

surgical tool to be used. It is a piece of the solution, it is not the

whole solution.

With that, Mr. Chairman, I am happy to answer any questions.

Mr. PETRI. Thank you.

Mr. Grote.

Mr. GROTE. Thank you, Mr. Chairman and Mr. DeFazio and

Chairman Young. My name is Bryan Grote. I am a principal with

Mercator Advisors. My company helps develop financial plans for

major projects. We also work with government agencies to design

and evaluate financial assistance programs.

Over the last 15 years, public officials have begun turning to the

private sector to share management responsibility and supplement

government resources for transportation infrastructure. In my remarks today, I am going to briefly focus on three questions to help

summarize the nature and extent of public-private highway transactions, and hopefully to put PPPs in a useful context for examining their potential to generate new capital.

What types of PPPs are being employed? The generic term, public-private partnership, encompasses a wide range of relationships,

contractual, through which public entities and private entities collaborate in the delivery, operation, financing, and/or ownership of

an infrastructure project. Different arrangements can be thought of

from a spectrum: traditional government delivery at one end to the

private concession model at the other. In my written testimony, Exhibit 1 illustrates a basic array of the possible arrangements.

PPPs appear to be best suited for those large, complex projects

with acknowledged need and strong support. Private sector involvement can provide substantial benefits in terms of accelerating development, taking on construction and performance risk, providing

efficient operation and superior service, introducing new technologies, and even attracting new capital.

So how much private investment can be generated by PPPs?

Some arrangements involve projects capable of generating their

own revenues, whether direct user charges like tolls or indirect

beneficiary fees, what people call value capture, such as development impact fees or special district assessments. They are of particular interest. They do have the potential to generate new resources for capital investment.

But despite the visibility of several large toll-backed financings

in recent years, highway capital investment in the U.S. is still

dominated by traditional public funding. About 94 percent of the

nearly 750 billion invested in highway capital nationwide between

1993 and 2005 has come in the form of either public grant funding
29

or tax supported bonds. Only about 6 percent has been in the form

of what could be considered private, that is, non-tax supported investment, through toll-funded grants, tax-exempt toll revenue

bonds, or taxable debt and equity capital.

While their national investment effect is modest thus far, the

usefulness of PPPs in advancing particular projects, especially

things like major corridors and urban connectors, is considerable

and growing. Nationwide, some 21 billion of investment in 43 highway facilities has been accomplished using various public-private

templates over the last dozen years. California, Florida, Texas, and

Virginia are leaders in this field, having accounted for 50 percent

of that total dollar volume.

So why might a concession or long-term franchise approach make

sense for some projects? The rationale for using concession type approaches lies with the revenue risk profiles of the projects being financed. Large start-up toll projects tend to face significant construction and revenue ramp-up risks. But in the long run these

projects generally are able to generate net revenues in excess of operating and maintenance requirements. The more flexible and patient capital provided through private concessions may better

match these project profiles than the municipal market.

Also, as we have seen with the Chicago Skyway and the Indiana

Toll Road lease transactions, such a capital structure can monetize

up front sometimes a significantly larger sum from a given revenue

stream than a traditional municipal bond approach.

This Subcommittee has been at the forefront of efforts to bolster

Federal support for PPP approaches in recent years, from design

build contracting and environmental streamlining, to providing

greater flexibility to charge tolls and implement pricing, most recently to enabling lower cost debt financing for certain public-private highway and intermodal projects with private activity bonds.

Continuing to focus on improved asset management and service

performance, and to support private investment in user-backed facilities, perhaps through tools such as governmental seed capital,

credit enhancement and tax subsidies, will help project sponsors

utilize PPPs to their best advantage, and that is in addressing important public infrastructure needs.

Thank you for your time this afternoon.

Mr. PETRI. Thank you. And I apologize for not saying Grote.

Mr. Florian.

Mr. FLORIAN. Thank you, Mr. Chairman and Subcommittee

members, for the opportunity to speak today. I am Mark Florian.

I am a managing director at Goldman, Sachs and manage our infrastructure advisory business. I had the privilege of serving Mayor

Daley and his staff in the sale of the Chicago Skyway Concession

as their advisor, and the privilege of serving Governor Daniels and

his staff in the sale of a long-term concession in the Indiana Toll

Road.

I am going to frame my comments in three or four different buckets: one, what is the problem that we face in transportation finance

today; second, what is a PPP, or a public-private partnership, and

how can that potentially be a solution; third, why are they viable

in today’s market; and, finally, how do you protect the public and

the public good.
30

The problem, as we have all identified, is that there is a widening gap between transportation needs and funding sources. As you

know, the Federal Government was actually quite generous in the

1950s and 1960s in providing a national highway system, and that

system now needs renewal as it is very expensive to maintain that

existing system. Second, there is congestion in the system, there

are pinch points. We have all seen it, we have all experienced it.

We need more capacity in our transportation system. Third, construction inflation. Construction inflation, just in the last few years

because of steel costs and other costs, has been in the order of 8

percent to 12 percent. As a result, we have an accelerating need

for investment.

At the same time, the primary funding vehicle, as you all know,

is motor fuel taxes, which are pennies per gallon. It is a volumebased tax, it does not increase with inflation or with need. So the

gap is yawning and growing bigger.

One potential solution is a public-private partnership. As you

have heard today, a public-private partnership really is a long-term

lease of a road. The private operator takes all the operating and

maintenance risk, while also taking on all the capital expenditures

that are necessary for the road. In the case of the State of Indiana,

they expect that over a 75-year term of the lease the private operator, will spend $4.5 billion, on maintaining the road and expanding

it. In return, the private operator gets the toll revenue.

The public governmental body keeps the right to enforce the contract and all the operating standards, which are quite detailed in

the case of Chicago, over 300 pages of operating standards created

to ensure that the road is operated properly. The public body maintains control over the tolls and is in a position to constantly monitor the operation. What happens if the private operator does not

perform? They do have an opportunity to cure the issue. If they do

not, the municipality, the government takes back the road. It is a

very powerful hammer to make sure that the operating standards

are abided by.

Why is this viable today? Well, there are a couple different factors that drive this. First, around the world there are many private

entities that have a lot of domain expertise in managing these

types of facilities. It is also very typical in Europe, if you want to

build a new road facility, that the government would ask the private sector to come in, give proposals to build a facility and to

maintain it over a 50 year or longer period of time. So there is a

lot of domain expertise. There is also a lot of expertise in the

United States with regard to these types of facilities.

Secondly, these types of private entities are supported by a tremendous influx of dollars from pension funds and other investors

that want to invest in infrastructure assets, and they want to do

this because they are long-term assets that provide a steady stream

of revenue. It is a very, very attractive investment as a slice of a

pension fund or other investment pool. In fact, there has been over

$50 billion dollars allocated in the last few years to invest in this

type of infrastructure, which creates a lot of demand, and ultimately better pricing for the governmental bodies that are interested in possibly entering into these transactions.
31

How do you protect the public? In the concession or lease agreement, which is typically 100 or 150 pages, there are many different

triggers that the public body retains. One is the term of the contract; the second is the limits on tolls; and third is operating standards, as I referenced before, where it is very, very detailed. As Governor Daniels mentioned, it gets down to even how quickly do you

clean graffiti or a dead squirrel off the road—and also capital mandates, how much maintenance capital has to be expended and how

does the road have to be expanded by the private operator over the

term. This is a living and breathing document. It truly is a publicprivate partnership, and, therefore, the public body is integrally involved in the management of the road over the long term.

Finally, in conclusion, I think this is a very viable alternative for

our transportation industry in this Country; it fills a critical need.

It is not the panacea for all ills, it is just a piece of the puzzle. And

I think we have already seen examples and will see examples of

success in this area in the future. Thank you.

Mr. PETRI. Thank you.

Mr. Gribbin.

Mr. GRIBBIN. Thank you, Mr. Chairman, Ranking Member

DeFazio. Thank you for this opportunity to join this panel to discuss the future of infrastructure finance.

For those not familiar with Macquarie, we are a leader in the

ownership and management of important infrastructure assets

around the world. Macquarie has operations in 24 countries and 16

offices here in the United States. Our Infrastructure Division manages a $24 billion portfolio, which includes investments in over 90

assets in more than 20 different countries around the world.

In my time here today, I will briefly outline how the private sector can play a role, and potentially a significant role, in helping

overcome the lack of funding for highway infrastructure.

What brings us here today really are two fascinating transactions: the long-term concessions contracts for the Indiana Toll

Road and the Chicago Skyway. Allow me, given the brevity of time

here, to focus just on Indiana.

The State, after this concession agreement, commissioned an

independent audit of the toll road to study what the road would be

worth had it stayed in public hands. The study found that the toll

road would be worth approximately $1.8 billion if tolls had been

raised and the concession in fact had remained with the Indiana

Finance Authority.

Yet, Statewide Mobility Partners, a Macquarie Cintra partner- ship, has signed a concession agreement offering $3.8 billion. So

how do we explain the $2 billion difference? I think it can be explained as an economic concept of dead capital.

In writing about poverty in the developing world, renowned economist Hernando de Soto explains the concept of dead capital. Dead

or captive capital is comprised of investments made within a legal

structure that prohibits those investments from being used as capital. For example, de Soto pointed to workers in developing countries who invested in building homes on land which they did not

have title to. Those workers’ investments are captive capital; they

cannot borrow against their investment and it is very difficult for

them to sell. The homes have value but that value is legally cap-
32

tive. De Soto estimates that trillions of dollars are locked up in investments of this type, investments that could be used to develop

businesses, create jobs, and lift people out of poverty.

Highway infrastructure here in the United States is analogous.

Inadequate markets and inflexible legal systems in this Country

have locked up billions of taxpayer dollars and our transportation

infrastructure, billions of dollar that could be used to create jobs

and fuel economic growth. Fortunately, concession agreements have

demonstrated that, with modest changes, the captive capital invested in these assets can be freed.

So how did Indiana liberate $2 billion, which is a significant

sum, in captive capital? The partnership was able to find additional

value in this asset in two ways. First, a dead equity financing

model allowed the partnership to pay more for the asset than the

State’s traditional bond financing approach; and, secondly, private

sector operators are able to achieve more efficient operations

through innovation and timely investment in maintenance.

Let me focus on the first point. The traditional bond financing

approach has layers of conservatism built into it which tend to

undervalue the asset. In addition, bond covenants require a debt

coverage ratio; that is, revenues of the asset must exceed debt payments by a defined percentage. The debt coverage ratio provides a

cushion for investors, but it prevents that cushion from being used

to help finance the asset.

By contrast, a debt equity model is able to use the equity investment as the cushion and, as a result, the debt equity financers are

able to free up more capital than those using traditional bond financing, producing a significantly greater payment to the owner.

In my written testimony I cover a number of the benefits to the

concession model. Let me just cover three here. First, and kind of

the most obvious, is that concession models, as mentioned before,

can free up billions of dollars in capital for other investments, or

can be used to help make projects that are not viable viable because of the additional financing it provides.

Second, concession agreements also transfer operating and maintenance risks away from the public, eliminating future liabilities.

Some people miss this point. They think if they lose the toll revenue stream, how will the State then maintain the facility. Well, all

the maintenance liabilities for that facility go to the concessionaire.

The State, or in the case of Indiana, Indiana Financing Authority

or the City of Chicago had no liability, now have no liability under

the concession agreement to maintain or expand those facilities.

Finally, concession agreements create positive incentives for improved operations and better service.

Well, Mr. Chairman, members of this Committee, thank you for

holding this hearing today. At the appropriate time, I will be

pleased to answer any questions you may have.

Mr. PETRI. Thank you.

Ms. Hedlund.

Ms. HEDLUND. Thank you, Mr. Chairman, Ranking Member

DeFazio. My name is Karen Hedlund, and I a member of the law

firm of Nossaman, Guthner, Knox & Elliott. My firm has had the

great privilege of advising over a dozen State departments of trans-
33

portation and local transportation agencies on public-private partnerships primarily for new projects.

In the spirit of the day, I might also mention that I recently represented a U.S. company competing for a transit project in the

State of Israel.

The Skyway and the Indiana Toll Road deals are the ones that

have garnered the big headlines, but, in actuality, most of the PPP

activity in the States has involved financing new transportation facilities, and this is where I am going to focus my remarks. I want

to address how the States are crafting their legislation, how they

procure private investment, some of the lessons learned from past

endeavors, and the critical role that is being played by the Federal

Government.

Today, over 21 States have enacted important public-private

partnership laws, and the list grows each year. Just in the last few

months, Indiana, Utah, and Alaska have authorized PPPs. California, building on the success of the toll corridors in Orange County,

has authorized additional PPPs to benefit goods movement projects.

And PPP authority has been proposed in New York, Ohio, New Jersey, Pennsylvania, Missouri, and Illinois.

As detailed in my written statement, these laws and the related

regulations provide specific guidance to the DOTs as to the procedures they should follow in procuring private partners, submission

requirements, and evaluation criteria. They mandate competition

and they require that contracts be awarded on the basis of best

value, taking into account both short-and long-term commitments

from the project sponsors.

This morning you heard about new projects that are being advanced in Virginia and Indiana, and this afternoon in Oregon.

Other active States include Texas, the plans to use PPPs as the

primary method for delivering new highway projects throughout

the State. They have no less than 10 major projects in procurement.

Florida is seeking concession proposals for a tunnel under Biscayne Bay that will speed port traffic directly to the interstate

highway system and get container trucks off the streets in Downtown Miami.

Georgia is considering PPP proposals for HOT Lanes, truck only

toll lanes, and BRT lanes to relieve the heavy congestion around

Atlanta.

What are the lessons that have been learned from the earlier

PPP endeavors? Well, the earliest franchise laws were premised on

the notion that private toll roads shouldn’t require any contribution

of public funds and a corollary to this that was alluded to day was

that the opportunities for private investment should only be offered

for projects that are low on the State’s priority list. Today, however, the States understand that few new projects can be financed

solely on the basis of toll revenues. New projects are not cash cows.

The States also recognize that by combining both public and private investment dollars in highly congested corridors is the most

effective tool to advance their most urgent projects over the shortest time horizon.

The States are now benefitting from substantial support from the

Federal sector thanks to the forward-looking provisions that you in-
34

cluded in SAFETEA-LU, the $15 billion in private activity bonds,

improvements to TIFIA, and expanding the ability to innovatively

finance new projects on our interstate highway systems that have

become congested and deteriorated.

In addition, at Federal highways, under the leadership of former

Administrator Mary Peters and former Chief Counsel Gribbin, they

have helped to remove administrative barriers to public-private

partnerships while maintaining very effective Federal oversight.

Finally, I would like to stress that, in our experience, the State

DOTs take great care in managing these PPP procurements. These

are time-intensive undertakings. They assign their most senior and

qualified public servants to the task. They spend a lot of time

thinking about the very questions that were asked this morning.

They devote months of effort to developing procurement documents

and getting input from all stakeholders, public and private. They

know how to drive a hard bargain and always with the public interest as their one and only goal.

Thank you for inviting me to be here this morning, and I would

be happy to answer any questions.

Mr. PETRI. Thank you.

Mr. Foote.

Mr. FOOTE. Good afternoon, and thank you for the opportunity

to testify about the sale of concession rights for existing publicly

owned highways to private investors.

There have been two such transactions in the last year, the Chicago Skyway and the Indiana Toll Road, and both have generated

a great deal of interest from the press, the financial community,

and, most importantly, State and local governments around the

Country.

Over the last year, as a Senior Fellow at the Kennedy School of

Government, and after 15 years as an executive of a company serving a toll road industry, I have been looking at these transactions

through a public policy lens. In keeping with this, my role today

is not to explain how these deals work or to recap the financial

benefits that may accrue to the various parties. Instead, it is to lay

out a framework to examine the public policy aspects of these sales.

In other words, to answer the question: Are these concession sales

in the public interest?

At this point, everyone in this room is familiar with the first of

these concession sales, the Chicago Skyway. The winners in this

deal are the taxpayers; the City of Chicago, who received a windfall

equal to about one-third of the total size of the city’s annual operating budget; the mayor and the city council, who were able to solve

an immediate budget crisis without resorting to tax increases; and

private investors who have what they hope will be an attractive investment.

While there are winners, there are also losers. In the case of the

Skyway, the losers are the Skyway users, who will be paying significantly higher tolls than they would have paid under city ownership. The other loser is the region.

First, the Skyway users. Tolls on the Skyway will more than

double in the next 12 years and continue to increase through the

99-year term of the concession. The increased revenues resulting

from these toll hikes will be used by the private owner to service
35

the debt and equity for the financed $1.8 billion purchase price. In

effect, the future tolls created on the Skyway have been monetized

to fund the operating budget of the City of Chicago.

The other loser is the region. First, not one dollar of the sales

proceeds realized by Chicago was earmarked for investment in

transportation projects, despite the fact that Chicago is one of the

Country’s most congested urban areas. The city also has abdicated

the control of a major transportation artery, and along with it the

ability to manage its regional transportation network in a coordinated fashion. To see how this might adversely impact the public

interest, let me cite two examples.

Under the concession agreement, the private owner has the ability to use time of day pricing to discourage trucks from using the

Skyway during daytime hours. One possible consequence of this is

to force trucks onto neighboring roads, generating externalities—

traffic, congestion, pollution—for which the private owner is not accountable and does not have to concern itself. Second, the alternative routes for drivers who do not want to use Skyway are nontolled limited access roads that are currently operating at or near

capacity, thus allowing Skyway to operate, in effect, as a monopoly.

What happens if a decision is made in the next several years to

toll these alternative free roads in order to manage congestion? To

do this effectively would require a coherent and coordinated regional toll policy. With the Skyway out of the public’s control, this

is no longer possible.

I have tried not to mask my opinion that the Chicago Skyway

sales scores poorly in terms of the public interest. This low score

is not because the Skyway is now in private hands, but because of

the particular motivation for the sale and the intrinsic nature of

the Skyway.

In contrast with the Skyway, the Indiana Toll Road situation has

significantly different characteristics that, in my view, change the

balance. First of all, the sale proceeds will be invested by the State

to improve its transportation infrastructure. True, these new roads

will be paid for, in effect by the people that use the Indiana Toll

Road, but these users, as well as the taxpayers of Indiana, will

benefit from an enhanced statewide transportation system. Second,

given where the toll road is situated and its relationship with other

roads, it is my opinion that there is not much opportunity for the

owner’s actions to impose cost on the surrounding communities.

Also, the toll road is not part of a network of roads that would benefit from being managed in a coordinated fashion. For all these reasons, the Indiana Toll Road concession tilts in favor of the public

interest.

The last point I want to make is that it is important for all of

us to understand why investors are willing to pay large sums for

these concessions. The reason is simply that these investors have

been granted a franchise to increase tolls, an action that State and

local governments are reluctant to take. These increases are not

subject to voter approval and are the consequence what have been

tagged the outsourcing of political will.

I am not arguing against the involvement of the private sector

in the provision of public services such as transportation. The sale

of existing roads should meet, however, three tests. First, a signifi-
36

cant portion of the proceeds of the sale should be reinvested in improving and enlarging the particular region’s transportation infrastructure. Second, the private owner should be held accountable for

the externalities, the non-cash costs of operating the toll road. And,

finally, if the road is part of a regional network, the toll regulation

needs to accommodate regional solutions.

Applying these tests may reduce the amount of money that can

be raised by State and local governments through these sales. But

maximizing the dollars should not be the sole objective. Improving

the mobility of our citizens should be the overriding goal.

Thank you.

Mr. PETRI. Thank you.

Mr. Young.

Mr. YOUNG. Thank you, Mr. Chairman. Thanks for holding these

hearings. I thank the witnesses.

I have repeated this slogan many times, that there is no free

roads. And under TEA-LU, we have tried to set up a commission

to recommend a solution to the financing of our problems. I do

think that the private investment in roads is part of that solution.

That is personal. I have been involved in Highway 81 in Virginia

and a big supporter of.

I am sorry I wasn’t here for Governor Kaine. I think that is one

of our solutions when it comes to congestion, and I do think the private sector will have to play a major role, or the public has to stay

and step up to the plate and say I am willing to pay for. I tried

that and never got anywhere. I am disappointed in some States,

my State is one. We charge 8 cents tax, the lowest of any State in

the union, yet they want to have a highway system; and that concerns me.

But I do have three short questions for Mr. Gribbin, probably.

What are some of the barriers you encounter in negotiating these

agreements when you get into these agreements? What do you find

the most difficult thing—anybody else can comment too—in this

process?

Mr. GRIBBIN. Thank you, Mr. Chairman. I think one of the larger

barriers is the fact that this is new. Governor Daniels touched on

this during his testimony. The public is used to these assets being

held in public hands; they don’t really understand kind of the costs

and benefits of moving them to the private sector. There tends to

be, in the case of Indiana, particularly a fair amount of fear of how

things will change, and will we still have access to the road and

will there be significant diversion. I think what will happen over

the course of time, as people get more comfortable with these

transactions, as they have on projects around the world, that those

barriers will be dropped.

Another barrier, coming from working for a company that does

work around the world, is the United States, as you know, has very

diverse political decision-making. We spread power out. So every

State has its own set of rules, communities get involved. Everyone

really, kind of from the homeowner to the White House can have

a say in how a road is built, and that is a public policy decision,

it is probably a good thing, but it does make it a little harder to

penetrate this market.
37

Mr. YOUNG. Are you solely interested in concessions or existing

toll ways, or are you interested in new capacity?

Mr. GRIBBIN. Mr. Chairman, we are actually interested in both.

In fact, right now, as we speak, we are building the South Bay Expressway south of San Diego. It is an investment that Macquarie

has made in a road out there that will be a greenfield project that

will open up next year.

Mr. YOUNG. The case of the greenway here between Dulles and

Leesburg, that was a private investment. I am sure you are aware

of that.

Mr. GRIBBIN. Yes.

Mr. YOUNG. Have you looked into that possibility of approaching

States or a corridor concept of doing a project that would be much

larger than that, or is that on your drawing board?

Mr. GRIBBIN. Actually, the size of the facility is not really a determining factor. So we have looked at everything from relatively

very small projects to projects the size of the Indiana Toll Road. We

would be interested in if it fits the public policy objectives of that

locality, any facility that has a revenue stream.

Mr. YOUNG. Well, you know, when they built that greenway, I

thought they were absolutely idiots, but—and I was right the first

year.

[Laughter.]

Mr. YOUNG. But it has turned to be a real going machine and a

public license, because you have to drive from Route 7 up to Leesburg. It is a nightmare because of that growth out there, but they

saw that growth coming and they have used that greenway, and it

has worked out quite well. In fact, the people now are commuting

to D.C. that are clear out past Leesburg, which would be an impossibility just on Route 7.

Have you got a team, have any of you got teams that looks at

this potential growth factor and where you could purchase land

and make a corridor available? Are you that far advanced or are

you sort of behind—

Mr. GRIBBIN. No, actually, that is one of the driving factors that

we look at, is we will look at, if it is an existing facility, potential

traffic growth, and for new facilities. Obviously, what we want to

find is a part of the Country where there is increasing demand over

time. Macquarie is interested in kind of having mid-return, midrisk investments. Our investors, for the most part, are pension

funds that are looking for a stable return over the course of decades, and toll roads match that extremely well. And part of that

is you are looking for that steady growth over time.

Mr. YOUNG. All right, I thank you.

One of the things, again, I stress, there are no free roads, and

I do believe the number one problem, Mr. Chairman, we have in

this Country is congestion. We talk about the high price of fuel. If

we were able to move our cars and trucks on time, the price of fuel

would diminish quite rapidly; the demand would go down, the supply would be available. It is sitting in traffic is killing us now more

than anything else, and, of course, moving a product. I mean, every

time—I used to be in that business, and any time I had to stay

docked more than five minutes after I was supposed to leave, I usually left on time, but I was losing money. And in this world of mov-
38

ing goods, unstability of fuel costs, I think the elimination of congestion is so crucially important, and we are going to be looking—

I am going to be looking at this not only the remaining of this year,

but in the near future to see if we can’t solve it. I do think that

private investment is one of the major solutions, too. It may not be

the only one, but one of the major solutions.

Thank you, Mr. Chairman. I will have to excuse myself; I have

got a bunch of people upstairs in our other Committee room wanting to talk about other transportation problems, so thank you.

Mr. PETRI. Thank you.

Mr. DeFazio, any questions?

Mr. DEFAZIO. Thank you, Mr. Chairman.

It is a very interesting question. As I said earlier, I think, we

need to try and see that we are balancing the public interest, and

I see a place for private equity, but we have got to think of all the

contingencies now. The job of the private folks is to maximize profits, and we have other tasks that we must engage in here in terms

of public safety, you know, creating inadvertent effects, moving

congestion from one point to another and that.

So, sort of that as background, I am just curious. Normally we

would hear, well, the private sector does things more efficiently, so

get government out. But as I look at Macquarie’s statement on the

Indiana road, essentially it says no significant cost savings are envisioned in terms of operating costs. In fact, there are some incremental—I mean, the improvements have an incremental cost, but

beyond that you would have to carry the cost of insurance, which

the State didn’t because I guess they were self-insured.

So it seems to me it boils down to this question that I asked Governor Daniels, given the mandated increases in tolls in the contract, what if the government had mandated those same increases

and then went out to borrow the money? And he didn’t really answer that question, but I will put it again. But as I understood the

answer here today, it was, well, because we are putting a significant amount of equity in, in addition to the debt financing, which

means you can get a larger infusion of cash up front. But I guess

my question is what percentage of the Chicago project and the Indiana project are equity versus debt? And as I also understand Chicago, initially there was one amount of equity, and then, once the

project was finalized, some of that equity was turned to debt and

that equity was withdrawn. So what is the percentage of equity

that is in—and then Mr. Gribbin or Mr. Florian. Mr. Florian put

the deals together, you are the financer. Whoever can—

Mr. GRIBBIN. Well, I will turn to him for the answer, if he gave

it.

Mr. DEFAZIO. Oh, okay.

Mr. FLORIAN. The percentage of equity that is typically put in

these projects—not only for Chicago Skyway, or the Indiana Toll

Road, but for other project financings for these types of roads

around the world—tends to be in the range of 75 percent debt, 25

percent equity.

Mr. DEFAZIO. But that would still seem to be larger than—I

mean smaller than the difference between what is being stated as

the monetized value for the state of the asset versus the private

monetization.
39

Mr. FLORIAN. That is correct, sir. Part of it is that when equity

investors invest in these types of assets they are looking for what

they think the future growth of the asset will be. They tend to take

a pretty optimistic view in terms of what that growth will be, and

they pay in the concession agreement, for that future growth. Now,

that being said, they are taking the risk as to whether or not that

growth ever occurs.

Mr. DEFAZIO. Right. I have something here, I think it is a chart

provided by Mr. Foote regarding the model for the sale of the Indiana Toll Road. I mean, you can’t see it from there, obviously, but

it has been attributed to you. And it is interesting to me when I

look at some of the out years. And one of the points I was trying

to make to Governor Daniels is you do forego a future revenue

stream, which is being converted instead to private profits in this

case. And he said, well, I don’t want to pay interest, I want to collect interest. But obviously they are paying interest on at least 75

percent and expecting a return to equity on the other. I mean, they

are not putting the equity in for a zero percent rate of return; I

don’t think their stockholders would be real thrilled, their shareholders.

So when I look at this, I mean, the numbers are pretty startling

in the not too distant future. Say 2030, on the Indiana Toll Road,

before taxes, it was over half a billion dollars a year in income,

over and above operating costs and everything. Is that—

Mr. FOOTE. That appears to be the way the numbers work out

based upon the toll increases as well as the projected traffic increases for the Indiana Toll Road, yes.

Mr. DEFAZIO. And you used pretty conservative assumptions

here, you used 1.1 percent growth, 3 percent in years 5 to 15, 1.1

percent after.

Mr. FOOTE. These were the assumptions that the purchaser of

the concession used.

Mr. DEFAZIO. So we are talking big numbers with pretty conservative assumptions. And then if we jump ahead to, say, 2050, it is

a billion 458 in a year. And, again, this was obviously money that

is going to be taxed at some level and then returned to the investors. But, again, the State is foregoing that future revenue stream

to use at that point for whatever purposes it so desires, because

this includes all of the improvement costs of the system, and this

is net, right? So—

Mr FOOTE. That is correct.

Mr. DEFAZIO. So but you think this project is a—you know, I

mean, you said Chicago in particular because they converted the

money to other purposes other than transportation infrastructure

and other concerns you raised about moving the congestion and

those things is not a very good deal for the region, but you think

this is. I mean, you really think that the State shouldn’t have

looked at the option of monetizing this on their own and, therefore,

trying to capture what becomes profit? Because there is no allegation here—the usual allegation I hear from people who want to privatize is government can’t do it, we can save money on operating

costs, and in this case that is net, the same.

Mr. FOOTE. Well, I think the Indiana Toll Road transaction does

pass the three tests I put forward. But you are asking another
40

question, that is, whether or not, to use a term that was used earlier—whether or not the private sector is better able to liberate the

dead capital or can the public sector do that. And I think under

certain circumstances the public sector can come close to it and

should be considered as an alternative, and I think, again, it may

not maximize the amount of money that can be liberated, but I

think if you lay in some of the other public policy issues or concerns, it might become a better deal for the public interest.

Mr. DEFAZIO. Mr. Gribbin, I have particular concern—I expressed it earlier—on the non-compete clauses. I just think of it

this way, you know, I have got to protect the public interest, and

if I were entering into this deal-- Governor Daniels said, well, you

have got to meet congestion standards. Okay, we understand that.

But there are a couple of ways to meet a congestion standard. One

is you add capacity; the other is you constrain demand. So since

you have got a fairly generous, shall we say—they call it a cap, or

floor, on future toll increases, what would there be to prevent your

folks from—I mean, you have to maximize returns, and say your

folks say, actually, if we add that extra lane because of the growth

in traffic we are starting to bump up against a congestion standard

that is going to mandate we do something, we don’t really see in

the time we will have the project that the return is going to be that

great. But if we raise the tolls now, you will have less utilization

and we will drop below the required standard, and then we figure

we will move gradually back up. And, actually, we penciled that

out as a net for us, we are going to come out ahead by driving traffic elsewhere with higher tolls.

Now, how would you answer that public policy question? I mean,

because you are there to maximize profit, you are not there to take

care of my congestion problems over here. And you have got the nocompete in your corridor. So how would you answer that?

Mr. GRIBBIN. I mean, the key to these agreements is aligning incentives between the public and private sector and making sure

that we are all working together toward the same goals. That is

why you have a large concession agreement that governs all types

of operations. As far as congestion relief, it is actually very much

in our interest to have no congestions on our roads, because we get

more throughput. The more throughput you get, the more tolls we

collect, the better off we do. In fact, in the Chicago Skyway, we just

recently took that over and truck traffic is already up about 25 percent. Queues on Friday and Sundays have been cut from half an

hour to about five minutes.

Mr. DEFAZIO. Well, that is the electronic toll collection I would

assume that has been a tremendous—

Mr. GRIBBIN. Part of that is electronic toll collection. On the

weekends, actually what we did is instead of collecting just at the

toll booths, we stuck another guy out there in traffic and collected

tolls on two cars at a time. Again, the State could have done that.

But we are heavily incentivized to maximize throughput on the facility.

Mr. DEFAZIO. Right. But what I am getting at—and just grant

me my question here, which is you are confronted at some point in

the future, on the Indiana Toll Road, with the very expensive prospect that you would have to add another lane. Say it is in the thir-
41

tieth year of your concession. You have only got 45 years to go.

Your people say, look, we are not going to get that money back, and

it is going to be nowhere near the 12.5 percent rate of return; it

is going to drag down our entire rate of return on the project. But

there is an alternative here. We are kind of at the optimal level

now, we are jamming as much through as we can. If we raise the

tolls a little bit more, we may drop down a little, but, actually,

since we are getting a higher per unit cost, we are going to make

it up and pretty quickly we are going to bump back up to the edge

of that required constraint to add capacity, and then maybe we will

do—and you just sort of keep avoiding it by raising the tolls.

What would there be—since you don’t have—I mean, this isn’t

economics, it is an externality. That is not your cost, the congestion

that is created somewhere else, that is the State’s cost, the local

community’s cost, and it is an economy that doesn’t belong to you.

So what would prevent that circumstance from happening? There

is nothing that says you have to look at this in a coordinated way,

looking at the alternate routes, looking at what congestion is created elsewhere. There is nothing to prevent that.

Mr. GRIBBIN. Well, there are two things that govern that externality. The first is the length of the concession agreement. A lot of

people are critical of long congestion agreements, but 75 years

forces us to act more like an owner than a renter, so we care about

the life cycle cost of that asset.

Mr. DEFAZIO. Right. But I am positing this, say, in the thirtieth

year out is when you are bumping against capacity.

Mr. GRIBBIN. That is the second thing, is that the concession

agreement requires that we return the facility to its owner in a certain condition that is specified in the concession agreement, because similar to traffic congestion, you could also say, well, what

happens if we just let the road run into ruin—

Mr. DEFAZIO. Right. No, we are not talking about—I am talking

about you are very responsible, better pavement conditions and a

lot of States don’t—but what I am saying is if at some point your

internal people say we could continue to have a higher rate of return if we didn’t build another lane with the remaining term we

have and we diverted traffic with higher tolls, what would stop

that? Nothing. I mean, it is not your cost, right?

Mr. GRIBBIN. The concession agreement and the condition we

have to turn the road back in to.

Mr. DEFAZIO. Yes, but the condition—we are not talking about

condition. The condition doesn’t say you have to add a lane, right?

Mr. Foote, would you want to address that from your more public

policy perspective? I have got to worry about these things from the

public policy side. You squeeze it here and it goes there.

Mr. FOOTE. Sure. Well, I am sure that these roads will be operated as a business, and use market dynamics to maximize profits,

which is fine. But it may be that you get more profits by having

fewer cars at a higher unit price, thus raising the possibility of

externalities for which the private owner is not responsible.

Mr. DEFAZIO. Right. Okay. There is nothing to—I mean, you

guys are there to make money. There is nothing there to condemn

it. I am just saying we have to look at it in a bigger picture way

here.
42

Mr. FOOTE. And, actually, Mr. Florian—

Mr. FLORIAN. Congressman, there is one provision that we put

in the Indiana Toll Road concession which I think deals with the

kind of challenge that you are grappling with here. The State can

mandate improvements to the road at any point in time that it

deems fit. Therefore, Macquarie and/or the State has the right to

expand the road, put in new interchanges, or do whatever it deems

necessary. Now, if the State—

Mr. DEFAZIO. But if the State mandates, how is it paid for?

Mr. FLORIAN. That is an excellent question. Typically, today,

when the State expands a road it is paying for it from its various

sources.

Mr. DEFAZIO. Right.

Mr. FLORIAN. So in the contract, if the State mandates something, the State has to pay. However, we put in a provision where,

if the concessionaire benefits from that State-mandated expansion

or change to the road, that the concessionaire has to compensate

the State for the economic benefit it receives.

Mr. DEFAZIO. So we would get an extended kind of negotiation

here. If the State said we have got to add a lane, we are going to

pay for it, then we will end up squabbling a little bit over rate of

return and how it benefits you, but it is possible they could add the

lane.

Mr. FLORIAN. And the concessionaire, ultimately, if there is more

traffic or other benefits to compensate the State back for that portion of the economic benefit they gain.

Mr. DEFAZIO. Okay. Thank you.

Mr. Chairman, do you want to take a round, then we will have

a second round?

Mr. PETRI. Sure, I will take a try at it.

This isn’t going on in North Dakota. It is clearly a phenomenon

where there are certain not bottlenecks, but conditions in the

transportation network where people can extract additional—you

can put it however you want to, provide additional management

benefits and extract additional rent from the overall system. We

had the same system in our State years ago. People argued a lot

about they called them tax islands for nuclear power plants, which

were a great benefit to the local community, they didn’t have to

pay any real estate tax and they got really good schools and everything else. We got rid of those and the State assumed the revenue

from the high capital power plants and no one wanted a power

plant in their backyard. So the other side of it was we didn’t get

any more nuclear power plans. So it is not a free transaction. But

people didn’t like the idea that all the benefits of this facility that

was providing, in this case electricity to a broader region, accrued

in a very narrow area.

We have somewhat the same phenomenon. You can privatize bits

and pieces of the system, you are not going to privatize the whole

system, and people will be able to extract some rent or benefit for

a pension fund or something else from it. Does this make sense

overall? Is this making our transportation system better? Is there

some way of channeling this phenomenon to take care of choke

points and to return money back into the system in terms of greater transportation efficiency? I guess, Mr. Foote, professor, that is
43

what your role in studying all this is in part. If you care to comment.

Mr. FOOTE. Well, I think this goes to the first test I put forward,

that and Governor Daniels also reiterated. His belief is that if you

are recapitalizing a transportation asset, the realized dollars

should be reinvested in the transportation network. In the case of

the State of Indiana those dollars will be captured within the State

and reinvested, and, again, I think that is one of the primary reasons why the Indiana Toll Road is probably in the public interest.

Now, you are thinking somewhat more broadly, that those dollar

will stay within the State of Indiana, but will not benefit residents

of the State of North Dakota. And certainly it is not Governor Daniels’ job to—you know, he is not accountable to those residents. So

there probably are some inequities that are built into this Stateby-State system of financing our transportation infrastructure, and

presumably it is this Committee in the Federal Government that

actually redistributes some of those dollar in places where it can

be better used but is not available.

Mr. PETRI. If I were in the investment business, I would go to

Delaware, for example. They are already collecting high tolls, but

they have got a small hold on the whole east coast, and they can

probably extract additional revenue by privatizing it and saying

that it is this pension fund that is raising all the tolls, but they

are getting their share out of it.

Is there any role in—there is something that is raised by some

of this which is in the area of moral hazard, and that is you who

are elected for a short term are making long-term commitments

which may or may not be of long-term benefit to the community

they are served. And I guess we never can really totally deal with

that, but that does raise that issue, and it is sort of systemic. Is

there anything we can do at the Federal level to reduce that risk?

Ms. HEDLUND. I am not sure what we can do at the Federal

level, but I think it should be noted that there are contractual techniques that are available to the public sector to protect the public

over the long term. Everyone recognizes that we don’t really know

what is going to happen in the future. Some of these projects may

be financial failures, and so what happens if the road comes back

to the public sector. They may make so much money that they become an embarrassment to the public sector. What happens if the

traffic gets very heavy? How are you going to incentivize the private parties going forward? And there are a number of techniques.

One that the Commonwealth of Virginia is going to use in connection with the assignment of the Pocahontas Parkway to a private entity is to have revenue sharing. Once the returns on that

road—which are not very robust at the moment, but they might be

in the future—once they reach a certain level, then the Commonwealth of Virginia is going to share in the returns that that road

generates.

In terms of what do you do if the road becomes congested, another technique—and this has been used in California, also in Virginia—to the extent that these roads benefit from non-compete provisions, if the road becomes congested and the owner of the road

refuses to make the investment in additional lanes, they will sim-
44

ply lose the benefit of the non-compete, and the public sector can

go and do whatever it wants.

A third technique—and this is one that is used very commonly

in Europe and is being studied here—one device that the private

companies use for taking their profits out of these projects early on

is refinancing. In Europe it is typical that 50 percent of all refinancing profits go back to the public sector.

So there are ways, financial devices used for keeping the public

sort of in the game over the long haul.

Mr. PETRI. Any other responses to that?

Mr. GROTE. Mr. Chairman, I think those are good ideas, and in

some ways the decision of a concession financing reminds me of decisions of debt financing, except we are talking about a longer

term, and maybe, largerconsequences at the end of the day. But

over the years, State and local governments have gotten some of

them, anyway, have gotten--pretty comfortable with using debt and

there are, as you may know, certain debt issuing policies and decisions about when it is appropriate to leverage an asse. Maybe some

of our private investors think that those restrictions, while appropriate for municipal debt, might be a little too restrictive or conservative for a long-term asset lease.

But in some ways the decision-making is kind of the same. You

have decided that there is a compelling enough public need, an investment backlog, a choke point, whatever, that you are actually

going to leverage something over 50 or 99 years through taxable

debt and equity. But, you are still making that first key decision,

that the benefits of accelerating whatever you are trying to do are

worth losing the flexibility over 50 or 99 years of leveraging an

asset that generates revenues.

Mr. PETRI. Just one—excuse me, yes.

Mr. GRIBBIN. Just one thing very quickly. I do think contractual

mechanisms—and we have thought through a lot of these in a lot

of detail to try to balance putting together a business transaction

with public policy. I think contractual mechanisms are very, very

important, as Karen mentions.

The one thing that has slowed down some of this type of activity

where the Federal Government could be quite helpful is just the

environmental process. And it is obviously incredibly important to

protect the environment. At the same time, the length and the

challenges of going through the environmental process has slowed

some of this interest and some of this investment in transportation

in this Country.

Mr. PETRI. One last question. Several observers in the transportation construction industry indicated that when these deals were

done, the price that was realized ended up being two or three times

more than what they anticipated was likely. Are there some assumptions that the investors are making? How do you explain

that? Someone clearly is trying to figure out how these deals really

are going to pay off, and there seems to be—Indiana has one set

of assumptions and the people who bid on it have a little different

set of assumptions, evidently. Is there any way of making that understanding why people are willing to pay so much for these assets

up front or what they are assuming how they are going to extract—
45

I mean, there is no free lunch, they are going to have to—they are

assuming they are going to come out okay on this.

Mr. FLORIAN. They are definitely taking that risk in terms of the

future revenues of the road. For the City of Chicago, for example,

we did an analysis that said if we raise the tolls on exactly the

same schedule that we anticipate we will let the concessionaire

raise the tolls, how much debt could the City of Chicago put on the

road if it held the road itself and how much funding would that

provide the city for whatever purpose. And the number that we

came up with is we thought that the city could put perhaps $800

million, $900 million of debt on the road, and that is the amount

it could front-load to reinvest. And, as you know, the city ended up

getting $1.8 billion. So the tax-exempt municipal bond market

doesn’t allow an entity like the City of Chicago to fully garner the

value of the road.

The other thing that is actually quite striking is that if you look

at the projections that the City of Chicago had for the volume

growth, the traffic growth on the road, they were conservative,

maybe 1 percent growth over a long, long period of time. The concessionaires in this case took a much more aggressive view. They

think that the traffic growth might be 3 percent, 4 percent, 5 percent over a long period of time, and they are taking risk on that.

Well, if you look at the difference between a 1 percent, 3 percent

or a 5 percent growth, there is a tremendous amount of value created. That is really what the City of Chicago did, it captured more

aggressive assumption in terms of what the growth would be over

time and shifted the risk of that projection to a private operator.

Mr. PETRI. Very well.

Mr. DeFazio.

Mr. DEFAZIO. Thank you, but that sort of begs the question what

if the City of Chicago had engaged the same traffic engineers to

make the more aggressive projections than the 900 million number

would have gone up in terms of initial capitalization, because you

would have been assuming a larger revenue stream sooner.

Ms. Hedlund, I just want to be sure I got this. So at what point

in the lease does the State start to share in the revenues?

Ms. HEDLUND. It is a negotiated percentage, and I don’t recall exactly what the number is in Virginia, but there is a minimum percentage that is essentially guaranteed to the contractor; above that

the State shares in 50 percent of it; and then there is a final number above which they actually take 80 or 90 percent of it.

Mr. DEFAZIO. Okay, so it is graduated..

Ms. HEDLUND. It is graduated.

Mr. DEFAZIO. Okay. But the Indiana and Chicago agreements do

not have any clause like that.

Ms. HEDLUND. That is right.

Mr. DEFAZIO. Right. Okay. And then the other one about the conversion of the I guess was it the equity, if the equity is converted

to debt, then—

Ms. HEDLUND. If there are certain types of refinancings, where

the owners are getting—essentially accelerating the benefits of the

transaction, that a portion of those refinancing profits can go back

to the public sector. And that is something that is—

Mr. DEFAZIO. Standard in Europe?
46

Ms. HEDLUND.—is standard in Europe.

Mr. DEFAZIO. So in the case of Chicago, where there already has

been some conversion of equity to debt, there already would have

been an additional return to the City of Chicago for some of the

value of that.

Ms. HEDLUND. These refinancings are typically defined as ones

that are not contemplated in the original plan. Now, I was not involved in Chicago, but my understanding is that the refinancing

that was done within the first year was something that was contemplated.

Mr. DEFAZIO. Oh, okay, so it wouldn’t have fallen into that.

Okay, Mr. Garrett, I hope you—since I know that we have engaged Macquarie, who I think is a very reputable but also tough

negotiator, I hope you have been listening to Ms. Hedlund here.

And I am wondering, given some of what you have heard today,

how would you balance the interests here in looking at these

projects in Oregon?

Mr. GARRETT. I think, Congressman, what we would do is we

would try to get Ms. Hedlund on our side of the table to help inform us.

Mr. DEFAZIO. All right.

Mr. GARRETT. Congressman, I think we are in a fortunate position to watch these conversations evolve, and obviously there are

lessons learned. And, indeed, this conversation has evolved since

we were engaged in it. So our discussions, again, if we reach that

point—we are early in the stage; we are just seeing if indeed the

projects we have identified are feasible to pursue this pathway, but

if indeed they are, I think we are well positioned to learn from

some of our brethren throughout the States, better inform our negotiations, and we will make sure we have the appropriate people

on our side.

Mr. DEFAZIO. Well, at this point we just have a consulting negotiation and sort of a developing proposal,—

Mr. GARRETT. That is correct.

Mr. DEFAZIO.—so we have ample time to benefit.

Mr. GARRETT. You bet.

Mr. DEFAZIO. Good.

Ms. Hedlund, you alluded to one thing, and, again, I don’t know

if this is common, and I will ask the others. But you said if there

was a failure and a reversion. Now, would there always be—I

mean, there isn’t necessarily—do all these contracts have to revert,

or could there be a failure and then you would be in bankruptcy,

and then it becomes an available—

Ms. HEDLUND. What the contracts contemplate if there is a financial problem and the owners of the road can no longer pay their

debt—that is the thing that you are concerned about—

Mr. DEFAZIO. Right.

Ms. HEDLUND.—is an opportunity to the debtholders to step in

and remedy the problem, and at that point the concern is going to

be that perhaps operation and maintenance has not been kept up

to the standards required under the contract. You give the debtholders an opportunity to come in and fix it, but if they don’t fix

it, the owners and the debtholders lose the benefit of the franchise.
47

So there is a very serious downside and the debtholders are pretty

strongly motivated to come in and make things right at that point.

Mr. DEFAZIO. Is that true of the agreements for Indiana and Chicago?

Mr. FLORIAN. It is, sir. You know, basically, there are these operating standards that are quite detailed, and those operating standards have to be met. If they are not, for some period of time, a secure period, the concessionaire has a right to fix it, but if they

don’t, they lose the road and all the investment and all the money

they put into it.

Mr. DEFAZIO. Just to respond to a concern you raised and then

I know, Mr. Chairman, we have another member who has questions, but we did include—and they are not yet fully actualized—

very significant changes and environmental streamlining in

SAFETEA-LU, and I don’t know whether DOT has finished writing

the implementing regs yet or not, but the point is we have heard

that and we are—I think you will find that there have been

changes made to very carefully balance between protecting the environment and the public interest and expediting some of these

projects. And I would assume that Macquarie is either familiar

with or will become very familiar with those sorts of things if it is

looking at new projects, as it potentially is in Oregon.

Thank you, Mr. Chairman.

Mr. PETRI. Thank you.

Ms. Schmidt.

Ms. SCHMIDT. Thank you, Mr. Chairman.

And I apologize if this has already been addressed, because I

came in late, but I would like to address my questions to probably

Mr. Gribbin and Mr. Florian.

I came from a local government background and a State government background, and in both cases we talked about public-private

partnerships, and we didn’t really see the savings for us at the

local level or at the State level, and we were confused as to how

a private partnership, private developer could actually make

money. I mean, I understand that you don’t have the constraints

that local governments and State governments have in building

roads, bridges, and other configurations, but even toward that end

the savings were minuscule in comparison to what we thought we

would lose in the prospect. So, you know, I apologize if you have

already addressed this, but could you kind of like walk me through

how you are going to make money off of this and how the respective States that you have these joint ventures in are also going to

make money in this, and how this really is a win-win?

Mr. GRIBBIN. Sure, I will take a first stab at that, and Mark can

follow on and fill in some gaps.

The benefit of a concession model is you get your savings up

front, so in Chicago they got a $1.83 billion check; Indiana will get

$3.8 billion. So you take all of the guesswork out of will this publicprivate partnership actually result in savings to the State, because

that is front-loaded. The way that the private sector is able to

value this higher is, first of all, we are able to do some financial

engineering and get more debt out of the facility than the public

sector can. Secondly, as Mark mentioned earlier, we will have what

we believe is more accurate traffic forecasts, which in these cases
48

tend to be more aggressive, or higher traffic forecasts, so we see

more value in the facility than the public entity does. And, finally,

there are operational efficiencies.

Now, Congressman DeFazio was correct in saying that we did

not value those heavily as part of our model for the value of Indiana, but ultimately there will be some upgrading efficiencies as we

introduce electronic tolling and as we streamline some of the operation systems there. But, again, from the public standpoint, there

is no guesswork over whether there are savings or not. Whether

there are savings or not is actually all of our risk, because we have

made this up-front payment. So then the obligation and the onus

is on us to come up with those savings.

Ms. SCHWARTZ. May I follow up? I guess my concern is, again,

coming from my background and also from my personal background in land holdings and dealings, when I have been confronted

with an opportunity, whether from a private sector in a private role

or in a public sector with a private person coming in and offering

me money up front for a deal, when I have amortized it out over

the long run, I would make more money if I did it on my own. Now,

I understand you would put in tolling capabilities that will allow

you to capture more of the dollars and those kind of things, but

can’t a State do that as well?

Mr. GRIBBIN. That is an excellent question. That is sort of a reoccurring question and it is a question that the States and localities

should ask themselves, you know, can we capture the same value

ourselves. In the case of Indiana,—I am not aware if Chicago did

something similar, but the State actually took the auditor of the

toll road, the company that was auditing the toll road, and gave

them that question; go out there, take these assumptions, and come

back and tell us what value we could capture out of this asset. And

the answer was $1.8 billion. The ultimate lease transaction amount

will be $3.8 billion. So in this case they did that study and they

found out that the public sector, from our standpoint of view, kind

of undervalued it. You know, time will tell, maybe we overvalued

it on the private side.

Mr. FLORIAN. I would just add that I don’t believe any of these

transactions should occur unless there is a benchmark in terms of

what the public governmental body believes the value of that asset

is to them and holding on to that asset. And once you have that

as a benchmark, you can go through a process, see if you can get

value that is greater, significantly greater, and if you can’t, you

don’t do the transaction. Mayor Daley, as well as Governor Daniels,

basically said to the marketplace and to their voters we are going

to do an experiment here, we are going to see if we can get incremental value. If we don’t get it, we are not moving forward with

the transaction. They both did create benchmarks for what they

thought the value of the concession was if they held on to it, and

in both cases that was exceeded significantly by the private sector

because of these assumptions.

Ms. SCHWARTZ. I just have one quick comment. $3.8 billion

sounds like a lot of money, but when it is put in the hands of government, sometimes it is not as wisely reinvested into the community, and I think that is the greater risk, is capturing those dollars

up front and then that is incumbent upon the States or the local
49

governments to reinvest those dollars wisely for those citizens.

That is not your responsibility, but that is theirs.

Mr. PETRI. Maybe you could—you have been very patient, but we

are going to be voting in a few minutes. We might as well, if you

are willing to answer a few more questions.

Why is it that Chicago can’t hire the same people that the bidders do in terms of making traffic projections? I mean, I would assume that that is really not Chicago’s decision, it is the bondholder’s. I mean, if you are going to finance Chicago Skyway

through the city, you are going to look at the traffic projections as

part of your package for investors and do your due diligence, and

you must employ independent people who do that. Why should the

projections be any different when they are made by a public entity

as opposed to a private investor?

Mr. FLORIAN. I think, at the end of the day, you have two different entities that are thinking about the value of the road, and

you can hire feasibility consultants, the same feasibility consultants. But really what we are saying here is the private sector is

willing to put a bigger price on these assets than the governmental

bodies typically believe these assets are worth. If you own an asset

that is worth $1 and somebody else thinks it is worth $2, are you

willing to sell it for $2? Likely, you will.

Mr. PETRI. But it is not really Chicago I mean, Chicagoans say

they are going to have 10 percent a year growth, and they can go

to Goldman, Sachs and say sell us some bonds based on those projections, and you say we are not going to do it, we will only submit

on 1 percent growth because you hire someone who looks at it or

you have statistics on which you base it. So why does that analysis

differ when Chicago goes in as opposed to the people that they are

selling this to?

Mr. FLORIAN. I think there is a difference—

Mr. PETRI. Is there less confidence in a public owner for the next

75 years than a private owner? Is that it? They think the people

won’t drive over the roads if they are owned by Chicago as opposed

to being owned by this—I don’t think people care when they are

driving in their cars.

Mr. FLORIAN. You bring up a great question. I think it is just the

difference between an owner in the public sector and how they view

these types of assets and wanting to be conservative with regard

to those assets, and then investors, public pension funds and other

entities, they are investing as an equity owner and they are looking

for growth. They take a different view.

Mr. PETRI. But I am an investor.

Mr. FLORIAN. Yes.

Mr. PETRI. I can buy Chicago bonds.

Mr. FLORIAN. Yes, you can.

Mr. PETRI. And maybe I can even negotiate a bond with—I know

if you do this, municipal bonds, where there is some revenue kicker

or whatever. Or I can lend my money to the private buyer. So it

shouldn’t make that much difference.

Mr. FLORIAN. I understand what you are saying. They are different pools of capital, frankly. There are municipal bond investors

that are quite conservative in the way they view the world, so they

historically have really not allowed people to finance aggressively
50

against anticipation of future growth. These are pension funds and

others from around the world that take a much different view and

a much more aggressive view.

So you are right, you can make either decision, but they are actually two different pools of capital. This new pool of capital that is

more aggressive and really wants to invest in infrastructure as an

equity player is, frankly, relatively new, just in the last three to

five years.

Mr. PETRI. So couldn’t we advise Chicago or Indiana or others to

structure their bonds to appeal to this new pool rather than selling

the assets?

Mr. FLORIAN. Well, one of the alternatives that we have talked

to these clients about, as well as others, is do you sell a piece of

the road or a minority share to somebody who would be willing to

take an aggressive view, and garner value that way but still maintain a substantial ownership stake. That may be one way of splitting the baby, so to speak.

Mr. GRIBBIN. Well, one of the things that Mark touched on I

think deserves underscoring, and that is even in the private sector

it is not unusual to have two people view the same business and

value that business differently, and that happens quite frequently.

Mr. PETRI. That is why they do business with each other, because they each think they are winning.

Mr. GRIBBIN. Exactly.

Mr. PETRI. And you won’t find out for a few years who is right.

Mr. GRIBBIN. Exactly.

Mr. PETRI. Let us see, any other questions? Do any of the panelists have an additional comment you would like to make? Not at

this time?

In that case, we thank you very much. You have been very responsive. I suspect this will not be the last word on this subject,

but it has been an interesting first word for this Subcommittee.

Thank you very much.

The hearing is adjourned.

[Whereupon, at 1:40 p.m., the subcommittee was adjourned.]
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Æ