U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

34–778 PDF 2007

PUBLIC-PRIVATE PARTNERSHIPS: INNOVATIVE FINANCING AND PROTECTING THE PUBLIC INTEREST

(110–7)

HEARING

BEFORE THE

SUBCOMMITTEE ON 

HIGHWAYS AND TRANSIT

OF THE

COMMITTEE ON 

TRANSPORTATION AND 

INFRASTRUCTURE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

FEBRUARY 13, 2007

Printed for the use of the 

Committee on Transportation and Infrastructure

(

COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE 

JAMES L. OBERSTAR, Minnesota, Chairman 

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 

ELLEN O. TAUSCHER, California 

LEONARD L. BOSWELL, Iowa 

TIM HOLDEN, Pennsylvania 

BRIAN BAIRD, Washington 

RICK LARSEN, Washington 

MICHAEL E. CAPUANO, Massachusetts 

JULIA CARSON, Indiana 

TIMOTHY H. BISHOP, New York 

MICHAEL H. MICHAUD, Maine 

BRIAN HIGGINS, New York 

RUSS CARNAHAN, Missouri 

JOHN T. SALAZAR, Colorado 

GRACE F. NAPOLITANO, California 

DANIEL LIPINSKI, Illinois 

DORIS O. MATSUI, California 

NICK LAMPSON, Texas 

ZACHARY T. SPACE, Ohio 

MAZIE K. HIRONO, Hawaii 

BRUCE L. BRALEY, Iowa 

JASON ALTMIRE, Pennsylvania 

TIMOTHY J. WALZ, Minnesota 

HEATH SHULER, North Carolina 

MICHAEL A. ACURI, New York 

HARRY E. MITCHELL, Arizona 

CHRISTOPHER P. CARNEY, Pennsylvania 

JOHN J. HALL, New York 

STEVE KAGEN, Wisconsin 

STEVE COHEN, Tennessee 

JERRY MCNERNEY, California 

JOHN L. MICA, Florida 

DON YOUNG, Alaska 

THOMAS E. PETRI, Wisconsin 

HOWARD COBLE, North Carolina 

JOHN J. DUNCAN, JR., Tennessee 

WAYNE T. GILCHREST, Maryland 

VERNON J. EHLERS, Michigan 

STEVEN C. LATOURETTE, Ohio 

RICHARD H. BAKER, Louisiana 

FRANK A. LOBIONDO, New Jersey 

JERRY MORAN, Kansas 

GARY G. MILLER, California 

ROBIN HAYES, North Carolina 

HENRY E. BROWN, JR., South Carolina 

TIMOTHY V. JOHNSON, Illinois 

TODD RUSSELL PLATTS, Pennsylvania 

SAM GRAVES, Missouri 

BILL SHUSTER, Pennsylvania 

JOHN BOOZMAN, Arkansas 

SHELLEY MOORE CAPITO, West Virginia 

JIM GERLACH, Pennsylvania 

MARIO DIAZ-BALART, Florida 

CHARLES W. DENT, Pennsylvania 

TED POE, Texas 

DAVID G. REICHERT, Washington 

CONNIE MACK, Florida 

JOHN R. ‘RANDY’ KUHL, JR., New York 

LYNN A WESTMORELAND, Georgia 

CHARLES W. BOUSTANY, JR., Louisiana 

JEAN SCHMIDT, Ohio 

CANDICE S. MILLER, Michigan 

THELMA D. DRAKE, Virginia 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

(II)

SUBCOMMITTEE ON HIGHWAYS AND TRANSIT 

PETER A. DEFAZIO, Oregon 

NICK J. RAHALL II, West Virginia 

JERROLD NADLER, New York 

JUANITA MILLENDER-MCDONALD, 

California 

ELLEN O. TAUSCHER, California 

TIM HOLDEN, Pennsylvania 

MICHAEL E. CAPUANO, Massachusetts 

JULIA CARSON, Indiana 

TIMOTHY H. BISHOP, New York 

MICHAEL H. MICHAUD, Maine 

BRIAN HIGGINS, New York 

GRACE F. NAPOLITANO, California 

MAZIE K. HIRONO, Hawaii 

JASON ALTMIRE, Pennsylvania 

TIMOTHY J. WALZ, Minnesota 

HEATH SHULER, North Carolina 

MICHAEL A ARCURI, New York 

CHRISTOPHER P. CARNEY, Pennsylvania 

JERRY MCNERNEY, California 

BOB FILNER, California 

ELIJAH E. CUMMINGS, Maryland 

BRIAN BAIRD, Washington 

DANIEL LIPINSKI, Illinois 

DORIS O. MATSUI, California 

STEVE COHEN, Tennessee 

ZACHARY T. SPACE, Ohio 

BRUCE L. BRALEY, Iowa 

HARRY E. MITCHELL, Arizona 

JAMES L. OBERSTAR, Minnesota 

(Ex Officio) 

JOHN J. DUNCAN, JR., Tennessee 

DON YOUNG, Alaska 

THOMAS E. PETRI, Wisconsin 

HOWARD COBLE, North Carolina 

RICHARD H. BAKER, Louisiana 

GARY G. MILLER, California 

ROBIN HAYES, North Carolina 

HENRY E. BROWN, JR., South Carolina 

TIMOTHY V. JOHNSON, Illinois 

TODD RUSSELL PLATTS, Pennsylvania 

JOHN BOOZMAN, Arkansas 

SHELLEY MOORE CAPITO, West Virginia 

JIM GERLACH, Pennsylvania 

MARIO DIAZ-BALART, Florida 

CHARLES W. DENT, Pennsylvania 

TED POE, Texas 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

JEAN SCHMIDT, Ohio 

CANDICE S. MILLER, Michigan 

THELMA D. DRAKE, Virginia 

MARY FALLIN, Oklahoma 

VERN BUCHANAN, Florida 

JOHN L. MICA, Florida 

(Ex Officio) 

(III)

(V)

CONTENTS 

Summary of Subject Matter .................................................................................... vi

TESTIMONY 

Page 

Busalacchi, Hon. Frank, Wisconsin Department of Transportation, Secretary, 

Madison, Wisconsin .............................................................................................. 4

Duvall, Hon. Tyler, U.S. Department of Transportation, Assistant Secretary 

for Transportation Policy, Washington, D.C. ..................................................... 4

Enright, Dennis, NW Financial Group, Principal, Jersey City, New Jersey ...... 32

Hedlund, Karen, Esq., Nossaman, Gunther, Knox & Elliott LLP, Partner, 

Arlington, Virginia ............................................................................................... 32

Poole, Robert, Reason Foundation, Director of Transportation Studies, Los 

Angeles, California ............................................................................................... 32

Sawers, Alistair, RBC Capital Markets, Transportation and Project Finance 

Specialist, San Franscisco, California ................................................................ 32

Wilson, Frank, Metropolitan Transit Authority of Harris County, Texas, 

President and CEO, Houston, Texas .................................................................. 4

PREPARED STATEMENT SUBMITTED BY A MEMBER OF CONGRESS 

Napolitano, Hon. Grace F., of California ............................................................... 116

PREPARED STATEMENTS SUBMITTED BY WITNESSES 

Busalacchi, Hon. Frank ........................................................................................... 53

Duvall, Hon. Tyler ................................................................................................... 65

Enright, Dennis ....................................................................................................... 82

Hedlund, Karen ....................................................................................................... 108

Poole, Robert ............................................................................................................ 118

Sawers, Alistair ........................................................................................................ 126

Wilson, Frank ........................................................................................................... 133

SUBMISSIONS FOR THE RECORD 

Duvall, Hon. Tyler, U.S. Department of Transportation, Assistant Secretary 

for Transportation Policy, Washington, D.C., responses to questions from 

Rep. Napolitano .................................................................................................... 78

Enright, Dennis, NW Financial Group, Principal, Jersey City, New Jersey:

The Chicago Skyway Sale, An Analytical Review, May 1, 2006 ...................... 90

Indiana Toll Road vs. Chicago Skyway, An Analytical Review of Two Public/

Private Partnerships, November 1, 2006 ........................................................ 98

ADDITION TO THE RECORD 

Securities and Financial Markets Association, statement ................................... 136

(vi) 

vi


34778.001
vii


34778.002
viii


34778.003
ix


34778.004
x


34778.005
xi


34778.006
xii


34778.007
xiii


34778.008
xiv


34778.009
xv


34778.010
xvi


34778.011
(1)

PUBLIC-PRIVATE PARTNERSHIPS: INNOVATIVE FINANCING AND PROTECTING THE 

PUBLIC INTEREST 

Tuesday, February 13, 2007

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE, 

SUBCOMMITTEE ON HIGHWAYS AND TRANSIT, 

Washington, DC. 

The subcommittee met, pursuant to call, at 10:00 a.m., in room 

2167, Rayburn House Office Building, the Honorable Peter A. 

DeFazio [chairman of the subcommittee] presiding. 

Mr. DEFAZIO. The Subcommittee will come to order. 

This is a hearing of the Highways amd Transit Subcommittee on 

Public Private Partnerships: Innovative Financing and Protecting 

the Public Interest. This is hopefully the first in a series of many 

hearings, as I mentioned at the last hearing. We have challenges 

before us. We have an annual deficit in this Country in terms of 

meeting our transportation infrastructure needs both for maintenance of the existing system and enhancements to that system to 

mitigate congestion and better move our citizens and our freight 

and bolster the economy. 

Confronted with these sort of twin problems, that is, the need for 

more investment and the over-dependence upon the gas tax, which 

has not been increased since 1991, is leading to the point where we 

may not even have full funding for the last transportation bill, let 

alone a new transportation bill for the 21st century. 

So what I intend to do with these hearings is explore that deficit, 

the causes of it and the potential ways to fill that gap. In particular, today we are focusing on private-public partnerships. Some 

would say this is a panacea, it will somehow supplant or eclipse the 

many tens of billions of dollars raised and spent from Federal gas 

taxes and State gas taxes. It won’t. It can be an adjunct to that 

if properly used. And as I expressed in the last hearing, I have real 

doubts about the conversion of existing infrastructure, essentially 

the modernization, the sale or long-term lease of that and what the 

benefits might be and how, if you are going to do that, you properly 

protect both the public interest and you assure that we aren’t fragmenting the national transportation system. 

Then, secondly, we provided pilots in SAFETEA-LU where you 

could, with addition of capacity, undertake some pilot tolling 

projects. And, again, I am somewhat dubious about that but open 

to discussion. 

2

And then the third would be greenfields and the construction of 

new projects, again, with private-public partnerships, providing equity protection of the public interest. There are a lot of questions 

regarding how one protects both the integrity of the national transportation system, how one protects the public interest and still involves private capital in these projects. And I am hopeful that 

these hearings will provide guidelines either for legislation or some 

guidance to the States so that some of them in a rush to move forward, for whatever reason, don’t basically get taken to the cleaners, 

which I think we have seen in a couple of the previous agreements, 

Indiana and Chicago most notably. 

So this Subcommittee does not have all the answers, but we are 

looking for good information from testimony. I hope to have lively 

discussion among the panelists. I prefer if the panelists didn’t just 

read their testimony. I have read all the testimony that was submitted, and was submitted in a timely basis. I have read all of it, 

and I assume the other members of the Subcommittee have. So 

what would be most useful would be if you summarize and make 

cogent points and/or respond to other people who are on the panel 

or anticipate other panelists and some of their major arguments, 

because we can all read and you can’t read more quickly than you 

can talk; most people can’t anyway. 

So with that, I would recognize the Ranking Republican, Mr. 

Duncan from Tennessee, for his opening remarks. 

Mr. DUNCAN. Well, thank you very much, Mr. Chairman, and I 

share many of the same concerns that you just expressed about the 

need to protect the public interest when a State or local government enters into a public-private partnership. I particularly think 

we need to look very closely at whether or not some State officials 

might try to get all the money in some sort of up-front way, or most 

of the money up-front, so that officials 25 or 30 or 50 years from 

now might be left holding the bag. 

I also have already heard a lot of concern expressed about foreign 

ownership of our infrastructure. I think we need to look into 

whether we need to put some limitations on that to American ownership or perhaps even prohibiting the sale, years down the road, 

to foreign companies. 

This is a fast-moving development, as we were told in a briefing 

last week by the GAO, and there is a lot of interest in it. Tennessee, my home State, has no toll roads and has for many years 

adopted a pay-as-you-go philosophy of spending no more than 

comes into the State highway fund, and, frankly, if I was to advocate a toll road in Tennessee, it would be one of the most unpopular things that I could possibly do. This does not mean that toll 

roads do not have a place, though, particularly in States where the 

people have grown accustomed to that. 

It is important, I think, to remember, though, that public-private 

partnerships are much more than just toll roads. Some are contractual agreements for all kinds of things, really, and many of the innovative procurement models of public-private partnerships, such 

as design-build and design-build to operate and maintain projects 

have a proven track record of saving time and money and of being 

operated more efficiently. 

3

I am also concerned about possible sweetheart deals for private 

companies. When we first started seeing the private sector take 

over many government operations, it was done because it saved a 

lot of money and because the private sector could perform almost 

anything in a more economical, more efficient way than the government could. However, in recent years we have been seeing that 

some very large corporations have been hiring so many retired Federal employees or retired admirals and generals and they have 

been getting sweetheart deals with just ridiculous profits in them, 

so that we have to see at times whether some of these are good 

deals for the people or not. Some are and some, unfortunately, now, 

are not. 

I guess we need to point out that we in this Country are fairly 

new at the business of private sector financing for infrastructure 

investment. I think we will get better at managing these types of 

innovative financing tools with time and experience. 

But I thank you for holding this hearing, it is a very important 

topic, and I will yield back the balance of my time. 

Mr. DEFAZIO. I thank the gentleman for his succinct and cogent 

remarks. 

Does the gentleman, Mr. Petri, wish to be recognized? 

Mr. PETRI. Well, I just—I don’t know if this is the time to do it. 

I am here to introduce a panel member. 

Mr. DEFAZIO. Well, you can do it now, because I believe 

there————

Are there other opening statements that people intend to make? 

Members obviously can submit statements for the record. 

[No response.] 

Mr. DEFAZIO. Since there are no other opening statements, I 

would be happy to recognize you, and then I will make the formal 

introduction after you make the personal introduction. 

Mr. PETRI. Well, thank you. I just wanted to, on behalf of my colleague, Steve Kagen, who is also from Wisconsin, a member of the 

full Committee, welcome our Secretary of Transportation, Frank 

Busalacchi, who has a distinguished career in public service in 

Wisconsin. He comes from the Milwaukee area, where he had for 

a number of years various leadership positions with the local 200 

of the Teamsters Union. He has led an agency with a budget of 

roughly $2 billion and 3,600 or so employees. He has been recognized and is now—and I think that is why he is here today—a 

member of the National Surface Transportation Policy and Review 

Study Commission that is going to be making recommendations on 

a whole variety of ways of trying to maintain and improve our national surface transportation policy. I just want to welcome him 

and thank him for the effort that he is putting in to help us. 

Mr. DEFAZIO. I thank the gentleman for those remarks and that 

introduction. 

The formal introduction will be that on the first panel is the 

Honorable Tyler Duvall, U.S. Department of Transportation Assistant Secretary of Transportation Policy; the Honorable Frank 

Busalacchi, Wisconsin Department of Transportation and, as mentioned, a member of the Commission; and Mr. Frank Wilson, Metropolitan Transit Authority of Harris County, Texas, President and 

CEO. 

4

With that, I would first recognize Mr. Duvall for his opening 

statement. 

Mr. Duvall. 

TESTIMONY OF THE HONORABLE TYLER DUVALL, U.S. DEPARTMENT OF TRANSPORTATION, ASSISTANT SECRETARY 

FOR TRANSPORTATION POLICY, WASHINGTON, D.C.; THE 

HONORABLE FRANK BUSALACCHI, WISCONSIN DEPARTMENT OF TRANSPORTATION, SECRETARY, MADISON, WISCONSIN; AND FRANK WILSON, METROPOLITAN TRANSIT AUTHORITY OF HARRIS COUNTY, TEXAS, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, HOUSTON, TEXAS 

Mr. DUVALL. Thank you, Chairman DeFazio, Ranking Member 

Duncan, and members of the Subcommittee. I greatly appreciate 

the opportunity to appear before you today to talk about one of the 

most important trends in transportation: public-private partnerships. 

Under the leadership of Secretary Peters, and Secretary Mineta 

before her, USDOT has made the expansion of public-private partnerships a key component in our ongoing congestion initiative, 

which we believe is one of the largest public interest failures we 

face in surface transportation, along with the high number of highway fatalities that continue to plague us. 

Based on a recent internal survey, the Federal Highway Administration estimates that approximately 50 percent or more of States 

either currently have laws in place or are considering legislation to 

expand public-private partnerships. This growing State level interest I think tracks closely with congressional interest in promoting 

PPPs in all of the most recent surface transportation bills dating 

back to ISTEA. In addition, executive orders by President Clinton 

and former President Bush have further asked agencies to reduce 

barriers to these arrangements. 

There has been a great deal of discussion, obviously, about the 

two transactions, one in Chicago and one in Indiana, but I think 

it is really important that we bear in mind that the opportunities 

for PPPs extend well beyond long-term lease agreements and certainly well beyond toll roads. 

The basic opportunity is for the public sector to allocate various 

project risks to the private sector that may be in a better position 

to manage and reduce those risks, and the ability to shift various 

risks to private operators increases the public sector’s ability to 

manage a large number of projects while also reducing strains on 

government budgets and the taxpayer. Creative risk-sharing arrangements are possible whether or not the facility at issue generates revenues to pay for its own costs. 

The willingness of public authorities to go beyond traditional procurement approaches has been driven largely by several trends. 

First, as the Chairman noted, taxes that fund transportation activities are being increasingly absorbed by rising costs, the need to 

dedicate ever more resources to system preservation and maintenance, an increased fuel economy and flattening VMT trends. If 

anything, these trends are expected to continue in the future. 

Deteriorating highway system performance has reached crisis 

levels in many parts of the country. The cost of wasted time and 

5

fuel for travelers is five times the level it was in 1982, and the economic costs are much higher if you add in uncertainty and lost productivity costs. 

Despite the strong policy arguments historically in favor of a 

user pay system, a mix of political and administrative complexities 

have pushed the United States towards a surface transportation financial model that is currently dependent on fees that have little 

or an indirect relationship to costs. Technology breakthroughs in 

recent years, however, have really reduced barriers, and a substantial change in public opinion with respect to that has followed. Currently, we estimate that the majority of projects over $500 million 

in the United States will be financed using some toll revenues. 

Coincident with these trends, it is very important that we understand global economic patterns. Basically, huge increases in global 

economic growth and changing demographics have really created 

massive pools of savings around the globe that have driven down 

long-term interest rates and increased the attractiveness of medium-risk and medium-return infrastructure assets in energy, telecommunications, and transportation sectors. The certainty of the 

U.S. legal system and our strong economic growth prospects are 

critical factors in why the U.S. is such an attractive investment 

destination. 

Any analysis of the policy merits or pitfalls of public-private partnerships must be contrasted to how we are doing now, not an idealized of how we are doing. It is critical that we identify the public 

policy failures and ask the question: Do public-private partnerships 

respond to those failures? I think increasingly the answer is yes, 

they do respond. They are not the answer, but they are a vital tool, 

we think, going forward. 

Despite these opportunities—and obviously the purpose of this 

hearing is to talk about the pressing public policy issues that are 

presented—in my written statement I identified several risks. I 

think the most important of these risks are monopoly pricing risks. 

In addition, we have corruption risks, thin market risks, system 

distortion lists, as the Chairman notes, financial exposure risks, 

and inexperience risks on behalf of the public sector. 

The single-most important public interest concern with the transactions that took place in Indiana and Chicago is the inherent tension that is created when governments view the leasing of existing 

transportation assets as a potential income source. While these 

transactions can provide large public benefits if properly structured, it is also true that contractual terms that offer substantial 

pricing power and protection from competition can increase the discounted present value of the revenue stream associated with an 

asset. Other critical assumptions go into asset valuations, such as 

traffic growth projections, the ability to control costs, and the cost 

of long-term borrowing. However, there is little question that pricing flexibility in a potentially constrained market will be a major 

driver of facility value. As a result, it is imperative that public 

agencies gain some understanding of a facility cost and risk profile, 

as well as the degree to which pricing will be constrained by competing facilities or the threat of competing facilities. 

Every facility has different economic characteristics, and State 

and local governments are strongly encouraged to analyze these 

6

characteristics not just from an individual facility perspective, but 

also from a network perspective, as the Chairman noted. Specific 

contract provisions that limit the prospect of competition will increase the up-front lease value, but may run counter to the public 

interest if such a provision is not commensurate with the risk 

being borne by the private sector. The emerging trend in this area 

appears to be the inclusion of either no protection at all for the private sector or limited protections. 

Public agencies implementing PPP programs are strongly encouraged to run open and transparent processes, to seek input from 

third parties, and to consult regularly with their legislators and 

other relevant elected officials. We welcome review by advocates of 

various kinds of these public sector concerns, and we will all need 

to be sensitive to cases in which important public sector concerns 

may not be adequately protected. 

I appreciate your attention to my testimony, and I would be 

happy to answer any questions that you may have. 

Mr. DEFAZIO. Thank you, Mr. Duvall. 

Mr. Busalacchi. 

Mr. BUSALACCHI. Thank you, Mr. Chairman. I am honored to 

have this opportunity to comment on protecting the public interest 

in public-private partnerships, or P3s. 

I am also a member of the National Surface Transportation Policy and Revenue Study Commission. The National Commission is 

working to construct a new 50-year vision for our Nation’s transportation system. We are in the midst of our deliberations, and my 

comments do not represent the views of the Commission. 

What has been made clear to me at the Commission hearings 

and by the communities back home is that we have a lot of needs. 

In Wisconsin, our annual unmet needs are in excess of $500 million 

for highways alone. If we factor in transit, inner city, and freight 

rail improvements, the needs increase. 

This Nation’s interstate system is at the end of its useful life. It 

cannot be repaired. It must be reconstructed and, in some areas, 

expanded. Where will we find the funding? Some suggest that P3s 

can replace what has traditionally been a Federal responsibility. I 

disagree. 

Let me first clarify that P3s come in many forms, and the private 

sector is a valued partner to Federal, State, and local governments. 

My focus today is on the deals where a private sector organization 

leases a highway. The private sector partner is responsible for operating the roadway and they collect the toll and other payments 

to gain a return on the investments. Let me share four concerns 

that I have. 

First, the public interest is different from the private interest, 

and, in this case, it will be extremely difficult to assure a win-win 

situation. In Wisconsin, the DOT partners with private sector to 

design and construct highways. We have done so for years. But the 

public sector is the one held accountable for setting priorities, financing, and managing the highway. Can we responsibly delegate 

some or all of that public sector accountability to the private sector? If we can, how do we integrate the needs of the private sector 

into what has traditionally been a public sector system? 

7

Some argue P3s will harness the power of the market for the 

good of the public. But we come to the table with very different interests. Do States have enough information to get the best possible 

deal for the public? From what I have seen, we do not. The private 

sector’s legal responsibility to its shareholders is to make money. 

Profit is their purpose. Our responsibility is to ensure that we 

make wise choices for our citizens. No contract, no matter how effective, can eliminate risk. We simply do not know enough to price 

or manage such long-term risks. 

Second, the public has significant concerns with P3 deals. The 

public sector needs better tools to evaluate the deals and share the 

evaluations with the public. People don’t seem to like these deals. 

Citizens tell us they don’t think the P3 approach is in their best 

interest. We need better information to consider the long-and shortterm costs and benefits associated with these approaches to 

projects. We need to show the public what they will pay with gas 

tax, compared to what they will pay with private sector tolling. 

With this information, we could all make better decisions. 

P3s will likely not generate a predictable revenue stream to replace the current Federal share. In the 1950’s, the Federal Government envisioned a national transportation system and funded it. 

States, in turn, built a first-class system. If the Federal Government had not paid the lion’s share of the construction costs for the 

system, it would not have been built. States cannot create or fulfill 

the kind of vision on their own, nor can the private sector. The 

Federal Government should continue to pay its share of at least 45 

percent of the Nation’s highway system. At National Commission 

hearings, witnesses tell us the Federal Government’s share should 

increase. 

Fourth, there should be considerable problems—there will be 

considerable problems with integrating private sector financing 

with public sector policy goals. Congress needs to consider many 

issues. Will States that do not toll be left behind, with no Federal 

partner? How will private sector partners be integrated into current planning process? Are Federal tax expenditures for private 

sector projects preferable to Federal revenue increases for public 

sector projects? 

The Committee also asked that I comment on USDOT’s model 

legislation designed to give States the authority to enter into P3 

agreements. Based on our review of the legislation, it poses no restrictions and creates no public protections. States will need to take 

care of the public interest in the deals they craft with the private 

sector. The model legislation protects the private sector’s proprietary information. 

In Wisconsin, these provisions conflict strongly with strongly 

held values about openness and competition that support a robust 

and competitive bidding process. The model legislation requires 

State DOTs to review unsolicited proposals within a certain time 

frame. P3 bidders are highly sophisticated consortiums represented 

by large banks and investment firms. We design and construct 

roads; we are not experts in high finance and investment contracting. For States to negotiate on a level playing field, we need 

to hire investment finance advisors that will make every project 

cost more. 

8

The Committee will make critical choices that determine the outcome of the debate on P3s. We do not believe P3s are ready for 

prime time. In a supplement to my written testimony, I included 

a list of policy questions that provide a starting point for the debate. 

I appreciate the opportunity to testify today, and I look forward 

to the policy discussions that lay ahead. Thank you. 

Mr. DEFAZIO. Thank you, Mr. Busalacchi, appreciate it. Excellent 

testimony. 

Mr. Wilson. 

Mr. WILSON. Good morning, Mr. Chairman, Ranking Member 

Duncan, and members of the Committee. First, I want to thank you 

for giving us the opportunity to be with you today for this important discussion of the Nation’s transportation infrastructure. 

I represent Houston Metro, which is a fully integrated multimodal transportation system serving the fourth largest city in the 

Country. This city is growing at the rate of 3,000 people a week. 

That is 3,000 a week. This has put our transportation system 

under immense pressure. And, because of that, we are forced to 

seek all legitimate alternatives to funding the improvements and 

expansion of the system. Given the inability to project adequate 

funding going forward, all options for us are on the table for discussion and utilization. My comments today are derived from my experience in working both the public and private sector. 

I have experienced a challenge of infrastructure delivery both as 

an owner and as a contractor, and have participated in 12 designbuild, design-build-operate-maintain in public-private partnerships 

nationally and internationally, with a combined construction value 

of over $10 billion in seven States and two countries. I say this not 

as a summary of my resume, but more to support an observation, 

and that observation is this: public-private partnerships do work 

universally and they do work well; however, they are not the silver 

bullet solution for every infrastructure project. 

I have learned that the most successfully structured public-private partnerships are created by necessity, not by ideology, and at 

the core of every partnership is a clear understanding of control, 

accountability, and risk. Simply put, the public agency controls policy; the private company controls performance. Each is clearly accountable for the respective roles under the commercial terms and 

conditions of a contract and each shares a project risk which they 

are uniquely able and equipped to identify, to mitigate, and control. 

I am able to report that the public interest can be protected in 

public-private partnerships. Good government and good business 

are not mutually exclusive. In our discussions later this morning, 

I would be happy to review a six-point checklist of criteria that are 

used to judge when public-private partnerships offer the most benefit in comparison to the traditional design-bid-build methods of 

project delivery. 

Where appropriately applied, public-private partnerships will deliver remarkable advantages and benefits, starting with a single 

point of contact and accountability, which provides clear focus and 

discipline in managing and making decisions on projects; reduce 

public agency staff and soft costs. These soft costs can generally 

run as much as 35 percent of the cost of a major infrastructure 

9

project, so it represents an incredible area of economy. There is 

closer cooperation and collaboration between designers and builders to improve constructibility and lower risk. There is a conversion 

of ideas on approach to a job so there are no surprises; what the 

designer designs, the builder can build. Cost of project delivery can 

be cut as much as 20 percent on major infrastructure projects using 

a partnership approach, and project schedules can be cut as much 

as 40 percent. So a project that might take seven years could be 

implemented in less than four. 

The key factor in public-private partnerships which can be overstated is that it minimizes change orders, claims, and litigation, 

which are project killers for traditionally implemented infrastructure projects. Quality is often built in, since the designer and builder is responsible for the operating and performance and quality 

risk on infrastructure projects. 

Private firms are enablers that can mobilize capital markets, as 

appropriate, and add new source of income. This income may range 

between three and ten percent. Not an overwhelming large amount 

of money, but, in addition to the cost savings, it most often is 

what—is a deciding factor in the financing capability of a project. 

And, finally, I would say the risk of profile due to the single point 

of accountability and enhanced integration of all the elements of 

work offer a more efficient method of financing, and this is because 

the different players—whether they be architects, engineers, contractors, material suppliers, or the owner itself—do not have to add 

financial premiums to the project to make sure that the have a viable outcome. 

I would be happy to explore any and all of these issues during 

our discussions, and, again, I want to thank you for the privilege 

of joining you today. 

Mr. DEFAZIO. Thank you. 

I thank all the witnesses for remaining within the time; that will 

give us a lot of opportunity for questions, which hopefully will be 

more interesting than testimony. 

I will lead off with the questions. 

Mr. Duvall, I want to thank you for sort of personalizing your 

testimony. I saw two references, one to Oregon, on our early discussion on tolling versus fuel tax. And just perhaps to edify you a little 

bit, we did actually have two toll projects in Oregon; they were 

both public and the tolls went away when the projects were paid 

for. There was no continuing profit from those projects. Those were 

two bridges over the Columbia River to our neighboring Washington State. So we have some experience with tolling, but we don’t 

believe it should be for-profit tolling. 

Secondly, Washington, I was more interested in that. I mean, 

Washington actually—you have a recent poll, but recent history 

sort of belies the poll. Washington actually, unlike the Federal Government, increased its gas tax by a nickel in 2003 and nine and 

a half cents in 2005, and a number of increases in registration, title 

fees, etc. It was referred to the ballot and it was upheld on the ballot. So I think the real poll of the people of Washington State is 

they were willing to pay fourteen and a half cents more per gallon 

in gas tax, so there is not the resistance that you are pointing to, 

which comes to your charge. 

10

You are Assistant Secretary of Transportation Policy. What have 

you or the Administration done to augment or update the Federal 

investment? We all admit that not having raised the gas tax since 

1991 isn’t meeting it. This Committee unanimously, in a bipartisan 

way, recommended an increase in the gas tax in the last highway 

bill; it was rejected by the Republican leadership and by the White 

House. So what are you proposing, what have you proposed to increase Federal investment, since you are here to advocate for private investment? 

Mr. DUVALL. Thank you, Chairman. Obviously, the last highway 

bill public transportation legislation was the single largest increase 

in—representing the largest————

Mr. DEFAZIO. Right. But I am talking about the—you have said 

in your testimony that we don’t have enough money. There is 

agreement, bipartisan agreement. We don’t have enough investment. What is the Administration proposing? What are you proposing, other than private partnerships, to enhance the investment 

in the Federal infrastructure? Are you proposing anything at all to 

increase that investment? 

Mr. DUVALL. Thank you, Mr. Chairman. Obviously, the discussion over future Federal funding is one that needs to take place in 

the next two years between the Administration and the Committee. 

Mr. DEFAZIO. No, but I mean what has the Department recommended or what are they recommending, what are you studying 

other than the Commission’s work? 

Mr. DUVALL. I mean, the Commission is obviously going to be a 

major driver, I think, of the policy recommendations of the————

Mr. DEFAZIO. So right now your bottom line is the one thing you 

are bringing us is public-private partnerships. Now, let’s go to your 

proposed working draft. 

Now, I find it kind of—you raise—you laid out here today, and 

I thought very well, some of the pitfalls and the potential problems 

with private-public partnerships, but I don’t find any of that reflected in the guidance to the States here or on your website materials in the guidance to the States. You did a good job here today, 

but it seems like there was a sales job last Thursday at the White 

House and today we are hearing something else, which is there are 

real problems here: monopoly rents are a problem, there are a 

number of other potential issues and pitfalls. It seems that it would 

be instructive for the Department to have a chart which lays out 

pro-con, good-bad, pitfalls, prior experience. I don’t see any of that. 

Are you developing some of that real experience, as opposed to 

something like this model legislation? 

Mr. DUVALL. Absolutely, Mr. Chairman. I think that is something the Department is currently working on, and we need to be 

much more aggressive about articulating what the risks are. I will 

say that the legislation is intended to be a broad authorizing statute. We have opened it up for public comments————

Mr. DEFAZIO. Sure. When could we expect seeing some sort of 

enumeration of the risks posted up on your website linked to the 

model legislation? 

Mr. DUVALL. Well, there actually are things on the website. 

11

Mr. DEFAZIO. Well, I have reviewed it. I don’t find it anywhere 

near as cogent as your testimony today, which perhaps was designed for a skeptical audience. 

Now, let me go to another inherent conflict I see here. You are 

a national transportation official. Do you find any conflict, as Mr. 

Busalacchi points out, between maximization of profits, particularly 

where you have in here—very puzzling to me—that you would recommend to States that they should have to accept unsolicited proposals outside their planning process and they would have to evaluate them within a certain number of days and go forward. Now, 

that seems to me overly prejudiced toward an investor who comes 

along and wants to cherry-pick something out of a State and submit it. 

Why would we mandate to the States that outside of their incredibly involved planning process, which has to meet with Federal 

law, would we require that they accept any out-of-the-air private 

proposal from a foreign firm or domestic firm, anybody who wanders in the door who is qualified—i.e., they have a pile of money—

and have to process it within so many days, when they actually already have a plan on the books? 

Mr. DUVALL. Right. To be clear, we are obviously not mandating 

States do anything. These are provisions borrowed from existing 

law. The State of Virginia probably has the most comprehensive 

public-private partnership legislation. It is precisely their willingness to take unsolicited proposals that several of the most important capacity expansions————

Mr. DEFAZIO. But don’t you find that conflicts with the idea of 

orderly planning? Let me read to you from the law. I am certain 

you are familiar with it; you are a lawyer and you are a Federal 

official, and not a private advocate or a State official here. 

Under U.S. Code, Section 135: ‘‘Each State shall develop a Statewide transportation plan, State-wide transportation improvement 

plan for all areas of the State subject to Section 134’’—I will skip 

ahead here—‘‘that will function as an intermodal transportation 

system for the State and an integral part of an intermodal transportation system to the United States.’’

Don’t you find, in particular, this kind of cherry-picking and the 

whole private profit versus public interest issue that Mr. 

Busalacchi has raised, don’t you see some conflict here? Don’t you 

feel a need for balance? I know your background is in business and 

law, and I am certain you will go back to that when your job is 

done here, but right now you are charged with the public trust to 

forward a system that meets public needs in an integrated way, nationally and within States, not stopping at State borders, not within a State, something cherry-picked out. I just see an incredible 

conflict between what—I don’t care if Virginia has that or not. For 

a Federal official to tell States, as a policy, as a model, they should 

say they will take unsolicited proposals outside our States, outside 

our plans and, hey, there go our profit centers for the next 99 years 

where we could have had a public return. 

Mr. DUVALL. Obviously, Mr. Chairman, any proposal from the 

private sector would have to be—that was accepted would have to 

be incorporated into the State-wide plan; Federal law requires that. 

12

Mr. DEFAZIO. Well, but you didn’t give that in the model legislation. You didn’t say it has to be in accordance with, incorporated 

in, or meet the requirements of the Federal law here, you just say 

they have to accept these things. 

Mr. DUVALL. Actually, it does refer that it has got to be compliant with Federal law. The legislation specifically says that. I think 

it is very important to think about the possibilities. I mean, we are 

a little pessimistic about the opportunities for innovation here. The 

private sector has a very strong interest in looking at what is not 

working in the current network and making proposals to————

Mr. DEFAZIO. Right. What is not working is in some places people aren’t making money on it. 

Mr. Busalacchi, would you care to comment on this line of questioning, because I think you have raised these concerns? 

Mr. BUSALACCHI. Thank you, Mr. Chairman. 

Yes. I mean, this is all about money. I mean, if anybody thinks 

it is anything other than money is wrong. I mean, the Indiana toll 

road, after the 10 years is up, for 65 years there is not going to 

be any revenue. Whatever the————

Mr. DEFAZIO. So you are saying, therefore, this current governor 

gets some cash up-front, which may or may not equal the value of 

this particular agreement, particularly with a non-compete and 

other clauses, but you are saying future governors couldn’t revisit 

it? They have lost that revenue stream? 

Mr. BUSALACCHI. I don’t know how they do, Mr. Chairman. They 

have entered into a 75 year contract. The Skyway entered into a 

99 year contract. How do they turn their back on that? The revenue is gone. 

Mr. DEFAZIO. But these things are so much more efficient than 

the way they were operated before, aren’t they, except————

Mr. BUSALACCHI. I don’t————

Mr. DEFAZIO. As I remember the proposal from MIG, it said, ‘‘no 

significant cost savings envisioned.’’ So what was this about? 

Mr. BUSALACCHI. Well, I mean, I really don’t know. This is part 

of the unanswered questions, and this is why, Mr. Chairman, there 

has to be debate. This is a very important thing that is going on 

in transportation in this Country. In my view, my personal view is 

this is not the panacea. And I know that there are probably other 

DOT secretaries that disagree with me, but, for example, in the 

State of Wisconsin, we don’t have tolls. We don’t want tolls. Our 

governor doesn’t want them and they are not going to be there. So 

where do we stand as the Federal Government shifts itself toward 

this policy? You know, where do we end up? Do we end up out in 

the cold? That is why, you know, we are asking these questions, 

that is why I am asking these questions. 

There needs to be a national debate on this, because the amount 

of money that the 3Ps are going to raise is very, very small compared to the overall needs that the Country has, and I am worried 

that this is a diversion. That is what this is. Let’s not worry about 

the real problem, which is these huge needs that we have; let’s talk 

about P3s, because they will raise this money and they will raise 

the funds for these needs over here. And, you know, that is something that the Commission is grappling with, Mr. Chairman. We 

have huge needs in this Country. The last transportation bill came 

13

nowhere near to funding those needs. That is the seriousness of 

what is going on here, and that is what we need to talk about. 

Mr. DEFAZIO. Well, thank you, Mr. Busalacchi. My time has expired, but I do want to say you ended up where I started, which 

was asking Mr. Duvall of any plans by the Administration to enhance funding in the Federal system, and the answer, by absence 

of an answer, was no, they are offering us public-private partnerships, and you are underlying the same thing. Thank you. 

Mr. Duncan. 

Mr. DUNCAN. Thank you, Mr. Chairman. 

Mr. Secretary, let me just ask you this. You heard me mention 

it last week. We had a briefing by the GAO in which they said this 

was a very fast moving development in transportation circles 

around the Country, and Mr. Busalacchi just mentioned this, they 

called it a very important development. We have heard a lot about 

the Indiana road and the Chicago Skyway. Do you know of many 

other States or local governments that are considering these types 

of public-private partnerships at this point? 

Mr. DUVALL. Yes. I think there is a series of interests across the 

Country ranging from new capacity, which the State of Texas basically, I think programmatically, has declared that virtually all 

major new capacity in the State will be done through some publicprivate model; obviously, the Commonwealth of Virginia. In terms 

of long-term leases, you know, there has been a lot of press coverage of the State of New Jersey and the Governor of Pennsylvania’s interest in exploring the valuations of those two facilities. 

There is a limited number of existing toll roads in the United 

States, so I do not view that trend as necessarily the be-all and 

end-all to solving our transportation problems, despite some characterizations to the contrary. 

I think what is important is can the structures of these transactions protect the public interest, as the Chairman has outlined, 

and I think there are risks and there are opportunities, and, if you 

structure them correctly, these transactions can protect the public 

interest and you can free up public resources to make high return 

investments in other areas. 

Mr. DUNCAN. You say there is a limited number of toll roads. I 

have never heard a figure on that. Do you know how many toll 

roads there are? 

Mr. DUVALL. How many toll roads? No. I can get you the exact 

number, but obviously it is predominantly the Northeast and Florida. Florida, for example, has not built a non-toll road, a free road, 

I think, since the early 1980’s, so they have got a massive network 

of toll roads in Florida; and the Northeast obviously has a lot of 

grandfathered toll facilities; and then there are pockets of toll 

roads throughout the Midwest. 

Mr. DUNCAN. Let me ask you. You have come forward with this 

model legislation and I wasn’t clear. You told the Chairman you 

put some things about risk up on your website or something. Have 

you—there is some concern about State or local governments not 

having the expertise to enter into these deals, these high finance 

deals and so forth. Have you come forward with any guidance to 

State or local governments? Have you sent out some reports or suggestions in ways to handle these things, or have you set up any 

14

meetings with State and local transportation officials or are you 

considering doing things like that? 

Mr. DUVALL. In terms of formal guidance by the Department, we 

have not sent out formal guidance. I think we have had many, 

many conversations in which we have talked to State and local officials that are interested in this topic about the need for understanding what you are getting into. And I agree with both of you 

that there is a clear risk that State agencies are not currently 

equipped to deal with complex financial questions. I think that is 

solved, however. Obviously, Commissioner Busalacchi mentioned 

the need to procure outside advice. 

I think it is interesting to note that the two transactions in Chicago and Indiana, actually, they had extensive internal financial 

expertise that was used to contract with outside entities to give 

them additional financial advice. But you are a hundred percent 

correct that this is an issue that State governments are going to 

need to deal with directly in coming months, and we would be 

happy to think about ways to improve our communications on that 

front. 

Mr. DUNCAN. Well, I am not saying they couldn’t develop the expertise, but I think this is certainly an area that you should look 

into, because, as I said in my opening statement, I think there is 

some legitimate concern over whether a governor may or might be 

attempted to take—might be tempted to take some big money on 

the front end and leave officials holding the bag a few years down 

the road. 

Mr. Busalacchi, you say in your testimony it is not clear that the 

deal in Indiana would happen if it were being considered today. 

The last news report I saw, half the citizens polled in New Jersey 

think the P3 approach to the turnpike is not in their best interest. 

Why do you say that? What led you to that conclusion, that the Indiana deal would not come about if it was being done today? 

Mr. BUSALACCHI. Well, I think the public outcry, Mr. Chairman, 

is that they are very much against what happened in Indiana. I 

think the governor’s poll show that. We are hearing the same thing 

coming out of New Jersey. And, of course, we hear it in our own 

State. I travel through the State extensively talking about this because, as I had said earlier, you know, we are facing basically the 

same situation that the entire Nation is facing: we have these astronomical needs and how we are going to fund them. 

And, you know, you touched on a real good point about the complexity of these deals. In my department, we could not handle these 

complex legal issues in our department. We have got good lawyers, 

but there is no way they could handle this. We would have to go 

on the outside and we would have to spend an awful lot of money 

to get this done. That would have to be approved by the governor 

and maybe even the legislator. 

Mr. DUNCAN. Has the State of Wisconsin had or have you had 

some particular difficulty with public-private partnerships on some 

of your projects that you could give us some examples of? 

Mr. BUSALACCHI. We have very little experience as far as transportation goes. I have had personal experience with public-private 

partnerships. I mean, we built Miller Park. That was a public-private partnership, one that I am very proud of. There are situations 

15

where this can work, but I think that we are just moving way, way 

too quickly and we are forgetting about the real problem here. The 

real problem is what is going on with the needs in this Country. 

You know, we get into the transportation bill and we get into this 

trap of talking about dollars. We have got to talk about needs. And 

that is what I am afraid is happening here, we are talking about 

dollars again. Let’s go back and talk about what needs to get done. 

We are falling far behind. 

Tyler is right, our global economy is going to get affected here. 

I am concerned about congestion just like USDOT is. It is going to 

hurt us. 

Mr DUNCAN. All right, I have already run over my time, but, Mr. 

Wilson, I understand that you were in New Jersey for a while, is 

that correct? 

Mr. WILSON. That is correct. Busalacchi that half the people in 

New Jersey are upset with the way the turnpike partnership is 

working out? 

Mr. WILSON. I think there is a disturbing confusion between—

maybe it is semantics, maybe not—what is called a public-private 

partnership and what in other terms is just called tolling of free 

lanes. There are emotional issues; there are economic issues; there 

are political issues. If you are going to convert a toll road and sell 

it, those are economic and political. If you are going to toll a free 

lane, those are economic and political. Not to be confused with a 

delivery method, which is public-private in terms of delivering any 

form of infrastructure. 

So, when I was in New Jersey, we formulated a piece of legislation that did much the same as what this Federal regulation is 

calling for, but, Mr. Chairman, we made it part of the planning 

process. The notion was that the planning process, as it exists in 

States—through the metropolitan planning organizations, State 

Departments of Transportation, local government involved in the 

cooperating, continuing development of transportation plans—does 

not capture all the wisdom in the world. And when the private sector can bring a good idea forward, it needs to be vetted through 

that process. 

So the legislation we adopted or the legislature adopted on the 

basis of experimental endeavor—seven projects were qualified—

those encouraged ideas to come forward and then went through 

this planning process and accepted or rejected. Just because a 

project or proposal is offered doesn’t mean it has to be accepted if 

it is inherently flawed. 

So in New Jersey and elsewhere, I would say the difference is 

what are we really attempting to do. As I said, the disturbing part 

about this is public-private partnerships whereas where they might 

work gets a bad reputation, when really what we are talking about 

is an economic or public policy to toll free roads or to sell roads. 

And I don’t believe that they are synonymous and necessarily have 

to be discussed in those terms. 

Mr. DUNCAN. Let me ask one last question. You have been a 

State and local transportation official for some time now. You 

know, we found in here that mainly because of all of our environmental rules and regulations and so forth, that all these highway 

projects take an average of about 10 years to complete, so you have 

16

to look way into the future. What do you see if you had to look 10 

or 25 years from now? What do you see for the future? Do you 

think that this is a trend that is really going to take off and explode, that most of our major transportation projects, say, 25 years 

from now are going to be public-private partnerships? 

Mr. WILSON. Let me give you a startling fact that I had the misfortune of discovering when Commissioner of Transportation of the 

State of New Jersey. The average project there took seven years 

from the beginning in the conceptual planning stage to the notice 

to proceed. That is not the completion of construction, that is just 

where construction began. Seven years. 

Mr. DUNCAN. Right. 

Mr. WILSON. That is not the startling part; we kind of expected 

that. The startling part was that the average size of a project was 

$5 million. 

What I am here to illustrate in response to your remarks is that 

the process we used, implemented for structure projects here, is inordinately expensive and wasteful. 

Mr. DUNCAN. Right. 

Mr. WILSON. And so we who come before Congress and local legislatures asking you for more money should be sent back and asked 

to ring out the inefficiencies in our delivery processes, because 

more money just goes to more waste. So what we need to be looking for is a more efficient, more effective way of delivering this 

more money. 

This is not a speech against additional gas tax or additional revenues in the trust fund at the Federal or local level, but it is a plea 

to allow folks like ourselves, practitioners in this business, to embrace any delivery method that gives us the leverage to implement 

projects in a much more affordable way. 

I mentioned in my statement here that typically you can expect 

between 18 and 20 percent cost reduction on a project. What is the 

difference between 20 percent cost reduction and 20 percent more 

revenue in a fund? So that is what we are looking to accomplish 

with this notion of public-private partnerships. 

Mr. DUNCAN. Thank you. 

Mr. DEFAZIO. I thank the gentleman. Just in noting we did adopt 

some significant modifications to the review process and the environmental process in SAFETEA-LU—I don’t believe they have been 

fully implemented as yet by the Department of Transportation—

which should help with that time problem. And, of course, whether 

it is public or private, it has to go through the same process, so 

that is not going to save time. DOT needs to fully implement the 

provision we provided. 

Mr. Altmire was first on our side, from Pennsylvania, perhaps 

the home of the next great public-private partnership. 

Mr. ALTMIRE. No questions, thank you, Mr. Chairman. 

Mr. DEFAZIO. All right, then the second person—I am doing 

questions in order of arrival on our side—Mr. Shuler. 

Mr. SHULER. I pass. 

Mr. DEFAZIO. All right. Find some Democrat. Mr. Lipinski, any 

questions? Home of the first great public-private partnership of the 

recent round. 

17

Mr. LIPINSKI. Mr. Chairman, I want to thank you for doing it in 

this manner. I was expecting you to go with seniority, so I wasn’t 

quite prepared to go yet, but I am always ready. 

Mr. Wilson, you were talking about your cutting costs 18, 20 percent. How much did you say time was cut? 

Mr. WILSON. About 40 percent. 

Mr. LIPINSKI. About 40 percent. Now, are you saying that there 

just are always inefficiencies when a government entity does these 

projects? I mean, the suggestion is that things are just done so 

poorly if it is being run through a government entity that you sort 

of need to take it away from them because they just add time, add 

wasteful spending. I mean, is that what the suggestion is? Well, 

where is all this time and money saved coming from? 

Mr. WILSON. I don’t think—having lived on both sides, private 

and public, I don’t think there is any question that the discipline 

to begin and end a project is much more intense on the private 

side. I am not going to say it is a dirty word, but there is a profit 

motive to moving a project. That does not say that you sacrifice 

quality or utility. You build those into your contracts and make the 

private enterprise responsible for those as well, and you do that 

through a variety of ways. One is longer warranties or concessions 

where they are responsible for the operation, performance, and 

quality of a job. 

But I will say this————

Mr. LIPINSKI. Are those things not done by public entities? 

Mr. WILSON. Pardon me? 

Mr. LIPINSKI. Are those not done by government entities, governments? 

Mr. WILSON. Is what not done? 

Mr. LIPINSKI. Putting those kind of incentives in. 

Mr. WILSON. Yes, I was going to get to the other point that I 

wanted to make, is why there are inefficiencies. 

Mr. LIPINSKI. OK. 

Mr. WILSON. Typically, on a large infrastructure project, you 

have the owners, engineers, architects, then you have the builders, 

the material suppliers, the construction managers, the quality control, quality assurance agents, the owner staff itself; and all those 

are disconnects in a project. All those are inefficiencies in a major 

infrastructure project, besides the abundant of cost or redundant 

cost. To manage all those interfaces is incredibly difficult and complex, and when you have an owner that has a different motive than 

a builder, you tend to run into trouble. And our industry, unfortunately, is replete with examples of where that has consumed large 

chunks of money and taken long, long periods of time, in some 

cases a lot of mortality on projects. 

When you consolidate the responsibility to deliver the product 

and integrate the design, the construction, and the operation, you 

tend to get a much more efficient package of services delivered. 

That drives the schedules down because the interfaces are managed by one entity, not multiple entities. So the inherent advantage 

of a public-private partnership is not necessarily in generating new 

income or magical financing techniques, it is to bring discipline and 

focus to the effort of delivering the infrastructure project on a respectable budget, on a respectable schedule, not sacrificing quality. 

18

So therein is why the public entity, as good as it is, needs to 

stretch and invite the private sector in. 

There are some things that the private sector cannot do and only 

government can do, and those are policy-related issues, environmental clearance, funding—not financing, but funding, utility coordination, approvals, permits, real estate acquisition. All those are 

legitimate functions of government where the private sector doesn’t 

belong. But once you have decided what your project is and you 

have got a good scope, it is time to let those who have that focus 

and discipline to deliver that product and then stand behind it and 

warrant it over a long period of time. 

Mr. LIPINSKI. I want to ask Mr. Busalacchi is there anything 

that you would want to add to that or any comments you have on 

that? 

Mr. BUSALACCHI. Well, I would just like to say this, and, again, 

I can’t speak for any other State, but I do know, in the four-plus 

years that I have been the Secretary in Wisconsin, we have 

changed dramatically how we deliver projects. We are delivering 

projects that are much large now because of the needs, and in delivery of those projects we have found that us managing the project 

is the only way to go. I don’t particularly want to do a big project 

and let the private sector control the project. 

We have a large—one of the largest projects going in the Country 

right now in the heart of Downtown Milwaukee, and that project 

could have been ripe for cost overruns and you name it, and that 

project is on time and it is on budget. It is a $810 million job. So 

I don’t necessarily agree with when you turn this stuff over to the 

private sector, that they are going to do it better. I don’t believe 

they can do it better. I believe there has to be involvement. We 

have a responsibility to the taxpayer. I just don’t believe we can 

just take this responsibility and hand it off to a contractor and say, 

OK, do it and we are going to trust you. I just don’t believe that 

that is what we have to do. We have to hold their feet to the fire, 

and we are doing that in our State. I can’t speak for anybody else. 

Mr. LIPINSKI. Thank you. 

Mr. DEFAZIO. Thank you. 

Mr. Petri? 

Mr. PETRI. Thank you, Mr. Chairman. I guess I have a question 

for the whole panel. I am thinking about this and the question in 

my mind is what is it uniquely and in a superior way the private 

people bring to this process. The Federal Government is more efficient than anyone else at borrowing money, it borrows it all over 

the world. So the argument that there are pools of money out there 

that could be used for American infrastructure through public-private partnerships, well, it could be, couldn’t it, that the Treasury 

could borrow money and we could have a transportation financing 

bank the way we do hundreds of banks, going back to the New 

Deal and before, in agriculture and rural development and 101 

other ways. This would get rid of the need for investment bankers 

and specialized fees and all this kind of thing. It would be a place 

that States or municipalities—probably States—would go to get approval and funding if we didn’t want to use gas tax revenue anymore. If we thought there is excess capital in the world and the 

government could borrow the money and loan it out, somehow or 

19

another, or even absorb the cost at the Federal level as its contribution and give it interest-free to the States, rather than let the 

private people get involved? 

So could you discuss that? Is there some reason we have to structure this in such a way that each State is supposed to deal, or municipality, in the case of Chicago, with private people? It seems to 

be dangerous with cherry-picking of fees, complexity, using money 

up front that mortgages a State’s credit and one thing or another 

that could be avoided, by just setting up some kind of financing 

bank and letting the Treasurer borrow the money and then having 

in-house experts manage it with the State and local people. 

Mr. DUVALL. Congressman Petri, it is a great question, and I 

think one of your panelists in the later session is going to get into 

this question about the cost of capital in public and private sectors, 

and it is obvious that, certainly at the Federal level, you can 

achieve very low at capital, and, obviously at the State and local 

levels, you have taxes and borrowing, which is significantly cheaper 

than taxable borrowing. 

I think that actually misses, though, the point about who bears 

the risk, and I think, obviously, to the extent you are doing government borrowing, you are putting taxpayers—and one of the reasons 

that government borrowing is cheaper is because you have got—

you know, you are putting the general taxpayer at risk. And I 

think one of the ideas here is to really shift large amounts of financial risk to entities that want to bear it. Aand can bear it, and that 

drives—in response to Congressman Lipinski’s questions—innovations and performance incentives that simply—it is not in any way 

a dig at government or government’s inability to do things—it is 

just that simply the rewards for performance and innovation cannot be replicated perfectly in a public model. And I think the point 

of the contracting mechanism and why it is so powerful is that the 

public sector can really unleash fairly serious performance requirements in connection with these contracts. 

So you are correct that the cost of capital through pure government borrowing can be lower, but it is much more complicated, and 

ultimately the question is who is bearing risk of failure and costs 

of failure and then, obviously, who is bearing the upside for success 

is the policy issue you all are confronting here. 

Mr. BUSALACCHI. Congressman Petri, I think the point that you 

are bringing up is really one of the reasons why I am here today. 

I think there needs to be more debate about this topic. I am not 

here saying don’t do it. All I am saying is that I think there may 

be other options here for us to accomplish our goal, and that is one 

suggestion that you have. But I really don’t see that coming out of 

USDOT, I just see one solution here, and that is what concerns me, 

and the fact that we are forgetting about this massive problem that 

we have with needs. 

So I think that you are absolutely right, and what we need to 

do is we need to have more debate about this. I am not saying debate it for 10 years. We can’t wait that long; the Country can’t wait 

that long. But I think we need to talk a little bit more about this 

to find out this to find out really what is going on, because, by my 

testimony today, I can tell you I am not convinced. Not by any 

means of the imagination am I convinced. 

20

Mr. WILSON. Congressman, may I just add one observation on 

this element of risk? You asked what was uniquely attractive with 

the private sector involvement in these kinds of programs, and let 

me say that it may not be unique, but it certainly is a different perspective when you consider the notion of ownership and who has 

the ownership risk in the program. Typically, the public entity is 

the owner. And after the project is designed and built and is operational, they bear massive risks in terms of quality and performance of the facility. 

Through this partnership arrangement, you can effectively transfer that risk for any period of time to the private enterprise, and 

that becomes an attractive option for a public entity in the sense 

that it does not have to buy and own the facility in order to get 

beneficial use of the facility. You can get the performance specified 

in your contract, you can get the reliability specified, or you don’t 

make payments. In other words, what you are using is the productive capacity and performance of the investment, but you don’t 

have to have ‘‘ownership’’ of it, you don’t have to hold the deed to 

get public benefit from it. 

You leave the risk of that performance with the private entity 

that designed it and built it, and has to stand behind its long-term 

performance. You can judge for yourself, locally, what long-term is; 

in some facilities it may be no longer than five to seven years when 

you have gone through the infant mortality stage of a project, or 

it may be a longer period of time because they are doing a good 

and adequate job. If not, then you take it back in your contract you 

have the ability to buy back, take back the facility, or own the facility at some future date. 

But I think it is the important—there are too many examples in 

our industry where infrastructure built was left to an owner that 

had to come in afterwards, make repairs they didn’t expect. 

Mr. DEFAZIO. I thank the gentleman. Hopefully we can keep the 

answers more brief so we can get to more members. 

I would observe that in a project that has been operating for 50 

years, there is not a lot of risk; there is a lot known. Taking greenfields, it is a different issue. And there is very little to distinguish 

what is going on here between assuming and operating existing—

and monetizing existing assets—Pennsylvania Turnpike, Indiana 

Toll Road, New Jersey Turnpike—or building a new project. 

Mr. Oberstar. 

Mr. OBERSTAR. Thank you, Mr. Chairman. 

I want to thank our witnesses for participating this morning and 

the members for their participation. 

And the gentleman from Tennessee, thank you for your leadership in the past in aviation and in water resources, and now lending your skills to highways. It has been always a pleasure working 

with you. 

And Mr. DeFazio, for yeoman service in the course of SAFETEALU. We spent an enormous amount of time. I think I saw more of 

him at times than I did of my wife. 

[Laughter.] 

Mr. OBERSTAR. I have a number of problems with this public-private partnership idea. In this no tax atmosphere where governors, 

legislators, the chambers of commerce paint halos around their 

21

head, pose for holy pictures, and saying no taxes, no new taxes. 

And then they turn around and say, but we are going to toll this 

and impose a fee for that. The word toll is spelled t-a-x. That is 

all it is. Don’t try to sugarcoat it or disguise it in something else, 

and don’t try to something the public. 

Secretary Busalacchi, I want to compliment you on the splendid 

leadership you have exercised on the Milwaukee Interchange. That 

$800-plus million project has been languishing for over two decades, and I spent enough hours snarled in its mess, visiting two 

daughters who graduated from Marquette, to know the job that you 

undertook and tackled with great aplomb and with great skill. I 

have been back to Milwaukee several times in the course of the 

construction, simply flying in to visit my grandchildren down in 

Kenosha, and also for events in Milwaukee. So you have really 

done a superb job. And you are absolutely right, the role of the 

public sector is to oversee. 

Now, this idea of public-private partnerships, if we want to go to 

something that the European countries use, that is a different—

that will be a sea tide change in the way we do transportation. The 

idea of a warranted system, a warranted construction program, 

where the national government says we want a four lane road, we 

want it to go 50 miles, and we want it to last 75 years, and you 

build it and you guarantee it, contractor. We don’t do that. We in 

the United States, in the AASHTO manual, specify to States we 

are building a 20-mile roadway. It is like a three layered chocolate 

cake, the frosting will consist of this amount of bakers sugar and 

this amount of chocolate, and there will be so much cake flour in 

it and so many eggs and all the rest of the ingredients. We spell 

them out and then we watch over the contractor to see that they 

perform the job to those specifications, and we don’t hold them accountable except for fraud and corruption. 

They are two very different ways of doing projects. And it would 

take a sea tide change of processing, of management of law and implementation of law to move to the European system, and that is 

what the public-private partnership idea does; it is a siren’s song, 

frankly, of a quick fix way to put a lot of money out and build a 

lot of roadways. But I want to tell you that if we had started with 

the interstate system with each State doing its own design, designing its own program with public-private partnerships, we would not 

have a national integrated highway system. 

To his great credit, Dwight Eisenhower didn’t throw his hands 

up and say, oh my God, no taxes, build it with some incantations 

and chants. No. Although his secretary of treasury did propose 

funding it with—funding the interstate highway system by bonds 

floated on the stock market. Humphreys had been a private sector 

financier. The Congress said no. This Committee said no. My predecessor, John Blatnik, over in that corner, was one of the five coauthors of the interstate highway system legislation, and they said 

we are going to impose a user fee, call it a gas tax. Eisenhower 

signed it and it passed in 1956. It came back in 1957. It was four 

cents. It came back and said this isn’t going to be enough, we need 

another cent. It passed on a voice vote in the House. I don’t think 

you can pass the prayer on a voice vote in the House anymore. But 

22

there was consensus in this Country, there was political will to do 

things. That is what this takes, is some kind of political will. 

And to say that our former chairman, Don Young, went to the 

White House, went to the House Republican Conference to advocate for a $375 billion bill that the Transportation Department recommended, consequence of TEA–21. Study the needs, come back 

and report it, which they did. We took that bill, we introduced it 

in October of 2003. Gasoline was selling at $1.34 a gallon. Oh my 

God, the White House threw their hands up, the House Republican 

Conference threw their hands up, said we can’t do this. And where 

did gas go within a year? It doubled. All that money went overseas 

to OPEC. Take the five cents, invest it in America. Those jobs are 

built with American labor, American goods, American steel, American cement and aggregate and asphalt. That is just baloney. We 

do it right, meet those needs, we have got enough. But we need the 

political will to do it. 

And I heard Mr. Wilson talk about the project delivery. Chairman Young asked me to work on this matter of project streamlining, and so with 32 pages of legislative language we did it. But 

now I ask Mr. Duvall what have you done? It is 18 months since 

the bill was enacted. Where are your regulations? 

Mr. DUVALL. I mean, obviously, there are a series of regulations 

in connection with the 6002 process. We put out proposed rules. We 

obviously greatly appreciate the flexibility you have given the Department to accelerate that, and we will work harder to get them 

out faster, but————

Mr. OBERSTAR. It is 18 months. Where have you been? Mr. 

Duvall, I mean, granted, it took me six months to work this out, 

but I have worked it out with every interested group, Associated 

General Contractors, ARTBA, AASHTO, Sierra Club, National 

Trust for Historic Preservation, and go on all the other interest 

groups, every one of them. I spent hours of my time on this thing. 

And you have been on this thing for 18 months. Get the regulations 

done. At least come up and talk with us if you have got a problem. 

But we are not going to tolerate these projects—we have got the 

money, but it has taken us seven years to do it because the project 

approval process is too complicated. Baloney. 

Mr. DUVALL. I agree, Mr. Chairman. 

Mr. OBERSTAR. Get the message? 

Mr. DUVALL. Well, I agree that we have got to work much harder 

to get the regulations out in a timely fashion. It has been a high 

priority. As you note, the 6002 regulations, there is a myriad of 

other regulations, obviously, the Department is putting out in connection with the bill, some of which have been very timely, others 

have not. And we have got to do a better job to make sure————

Mr. OBERSTAR. I want to tell you the Seattle monorail project, 

which unfortunately failed for other reasons, projected 44 months 

of project approvals. They used this process and did it in 40 weeks. 

Mr. DUVALL. It is a very important—I think that one of the problems we have got is that the environmental process has obviously 

become the mechanism to have the public discourse————

Mr. OBERSTAR. It is not just environmental. 

Mr. DUVALL. Right. 

Mr. OBERSTAR. Don’t blame it all on the environment. 

23

Mr. DUVALL. No, no. 

Mr. OBERSTAR. There are lots of other issues. 

Mr. DUVALL. That is actually what I was saying, is that it has 

become the mechanism to debate the project, and whether to move 

forward, and it is an important policy————

Mr. DEFAZIO. I think that the Chairman is making a great point, 

and I think that the Subcommittee will request a briefing on the 

status of the implementation of the streamlining. We would think 

that this Administration would be particularly interested in putting that forward, and perhaps if they spent more time on that 

rather than developing model legislation for a minor portion of the 

problem, which is public-private partnerships, we would have the 

streamlining in place and we wouldn’t have to include that as part 

of this debate. I thank the————

Mr. OBERSTAR. Thank you, Mr. Chairman. It is message delivery, 

not project delivery here. 

Mr. DEFAZIO. Thank you. 

Mrs. Drake. 

Mrs. DRAKE. Thank you, Mr. Chairman. And I apologize for missing the bulk of the meeting, and I am sure you have covered this 

in detail. I only have one very simple question for you. I am from 

Virginia. Virginia, I think, has used public-private partnerships 

very well, and I wondered, from your perspective of looking at the 

Nation and you look at States that do use it, States that don’t use 

public-private partnerships, if you can draw the conclusion of are 

States like Virginia—I think in Virginia we would say we are in 

a better position because we have used public-private partnerships, 

but, looking around the Nation, would that be a fair assessment? 

And the other comment that I would make is what I have seen 

from it too, because we have unsolicited proposals, is that there are 

proposals coming forward on various plans that really generate 

public debate, debate within the general assembly, and get us looking at transportation a little bit differently and what things might 

be out there. 

So I apologize if you have already covered that in great detail. 

Mr. DUVALL. No, thank you, Congresswoman. I did mention the 

Commonwealth’s activities, and there is little question that the 

Commonwealth has been a leader in exploring these partnerships 

and has the most comprehensive authorizing legislation that was 

a substantial public debate with the governor and with the State 

legislature in Virginia, and continues to—the State legislature continues to provide strong oversight over the implementation of that 

broad authorizing legislation. But there is little question that Virginia’ s willingness to negotiate and enter into discussions has 

given them a tremendous opportunity to improve their transportation systems, both in the Hampton Roads region and up here in 

Northern Virginia. 

The three major projects that are proceeding—actually, there are 

more than that, but the ones that are getting a lot of attention are 

all going to involve some public-private partnership arrangements, 

and it is unsolicited proposals, in fact, that came forward, particularly with the Beltway widening here in Washington, D.C., that 

came up with the creative approach to take a fewer number of 

houses than the State had considered and really stimulated, as you 

24

said, a public debate. If you have told me 10 years ago that the 

State of Virginia would have been in a position to proceed with a 

widening of the Capital Beltway without enormous public negative 

reaction, I would have said that there is no way. But what happened is the private entity working with the government developed 

a very streamlined and rational approach to the expansion that I 

think has gained widespread public approval from all the members 

of Congress, from the constituents in the region, and it is moving 

forward at an aggressive pace at this point. 

But you are right. I mean, I think that the template that Virginia has used—and, again, I think it is clearly in the public interest how Virginia has implemented it—is a really impressive model 

that other States—in fact, it is what other States have looked at 

in the U.S. 

Mrs. DRAKE. Thank you for that. 

Mr. Chairman, I yield back. Thank you. 

Mr. DEFAZIO. I thank the gentlelady. 

Mrs. Napolitano. 

Mrs. NAPOLITANO. Thank you, Mr. Chairman. 

I have been listening with great interest to the testimony that 

has been given, and coming from a State which has undertaken 

private-public partnerships in the past, it is really an interesting 

scenario to hear that now the DOT Federal is wanting to make—

fling the door open, if you will, not even talking specifically on the 

91 Freeway in Los Angeles that began as a 3P and, unfortunately, 

did not continue in that vein. 

But one of the concerns I have is, Secretary Duvall, has DOT 

sought information input, comments, held meetings with the States 

Departments of Transportation folks to receive input as to how 

they perceive this could work or not work, and any of the areas 

that you have outlined that they feel might require further comment or further input to be able to become more effective? 

Mr. DUVALL. Thank you, Congresswoman. Yes, we have absolutely sought advice and input, and, in fact, it is safe to say that 

the States, at the DOT level, are really screaming for additional 

flexibility in this area to really pursue arrangements that current 

State law and legal mechanisms do not allow them to consider. You 

are 100 percent correct that the experience with SR–91, while receiving a lot of negative attention, has actually been very vital to 

this national debate, and I agree with Commissioner Busalacchi 

that we do need a national debate about this topic. 

Mrs. NAPOLITANO. OK, but can you determine, can you maybe 

quantify in terms of the bigger States are for it, the smaller States 

are against it, or something to that effect? Because, in essence, the 

larger States have already done the partnerships in some form or 

another. The smaller States are beginning to want to because of 

the expansion need, but do they know the pitfalls that the larger 

States have become embroiled in and have found information that 

could help them determine whether or not that is the way to go? 

Mr. DUVALL. Yes. The small, mid-size, and large States—I would 

not characterize all large States, though, as having done this. 

There are actually still a very few number of large States that have 

pursued this approach to expanding and managing existing capacity. I think what is safe to say is there is a significant degree of 

25

learning that has already taken place among the career officials at 

State DOTs in the past five to ten years and I am actually fairly 

well amazed at how much they do know already about the risks, 

even in States that have not done a single transaction. AASHTO 

has been a great forum for discussion. There have been numerous 

conferences in which this has been discussed and debated, and I 

am constantly amazed, frankly, of how much people already know 

about the risks. And SR–91, you are right, has been a poster child 

that has actually helped us in many ways carve out what the policy 

issues are with non-compete provisions. 

Mrs. NAPOLITANO. Well, I was one of the ones that voted against 

it, and partly because it was built on public land and somebody 

was going to take private benefit from it, and we knew that it did 

not have all the questions answered nor coverage of where the infrastructure maintenance was going to come from and for how long. 

There were a lot of things that were not covered. 

Do you have any way of being able to—and I have heard some 

of the discussion that on your website you have some information—

to be able to help those that are seeking information as to whether 

or not they can make informed decisions or be able to be referred 

to those cities or States that could assist them in being able to protect their public interest? 

Essentially, in 91, the non-compete clause, California has a great 

need for expansion, yet we could not expand because of that clause 

in that 91 contract, and that hurt our whole area. In fact, they are 

still suffering from that; it has not expanded. And I am sorry, but 

others are going to have to make sure that they look at the noncompete clause, because if they are able to expand, they can’t by 

law. 

Mr. DUVALL. Right. I think you will have a panelist later discuss 

non-compete clauses in potentially more detail, but I think it is 

safe to say that the state of the practice has evolved to the point 

where they are either not included or sufficiently weakened relative to what was included in that transaction. 

As far as expanding outreach, I think it is important, and I think 

I basically committed to the Chairman today to develop some written materials related to the risks, and we will do that. But I think 

it is clear, though, that we have been engaging in a longstanding 

discussion with States who want—who have asked us these questions, who are inquiring. We have done a lot of conferences, a lot 

of outreach to States; we have developed, obviously, model legislation, but we have also done a significant number of reports. There 

is a lot of expertise that does not reside in our Department, however, and I think this is a longer term issue for us, as well as the 

States. 

Mrs. NAPOLITANO. Well, my time has run out, Mr. Chair, but I 

will submit some questions. 

Mr. DEFAZIO. I thank the gentlelady. I think that was a particularly important question. 

Mr. Busalacchi, would you like to respond to that? 

Mr. BUSALACCHI. Yes. I would just like to say something, Mr. 

Chairman, in talking about Virginia. And this is why I think we 

have got to get out there and we have got to have this debate, and 

I really appreciate what you are doing here today. It is our underVerDate 0ct 09 2002 16:22 Aug 01, 2007 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 P:\DOCS\34778.TXT HTRANS1 PsN: JASON
26

standing that Virginia is having real problems raising revenues to 

get highway projects done, and that is why—and, you know, I understand what Mr. Duvall is saying, but that is why we have to get 

out there and we have to look at these 3Ps and see if they really 

are this panacea that everybody seems to think they are. I don’t 

think they are. Our legislature doesn’t think they are. We are facing, in Wisconsin, opposition to this program. People don’t like the 

idea that their roads may be owned by foreigners. Forgive me for 

saying it, but that is really—that is part of the problem, 

and————

Mr. DEFAZIO. You will be on Lou Dobbs tonight, Mr. Busalacchi, 

I guarantee it. 

[Laughter.] 

Mr. DEFAZIO. Thank you for that. 

But I think, Mr. Duvall, Mrs. Napolitano made a great point 

here, which is I would really like to see—I mean, you are saying 

you have had these conversations. I have heard from DOTs, a lot 

of them across the Country, and they are talking about the hard 

sell they are getting from their regional Federal officials on 3Ps, 

they are not saying, gee, they gave us a great list of the pitfalls 

or problems. You said the practice has evolved, you haven’t said 

your guidance or your advice to the States has evolved to say, hey, 

look out for non-competes. You don’t have to look very far back in 

history to find non-competes, i.e., the Indiana Toll Road, that’s a 

big one with 10 miles each side non-compete or other projects. 

It is not like this is some ancient historic artifact or there aren’t 

maybe some private companies out there trying to get some gullible 

State DOT to sign off on a non-compete. And I have not seen specific guidance from the Fed saying, hey, this is a big problem, look 

what happened in California, look at the problems it is creating 

elsewhere, look at the potential problems. 

Just one last question. I pointed out, when we had the financiers 

in here and Macquarie, good company. I said, there are two ways 

to meet a congestion standard, aren’t there? One is increase capacity, the other is to price people off your asset. And in Indiana, if 

they priced people off the asset, there is a 10-mile non-compete on 

either side of that. So you are dumping the traffic into an area 

where you can’t—just like what happened in California. And this 

was just signed by Mr. Daniels six months ago. So it isn’t a historic 

artifact. Where is the advice? 

Mr. DUVALL. Well, Mr. Chairman, again, as I said, we will definitely put out some guidance document related to risk. 

Mr. DEFAZIO. I appreciate that. That would be great. I have got 

to go on to another————

Mr. COHEN. Thank you, Mr. Chairman. 

Mr. DEFAZIO. Microphone. 

Mr. COHEN. Push my button and clear my throat. 

I guess this is for the panel, and I am a little confused on the 

whole issue, but if you get into these public-private partnerships, 

does this change the process of determining priorities and where 

these roads are built? Where you build roads determines the value 

of property, and does this give the private sector the ability to 

choose where these roads would be built, whether there would be 

off-ramps, etc., and have different issues concerning the land that 

27

is pertinent to the road or near the road, and the value that might 

have? Have those factors been considered or is that an appropriate 

issue? 

Mr. DUVALL. Congressman Cohen, obviously, any project that advances has got to be agreed to by the government officials that are 

administering the program in accordance with Federal planning requirements. So I am not sure if that answers your question, but 

there is no way a private project can move forward without full 

consent and understanding of the officials administering the program. So if it doesn’t fit within their transportation plan and proposal, it can’t move forward. 

I think it is important to note, increasingly, we are seeing, obviously, resources not being allocated towards projects that are really 

producing the highest returns, and there have been a number of 

economic studies in recent years that really point to this failure. 

And one of the reasons we have been excited from a policy standpoint about this idea is we think it will actually free up resources 

to make what may or may not be considered a low-return investment, but that is still in the public interest, but allocate some of 

the risk of high-return projects and get resources flowing faster to 

projects that produce high economic returns. That is the idea, and 

we are seeing some of it being played out here in Virginia and in 

Texas. We have a long way to go before that is implemented nationwide, though. 

Mr. COHEN. When the private sector gets involved, they make 

their money by the tolls, is that correct; they invest in the roads 

and then they get the return on tolls? 

Mr. DUVALL. It depends on the arrangement. Obviously, the 

State of Florida is pursuing what is called an availability payment 

model, where the State sets aside a set of resources and then has 

the private entities bid on effectively a maximum ceiling, and if the 

lowest bid effectively wins and they get a concession for those public resources, however they are generated. That is a model that is 

used in Europe. So as I said in my opening statement, it is not confined to revenue-generating projects, this concept of risk sharing. 

Yes, you are correct that the ones that are getting the most media 

attention are toll road projects, though. 

Mr. COHEN. Is there ever an issue concerning the toll roads? You 

have got to have law enforcement there to police, I presume, and 

if there is a wreck which ties up traffic, you have got to clear it. 

Is there ever a discussion about utilizing the public’s abilities to 

clear up road and who gets priorities, and if there is any problems 

there? 

Mr. DUVALL. No. All the agreements provide for full access to law 

enforcement officials. They also actually—several of them fund the 

activities of the law enforcement officials as a part of the contract. 

I also think it is important to talk about the performance requirements that States can impose on private entities to not only—to 

clear incidents, to move traffic faster, to deploy electronic tolling, 

to create reversible lanes. All those can be required as part of the 

agreement. They are in the inherent interest of the private entity 

because throughput maximization is a good idea if you are trying 

to generate a high return, but it is also something the public officials can require as a part of the performance. 

28

And a breach of the agreement—I think this is an important 

topic of further conversation—but a breach of the agreement means 

that the facility, if it is material, can revert back to public hands, 

and any payments that have been made to date do not go back to 

the private sector. So the public sector—and you have got very good 

lawyers that now are expert at doing this and can greatly protect 

themselves in connection with these issues. 

Mr. COHEN. But does it ever skew the public resources? Has 

there ever been a situation where you have got maybe political influence and they put a priority on this toll road to go and clear up 

this accident so that the traffic flow on that road is better and it 

helps—as distinguished from a public road? Any time you get this 

private-public distinction and you have got public resources necessary for operation, you have got the possibility that there will be 

influence used politically to have those public resources used to 

help the private entrepreneur. And the road-building industry, I 

don’t know about the Country, but in Tennessee we have had a 

couple of scandals through the people that build roads; I mean, 

they have kind of got a tendency to get together and decide what 

the best price would be and do that. That doesn’t work real well. 

Mr. DUVALL. Right. 

Mr. COHEN. So if they kind of get together on that, might they 

not get together on saying, you know, clear my road first? 

Mr. DUVALL. Right. Clear risk of those kind of side backroom 

deals taking place, I think it just a risk that the public officials 

have got to be aware of and make sure that there is open transparency to what is being negotiated. As I said, obviously, the private sector is increasingly a tool to finance some of these public 

services, which, as you said, presents some conflict questions. I just 

think it has got to be managed on a case-by-case basis. 

Mr. COHEN. There was a road I got on one time going from L.A. 

down to Laguna, and it was a toll road. Was that a public-private 

partnerships? OK. 

Mr. DUVALL. The 91, is that the one you are talking about? 

Mrs. NAPOLITANO. That is the one by Irvine, over in that area. 

Mr. DUVALL. I think so, yes. OCTA? I don’t know. 

Mr. COHEN. Whatever. Thank you. 

Mr. DUVALL. All right, thanks. 

Mr. DEFAZIO. I thank the gentleman. 

Mr. Baird. 

Mr. BAIRD. I thank the Chairman and our witnesses. 

Mr. Duvall, is it your opinion that it is in the United States’ best 

interest to have a domestic fabrication capacity for steel and other 

infrastructure needs? 

Mr. DUVALL. Yes, I believe it is in the Country’s interest to have 

capacity to do that. 

Mr. BAIRD. Is it your understanding that part of the reason for 

the Buy America Act provisions in Federal law are to help preserve 

that domestic fabrication capacity and ensure that Federal tax dollars are spent to help maintain the capacity and employ American 

workers? 

Mr. DUVALL. That is my understanding, yes. 

Mr. BAIRD. Is it your or the Administration’s position that private partnerships or privately funded transportation projects 

29

should be exempt from Buy America provisions, even if they become, in some fashion, part of the broader Federal highway system? 

Mr. DUVALL. I think the question of application of all Federal requirements, including Buy America, depends obviously on the nature of the Federal involvement in the partnership to begin with. 

So if there is Federal funding participation, if there are other Federal elements of participation, the requirements should attach with 

that participation. To the extent the Federal Government is not involved in funding, approving, or otherwise providing oversight to a 

project, the requirements would not attach. 

Mr. BAIRD. Do you see any potential problems if expansion of 

public-private partnerships were to continue and possibly evade, 

thereby, Buy America provisions? In terms of the potential to maintain our domestic infrastructure. 

Mr. DUVALL. Again, to the extent the Federal funds are flowing, 

the requirements have to be satisfied, so I don’t see that risk. 

Mr. BAIRD. Let me give you an example. There is a bridge in Tacoma, Washington being built, the new lane on the Tacoma Narrows span. It is being built with Korean steel. It is a tolled project 

And not far away are some of the best steel fabricators in the 

United States of America. They happen to be in my district. Not 

a bit, or very, very little of that new span is being made domestically, and at some point, if we continue this, we are going to lose 

our domestic steel fabrication capacity. And one of my concerns 

about this public-private partnership issue is that we are going to 

lose that capacity, and when an earthquake comes or an international conflict comes, we are going to be beholden to foreign 

manufacturers and foreign fabricators. 

Do you have any concern at all about that? 

Mr. DUVALL. I mean, again, I am not an expert on that business, 

but I think to the extent the Federal Government’s interest—and 

I actually have not been intimately involved in the day-to-day negotiations of that contract, so I can’t speak to the terms there—but 

clearly the Federal Government has expressed, through the Congress, a clear interest in ensuring the Buy America provisions are 

enforced, and I don’t see the public-private partnership trend as a 

threat to that in any way, actually. 

Mr. BAIRD. Really? In no way at all? 

Mr. DUVALL. I don’t see it as a threat, no. 

Mr. BAIRD. I would ask you to look into that a little and get back 

to me. 

Mr. DUVALL. OK. 

Mr. BAIRD. It just seems to me that if increasing numbers of Federal transportation projects are built with private money and thereby evade Buy America provisions, there will be less market for domestic fabricators and construction people, and that declining market would seem to possibly imperil their financial viability and 

thereby, importantly, the security of this Country. And I would encourage you to look seriously, as you seem to be an advocate of 

public-private partnerships. 

Let me throw out an idea that I have kicked around and welcome 

the comments of the panelists. First of all, it is my understanding 

that Macquarie gets a significant portion of their funds from retireVerDate 0ct 09 2002 16:22 Aug 01, 2007 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 P:\DOCS\34778.TXT HTRANS1 PsN: JASON
30

ment funds from Australian citizens. Is that an accurate understanding? 

Mr. DUVALL. Yes. 

Mr. BAIRD. That is accurate. 

Mr. DUVALL. Yes. 

Mr. BAIRD. It is paradoxical to me that we are going to have 

American citizens driving on roads paid for by foreign retirees and 

our tolls are going to go to those foreign retirees. That strikes me 

as funny. We have, in this Country, dual problems: one, an infrastructure deficit that exceeds about $1.6 trillion dollars, according 

to engineers; and, two, a big question about where we put the Social Security trust funds. Those trust funds, as you know, are declining over the next number of years. Many of us have said they 

should be put into a lockbox. No one knows quite where that 

lockbox would be stored; it is apparently stored as a payday loan 

operation that funds the general fund to hide the cost of the deficit. 

Let me throw this out there and see any response you have got. 

What about putting the Social Security trust funds, over the next 

10 years, while we have still got a surplus in those trust funds, 

into an infrastructure bank that would fund infrastructure, create 

jobs, and that would be paid back on some timetable to ensure that 

the baby boomers and others receive benefits? 

Mr. DUVALL. I will get really far afield of my responsibilities to 

comment on that question directly. I will say, however, that the 

prospect of long-term money, U.S. long-term money, entering into 

the infrastructure equation in the U.S. is a huge opportunity and 

it is already happening. CalPERS—my written statement notes—

is becoming a major intermodal freight investor in the Midwest. 

The three major unions in the United States, the Operating Engineers, the Teamsters, and one other—I can’t remember the third—

are investing actually in Macquarie. Fifty-two percent of Macquarie 

is U.S. Macquarie Infrastructure Partners is owned by U.S. investors. 

And I think you are absolutely right, the Canadian Pension 

Fund, the equivalent of the Canadian social security, has dedicated 

10 percent of their fund, I believe to infrastructure. 

So, yes, I think you are onto a major point here, which is that 

we have got a lot of long-term capital in the U.S. that could be 

really aggressively, I think, deployed to improve our infrastructure, 

if we get the policy framework right. And I think that—to me, that 

is the big challenge for this Committee, is how do we get the policy 

framework right to tap into that. But you are right. 

Mr. BAIRD. Thank you. 

Mr. Chairman, can I ask if the others want to comment? 

Mr. DEFAZIO. Certainly. Go ahead. 

Mr. BUSALACCHI. Well, I just would, you know, again, as I had 

said earlier, you are raising some really good points, and I think 

that is what comes out of the debate that we have with this, because, you know, you are right about the materials. You are absolutely right on the mark. And we—this is all about making money, 

and if they can get the steel cheaper and they can get the concrete 

cheaper, they are going to get it cheaper. And if they can get it 

overseas, you can bet they are going to bring it over here if they 

control the job. And that is what we have got to be careful about. 

31

Insofar as having our own pension funds, you know, in this 

Country doing this investing, you know, sure, if that is what they 

want to do, but some of these pension funds are prohibited from 

entering into these things. So that is another area that you really 

have to—that you really would have to look at domestically. 

But you are raising some good points and it is something that—

that is why this Committee needs to really closely watch what is 

going on with this. 

Mr. DEFAZIO. I thank the gentleman from Washington State. 

We are going to—this Committee is going to hold a hearing this 

spring on the Buy America provisions, and I expect we will fully 

investigate. And I think these are excellent questions you are raising. 

The other question you are raising about social security, just for 

reference sake, I believe it would be like $1.2 trillion that is going 

to be borrowed and spent of so-called social security surplus over 

the next decade. Now, just imagine, here is a country of 16 million 

people, Australia, and a major funder of infrastructure in a Country of nearly 300 million people. Kind of odd, isn’t it? 

Mr. BAIRD. It is actually, Mr. Chairman, if I may, I believe it is 

about $1.2 trillion over the next five years. 

Mr. DEFAZIO. Oh, it is five, I am sorry, five years. Right, during 

the budget, yes. Member of the Budget Committee, I stand corrected. 

Mr. BAIRD. But the point being there is money there, and we 

could invest it, create jobs, build an infrastructure, comply with domestic laws, and I sure think the American taxpayers would rather 

be paying into their own retirement fund, if they are paying a toll, 

rather than the Australian retirement fund. 

Mr. DEFAZIO. I thank the gentleman for that provocative line of 

thought, and I would like to work with him on that. 

I want to thank the panel for sitting and providing good testimony and answers, and your obligations are completed. 

We now have a vote on the rule, probably a five minute vote, so 

hopefully we will reconvene—how many votes? I am sorry, four 

votes. 

I am really sorry about this for the next panel. There apparently 

are four votes. I would expect—I am not sure how many of those 

are fifteens. Just the first? And the others are all fives or suspensions. OK. So we would expect it would take a minimum of about 

half an hour. I won’t set a time certain, but we will convene as 

soon as possible after the last vote, which will probably be about 

five after or ten after twelve. Thank you. 

[Recess.] 

Mr. DEFAZIO. The Committee will come to order. It took longer 

than we thought, but that is the way things are around here. 

I appreciate the next panel being patient, and we will proceed 

immediately. We expect no more votes for the immediate future, so 

I guess—I don’t have the witness list in front of me, but we will 

just go from left to right. 

Ms. Hedlund, why don’t you begin? Thank you. 

32

TESTIMONY OF KAREN HEDLUND, ESQ., NOSSAMAN, GUNTHER, KNOX & ELLIOTT LLP, PARTNER, ARLINGTON, VIRGINIA; DENNIS ENRIGHT, NW FINANCIAL GROUP, PRINCIPAL, JERSEY CITY, NEW JERSEY; ALISTAIR SAWERS, RBC 

CAPITAL MARKETS, TRANSPORTATION AND PROJECT FINANCE SPECIALIST, SAN FRANCISCO, CALIFORNIA; AND 

ROBERT POOLE, REASON FOUNDATION, DIRECTOR OF 

TRANSPORTATION STUDIES, LOS ANGELES, CALIFORNIA 

Ms. HEDLUND. Thank you, Mr. Chairman, Ranking Member 

Duncan, and members of the Committee. Thank you for inviting 

me back. Today, I am going to try to address certain public policy 

issues that arise in PPP transactions and how these are resolved 

through statutory and contract requirements. 

My firm has had the privilege of advising on PPPs in over 15 

States, and our advice is frequently sought on PPP legislation, 

which I know is of an interest to this Committee. I do live here, 

but I probably spend more time in the State capitals than I do in 

this one, and I am going to try to bring you that perspective. 

The authorizing legislation in many States I think reflects real 

thoughtfulness about the proper processes that need to be used to 

implement PPPs and to protect the public interest. And public 

agencies also have at their disposal a wealth of contract provisions 

that are accepted the world to ensure that private partners keep 

their end of the bargain and do not take unfair advantage of the 

public in operating public use facilities. 

As of today, over 24 States have adopted some form of PPP legislation and, as with other governmental activities, such laws vary 

greatly from State to State in scope and in detail. What the States 

do have in common in their approach to PPPs is that they view 

them as but one tool in the toolbox, not as a panacea. Even if the 

gas tax were raised, I think we would find PPPs being used to continue to advance important mobility projects for which traditional 

sources of funding are lacking. 

In my written statement, I tried to answer some of the hot button issues related to public-private partnerships that this Committee and others have raised. How can you—how can the integrity 

of the procurement process be maintained by achieving transparency for the public? How should the term of a PPP be determined, should it be 35 years, should it be 99 years? How can increases in user fees be limited? How can unreasonable private operator profits be controlled? Are there reasonable approaches to 

this issue of competitive facilities? How do we assure long-term 

performance? And what is the private operator defaults or becomes 

bankrupt? 

Most legislation will either resolve these issues or require that 

they be addressed in resulting agreements on a case-by-case basis, 

so let me address just a couple of these. 

To avoid sweetheart deals, State laws provide for competition. 

Choosing solicited procurements over unsolicited procurements now 

seems to be the trend, and the State of Oregon is choosing solicited 

procurements; the State of Georgia has gone from a statute that 

only permitted unsolicited procurements to add solicited procurements. 

33

As to the appropriate term of the agreement, most State laws do 

provide from kind of maximum term, but the term of any particular agreement should be established with regard to the financial feasibility of the project. Projects with a weak revenue stream 

may require a longer term to allow the private operator to be able 

to achieve its targeted rate of return, and that was the reason for 

the very long term in Pocahontas. Projects with lower revenue risk 

can have relatively shorter terms. 

The decision on how much and how fast user fees should be permitted to rise is a public sector decision involving significant policy 

considerations. The final decisions can be implemented through 

contract terms specifying maximum annual toll rate adjustments, 

which can be tied to an appropriate index. The maximum profits 

that a private entity can secure is controlled through the use of 

other contractual devices such as requiring the private entity, if its 

rate of return exceeds a specific percentage, excess revenues be returned to the sponsoring agency. 

As to this issue of non-compete agreements, there was actually 

only one project actually built in the United States in the last 20 

years that prohibited non-safety related improvements on adjoining 

free lanes, that was the SR–91. Safety improvements were permitted. 

But the market has evolved dramatically from that in the last 16 

years. Instead, agreements typically now provide for, if at all, possible compensation to be paid to the private operator if, and only 

if, the construction of facilities that are not included in the region’s 

long-term revenue unconstrained plan actually result in a proven 

reduction in a project’s revenue. So there is no bar to the public 

sector to building additional facilities. Under certain circumstances, 

unlikely to happen, there might be compensation that has to be 

paid. 

As to long-term performance, you will hear Dr. Poole, I am sure, 

argue, as he has in the past, that the private entity is highly motivated to maintain the facility in order to protect its investment and 

keep its customers, but we don’t have to rely on economic theory. 

Instead, detailed performance requirements have become standard 

in these transactions. 

Finally, if the operator defaults and goes bankrupt because traffic fails to meet its original projections, the State may terminate 

the contract and step back in and operate the road. In addition, 

most public agencies retain the right to terminate a contract for 

convenience when they deem it in the public interest or as a result 

of changed circumstances or a change in public policy. 

There are other issues that arise only in the context of leasing 

existing assets. The States, I think, are approaching this issue with 

a great deal of caution and after a lot of study. If they determine 

to go forward, I think the governors of New Jersey and Pennsylvania will probably seek specific authorizing legislation that is no 

doubt going to address issues such as the proper use of the proceeds and the tradeoff to be made between the term and asset 

value and protecting existing employees. 

In conclusion, I would observe that developments in public-private partnerships are just the kind of experiments that Justice 

Brandeis said in 1935 are one of the happy incidents of the Federal 

34

system. Properly executed, these experiments of individual States 

are providing new funding to meet mobility and safety challenges 

that hopefully will serve the social and economic needs of the entire Country. 

I look forward to your questions. 

Mr. DEFAZIO. Thank you. 

Mr. Enright. 

Mr. ENRIGHT. Thank you, Mr. Chairman. Thank you for inviting 

me to speak. 

In listening to the prior panel, there seemed to be a lot—in the 

questions that followed, there seemed to be a lot of confusion between public-private partnerships as a concept and monetization of 

assets as a concept, and that the rubric between them has crossed. 

And there is a long history of very successful public-private partnerships in the U.S., but until the Chicago Skyway P3 transaction, 

success was measured largely by a reduction in cost to the users 

and shorter terms of 5 to 30 years. 

In the P3 asset sales like Chicago and Indiana, they actually produced higher cost to users, not lower, and longer terms of 75 to 99 

years. That is a significant difference in the definition of public-private partnership. 

The key question, though, is can the public sector get more value 

from self-help financing approaches, using traditional toll road type 

of financing. 

There is much talk about worldwide privatization experience, it 

is not new in the United States. Non-U.S. experience actually is 

driven by credit concerns around the world. Most of the toll road 

privatizations around the world are actually in third world countries, although there are quite a few in Europe and Australia, and 

in those markets they cannot possibly provide the governmental 

funding to build the road, and private capital is an important 

source of funding. They also have no market for U.S. style governmental enterprise finance pretty much around the world. The U.S. 

is almost unique in that regard, using revenue bonds as a funding 

source. And low-cost public funding through tax-exempt bonds is 

not available in the rest of the world. 

In contrast, the U.S. experience has seen success in P3s when 

there is significant technology, revenue demand, or efficiency challenges. In the U.S., we have a large network of high-quality public 

employees with extensive experience in the implementation of large 

public works projects and, therefore, are better able to match the 

private sector efficiency. 

One U.S. P3 success story, which has been around for 20 or 30 

years now, are waste energy plants. The key to success in this sector was the sharing of risk between public and private sectors. And 

I have spelled that out a little bit more in my written testimony. 

In the transportation sector, roads, anyway, there is little technology risk to share. The only real risk is production of future revenues to pay for the cost of the road, and that has always been an 

acceptable risk to the public entities that fund toll roads. The U.S. 

has a proven track record of using revenue-backed governmental 

bonds for enterprise finance. The U.S. public mission in toll roads 

has been one of providing mobility through affordable tolls, designed only to fund the needs of the road. U.S. toll roads authoriVerDate 0ct 09 2002 16:22 Aug 01, 2007 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 P:\DOCS\34778.TXT HTRANS1 PsN: JASON
35

ties have not been maximizing the bottom line with inflation-adjusted increases, since they were never considered. They have been 

driven by a public policy mandate that treasured minimizing tolls. 

Along comes Chicago. In Chicago, which was a groundbreaking 

transaction for the transportation sector, it was really the first 

time the P3 mandate was utilized to increase cost to users in a 

major way, and that revenue stream was then monetized. So what 

Chicago really proved was that capital markets would accept a 

long-term projection of revenue increases based upon economic indices as a basis of financing. 

Then it was Indiana. They also used monetization of future toll 

roads, and it is a Statewide roadway. This raised a bunch of new 

public policy issues. This is a 150-mile stretch of road, not a bridge 

like Chicago. It is a key link in the interstate highway system, and 

it is probably the State’s most important economic development 

tool. In the future, as they pursue economic development, they will 

need to negotiate with the new owner of the road and return profit 

to the private sector. The cost of capital to the private sector historically and in the future is likely to be 60 percent more than the 

public dollar, and the private sector has considerable leverage and 

sophistication in negotiations that really doesn’t exist on the public 

side, as you heard some of the earlier speakers indicate. And remember, the lease is not up for renewal anytime soon, so who has 

the leverage? 

So what convinced the governmental leaders in these two States, 

two situations, to do these deals? It was really the pitch. And the 

pitch was that they were going to be able to monetize future 

growth today. This pitch is made by the private participants most 

likely to benefit. 

Well, surprise. The private sector is not willing to overpay for toll 

road assets. Chicago and Indiana actually prove that. They can’t. 

The credit discipline in the capital markets, particularly for transactions of this size, limits how much they can do in debt, and that 

debt limitation then requires additional equity capital to make it 

up, and equity capital is more expensive. The combination of those 

two costs of capital drives the valuation. And the valuations in Chicago and Indiana are no greater than the amount of dollars that 

could have been generated by a public finance option. Public capital 

is about 60 to 70 percent lower than the private option, and the 

public solution can deliver greater value or require a significantly 

lower tolls to get the same dollars. So the bonus of public ownership is really a public ownership dividend: they get to keep the future cash flows the private sector is not paying for. 

How can the public interest be protected? Independent evaluations, public agency monetizations without taxpayer risk, capturing 

the public ownership dividend through future revenue share ownership, and, if private, if you decide that it should be private, you 

need more sophisticated procurement. You need to evaluate in a 

combination of factors, including the length of the deal, limits on 

the return to the investors, risk-sharing parameters for unforeseen 

events, and the price offered. 

In the international world, P3 deals rarely exceed 30 years, and 

many are much shorter, even for to-be-built projects. Some allow 

for termination of the concession when the equity returns have 

36

been achieved and return the revenue-producing asset to the public 

sector. Chicago and Indiana transactions are so exciting because, 

like Columbus, they found a new world: dollars today based upon 

a future revenue monopoly. However, there is little risk. If higher 

toll increases reduce traffic, then increases on free route—it increases traffic on free routes and makes time advantage on the toll 

route even more valuable. Are these platinum card highways? 

So the lessons learned from the public sector point of view are: 

one, there is no need to sell assets and surrender control; two, because publicly-funded monetization is relatively available without 

taxpayer risk; three, until higher valuations arrive, if ever, the 

public option should be the preferred option; four, for existing toll 

road assets, there is little reason to pursue the P3 option; five, capture the public ownership dividend of future cash flows; six, to-bebuilt roads, private sector may be more appropriate since there is 

more inherent risk. 

In summary—and I am sorry I went over my limit—the key concerns are: the transportation system integrity, you know, rich 

roads, poor roads types of problem—the private sector is only going 

to want to do the rich roads; you are going to be stuck with the 

poor roads—capturing future cash flows; cost of capital evaluations; 

the actual toll regime imposed, meaning the formulas for increases; 

and the term and lengths of the monetization. 

I hope I have provided some insight into potential protections for 

the public sector, and thank you for inviting me to speak. 

Mr. DEFAZIO. Thank you, Mr. Enright. 

Mr. Sawers. 

Mr. SAWERS. Thank you, Mr. Chairman. Just wanted to run 

through some of the more European experience. You can tell by the 

foreign accent that I have obvious reason for having foreign experience, but I have worked for over three years in the U.S. as well, 

so I have a certain amount of insight in both jurisdictions. 

I would like to make a distinction between public-private partnerships and privatization. Privatization is much more where markets and price mechanism defines the service provided. With PPP, 

the public sector is set there to define what is required to meet the 

public needs and remains the client throughout the long-term. This 

speaks quite clearly to how the public interest can be monitored in 

the PPP version. 

In general, more international PPPs in the highway and transit 

sectors are focused on greenfield projects rather than brownfield 

ones. As we have been discussing, in the U.S. there have been 

much more brownfield activity. These have varied from the O&M 

style, the old such as Chicago Skyway, which has been discussed, 

but they also include refurbishment style deals such as the Missouri bridge’s replacement PPP and also enhancement-focused 

PPPs such as the I–495 managed lanes. So picking on brownfield 

as being a sort of single homogenous type of project is risky, and 

in terms of defining the public interest, they all have slightly different characteristics. 

In my written evidence I went into some detail describing how 

public interest and, thus, the public sector objectives have been defined in international PPP programs. In summary, the sort of key 

points have been to a move to define output or performance speciVerDate 0ct 09 2002 16:22 Aug 01, 2007 Jkt 000000 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 P:\DOCS\34778.TXT HTRANS1 PsN: JASON
37

fications. These reflect the user’s needs and the broader policy objectives such as minority employment or congestion relief or encouraging innovation. The other issue that has been very much a 

key focus in the U.K. is value for money, and this has been where 

a concept that has been applied to not just taking the initial low 

bid view of a bid coming from the private sector, whether it is just 

pure construction, but also taking into account all the risks and the 

whole life costs of the project. 

Additional account has been taken to the benefits and the need 

for protection for public sector workers, though this has been much 

more an issue on health care PPPs, which are not really a feature 

here, rather than transportation. 

And then the final issue has been as much of perception as anything else, which is that PPP companies, being private, are making 

an unreasonable profit, especially from user fees, but also in the 

case of availability payment deals, which Tyler touched on, also 

from the refinancings of the project debt, which I know the Chairman has an issue with. 

The process of defining and entering into a PPP contract established some quite significant protections in the public interest inherently. The U.S. Treasury made some significant effort to study 

and evaluate these at one point. Their initial experience was that 

large amounts of the benefit of PPP came from reductions in 

change orders, as a previous witness mentioned, and the process of 

writing the PPP contracts required much better project definition 

than the traditional design bid-build model. 

Also, equity investors in the project, who typically include the 

construction and operating companies, stand to lose all of their investment and are strongly incentivized to remedy problems. Similarly, debt provided to the project has only one form of security, 

that is, the PPP contract, and typically they hold 80 to 90 percent 

of the deal, so they are very strongly incentivized to police that contract and reflect any of those terms in the main contract in their 

subcontracts and do the government’s job for it. 

A study by the U.K. Treasury in 2003 found these protections resulted in something like 89 percent of projects being delivered on 

time, contrasting with previous research, which has shown that 70 

percent of all non-PPP projects were delivered late. So that is quite 

a significant difference. 

Another frequently quoted example is the bankruptcy of U.K. 

PPP construction firm Jarvis in 2005. All of its deals were completed at no additional costs to the public sector, and, while there 

were some delays, that was quite a result. And the other famous 

or infamous example is the Eurotunnel, which did not come back 

on to either country’s balance sheet. 

The problem of excessive returns has been addressed by revenue 

share triggers, which trigger either high levels of return or high 

levels of absolute revenue, or by, as just mentioned, termination of 

the concession when a cumulative return reaches a predefined target level. And that was Delford Crossing on the beltway around 

London. In most cases, however, toll or fare restrictions are the 

main focus, and the market is sort of the key focus there. 

Also, the majority of international projects are availability payment deals, or shadow toll deals, which are inherently capped. And 

38

that also speaks to why they are generally around 30 years, rather 

than 50 or 75 years, because you are just getting a straight payment from the government. 

Quite often, these include additional incentive payments to address public sector policy objectives such as safety payments for reductions in accidents—and that is the case in Norway, Portugal, 

and some of the U.K. deals—also, there have been terms that have 

been put into PPP contracts to reflect refinancing and make sure 

that the benefits of refinancing have been shared with the government side. And, again, that has mainly been on availability deals, 

but that is where the government is obviously paying the up-front 

payment, so it has a right to the refinancing benefit. And also several jurisdictions—and I think this was touched on by a previous 

witness—undertake value for money analysis and compare their 

PPP project with an equivalent conventional method of procurement, either called the public sector comparison or a shadow bid, 

so they justify the difference between PPP and the traditional way 

of doing it. 

Another thing which I think has been a reoccurring theme that 

lots of people have touched on is sharing best practice. Several 

countries have set up public entities to promote sharing best practice. An example is Partnerships BC in British Columbia, partners 

between Victoria and Australia. These authorities either do efforts 

to standardized contracts, reduce bid costs, or to share knowledge 

and to advise people procuring projects to make sure that the private sector does not have the advantage of better information. 

In conclusion, it should be noted that many of these protections 

can increase risks, costs, and complexity of the project and drive 

down the overall value coming from the private sector. Thus, it is 

a tradeoff between the cheapest price and the risk to the public sector. 

I look forward to your questions. 

Mr. DEFAZIO. Thank you, Mr. Sawers. 

Mr. Poole. 

Mr. POOLE. Thank you, Mr. Chairman, Mr. Duncan. I appreciate 

the opportunity to speak today. I am Robert Poole, Director of 

Transportation Studies at Reason Foundation. I have been researching PPP toll roads actually since the late 1980’s, starting 

with California’s pilot program for toll road concessions. 

The past two years, as the previous speakers have just said, the 

global capital markets had discovered the U.S. highway sector. 

This comes about at an opportune time, just as we are really realizing the magnitude of the gap between the needs for highway investment and what available funding sources will produce. And so, 

to help close that gap, States are turning increasingly to tolling 

and PPPs. 

The newest form is the long-term concession, which is going to 

be the focus of my remarks. In exchange for a long-term contractual agreement the toll road company will design, finance, build, 

operate, market and rebuild a new or existing toll road, and it is 

the same basic concept, the same basic agreement form whether it 

is an existing road that is being leased or a new one being built, 

although there are obviously differences in risks involved. 

39

This idea actually goes back to the 18th and 19th Centuries 

when private companies under State franchises built toll roads, 

turnpikes in Europe, in England particularly, and in the United 

States. And it was revived in a modern form in the 1990’s in Virginia and California, but it has really taken off, as I said, in the 

past two years between leases of some existing toll roads and something like $25 billion worth of private sector projects in various 

stages of negotiation for new toll road capacity in about six States. 

This model has over 40 years experience in Europe and nearly 20 

years of use in Australia, and that is why companies from overseas 

have been among the pioneers of bringing the ideas to America. 

Now some will argue that we don’t really need this concept of 

long-term toll concessions because State toll agencies can do all the 

things that we need if we want toll roads, but my research suggests 

there are six advantages that the private sector concessions model 

brings. 

Number one, access to new sources of capital. Toll road companies can tap pension funds and other long-term investors who don’t 

buy tax exempt toll revenue bonds. It is a different pool of capital 

and a potentially much larger one. S and P estimates that up to 

$150 billion was raised just last year to invest in infrastructure 

projects. 

Number two, larger sums for toll projects. I am familiar with lots 

of studies, feasibility studies for toll roads, and many toll road 

projects don’t pencil out using conventional toll finance with 30 

year revenue bonds, but some of the same projects will work out 

under 50 or 60 year concession agreements because of the differences in the financing model. The long term really makes a big 

difference. 

Number three is shifting risk from taxpayers to investors, and 

previous witnesses have mentioned that. Large transportation 

projects worldwide are notorious for cost overruns and for having 

over-optimistic forecasts of traffic and revenue. In concession agreements, in exchange for the long term, the private sector will accept 

and take on construction risk and traffic and revenue risk. These 

are huge advantages. 

Number four has not been mentioned so far, multi-State potential. In the goods movement area where we are doing a lot of work, 

a lot of important projects are multi-State projects from a shipping 

origin to a distribution point in other States. State toll agencies 

can’t operate across State lines, but private companies under concession agreements can and are particularly well suited to this. 

Number five is a more businesslike approach. We do have some 

businesslike toll agencies, but many of them are very bureaucratic 

and not really operating as businesses with customer service as 

their number one consideration. 

The sixth point that I think is very, very important is major innovations. Toll road companies are more likely to think outside the 

box and come up with innovative approaches to solving difficult 

problems, for example, traffic congestion. It was a private company 

in California under California’s original concession program that 

came up with variable pricing as a means of managing traffic 

flows. This is what has made HOT lanes possible in America. No 

40

public agency was willing to take the risk of introducing variable 

tolling. The private sector did. 

In France, a private toll company solved a 30 year impasse over 

a missing link on the Paris ring road by building it as a tunnel underneath Versailles instead of trying to cut the town in two. 

Now because these concessions are very new, there are a lot of 

misconceptions, and I have addressed them at some length in my 

written testimony. 

None of these deals involve selling roads. They are all leases. 

They are all governed by the concession agreements. I have actually read the Chicago and Indiana concession agreements hundreds 

of pages long, and they really do have a lot of important provisions 

for protecting the public interest. 

It is clear, foreign companies have been in the lead so far because they have the expertise. They have the track record. We 

don’t have a private sector toll road industry in the United States 

although we are starting to get there. We are starting to see joint 

ventures between U.S. and global companies. So I am confident 

that we will have a domestic industry probably within the next five 

years. There is also a lot of U.S. capital being raised today to invest 

in these kinds of projects. 

Eminent domain: this power is never delegated to the private 

sector. It is always one of the things that the public sector uses on 

behalf of a PPP project. 

Uncontrolled tolls: all the concession agreements provide some 

controls over either the rate of annual increase or the rate of return that can be earned in a project. 

Up front payments, that obviously has been discussed. There is 

a big tradeoff between how much money a State will get up front 

versus sharing revenues over the life of the project. I frankly am 

urging, I am recommending to State DOTs that they go for the revenue sharing option. I think that is both better for public policy 

and will be a more sustainable model long term. It also gives the 

public sector partner a real stake in the success of the project 

which I think is an important long-term consideration. 

Finally, the question, could a public toll agency raise just as 

much money? Frankly, I doubt it. Nobody has figured out how a 

public agency can give investors 50 years of certainty that there 

can be annual increases of toll rates. Until somebody figures that 

out, the capital markets will not raise the same amount of money 

for a public sector agency as they will for a private concession. 

To sum up, I think it is actually very fortunate for America’s 

highway users that the capital markets including pension funds 

have discovered the U.S. highway market just as we realize how 

enormous the gap between needs and revenues is. So I think it is 

going to take, as we know, hundreds of billions of dollars to rebuild 

the Interstates, to expand capacity where needed. But we now have 

a new source for a considerable chunk of that investment. The 

challenge, of course, is to develop the right public policy framework 

to be sure the public interest is protected along the way. 

Thanks very much, and I look forward to your questions. 

Mr. DEFAZIO. Thank you. 

I first recognize the gentleman from Tennessee. 

41

Mr. DUNCAN. Well, thank you, Mr. Chairman. I have a series of 

appointments, and I appreciate your letting me go first. 

For the record, I need to ask unanimous consent that the record 

be held open for 30 days for the submission of written statements 

or follow-up questions to the witnesses. I have had that request 

from some on our side. 

Mr. DEFAZIO. Without objection. 

Mr. DUNCAN. Now I have known of Mr. Poole’s work for several 

years, and he has done a lot of good work. I especially like the revenue sharing suggestion, Mr. Poole, keeping the public sector involved instead of taking all the money up front. 

Mr. Enright had, I thought, some pretty interesting testimony, 

and I underlined these sentences. He said, the combination of credit discipline imposed by the lending community and the high cost 

of equity has assured that the valuation utilized by these private 

buyers is no greater than the amount of dollars that could have 

been generated by the public agencies undertaking the monetization financing on their own. As a matter of fact, the cost of capital 

in today’s markets for public financing is only 60 to 70 percent of 

the cost of a private monetization, and therefore can either deliver 

greater delivery or require significantly lower toll increases. 

What do you think about those two sentences? 

Mr. POOLE. Well, I think on paper you can make a comparison 

of that sort and show mathematically that you could get equivalent 

amounts of money and also that some ways of defining the average 

cost of capital, the public sector will clearly come out lower. 

The question is: Could you actually realize that in practice? In 

my written testimony I say a little bit more than I said in the oral. 

I think what the markets are reacting to in these concession agreements is the legal certainty of being able to raise tolls every year 

over a long-term period. 

With the public sector, the history of tolling by public sector 

agencies is that it will go for a long, long time with flat rate tolls 

even though inflation keeps rising and the costs of running things 

and maintaining things and repairing things keeps going up, but 

their revenues don’t. Then they get to a crisis point and have to 

do a big toll increase that is very painful to the users. 

I think there is a very interesting tradeoff and probably better 

for the users to have steady annual predictable inflation-related increases in the toll rates, but in turn, that predictability is indeed 

what seems to be driving the higher valuations that the private 

sector deals are getting. 

I don’t think, I cannot imagine a way to commit future legislators, legislatures and governors over a 50 year period to make sure 

that tolls can be increased by a public agency. I just don’t know a 

way to do that. So that is why I think you are always in practice 

going to see a big difference in what a private concession deal can 

raise versus what a public toll agency can raise. 

Mr. DUNCAN. Anything you want to add, Mr. Enright? 

Mr. ENRIGHT. I would strongly disagree with Mr. Poole’s reasoning there. I have been in the public finance business for over 

30 years, and I did not undertake those statements without doing 

significant analysis and also talking with many bankers at large 

banks as to their view of this issue. 

42

There is no question that the capital is available at lower cost 

by doing a public deal. As a matter of fact, in doing normal toll 

road financings, there is an expectation that they have to meet an 

ongoing requirement to provide revenue to pay the debt service. 

Nothing would be different if you did a monetization deal. 

The only difference is that the proceeds would not be going directly into that roadway. They would be going for what other, 

whatever public purpose they are going for. But there is no question that that can be done in the capital markets, and I have researched it quite thoroughly. 

Mr. DUNCAN. All right. Ms. Hedlund, the staff tells me that there 

has been a lot of negative publicity about the Indiana deal and the 

Chicago Skyway. Why do you think that is and what lessons do you 

think that they have learned about what they have gotten into or 

what they have done? 

Ms. HEDLUND. Well, let me first say that I didn’t work on either 

of those transactions, so everything I know about them is pretty 

much what I have read in the newspaper. 

Mr. DUNCAN. Right. 

Ms. HEDLUND. I don’t think the Chicago deal has gotten a lot of 

negative publicity in Chicago. It is an unusual transaction. It was 

not a core asset of the City. The City had been trying to get rid 

of it for years. 

Mr. DUNCAN. I did see George Will wrote a column last week, 

criticizing the Chicago deal. Did you see that? 

Ms. HEDLUND. Yes, I did. Yes, I did, but the value in the Chicago 

Skyway is something that arose only recently when a couple of casinos were built at the south end of the lake. That is a road that 

was built to take southsiders to the steel mills. The steel mills 

aren’t there anymore. It now takes people to casinos. 

You know it was the first deal. It was certainly the one that got 

a tremendous amount of attraction, particularly because it drew a 

bid that was well in excess of even what Goldman Sachs, who was 

advising the City, expected. 

Indiana, I know has been very, very controversial, and I can assure that I am certain the other governors that are looking at similar kinds of monetization are looking at that transaction and seeing 

if there are ways of improving on it. 

Mr. DUNCAN. I am sure you are familiar with the term, shadow 

tolling? 

Ms. HEDLUND. Yes. 

Mr. DUNCAN. Is that something that is starting to be used in 

place or what can you tell us about it? 

Ms. HEDLUND. The concept is used in Great Britain. There was 

a similar transaction done in Massachusetts on Highway 203 that 

was structured around a long-term lease payment, and the State 

assured the contractors that they would make certain payments to 

them over a period of time. The Miami Port Tunnel which is in the 

middle of a procurement has availability payments. So it is something that is being examined. 

You do have to have a stream of revenues. It may be a public 

stream of revenues, but you have to have some kind of stream of 

revenues to compensate the private party for providing the availability of that project over the long term. 

43

Mr. DUNCAN. Mr. Poole, you mentioned that Standard and Poor’s said that $150 billion or almost $150 billion in private capital was 

raised for infrastructure projects last year alone. How much of that 

was in the U.S.? Something else, is that a big jump over, say, five 

years ago? 

Mr. POOLE. I don’t know for sure the answer to either of those 

questions, Mr. Duncan. I suspect that a significant fraction of that 

was in the U.S. I know Goldman Sachs just announced they have 

raised $6.5 billion. 

Mr. DUNCAN. You said that. 

Mr. POOLE. I believe that was almost all in the United States. 

Carlyle Group has a fund that I think is almost all U.S. money. I 

think Merrill Lynch has a fund. 

The trend in the last few years, I mean really, literally in the 

last year, is for major new U.S. money, capital, to be raised in 

these kinds of investment funds because of the overseas funds—the 

Australian pension funds discovering that there is a market here 

for toll roads and that we have a secure legal framework as opposed to lots of third world places where the deal might be overturned after you have built the road and taken away from you. 

The U.S. is a very, potentially, very, very attractive market, huge 

needs, stable rule of law and a willingness of people to do some 

large scale projects. So I think we are going to see a big trend, a 

further trend toward U.S. capital going to this. 

As I mentioned in the written testimony, I predict within five 

years, we will see purely U.S. toll road companies if this trend continues competing with the Macquaries and the Cintras from overseas. We are already seeing a lot of joint ventures, U.S. and foreign 

companies trading on the U.S. firm’s knowledge of the local market, the overseas company’s actual hands-on experience running, 

owning and operating toll roads for 15, 20 years and so forth. It 

is a market very much that is in transition to a much more domestic one. 

Mr. DUNCAN. But you see a lot of interest developing, though. 

Mr. POOLE. Very definitely, I mean I speak at conferences every 

month, and increasingly there are conferences in New York with 

investor type people. I think the movement of U.S. pension funds, 

as Tyler Duvall mentioned, into this field is a sea change. It is a 

huge, huge development, I mean if there are enough projects. I 

don’t think there is going to be any question there will be enough 

funding to do them if they lend themselves to this sort of funding. 

Mr. DUNCAN. I apologize. I have been told two different ways to 

pronounce your name. 

Mr. SAWERS. Sawers. 

Mr. DUNCAN. Let me ask you this. What is the European experience? 

I am told by the staff that there are several major highway 

projects in Europe or different places around the world where they 

have started out as a public-private partnership, but they have reverted back to total public ownership or something. Is this something? Is this growing in Europe? 

Mr. SAWERS. No. This is very much definitely spreading through 

the European countries. It kind of started in France and Spain and 

the U.K. as the three core countries that started this. Some of them 

44

are public-private partnerships because they had operating companies, but they have actually gone increasingly towards more of the 

PPP model. 

In terms of reversion, there have been a couple of toll roads that 

have reverted to the public ownership, but they have been because 

of expiry of contracts. In Spain, actually they have been going for 

30 years. So several of them were returned to the public side and 

actually relet with additional investment. 

Mr. DUNCAN. They came to public ownership, but then they 

started a new public-private partnership. Is that what you are saying? 

Mr. SAWERS. That is what I am saying. The only country that 

has had particular trouble is Portugal which had this shadow toll 

system, and they couldn’t afford to pay their shadow tolls because 

their budgetary issues changed and the government changes. Actually, they were seeking to convert their shadow tolls to real tolls 

which is obviously riskier. 

Mr. DUNCAN. Well, I appreciate all your testimony. I can tell you 

there is a lot of interest in this. We have a difficult time when our 

hearings get interrupted by four votes, but nobody can control that. 

I thank each of you for being here, and I turn it back to the Chairman. 

Mr. DEFAZIO. I thank the gentleman from Tennessee for his 

thoughtful questions and understand he has other commitments 

and appreciate the time he invested today. We will have more opportunities to invest time. 

Ms. Hedlund, if I could refer to something in your testimony that 

I find somewhat disturbing, and I think part of what has occurred 

in Indiana and elsewhere is that if you follow the model legislation 

proposed by the Administration, States would attempt to get 

around public disclosure, freedom of information and other things 

and basically declare these agreements proprietary at the outset. 

In your testimony, you say, following actual execution of the contract, almost all agencies release to the public the contracts themselves—wow—the proposals and relevant information, excepting 

only proprietary data such as financial statements of private companies. 

Isn’t that a little late for the public when a governor has just 

given an asset away in the case of Mr. Daniels for 75 years? 

The public gets to evaluate it after it is executed. What good does 

that do since it is irrevocable? Wouldn’t we want to do that beforehand, before it is actually executed? 

Ms. HEDLUND. With respect to Indiana, I believe he did put the 

entire contract in front of the legislature. I do know in the case of 

Chicago, the contract was printed in the proceedings of the city 

council for all of them to look at well in advance of the time they 

took the vote. 

Mr. DEFAZIO. Then why would you say this? Why wouldn’t you 

say that in fact most agencies actually release all the details and 

they are approved and vetted in public? 

I have been approached by analysts who say, well, now that I 

have analyzed Indiana, given the constraints in it, it actually was 

undersold. That wasn’t anywhere near the price you should have 

gotten with the non-competes and all the other restrictions in it, 

45

since it wasn’t reviewed publicly and people didn’t have an opportunity to comment on it other than the legislature which was 

bullied into it very quickly. 

Why would you say this? I am just puzzled. 

Ms. HEDLUND. I may have not expressed it correctly, and I was 

really trying to get at a different point. With the old traditional design-bid-build method of procurement, the State puts out the RFP, 

puts out the entire design, the bids come in and they are made 

public immediately upon the bids coming in. 

You have a more complicated situation with a public-private 

partnership, and the evaluation process takes a longer period of 

time. I am talking about a competitive procurement here. We can 

talk about negotiated procurements separately. 

But in a competitive procurement, it is important that during the 

evaluation process, that the proposals, not that they be kept from 

the public—the public has an interest in knowing what those proposals are—they need to keep the proposals private from the other 

proposers, just to maintain the integrity of the proposal process 

itself. Those proposals, the RFP, the contracts are all made. In a 

competitive process, the proposed contract terms are made public 

before the proposals come in. 

Mr. DEFAZIO. OK, well, I think then perhaps we are in more 

agreement than the phrasing would have led me to believe. I believe the public interest is best served if the public, before an irrevocable 50 or 75 or 99 year contract is entered into, has full opportunity to review it and that others who might be interested, who 

bring more expertise to the issue, could also have an opportunity 

to review it so people would be fully aware of what was being entered into. 

Ms. HEDLUND. I think my State clients would agree with you 100 

percent. 

Mr. DEFAZIO. OK, that is good. 

Mr. Poole, I think we have some grounds for agreement, that if 

you are going to do these sorts of things, you should do revenue 

sharing. I would agree there. 

You talk about the markets reacting. I would say the markets 

are reacting to what they see here as a really sweet deal. In the 

case of Macquarie, they only put 10 percent into Indiana. Now 

couldn’t the State of Indiana have borrowed under a general obligation bond, $380 million, and then gone out and financed the rest 

of the project the way Macquarie did because they only put 10 percent in? 

Mr. POOLE. Well, it is conceivable that they could have. On the 

other hand, the team that actually, the Macquarie team, I think it 

is Macquarie-Cintra that won the bidding, has taken on risks even 

though it is not the same as initial construction risk. Over 75 

years, they are contractually committed to maintain at least level 

of service C on some segments and level of service D on other segments. 

Mr. DEFAZIO. Right, on level of service, as I said earlier and as 

an economist you would know, that there are two ways to manage 

demand in case of congestion or level of service. You would say, 

OK, we are going to expand the roadway. 

46

Mr. POOLE. Which is what the concession agreement requires 

them to do to maintain those levels of service 

Mr. DEFAZIO. Yes. But what if I raise the tolls regularly and I 

just artificially depress demand, people will be diverted into the 10 

mile non-compete area on either side, how do you measure that? 

Mr. POOLE. Well, I mean those are tradeoffs definitely. 

Mr. DEFAZIO. Yes, those are big tradeoffs. 

Mr. POOLE. They are tradeoffs. 

Mr. DEFAZIO. Right. 

Mr. POOLE. I mean I think the non-compete provisions are modest and reasonable. 

Mr. DEFAZIO. Unless you live within 10 miles on either side of 

that asset. 

Mr. POOLE. They allow local, high speed————

Mr. DEFAZIO. The people of Indiana don’t seem to think so. 

When you say the caps or ceilings, I guess I hope we don’t have 

to argue semantics. Have you seen the evaluation and would you 

question it? There are two evaluations that strike me. 

Mr. POOLE. Right. 

Mr. DEFAZIO. One is applying these ceilings or caps, which I 

would call floors, and hopefully we don’t have this much of a semantic disagreement, but we might because I would look at them 

as floors because is it no less than 2 percent GPD or CPI. Now that 

sounds to me like a floor. It will never be less than 2 percent. 

Next year, the economy tanks. The Bush Administration attacks 

Iran. Oil goes to $200 a barrel. We see a great depression in this 

Country. We have negative growth for 10 years, and you get 2 percent a year on your tolls. Now wouldn’t you call that a floor, not 

a ceiling? 

Mr. POOLE. No, I wouldn’t for the following reason. I actually 

know people who do toll road————

Mr. DEFAZIO. We have gone through a period of devaluation and 

adding 2 percent a year to the toll isn’t a floor? 

Mr. POOLE. They will only charge the 2 percent more if people 

are willing to pay it. If you have a recession, it is quite————

Mr. DEFAZIO. Right, if people are willing to pay it to access the 

asset. 

Mr. POOLE. In a time of recession, it is quite possible that traffic 

will fall off. 

Mr. DEFAZIO. Yes, but just remember the premise. Oil has gone 

to $200 a barrel. One of the big factors becomes distance and fuel 

economy. That is the straightest route, so Macquarie just keeps 

jacking up the tolls even though the rest of the economy is in a depression. They can do that. 

Mr. POOLE. That is not how. That is not what you do in a traffic 

and revenue study. You have to look at what is the optimum toll 

to maximize revenue. It is not the highest conceivable. 

Mr. DEFAZIO. Right, I know what an economist can argue. 

But let us look at it this way. Let us go back to what I assume 

you have seen. There are two numbers that really stick in my 

mind. The first is if we applied the ceiling, which I call a floor, to 

the Holland Tunnel, today’s toll could be as high as $165 or 

$185.13 per car. Obviously, people wouldn’t pay that. 

Mr. POOLE. That is right. 

47

Mr. DEFAZIO. But they might pay $10. 

Mr. POOLE. They might. 

Mr. DEFAZIO. Right now it is only $6. So we are not optimizing 

the asset. 

Mr. POOLE. I think a lot of environmentalists would say that 

would be a very good thing. 

Mr. DEFAZIO. Well, I don’t happen to agree with that particular 

sentiment of an environmentalist. 

Now if we applied to the Indiana toll road from 1985, the ceiling, 

which I call a floor, they could charge commercial vehicles $38.19, 

those poor truck drivers, as opposed to $14.60, and cars $12.16 as 

opposed to $4.65. Again, it seems to me to leave an awful lot of latitude. How can we call that a ceiling? It is not a ceiling. 

Mr. POOLE. Mr. Chairman, we had an actual experiment with 

that a couple of years ago. The Ohio Turnpike which is the continuation of the Indiana toll road, attempted a large one time toll increase, and their truck traffic diverted in massive numbers to parallel State highways. This was a big problem, understandably so, 

and so the Ohio Turnpike Administration basically decided this 

was terrible for them. They were losing money. They were not getting the revenue increase they thought. They actually lowered significantly the truck tolls to win back the trucking traffic. 

Mr. DEFAZIO. That is great. 

Mr. POOLE. The point is they cannot charge whatever they feel 

like. 

Mr. DEFAZIO. No, they can’t, but they can certainly extort a little 

bit more than they are extorting today with this sort of monopoly 

situation. It could be more incremental like the frog in the hot 

water as we turn the heat up to see at what point are they going 

to jump, again, if you did so as constructed. 

If that is true, I guess I would wonder why is Governor Daniels 

taking some of the money which is supposed to be spent on capital 

projects and either with that or maybe he is diverting State general 

revenues. I am not sure which, but he is actually subsidizing the 

toll, as I understand, for a five year period because they legislated 

an increase but they didn’t want it to hit them all at once because 

people would be mad. Governor Daniels is already at 19 percent in 

the polls, and he doesn’t want to go to zero. So he says, oh, let us 

keep the tolls down. 

Do you know what this sounds like to me? I am sure you probably supported this too. Energy deregulation in California, I was 

one of the earliest and most frequent opponents of energy deregulation. California borrowed money to keep the rates down for a short 

period of time so the frogs wouldn’t jump out of the hot water and 

think this was a really sweet deal before the whole Western United 

States collapsed on top of the scandal. 

I am looking at kind of the same thing here in Indiana. They 

could raise the toll. They are going to raise the toll, but the state 

is going to subsidize the toll to keep the toll down in the short 

term. Do you think that is good public policy? 

Mr. POOLE. I think it is normal politics, Mr. Chairman. 

Mr. DEFAZIO. Well, that is politics, but I thought we were going 

to get policy. 

48

Mr. Enright, would you care? I am really puzzled here. You are 

saying public entities can raise this money. He says they can’t. You 

say they can. Where is the dissonance here? 

Mr. ENRIGHT. I don’t know Mr. Poole’s resume in finance, but I 

do know I have 30 years and I have talked to bankers at virtually 

every major U.S. investment bank or commercial bank who participates in this type of financing, and they all agree that the money 

can be raised. 

As to the issue of new pools of capital, it is nice that pension 

funds are interested in infrastructure assets, and certainly if the 

public sector wants to pay the cost of taxable financing, they can 

sell bonds to pension funds. Toll roads already do taxable financing 

occasionally and do sell to pension funds. So the availability of capital shouldn’t drive the public policy decision, in my view. 

The capital is available in the tax exempt sector, if the proceeds 

are used in accordance with tax law, and if not, they are available 

in the taxable sector to the toll roads as well without equity. They 

can finance 100 percent financing. They always have financed 100 

percent financing. 

Mr. Chairman, going back to your example of couldn’t the State 

of Indiana raise general obligation bonds, they wouldn’t have even 

needed to do that. Revenue bonds supported solely by the revenues 

of a toll road are a highly acceptable and high quality revenue bond 

in the industry. 

Mr. DEFAZIO. But what about what Mr. Poole says, that the investors won’t accept the risk because the government might not 

raise the tolls and choose to default instead? I guess that is what 

he is saying. 

Mr. ENRIGHT. The basis structure of any toll road financing in 

the U.S. requires the entity that is running the toll road to raise 

tolls in an amount necessary to meet its loan covenants, typically 

a debt service coverage ratio of anywhere from 1.2 to 1.5 percent 

depending upon how they structure their documents. 

Mr. DEFAZIO. That is enforceable on a public entity? 

Mr. ENRIGHT. Absolutely, it is absolutely enforceable, and the 

same thing is true for water systems, sewer systems. Anything that 

is rate-oriented, that is enforceable, parking authorities. They all 

have rate covenants, and they are required in their documents to 

raise the rates. 

The other point to distinguish from whether the legislature and 

the governors have to raise the rates, they don’t. It is the toll road 

authority who raises the rates which is, in theory anyway, an independent authority. The problem is that they have been pressured 

to not raise the rates for the public good. 

But if you want to monetize the future revenues, then you have 

to surrender the freedom to raise the tolls. Whether you do it with 

public sector or you do it with private sector, whatever administration makes that decision to give up the control of tolls does it on 

the date the agreement is signed. It is a massive future toll increase for the rate payers, whether it is public or private. You can 

monetize that future toll increase and get the cash today if you 

wish. 

Mr. DEFAZIO. Mr. Poole, that was, I thought, one of your arguments that I asked the staff to refute and they couldn’t, but I think 

49

it has been. Do you agree with Mr. Enright’s characterization that 

there would be a rate covenant and that it could be issued either 

by a public entity or a private entity? 

Mr. POOLE. No. I think that could be done in principle. I think 

we will have an opportunity to observe over the next few years. Mr. 

Enright has basically issued a challenge. I think any public sector 

toll agency is free and their governor is free to try to implement 

that, and we will see if anybody does. My prediction is that none 

of them will. 

Mr. DEFAZIO. Well, Mr. Daniels has implemented that for 75 

years. 

Mr. POOLE. Exactly. 

Mr. DEFAZIO. Of course, he is at 20 percent in the polls. That is 

unfortunate, but he did implement it. Got it done. 

Mr. POOLE. I think when Governor Rendell implements his, he 

will not be at 20 percent in the polls. He has bipartisan support 

in his legislature, and they will include revenue sharing in their 

deal. 

Mr. DEFAZIO. Revenue sharing would certainly be an improvement. 

I guess my question, and perhaps Mr. Sawers could address this, 

but other panel members could. Why wouldn’t we adopt something 

more along the lines of the British model where the terms are generally limited? 

They have also gone to this non-tolling version, but let us just 

leave aside whether you want to call it availability payment or 

shadow tolling because we don’t want to strain people here. 

Let us look at the fact that basically their agreements are generally a term of up to about 30 years. Many of these are greenfields. They are not assuming existing assets. Somehow the investors are making money. The control reverts back to the public in 

30 years or even less if the equity investment plus profit is made 

back with unanticipated revenues before then. Is that a fair characterization? 

Mr. SAWERS. More or less, but not quite, I think the issue about 

the 30 year term is where it has been an availability payment, so 

the government is paying the money. It is basically paying back 

like a lease payment effectively with a whole bunch of performance 

tweaks to it for the construction of a greenfield asset. 

Brownfields, there have been deals where, for example, a major 

city, Birmingham, is putting out its road network for highways 

maintenance, so contracting for a fixed price for highways maintenance for 15, 20 years but including quite a lot of major refurbishment and capital investment. It is that style of deal, but there 

aren’t any toll road deals which are done on 30 years. Toll road 

deals tend to be longer because there is more risk, and that is the 

key, the risk. 

I would say that is the difference between the project finance 

market, as we call it, and the municipal market, the risk and who 

bears the risk. You may say that on an existing O and M deal like 

Chicago Skyway, there isn’t much risk there. Well, yes, that is your 

view, and therefore you are probably even better off doing your own 

bonds. But if it was a greenfield deal, you would be transferring 

a lot of risk to the private sector for that difference. 

50

Mr. DEFAZIO. I think there is room for agreement there, and I 

have consistently said from the beginning, I can see more likely 

public purposes and objectives being met by well crafted agreements in the greenfield area as opposed to monetization of existing 

assets. 

I guess my question would be to both Mr. Enright and/or Mr. 

Poole. It seems to me that in the case of the monetization of, say, 

the Indiana Toll Road, that there must be a profit involved. There 

is. Obviously, there are tax advantages. That has to do with the 

term. There is only 10 percent equity in it. That is true. We have 

already established the State could have done the same thing. They 

could have done it with a GO bond which Goldman Sachs says and 

you are saying. They could do it without a GO bond with the rate 

covenants. 

I guess the question is: What is the total cost over here versus 

what I would look at as the cost of the State in whatever tax relief 

they are giving? 

Has anyone calculated what the public is foregoing, the opportunity costs, the revenues, the taxes foregone and all that versus 

had they done this themselves, operated it efficiently and used the 

profits or kept the tolls down one way or the other as they chose? 

Has anyone done that kind of analysis, total cost analysis over the 

term and/or profit? 

Yes, go ahead. 

Mr. ENRIGHT. We have done that analysis. The difference that 

occurs is in order to finance the asset, the asset acquisition if you 

will in the case of the Chicago-Indiana deal, again they have to live 

within the discipline of the credit community and that discipline 

will allow them to only indicate so much they can finance in the 

deal, regardless of the pure net present value of expected cash 

flows. They are going to be limited by that. 

After the Chicago deal, which actually did a lot of things in their 

refinancing structure that people thought weren’t even possible, 

the bond rating agencies changed the rules and tightened up a lot 

of the requirements, so you can’t have an assumption of galloping 

high toll increases forever and traffic increases forever to finance 

your deal. 

The net realizable value of the deal is significantly less than the 

actual present value of the cash flows over time. That difference, 

that delta between what you get up front and what the actual cash 

flows are going to be is a large amount. If it is owned by the public 

sector, you capture all of that. You get what we call the public ownership dividend by capturing that and getting all the cash flows. 

Certainly revenue sharing is a way to get them, but you have now 

given up part of the cash flows you could otherwise capture. On existing asset deals, that just doesn’t seem to make sense. 

Mr. DEFAZIO. In a revenue sharing, you would capture part of 

that premium back but obviously not all of it or there wouldn’t be 

a profit motivation. 

Mr. ENRIGHT. Correct. On to be built deals, on what are called 

greenfield deals, I mean yes, OK, there is risk involved—there is 

no question about that—but perhaps the public sector doesn’t want 

to take that risk although traditionally in the U.S., they have been 

willing to. There have been a few failures on toll roads over the 

51

years, but pretty few. They can do that. They can share that risk 

if they want. 

But on existing asset deals, there are pretty well established 

traffic flows. You kind of know what you can do in toll increases. 

There could be limits practically. But in the real world, do you care 

whether you get half the traffic at double the toll or the expected 

traffic at the toll? You don’t care. It is revenue. 

Mr. DEFAZIO. Right. 

Mr. ENRIGHT. I think the more you increase a toll, the more valuable your road is. 

Mr. DEFAZIO. If you look at the Macquarie Infrastructure Group 

disclosure which is very candid and well written—it is a good company—over the long term, revenue growth is expected to be substantially driven by toll growth rather than traffic growth. 

Mr. ENRIGHT. Our analysis would indicate that to be true. 

Mr. DEFAZIO. Which means to some extent, since we all know 

that our traffic projections according to the Federal Government 

are like this, we must be driving some of that traffic somewhere 

else because of the tolls. 

Mr. ENRIGHT. In the Chicago case, it would drive it on to roads 

not the responsibility of the City of Chicago. So the State of Illinois 

would have to pick up the tab for that. 

Mr. DEFAZIO. It also says no significant cost savings are envisioned, so that doesn’t go to the argument that they are so much 

more efficient in the private sector. 

Mr. Poole, would you care to comment on what he just said? 

Mr. POOLE. I think, again, there clearly are tradeoffs involved. 

There is risk in a 75 year deal even with an existing facility. There 

are risks involved in adding the necessary capacity to meet the 

level of service requirements which are spelled out in the concession agreement. So you are not getting nothing in exchange for the 

private sector taking that risk and making the profits. You are getting something because you are transferring the risk of future expansions, changes in technology, changes in business conditions. 

One of the criticisms of the long term is don’t know if people are 

even going to be driving cars in 75 years. They are taking that risk. 

Mr. DEFAZIO. No, absolutely. I understand that, but again we 

would say there is considerably less risk. 

I have been told by the staff that we have to clear out for another 

hearing which I am sure is equally interesting and substantive. 

One thing you said, Mr. Poole, I do want to say I hope that Governor Rendell is entering into this carefully. As you said bipartisan, 

bipartisan doesn’t matter. It was unanimously adopted that they 

would have energy deregulation in California, unanimously by the 

legislature. Of course, you can talk to ex-Governor Davis about that 

and others. Bipartisanship is no indication of the wisdom or the 

protection of the public interest in a particular deal. 

My understanding with Governor Rendell is that he is saying he 

doesn’t raise the gas tax so he would rather have an invisible tax 

which is a toll and would rather lock it in with a contract over a 

long period of time, and then he can say, well, gee, maybe I will 

do what Mitch Daniels did until I am out of office. He will subsidize the tolls. Then when he gets out of office, he will say, well, 

gee, who could have known? 

52

In any case, I think these are incredibly complicated things that 

need to be approached deliberately. I don’t want to see them 

abused because I think it is a useful tool. It is not going to solve 

our infrastructure problems, but if we get some bad deals, a few 

more Indianas, public sentiment is going to demand the Federal 

Government step in and put an end to this stuff. They have got to 

be approached carefully. 

I appreciate the dialogue we had here today. I thank the witnesses for their generous granting of time. 

As was stated earlier, the record will be held open for 30 days. 

Thank you. 

[Whereupon, at 1:40 p.m., the subcommittee was adjourned.]

53


34778.012
54


34778.013
55


34778.014
56


34778.015
57


34778.016
58


34778.017
59


34778.018
60


34778.019
61


34778.020
62


34778.021
63


34778.022
64


34778.023
65


34778.024
66


34778.025
67


34778.026
68


34778.027
69


34778.028
70


34778.029
71


34778.030
72


34778.031
73


34778.032
74


34778.033
75


34778.034
76


34778.035
77


34778.036
78


34778.037
79


34778.038
80


34778.039
81


34778.040
82


34778.041
83


34778.042
84


34778.043
85


34778.044
86


34778.045
87


34778.046
88


34778.047
89


34778.048
90


34778.049
91


34778.050
92


34778.051
93


34778.052
94


34778.053
95


34778.054
96


34778.055
97


34778.056
98


34778.057
99


34778.058
100


34778.059
101


34778.060
102


34778.061
103


34778.062
104


34778.063
105


34778.064
106


34778.065
107


34778.066
108


34778.067
109


34778.068
110


34778.069
111


34778.070
112


34778.071
113


34778.072
114


34778.073
115


34778.074
116


34778.075
117


34778.076
118


34778.077
119


34778.078
120


34778.079
121


34778.080
122


34778.081
123


34778.082
124


34778.083
125


34778.084
126


34778.085
127


34778.086
128


34778.087
129


34778.088
130


34778.089
131


34778.090
132


34778.091
133


34778.092
134


34778.093
135


34778.094
136


34778.095
137


34778.096
138


34778.097
139

Æ


34778.098