Highway Public-Private Partnerships: More Rigorous Up-front Analysis Could Better Secure Potential Benefits and Protect the Public Interest
Published: 2008-02-08T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The United States is at a critical juncture in addressing the demands on its transportation system, including highway infrastructure. State and local governments are looking for alternatives, including increased private sector participation. GAO was asked to review (1) the benefits, costs, and trade-offs of public-private partnerships; (2) how public officials have identified and acted to protect the public interest in these arrangements; and (3) the federal role in public-private partnerships and potential changes in this role. GAO reviewed federal legislation, interviewed federal, state, and other officials, and reviewed the experience of Australia, Canada, and Spain. GAO's work focused on highway-related public-private partnerships and did not review all forms of public-private partnerships.
section_title: What GAO Found
paragraphs: Highway public-private partnerships have resulted in advantages for state and local governments, such as obtaining new facilities and value from existing facilities without using public funding. The public can potentially obtain other benefits, such as sharing risks with the private sector, more efficient operations and management of facilities, and, through the use of tolling, increased mobility and more cost effective investment decisions. There are also potential costs and trade-offs--there is no "free" money in public-private partnerships and it is likely that tolls on a privately operated highway will increase to a greater extent than they would on a publicly operated toll road. There is also the risk of tolls being set that exceed the costs of the facility, including a reasonable rate of return, should a private concessionaire gain market power because of the lack of viable travel alternatives. Highway public-private partnerships are also potentially more costly to the public than traditional procurement methods and the public sector gives up a measure of control, such as the ability to influence toll rates. Finally, as with any highway project, there are multiple stakeholders and trade-offs in protecting the public interest. Highway public-private partnerships we reviewed protected the public interest largely through concession agreement terms prescribing performance and other standards. Governments in other countries, such as Australia, have developed systematic approaches to identifying and evaluating public interest and require their use when considering private investments in public infrastructure. While similar tools have been used to some extent in the United States, their use has been more limited. Using up-front public interest evaluation tools can assist in determining expected benefits and costs of projects; not using such tools may lead to aspects of protecting the public interest being overlooked. For example, while projects in Australia require consideration of local and regional interests, concerns by local governments in Texas that they were being excluded resulted in state legislation requiring their involvement. While direct federal involvement has been limited to where federal investment exists, and while the Department of Transportation has actively promoted them, highway public-private partnerships may pose national public interest implications such as interstate commerce that transcend whether there is direct federal investment in a project. However, given the minimal federal funding in highway public-private partnerships to date, little consideration has been given to potential national public interests in them. GAO has called for a fundamental reexamination of federal programs to address emerging needs and test the relevance of existing policies. This reexamination provides an opportunity to identify and protect potential national public interests in highway public-private partnerships.

section_title: Letter
paragraphs: America’s transportation system is the essential element that facilitates  the movement of both people and freight within the country. Both  economic activity and mobility are dependent upon an efficient  transportation system. The United States is at a critical juncture regarding  its ability to address demands on the transportation system. The Safe,  Accountable, Flexible, Efficient Transportation Equity Act—A Legacy for  Users (SAFETEA-LU) authorized about $286 billion for highway, transit,  and other transportation system spending for the 6-year period ending in  fiscal year 2009. However, the Highway Trust Fund, the principal  mechanism for providing federal funds for highway programs, could have  a negative balance as early as 2012. More specifically, under current law,  the Highway Account, which makes up the majority of Highway Trust  Fund receipts, is projected to have a negative balance by 2009 due to a  growing difference between projected receipts—the federal excise tax on  motor fuel and truck-related taxes are primary sources of revenue for the  Highway Account—and outlays. Baring changes to the tax structure, the  situation will likely be further exacerbated by inflation and more fuel  efficient vehicles that will act to further erode the resources available to  meet transportation system demands. In 2005, the federal government  accounted for about 40 percent of highway program capital spending (see  fig. 1). State and local governments accounted for about 60 percent of  highway program capital spending.
The nation is also on an imprudent and unsustainable fiscal path. As the  baby-boomer generation retires, entitlement programs will grow and  require increasing shares of federal spending in the years ahead. Absent  significant changes to tax and spending programs and policies, we face a  future of unsustainable deficits and debt that threatens to cripple our  economy and quality of life. This looming fiscal crisis requires a  fundamental reexamination of all government programs and commitments  by reviewing their results and testing their continued relevance and  relative priority in the twenty-first century. This reexamination offers the  prospect of addressing emerging needs (1) by weeding out programs and  policies that are outdated or ineffective and (2) by modernizing those  programs and policies that remain relevant. The federal programs for  highways are particularly ripe for reexamination. The Interstate Highway  System has been completed, yet the basic structure of the federal-aid  highway program has not changed. As we have reported, federal  transportation programs do not have mechanisms to link funding levels  with the accomplishment of specific performance-related goals and  outcomes related to mobility, and most highway grant programs are  apportioned by formula, without regard to the needs or capacity of  recipients. Transportation and other experts on a panel recently convened  by the Comptroller General stated that the nation’s transportation policy  has lost focus and that the nation’s overall transportation goals need to be  better defined and linked to performance measures that evaluate what the  respective policies and programs actually accomplish. There was broad  consensus among the participants on the need for a transformation of our  current approach to transportation policy to better meet current and  future mobility needs in a strategic, integrated, and sustainable manner.
Finally, the nation faces increasing congestion on the nation’s highways.  According to a February 2007 American Association of State Highway and  Transportation Officials report, Federal Highway Administration (FHWA)  has forecasted that over the next 50 years highway vehicle miles of travel  will more than double from 3 trillion to 7 trillion. To meet the growing  demand for new transportation capacity, states and localities are looking  for alternatives to direct government provision of transportation  infrastructure and services. One of these alternatives is increased private  sector participation in delivering the infrastructure and services that the  public sector is struggling to keep up with.
The private sector has traditionally been involved as contractors in the  design and construction of highways. In recent years, the private sector  has become increasingly involved in assuming other responsibilities  including planning, designing, and financing. The private sector has also  entered into a wide variety of highway public-private partnership  arrangements with public agencies. According to FHWA, the term “public- private-partnership” is used for any scenario under which the private  sector assumes a greater role in the planning, financing, design,  construction, operation, and maintenance of a transportation facility  compared to traditional procurement methods. Under some of these  alternative arrangements, the private sector is increasingly being looked at  to not only construct facilities but also to finance, maintain, and operate  such infrastructure under long-term leaseholds—up to 99 years in some  cases. In some cases, this involves financing and constructing a new  facility and then operating and maintaining it over a specified period of  time, while in other cases it involves operating and maintaining an existing  toll road for a period of time in exchange for an up-front payment provided  to the public sector. Proponents of these forms of highway public-private  partnerships contend that they offer the potential advantages of obtaining  critical new or expanded infrastructure sooner than if provided solely by  the public sector, at a potentially lower cost given the efficiencies and  innovation of market-driven private companies, and the use of private  rather than public funds. In addition, risks of major infrastructure projects,  such as risks associated with constructing highways and risks of  generating sufficient traffic and revenue for financial viability, can be  shifted from the public to the private sector. Since these arrangements are  often used in relation to toll roads, the private sector return is achieved  through the collection of future toll revenue. However, highway public- private partnership arrangements are not “risk free,” and concerns have  been raised about how well the public interest has been evaluated and  protected. Concerns have also been raised about the potential loss of  public control over critical assets for up to 99 years.
In January 2008, the National Surface Transportation Policy and Revenue  Study Commission issued its report on the surface transportation system.  The commission was required, among other things, to conduct a  comprehensive study of the current condition and future needs of the  surface transportation system and develop a conceptual plan, with  alternative approaches, to ensure that the surface transportation system  continues to serve the needs of the United States. The report made a  number of recommendations for restructuring and financing the nation’s  surface transportation programs, in order to align federal leadership and  federal transportation investments with national interests in the areas of  highways, transit, passenger rail, freight, and other areas. The report also  contained recommendations on tolling, congestion pricing, and the use of  public-private partnerships. These recommendations included providing  states and localities the flexibility to use tolls to fund new capacity on the  Interstate Highway System and the flexibility to implement congestion  pricing on this system—on both new and existing capacity in metropolitan  areas with populations greater than 1 million. The report encouraged the  use of public-private partnerships, including concessions, for highways  and other surface transportation modes, and stated that “public-private  partnerships should play an important role in financing and managing our  surface transportation system.” The commission recommended criteria to  be included in public-private partnership concessions, including  requirements that states cap toll rates (at the level of the consumer price  index (CPI) minus a productivity adjustment), prohibit the use of revenues  for nontransportation purposes, avoid toll rates that discriminate against  certain users, and fully consider the effect tolling might have on diverting  traffic to other facilities. The commission also recommended that there be  increased transparency and adequate public participation in the decision  to use public-private partnerships, revenue sharing between states and  private concessionaires, and a demonstration that private sector financing  provides better value for money than if the concession were financed  using public funds.
To assist Congress as it assesses the future of federal surface  transportation and highway programs, you asked us to identify the issues  associated with increased use of private sector participation in providing  transportation infrastructure to the public. In response to your request,  this report addresses (1) the benefits, costs, and trade-offs associated with  highway public-private partnerships; (2) how public officials have  identified and acted to protect the public interest in highway public- private partnership arrangements; and (3) the federal role in highway  public-private partnerships and potential changes in this role.
For purposes of this report, we limited the term “highway public-private  partnerships” to highway-related projects in which the public sector enters  into a contract, lease, or concession agreement with a private sector firm  or firms, and where the private sector provides transportation services  such as designing, constructing, operating, and maintaining the facility,  usually for an extended period of time. This definition included long-term  concessions for toll roads in which the private sector firm(s) receives  some or all toll revenues over the life of the lease or concession agreement  with the public sector. There are numerous other types of arrangements  which the Department of Transportation (DOT) classifies as “public- private partnerships” that we did not include. For example, we did not  include fee-for-service arrangements in which effective ownership of a  transportation facility does not transfer to the private sector, nor did we  include arrangements where concessionaires are only paid for services  provided or public-private partnerships that might be used to allow the  private sector to improve federal real property. This report is focused on  the use of public-private partnerships in highways, although we recognize  that such public-private partnerships can be used to provide other  transportation (e.g., transit) and outside the transportation sector, such as  hospitals and prisons. We also recognize that there may be other forms of  highway public-private partnerships, such as shadow tolling in which the  public sector pays a private sector company an amount per user of a  roadway and there is no direct collection of a toll by the private company,  or availability payments in which a private company is paid based on the  availability of a highway to users. We did not include any of these types of  public-private partnerships in the scope of our report, and the findings and  conclusions of this report cannot be extrapolated to those or other types  of public-private partnerships.
To address these issues, we reviewed pertinent federal legislation and  regulations, including SAFETEA-LU, as well as federal guidance and  relevant modifications of FHWA procedures to permit the use of highway  public-private partnerships on federally supported projects. We also  collected data and analyzed information related to one project in  Canada—the 407 Express Toll Road (ETR) near Toronto—and four  projects in the United States—two were leases of existing transportation  facilities and two were new construction projects—where such highway  public-private partnerships had been, or were expected to be, used: (1)  Chicago Skyway, Chicago, Illinois; (2) Indiana Toll Road, Indiana; (3)  projects in and around the Portland, Oregon, area; and (4) the Trans-Texas  Corridor (TTC), Texas. This included obtaining descriptions of these  projects, copies of the concession or development agreements, and  documentation related to the financial structure of such projects. These  projects were selected because they were recent examples of highway  public-private partnerships, were large dollar projects, or used different  approaches. We also interviewed other states that were considering  highway public-private partnerships for their highways, including  California, New Jersey, and Pennsylvania. Our work also collected data  and information on the use of highway public-private partnerships in  Australia, Canada, and Spain. Further, we collected information on how  public interest is evaluated in privately financed initiatives in the United  Kingdom. All of these countries are leaders in using highway public-private  partnerships to obtain transportation infrastructure. Finally, we  interviewed FHWA and other federal officials, state and local officials  associated with the three projects we selected, and with private sector  officials involved with U.S. highway public-private partnership  arrangements. We also conducted extensive interviews with government  and private sector officials in Australia, Canada, and Spain. (See app. I for  a more detailed discussion of our scope and methodology.)
We conducted this performance audit from June 2006 to February 2008 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
subsections: section_title: Background
paragraphs: Private sector participation and investment in highways is not new. In the  1800s, private companies built many roads that were financed with  revenues from tolls, but this activity declined due to competition from  railroads and greater state and federal involvement in building tax- supported highways. Private sector involvement in highways was  relegated to contracting with states to build roads. In the absence of  private toll roads, states and local governments were responsible for road  construction and maintenance. In the 1930s many states began creating  public authorities that built toll roads such as the Pennsylvania Turnpike  that relied on loans and private investors buying bonds to finance  construction. The Federal-Aid Highway Act of 1956 established a federal  tax-assisted National System of Interstate and Defense Highways,  commonly know as the Interstate Highway System. Further, the federal  Highway Revenue Act of 1956 established a Highway Trust Fund to be  funded using revenue from, among other sources, motor fuel taxes. The  Federal-Aid Highway Act of 1956 generally prohibited the use of federal  funds for the construction, reconstruction, or improvement of any toll  road.
States retain the primary responsibility for building and maintaining  highways. While states collect revenues to finance road construction and  maintenance from a variety of sources, including fuel taxes, they also  receive significant federal funding. For example, in 2005, of the $75.2  billion spent on highways by all levels of government, about $31.3 billion  (about 42 percent) was federal funding. Federal highway funding is  distributed mostly through a series of formula grant programs, collectively  known as the federal-aid highway program. Funding for the federal-aid  highway program is provided through the Highway Trust Fund—a fund  that was used to finance construction of the Interstate Highway System on  a “pay as you go” basis. Receipts for the Highway Trust Fund are derived  from two main sources: federal excise taxes on motor fuel and truck- related taxes. Receipts from federal excise taxes on motor fuel constitute  the single largest source of revenue for the Highway Account. Funds are  provided to the states for capital projects, such as new construction,  reconstruction, and many forms of capital-intensive maintenance. These  funds are available for eligible projects and pay 80 percent of the costs on  most projects. Additionally, the responsibility for planning and selecting  projects is handled by the states and metropolitan planning organizations.
Over time, federal programs and legislation have gradually become more  receptive to private sector participation and investment. For example, the  Surface Transportation and Uniform Relocation Assistance Act of 1987  established a pilot program allowing federal participation in financing the  construction or reconstruction of seven toll facilities, excluding highways  on the Interstate Highway System. Construction costs for these projects  were eligible for a 35 percent federal-aid match. The Intermodal Surface  Transportation Efficiency Act of 1991 (ISTEA) removed the pilot project  limitation on federal participation in financing the initial construction or  reconstruction of tolled facilities, including the conversion of nontolled to  tolled facilities. ISTEA raised the federal share of construction costs on  toll roads to 50 percent and allowed federal participation in financing  privately owned and operated toll roads, provided that the public authority  remained responsible for ensuring that all of its title 23 responsibilities to  the federal government were met. ISTEA also included a congestion  pricing pilot program that allowed the Secretary of Transportation to enter  into cooperative agreements with up to five state or local governments or  public authorities to establish, maintain, and monitor congestion pricing  projects.
In 1998, the Transportation Equity Act for the 21st Century (TEA-21)  renamed the congestion pricing pilot, calling it a “value-pricing pilot  program,” and expanded the number of projects eligible for assistance to  15. TEA-21 also created a pilot program for tolling roads in the Interstate  Highway System. Under this pilot, up to three states can toll interstates if  the purpose is to reconstruct or rehabilitate the road and the state could  not adequately maintain or improve the road without collecting tolls.  Finally, the Transportation Infrastructure Finance and Innovation Act of  1998 (TIFIA) created a new federal program to assist in the financing of  major transportation projects, in part by encouraging private sector  investment in infrastructure. The TIFIA program permits the Secretary of  Transportation to offer secured loans, loan guarantees, and lines of credit.
In 2005, SAFETEA-LU reauthorized appropriations to fund all of the  previously established toll programs. SAFETEA-LU also allowed the  combining of public and private sector funds, including the investment of  public funds in private sector facility improvements for purposes of  eligibility for TIFIA loans. SAFETEA-LU also created the Express Lanes  Demonstration Program, which authorizes the Secretary of Transportation  to fund 15 demonstration projects to use tolling of highways, bridges, or  tunnels—including facilities on the Interstate Highway System—to  manage high congestion levels, reduce emissions in nonattainment or  maintenance areas under the Clean Air Act, or finance highway expansion  to reduce congestion. Finally, SAFETEA-LU amended the Internal  Revenue Code to add qualified highway or surface freight transfer  facilities to the types of privately developed and operated projects for  which exempt facility bonds (also called private activity bonds, PABs) may  be issued. According to FHWA, passage of the PAB provisions reflected  the federal government’s desire to increase private sector investment in  U.S. transportation infrastructure. SAFETEA-LU authorized the Secretary  of Transportation to allocate up to $15 billion in PABs for qualifying  highway and freight transfer facilities. As of January 2008, about   $3.2 billion in PABs had been approved by DOT.
The private sector has historically been involved in the construction phase  as a contractor. Over time, the private sector has been increasingly  involved in other phases of projects serving as either contractors or  managers (see fig. 2). The private sector has become more involved in a  wide range of tasks, including design, planning, preliminary engineering,  and maintenance of highways. In addition, contractors have been given  more responsibility for project oversight and ensuring project quality  through increased use of contractors for engineering and inspection  activities, as well as quality assurance activities. This increasing use of  contractors can, in part, be attributed to the need for staff and expertise by  state highway agencies. Existing surveys of state highway departments  from 1996 to 2002 show an increase of tasks completely outsourced from  about 26 percent to about 36 percent.
Private sector participation can also involve highway public-private  partnerships. As highway public-private partnerships can be defined to  include any private sector involvement beyond the traditional contracting  role in construction, there are many types of highway public-private  partnership models. For example, design-build contracts, in which a  private partner both designs and then constructs a highway under a single  contract, is considered by DOT to be a highway public-private partnership.  Some highway public-private partnerships involve equity investments by  the private sector (see fig. 3). In construction of new infrastructure,  commonly called “greenfield projects,” the private sector may provide  financing for construction of the facility and then has responsibility for all  operations and maintenance of the highway for a specified amount of  time. The private operator generally makes its money through the  collection of tolls. Private investments have also been made in existing  infrastructure through the long-term leases of currently existing toll roads.  These transactions, often called “brownfield” projects, usually involve a  private operator assuming control of the asset—including responsibilities  for maintenance and operation and collection of toll revenues—for a fixed  period of time in exchange for a concession fee provided to the public  sector. The concession fee could be in the form of an up-front payment at  the start of the concession, or could be provided over time through a  revenue sharing arrangement, or both. While many long-term public- private partnerships involve tolled highways, that is not necessarily always  the case. For example, under a “shadow tolling” arrangement, the private  sector finances, constructs, and operates a nontolled highway for a period  of time and is paid a predetermined fee per car by the public sector.
The projects included as part of our review primarily involved the long- term concessions of toll roads involving private sector equity. This model  has seen strong interest in the past few years as many states have  considered using this model to construct new highway infrastructure. For  example, Texas is currently developing a number of new highways  through this model. In addition, many states have explored private  involvement for the long-term operation and maintenance of existing toll  roads. For example, the city of Chicago and the state of Indiana recently  entered into long-term leases with the private sector for the Chicago  Skyway and Indiana Toll Road, respectively. Since we began our review,  other states have begun exploring leasing existing toll roads to the private  sector. For example, Pennsylvania has considered many options, including  a long-term lease, for extracting value from the Pennsylvania Turnpike. In  2006, Virginia entered into a long-term lease agreement with a private  company for the Pocahontas Parkway in the Richmond area and, in 2007,  the Northwest Parkway Public Highway Authority entered into a long-term  concession in the Denver region.
The U.S. highway public-private partnership projects included in our  review were varied (see table 1). Two of the projects—the TTC and  Oregon—involved construction of infrastructure. The Texas project, in  particular, was envisioned as an extensive network of interconnected  corridors that involved passenger and freight movement, as well as  passenger and freight railroads. The Oregon projects were primarily in the  Portland area and involved capacity enhancement. Two of the projects we  reviewed also involved leases of existing facilities—the Indiana Toll Road  and the Chicago Skyway. In both instances, local or state officials were  looking to extract value from the assets for reinvestment in transportation  or other purposes. (See app. II for more information about the highway  public-private partnerships that were included in our review.)
There has been considerable private participation in highways and other  infrastructure internationally. Europe, in particular has been a leader in  use of these arrangements. Spain and France pioneered the use of highway  public-private partnerships for the development of tolled motorways in  Europe. Spain began inviting concessionaires to build a national autopista  network in the 1960s, while private autoroute concessions in France date  from the 1970s. Public-private partnership arrangements for infrastructure  project financing or delivery of highway-related projects is widespread  among the regions of the world. Highway public-private partnership  initiatives support continued economic growth in more developed parts of  the world or foster economic development in the less developed parts of  the world. Over the period 1985 to 2004, the highest investment in road  projects (includes roads, bridges, and tunnels) funded and completed  using public-private partnerships was in Europe ($58.1 billion) followed by  Asia ($44.5 billion) and North America ($32.2 billion). (See fig. 4.) FHWA  attributed the predominant role of Europe to the absence of a dedicated  funding source for highways and a rapid transition in the 1990s from a  largely public infrastructure system to a more privately financed,  developed, and operated system, among other things.
section_title: Highway Public- Private Partnerships Can Potentially Provide Benefits but also Entail Costs, Risks, and Trade-offs
paragraphs: While highway public-private partnerships have the potential to provide  numerous benefits, they also entail costs and trade-offs to the public  sector. The advantages and potential benefits of highway public-private  partnerships, as well as their costs and trade-offs are summarized in table  2. Highway public-private partnerships that involve tolling may not be  suited to all situations. In addition to potential benefits to the public  sector, highway public-private partnerships can potentially provide private  sector benefits as well through investment in a long-term asset with steady  income generation over the course of a concession and availability of  various tax incentives.
subsections: section_title: Highway Public-Private Partnerships Have Been Used to Provide New Infrastructure and Funding for Transportation and Other Needs and Have the Potential to Provide Other Benefits
paragraphs: Highway public-private partnerships have resulted in advantages from the  perspective of state and local governments, such as the construction of  new facilities without the use of public funding and extracting value—in  the form of up-front payments—from existing facilities for reinvestment in  transportation and other public programs. In addition, highway public- private partnerships can potentially provide other benefits to the public  sector, including the transfer of project risks to the private sector,  increased operational efficiencies through private sector operation and  life-cycle management, and benefits of pricing and improved investment  decision making that result from increased use of tolling.
subsections: section_title: Finance New Construction and Receive Up-front Payments through Asset Monetization
paragraphs: In the United States and abroad, public-sector entities have entered  highway public-private partnership agreements to finance the construction  of new roadways. As we reported in 2004, by relying on private sector  sponsorship and investment to build the roads rather than financing the  construction themselves, states (1) conserved funding from their highway  capital improvement programs for other projects, (2) avoided the up-front  costs of borrowing needed to bridge the gap until toll collections became  sufficient to pay for the cost of building the roads and paying the interest  on the borrowed funds, and (3) avoided the legislative or administrative  limits that governed the amount of outstanding debt these states were  allowed to have. All of these results were advantages for the states. For  example, the TTC is a project that Texas plans to finance, construct,  operate, and maintain through various private sector investors. The  project is based on competitive bidding and procurement processes, and it  will be developed in individual segments as warranted over 50 years.
While relatively new in the United States, leveraging private resources to  obtain highway infrastructure is more common abroad. Since the 1960s,  Spain has been active in highway public-private partnerships, using  approximately 22 toll highway concessions to construct its 3,000- kilometer (approximately 1,860 mile) national road network at little cost  to the national government. By keeping the capital costs off the public  budget, Spain mitigated budgetary challenges and met macroeconomic  criteria for membership in the European Union’s Economic Monetary  Union. More recently, Australian state governments have entered into  highway public-private partnerships with private sector construction firms  and lenders to finance and construct several toll highways in Sydney and  Melbourne. Officials with the state of Victoria, Australia, have said that  government preferences to limit their debt levels, particularly following a  severe recession in the early 1990s, would have made construction of  these roads difficult without private financing, even though some of the  roads had been on transportation plans for several years.
Some governments in the United States and Canada are also using  highway public-private partnerships to extract value from existing  infrastructure and raise substantial funds for transportation and other  purposes. For example, in 2005 the city of Chicago received about $1.8  billion by leasing the Chicago Skyway to a concession consortium of  Spanish and Australian companies for 99 years. The city used the lease  proceeds to fund various social services; pay off remaining debt on the  Chicago Skyway (about $400 million) and some of the city’s general  obligation debt; and, create a reserve fund which, according to the former  Chief Financial Officer of Chicago, generates as much net revenue in  annual interest as the highway had generated in annual tolls. By paying off  the city’s general obligation debt, the city’s credit rating improved, thus  reducing the cost of debt in the future.
In another example of extracting value from existing infrastructure, the  state of Indiana signed a 75-year, $3.8 billion lease of the Indiana Toll Road  in 2006 with the same consortium of private sector companies that had  leased the Chicago Skyway. The proceeds will primarily be used to fund  the governor’s 10-year statewide “Major Moves” transportation plan.  Indiana officials told us that Indiana was the only state with a fully funded  transportation plan for the next 10 years. Indiana also established reserves  from the lease proceeds to provide future funding. Finally, the Provincial  Government of Ontario, Canada, preceded both of these concession  agreements in 1999 when it entered into a long-term lease with a private  consortium for the Highway 407 ETR in the Toronto area in exchange for  $3.1 billion Canadian dollars (approximately $2.6 billion U.S. dollars in  1999, or $3.2 billion U.S. dollars in 2007). According to Ontario officials,  proceeds from the 407 ETR lease were added to the province’s general  revenue fund but were not dedicated to a long-term investment or other  specific capital projects.
section_title: Potential Benefits Associated with Transferring Risks
paragraphs: The public sector may also potentially benefit from transferring or sharing  risks with the private sector. These risks include project construction and  schedule risks. Various government officials told us that because the  private sector analyzes its costs, revenues, and risks throughout the life  cycle of a project and adheres to scheduled toll increases, it is able to  accept large amounts of risk at the outset of a project, although the private  sector prices all project risks and bases its final bid proposal, in part, on  the level of risk involved.
The transfer of construction cost and schedule risk to the private sector is  especially important and valuable, given the incidence of cost and  schedule overruns on public projects. Between 1997 and 2003, we and  others identified problems with major federally funded highway and  bridge projects and with FHWA’s oversight of them. We have reported  that on many projects for which we could obtain information, costs had  increased, sometimes substantially, and that several factors accounted for  the increases, including less than reliable initial cost estimates. We further  reported that cost containment was not an explicit statutory or regulatory  goal of FHWA’s oversight and that the agency had done little to ensure that  cost containment was an integral part of the states’ project management.  Since that time both Congress and DOT have taken action to improve the  performance of major projects and federal oversight; however, indications  of continuing problems remain. In 2004, DOT established a performance  goal that 95 percent of major federally funded infrastructure projects  would meet cost and schedule milestones established in project or  contract agreements, or achieve them within 10 percent of the established  milestones. While federally funded aviation and transit projects have met  this goal, federally funded highway projects have missed the goal in each  of the past 3 years.
Overseas, an example of a successful transfer of construction risk involves  the CityLink highway project in Melbourne, Australia. This project faced  several challenges during construction, including difficult geological  conditions and a tunnel failure, which caused project delays and added  costs. According to officials from the government of Victoria, Australia,  because construction risks were borne by the private sector, all cost and  schedule overruns came at the expense of the private concessionaire, and  no additional costs were imposed on the government. Another benefit of  highway public-private partnerships related to the costs of construction is  that because highway public-private partnership contracts are public and  cost and schedule overruns are generally assumed by the private sector,  there can be more public transparency about project costs and timelines  than under public projects.
Traffic and revenue risks can also be transferred to the private sector. In  some highway public-private partnership projects, traffic and revenues  have been low, imposing costs on the private sector but not leading to  direct costs to the public sector. For example, the Pocahontas Parkway   opened to traffic in stages beginning in May 2002. Revenues have been less  than projected on this road because traffic has been lower than projected.  Virginia used public and private funds for operating and maintaining the  Parkway until it had sufficient revenue to repay initial state funds used for  construction and pay for the operation and maintenance through tolls.  Traffic projections for 2003 indicated there would be about 840,000  transactions per month (about $1.4 million in revenue). However, as of  January 2004, traffic was about 400,000 transactions per month (about  $630,000 in revenue). In June 2006, under an amended and restated  development agreement, a private concessionaire that believed the road  was a good long-term investment assumed responsibility for the road for a  period of 99 years. The private concessionaire is now responsible for all  debt on the Pocahontas Parkway and the risk that revenues on the  highway might not be high enough to support all costs. Similarly, in  Australia, construction of the Cross City Tunnel in Sydney was privately  funded; but, the project began to experience financial problems when  actual traffic and revenues were lower than forecasted. Within the first 2  years of operation, the private operator went into receivership. In  September 2007, the Cross City Tunnel project was sold to new owners  following a competitive tender process. Government officials from New  South Wales told us that, as of spring 2007, there had been no costs to the  government because the traffic and revenue risks were borne by the  private sector.
section_title: Potential Efficiencies in Operations and Life-Cycle Management
paragraphs: Highway public-private partnerships may also yield other potential  benefits, such as management of assets in ways that may yield efficiencies  in operations and life-cycle management that may reduce total project  costs over a project’s lifetime. For example, in 2004, FHWA reported that,  in contrast to traditional highway contracting methods that have  sometimes focused on costs of individual project segments, highway  public-private partnerships have more flexibility to maximize the use of  innovative technologies. Such technologies will lead to increases in quality  and the development of faster and less expensive ways to design and build  highway facilities. According to DOT, highway public-private partnerships  can also reduce project life-cycle costs. For example, in the case of the  Chicago Skyway, the private concession company invested in electronic  tolling technologies within the first year of taking over management of the  Chicago Skyway. This action was taken because, in the long term, the up- front cost of new technologies would be paid off through increased  mobility, higher traffic volumes, a reduced need for toll collectors, and  decreased congestion at the toll plaza by increasing traffic throughput.  According to the Assistant Budget Director for Chicago, the high initial  cost for installing electronic tolling was likely a prohibiting factor for the  city to make the same investment, based on the city’s limited annual  budget. Foreign officials with whom we spoke also identified life-cycle  costing and management as a primary benefit of highway public-private  partnerships.
Highway public-private partnerships can also better ensure more  predictable funding for maintenance and capital repairs of the highway.  Under more traditional publicly financed and operated highways,  operations and maintenance and capital improvement costs are subject to  annual appropriations cycles. This increases the risk that adequate funds  may or may not be available to public agencies. However, under a highway  public-private partnership, concessionaires are generally held, through  contractual provisions, to maintain the highway up to a certain level of  standard (sometimes as good as or better than a state would hold itself to)  throughout the course of the concession, and the concessionaire must  fund all maintenance costs itself. Furthermore, capital improvements,  including possible roadway expansions, may also be contractually  required of concessionaires ensuring that such works will be conducted as  needed. Finally, the desire for a safe and well-maintained roadway in order  to attract traffic (and, therefore, revenues) may incentivize a private  operator to useful and efficient operations and maintenance techniques  and practices.
section_title: Potential Pricing and Investment Decision-Making Benefits
paragraphs: Highway public-private partnerships can also potentially provide mobility  and other benefits to the public sector, through the use of tolling. The  highway public-private partnerships we reviewed all involved toll roads.  Highway public-private partnerships potentially provide benefits by better  pricing infrastructure to reflect the true costs of operating and maintaining  the facility and thus realizing public benefits of improved condition and  performance of public infrastructure. In addition, through the use of  tolling, highway public-private partnerships can use tolling techniques  designed to have drivers readily understand the full cost of decisions to  use the road system during times of peak demand and potentially reduce  the demand for roads during peak hours. Through congestion pricing, tolls  can be set to vary during congested periods to maintain a predetermined  level of service. Such tolls create financial incentives for drivers to  consider costs when making their driving decisions. In response, drivers  may choose to share rides, use transit, travel at less congested (generally  off-peak) times, or travel on less congested routes to reduce their toll  payments. Such choices can potentially reduce congestion and the  demand for road space at peak periods, thus allowing the capacity of  existing roadways to accommodate demand with fewer delays. For  example, a representative of the government of Ontario, Canada, told us  that the 407 ETR helped relieve congestion in Toronto by attracting traffic  from a parallel publicly financed untolled highway. In fact, advisors to the  government said that the officials established a tolling schedule for the 407  ETR based on achieving predetermined optimal traffic flows on the 407  ETR.
Tolling can also potentially lead to targeted, rational, and efficient  investment decisions. National roadway policy has long incorporated the  user pays concept, according to which roadway users pay the costs of  building and maintaining roadways, generally in the form of excise taxes  on motor fuels and other taxes on inputs into driving, such as taxes on  tires or fees for registering vehicles or obtaining operator licenses.  Increasingly, however, decision makers have looked to other revenue  sources—including income, property, and sales tax revenues—to finance  roads in ways that do not adhere to the user pays principle. Tolling,  however, is more consistent with user pay principles because tolling a  particular road and using the toll revenues collected to build and maintain  that road more closely aligns the costs with the distribution of the benefits  that users derive from it. Furthermore, roadway investment can be more  efficient when it is financed by tolls because the users who benefit will  likely support additional investment to build new capacity or enhance  existing capacity only when they believe the benefits exceed the costs. In  addition, toll project construction is typically financed by bonds sold and  backed by future toll revenues, and projects must pass the test of market  viability and meet goals demanded by investors, thus better ensuring that  there is sufficient demand for roads financed through tolling. However,  even with this test there is no guarantee that projects will always be viable.
section_title: Potential Private Sector Benefits
paragraphs: The private sector, and in particular, private investment groups, including  equity funds and pension fund managers, have recently demonstrated an  increasing interest in investing in public infrastructure. They see the sector  as representing long-term assets with stable, potentially high yield returns.  While these private sector investors may benefit from highway public- private partnerships, they can also lose money through a highway public- private partnership. Although profits are generally not realized in the first  10 to 15 years of a concession agreement, the private sector receives  benefits from highway public-private partnerships over the term of a  concession in the form of a return on its investment. Private sector  investors generally finance large public sector benefits early in a  concession period, including up-front payments for leases of existing  projects or capital outlays for the construction of new, large-scale  transportation projects. In return, the private sector expects to recover  any and all up-front costs (whether construction costs of new facilities or  concession fees paid to the public sector for existing facilities), as well as  ongoing maintenance and operation costs, and generate a return on  investment. According to investment firms with whom we spoke, future  toll revenue from tolled transportation projects can provide reliable long- term investment opportunities. Furthermore, any cost savings or  operational efficiencies the private sector can generate, such as  introducing electronic tolling, improving maintenance practices, or  increasing customer satisfaction in other ways can further boost the return  on investment through increased traffic flow and increased toll revenue.
The private sector can also receive potential tax deductions from  depreciation on assets involving private sector investment and the  availability of these deductions were important incentives to the private  sector to enter some of the highway public-private partnerships we  reviewed. Obtaining these deductions, however, may require lengthy  concessions periods. In the United States, federal tax law allows private  concessionaires to claim income tax deductions for depreciation on a  facility (whether new highways or existing highways obtained through a  concession) if the concessionaire has effective ownership of the property.  Effective ownership requires, among other things, that the length of a  concession be greater than or equal to the useful economic life of the  asset. Financial and legal experts, including those who were involved in  the Chicago and Indiana transactions, told us that since the concession  lengths of the Chicago Skyway and the Indiana Toll Road agreements each  exceed their useful life, the private investors can claim full tax deductions  for asset depreciation within the first 15 years of the lease agreement.  The requirement to demonstrate effective asset ownership contributed to  the 99-year and 75-year concession terms for the Chicago Skyway and  Indiana Toll Road, respectively. One tax expert told us that, in general,  infrastructure assets (such as highways) obtained by the private sector in  a highway public-private partnership may be depreciated on an  accelerated basis over a 15-year period.
Private investors can also potentially benefit from being able to use tax- exempt financing authorized by SAFETEA-LU in 2005. Private activity  bonds have been provided for private sector use to generate proceeds that  are then used to construct new highway facilities under highway public- private partnerships. This exemption lowers private sector costs in  financing highway public-private partnership projects. As of January 2008,  DOT had approved private activity bonds for 5 projects totaling $3.2  billion and had applications pending for 3 projects totaling $2.2 billion.  DOT said it expects applications for private activity bond allocations from  an additional 12 projects totaling more than $10 billion in 2008.
Finally, the private sector can potentially benefit through gains achieved in  refinancing their investments. Both public and private sector officials with  whom we spoke agreed that refinancing is common in highway public- private partnerships. Refinancing may occur early in a concession period  as the initial investors either attempt to “cash out” their investment—that  is, sell their investment to others and use the proceeds for other  investment opportunities—or obtain new, lower cost financing for the  existing investment. Refinancing may also be used to reduce the initial  equity investment in highway public-private partnerships. Refinancing  gains can occur throughout a concession period; as project risks typically  decrease after construction, the project may outperform expectations, or  there may be a general decrease in interest rates. In the case of the  Chicago Skyway, the concession company had to secure a large amount of  money in a short period of time to close on the agreement with the city.  According to the Chief Executive Officer of the Skyway Concession  Company, the company obtained a loan package with the best interest  rates available at the time and refinanced within 7 months of financial  close on the agreement. He said this refinance resulted in a better deal,  including better leverage and interest rates. An investment banker  involved in the Chicago Skyway concession told us that refinancing plans  are often incorporated into the original investment business case and form  an important part of each bidders’ competitive offer. For example, if the  toll road is not refinanced, the investment will underperform against its  original business case. The investment banker said that there was no  refinancing gain on the Chicago Skyway because the gain was already  planned for as part of the initial investment case and was reflected in the  financial offer to the city of Chicago. In some cases, refinancing gains may  not be anticipated or incorporated into the financial offer and may be  realized later in a concession period. The governments of the United  Kingdom and Victoria and New South Wales, Australia, have  acknowledged that gains generated from lower cost financing can be  substantial, and they now require as a provision in each privately financed  contract that any refinancing gains achieved by concessionaires—and not  already factored into the calculation of tolls—be shared equally with the  government. For example, the state of Victoria, Australia, shared in  refinancing gains from the private investor’s refinancing of a highway  public-private partnership project in Melbourne called EastLink project.
section_title: Highway Public-Private Partnerships May Not Be Applicable to All Situations
paragraphs: Highway public-private partnerships may not be applicable to all  situations, given the challenges of tolling and the private sector’s need to  make profits. While tolling has promise as an approach to enhance  mobility and finance transportation, officials face many challenges in  obtaining public and political support for implementing tolling. As we  reported in June 2006, based on interviews with 49 state departments of  transportation, opposition to tolling stems from the contention that fuel  taxes and other dedicated funding sources are used to pay for roads, and  thus tolling is seen as a form of double taxation. In addition, concerns  about equity are often raised, including the potential unequal ability of  lower-income and higher-income groups to pay tolls, as well the use of  tolling to address the transportation needs in one part of a state while  freeing up federal and state funding in tolled areas to address  transportation needs in another part of a state. State officials also face  practical challenges in implementing tolling, including obtaining the  statutory authority to toll and addressing the traffic diversion that might  result when motorists seek to avoid toll facilities. Our June 2006 report  concluded that state and local governments may be able to address these  concerns by (1) honestly and forthrightly addressing the challenges that a  tolling approach presents, (2) pursuing strategies that focus on developing  an institutional framework that facilitates tolling, (3) demonstrating  leadership, and (4) pursuing toll projects that provide tangible benefits to  users.
Although highway public-private partnerships could conceivably be used  for reconstructing existing roadways, in practice this could be very  difficult, due, in part, to public and political opposition to tolling existing  free roads. Aside from bridges and tunnels, existing Interstate Highway  System roads generally cannot be tolled, except under specific pilot  programs. One such program, the Interstate System Reconstruction and  Rehabilitation Pilot Program, was authorized in 1998 to permit three states  to toll existing interstate highways to finance major reconstruction or  rehabilitation needs. Two states applied for and received preliminary  approval to do so—Virginia in 2003 and Missouri in 2005—and  Pennsylvania submitted an application in 2007. While Virginia’s toll project  is proceeding through environmental review, Missouri’s project remains  on hold, and Pennsylvania’s application awaits approval. In addition, three  other states submitted applications and withdrew them, owing in part to  public and political opposition to tolls. A fourth state sent in an  “Expression of Interest” for this pilot program, but the state never formally  submitted an application. An official with the metropolitan planning  organization for Chicago said tolling highways is difficult in Illinois,  especially when the public is use to free alternatives, and an official with  the California DOT echoed this sentiment, saying that highway public- private partnerships are not a substitute or final solution for ongoing  funding of transportation infrastructure. FHWA officials agreed that  highway public-private partnerships are not suitable in all situations.
Another reason highway public-private partnerships may not be applicable  to all situations is that the private sector has a profit motive and is likely to  only enter highway public-private partnerships for new construction  projects that are expected to produce an adequate rate of return on  investment. Therefore, highway public-private partnerships appear to be  most suited for construction of new infrastructure in areas where  congestion may be a problem and traffic is expected to be sufficient to  generate net profits through toll revenues. For example, we found that  Oregon has decided to forego a highway public-private partnership for one  possible highway public-private partnership project in the Portland area  because the forecasted revenues were not high enough to make the route  toll viable for private investors. Similarly, Texas has concluded that not all  segments of the TTC are toll viable; these segments might not receive  direct private interest and might need to be subsidized with concession  fees from other segments or other funds, including public dollars, if they  are available. According to the Texas DOT, some projects will be partially  toll viable and may require both public and private funds. DOT officials  told us that, in both Oregon and Texas, funds are currently not available to  procure these projects through a public procurement.
section_title: Highway Public-Private Partnerships Also Come with Potential Costs and Trade-offs to the Public Sector
paragraphs: Highway public-private partnerships come with potential costs and trade- offs to the public sector. The costs include the potential for higher user  tolls than under public toll roads and potentially more expensive project  costs than publicly procured projects. While the public sector can benefit  through the transfer or sharing of some project risks with the private  sector, not all risks can or should be transferred; and, the public sector  may lose some control through a highway public-private partnership.  Finally, because there are many stakeholders with interests in a public- private partnership as well as many potential objectives—and many  governments affected—there are trade-offs in protecting the public  interest.
subsections: section_title: Potential Financial Costs and Trade-offs
paragraphs: Although highway public-private partnerships can be used to obtain  financing for highway infrastructure without the use of public sector  funding, there is no “free money” in highway public-private partnerships.  Rather, this funding is a form of privately issued debt that must be repaid.  Private concessionaires primarily make a return on their investment by  collecting toll revenues. Though concession agreements can limit the  extent to which a concessionaire can raise tolls, it is likely that tolls will  increase on a privately operated highway to a greater extent than they  would on a publicly run toll road. For example, during the time the  Chicago Skyway was publicly managed, tolls changed infrequently and  actually decreased by approximately 25 percent in real terms (2007  dollars) between 1989 and 2004 (see fig. 5). According to the former Chief  Financial Officer of Chicago, the Chicago Skyway had not historically  increased its tolls unless required by law, even though the Skyway had  been operating at a loss and had outstanding debt. On the other hand,  under private control, maximum tolls are generally set in accordance with  concession agreements and, in contrast to public sector practices,  allowable toll increases can be frequent and automatic. The concession  agreements for both the Chicago Skyway and Indiana Toll Road permit toll  rates to increase each year, based on a minimum of 2 percent and a  maximum of the annual change of either the CPI or per capita U.S.  nominal gross domestic product (GDP), whichever is higher. Based on  estimated increases in nominal gross domestic product and population,  the tolls on the Chicago Skyway will be permitted to increase in real terms  nearly 97 percent from 2007 through 2047—from $2.50 to $4.91 in 2007  dollars. This is also shown in figure 5. These future toll projections reflect  the maximum allowable toll rates, which have been authorized by the  public sector in the concession agreements.
Depending on market conditions, the potential exists that the public could  pay higher tolls than those that would more appropriately reflect the true  costs of operating and maintaining the facilities, including earning a  reasonable rate of return. Within the maximum allowable toll rates  authorized by the public sector in the concession agreements, toll rate  changes will be driven by such market factors as the demand for travel on  the road, which, in turn, will be influenced by the level of competition that  toll road concessionaires will face. This competition will vary from facility  to facility. In cases where an untolled public roadway or other  transportation mode (e.g., bus or rail) is a viable travel alternative to the  toll road, these competing alternatives may act to constrain toll rates. In  other instances, where there are not other viable travel alternatives to a  toll road that would not require substantially more travel time, there may  be few constraints on toll rates other than the terms of the concession. In  such instances, a concessionaire may have substantial market power,  which could give the concessionaire the ability to set toll rates that exceed  the costs of the toll road, including a reasonable rate of return, as long as  those toll rates are below the maximum rates allowed by the concession  agreement. We have not determined the extent to which any  concessionaire would have substantial market power due to limited  alternatives, although this is an appropriate consideration when entering  possible highway public-private partnerships.
In addition to potentially higher tolls, the public sector may give up more  than it receives in a concession payment in using a highway public-private  partnership with a focus on extracting value from an existing facility.  Conversely, because the private sector takes on substantial risks, the  opposite could also be true—that is, the public sector might gain more  than it gives up. In exchange for an up-front concession payment, the  public sector gives up control over a future stream of toll revenues over an  extended period of time, such as 75 or 99 years. It is possible that the net  present value of the future stream of toll revenues (less operating and  capital costs) given up can be much larger than the concession payment  received. Concession payments could potentially be less than they could  or should be. In Indiana the state hired an accounting and consulting firm  to conduct a study of the net present value of the Indiana Toll Road and  deemed its value to the state to be slightly under $2 billion. This valuation  assumed that future toll increases would be similar to the past—infrequent  and in line with the road’s history under public control. An alternative  valuation of the toll road lease performed by an economics professor on  behalf of opponents of the concession changed certain assumptions of the  net present value model and produced a different result—about $11  billion. This valuation assumed annual toll rate increases by the public  authority of 4.4 percent, compared with the 2.8 percent used in the state’s  valuation. We did not evaluate this study and make no conclusions about  its validity; other studies may have reached different conclusions;  however, the results of this study illustrate how toll rate assumptions can  influence asset valuations and, therefore, expected concession payments.
Similarly, unforeseen circumstances can dramatically alter the relative  value of future revenues compared with the market value of the facility. In  1999, the government of Ontario, Canada received a $3.1 billion  concession fee in exchange for the long-term lease for the 407 ETR. In the  years following the concession agreement, as commercial and residential  development along the 407 ETR corridor exceeded initial government  projections, the value of the roadway increased. In 2002, a valuation  conducted by an investor in the concession estimated that the market  value of the facility had nearly doubled—from $3.1 billion Canadian to $6.2  billion Canadian. This valuation included a new 40 kilometers that had  been added to the 407 ETR since it was originally built, as well as  additional parking lots and increased tolls.
Using a highway public-private partnership to extract value from an  existing facility also raises issues about the use of those proceeds and  whether future users might potentially pay higher tolls to support current  benefits. In some instances, up-front payments have been used for  immediate needs, and it remains to be seen whether these uses provide  long-term benefits to future generations who will potentially be paying  progressively higher toll rates to the private sector throughout the length  of a concession agreement. Both Chicago and Indiana used their lease  fees, in part, to fund immediate financial needs. Chicago, for example,  used lease proceeds to finance various city programs, while Indiana used  lease proceeds primarily to fund its “Major Moves” 10-year transportation  program. However, Chicago also used the proceeds to retire both Chicago  Skyway and some city debt, and both Chicago and Indiana established  long-term reserves from the lease proceeds. Conversely, proceeds from  the lease of Highway 407 ETR in Toronto, Canada, went into the  province’s general revenue fund, and officials in the Ministry of Transport  were unaware of how the payment was spent. Consequently, it is not clear  if those uses of proceeds will benefit future roadway users.
Highway public-private partnerships also potentially require additional  costs to the public sector compared with traditional public procurement.  These costs include potential additional costs associated with (1) required  financial and legal advisors, and (2) private sector financing compared  with public sector financing. A June 2007 study by the University of  Southern California found that because the U.S. transportation sector has  little experience with long-term concession agreements, state departments  of transportation are unlikely to have in-house expertise needed to plan,  conduct, and execute highway public-private partnerships. FHWA has also  recognized this issue—in a 2006 report it noted that, in several states,  promising projects have been delayed for lack of staff capacity and  expertise to confidently conclude agreements. Furthermore, public sector  agencies must also exercise diligence to prevent potential conflicts of  interest, if the legal and financial firms also advise private investors. In  addition, highway public-private partnership projects are likely to have the  higher cost of private finance because public sector agencies generally  have access to tax-exempt debt, while private companies generally do not.
Financial trade-offs can also involve federal tax issues. As discussed  earlier, unlike public toll authorities, the private sector pays income taxes  to the federal government and the ability to deduct depreciation on assets  involved with highway public-private partnerships for which they have  effective ownership for tax purposes can reduce that tax obligation. The  extent of these deductions and amounts of foregone revenue, if any, to the  federal or state governments are difficult to determine, since they depend  on such factors as the taxable income, total deductions, and marginal tax  rates of private sector entities involved with highway public-private  partnerships. Nevertheless, foregone revenue can also amount to millions  of dollars. For example, there may be foregone tax revenue when the  private sector uses tax-exempt private activity bonds. As we reported in  2004, the 2003 cost to the federal government from tax-exempt bonds used  to finance three projects with private sector involvement—Pocahontas  Parkway, Southern Connector, and the Las Vegas Monorail—was between  $25 million and $35 million. There can also be potential costs of highway  public-private partnerships using public finance since state and local debt  is also tax deductible. Regardless of the tax impact on government  revenues, the availability of depreciation deductions can be important to  private sector concessionaires. As discussed earlier, financial experts with  whom we spoke said that depreciation deductions associated with the  Chicago Skyway and Indiana Toll Road transactions were significant, and  that it is likely that in the absence of the depreciation benefit, the  concession payments to Chicago and Indiana would have been less than  $1.8 and $3.8 billion, respectively.
section_title: Potential Loss of Control
paragraphs: In highway public-private partnerships the public sector may lose some  control over its ability to modify existing assets or implement plans to  accommodate changes over time. For example, concession agreements  may contain noncompete provisions designed to limit competition from or  elicit compensation for highways or other transportation facilities that  may compete and draw traffic from a leased toll road. The case of SR-91 in  California illustrates an early and extreme example of a noncompete  provision’s potential effect. In 1991, the California DOT used a highway  public-private partnership to construct express lanes in the middle of the  existing SR-91. The express lanes were owned and operated by a private  concessionaire, and the public sector continued to own the adjacent lanes.  The concession contained provisions that prevented improvements or  expansions of the adjacent public lanes. Eight years after signing the  concession agreement, the local transportation authority purchased the  concessionaire’s rights to the tolled express lanes, thus enabling  transportation improvements to be made. It appears that noncompete  clauses in projects that followed SR-91 have generally provided more  flexibility to modify nearby existing roads and build new infrastructure  when necessary. This issue is discussed further in the next section of the  report.
The public sector may also lose some control of toll rate setting by  entering into highway public-private partnerships. Highway public-private  partnership agreements generally allow the private operator to raise tolls  in accordance with provisions outlined in the concession contract. The  private operator may be able to raise tolls on an annual basis, without  prior approval. To the extent that the public sector may want to adjust toll  rates—for example, to manage demand on their highway network—they  may be unable to do so because the toll setting capability is defined  exclusively by the concession contract and the private operator.
section_title: Not All Risks Can or Should Be Transferred in Highway Public- Private Partnerships
paragraphs: While the public sector may benefit from the transfer of risk in a highway  public-private partnership, not all risks can or should be transferred and  there may be trade-offs. There are costs and risks associated with  environmental issues, which often cannot or should not be transferred to  the private sector in a highway public-private partnership. For example, if  a project is to be eligible for federal funds at any point throughout the  project lifetime, a lengthy environmental review process must be  completed, as required for all federally funded projects, by the National  Environmental Policy Act (NEPA). There can also be various federal  permits and approvals required. The financial risk associated with the  environmental assessment process (and whether the project will be  approved) generally resides with the public sector, in part, because the  environmental review process can add to project costs and can cause  significant project delays. In addition, the private sector may be unwilling  to accept the risk and project uncertainty associated with the publicly  controlled environmental review process. An example of the delay that  can be experienced in projects undergoing environmental review includes  the South Bay Expressway in California. The state selected a private  sponsor for this project in 1991. However, litigation challenging the final  record of decision on the environmental impact statement for the project  was not resolved until March 2003, and construction did not begin until  July 2003. In another example, private sector officials in Texas have told  us they are not involved with the environmental assessment process for  the TTC, given the added costs and the increased project delivery times.  According to the Texas DOT, environmental review is a core function of  government and a risk that to date appears best suited to the public sector.
Finally, there may also be political trade-offs faced by the public sector  when involved in highway public-private partnerships. For example, public  opposition to the TTC and other highway public-private partnerships in  Texas remains strong. Although the governor of Texas has identified a  lack of funds as a barrier to meeting the state’s transportation needs,  public outcry over the TTC and the lack of involvement of local  governments was so substantial that in June 2007 the state legislature  enacted a 2-year moratorium on future highway public-private  partnerships in the state. In the case of the 407 ETR in Toronto, a  consultant to the Ontario Ministry of Transportation told us the  government was publicly criticized for the transaction and road users had  little understanding of the reasons the government entered the agreements  or what the future toll rates could be. As a result, the government suffered  public backlash. Similarly, the New South Wales government, as part of its  agreement with the concession company of the Cross City Tunnel in  Sydney, Australia, closed some city streets in order to mitigate local  congestion in the downtown area as part of the tunnel project. Although  the government’s intent was to alleviate congestion from downtown  Sydney, many drivers felt that they were diverted into the tolled tunnel,  and the government was criticized for its actions.
section_title: It Is Important to Consider the Opportunities of Highway Public-Private Partnerships Against Public Objectives, Potential Costs, and Trade- offs, as well as Public Interests
paragraphs: The diversity and uncertainty of both the benefits and costs of highway  public-private partnerships of the type we reviewed—long-term  concessions—are complex and suggest that the merits of future  partnerships will need careful evaluation on a case-by-case basis.  As  noted above, highway public-private partnerships have the potential to  provide benefits, such as construction of new facilities, without the use of  public finance, the transfer or sharing of project risks, and achievement of  increased operational efficiencies through private sector operation and  life-cycle management. However, also as discussed earlier, there are costs  and trade-offs involved, including loss of public-sector control of toll  setting and potentially more expensive project costs than publicly  procured projects. State and local governments pursue highway public- private partnerships to achieve specific public objectives, such as  congestion relief and mobility or increasing freight mobility. In some  instances, the potential benefits of highway public-private partnerships  may outweigh the potential costs and trade-offs, and the use of highway  public-private partnerships and long-term concessions would serve the  public well into the future. In other instances, the potential costs and  trade-offs may outweigh the potential benefits, and the public interest may  not be well served by using such an arrangement. In instances where  public officials choose to go with a highway public-private partnership  accomplished through a long-term concession, realizing potential benefits  will require careful structuring of the public-private partnership agreement  and identifying and mitigating the direct risks of the project.
From a public perspective, an important component of any analysis of  potential benefits and costs of highway public-private partnerships and  long-term concessions is consideration of the public interest. As with any  highway project, there can be many stakeholders in highway public- private partnerships, each of which may have its own interests.  Stakeholders include regular toll road users, commercial truck and bus  drivers, emergency response vehicles, toll road employees, and members  of the public who may be affected by ancillary effects of a highway public- private partnership, including users of nearby roads, land owners, special  interest groups and taxpayers, in general (see fig. 6). Identification of the  public interest is a function of scale and can differ based on the range of  stakeholders and the geographic and political domain considered. At the  national level, the public interest may include facilitating interstate  commerce, as well as meeting mobility needs. State and regional public  interest, however, might prioritize new infrastructure to meet local  demand or maximum up-front payments to reduce debt or finance  transportation plans above and beyond national mobility objectives. With  competing interests over the duration of the concession agreement, trade- offs will be necessary. For example, if mobility is an objective of the  project, high toll rates at times of peak travel demand may be necessary to  deter some users from driving during peak hours and thus mitigate  congestion. But, if rates are too high, traffic diversion to free alternate  public routes may be an unintended outcome that could adversely affect  drivers on those roads.
section_title: Highway Public- Private Partnerships Have Sought to Protect Public Interest in Many Ways, but Use of Public Interest Criteria Is Mixed in the United States
paragraphs: The public interest in highway public-private partnerships can and has  been considered and protected in many ways. State and local officials in  the projects we reviewed heavily relied on concession terms. Most often,  these terms were focused on ensuring performance of the asset, dealing  with financial issues such as toll rates, maintaining the public sector’s  accountability and flexibility to provide transportation services to the  public, addressing workforce issues, and maintaining the ability to address  these concession terms over the life of the contract. Additionally,  oversight and monitoring mechanisms were used to ensure that private  partners fulfill their obligations. In addition to concession terms, certain  financial analyses were used to protect the public interest. For example,  PSCs, which attempt to compare estimated project costs as a highway  public-private partnership with undertaking a project publicly, have been  used for some highway projects. We found that some foreign governments  have also used formal public interest tools as well as public interest  criteria tests. However, use of these tests and tools has been more limited  in the United States. Not using formal public interest criteria and  assessment tools can potentially allow aspects of the public interest to be  overlooked and use of formal analyses before entering into highway  public-private partnerships can help lay out the expected benefits and  costs of the project.
subsections: section_title: Highway Public-Private Partnerships We Reviewed Have Used Concession Terms to Protect the Public Interest
paragraphs: The highway public-private partnerships we reviewed have used various  mechanisms to protect the public interest by holding concessionaires to  requirements related to such things as performance of an asset, financial  aspects of agreements, the public sector’s ability to remain accountable as  a provider of public goods and services, workforce protections, and  concession oversight. Because agreeing to these terms may make an asset  less valuable to the private sector, public sector agencies might have  accepted lower payments in return for these terms.
subsections: section_title: Asset Performance Measures
paragraphs: Public sector agencies involved in highway public-private partnerships  have attempted to protect the public interest by ensuring that the  performance of the asset is upheld to high safety, maintenance, and  operational standards and can be expanded when necessary (see table 3).  Operating and maintenance standards were incorporated in the Indiana  Toll Road and Chicago Skyway concession agreements. Based on  documents we reviewed, the standards on the Indiana Toll Road detail  how the concessionaire must maintain the road’s condition, utility, and  level of safety with the intent to ensure that the public would not see any  reduction in the performance of the highway over the 75-year lease term.  The standards also detail how the concessionaire must address a wide  range of roadway issues, such as signage, use of safety features such as  barrier walls, snow and ice removal, and the level of pavement  smoothness that must be maintained. According to a Deputy  Commissioner with the Indiana DOT, the standards actually hold the  lessee to a higher level of performance than when the state operated the  highway, because the state did not have the funding to maintain the  Indiana Toll Road to its own standards. For the Chicago Skyway, the  concessionaire is required to follow detailed maintenance and operations  standards that are based on industry best practices and address  maintenance issues such as roadway maintenance, drainage maintenance,  and roadway safety features, as well as operational issues such as toll  collection procedures, emergency planning, and snow and ice control  procedures. According to an engineering consultant with the city of  Chicago who was involved in writing the standards used in the concession,  when the Chicago Skyway had been under public control, employees were  not required to follow formal standards.
Concessions may include requirements to maintain performance in terms  of mobility and capacity by ensuring a certain level of traffic throughput  and avoiding congestion. Highway public-private partnerships may also  require that a concessionaire expand a facility once congestion reaches a  certain level and some agreements can include capacity and expansion  triggers based on LOS forecasts. LOS is a qualitative measure of  congestion; according to the concession agreement, on the Indiana Toll  Road, when LOS is forecasted to fall below certain levels within 7 years,  the concessionaire must act to improve the LOS, such as by adding  additional capacity (such as an extra lane) at its own cost, to ease the  future projected congestion. Because the provisions call for expansions in  advance of poor mobility conditions, it appears this agreement aims to  prevent a high level of congestion from ever happening. According to  Texas DOT officials, the concessionaire for the State Highway 130,  segments 5 and 6 project (see table 1) will be required to add capacity  through expansion, or better manage traffic, to improve traffic flow if the  average speed of vehicles on the roadway falls below a predetermined  level. According to government officials in Toronto, Canada, the private  operator of the 407 ETR is also required to maintain a certain vehicle flow  and traffic growth on the road or face financial penalties.
section_title: Financial Mechanisms
paragraphs: Public sector agencies have also sought to protect the public interest in  highway public-private partnerships through financial mechanisms such as  toll rate setting limitations (see table 4). However, the toll limitations used  in U.S. highway public-private partnerships that we reviewed may be  sufficiently generous to the private sector that they might not effectively  limit toll increases. Toll limitations constrain the high profit-maximizing  toll levels that a private concessionaire might otherwise set. As discussed  earlier, tolls on the Chicago Skyway can be increased at predetermined  levels for the first 12 years of the lease (rising from $2.50 to $5 per 2-axle  vehicle). Afterward, tolls can then increase annually at the highest of three  factors: 2 percent, increase in CPI, or increase in nominal per capita GDP.  According to the concession agreement, tolls on the Indiana Toll Road can  be increased at set levels until mid-2010 and then can rise by a minimum of  2 percent or a maximum of the prior year’s increase in CPI or nominal per  capita GDP. In general, these limitations are meant to restrict the rate of  toll increases over time. Since nominal GDP has generally increased at an  annual rate of between 4 and 7 percent over the last 20 years, the  restrictions may not effectively limit toll increases.
Some foreign governments have taken a different approach to limiting toll  increases that may create more constraining limits. For example, in Spain,  we were told that concessionaires are limited to increasing tolls by  roughly the rate of inflation in Spain every year (although slight  adjustments may be made based on traffic levels). In contrast, since the  annual rate of inflation in the United States has typically been lower than  nominal GDP growth (except during years of negative real GDP change),  the maximum allowable toll increases in Chicago and Indiana will likely  exceed the U.S. inflation rate. We were told that in the EastLink project in  Australia, toll rates have been kept low by having prospective bidders for a  concession bid down the level of toll rates; the contract is awarded to the  bidder that agrees to operate the facility with the lowest toll. Government  officials told us that this process resulted in the lowest per kilometer toll  rate of any toll road in Australia. However, using a process that constrains  bidders to the lowest tolls may involve government subsidies. Although no  closure of competing roads or government subsidies were involved with  the EastLink project in Victoria, Australia, the potential for government  subsidies was involved in the Cross City Tunnel project in Sydney,  Australia. An official with the New South Wales government said the  government was adopting a new policy in light of the Cross City Tunnel  project specifying that the government should be prepared to provide  subsidies on toll road projects to keep tolls at certain predetermined  levels. In commenting on a draft of this report, DOT officials said that  different government agencies may have different goals for highway  public-private partnerships besides keeping tolls low. These other goals  could include maximizing the number of new facilities provided, earning  the largest up-front payment or annual revenue sharing, or using higher  tolls to maximize mobility and choice.
Revenue-sharing mechanisms have also been used to protect the public  interest by requiring a concessionaire to share some level of revenues with  the public sector. For example, in Texas, revenues on the State Highway  130, segments 5 and 6, concession will be shared with the state so that the  higher the return on investment of the private concessionaire, the higher  the share with the state. For example, after a one-time, up-front payment  of $25 million, if the annual return on investment of the private  concessionaire is at or below 11 percent, then the state could share in 5  percent of all revenues. If it is over 15 percent, then Texas could receive 50  percent of the net revenues. Higher returns would warrant higher revenue  shares for the state. Officials with the Texas DOT said they see revenue  sharing, as opposed to one large up-front payment at lease signing, as  protecting the public interest in the long run and ensuring that the public  and private sectors share common goals. Both Chicago and Indiana  officials told us there were no revenue sharing arrangements in either the  Chicago Skyway or Indiana Toll Road concessions.
Foreign governments have also used other financial mechanisms, such as  controls on public subsidies to private projects and the sharing of  refinancing gains, to protect the public interest in highway public-private  partnerships. For example, in Spain, we were told that concessionaires for  highway projects that require public subsidies often bid for the lowest  subsidy possible to lower costs to the government. In other highway  projects, the government of Spain will provide loans for private projects  for which the interest rate on repayment is based on traffic levels: the  lower the traffic level the lower the interest rate. According to documents  we reviewed, in highway public-private partnerships in both Victoria and  New South Wales, Australia, any profits the concessionaire earns by  refinancing of the asset must be shared with the government. In May 2007,  the government of New South Wales, Australia, issued guidance in relation  to refinancing gains. According to a New South Wales official, the general  position of the government on highway public-private partnership  refinancing is that all refinancings, other than those contemplated at  financial close, require government consent. Government consent plays a  fundamental role in project refinancing since refinancing may increase  project risk by increasing debt burden and reducing investors’ long-term  financial incentives, among other things. In Canada, federal policy requires  that any federal funds used to construct a road that is then leased to a  private concessionaire must be repaid to the federal government.
section_title: Accountability and Flexibility
paragraphs: Governments entering into highway public-private partnerships have also  acted to protect the public interest by ensuring that they are not fully  constrained by the concession and are still able to provide transportation  infrastructure (see table 5). This flexibility has been achieved in part by  avoiding fully restrictive noncompete clauses. Since Orange County  bought back the SR-91 managed lanes because it was no longer willing to  be bound by the restrictive noncompete clause it originally agreed to,  governments entering into highway public-private partnerships have  sought to avoid such restrictive clauses. Some more recent noncompete  clauses can be referred to as “compensation clauses” because they require  that the public sector compensate the concessionaire if the public sector  proceeds (in certain instances) with an unplanned project that might take  revenues from the concessionaire’s toll road. For example, for the State  Highway 130 concession in Texas, both the positive and negative impacts  that new public roads will have on the toll road will be determined and,  potentially, Texas DOT will compensate the concessionaire for losses of  revenues on the concession toll road. However, that payment might be  counterbalanced by Texas DOT receiving credits for new publicly  constructed roads that are demonstrated to increase traffic on the  concession toll road. Additionally, according to the Texas DOT, on the  State Highway 130 concession, projects already on the state’s 20-year  transportation plan when the concession was signed are exempt from any  such provisions. Certain other projects are also exempt, such as  expansions or safety improvements made to I-35 (a parallel existing  highway on the Interstate Highway System); any local, city, or county  improvements; or, any multimodal rail projects. According to the Texas  DOT, in no case is it, or any other governmental authority, precluded from  building necessary infrastructure. A noncompete clause lowers potential  competition from other roadways for a private concessionaire, thereby  increasing their potential revenues. Therefore, a contract without any  noncompete provisions, all else equal, is likely to attract lower concession  payments from the private sector.
According to an Indiana official, a noncompete clause for the Indiana Toll  Road requires the state to compensate the concessionaire an amount equal  to the concessionaire’s lost revenue from a new highway if the state  constructs a new interstate quality highway with 20 or more continuous  miles within 10 miles of the Indiana Toll Road. Indiana officials told us  that the concession agreement for the Indiana Toll Road does not prevent  the state from building competing facilities and provides great latitude in  maintaining and expanding the state’s transportation network around the  toll road and that they do not expect this restriction to place serious  constraints on necessary work near the toll road. Others have suggested  that the state could face difficulties if toll rates on the Indiana Toll Road  begin to divert significant levels of traffic to surrounding roads. In such a  case, the state could be constrained in making necessary improvements or  constructing new facilities to handle the additional traffic. City of Chicago  officials did not sign a noncompete provision in the Chicago Skyway  contract. While city officials decided not to have a noncompete provision  in order to keep their options open for future work they might find  necessary, city officials told us that the concessionaire agreed to a lease  agreement without such a provision because geographic limitations (the  Chicago Skyway being located in a very heavily developed urban area and  close to Lake Michigan) make construction of a competing facility very  unlikely.
Spanish officials told us that they preserve flexibility by retaining the  ability to renegotiate a concession agreement if it is in the public interest  to do so. They referred to this as “rebalancing” a concession agreement.  For example, if the government believes that adding capacity to a certain  concession highway is in the public interest, it can require the  concessionaire to do so as long as the government provides adequate  compensation for the loss of revenues. Likewise, the government may  rebalance a contract with a concessionaire if, for example, traffic is below  forecasted levels, to help restore economic balance to the concession. In  this case, the government might offer an extension to the concession term  to allow the concessionaire more time to recover its investments. An  executive of one concessionaire in Spain told us that it is important for the  government to have that ability of renegotiation and concessionaires  generally agree to the government’s requests.
section_title: Workforce
paragraphs: Protection of the public interest has also extended to the workforce, and  concession provisions have been used in this area as well. In some cases,  public sector agencies entering into highway public-private partnerships  with existing toll roads have contractually protected the interest of the  existing toll road workforce by ensuring that workers are able to retain  their jobs, or are offered employment elsewhere. Some public sector  agencies have also addressed benefits issues. For example, in the Chicago  Skyway concession there were 105 city employees when the concession  began. According to the concession agreement, the city required the  concessionaire to (1) comply with a living wage requirement; (2) pay  prevailing wages for all construction activities; and (3) make its best effort  to interview (if requested), though not necessarily offer employment to, all  Chicago Skyway employees for jobs before the asset was transferred. A  Chicago official told us that once the concessionaire commenced  operation five employees chose to maintain employment with the Chicago  Skyway, while 100 took other city jobs. Those employees that took other  city jobs retained their previous benefits.
The state of Indiana also used concession provisions to help protect the  workforce on the Indiana Toll Road. According to the concession  agreement, these provisions required the concessionaire to follow certain  laws such as nondiscrimination laws and minority-owned business  requirements. Indiana officials told us that, prior to the lease agreement,  the Governor of Indiana had made a commitment that each Indiana Toll  Road employee would either be offered a job with the private concession  company or with the state without a reduction in pay or benefits occurring  with the new job. According to the Indiana DOT, all employees of the  Indiana Toll Road (about 550 employees at the time the lease agreement  commenced) were interviewed by the concessionaire; and about 85  percent of the employees transitioned to the private operator, but did so at  equal or higher pay. According to an official with the toll road  concessionaire, the average wages of an Indiana Toll Road employee  increased from $11.00 per hour to between $13.55 and $16.00 per hour.  Indiana officials indicated about 115 employees were offered placement  with the state of Indiana and those that retained employment with merit or  nonmerit state agencies maintained all outstanding vacation and sick time.  Those toll road employees that left state agencies (including moving to the  concessionaire) were paid for outstanding vacation time they had accrued,  up to 225 hours. Indiana officials also indicated that, although those  employees that left state agencies no longer are part of the state’s pension  plan, their contributions and their vested state contributions were  preserved, and these employees are now offered a 401(k) plan by the  concessionaire.
Another highway public-private partnership we examined, the TTC,  involved new construction and, at the time of our review, had not yet  reached the point of a concession. Oregon also involved new construction  and was not at the point of a concession. Unlike existing facilities, new  construction does not involve an existing workforce that could lose its  jobs or face significantly different terms of work when the private sector  takes over operations. However, concession terms can be used to protect  the future workforce that is hired to construct and operate a highway built  with a highway public-private partnership. For example, in a different  highway public-private partnership project in Texas that has signed a  concession, State Highway 130, segments 5 and 6, the concession  agreement states that prevailing wage rates will be set by the Texas DOT  and that the concessionaire should meet goals related to the hiring of  women, minorities, and disadvantaged business enterprises. According to  the Texas DOT, the concessionaire is also required to establish and  implement a small business mentoring program.
Other countries have also acted to protect employees in highway public- private partnerships. For example, the United Kingdom has taken actions  to ensure that the value gained in its highway public-private partnership  projects is not done so at the expense of its workforce. According to the  United Kingdom’s Code of Practice on workforce matters, new and  transferred employees of private concessionaires are to be offered “fair  and reasonable” employment conditions, including membership in a  pension plan which is at least equivalent to the public sector pension  scheme that would apply. According to an official with the United  Kingdom Treasury Department, this Code of Practice has been agreed to  by both employers and trade unions and was implemented in 2003.
section_title: Oversight and Monitoring of Concessions
paragraphs: The public sector also undertakes oversight and monitoring of  concessionaires to ensure that they fulfill their obligations to protect the  public interest. Such mechanisms can both identify when requirements are  not being met, and also provide evidence to seek remediation when the  private sector does not do so. In Indiana, an Indiana Toll Road Oversight  Board was created as an advisory board composed of both state  employees and private citizens to review the performance and operations  of the concessionaire and potentially identify cases of noncompliance.  This Oversight Board meets on at least a quarterly basis and has discussed  items dealing with traffic incidents, concerns raised by state residents and  constituents, and the implementation of electronic tolling on the facility.  The Chicago Skyway concession also incorporates oversight. Oversight  includes reviewing various reports, such as financial statements and  incident reports filed by the concessionaire, and hiring independent  engineers to oversee the concessionaire’s construction projects. In both  Indiana and Chicago the concessionaire reimburses the public sector for  oversight and monitoring costs—in Indiana up to $150,000 per year  adjusted for inflation.
Oversight and monitoring also encompass penalties if a concessionaire  breaches its obligations. For example, the highway public-private  partnership contracts in Chicago and Indiana allow the public sector to  ultimately regain control of the asset at no cost if the concessionaire is in  material breach of contract. Additionally, the public sector has sometimes  retained the ability to issue fines or citations to concessionaires for  nonperformance. For example, according to the Texas DOT, in Texas an  independent engineer will be assigned to the TTC concessionaire who will  be able to issue “demerits” to the concessionaire for not meeting  performance standards. These demerits, if not remedied, could lead to  concessionaire default.
Foreign governments have also taken steps to provide oversight and  monitoring of concessionaires. In Spain, the Ministry of Public Works  assigns public engineers to each concession to monitor performance.  These engineers not only monitor performance during construction to  ensure that work is being done properly, but also monitor performance  during operation. They do so by recording user complaints and incidents  in which the concessionaire does not comply with the terms of the  concession. Accountability and oversight mechanisms have also been  incorporated in Australian concessions. In both Victoria and New South  Wales, projects must demonstrate that they incorporate adequate  information to the public on the obligations of the public and private  sectors and that there are oversight mechanisms. In some instances, a  separate statutory body, which may be chaired by a person outside of  government, provides oversight, as was done on the CityLink toll road in  Melbourne, Australia. Officials with a private concessionaire in Australia  told us that they generally meet monthly with the state Road and Traffic  Authority to review concession performance. In addition, both the Victoria  and New South Wales Auditor Generals are also involved with oversight.  In both states the Auditor General reviews the contracts of approved  highway public-private partnerships. In New South Wales, the law requires  publication of these reviews and contract summaries. In Victoria,  government policy requires publication of the contracts, together with  project summaries, including information regarding public interest  considerations.
section_title: Financial Analyses and Bidding Processes Have Also Been Used to Protect the Public Interest
paragraphs: Governments have also used financial analyses, such as asset valuations,  and procurement processes to protect the public interest. We found that  states and local governments entering into the two existing highway  public-private partnerships that we reviewed largely limited their analyses  to asset valuation. For example, both the city of Chicago and the state of  Indiana hired consultants to value the Chicago Skyway and the Indiana  Toll Road, respectively, before signing concessions for these assets. In  Indiana, the state’s consultant performed a net present valuation of the toll  road that determined that the toll road was worth about $2 billion to the  state. Because the winning bid of $3.85 billion that the state received was  far more than the consultant’s assessed value, Indiana used that valuation  to justify that the transaction was in the public interest. The assistant  budget director for Chicago told us that in Chicago an analysis showed the  city could leverage only between $800 and $900 million from the toll road.  The officials then compared that amount to the $1.8 billion that the city  received from the winning bidder and determined that the concession was  in the public interest. Both valuations assumed that future toll rates would  increase only to a limited extent under public control.
Additionally, steps have been taken to protect the public interest through  procurement processes. Both Chicago and Indiana used an auction  bidding process in which qualified bidders were presented with the same  contract and bid on the same terms. This process ensured that the winning  bidder would be selected on price alone (the highest concession fee  offered) since all other important factors and public interest  considerations—such as performance standards and toll rate standards— would be the same for all bidders. Texas has also taken steps to protect  the public interest through the procurement process for the TTC. While  the Texas DOT signed the comprehensive development agreement with a  private concessionaire for the TTC-35, it does not guarantee that the  private firm will be awarded the concession for any segment of the TTC.  All segments may be put out for competitive procurement; and, while the  master development concessionaire has a right of first negotiation for  some segments, it must negotiate with Texas and present a detailed facility  plan. Additionally, according to the Texas DOT, the concessionaire is  required to put together a facility implementation plan that, among other  things, analyzes the projected budget and recommends a method for  project delivery.
section_title: Foreign Governments Have Developed Public Interest Criteria and Assessment Tools
paragraphs: Some foreign governments have recognized the importance of public  interest issues in public-private partnerships and have taken a systematic  approach to these issues. This includes developing processes, procedures,  and criteria for defining and assessing elements of the public interest and  developing tools to evaluate the public interest of public-private  partnerships. These tools include the use of qualitative public interest tests  and criteria to consider when entering into public-private partnerships, as  well as quantitative tests such as Value for Money (VfM) and PSCs, which  are used to evaluate if entering into a project as a public-private  partnership is the best procurement option available. According to a  document from one state government in Australia (New South Wales),  guidelines for private financing of infrastructure projects (which includes  the development of public interest evaluation tools) supports the  government’s commitment to provide the best practicable level of public  services by providing a consistent, efficient, transparent, and accountable  set of processes and procedures to select, assess, and implement privately  financed projects.
Some governments have laid out elements of the public interest in public- private partnerships and criteria for how those elements should be  considered when entering into such agreements. These steps help ensure  that major public interest issues are transparently considered in the  public-private partnerships from the outset of the process, including  highway public-private partnerships. For example, the state of Victoria in  Australia requires all proposed public-private partnership projects to  evaluate eight aspects of the public interest to determine how they would  be affected. These eight aspects include the following:    Effectiveness. Whether the project is effective in meeting the government’s  objectives. Those objectives must be clearly determined.
Accountability and transparency. Whether public-private partnership  arrangements ensure that communities are informed about both public  and private sector obligations and that there is oversight of projects.
Affected individuals and communities. Whether those affected by public- private partnerships have been able to effectively contribute during the  planning stages and whether their rights are protected through appeals  and conflict resolution mechanisms.
Equity. Whether disadvantaged groups can effectively use the  infrastructure.
Public access. Whether there are safeguards to ensure public access to  essential infrastructure.
Consumer rights. Whether projects provide safeguards for consumers,  especially those for which the government has a high level of duty of care  or are most vulnerable.
Safety and security. Whether projects provide assurance that community  health and safety will be secured.
Privacy. Whether projects adequately protect users’ rights to privacy.
Similarly, the government of New South Wales, Australia, also formally  considers the public interest before entering into public-private  partnerships. Public interest focuses on eight factors that are similar to  Victoria’s: effectiveness in meeting government objectives, VfM,  community consultation, consumer rights, accountability and  transparency, public access, health and safety, and privacy. The public  interest evaluation is conducted up front prior to proceeding to the market  and is updated frequently, including prior to the call for detailed proposals,  after finalizing the evaluation of proposals, and prior to the government  signing contract documents.
Additionally, foreign governments have also used quantitative tests to  identify and evaluate the public interest and determine if entering into a  project as a public-private partnership is the best option and delivers value  to the public. In general, VfM evaluations examine total project costs and  benefits and are used by some governments to determine if a public- private partnership approach is in the public interest for a given project.  VfM tests are often done through a PSC, which compares the costs of  doing a proposed public-private partnership project against the costs of  doing that project through a public delivery model. VfM tests examine  more than the financial value of a project and will examine factors that are  hard to quantify, such as design quality and functionality, quality in  construction, and the value of unquantifiable risks transferred to the  private sector. VfM tests are commonly used in Australia, the United  Kingdom, and British Columbia, Canada.
PSCs are often used as part of VfM tests. Generally speaking, a PSC test  examines life-cycle project costs, including initial construction costs,  maintenance and operation costs, and additional capital improvement  costs that will be incurred over the course of the concession term. A PSC  can also look at the value of various types of risk transfer to the private  sector, whereby the more risk transferred to the private sector the more  value to the public sector. For example, in the United Kingdom, use of the  PSCs is mandated for all public-private partnership projects at both the  national as well as local levels. British Columbia, Canada, also conducts a  PSC for all public-private partnership proposals that compares the full life- cycle costs of procuring the proposed project as a public-private  partnership, compared with a traditional design-bid-build approach. The  British Columbia PSC not only compares the project costs but also  evaluates the value of various risks. According to a Partnerships British  Columbia official, the more risk transferred from the public to the private  sector in a public-private partnership proposal, all else being equal, the  better the value for the public. For example, this official said that the PSC  they use will value a certain level of construction risk and determine the  value (based on the costs and probability of that risk occurring) to the  public sector of having the private sector assume that risk through a  public-private partnership. The Partnerships British Columbia official also  told us that the values of risks occurring are often not included in  traditional public cost estimates, which is a reason that cost overruns are  so common in public sector infrastructure projects. British Columbia uses  the results of PSCs to help determine a project’s procurement method. An  official with British Columbia told us that many projects have been done  through a traditional public procurement rather than privately because the  results of the PSCs indicated that there was not enough value for money in  the private approach.
Although PSCs can be helpful in identifying and evaluating the public  interest, they have limitations. According to officials in Australia, Canada,  and the United Kingdom, PSCs are composed of numerous assumptions,  as well as projections years into the future. PSCs may have difficulty  modeling long-term events and reliably estimating costs. Additionally,  discount rates used in PSCs to calculate the present value of future  streams of revenue may be arbitrarily chosen by the procuring authority if  not mandated by the government. Officials with the Audit Office of New  South Wales, Australia, raised similar concerns and said the volume and  volatility of assumptions raise questions about the validity and accuracy of  PSCs. A government official with the U.K. told us that a limitation of its  PSC is that it is a generic tool that applies to all privately financed  projects, from transportation to hospitals, and therefore, there are some  standard assumptions built into the model that may not be accurate for a  transportation project. The official added that the government is  considering working on creating a sector-specific PSC. However, despite  these concerns there was general agreement among those with whom we  talked that PSCs are useful tools.
While foreign governments may have extensive experience using PSCs and  other public interest assessment tools, these tools continue to evolve  based on experience and lessons learned. The use of formal tools and  processes also does not guarantee that highway public-private  partnerships will not face significant challenges and problems. For  example, although a document we reviewed indicated that a formal  assessment process and PSC was used to evaluate the Cross City Tunnel in  Sydney, Australia, before it was built and operated through a concession  agreement, this evaluation did not prevent the problems of low traffic,  public opposition to the toll road, and bankruptcy that were discussed  earlier in this report. The problems experienced led to changes in how  public-private projects will be handled and evaluated in the future.  According to the Director of the New South Wales Department of Treasury  and Finance, one of the big lessons learned from the Cross City Tunnel  experience was the importance of public outreach and communication.  Documents from the New South Wales government also showed that  public interest tools were strengthened. For example, in December 2006,  the New South Wales guidelines for public-private partnerships were  updated to, among other things, strengthen VfM tests by conducting them  from the perspective of the user or taxpayer and requiring updates of the  tests through the tender process. In addition, the New South Wales  Department of Treasury and Finance issued new guidance on how to  determine appropriate discount rates—an important component of PSCs.  Evolution of tools has occurred in other countries as well. According to an  official with British Columbia, the methodology of their PSC tests is  reviewed by an independent auditor, and improvements to the  methodology are continually made. Change in public interest evaluation  tools has also occurred elsewhere. According to an official with the United  Kingdom Treasury Department, after criticism about potential VfM  benefits and the use of PSC models developed by consultants, the United  Kingdom has moved from an advisor-driven PSC to a Treasury-driven two- part, four-stage VfM model that involves a simple spreadsheet and  qualitative assessment. Even this new model is being considered for  change due to complex contracting issues.
section_title: Use of Formal Public Interest Processes and Tools in the United States Are More Limited
paragraphs: We found a more limited use of systematic, formal processes and  approaches to the identification and assessment of public interest issues in  the United States. Both Oregon and Texas have used forms of PSCs. For  example, Oregon hired a consultant to develop a PSC that compared the  estimated costs of the private sector proposal for the Newburg-Dundee  project with a model of the public sector’s undertaking the project, using  various public financing sources, including municipal debt and TIFIA  loans. According to the Innovative Partnerships Project Director in the  Oregon DOT, the results of this model were used to determine that the  added costs of undertaking the project as a public-private partnership  (given the need for a return on investment by the private investors) were  not justifiable given the limited value of risk transfer in the project. While  this PSC was conducted before the project was put out for official  concession, the PSC was prepared after substantial early development  work was done by private partners.
Similar to a PSC, Texas has developed “shadow bids” for two highway  public-private partnerships in the state. These shadow bids included  detailed estimates of design and construction costs, as well as operating  costs and a detailed financial model, the results of which were compared  against private sector proposals. While the model used by Texas is unique  to each individual project, the methodology used (such as the estimation  of future costs) is similar. In addition, the Director of the Texas Turnpike  Authority of the Texas DOT told us that, while there are no statutory or  regulatory provisions defining the public interest in public-private  partnerships, when procuring public-private partnerships, the department  develops specific evaluation procedures and criteria for that specific  procurement, as well as contract provisions that are determined to be in  the interests of the state. Public-private partnership proposals the  department receives are then evaluated against those project criteria.  However, these criteria are project-specific, and there are no standard  criteria that are equally applied to all projects.
Neither Chicago nor Indiana had developed public interest tests or used  PSCs prior to leasing of the Chicago Skyway or the Indiana Toll Road.  Instead, analyses for these deals were largely focused on asset valuation  and development of specific concession terms. Other state and local  governments we spoke with said they have limited experience with using  formal public interest criteria tools and tests. For example, the Chief  Financial Officer of the California DOT told us that while the department  is currently working with the California Transportation Commission to  develop guidelines for public interest issues, this effort has not been  finalized. Additionally, officials in New Jersey and Pennsylvania, two  states that are exploring options, including private involvement, to better  leverage existing toll roads, said that they have not yet created any formal  public interest criteria or assessment tools such as PSCs. An official with  the Illinois DOT also said that his state had not yet developed public  interest criteria or assessment tools.
Not using formal public interest tests and tools means that aspects of the  public interest can potentially be overlooked. For example, because VfM  tests can allow the government to analyze the benefits and costs of doing a  project as a public-private partnership, as opposed to other more  traditional methods, not using such a test might mean that potential future  toll revenues from public control of toll roads are not adequately  considered. Neither Chicago nor Indiana gave serious consideration to the  potential toll revenues they could earn by retaining control over their toll  roads. In contrast, Harris County, Texas, in 2006 conducted a broad  analysis of options for its public toll road system. This analysis was  somewhat analogous to a VfM test. The analysis evaluated and conducted  an asset valuation under three possible scenarios, including public control  and a concession. This analysis was used by the county to conclude that it  would gain little through a long-term concession and that through a more  aggressive tolling approach, the county could retain control of the system  and realize similar financial gains to those that might be realized through a  concession.
Since public interest criteria and assessment tools generally mandate that  certain aspects of the public interest are considered in public-private  partnerships, if these criteria and tools are not used, then aspects of public  interest might be overlooked. These aspects include such things as the  following:    Transparency. According to documents we reviewed, both Victoria and  New South Wales, Australia, require transparency in public-private  partnership projects so that communities and the public are well informed.
Officials in Toronto, Canada, however, told us there was no such  requirement and a lack of transparency about the 407 ETR concession— including information about the toll rate structure—meant that some  people did not understand the objectives of the concession, as well as the  tolling structure, and led to significant opposition to the project. The  former Director of the Indiana Office of Management and Budget (OMB)  told us that the Indiana legislature, as well as others, complained that the  Indiana Toll Road lease was done in “secrecy.”
Consideration of communities and affected interests. Local and regional  governments believe that there was limited coordination with them as well  as the public on the TTC project. This lack of consideration of local and  regional interests and concerns led to opposition by local and regional  governments. That reaction helped drive statewide legislation that requires  the state to involve local and regional governments to a greater extent in  public-private partnerships. While Chicago considered the city’s interests  in the Chicago Skyway lease, it did not necessarily consider the interests  of other parties, such as regional mobility. The Executive Director of the  Chicago Metropolitan Agency for Planning (the metropolitan planning  organization for the greater Chicago area) told us that regional interest  issues, such as the traffic diversion onto local streets that might occur as a  result of higher tolls on the Chicago Skyway, were not addressed in  consideration of the lease. He added that, as a result, other routes near the  Chicago Skyway might not be able to absorb the diverted traffic, causing  regional mobility problems.
The use of formal public interest tests can also allow public agencies to  evaluate the projected benefits, as well as the costs and trade-offs, of  public-private partnerships. In addition, such tests can help determine  whether or not the benefits outweigh the costs and if proceeding with the  project as a partnership is the superior model, or if conducting the project  through another type of procurement and financing model is better.
section_title: Direct Federal Involvement with Highway Public- Private Partnerships Has Generally Been Limited, but Identification of National Interests in Highway Public- Private Partnerships Has Been Lacking
paragraphs: Direct federal involvement in highway public-private partnerships has  generally been limited to projects in which federal requirements must be  followed because federal funds have or will be used. While federal funding  in highway public-private partnerships to date has been limited, the  administration and DOT have actively promoted such partnerships  through policies and practices, including developing experimental  programs that waive certain federal regulations and encourage private  investment. Although federal involvement with highway public-private  partnerships is largely limited to situations where there is direct federal  investment, recent highway public-private partnerships may, or could,  have implications on national interests such as interstate commerce and  homeland security. However, FHWA has given little consideration of  potential national public interests in highway public-private partnerships.  We have called for a fundamental reexamination of federal programs,  including the highway program to identify specific national interests in the  transportation system to help restructure existing programs to meet  articulated goals and needs. This reexamination would provide an  opportunity to define any national public interest in highway public- private partnerships and develop guidance for how such interests can best  be protected. The increasing role of the private sector in financing and  operating transportation infrastructure raises potential issues of national  public interest. We also found that highway public-private partnerships  that have, or will, use federal funds and involve tolling may be required by  law to use excess toll revenues (revenues that are beyond that needed for  debt service, a reasonable return on investment to a private party, and  operation and maintenance) for projects eligible for federal transportation  funding. However, the methodology for calculating excess toll revenues is  not clear.
subsections: section_title: Direct Federal Involvement in Highway Public-Private Partnerships Has Generally Been Limited to Projects in Which Federal Funds Have Been Invested
paragraphs: Direct federal involvement in highway public-private partnership projects  is generally determined by whether or not federal funds were or will be  involved in a highway project. As a result, FHWA has had a somewhat  different involvement in each of the four U.S. highway public-private  partnership projects we reviewed.
subsections: section_title: Indiana Toll Road
paragraphs: Since June 2006, the Indiana Toll Road has been operated by a private  concessionaire under a 75-year lease. The Indiana Toll Road was  constructed primarily with state funds and then incorporated into the  Interstate Highway System. Although about $1.9 million in federal funds  were used to build certain interchanges on the highway, Indiana  subsequently repaid these funds. FHWA officials told us they did not  review the lease of the highway to the private sector because there were  no federal funds involved and no obligation on FHWA under title 23 of the  U.S.C. to do so.
section_title: Chicago Skyway
paragraphs: The Chicago Skyway was leased in October 2004 to a private  concessionaire. FHWA officials told us that they did not review the  Chicago Skyway lease agreement before it was signed. Only a limited  amount of federal funding was invested in the Chicago Skyway. According  to FHWA, the state of Illinois received about $1 million in 1961 to  construct an off-ramp from the Chicago Skyway to Interstate 94. In  addition, about $14 million in federal funds were received in 1991 through  an earmark in ISTEA. The Assistant Budget Director for Chicago told us  the latter was for painting and various other improvements. FHWA  officials stated that since the lease transaction did not involve any new  expenditure of federal funds, there was no requirement that FHWA review  and approve the lease before it was executed. According to FHWA  officials, FHWA’s primary role in the transaction was the modification of a  1961 toll agreement to allow Chicago to continue collecting tolls on the  facility.
However, because federal funds were involved, FHWA did determine that  two portions of federal law were applicable, one governing how proceeds  from the lease of the asset—the up-front payment of $1.8 billion—were  used and the other governing use of toll revenues.
Use of lease proceeds. Proceeds from the lease of property acquired, even  in part, with federal funds would be governed by section 156 of title 23  U.S.C. This section requires that states charge fair market value for the  sale or lease of such assets and that the percentage of the income from the  proceeds obtained from a sale or lease that represents the federal share of  the initial investment (about $15 million in this case) be used by the state  for title 23 eligible projects. Title 23 eligible projects can include  construction of new transportation infrastructure. According to FHWA,  the federal share in the Chicago Skyway ranged between 0.88 percent and  2.95 percent, depending on whether money from the ISTEA earmark was  considered an addition to the real property or not and assuming control  over the I-94 connector had been transferred to the contractor. Title 23 of  the U.S.C. covers a broad range of activities that are eligible for federal-aid  highway funds, including reconstruction, restoration, rehabilitation, and  resurfacing activities and the payment of debt service for a title 23 eligible  project. FHWA determined that Chicago met its obligations under title 23  section 156 merely by retiring the Chicago Skyway debt ($392 million or  nearly 25 percent of the lease proceeds).
Use of toll revenue. When tolling is allowed on federally funded highways,  the use of toll revenues is generally governed by section 129 of title 23  U.S.C. Under section 129, toll revenue must first be used for (1) debt  service, (2) to provide a reasonable return on investment to any private  party financing a project, and (3) the operations and maintenance of the  toll facility. If there are any revenues in excess of these uses, and if the  state or public authority certifies that the facility is adequately maintained,  then the state or public authority may use any excess revenues for any title  23 eligible purpose. According to FHWA, since federal funds were  expended in the Chicago Skyway, a toll agreement has been executed  between FHWA, the Illinois DOT, city of Chicago, and Cook County  providing that the toll revenues will be used in accordance with title 23  section 129.
Although FHWA determined that provisions governing excess toll  revenues were met, it did not independently determine whether the rate of  return to private investors would be reasonable. The rate of return is a  critical component in determining whether excess revenues exist or not.  According to FHWA officials there is no standard definition of what  constitutes a “reasonable rate of return.” Therefore, FHWA concluded it  had no basis to evaluate the reasonableness of the return. In addition,  FHWA officials stated that under guidance issued by the agency’s  Executive Director in 1995, the reasonableness of rate of return to a  private investor is a matter to be determined by the state. FHWA officials  said they relied on assurances from the city of Chicago that the rate of  return was reasonable. According to DOT officials, FHWA determined that  since the value of a concession was established through fair and open  competitive procedures, the rate of return should be deemed to be  reasonable. A review of the concession agreement indicates that the lease  agreement was expected by the city of Chicago to “produce a reasonable  return to the private operator” and that the city pledged “not to alter or  revoke that determination” over the 99-year period of the lease. The  Assistant Budget Director for Chicago also told us that the rates of return  will be reasonable because a competitive bid process was used prior to  signing a lease and that the concession agreement contains limitations of  how much tolls can change over time—an important limitation since toll  levels can significantly affect rates of return.
FHWA officials have recognized that concession arrangements governing  facilities paid for largely with federal funds face a more difficult time  meeting the requirements of sections 156 and 129 of title 23. For example,  if a state received a $1 billion up-front payment to lease a highway built  with 80 percent federal funds, the state would be required to invest $800  million of that payment in other title 23 eligible projects.
section_title: Trans-Texas Corridor
paragraphs: According to the Director of the Texas Turnpike Authority Division of the  Texas DOT, Texas’s intent is to make all transportation infrastructure  projects eligible for federal aid whenever possible. While at the time of our  review no federal funds had been expended on the Trans-Texas Corridor  (TTC-35) project, Texas is considering using federal funds to complete  parts of the corridor.
For the project to be eligible for federal funds, unless otherwise specified  by FHWA, it must meet all federal requirements, including the  environmental review process required under NEPA. The TTC-35 project  is currently undergoing a two-tiered review process under NEPA. In Tier I,  the Texas DOT has identified a potential 10-mile wide corridor through  which the actual corridor will run, completed a draft environmental  impact statement, which evaluates the impact of the project on the local  and regional environment, and is awaiting federal approval through a  record of decision. The record of decision, among other things, identifies  the preferred alternative and provides information on the adopted means  to avoid, minimize, and compensate for environmental impacts. The Tier I  process is expected to be completed by early 2008. Tier II of the process  will be used to determine the actual alignment of the road or rail line and  will be completed in several parts for each facility, or unique segment of  the facility. This process, like Tier I, includes identification of specific  corridor segments, solicitation of public comments for each segment, and  final approval, which will authorize construction. As we reported in 2003,  environmental impact statements on federally funded highway projects  take an average of 5 years to complete, according to FHWA.
The state of Texas has also entered into a Special Experimental Project  No. 15 (SEP-15) agreement with FHWA for the TTC-35. According to  FHWA, under this agreement FHWA has permitted the Texas DOT to  release a request for proposals (RFP) and award the design-build contract  prior to completion of the environmental review process. This sequence  would not have been allowed under federal highway regulations existing  at the time. In accordance with the SEP-15 agreement, Texas entered into  a contract with a private sector consortium to prepare a Master  Development Plan for the TTC-35 and to assist in preparing environmental  documents and analyses. The Master Development Plan is intended to help  the state identify potential development options for the TTC-35 and to  begin predevelopment work related to the project. The Master  Development Plan also allows the private consortium to develop other  highway facilities. In conjunction with this agreement, in March 2007, the  private consortium was awarded a 50-year concession to construct,  finance, operate and maintain State Highway 130, segments 5 and 6 (a  highway that is expected to connect to the TTC-35).
section_title: Oregon
paragraphs: Similar to Texas, the Oregon Innovative Public-Private Partnerships  Program is a program for the planning, acquisition, financing,  development, design, construction, and operation of transportation  projects in Oregon using the private sector as participants. Three projects  have been identified under this program: (1) a potential widening of a 10- mile section of Interstate 205 (I-205) in the Portland area, (2) development  of highways east of Portland serving existing industrial development and  future residential and commercial development (called the Sunrise  Corridor), and (3) construction of an 11-mile highway in the Newberg- Dundee corridor.
Oregon sought and received an FHWA SEP-15 approval for these projects.  According to FHWA, the SEP-15 approval was to provide the Oregon DOT  the flexibility to release an RFP and award a design-build contract prior to  completion of the environmental review process, which was not permitted  under federal highway regulations at the time. As discussed above, this  requirement has changed. Subsequent to the SEP-15 approval, in October  2005, the state entered into an Early Development Agreement with FHWA  that also permitted the state to engage the private sector in  predevelopment activities prior to completion of the environmental review  process. In January 2006, Oregon entered into preliminary development  agreements with a private sector partner (Oregon Transportation  Improvement Group) to proceed with predevelopment work on the three  proposed projects. As of January 2007, Oregon had decided not to pursue  the Sunrise Corridor project because it determined that projected toll  revenue was not enough to cover the cost of operation or construction.  Rather, Oregon plans to seek traditional funding sources. In July 2007, the  state announced that it and the Oregon Transportation Improvement  Group had ceased pursuing public-private development of the Newberg- Dundee project. According to the Oregon Department of Transportation,  as of November 2007, the third project (I-205 lane widening) was not yet in  the regional transportation plan but was expected to be added to the plan  without difficulty. As of May 2007, federal funding ($20.9 million) had been  used for such things as environmental assessment, planning, and right-of- way acquisition on the Newberg-Dundee project.
section_title: Federal Government Encourages and Promotes Highway Public-Private Partnerships through Policy and Practice
paragraphs: Although federal involvement with highway projects and highway public- private partnerships is largely governed by whether there is a direct  federal investment in a project or not, the administration and DOT have  actively encouraged and promoted the use of highway public-private  partnerships. This effort has been accomplished through both policies and  practices such as developing SEP-14 and SEP-15 procedures and preparing  various publications and educational material on highway public-private  partnerships.
subsections: section_title: Administration and DOT Actively Encourage and Promote Highway Public- Private Partnerships
paragraphs: Encouraging highway public-private partnerships is a federal  governmentwide initiative articulated in the President’s Management  Agenda and implemented through the Office of Management and Budget  (OMB). OMB promotes, among other things, increasing the level of  competition from the private sector for services traditionally done by the  public sector. DOT has followed this lead by incorporating highway public- private partnerships into its own policy statements. Its May 2006 National  Strategy to Reduce Congestion on America’s Transportation Network  states that the federal government should “remove or reduce barriers to  private investment in the construction or operation of transportation  infrastructure.”
FHWA has used its administrative flexibility to develop three experimental  programs to allow more private sector participation in federally funded  highway projects. The first, SEP No. 14, or SEP-14, has been in place since  1990 to permit contracting techniques to be employed that deviate from  the competitive bidding provisions of federal law required for any highway  built with federal funds. As those techniques have been approved for  widespread use by FHWA since its enactment, the program has changed to  allow other alternative contracting techniques, such as best value  contractor selection and the transfer of construction risk to the private  construction contractor. States have used the techniques allowed under  SEP-14 to allow more private sector involvement in building and  maintaining transportation infrastructure than under traditional  procurement methods. For example, states used design-build contracting  in almost 300 different construction and maintenance projects that were  approved by FHWA between 1992 and 2003, including repavement of  existing roads, bridge rehabilitation and replacement, and construction of  additional highway lanes.
The second experimental program, the Innovative Finance Test and  Evaluation Program (TE-045), was established in April 1994. This program  was initially designed and subsequently operated to give states a forum in  which to propose and test those concepts that best met their needs. Since  TE-045 did not make any new money available, its primary focus was to  foster the identification and implementation of new, flexible strategies to  overcome fiscal, institutional, and administrative obstacles faced in  funding transportation projects. States were encouraged to consider a  number of areas in developing proposals under the program, including  income generation possibilities for highway projects and alternative  revenue sources, which could be pledged to repay highway debt. States  were also encouraged to consider the use of federal-aid to promote  highway public-private partnerships. According to FHWA, several types of  financing tools were proposed by states and tested under TE-045. These  included tools that provided expanded roles for the private sector in  identifying and providing financing for projects, such as flexible matches  and section 129 project loans.
The third experimental program, SEP No. 15, or SEP-15, is broad in scope  and was designed to facilitate highway public-private partnerships and  other types of innovation in the federal-aid highway process. SEP-15  allows for the modification of FHWA policy and procedure, where  appropriate, in four different areas: contracting, compliance with  environmental requirements, right-of-way acquisition, and project finance.  According to FHWA, SEP-15 enables FHWA officials to review state  transportation projects on a case-by-case basis to “increase project  management flexibility, encourage innovation, improve timely project  construction, and generate new revenue streams for federal-aid  transportation projects.” While this program does not eliminate overall  federal-aid highway requirements, it is designed to allow FHWA to develop  procedures and approaches to reduce impediments to states’ use of  public-private partnerships in highway-related and other transportation  projects. Table 6 summarizes the highway projects in which FHWA has  granted SEP-15 approvals.
The SEP-15 flexibilities have been pivotal to allowing highway public- private partnership arrangements we reviewed in Texas and Oregon to go  forward while remaining eligible for federal funds. For example, until  August 2007, federal regulations did not allow private contractors to be  involved in highway design-build contracts with a state department of  transportation until after the federally mandated environmental review  process under NEPA had been completed. The Texas DOT applied for a  waiver of this regulation under SEP-15 for its TTC project to allow its  private contractor to start drafting a comprehensive development plan to  guide decisions about the future of the corridor before its federal  environmental review was complete. FHWA approved this waiver, which  allowed the contractor’s work to proceed during the environmental review  process and which could ultimately shorten the corridor’s project time  line. According to the Texas DOT, at all times, it and the FHWA maintain  control over the NEPA decision-making process. The developer’s role is  similar to other stakeholders in the project. Similarly, Oregon used the  SEP-15 process to experiment with the concept of contracting with a  developer early in the project development phase for three potential  projects in and around Portland, Oregon. Like Texas, Oregon wanted to  involve the private sector prior to completion of the NEPA process.
section_title: FHWA and DOT Practices Also Promote Highway Public- Private Partnerships
paragraphs: FHWA and DOT have reinforced its legal and policy initiatives with  promotional practices as well. These activities include the following:    Developing publications. Publications include a public-private partnership  manual that has material to educate state transportation officials about  highway public-private partnerships and to promote their use. The manual  includes sections on alternate federal financing options for highway  maintenance and construction and outlines different federal legal  requirements relating to highway public-private partnerships, including the  environmental review process. It also includes a public-private  partnership user guide. The user guide describes the many participants,  stages of development, and factors (such as technical capabilities and  project prioritization and selection criteria and processes) associated with  developing and implementing public-private partnerships for  transportation infrastructure projects.
Drafting model legislation for states to consider to enable highway  public-private partnerships in their states. The model legislation  addresses such subjects as bidding, agreement structure, reversion of the  facility to the state, remedies, bonds, federal funding, and property tax  exemption, among other things.
Creating a public-private partnership Internet Web site. This Web site  serves as a clearinghouse of information to states and other transportation  professionals about public-private partnerships, pertinent federal  regulations, and financing options. It has links to FHWA’s model public- private partnership legislation, summaries of selected highway public- private partnerships, key DOT policy statements, and the FHWA public- private partnership manual, among other things.
Making public presentations. DOT and FHWA officials have made public  speeches and written at least one letter to a state in support of highway  public-private partnerships. For example, when Texas was considering  modifying its public-private partnership statutes, FHWA’s Chief Counsel,  in a letter to the Texas DOT, warned that if Texas lost its initiative on  highway public-private partnerships that “private funds flowing to Texas  will now go elsewhere.” DOT has also provided congressional testimony in  support of highway public-private partnerships. For example, in a recent  testimony to Congress, DOT’s Assistant Secretary of Transportation for  Policy stated that highway public-private partnerships are “one of the most  important trends in transportation” and that DOT “has made expansion of  public-private partnership a key component” in DOT’s on-going  initiatives to reduce congestion and improve performance.
Making tolling a key component of congestion mitigation. Such a  strategy could act to promote highway public-private partnerships since  tolls provide a long-term revenue stream, key to attracting investors.  One  major part of DOT’s May 2006 national strategy to address congestion is  the Urban Partnership Agreement. Under the Urban Partnership  Agreement, DOT and selected metropolitan areas will commit to  aggressive strategies to address congestion. The key component of these  aggressive strategies is tolling and congestion pricing. Congestion pricing  could involve networks of priced lanes on existing highways, variable user  fees on entire roadways, including toll roads and bridges, or area-wide  pricing involving charges on all roads within a congested area.
section_title: National Interests in Highway Public-Private Partnerships Need to Be Identified
paragraphs: Although federal involvement with highway public-private partnerships is  largely limited to situations where there is a direct federal investment,  highway public-private partnerships can have implications on broader  national interests, such as interstate commerce. FHWA officials told us  that various federal laws and requirements that states must follow to  receive federal funds are designed to protect national and public  interests—for example, federally funded projects must receive  environmental approval through the NEPA process. In addition, TIFIA  loans must be investment grade and meet policy considerations they have  some public interest criteria. However, FHWA officials told us that no  specific federal definition of national public interest or federal guidance  on identifying and evaluating national public interest exists. Thus, when  federal funds are not involved in a project, there are few mechanisms to  ensure that national public interests are identified, considered and  protected. As a result, given the minimal federal funding in highway  public-private partnerships we reviewed, little consideration has been  given to potential national public interests in these partnerships.
Recent highway public-private partnerships have involved sizable  investments of funds and significant facilities and suggest that  implications for national public interests exist. For example, both the  Chicago Skyway and the Indiana Toll Road are part of the Interstate  Highway System; the Indiana Toll Road is part of the most direct highway  route between Chicago and New York City and, according to one study,  over 60 percent of its traffic is interstate in nature. However, federal  officials had little involvement in reviewing the terms of either of these  concession agreements before they were signed. In the case of Indiana,  FHWA played no role in reviewing either the lease or national public  interests associated with leasing the highway nor did it require the state of  Indiana to review these interests.  Similarly, development of the TTC may  greatly facilitate North American Free Trade Agreement-related truck  traffic nationwide. Although the TTC is going through the NEPA process,  to date, no federal funding has been expended in the development of the  project. In commenting on a draft of this report, DOT correctly noted that  many of these same issues could be raised if the states involved had  undertaken major projects with potential implications for national  interests as publicly funded projects, using only state funds. Nevertheless,  both state and DOT officials have also asserted that without a public- private partnership, these projects would not have advanced. In addition,  public-private partnerships may present distinct challenges because they  can and have involved long-term commitments of up to 99 years and the  loss of direct public control—issues that are not present in state financed  projects—and the fact that private entities are not accountable to the  public in the same way public agencies are.
The absence of a clear definition of national public interests in the  national transportation system is not unique to highway public-private  partnerships. We have called for a fundamental reexamination of the  federal role in highways and a clear definition of specific national interests  in the system, including in such areas as freight mobility. A fundamental  reexamination of federal surface transportation programs, including the  highway program, presents the opportunity to address emerging needs,  test the relevance of existing policies, and modernize programs for the  twenty-first century. The growing role of the private sector in both  financing and operating highway facilities raises the question of what role  the private sector can and should play in the national transportation  system and whether the presence of federal funding is the right criteria for  federal involvement or whether other considerations should apply. For  example, DOT has recognized the national importance of goods movement  and the challenges of large, multimodal projects that cross state lines by  establishing a “Corridors of the Future” program to encourage states to  think beyond their boundaries in order to reduce congestion on some of  the nation’s most critical trade corridors. DOT plans to facilitate the  development of these corridors by helping project sponsors reduce  institutional and regulatory obstacles associated with multistate and  multimodal corridor investments. Whether such corridors, which could be  seen as being in the national interest, could be developed if portions of  them were under effective private ownership is just one of many questions  that could be addressed in identifying national public interests in general  and public-private partnerships in particular. Once the national interest in  highway public-private partnerships is more clearly defined, then an  appropriate federal role in protecting and furthering those defined  interests can be established.
The recent report by the National Surface Transportation Policy and  Revenue Study Commission illustrates the challenges of identifying  national public interests both in general and in public-private partnerships  in particular. The report encouraged the use of public-private partnerships  as an important part of financing and managing the surface transportation  system as part of an overall strategy for aligning federal leadership and  federal transportation investments with national interests. As discussed  earlier, the commission recommended broadening states’ flexibilities to  use tolling and congestion pricing on the Interstate system but also  recommended that that the public interest would best be served if  Congress adopted strict criteria for approving public-private partnerships  on the Interstate Highway System, including limiting allowable toll  increases, prohibiting non-compete clauses, and requiring concessionaires  to share revenues with the public sector. This definition of the public  interest stands in sharp contrast to the dissenting views of three  commissioners and to comments provided by DOT on a draft of this  report. In their minority report, the dissenting commissioners stated that  the Commission’s recommendations would replace negotiated terms and  conditions with a federal regulation and subject private toll operators to  greater federal scrutiny than local public toll authorities. In commenting  on a draft of this report, DOT stated that national interests are served by  limiting federal involvement in order to allow these arrangements to grow  and provide the benefits of which they are capable. These sharply  divergent views should assist Congress as it considers the appropriate  national interests and federal role in highway public-private partnerships.
section_title: Conclusions
paragraphs: Highway public-private partnerships show promise as a viable alternative,  where appropriate, to help meet growing and costly transportation  demands. The public sector can acquire new infrastructure or extract  value from existing infrastructure while potentially sharing with the  private sector the risks associated with designing, constructing, operating,  and maintaining public infrastructure. However, highway public-private  partnerships are not a panacea for meeting all transportation system  demands, nor are they without potentially substantial costs and risks to  the public—both financial and nonfinancial—and trade-offs must be made.  While private investors can make billions of dollars available for critical  infrastructure, these funds are largely a new source of borrowed funds,  repaid by road users over what potentially could be a period of several  generations. There is no “free” money in highway public-private  partnerships.
Many forms of public-private partnerships exist both within and outside  the transportation sector, and conclusions drawn about highway public- private partnerships—those involving long-term concession agreements— cannot necessarily be drawn about partnerships of other types and in  other sectors. Highway public-private partnerships are fairly new in the  United States, and although they are meant to serve the public interest, it  is difficult to be confident that these interests are being protected when  formal identification and consideration of public and national interests has  been lacking, and where limited up-front analysis of public interest issues  using established criteria has been conducted. Consideration of highway  public-private partnerships could benefit from more consistent, rigorous,  systematic, up-front analysis. Benefits are potential benefits—that is, they  are not assured and can only be achieved by weighing them against  potential costs and trade-offs through careful, comprehensive analysis to  determine whether public-private partnerships are appropriate in specific  circumstances and, if so, how best to implement them. Despite the need  for careful analysis, the approach at the federal level has not been fully  balanced, as DOT has done much to promote the benefits, but  comparatively little to either assist states and localities weigh potential  costs and trade-offs, nor to assess how potentially important national  interests might be protected in highway public-private partnerships. This  is in many respects a function of the design of the federal program as few  mechanisms exist to identify potential national interests in cases where  federal funds have not or will not be used. The historic test of the presence  of federal funding may have been relevant at a time when the federal  government played a larger role in financing highways but may no longer  be relevant when there are new players and multiple sources of financing,  including potentially significant private money. However, potential federal  restrictions must be carefully crafted to avoid undermining the potential  benefits, such as operational efficiencies, that can be achieved through the  use of highway public-private partnerships. Reexamining the federal role  in highways provides an opportunity to identify the emerging national  public interests, including the national public interests in highway public- private partnerships.
Finally, in the future, states may seek increased federal funding for  highway public-private partnerships or seek to monetize additional assets  for which federal funds have been used. If this occurs, then it is likely  some portion of toll revenues may need to be used for projects that are  eligible for federal transportation funding. Clarifying the methodology for  determining excess toll revenues and reasonable rates of return in  highway public-private partnerships, would give clearer guidance to states  and localities undertaking highway public-private partnerships and help  reduce potential uncertainties to the private sector and the financial  markets.
section_title: Matter for Congressional Consideration
paragraphs: A reexamination of federal transportation programs provides an  opportunity to determine how highway public-private partnerships fit in  with national programs as well as an opportunity to identify the national  interests associated with highway public-private partnerships. In order to  balance the potential benefits of highway public-private partnerships with  protecting key national interests, Congress should consider directing the  Secretary of Transportation to consult with them and other stakeholders  to develop and submit objective criteria for identifying national public  interests in highway public-private partnerships. In developing these  criteria, the Secretary should identify any additional legal authority,  guidance, or assessment tools required, as appropriate and needed, to  ensure national public interests are protected in future highway public- private partnerships. The criteria should be crafted to allow the  department to play a targeted role in ensuring that national interests are  considered in highway public-private partnerships, as appropriate.
section_title: Recommendation for Executive Action
paragraphs: To ensure that future highway public-private partnerships meet federal  requirements concerning the use of excess revenues for federally eligible  transportation purposes, we recommend that the Secretary of  Transportation direct the Federal Highway Administrator to clarify  federal-aid highway regulations on the methodology for determining  excess toll revenue, including the reasonable rate of return to private  investors in highway public-private partnerships that involve federal  investment.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided copies of the draft report to DOT for comment prior to  finalizing the report. DOT provided its comments in a meeting with the  Assistant Secretary for Transportation Policy and the Deputy Assistant  Secretary for Transportation Policy on November 30, 2007. DOT raised  substantive concerns with several of the draft report’s findings and  conclusions, as well as one of the recommendations. Specifically, DOT  commented that the draft report did not analyze the benefits of highway  public-private partnerships in the context of current policy and traditional  procurement approaches. DOT stated that highway public-private  partnerships are a potentially powerful response to current and emerging  policy failures in the federal-aid highway program that both DOT and GAO  have identified over the years. For example, DOT asserted that the current  federal-aid program (1) encourages the misallocation of resources, (2)  does not promote the proper pricing of transportation assets, including the  costs of congestion, (3) is not tied to achieving defined results and (4)  provides weak incentives for innovation. DOT also stated that—in addition  to supplying large amounts of additional capital to improve U.S.  transportation infrastructure—public-private partnerships are responsive  to a crisis of performance in government stewardship of the transportation  network and traditional procurement approaches. DOT noted that  highway public-private partnerships can bring discipline to the decision- making process, result in more efficient use of resources, and produce  lower capital and operating costs, resulting in lower total costs of projects  than under traditional public procurement approaches. DOT stated that  traditional procurement approaches produce comparatively inferior  results.
We agree with DOT that highway public-private partnerships have the  potential to provide many benefits and that a number of performance  problems characterize the current federal-aid highway program. Our draft  report discusses the potential benefits cited by DOT, although we revised  our draft report to better clarify the potential benefits of pricing and  resource efficiencies of highway public-private partnerships that DOT  cited in its comments. However, we also believe that all the benefits DOT  cited are potential benefits—they are not assured and can be achieved  only through careful, comprehensive analysis to determine whether  public-private partnerships are appropriate in specific circumstances and,  if so, how best to structure them. Among the benefits that DOT cited was  the ability of highway public-private partnerships to supply additional  capital to improve transportation infrastructure. As our report states, this  capital is not free money but is rather a form of privately issued debt that  must be repaid to private investors seeking a return on their investment by  collecting toll revenues. Regarding DOT’s comment about policy failures  in the federal-aid highway program, we believe the most direct strategy to  address performance issues is to reexamine and restructure the program  considering such factors as national interests in the transportation system  and specific performance-related goals and outcomes related to mobility.  Such a restructuring would help (1) better align and allocate resources, (2)  promote proper pricing, (3) achieve defined results, and (4) provide  incentives for innovation. We believe our report places highway public- private partnerships in their proper context as viable potential alternatives  that must be considered in such a reexamination and, therefore, made no  further changes to the report.
Regarding DOT’s characterization of a crisis of performance in  government stewardship of the transportation network and assertion that  the traditional procurement approaches produce comparatively inferior  results, our past work has recognized concerns about particular projects  and public agencies, as well as improvements that are needed to public  procurement processes in general. It was not within the scope of our  review to systematically compare the results of projects acquired through  public-private partnerships with those acquired through traditional  procurement approaches. Nevertheless, we believe neither our work—nor  work by others—provides a foundation sufficient to support DOT’s  sweeping characterization of public stewardship as a “crisis,” or its far- reaching conclusion that traditional procurement approaches produce  inferior results compared with public-private partnerships. We, therefore,  made no further changes to our report.
DOT also disagreed with much of our discussion concerning protection of  the public interest in highway public-private partnerships. DOT stated that  many federal and state laws govern how transportation projects are  selected and delivered, including highway public-private partnerships, and  that the draft report did not explain why highway projects delivered  through public-private partnerships pose additional challenges to  protecting the public interest, or why there should be a greater interest in  such projects than in highways built and operated by state and local  governments. In response to DOT’s comments, we added additional  information to the final report about initiatives that certain states have  taken to identify and protect the public interest in highway public-private  partnerships. We agree that federal and state laws governing traditional  highway procurement contain mechanisms to protect the public interest  and that many of the public interest concerns are the same regardless of  how the project is delivered. However, we continue to believe that  additional and more systematic approaches are necessary with highway  public-private partnerships given the long-term nature of concession  agreements (up to 99 years in some cases), the potential loss of public  control, and the fact that private entities are not accountable to the public  in the same way public agencies are.
Similarly, DOT disagreed with our discussion of national public interests  and stated that our draft report did not explain why highway projects  undertaken through highway public-private partnerships raise issues of  potential national interests more so than if a state or local government  undertook them. DOT stated that the report did not adequately explain  how highway public-private partnerships impact national interests, such as  interstate commerce, that would allow policy makers to clearly  understand the nature of those concerns and assess what actions are  needed to address them. As stated above, we agree that highway projects  delivered through state and local governments raise many of the same  concerns but that additional and more systematic approaches are  necessary with highway public-private partnerships. Furthermore, it was  not the objective of our report to define what the national interest  concerns were on particular projects or to suggest what actions were  needed to address such concerns. Rather, our report illustrates that such  projects may have implications for national interests, and that it is  important to consider such interests and their implications up-front as part  of the decision-making process in order to ensure that any potential  concerns are identified, evaluated, and resolved. At the current time, there  is little mechanism to allow such consideration when federal funds are not  involved with a project. As discussed in our report, the reexamination of  federal transportation programs, which we have called for in previous  reports, provides an opportunity to determine the most appropriate  structure of these federal programs, where highway public-private  partnerships fit into this structure, and the identification of national  interests associated with highway public-private partnerships.
Finally, DOT indicated that the scope of our work focused primarily on a  subset of public-private partnerships involving long-term concession  agreements and, as a result, our conclusions cannot be generalized to  other types of public-private partnerships. We agree with DOT that the  scope of our work only focused on a subset of all types of public-private  partnerships. Our report acknowledges that there are also public-private  partnerships in nontransportation areas, as well as in other modes of  transportation (such as mass transit). We also acknowledge that there are  other types of highway public-private partnerships, such as availability  payments, that are not included in our scope. In response to DOT’s  comments, we made these scope limitations clearer in our report and  acknowledged that the findings and conclusions of our report cannot  necessarily be extrapolated to other types of public-private partnerships.
Our draft report recommended that DOT develop and submit to Congress  a legislative proposal that establishes objective criteria for identifying  national public interests in highway public-private partnerships, including  any additional legal authority required by the Secretary of Transportation  necessary to develop regulations, guidance, and assessment tools, as  appropriate, to ensure such interests are protected in future highway  public-private partnerships. DOT disagreed with this recommendation,  stating that the draft report did not provide sufficient evidence to explain  why the federal government should intrude on inherently state activities or  to justify a more expansive federal role. Instead, DOT stated that federal  involvement should be limited in order to allow these arrangements to  grow and provide the benefits of which they are capable. As discussed in  our report, the reexamination of federal transportation programs provides  an opportunity to determine the most appropriate structure of these  federal programs, where highway public-private partnerships fit into this  structure, and the identification of potential national interests that are  associated with highway public-private partnerships. We believe that once  these specific national interests have been established, instead of  necessarily leading to a more expansive federal role, the federal  government can play a more targeted role—including ensuring that  identified national interests in highway public-private partnerships are  considered by states and localities, as appropriate. We have, therefore,  deleted our recommendation but have instead suggested that Congress  consider directing DOT to undertake these actions.
We also recommended that the Secretary of Transportation direct the  Administrator of FHWA to clarify federal-aid highway regulations on the  methodology for determining excess toll revenue, including a reasonable  rate of return to private investors in highway public-private partnerships.  DOT indicated, in response to this recommendation, that it would  reexamine the regulations and take appropriate action, as necessary, to  ensure the regulations are clear. Therefore, we made no change to the  recommendation.
DOT also provided technical comments that were incorporated, as  appropriate. We also obtained comments from states, localities, and  organizations in the foreign countries included in our review. In general,  these comments were technical in nature and were incorporated where  appropriate.
We are sending copies of this report to appropriate congressional  committees; the Secretary of Transportation; the Administrator of the  Federal Highway Administration; and the Director, Office of Management  and Budget. We also will make copies available to others upon request. In  addition, the report will be available at no charge on the GAO Web site at  http://www.gao.gov.
If you or your staff have any questions concerning this report, please  contact me at (202) 512-2834 or heckerj@gao.gov. Contact points for our  Office of Congressional Relations and Public Affairs Office may be found  on the last page of this report. GAO staff that made major contributions to  this report are listed in appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: Our work was focused on federal surface transportation and highway  programs and the issues associated with use of private sector participation  in providing public transportation infrastructure. In particular, we focused  on (1) the benefits, costs, and trade-offs associated with highway public- private partnerships; (2) how public officials have identified, evaluated,  and acted to protect the public interest in public-private partnership  arrangements; and (3) the federal role in highway public-private  partnerships and potential changes needed in this role. Our scope was  limited to identifying the primary issues associated with using public- private partnerships for highway infrastructure and not in conducting a  detailed financial analysis of the benefits and costs of specific  arrangements. We selected recent projects to review, such as the lease of  the Chicago Skyway and the Indiana Toll Road and planning for the  Oregon and Trans-Texas Corridor (TTC), to understand decision-making  processes. These projects were selected because they were recent  examples of highway public-private partnerships, were large dollar  projects, or used different approaches to highway public-private  partnerships. We also spoke with states that were considering highway  public-private partnerships, including California, New Jersey, and  Pennsylvania.
It was not our intent to review all highway public-private partnerships in  the United States. We also did not review all types of highway public- private partnerships. For example, we did not review highway public- private partnerships involving shadow tolling or availability payments. In  shadow tolling, the public sector pays a private sector company an amount  per user of a roadway as opposed to direct collection of a toll by the  private company. In availability payments, a private company is paid based  on the availability of a highway to users. These were not included in our  scope and the findings and conclusions of this study cannot necessarily be  extrapolated to those or other types of public-private partnerships. In  reviewing highway public-private partnerships, it was not our intent to  either endorse or refute these projects but rather to identify key public  policy issues associated with using public-private partnerships to provide  highway infrastructure.
To identify the benefits, costs, and trade-offs associated with public- private partnerships for tolled highway projects, we collected and  reviewed relevant documents including concession agreements, planning  documents, toll schedules, guidance, and academic, corporate, and  government reports. We obtained toll schedule data from the Chicago  Skyway concession company and used them to project a range of future  maximum toll rates using Congressional Budget Office estimates of future  growth rates for gross domestic product (GDP) and the consumer price  index (CPI) and Census Bureau forecasts for population growth (in order  to determine forecasted per capita GDP). We also conducted interviews  with public-sector representatives from state departments of  transportation; elected officials; public-interest groups; municipal planning  organizations; Federal Highway Administration (FHWA) representatives;  and other representatives at municipal, state, and federal levels. We also  spoke with foreign government representatives in the United Kingdom,  and we visited relevant public- and private-sector representatives in  Canada, Spain, and Australia to understand the foreign perspective and to  identify common benefits, costs, and trade-offs experienced in other  countries. The countries we visited to obtain information on highway  public-private partnerships was based on those countries that had a  history of using highway public-private partnerships to obtain highway  infrastructure, had highway public-private partnerships in place for a  period of time so lessons learned could be determined, or had developed  tools to assess public interest issues. These foreign public-private  partnership experiences were compared with experiences in the United  States. We conducted interviews with the private-sector concessionaires,  financial investors, and legal, technical and financial advisors to the public  and private sectors. Finally, we visited public-private partnership projects,  including the Chicago Skyway, the Indiana Toll Road, and the 407 Express  Toll Road (ETR) in Toronto, Canada.
To assess the reliability of the Chicago Skyway historic toll data, we (1)  reviewed sources containing historic toll information, including the city’s  request for qualifications from potential concession companies, an  academic paper, and a relevant journal article and (2) worked closely with  the Assistant Budget Director for the city of Chicago to identify any data  problems. We found a discrepancy in the toll rates and brought it to the  official’s attention and worked with him to determine the correct historic  toll rates. We determined that the data were sufficiently reliable for the  purposes of this report. To estimate each year’s population in order to  estimate annual GDP per capita, we used the Census Bureau’s interim  population projections, which were created in 2004, and which project  population growth in 10-year increments. We computed the average  annual rate of increase in estimated population for every 10-year period  and then used each 10-year period’s annual average rate of increase to  estimate the population for each year in that period. As a base population  estimate, we used the Census Bureau’s population estimate of just over  303 million on January 1, 2008. We divided the forecasted nominal GDP for  every year by the projected population in that year to determine the  forecasted per capita nominal GDP. We determined the Census Bureau  data were reliable for use by checking for obvious errors or omissions, as  well as anomalies such as unusual data points. We used the CPI to convert  past and projected toll rates to 2007 dollars. To convert amounts  denominated in foreign currencies, we converted to 2007 U.S. dollars using  the Organization for Economic Cooperation and Development’s  purchasing power parities for GDPs. To obtain information on the value of  concession agreements and the use of lease proceeds, we obtained  financial information from the concession companies and state  representatives.
To determine how public officials have identified, evaluated, and acted to  protect the public interest in public-private partnership arrangements, we  conducted site visits of highway public-private partnerships and visited  selected foreign countries with long-term experience of conducting  highway public-private partnerships. We visited the state of Oregon to  examine three potential public-private partnership projects in the  metropolitan Portland region. We also conducted site visits for the  Chicago Skyway and Indiana Toll Road, as well as the TTC in Texas, and  the 407 ETR in Toronto, Canada. We also conducted visits to Spain, the  states of New South Wales, and Victoria in Australia. For each site visit, we  met with relevant officials from public sector agencies, such as state  departments of transportation and state financial agencies, consultants  and advisors to the public sector, including legal, financial, and technical  advisors; the private sector operators; and other relevant stakeholders,  such as users groups. Interviews covered a wide range of topics, including  a discussion of how the public interest was defined, evaluated and  protected in the relevant public-private partnership project. In addition to  conducting interviews, we collected relevant documents, including legal  contracts, public interest assessment tool guidance, procurement  documents, financial statements, and reports, and analyzed them as  necessary. Where appropriate, we reviewed contracts for certain public  interest mechanisms. In addition to those site and country visits, we met  with officials from British Columbia, Canada, and the United Kingdom to  discuss their processes and tools for evaluating and protecting the public  interest. We also held interviews with officials of FHWA and collected and  analyzed policy and legal documents related to public interest issues.
To address the federal role in highway public-private partnerships, we  reviewed pertinent legislation; prior GAO reports and testimonies; and  other documents from FHWA, state department of transportation (DOT),  and foreign national and provincial governments. This included policy  documents from DOT, the public-private partnership Internet Web site  developed by FHWA, model legislation prepared by FHWA, the FHWA  public-private partnership manual, and various public presentations made  by FHWA officials about highway public-private partnerships issues. We  also obtained data from FHWA on the use of the SEP-14 and SEP-15  processes, including a list of projects approved to use these processes.  Further, we obtained data from FHWA on the use of private activity bonds  in the context of highway-related projects. After checking for obvious  errors or omissions, we deemed these data reliable for our use. We  discussed federal tax issues, including deduction from income of  depreciation for highway public-private partnerships, with both FHWA and  a tax expert associated with the Chicago Skyway lease. Our discussion of  national interests in highway projects was based on a review of DOT’s  fiscal years 2006 to 2011 strategic plan, documentation of the Department  of Defense Strategic Highway Network, and pertinent legislation related to  the National Highway System. We also interviewed FHWA officials,  officials from state DOTs and local governments, officials from private  investment firms, and officials from foreign national and provincial  governments that have entered into highway and other public-private  partnerships. Discussions with FHWA included clarifying how it  determines such things as reasonable rates of return on highway projects  where there is private investment and the use of proceeds when there is  federal investment in a highway facility that is leased to the private sector.  Where feasible, we corroborated these clarifications with documents  obtained from FHWA.
We conducted this performance audit from June 2006 to February 2008 in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
section_title: Appendix II: Profile of GAO Public-Private Partnership Case Studies
subsections: section_title: Case Study: Chicago Skyway, Chicago, Illinois
paragraphs: Project description: The Chicago Skyway is a 7.8-mile elevated toll road  connecting Interstate 94 (Dan Ryan Expressway) in Chicago to Interstate  90 (Indiana Toll Road) at the Indiana border. Built in 1958, the Skyway was  operated and maintained by the city of Chicago Department of Streets and  Sanitation. In March 2004, the city of Chicago issued a request for  qualifications from potential bidders interested in operating the facility on  a long-term lease basis. It received 10 responses and in May 2004 invited  five groups to prepare proposals. Bids were submitted in October 2004,  with the long-term concession awarded to the Skyway Concession  Company (SCC) that included Cintra and Macquarie on October 27, 2004.  This was the date the contract was signed.
Project concession fee: Cintra/Macquarie bid $1.83 billion.
Concession term: 99 years.
Institutional arrangements: Cintra is a part of Grupo Ferrovial, one of  the largest infrastructure development companies in Europe and  Macquarie Infrastructure Group, a subsidiary of Macquarie Bank Limited,  Australia’s largest investment bank. SCC assumed operations on the  Chicago Skyway on January 24, 2005. SCC is responsible for all operating  and maintenance costs of the Chicago Skyway but has the right to all toll  and concession revenue. This agreement between SCC and the project  sponsor, city of Chicago, was the first long-term lease of an existing public  toll road in the United States.
Financing: Original financial structure was: Cintra equity—$485 million;  Macquarie equity—$397 million; and bank loans—$1 billion  (approximately). SCC subsequently refinanced the capital structure in  2005, which reduced the equity holdings of Cintra and Macquarie to  approximately $500 million. Originally financed by European banks, the  $1.550 billion refinancing also included Citgroup. The refinancing involved  capital accretion bonds ($961 million) with a 21-year maturity with an  interest rate equivalent to 5.6 percent. There is an additional $439 million  in 12-year floating rate notes, and $150 million in subordinated bank debt  provided by Banco Bilbao Vizcaya Argentaria and Santander Central  Hispano of Spain, together with Calyon of Chicago.
Revenue sources: Based on tolls: up to $2.50 until 2008; $3.00 until 2011,  $3.50 until 2013, $4.00 until 2015, $4.50 until 2017, $5.00 starting in 2017.
Lease proceeds: Proceeds from the agreement paid off $463 million of  existing Chicago Skyway debt; $392 million to refund long- and short-term  debt and to pay other city of Chicago obligations; $500 million for long- term and $375 million for a medium-term reserve for the city of Chicago,  as well as a $100 million neighborhood, human, and business  infrastructure fund to be drawn down over 5 years.
section_title: Case Study: Indiana Toll Road, Northern Indiana
paragraphs: Project description: The Indiana Toll Road stretches 157 miles across  the northernmost part of Indiana from its border with Ohio to the Illinois  state line, where it provides the primary connection to the Chicago  Skyway and downtown Chicago. The Indiana Toll Road links the largest  cities on the Great Lakes with the Eastern Seaboard, and its connections  with Interstate 65 and Interstate 69 lead to major destinations in the South  and on the Gulf Coast. For the past 25 years, the Indiana Toll Road has  been operated by the Indiana DOT. In 2005, the Governor of Indiana  tasked the Indiana Finance Authority to explore the feasibility of leasing  the toll road to a private entity. A Request for Toll Road Concessionaire  Proposals was published on September 28, 2005. Eleven teams submitted  proposals by the October 26 deadline. The lease concession was awarded  to Indiana Toll Road Concession Company LLC (ITRCC) comprised of an  even public-private partnership between Cintra and Macquarie.
Project concession fee: ITRCC submitted the highest bid of $3.8 billion.
Concession term: 75 years.
Institutional arrangements: ITRCC is composed of a 50/50 public- private partnership between Cintra, which is part of Grupo Ferrovial, and  Macquarie Infrastructure Group. The Indiana Toll Road lease transaction  was contingent upon authorizing legislation. House Enrolled Act 1008,  popularly known as “Major Moves,” was signed into law in mid-March  2006. On April 12, 2006, the Indiana Toll Road and the Indiana Finance  Authority executed the “Indiana Toll Road Concession and Lease  Agreement.” Pursuant to its terms, the Indiana Finance Authority agreed to  terminate the current operational lease to the Indiana DOT. A 10-member  board of directors oversees ITRCC and its operations of the Indiana Toll  Road. ITRCC formally assumed operational responsibility for the toll road  on June 29, 2006.
Financing: The financing structure is Cintra Equity—$385 million;  Macquarie Equity—$385 million; and bank loans—$3.030 billion. Loans  were provided by a collection of seven European banks: (1) Banco Bilbao  Vizcaya Argentaria SA; (2) Banco Santander Central Hispano SA; and (3)  Caja de Ahorros y Monte de Piedad de Madrid, all of Spain; BNP Paribas of  France; DEPFA Bank of Germany; RBS Securities Corporation of  Scotland, and Dexia Crédit Local, a Belgian-French bank.
Revenues: Based on tolls: $8.00 through June 30, 2010, for two-axle  vehicles with higher tolls for three- to seven-axle vehicles. From June 30,  2011, tolls can be based on 2 percent or the percentage increase of the CPI  or per capita nominal GDP whichever is greater.
Lease proceeds: The concession fee will provide funding for the Major  Moves program, which will support about 200 new construction and 200  major preservation projects around the state, including beginning  construction of Interstate 69 between Evansville and Indianapolis. The  proceeds will also fund projects in the seven toll road counties and  provide $150 million over 2 years to all the state’s 92 counties for roads  and bridges.
section_title: Case Study: Trans-Texas Corridor, Texas
paragraphs: Project description: The TTC program is envisioned to be a 4,000-mile  network consisting of a series of interconnected corridors containing  tolled highways for automobile traffic and separate tolled truckways for  motor carrier traffic; freight, intercity passenger, and commuter rail lines;  and various utility rights-of-way. The Texas Transportation Commission  formally adopted a TTC action plan in June 2002, which identified four  priority segments of the TTC, which roughly parallel the following existing  routes: Interstate 35 from Oklahoma to San Antonio and Interstate 37 from  San Antonio south to the border of Mexico; Interstate 69 from Texarkana  to Houston to Laredo and the lower Rio Grande Valley; Interstate 45 from  Dallas-Fort Worth to Houston; and Interstate 10 from El Paso in the west,  to the border of Louisiana at Orange. Plans call for the TTC to be  completed over the next 50 years with routes prioritized according to  Texas’ transportation needs. Texas DOT, the state transportation agency,  will oversee planning, construction, and ongoing maintenance although  private vendors can deliver the services including daily operations.
In 2005, the Texas DOT selected a consortium led by Cintra and Zachry  Construction Corporation under a competitively procured comprehensive  development agreement (CDA) to develop preliminary concept and  financing plans for TTC-35, including segments comprising the 600-mile  Interstate 35 corridor in Texas. Included in this plan are facilities adjacent  to Interstate 35 between Dallas and San Antonio consisting of a four-lane  toll road that could eventually include separate truck toll facilities,  utilities, and freight, commuter, and high-speed rail lines. Under the terms  of the CDA, Cintra-Zachry produced the master development and financial  plan for TTC-35. Once the master plan is complete, individual project  segments—be they road, rail, utilities, or a combination of these—may be  developed, as specified in the separate facility implementation plans as  part of the master plan. Cintra-Zachry will have the right of first  negotiation for development of some facilities developed in the master  plan subject to Texas DOT’s approval. According to the Texas DOT, the  contract only required the department to negotiate in good faith for  possible concession contracts valuing at least $400 million. The award of  the State Highway 130, segment 5 and 6 agreement discussed above fully  meets the requirements of the CDA. However, Cintra-Zachry is eligible for  consideration on future TTC-35 facilities.
Project cost: Initial cost estimates for the full 4,000 mile TTC project  range from $145 billion to $184 billion in 2002 dollars, as reported in the  Texas DOT’s June 2002 TTC Plan. According to the Texas DOT, this would  include all highway and rail modes fully built as envisioned in the 2002  plan. The Texas DOT acknowledges that many of the proposed facilities or  modes may not be needed. Implementation of this plan includes the  flexibility to build only what will be needed.
Institutional arrangements: The consortium Cintra-Zachry, LP is 85  percent owned by Cintra Concesiones de Infraestructuras de Transporte,  S.A. and 15 percent owned by Zachry Construction Corporation. Zachry  Construction Corporation is a privately owned construction and industrial  maintenance service company located in San Antonio, Texas. The Cintra- Zachry team produced the master development plan and financial plan for  TTC-35. This plan was accepted by the Texas DOT in 2006. The team may  opt to perform additional activities such as financing, planning, design,  construction, maintenance, and toll collection and operation of segments  of the approved development plan for the corridor, as approved by the  Texas DOT and FHWA.
Project financing: To be determined for entire TTC program. The final  Cintra-Zachry TTC-35 proposal called for a capital investment of $6 billion  in a tollroad linking Dallas and San Antonio, and $1.2 billion in concession  payments to Texas DOT for the right to operate the facility for 50 years.  According to the Texas DOT, the current Master Development Plan shows  approximately $8.8 billion and $2 billion, respectively.
Revenue sources: Tolls. The CDA between Cintra-Zachry and Texas DOT  does not specify how toll rates will be set and adjusted or the term of any  toll concessions for the corridor. According to the Texas DOT, state  statute and department policy require the Texas DOT to approve all rate  setting and rate escalating methodologies. The CDA requires Cintra-Zachry  to be compliant with these regulations. The State Highway 130 agreement  specifically sets toll rates and the formula for future adjustments.
Lease proceeds: To be determined.
section_title: Case Study: Oregon
paragraphs: Project descriptions: In January 2006, the Oregon Transportation  Commission approved the Oregon DOT agreements with the Oregon  Transportation Improvement Group (OTIG) for predevelopment work on  three proposed public-private partnership highway projects—Sunrise  Corridor, South Interstate 205 Widening, and Newberg-Dundee  Transportation Improvement Projects. The proposed Sunrise Corridor is  construction of a new four-lane, limited access roadway facility to SE  172nd (segment 1) and additional transportation infrastructure to serve  the newly incorporated city of Damascus (segment 2). The proposed South  Interstate 205 Corridor Improvements project is a widening of this major  north-south freight and commuter route in the Portland metropolitan  region. The proposed Newberg-Dundee project is an identified alternative  corridor (bypass) that is approximately 11 miles long, starting at the east  end of Newberg and ending near Dayton at the junction with Oregon 18.
Under an agreement with Macquarie, Macquarie will do the  predevelopment work for all three projects as three separate contracts and  will internalize the predevelopment costs for each project if that project  proceeds into implementation. If the project does not proceed, then  Oregon DOT will reimburse Macquarie for the predevelopment work for  that project.
Sunrise corridor: OTIG and Oregon DOT determined that the Sunrise  Corridor would not be toll-viable, and decided to indefinitely postpone the  project. This decision was based on the project not offering substantial  time savings to other alternative routes in the area and the predictability of  traffic on the proposed project was uncertain. According to an Oregon  DOT official, the project will be put on hold and may be reconsidered in  the future, but it is not considered a priority at this time. Oregon DOT paid  Macquarie $500,000 for the study.
South Interstate 205 widening: According to an Oregon DOT official,  this project is not yet listed in the regional transportation plan but the  environmental review process has already begun. Final decisions on  whether this project will proceed will not occur until the environmental  assessment is completed.
Newberg-Dundee: In July 2007, OTIG and Oregon DOT agreed to cease  pursuing public-private development of a Newberg-Dundee tolled bypass  after an independent analysis confirmed that the plan to charge a toll on  the bypass alone would not produce sufficient revenue to finance the  planned project under a public-private concession agreement. Instead,  according to an Oregon DOT official, the project will likely be continued  under a traditional public sector procurement approach using the private  sector as contractors. According to this official, the road is still expected  to be tolled.
section_title: Case Study: Highway 407 ETR, Toronto, Canada
paragraphs: Project description: Highway 407 ETR stretches 108 kilometers through  the Greater Toronto Area. In 1998, as part of the largest privatization  project in Canadian history at that time, the Province of Ontario put out a  tender for the operation of the original 68 kilometers of highway and the  requirement to build the remaining 40 kilometers. Following an  international competition, the 407 ETR consortium led by Cintra of Grupo  Ferrovial, SNC-Lavalin and Capital D’Amerique CDPQ was awarded the 99- year contract in 1999.
Project cost: $3.1 billion Canadian dollars for a 99-year lease.
Institutional arrangements: The 407 ETR consortium was initially led  by Cintra of Grupo Ferrovial, SNC-Lavalin and Capital D’Amerique CDPQ.  In 2002, Macquarie Infrastructure Group purchased all of Capital  D’Amerique CDPG’s interest in the toll road.
Revenue sources: Tolls are based on level of traffic flow. Toll rates are  guaranteed to increase at 2 percent per year for the first 15 years and by an  amount set by the concessionaire if traffic exceeds certain traffic levels.
Lease proceeds: Most of the proceeds were deposited into a general  consolidated revenue fund and each resident of Ontario received a $200  check from the government for the sale.
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Steve Cohen, Assistant  Director; Jay Cherlow; Colin Fallon; Greg Hanna; John Healey; Carol  Henn; Bert Japikse; Richard Jorgenson; Maureen Luna-Long; Teague  Lyons; Matthew Rosenberg; Michelle Su; Richard Swayze; and James  Wozny made key contributions to this report.