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.