October 1 2006

While privatizing the Turnpike or other Interstates through long-term leases is hotly debated, the variety of public-private partnerships are virtually limitless.

With encouragement from the federal government, a wide variety of public-private partnerships – or PPPs – have emerged in the design, construction, maintenance, operation and financing of transportation facilities during the past five years.

The possibilities for involving the private sector in the transportation process are almost limitless. While a few large-scale concessions for toll facilities involving hundreds of millions of dollars bring attention to the growing phenomenon of public-private partnerships (or PPPs), many less spectacular opportunities exist for attracting private resources to help meet transportation needs. A PPP may be as small as a design-build contract for a single project, with the purpose of reducing costs or accelerating completion, or as large as the long-term lease of the Pennsylvania Turnpike.

The different types of PPP agreements relating to designing, building, maintaining and, in some cases, operating transportation projects are too numerous and diverse to set forth in detail. However, they share several potential advantages: 

The ability of the private sector to marshal appropriate specialized resources rapidly and efficiently in the design and construction stages. 

  • The private sector’s diversified knowledge and awareness of new methods in design, construction, operations and maintenance. 
  • The ability of private investors to identify creative financing solutions to expedite projects, their acceptance of more aggressive levels of debt in PPPs than in public projects, and, in some cases, their contribution of equity to the transaction. 
  • The cost savings, as well as avoidance of higher future construction costs, that result from more rapid implementation of projects.
  • The willingness of private entities to assume responsibility for completion of projects on time and within budget (“risk transfer”).

Currently, Pennsylvania has a limited ability design or implement PPPs. Enabling legislation specifically authorizing PPPs could enable PennDOT, metropolitan planning organizations, and perhaps other entities to consider a wide range of alternatives, from design through funding. Transit authorities could explore opportunities for private sector involvement in operations, financing, and infrastructure. A provision to permit unsolicited proposals could create incentive to think creatively about state and regional transportation infrastructure or to expedite regional priorities. The possibilities are almost limitless.

However, there are lessons to be learned from the experiences of others. For example, careful preliminary analysis of PPP agreements and detailed evaluation of project progress are important responsibilities of public agencies. The discipline of the free market provides private partners with ample incentive to avoid costly mistakes, but involvement of the private sector does not guarantee a trouble-free outcome. And how any savings, revenue, or interest earned from engaging in PPPs should be used requires careful consideration of policy makers: is it limited to transportation projects, statewide or regional, or should funds be available for general government purposes, etc.?

Some Examples of PPPs

The following provides a brief overview of popular PPPs, including long-term leases of assets and new construction of toll facilities: 

Lump-sum payments by private investors for rights to future revenue collection on existing toll facilities is one of the more publicly debated PPP options. Since January 2005, when the City of Chicago received a lump-sum payment of $1.8 billion from an international consortium to lease the 7.8-mile Chicago Skyway for 99 years, transportation officials have taken notice of the potential for “monetizing” existing toll facilities. Interest in concession agreements increased still further when the State of Indiana obtained $3.85 billion for a 75-year lease of the Indiana Toll Road by the same Spanish-Australian consortium.

Based on the Chicago Skyway and Indiana Toll Road examples, concession agreements for existing toll facilities in Pennsylvania could provide the state government with billions of dollars to improve deteriorating roadways and build transportation projects that have languished for lack of funds. By accelerating reconstruction and new construction of Pennsylvania’s highways and roads, funds from private investors – who would advance billions of dollars today for the right to collect future toll revenues – might well save the state hundreds of millions of dollars in construction costs that would otherwise be deferred indefinitely.

It’s worth noting that PPP investors expect to be paid back handsomely. Private investors assume a risk that future tolls will not be sufficient to meet the repayment schedule for borrowed funds or that the ultimate rate of return to equity shareholders will be inadequate. However, the concession agreement may give the private partner considerable latitude to raise tolls well above current levels. 

  • The Indiana Toll Road concession agreement allows an increase of almost 80 percent on tractor-trailer tolls between 2006 and 2010. Although tolls for passenger cars and other two-axle vehicles cannot be changed for the four-year period, an increase of at least 8.2 percent is permitted for the fifth year. Thereafter, the agreement allows tolls to rise by 2 percent annually – or at the rate of inflation in consumer prices or the rate of growth in the per-capita Gross Domestic Product if either is greater than 2 percent. 
  • The Chicago Skyway concession agreement was based on an immediate 25 percent toll increase for passenger cars and other two-axle vehicles. Although truck tolls were unchanged for off-peak travel (8 p.m. to 4 a.m.), the charge for peak travel was raised by 40 percent. Between 2008 and 2017, tolls may rise in accordance with a specified schedule or an increase in the Consumer Price Index. Beyond 2017, the concessionaire may boost tolls annually by the greater of 2 percent or the percentage rise in the CPI or nominal GDP per capita.

Construction of new toll facilities by private investors for rights to future revenue collection is another PPP approach. The gradual erosion of the purchasing power of motor fuel taxes, coupled with the general unwillingness to increase the tax rate, has prompted many states to consider a policy that all new highway construction be self-funding. Tolls on the new facilities are ordinarily the sole or primary source of funds expected to compensate investors. However, some major transportation corridors are being designed to attract significant revenue from development fees or special assessments on adjacent property.

Early experience with PPP’s in the construction of toll facilities in other states has been somewhat inconsistent. Nevertheless, even when the original financial plan and operating agreement have been flawed – causing temporary discomfort for both investors and public officials during a period of disappointment and reorganization – the projects have thus far demonstrated their fundamental viability. The Dulles Tollroad and Pocahontas Parkway, both in Virginia, and the State Route 91 HOT lanes in Orange County, California are examples of privately funded tolling to expand capacity.

Though there are lessons to learn, many of the large PPPs are in the project planning stage or have begun to function only recently; therefore evaluating their success and identifying best practices is ongoing. Experience in other states thus far, however, demonstrates that careful analysis and ongoing monitoring of all aspects of PPP agreements and contractor performance can help to avoid unpleasant surprises for the sponsoring government entity.

For more detail on PPPs and other approaches being used in other states, use this link to view the full report.