Back in September of last year we took a look at the status and future prospects for public-private partnerships. We wrote:

"Overall, our survey suggested that tolling, private equity capital and long-term concession-based public-private partnerships will play a significant role in the nation’s efforts to expand infrastructure capacity. The circumstances that are driving states to partner with the private sector ... include declining tax revenues flowing into the Highway Trust Fund; public opposition to higher fuel taxes; and the sheer magnitude of the infrastructure deficit which overwhelms the taxing and bonding capacity of state and local governments. ... As several elected officials pointed out to us, engaging the private sector in the task of expanding transportation capacity may be the best way to modernize the nation’s transportation network without imposing an unacceptable fiscal burden on American taxpayers or burdening future generations with further debt." ("Public-Private Partnerships at a Crossroads" NewsBrief 19-17)

The Changing Landscape

Since then, the political and economic climate have changed profoundly. The Democrats have come to control both the White House and Congress, and the country is in the throes of what many people call the greatest economic upheaval since the Great Depression. Reacting to the recession, the Obama administration has injected unprecedented sums of money into the economy including a staggering $101 billion for surface transportation ($48 billion in stimulus funds and $53 billion in FY 09 omnibus appropriations). At the same time, as we noted recently, interest in infrastructure has climbed to the forefront of state and federal agendas and is high on President Obama’s list of national priorities. There is broad agreement that after years of underinvestment the nation must become serious about renewing its aging infrastructure. (see, "The Prospects for a National Transportation Infrastructure Agenda," NewsBrief 20-3).

However, there also are great uncertainties surrounding the administration’s intentions concerning future transportation funding and financing. A preliminary FY2010 budget summary released on February 26 proposes to maintain funding at current levels and to change budget scoring that would eliminate multiyear contract authority, preventing states from making long term commitments to major investment projects (following strong remonstrations by congressional leaders and interest groups, the administration has shown willingness to compromise). Adding to the uncertainty, are warnings of another potential shortfall in the Highway Trust Fund before the end of FY 2009— and no clear indication how this shortfall is going to be addressed.

From the private sector viewpoint, the landscape also has undergone significant changes. Recent data indicate that toll roads have suffered a sharp decline in traffic. Traffic on 91 Express Lanes in California fell 7.9% in 2009 so far, reducing traffic to levels not seen since 2005. Traffic on the Chicago Skyway has decreased 7.5% and on the Indiana Toll Road almost 15%. Toll revenue has declined 10% on the Massachusetts Turnpike and 8.6% on the New York Thruway, reports Peter Samuel in TollRoads News ("Traffic reports so far this year gloomy," March 10, 2009). "The blush is off the rose," one rating agency analyst told us. In addition, looming over the financial landscape are the Obama administration’s plans to reform financial market oversight—changes that may affect the cost, availability and flow of credit in ways that are hard to anticipate.

How have these new circumstances affected the public sector’s interest in public-private partnerships (PPPs)? And will they impact the private sector’s ability and willingness to invest in transportation infrastructure? To get some indication, we have sought the views of transportation officials, members of the National Transportation Financing Commission and senior executives and analysts in the financial sector, trade associations, and think tanks. We have benefitted from an opportunity to review an early draft of a Deloitte research study of the future prospects for private sector investment in infrastructure by William Eggers. We also have paid close attention to presentations and discussions at several recent transportation conferences, (notably the Fifth Annual PPP Summit on March 12-13, the National Infrastructure Conference organized by Iona College on March 4, and the AASHTO annual Washington Briefing on February 23-24). Finally, we have been monitoring (and participating) in the running dialogue among some 60 "Beltway insiders" on the National Journal’s Transportation Blog (www.transportation.nationaljournal.com).

Public support for PPPs remains high

First the positive news: Despite the Obama administration’s pronounced shift toward greater government involvement in the economy, there are multiple signs that public support for PPPs remains high. This conclusion must be tempered with a caveat that attitudes toward public-private cooperation are still evolving. Their future direction will depend on the yet to be revealed policies of the Obama administration and the Congress concerning PPP oversight and on future actions of state officials and legislatures. For now, however, there are signs that should cheer PPP advocates.

1. Transportation Secretary LaHood Comes Out in Favor of PPPs

In a March 3 interview with the Wall Street Journal, Secretary LaHood made it clear that public-private partnerships will be among the "principles" that he will be recommending to Congress as a foundation for the next surface transportation authorization. Mr. LaHood’s willingness to "think outside the box," as he put it, has been reinforced by the White House’s emphatic opposition to raising taxes in a recession— leaving only a limited set of other funding options on the table, such as bonding, the use of private capital and long term concessions.

Commenting on the Financing Commission’s recommendation for a "modest" 10-cent gas tax increase, the Secretary observed: "With the economy the way it is right now, trying to propose a 10-cent a gallon increase in the gasoline tax is not going to fly anywhere in America, including this administration. ...Ten cents a gallon increase is not modest, it’s impossible... We’ve got to be talking differently than raising taxes."

The appointment of Roy Kienitz to the No. 3 position in the Department of Transportation as Undersecretary for Transportation Policy, strengthens the likelihood of a positive federal posture on private sector involvement in transportation. As Gov. Ed Rendell’s deputy chief of staff and principal adviser on transportation, Kienitz was intimately involved in developing Gov. Rendell’s plan for a concession of the Pennsylvania Turnpike to a private consortium (the plan was subsequently aborted because of opposition in the state legislature). He will presumably continue to be well disposed toward the approaches championed by his former boss.

2. Congressional Attitudes Have Become More Accepting of PPPs

Congressional attitudes also are becoming more accepting of private sector involvement. "We will have multiple revenue sources as we go into the reauthorization," Rep. James Oberstar (D-MN), chairman of the House Transportation and Infrastructure Committee, told participants in the AASHTO annual Washington Briefing. While Mr. Oberstar still believes that the fuel tax remains, in his words "the cornerstone of federal transportation system financing," he acknowledges that private capital must be part of the infrastructure funding equation. Support for public-private partnerships has also been publicly expressed by other congressional leaders such as Speaker Nancy Pelosi (D-CA); Sen. Barbara Boxer (D-CA), Chairman of the Environment and Public Works Committee; Sen. Max Baucus (D-MT), Chairman of the Finance Committee; Sen. Chris Dodd (D-CT), Chairman of the Banking Committee; Rep. John Mica (R-FL), Ranking Member of the House T&I Committee; Rep. Peter DeFazio (D-OR), chairman of the House Highways and Transit Subcommittee and Rep. Earl Blumenauer (D-OR), member of the House Ways & Means Committee.

3. The Stimulus Bill May Help to Leverage Private Investment

Even the stimulus bill had some good news for PPP advocates. It authorized the Secretary of Transportation to allocate up to $200 million of the $1.5 billion set aside for discretionary transportation grants to support the Transportation Infrastructure Finance and Innovation Act (TIFIA) program. TIFIA often has been critical to making PPP projects financially viable by leveraging private capital contributions. It has provided critical funding for such major road construction projects as the Capital Beltway HOT lanes in northern Virginia, the SH 130 project in Texas and, most recently, the I-595 project in Florida (see below). With the current TIFIA funds completely committed, the additional stimulus monies would enable the TIFIA program to help finance additional public-private partnership investments. A $200 million allocation to TIFIA would provide approximately $2 billion worth in additional lending capacity.

4. The Financing Commission Has Given a Big Boost to Private Sector Financing

In its recently released report, the National Transportation Infrastructure Financing Commission has recommended a series of measures to expand the ability of states and localities to fund infrastructure investments. Prominent among the recommended options are measures allowing tolling of existing Interstate capacity in large metropolitan areas, facilitation of public-private partnerships to leverage private capital, expansion of TIFIA credit and private activity bond (PAB) programs, and re-capitalization of State Infrastructure Banks (SIBs). (The Commission was careful to note that public-private partnerships should be pursued "with appropriate protections for the public interest." However, the Commission recommended that primary oversight responsibility should reside with the states.) Privately, several Commissioners have told us that they consider their recommendations concerning funding and financing tools to facilitate private investment in infrastructure as the most significant contribution to the policy debate.

5. Florida’s I-595 project pioneers a New PPP Approach

In a project that Secretary LaHood called "part of the Obama Administration’s commitment to reviving the economy and putting Americans back to work," the Florida Department of Transportation (FDOT) has entered into a $1.8 billion 35-year concession with a private consortium headed by Spanish-owned ACS Infrastructure Development to build and operate high-occupancy toll lanes in the median of I-595, linking I-75 and I-95 near Fort Lauderdale. The financing includes a $603 million TIFIA loan, $750 million in private bank debt and over $200 million in private equity. Florida DOT will set toll rates, retain all revenues and make "availability payments" to the private concessionaire annually out of toll proceeds. The I-595 project represents the first U.S. public-private partnership employing the concept of availability payments.

6. The Texas I-635 Managed-Lanes Project is Continuing a Statewide Practice of Private Toll Road Concessions

In another fresh example of private sector involvement, the Texas Department of Transportation (TxDOT) has awarded a $2.7-billion 52-year toll road concession to the private Spanish firm Cintra . The project involves construction and operation of I-635 high occupancy toll (HOT) lanes on the LBJ Freeway in north Dallas. The project is provisionally funded with an $800 million 35-year TIFIA loan, $598 million in private equity (provided largely by Cintra and Meridiam Infrastructure Finance), $800 million in bank debt and private activity bonds, and $445 million in public money. This is the third private toll road concession to be awarded in Texas to a Cintra-led consortium.

7. The Dulles Rail Line — An Unusual Public-Private Financing Arrangement

On March 10, the U.S. Department of Transportation extended a formal $900 million commitment to the long-planned extension of Metrorail to Dulles Airport. The project involves a unique financing arrangement that involves the federal government, the Commonwealth of Virginia, toll road users and the local business community. The Phase One construction project ($2.6 billion) will be financed with a combination of the federal grant (34%); toll revenue collected by the Metropolitan Washington Airport Authority on the Dulles Toll Road (41%); the Commonwealth of Virginia (10%) and a 15% contribution from the development community, raised through a voluntary assessment on commercial land. Thus, 56% of the total cost in this unique funding arrangement will come from toll road users and developers.

8. California’s new PPP Law Sets Forth a New Model for Public-Private Cooperation

After several failed attempts, the California legislature has passed comprehensive PPP legislation (SB 4). The law: (1) establishes a design-build demonstration program allowing up to 15 demonstration projects to be managed by the state DOT (Caltrans) and local transportation agencies; (2) sets up an independent Public Infrastructure Advisory Commission to advise state and local agencies on PPP best practices; and (3) allows for solicited and unsolicited proposals from the private sector. Private concession agreements will have to be submitted to the legislature and the Advisory Commission for comment, but neither body has the power of disapproval. There are some 10 toll projects on the drawing board that are possible candidates for public-private partnerships. In the past, California often has been a bellwether state for policy innovation. Its new PPP law may become a legislative model for how the public and private sectors can work together at the state level to improve critical infrastructure.

9. Support for Private Sector Involvement at State Level is Growing

A number of governors—Mitch Daniels of Indiana, Ed Rendell of Pennsylvania, Rick Perry of Texas, Tim Kaine of Virginia, Charlie Crist of Florida, Arnold Schwarzenegger of California, and Jon Corzine of New Jersey, to mention only the most prominent—are well-known for their vigorous and steadfast promotion of private sector involvement in statewide transportation programs. The National Governors Association has recently echoed their views and added its own imprimatur in a report entitled "An Infrastructure Vision for the 21 st Century." Written by Darren Springer and Greg Dierkers of the NGA Center for Best Practices, the report calls for an expansion and diversification of revenue sources to invest in transportation infrastructure. Prominently mentioned among these sources are public-private partnerships. Wrote the authors, "PPPs pose many new opportunities for states to approach infrastructure financing, management and construction of new facilities in new and creative ways. Such arrangements can provide a number of benefits to states, evidenced by the more than 26 states that have some sort of PPP-enabling legislation. PPPs are ...only in the early stages of realizing their full potential to help address the infrastructure needs of the country."

The view from the private sector

One year ago, we noted the existence of an impressive number of private infrastructure funds (34 by one count) dedicated to investments in infrastructure. In the aggregate, they were estimated to have raised in excess of $120 billion. After leveraging the estimated capital pool through bank loans and the capital markets, we concluded that the infrastructure funds could support investments in the range of $340 to $400 billion (See, "A $400 Billion Solution?" NewsBrief 19-8, March 10, 2008, See also, "A Fresh Look at the Role of Private Investment in Transportation Infrastructure," NewsBrief 19-11, May 15, 2008).

It is uncertain to what extent the current economic downturn and the credit crisis have affected the availability of this capital. Investors now realize that transportation assets are not immune to economic downturns. And this is bound to introduce new uncertainties into their calculations. Uncertainty translates into risk, and both debt and equity capital markets are requiring greater risk premiums over government bonds in the face of this uncertainty.

As a senior financial executive commented to us, while the cost of debt and equity may seem unreasonably high given the current state of the economy, we shouldn’t expect the era of low- cost debt (or new highs on the equity markets for that matter) to return any time soon. The very attractive terms and low cost of financing attached to PPPs entered into prior to last summer, were as unsustainable as house prices and the stock market. 

This does not mean that private capital is no longer are interested in infrastructure development or that toll roads have ceased to be a sound long-term investment. The recent decline in toll road traffic and toll receipts are properly viewed as temporary phenomena linked closely to the recessionary conditions. In the long term, toll roads are still seen as a relatively safe investment with reasonable and predictable returns. However, it is widely believed that the days of highly leveraged deals are over and that the cost of bank debt will be considerably higher. Since future concession projects will require heavier equity participation and higher costs of borrowing, such investments will produce less attractive returns and may render certain toll road concessions now under discussion no longer economically attractive unless subsidized by public funds.

The nature of private concessions may also change. More future PPP projects are likely to be structured on "availability payments " basis. This would render them politically less vulnerable to criticism because projects structured around availability payments leave the authority to set toll rates and the right to collect and retain toll revenues in the hands of public authorities— thus disarming congressional and other critics opposed to private control of public toll road facilities. Finally, investors’ earlier fears of excessive government regulation of PPPs are receding as congressional leaders and administration officials seek to reassure the investment community that they do not intend to impose draconian controls on private concessions.

Our bottom-line conclusion: The positive public attitudes toward PPPs coupled with the favorable long-term outlook for infrastructure investments outweigh the short-term concerns due to the current economic conditions and the temporary credit crunch. Along with the elected officials quoted earlier, we believe that engaging private investors and entrepreneurs in the task of expanding transportation capacity will prove to be the best way to help modernize the nation’s transportation network without imposing an unacceptable fiscal burden on the American taxpayer or burdening future generations with further debt.

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