Private on the I's

March 1, 2006

Transportation privatization is making headlines in the U.S. In October 2004, the city of Chicago signed a $1.8 billion contract with the Cintra-Macquarie Consortium (a partnership of two companies from Spain and Australia) to lease the Chicago Skyway for 99 years.

Following on its heels, in December 2004, the Texas Department of Transportation (TxDOT) announced the selection of Madrid-based Cintra for a 50-year concession contract to build, operate and finance the first leg of the state’s ambitious Trans-Texas Corridors, the $6 billion portion running parallel to I-35.

Transportation privatization is making headlines in the U.S. In October 2004, the city of Chicago signed a $1.8 billion contract with the Cintra-Macquarie Consortium (a partnership of two companies from Spain and Australia) to lease the Chicago Skyway for 99 years.

Following on its heels, in December 2004, the Texas Department of Transportation (TxDOT) announced the selection of Madrid-based Cintra for a 50-year concession contract to build, operate and finance the first leg of the state’s ambitious Trans-Texas Corridors, the $6 billion portion running parallel to I-35.

Privatized projects provide transportation agencies with what they sorely need: money and time. They hold the promise to not only finance needed highway projects but also get them constructed sooner than possible with traditional approaches. The private sector brings several key potential advantages to transportation projects, including greater operating efficiencies, a primary focus on the business due to less emphasis on public policy and social issues, the ability to attract and retain experienced, high-quality management personnel and access to capital.

Despite their promise, private projects are clearly not a panacea. Public transportation authorities considering the private solution must address a number of challenges, including political opposition, public concerns and policy hurdles.

Different handshakes

Public/private partnerships (PPPs) take on several forms. Purely private projects, while not technically PPPs because they involve no formal contracting between a private developer and the public sector, provide an example of the private sector delivering transportation projects. The Dulles Greenway in Virginia and Camino Colombia in Texas were both purely private transportation projects. The level of risk of these projects is substantial and the lack of coordination with other elements of public infrastructure can be perilous; in fact Camino Colombia went bankrupt due to the lack of key roadway connections and the road was recently purchased by TxDOT at a fraction of its original cost.

The concession model makes the private sector responsible for all or most of project development and financing along with facility design, construction, operation and maintenance, but the project is contracted through a governmental entity. Concessionaires see infrastructure projects as profitable capital assets; after making a significant upfront investment, the concessionaire is entitled to revenues for the length of their contract and profits up to any ceilings in their concession agreement. U.S. projects using the concession model include the Trans-Texas Corridor, the Chicago Skyway and SR-125 in California as well as the initial development of the SR 91 express lanes in Orange County.

The non-profit corporation (63-20) model, known as 63-20 corporations after the IRS code under which they operate, provide a means to increase private participation in transportation projects while retaining some of the financing advantages available to the public sector. 63-20 companies differ from the concession model in several key ways. First, the corporation cannot make a profit on the transportation project. Second, the corporation can issue tax-exempt debt under certain IRS requirements, desirable because of the unique cost advantage tax exemption offers. Examples of 63-20 corporations include those established to develop the Pocahontas Parkway in Virginia, the Southern Connector in South Carolina and the Las Vegas Monorail.

What can you do for me?

The public sector looks to private transportation projects to achieve the following significant benefits:

New opportunities for financing

Everyone in the transportation industry is aware of the shortfall between the public funds available and the projects that need to be funded. Transportation agencies are therefore casting about for new funding sources and mechanisms. The key is to find sources of upfront funding and long-term financing. In the concession model, both early development investment and long-term funding comes primarily from a private investor. These private companies envision the freeway or bridge as an asset like a piece of real estate. For a sizable initial investment, the company can realize a profitable return over a period of 50 to 100 years.

Speedier project delivery

The rate of traditional road building can be painfully slow. An infusion of upfront funding enables projects to be built all at once rather than piecemeal as financing becomes available (traditional “pay-as-you-go.”) One study found that innovative financing and contracting can result in as much as a 50% or more time reduction in project duration when compared to traditional design-bid-build.

Cost savings

PPPs can result in significant project cost savings to the public sector. Research by the Florida Department of Transportation has found that the magnitude of cost and time overruns is significantly reduced with innovative contracts and PPPs. The Pocahontas Parkway, constructed under Virginia’s Public-Private Transportation Act of 1995, came in $10 million below the original $324 million estimated cost because of cost savings from an innovative design-build-finance contract.

Efficiency and innovation

By their nature, PPPs reward innovative thinking and efficient operation. The public-private partnership approach maximizes the motivation to save costs and think creatively and brings fresh approaches to transportation. PPPs often have more flexibility to capitalize on the use of innovative technology that leads to increased quality.

Political doubt?

Despite the advantages of PPPs in transportation and toll projects, challenges remain to their adoption and use around the U.S.

Many of the federal, state and local laws and policies surrounding transportation are premised on the use of government funds and traditional contracting. However, significant progress in the opening up of transportation to PPPs is under way around the U.S. As of 2004, 23 states have granted legal authority for private-sector participation in transportation projects with 21 allowing private-sector involvement in highway projects.

Virginia and Texas have taken the lead in promoting private partnerships. Virginia was one of the first states to enact a comprehensive PPP law with the Public-Private Transportation Act of 1995, which enables Virginia to enter into contracts authorizing private entities to acquire, construct, improve, maintain and operate transportation facilities. Meanwhile, Texas’s 2003 legislation House Bill 3588 provides numerous new tools to aid in the formation of public/private partnerships, including expanded tolling authority and the use of Comprehensive Development Agreements (CDAs). A CDA may include project design, construction, financing, right-of-way acquisition and highway operation and maintenance.

The federal government is similarly seeking to expand opportunities for PPPs in transportation. The Federal Highway Administration (FHWA) has made the promotion of PPPs a priority for the agency. The FHWA recently implemented a new program, Special Experiment Project No. 15 (SEP-15), to promote innovation and find ways to eliminate federal hurdles to PPPs. In addition, the new federal transportation bill includes language allowing Private Activity Bonds that will allow privately financed projects access to tax-exempt debt.

The resistance to privatized road projects is deeply rooted in some sectors of the public. Many politicians and citizens consider the private sector’s profit motive incompatible with public service. Opposition also can simmer over the issue of tolls. The U.S. public has come to think of highways as “free,” and many charge that a toll constitutes “double-taxation.” Effective public information and outreach is essential to answer questions about PPPs and reassure the public that their needs and safety will not be sacrificed for a private partner’s profits.

The needs for the desire

The hurdles facing PPPs for transportation can be overcome with careful planning and some hard work. The following list of factors for success is drawn both from this research and from real-world experience with PPPs.

1. Public-sector champion: Without a dedicated champion on the public side, PPPs face long odds. This champion doesn’t have to be a single individual—it can be a team of people or a particular transportation agency. Nevertheless, this champion needs to serve as cheerleader, promoter and salesperson. The public-sector champion serves to reassure both the public and the private sector. Other public agencies and the population in general need to see that the project has strong support and that powerful interests believe in the project and are committed to seeing it through. The private sector, meanwhile, needs to know that the project has enough backing to weather political storms.

2. Favorable investment environment: For the private sector, participating in a public-private sector partnership involves making a decision as to where best to devote limited resources. The private sector looks for predictability. Investors are willing to undertake risk, but they need to understand what that risk is and be able to quantify it in some way. Factors such as the legal framework, the regulatory environment and the level of public oversight need to be clear upfront. The private sector is going to shy away from projects where it looks like the rules might change in the middle of the game.

3. A project that solves a problem: Ultimately, neither the public nor private investors will back a transportation project that they don’t think is needed. A road that won’t reduce congestion, a bridge that no one wants, a highway going nowhere—none will get support. Successful PPPs are formed for a purpose—to reduce congestion, improve mobility and provide economic development.

4. An experienced private partner that brings value: For many of the PPPs in the U.S., the private-sector partner has been a large construction contractor who can offer significant experience in structuring, organizing and executing transportation projects. Concessionaires, however, are still new in the U.S. and often bring the advantage of a “portfolio” of various toll projects. Concession teams can often benefit by including a partner with more U.S. experience. The consortium awarded the first concession contract for the Trans-Texas Corridors, for example, is lead by Cintra but includes a 15% stake by San Antonio-based Zachry Construction.

The U.S. has reached a crucial point for PPPs. Once a radical idea, the evidence suggests we are moving into a time where privatization can play an important role in delivering critical infrastructure. As they become more common, many issues still in flux will settle into routine as best practices are identified and refined. In the meantime, public agencies need to educate themselves on the pros and cons so they can decide where PPPs can be used effectively. The opportunity exists for PPPs to get more projects delivered sooner and more cost effectively than with traditional financing and contracting.

About The Author: Nees and Bailey-Campbell are vice presidents and transportation programs managers for Carter & Burgess, Dallas.

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