Public-Private Partnerships in Highway and Transit Infrastructure Provision

Public-Private Partnerships in
Highway and Transit Infrastructure Provision
July 9, 2008
William J. Mallett
Specialist in Transportation Policy
Resources, Science, and Industry Division

Public-Private Partnerships in
Highway and Transit Infrastructure Provision
Summary
Growing demands on the transportation system and constraints on public
resources have led to calls for more private sector involvement in the provision of
highway and transit infrastructure through what are known as “public-private
partnerships” (PPPs). A PPP, broadly defined, is any arrangement whereby the
private sector assumes more responsibility than is traditional for infrastructure
planning, financing, design, construction, operation, and maintenance. This report
describes the wide variety of public-private partnerships in highways and transit, but
focuses on the two types of highway PPPs that are generating the most debate: the
leasing by the public sector to the private sector of existing infrastructure; and the
building, leasing, and owning of new infrastructure by private entities.
PPP proponents argue that, in addition to being the best hope for injecting
additional resources into the surface freight and passenger transportation systems for
upkeep and expansion, private sector involvement potentially reduces costs, project
delivery time, and public sector risk, and may also improve project selection and
project quality. Detractors, on the other hand, argue that the potential for PPPs is
limited, and that, unless carefully regulated, PPPs will disrupt the operation of the
surface transportation network, increase driving and other costs for the traveling
public, and subvert the public planning process. Some of the specific issues raised
in highway operation and costs include the effects of PPPs on trucking, low-income
households, and traffic diversion. Issues raised in transportation planning include
non-compete provisions in PPP agreements, unsolicited proposals, lease duration,
and foreign control of transportation assets.
On the question of new resources, the evidence suggests that there is significant
private funding available for investment in surface transportation infrastructure, but
that it is unlikely to amount to more than 10% of the ongoing needs of highways over
the next 20 years or so, if that, and probably a much smaller share of transit needs.
With competing demands for public funds, there is also a concern that private
funding will substitute for public resources with no net gain in transportation
infrastructure. The effect of PPPs on the planning and operation of the transportation
system is a more open question because of the numerous forms they can take, and
because they are dependent on the detailed agreements negotiated between the public
and private partners. For this reason, some have suggested that the federal
government needs to more systematically identify and evaluate the public interest,
particularly the national public interest, in projects that employ a PPP.
Three broad policy options Congress might consider in how to deal with PPPs
in federal transportation programs and regulations are discussed in this report. The
first option is to continue with the current policy of incremental changes and
experimentation in program incentives and regulation. Second is to actively
encourage PPPs with program incentives, but with relatively tight regulatory controls.
Third is to aggressively encourage the use of PPPs through program incentives and
limited, if any, regulation.

Contents
In troduction ......................................................1
Background ......................................................2
Types of Transportation Public-Private Partnerships......................5
Prominent Examples of Public-Private Partnerships.......................7
Chicago Skyway...............................................7
Indiana Toll Road..............................................8
Northern Virginia I-495 HOT Lanes...............................8
Las Vegas Monorail............................................9
Missouri DOT Safe and Sound Program...........................10
Federal Legislation and Public-Private Partnerships......................11
Highway Public-Private Partnerships.............................12
Highway Tolling.........................................12
Innovative Finance........................................13
Innovative Contracting.....................................15
Transit Public-Private Partnerships...............................16
Innovative Financing......................................16
Innovative Contracting.....................................16
Issues for Congress...............................................17
Additional Resources for Transportation Infrastructure...............17
Diversion of Resources From the Transportation Sector...........20
Other Resource Benefits...................................20
Effects of Public-Private Partnerships on the Operation and
Planning of the Surface Transportation System..................22
Operation of the Highway Network...........................22
Infrastructure Planning.....................................24
Protecting the Public Interest................................26
Policy Options for Congress........................................26
List of Figures
Figure 1. Total Highway Trust Fund Revenue, 1993-2006
(Current and Inflation-Adjusted 1993 Dollars).......................4

Public-Private Partnerships in
Highway and Transit Infrastructure Provision
Introduction
Growing demands on the transportation system and constraints on public
resources have led to calls for more private sector involvement in the provision of
highway and transit infrastructure through what are known as “public-private
partnerships” (PPPs). The opportunity to own or lease assets that have the potential
for generating stable, medium-level revenues over the long term has attracted private
sector interest. According to the U.S. Department of Transportation “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.”¹ Typically the “public” in public-private partnerships refers to a state
government, local government, or transit agency. The federal government,
nevertheless, exerts influence over the prevalence and structure of PPPs through its
transportation programs, funding, and regulatory oversight.
Proponents of PPPs argue that they are the best hope for injecting additional
resources into the surface freight and passenger transportation systems for upkeep
and expansion. Furthermore, PPP proponents argue, private sector involvement often
reduces costs, project delivery time, and public sector risk, and may improve project
selection and project quality. Detractors, on the other hand, argue the potential for
PPPs is limited, and that, unless carefully regulated, PPPs will disrupt the operation
of the national surface transportation network, increase costs for the traveling public,
and subvert the public planning process. With competing demands for public funds,
there is also a concern that private funding will substitute for public resources with
no net gain in transportation infrastructure.
A wide variety of public-private partnerships in highways and transit exist, but
this report focuses on the two types of highway PPPs that are generating the most
debate: (1) the leasing by the public sector to the private sector of existing
infrastructure, sometimes referred to as “brownfield” facilities; and (2) the building,
leasing, and owning of new infrastructure by private entities, sometimes known as
“greenfield” facilities. A common, though not essential, element to greater private
sector participation in highway infrastructure provision is the use of tolling. Vehicle
tolls provide a revenue stream to retire bonds issued to finance a project and to
provide a return on investment. Highway tolling can be implemented by public
authorities, but it is widely believed that the privatization of transportation

¹ U.S. Department of Transportation, Federal Highway Administration, Public-Private
Partnerships Website, “PPPs Defined.” [http://www.fhwa.dot.gov/PPP/defined.htm].

infrastructure will hasten the spread of tolling and may raise toll rates. Consequently,
a discussion of PPPs must include, as this report does, the issue of vehicle tolling and
other direct pricing mechanisms.
This report begins with a brief discussion of the surface transportation system
and its financing needs as background to the debate on PPPs. That is followed by
sections describing the different types of PPPs, with details of a few prominent
examples, and the development of federal legislation with respect to PPPs. The
report then discusses the main issues of contention with the construction and long-
term leasing of highways by the private sector, particularly as they relate to the
funding, planning, and operation of the surface transportation system, before
providing some policy options Congress may wish to consider.
Background
The appropriate role of the private sector in the provision of ostensibly public
surface transportation infrastructure has been discussed for decades. But this debate
has recently taken on a new urgency because of the magnitude of estimated future
needs of the surface transportation system coupled with problems funding existing
highway and transit programs at the federal, state, and local levels. A number of high
profile PPP agreements, including the leasing of the Indiana Toll Road and the
Chicago Skyway described below, have also contributed to this heightened interest.
Although estimating future infrastructure needs is fraught with difficulty,² a
number of recent reports have concluded that the nation’s surface transportation
infrastructure will require substantially more funding over the next few decades to
deal with physical deterioration, congestion, and future demand for both passenger
and freight travel.³ Capital cost estimates prepared by the Department of
Transportation (DOT), for example, suggest that the nation as a whole, including all
levels of government and the private sector, needs to increase highway capital
spending by 12% and transit capital spending by 25% from 2005 through 2024 in
order to maintain the current condition and performance of the system.⁴ Investment
to improve conditions and performance would be higher than these estimates. The
National Surface Transportation Policy and Revenue Study Commission
(NSTPRSC), created under Section 1909 of the Safe, Accountable, Flexible, Efficient

² Problems associated with estimating future infrastructure needs include defining a “need”
and predicting future conditions, especially consumer demand which can vary depending
on economic conditions and public policy choices such as how a service is funded and
priced.
³ See, for example, Transportation Research Board, National Cooperative Highway Research
Program, Future Financing Options to Meet Highway and Transit Needs, NCHRP Web-
Only Document 102 (Washington, DC, 2006), p. 2-16. [http://onlinepubs.trb.org/
onlinepubs/nchrp/nchrp_w102.pdf].
⁴ U.S. Department of Transportation, Federal Highway Administration and Federal Transit
Administration, 2006 Status of the Nation’s Highways, Bridges, and Transit: Conditions and
Performance (Washington, DC, 2007). [http://www.fhwa.dot.gov/policy/2006cpr/index.
htm].

Transportation Equity Act — A Legacy for Users (P.L. 109-59; SAFETEA),
estimated significantly greater needs than DOT in its report to Congress.⁵
NSTPRSC’s middle range capital spending estimate for highways by all levels of
government and the private sector over the next 30 years (2006 through 2035), for
instance, suggests an increase of between 96% and 176% over currently sustainable
expenditures, and for transit the equivalent range is between 31% and 92%.⁶
At the same time that many argue for greater surface transportation
infrastructure funding, there is concern that the main revenue mechanism at the
federal level, the fuels tax, is faltering. The federal contribution to highway and
transit infrastructure, approximately 40% of capital spending on these modes since
the 1990s, is largely derived from the Highway Trust Fund which relies primarily on
the federal fuels tax and less so on other vehicle-related taxes.⁷ Almost all federal
highway funds and approximately 80% of federal transit funds are derived from the
trust fund. In its most recent estimates, the Congressional Budget Office (CBO)
suggests that on its current path the Highway Account of the Highway Trust Fund
will go into deficit sometime in FY2009, before the end of the current authorization
period, and that the Mass Transit Account will go into deficit in FY2012.⁸
Funding shortfalls in the Highway Trust Fund are related to a few key
underlying factors, particularly the erosion of the real per gallon value of the fuels
tax. The federal tax on gasoline was last raised in the early 1990s, by 5 cents in 1990
(P.L. 101-508) and then by 4.3 cents in 1993 (P.L. 103-66). Of the 5 cent increase
in 1990, 2.5 cents was directed to the Highway Trust Fund and 2.5 cents was directed
to the General Fund of the U.S. Treasury for deficit reduction, whereas in 1993 the
entire 4.3 cents was directed to the General Fund for deficit reduction. The 2.5 cents
increase in 1990 for deficit reduction was redirected to the Highway Trust Fund
beginning October 1, 1995 with 2 cents going to the Highway Account and 0.5 cents
to the Mass Transit Account (P.L. 103-66). The 4.3 cents raised in 1993 was
redirected to the trust fund beginning October 1, 1997 with 3.44 cents going to the
Highway Account and 0.86 cents to the Mass Transit Account (P.L. 105-34; P.L.
105-178). Consequently, the gasoline tax flowing to the Highway Trust Fund went
from 9 cents to 11.5 cents per gallon in 1990, to 14 cents per gallon in 1995, and to

18.3 cents per gallon in 1997.

⁵ National Surface Transportation Policy and Revenue Study Commission, Transportation
for Tomorrow (Washington, DC, 2007). [http://www.transportationfortomorrow.org/final_
report/].
⁶ Ibid., Volume II, pages 4-6 and 4-12. High range estimates were 168% to 268% for
highways and 78% to 162% for transit.
⁷ The federal tax on gasoline is currently 18.4 cents per gallon, of which 15.44 cents is
deposited in the Highway Account of the Highway Trust Fund, 2.86 cents in the Mass
Transit Account, and 0.1 cents in the Leaking Underground Storage Tank Trust Fund.
⁸ Estimates provided to CRS by the Congressional Budget Office, February 29, 2008.

Adjusted for changes in the consumer price index (CPI), the federal tax on
gasoline in 2006 was worth about 72% percent of its value in 1993.⁹ Adjusted for
changes in the price of materials used in highway construction, as estimated by
FHWA, however, the federal gasoline tax was worth only 49% in 2006 compared
with 1993.¹⁰ Although the federal fuels tax in absolute terms has lost a good deal of
its purchasing power since 1993, revenues to the trust fund in inflation-adjusted
terms have not suffered as much because the amount of driving and, therefore, fuel
consumption, has until recently continued to grow (see Figure 1). Indeed, through
the 1990s revenues continued to grow in real (inflation-adjusted) terms. However,
revenues have been flat in real terms since at least 2001, and when adjusted for the
price of highway construction materials fell sharply in both 2005 and 2006. For these
reasons, many point to a disconnect between growing infrastructure needs on the one
hand and the purchasing power of the revenues in the Highway Trust Fund on the
other.
Figure 1. Total Highway Trust Fund Revenue, 1993-2006
(Current and Inflation-Adjusted 1993 Dollars)

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¹⁰ U.S. Department of Transportation, Federal Highway Administration, Price Trends for
Federal-Aid Highway Construction (Washington, DC: 2008). [http://www.fhwa.dot.gov/
programa dmin/pt2006q4.pdf].

How the federal government ought to deal with the gap between revenues from
traditional funding mechanisms, particularly the federal fuels tax, and future
infrastructure investment needs is a major underlying issue in the debate about the
role of PPPs. The two main sides of the debate were evident in the NSTPRSC report
that contained both majority and minority views. The majority view, supported by
nine of the twelve Commissioners, contended that severe underinvestment is the
main problem facing transportation infrastructure in the years ahead. Expressing the
desire for maintaining a strong federal role in financing the capital needs of the
transportation system, at the aforementioned 40% level, they recommended a 25 to
40 cent-per-gallon increase in the federal fuels tax to be phased in over the next five
years, and indexing the tax to inflation beginning in year 6, although, they argued,
these increases need to be accompanied by major reforms of the federal program to
make it more focused and efficient. The majority also argued that PPPs, private
capital, and tolling, including congestion pricing, would need to be employed to a
greater extent, but under a set of rules and regulations designed to protect the public
interest.
An opposing viewpoint, expressed by three commissioners including the U.S.
Secretary of Transportation Mary Peters, proposed that there is some need for
additional resources in transportation infrastructure, but not to the extent estimated
in the majority report. They argued that “a failure to properly align supply and
demand, not a failure to generate sufficient tax revenues, is the essential policy
failure” in transportation infrastructure provision.¹¹ A key ingredient of change, in
their view, should be market-based reforms of highway systems allowing for much
greater reliance on tolling, particularly congestion pricing, private sector
participation, and, thus, PPPs. Moreover, they argue that the Federal role ought to
be reduced and refocused in order to allow innovation at the state and local level.
Types of Transportation Public-Private Partnerships
Public-private partnerships are typically conceived of as distinct from the
traditional method of planning, building, operating, and maintaining highway and
transit infrastructure. In the traditional method, known as “design, bid, build,” the
public sector decides there is a need for building a new facility, plans its development
with a wide variety of community input, organizes the financing from tax revenue
(either on a pay-as-you-go basis or through government bonds backed by tax revenue,
tolls, or fares), lets out contracts to design and build the facility, and takes final
ownership to operate and maintain the facility. In contrast, a public-private
partnership involves more private sector participation in any or all phases of
infrastructure development and operation. In many PPPs, private sector involvement
is predicated on a revenue stream from the operation of a facility such as a vehicle
toll or container fee.

¹¹ National Surface Transportation Policy and Revenue Study Commission, 2007, p. 60.

According to the U.S. Department of Transportation, PPPs in highway and
transit infrastructure provision can be categorized into six basic types, although the
exact arrangements vary from project to project, many other types of PPPs are
possible, and there is some overlap among types.¹² From least to most private
responsibility, these six basic types of PPP are:
^!Private Contract Fee Services. These types of PPPs turn over to
the private sector more responsibility for providing services than is
traditional. This may include contracting for operations and
maintenance (O&M) services and program and financial
management services. An example of this type of PPP is the partial
outsourcing of street maintenance in the District of Columbia,
including snow and ice removal.
^!Design-Build (DB). This type of partnership arrangement combines
two services that are traditionally separate, design and construction,
into one fixed-fee contract. The public sector, nevertheless, retains
ownership of the facility as well as responsibility for planning,
preliminary engineering, financing, and O&M. An example of this
type of PPP is the 12-mile light rail system in Minneapolis,
Minnesota, opened in 2004, that was mostly constructed using two
design-build contracts, one to construct the rail track and signal
equipment and one for the trains.
^!Design-Build-Operate-Maintain (DBOM). These partnerships go
even further than design-build PPPs by adding private sector
responsibility for O&M once a facility goes into service. The public
sector is still responsible for financing, and retains the risks and
rewards associated with the operating costs and revenues. The 21-
mile Hudson-Bergen light rail system in New Jersey is a good
example of DBOM. The original fixed-price contract awarded to the^st
21 Century Rail Corporation in 1996 was for design and
construction of the initial 10 miles by a guaranteed date and then 15
years of operation and maintenance. The contract was subsequently
renegotiated for extensions to the system and to lengthen the O&M
contract.
^!Long Term Lease Agreement. This type of partnership typically
involves the leasing of an existing facility to a private company for
a specified amount of time. The private company usually pays an
initial concession fee and must operate and maintain the facility to
prescribed standards. The private company typically collects tolls on
users and keeps the revenue to pay bond holders and to generate a
return on its investment. Prominent examples of this type of PPP are
the Chicago Skyway and the Indiana Toll Road (see descriptions
below).

¹² U.S. Department of Transportation, Federal Highway Administration, Public Private
Partnerships Website, “PPP Options.” [http://www.fhwa.dot.gov/PPP/pcfs.htm].

^!Design-Build-Finance-Operate (DBFO). In addition to the
designing, building, and operation of an infrastructure project, these
types of PPPs also transfer to the private sector most of the financing
responsibility. Debt financing leveraged with a revenue stream, such
as tolls, is the most common mechanism in this type of PPP.
However, financing may be supplemented with public sector grants
and/or in-kind contributions such as right-of-way. The 14-mile
Dulles Greenway toll road in northern Virginia is an example of this
type of PPP.
^!Build-Own-Operate (BOO). In this type of PPP, the public sector
grants to the private sector the right to design, build, operate,
maintain and own a facility in perpetuity. Consequently, conception
of the project and subsequent planning is more likely to lay with the
private sector. An example of this type of PPP is the 6 mile Foley
Beach Express near Gulf Shores, Alabama that incorporates a toll
bridge over the Intracoastal Waterway.
Prominent Examples of Public-Private Partnerships
To illustrate the way in which PPPs can be structured, this section describes a
few prominent examples, four dealing with highways and one dealing with transit.
Two of the examples, the Chicago Skyway and Indiana Toll Road, both involve long-
term leases of existing facilities, and have received a good deal of attention over the
past few years. Both leasing deals have raised questions, among other things, about
the loss of control of a major public asset for several generations, increases in toll
rates, and the effects on the surrounding transportation network. Another example,
the addition of High Occupancy Toll (HOT) Lanes to the Capital Beltway (I-495) in
northern Virginia, involves private investment in new highway capacity that is seen
by some as a boon to a state with limited public funding for major infrastructure
projects. However, it too raises several public policy questions, including those
about the public planning process for transportation infrastructure and the ability of
lower-income travelers to pay tolls that may be high during the weekday morning and
evening peak periods. The development of the Las Vegas Monorail provides an
example of the potential and the difficulties of private investment in public transit.
And the final example, the Missouri Safe and Sound program, details a plan for
private involvement in repairing and maintaining a significant number of highway
bridges. While innovative, the Missouri plan may commit a substantial amount of
the state’s federal bridge funding for 25 years, potentially tying the hands of future
decision makers and reducing the flexibility of the state to react to other
transportation challenges. The issues raised by these questions and several others are
discussed in more depth in the “Issues for Congress” section later in this report.
Chicago Skyway
The Chicago Skyway is a 7.8 mile elevated toll road connecting the Dan Ryan
Expressway (I-94) to the Indiana Toll Road (I-90). Built in 1958 without federal
funds, the Skyway was operated and maintained by the City of Chicago Department

of Streets and Sanitation until 2004 when it was leased for 99 years to the Skyway
Concession Company (SCC), a private concessionaire that involves two well-known
foreign companies involved in infrastructure investment, Cintra (Spain) and
Macquarie Infrastructure Group (Australia). SCC won this concession with a bid of
$1.83 billion in a competition that included four other detailed proposals. The City
of Chicago and SCC signed a contract on October 27, 2004, and SCC began
operating the Skyway on January 24, 2005. According to the lease agreement, SCC
must operate and maintain the Skyway to certain standards, and, within limits, can
collect and retain all toll revenue. For cars, tolls are limited to $2.50 through 2007,
gradually rising to $5.00 in 2017. After that tolls can be increased by the greater of
2%, the percentage change in the CPI, or the percentage increase in per capita
nominal GDP. Of the $1.83 billion collected by the City of Chicago, $463 million
was used to repay the outstanding debt on the road, $392 million is being used to pay
down the city’s general obligation debt, and $875 million was placed into long-term
and medium-term reserve funds.¹³
Indiana Toll Road
The Indiana Toll Road is a 157-mile segment carrying an Interstate designation
that runs across northern Indiana linking with the Chicago Skyway in the west and
the Ohio Turnpike in the east.¹⁴ The Indiana Toll Road, built largely without federal
funds and opened in 1956, was operated by the Indiana DOT from 1981 to 2006.
After a bidding process involving eleven proposals, a 75-year lease concession was
awarded to the Indiana Toll Road Concession Company (ITRCC), a partnership
between Cintra and Macquarie Infrastructure Group, for $3.8 billion. ITRCC began
operating the facility on June 29, 2006. For cars, tolls are limited to $8.00 through
June 30, 2010. After that tolls can be increased by the greater of 2%, the percentage
change in the CPI, or the percentage increase in per capita nominal GDP. The
proceeds from the lease are being used by the Indiana DOT to fund 200 highway
construction projects and 200 highway major preservation projects under the state’s
10-year “Major Moves” initiative.¹⁵ In addition, the 7 counties through which the toll
road passes will receive payments of $40 million to $120 million for local
transportation projects and all counties will receive extra state aid for transportation.
Northern Virginia I-495 HOT Lanes
In December 2007, the Virginia Department of Transportation (VDOT) signed
an agreement with a private consortium to build and operate four new HOT lanes,
two in each direction, on a 14-mile stretch of the Capital Beltway (I-495) from the

¹³ Government Accountability Office, Highway Public-Private Partnerships: More Rigorous
Up-front Analysis Could Better Secure Potential Benefits and Protect the Public Interest,
GAO-08-44 (Washington, DC, February 2008), p. 21. [http://www.gao.gov/new.items/
d0844.pdf]; see also, “The Pros and Cons of Toll Road Leasing,” Public Works Financing,
Vol. 2005, May 2006, p. 1-11.
¹⁴ Government Accountability Office, February 2008.
¹⁵ Indiana Department of Transportation, Major Moves Website. [http://www.in.gov/indot/

7039.htm].

Springfield Interchange to north of the Dulles Toll Road. The partnership between
VDOT and the private consortium is an example of a Design-Build-Finance-Operate
(DBFO) PPP. The new lanes will be operated using congestion pricing technology
that collects a variable toll based on traffic levels. High-occupancy vehicles (HOV-
3), motorcycles, buses, and emergency vehicles will travel without charge. The
private consortium, Fluor Corporation and Transurban, is expected to finance all but
$409 million of the estimated $1.9 billion project. The private consortium is
committing $349 million in equity and will borrow the rest using Federal credit
assistance, a Transportation Infrastructure Finance and Innovation Act (TIFIA) loan
of $585 million and $586 million in tax-exempt private-activity bonds.¹⁶ The
contract is a fixed-price, fixed time, design-build contract, with an 80-year lease for
operations, maintenance, and toll collection. Work to construct the new lanes began
in the spring of 2008 and must be completed by spring 2013. The $409 million
committed by the state will finance a number of additional highway improvements
including the final phase of the Springfield Interchange, improvements to the I-66
interchange, reconstruction of some bridges on the Beltway, and participation in a
regional congestion plan. The state will retain ownership of the new lanes and will
share in toll revenues if they exceed an 8.1% return on investment. A similar project
involving VDOT and Fluor-Transurban is being pursued on a 70 mile segment of I-

395/I-95 from Arlington to Massaponax.¹⁷

Las Vegas Monorail
Possibly one of the most innovative PPPs in transit over the past few years has
been the development of the Las Vegas Monorail system, currently a 4-mile system
that connects hotels and other attractions on the Las Vegas Strip. Most transit PPPs
have been of the design-build variety and a few have been design-build-operate-
maintain, but direct government ownership and financial support has been an
essential element of these types of projects. The Las Vegas Monorail, by contrast,
has been more of a private venture, owned and operated by the Las Vegas Monorail
Company, a non-profit corporation, financed with some tax-exempt bonds and an
exemption from sales tax as a charitable organization.¹⁸ The original segment of the
system, operating between two major hotels, was opened in 1995. The system was
expanded in 2004 with financial and in-kind contributions from hotels and resorts in
addition to the sale of tax-exempt bonds that are being repaid with passenger fares
and advertising revenues.¹⁹ A proposal to extend the system to McCarren
International Airport was approved by Clarke County in November 2006. Despite
this approval, the project does not appear to have attracted the approximately $500

¹⁶ Virginia Department of Transportation, Virginia Hot Lanes, “Capital Beltway Project
Funding.” [http://www.virginiahotlanes.com/beltway-project-info-funding.asp].
¹⁷ Fluor-Transurban, Virginia Hot Lanes Website. [http://www.virginiahotlanes.com/].
¹⁸ McCabe, Francis, “Monorail Tax Break Renewed,” Las Vegas Review-Journal, March 4,

2008, p. B2.

¹⁹ General Accounting Office (now the Government Accountability Office), Highways and
Transit: Private Sector Sponsorship of Investment in Major Projects Has Been Limited,
GAO-04-419 (Washington, DC, March 2004), pp. 52-53. [http://www.gao.gov/new.items/
d04419.pdf].

million needed to finance construction.²⁰ Financial problems with the existing
system may be to blame. Recent newspaper reports have stated that the system is
failing to meet its operating and debt expenses by about $30 million annually and that
the company may exhaust its reserve funds by 2010.²¹ One estimate suggests that
while the monorail carried about 22,000 passengers a day in late 2007, it needs to
carry about 35,000 a day to break even.²²
Missouri DOT Safe and Sound Program
Another innovative PPP is the Safe and Sound Program proposed by Missouri
Department of Transportation (MoDOT).²³ Under this program, MoDOT is seeking
a private sector partner to repair 802 state bridges by 2012 and then to maintain them
in good condition for another 25 years. MoDOT estimates the state has about 10,000
bridges, of which about 1,000 are rated in poor or serious condition.²⁴ In exchange
for financing the repair and maintenance costs, beginning in 2012, the private partner
will receive regular payments from the state for the remaining 25 years. The state is
proposing to use federal bridge program funds to make the payments. The state has
called this type of PPP, Design-Build-Finance-Maintain, the bridge equivalent of the
Design-Build-Finance-Operate model described above. The state received two bids
for the contract and chose Missouri Bridge Partners, a consortium of firms including
Zachry American Infrastructure, Parsons Transportation Group, Fred Weber Inc.,
Clarkson Construction, HNTB, and Infrastructure Corporation of America. MoDOT
estimates that the project will cost between $400 million and $600 million. Although
it is not yet clear how the project will be financed, in 2007, the U.S. Department of
Transportation approved a $700 million allocation of Private Activity Bonds to the
MoDOT for the project.²⁵

²⁰ McCabe, Francis, “Monorail Extension Going Nowhere Fast,” Las Vegas Review-Journal,
January 13, 2008, p. B2.
²¹ McCabe, Francis, March 4, 2008.
²² McCabe, Francis, “Monorail Ridership Climbs in 2007,” Las Vegas Review-Journal,
January 19, 2008, p. B3.
²³ Missouri Department of Transportation, Safe and Sound Program Website. [http://www.
modot.gov/safeandsound/index.htm] .
²⁴ Ibid; see also Stokes, D.C., L. Gilroy, and S.R. Staley, “Missouri’s Changing
Transportation Paradigm,” Show-Me Institute, Policy Study, No. 14, February 27, 2008.
[http://showme institute.org/ docLib/20080225_smi _study_14.pdf].
²⁵ U.S. Department of Transportation, Federal Highway Administration, “PPP Update: $3.37
Billion in Conditional Private Activity Bond Allocations Made,” Innovative Finance
Quarterly, Vol. 13, No. 2, Spring 2007. [http://www.fhwa.dot.gov/innovativeFinance/
ifqvol13no2.htm] .

Federal Legislation and Public-Private Partnerships
In the period from the mid-1950s through the 1970s, highway and transit
infrastructure provision were both marked by a large infusion of public funding,
particularly from the federal government.²⁶ Highway spending grew from the mid-

1950s, in large part to finance the construction of the Interstate Highway System,

whereas transit spending grew from the mid-1960s with the public sector takeover
of struggling private transit companies and an investment in new vehicles and
infrastructure. During this period, the private sector’s role was largely limited to
bidding on and building what the public sector had planned, designed, and financed,
a process known as “design-bid-build”. With the effective completion of the
Interstates by the early 1980s, however, public capital spending on highways had
already declined in real terms, and the federal share of total public capital spending²⁷
that had reached highs in the late 1970s and early 1980s began to decline. Transit
spending by all levels of government, that had grown rapidly in the 1970s, slowed²⁸
dramatically in the 1980s and the Federal share declined.
According to some analysts, these trends spurred interest in the use of public-
private partnerships, as states and localities, particularly those in fast growing parts
of the country, searched for new ways to fund and build transportation
infrastructure.²⁹ In highway transportation during the 1980s, there was some renewed
focus on vehicle tolling, a potential revenue stream that was of interest to private
investors as well as public authorities. Consequently, by the late 1980s, spurred on
by experience in other parts of the world and developments in automated toll
collection technology, seven states had approved legislation to allow private³⁰
investment in highway projects. Two of the earliest projects developed under these
new rules were the Dulles Greenway in Virginia and SR-91 in California, toll roads
that both opened in 1995. According to DOT, 23 states currently have PPP enabling
legi slation.³¹
In transit, new revenue was sought from the development of new private³²
facilities on or over transit agency land, a process known as joint development. For
example, joint development was used in the construction of mixed-use facilities

²⁶ U.S. Department of Transportation, Federal Highway Administration and Federal Transit
Administration, 2007, chapter 6.
²⁷ Ibid., exhibits 6-8 and 6-10.
²⁸ Ibid., exhibits 6-21 and 6-22.
²⁹ Perez, Benjamin G. and James W. March, “Public-Private Partnerships and the
Development of Transport Infrastructure: Trends on Both Side of the Atlantic,” Paper
Presented at the First Conference on Funding Transport Infrastructure, Banff, Alberta,
Canada, August 2-3, 2006. [http://www.fhwa.dot.gov/PPP/perez_banff_ppp_final.pdf].
³⁰ Ibid., p. 9.
³¹ U.S. Department of Transportation, Federal Highway Administration, Public-Private
Partnerships Website, “PPP Legislation.” [http://www.fhwa.dot.gov/PPP/legislation.htm].
³² U.S. Department of Transportation, Report to Congress on Public-Private Partnerships
(Washington, DC, 2004), p. 36. [http://www.fhwa.dot.gov/reports/pppdec2004/pppdec2004.
pdf].

(offices, retail, and a hotel) surrounding the Washington Metropolitan Area Transit
Authority’s (WMATA) Bethesda, MD station completed in 1985. The air-rights
lease for this development generates $1.6 million annually in rents for WMATA.³³
Highway Public-Private Partnerships
With the growing interest in tolling and public-private partnerships, the federal
government in the late 1980s began to explore the possibilities for their inclusion in
federal surface transportation programs. The three main areas of legislative change
to accommodate this in the highway program have been in the areas of highway
tolling, innovative finance, and innovative contracting.
Highway Tolling. Since the passage of the Intermodal Surface Transportation
Efficiency Act of 1991 (ISTEA; P.L. 102-240), it has generally been permissible to
use tolling to finance the construction or reconstruction of federally supported roads,
tunnels, and bridges, except on the Interstate system, even when the facility is
privately owned (23 U.S.C. §129(a)).³⁴ Moreover, over the years, and particularly
since the late 1980s, Congress has created a number of exceptions to tolling
restrictions on Interstates that permit the development of PPPs. In the Surface
Transportation and Uniform Relocation Assistance Act of 1987 (P.L. 100-17),
Congress established a pilot program allowing federal funds to be used, with a
maximum federal share of 35%, in the construction or reconstruction of up to seven
toll facilities. However, these new or reconstructed facilities had to be publicly
owned and operated and Interstate highways were specifically excluded. In the next
authorization bill, ISTEA, Congress removed the pilot program status, allowed states
to convert non-tolled roads, bridges, and tunnels to tolled facilities, raised the federal
share to 50%, and allowed for private ownership and operation. ISTEA also
established the Congestion Pricing Pilot Program which allowed federal funds to be
used in the implementation of congestion pricing (variable tolls) on up to 5 projects,
of which a maximum of 3 could be Interstates.
The Congestion Pricing Pilot Program was continued in the Transportation
Equity Act for the 21^st Century (TEA-21; P.L. 105-178), enacted in 1998, but
expanded to allow 15 projects and renamed the Value Pricing Pilot Project.
Additionally, TEA-21 created another pilot program, the Interstate System
Reconstruction and Rehabilitation Pilot Program, for up to 3 toll projects with the
purpose of reconstruction on the Interstate Highway System. To date, a decade later,
only two of the three slots have been filled, with I-70 in Missouri and I-81 in Virginia
having been granted approval.

³³ Transportation Research Board, Transit Cooperative Research Program, Transit-Oriented
Development in the United States: Experiences, Challenges, and Prospects, TCRP Report

102 (Washington, DC, 2004). [http://onlinepubs.trb.org/onlinepubs/tcrp/tcrp_rpt_102.pdf].

³⁴ At the outset, a number of existing toll roads were included as part of the Interstate
Highway System.

Most recently, in SAFETEA, Congress authorized three new ways to institute
tolling on federally funded roads and modified another method.³⁵ Section 1121 of
SAFETEA amended 23 U.S.C. §166 to allow conversion of High Occupancy Vehicle
(HOV) lanes to High Occupancy Toll (HOT) lanes. SAFETEA also created two new
programs, the Express Lane Demonstration program (Section 1604(b)) and the
Interstate System Construction Toll Pilot program (Section 1604(c)). The Express
Lane Demonstration program authorizes up to 15 new tolled facilities from the
conversion of existing HOV facilities or where new lanes are constructed. The
program explicitly provides for private investment. The Interstate System
Construction Toll Pilot program authorizes tolling on the construction of three new
Interstate highways. To date, one of the three slots has been reserved for construction
of I-73 in South Carolina, although the slot applies to I-73 in other states as well if
they want to construct their portion of it under this program. SAFETEA also
extended and modified the Value Pricing Pilot Program by setting aside a portion of
the authorized funding for congestion pricing pilot projects that do not involve
highway tolls, such as parking pricing strategies and pay-as-you drive pricing
involving innovative forms of car ownership and insurance.³⁶
Although it is not entirely clear what effect the changes in federal law have had
on the development of toll roads, a substantial number of projects have been initiated
since the passage of ISTEA, and this activity appears to have accelerated. A recent
survey sponsored by the Federal Highway Administration found that since the
passage of ISTEA, a total of 168 toll road projects were initiated in 27 states and one
U.S. territory.³⁷ These projects totaled 3,770 centerline miles and 14,560 lane miles
of highway, although not all the projects involved new capacity. About one-third of
the new toll lane-miles were on the Interstate system, and about one-half of the toll
roads developed since ISTEA involved a public-private partnership. Of the 168 toll
road projects, 50 were open at the time of the survey in 2005. The data also indicate
that about 50 to 75 miles of toll roads were developed annually in the decade after
the passage of ISTEA in 1991, and that more recently this has increased to about 150
miles annually.
Innovative Finance. Another way in which changes in federal law have
encouraged PPPs is through developments in innovative financing, a term that covers
a broad set of ways to finance infrastructure outside the usual methods involving pay-
as-you-go (direct appropriations), intergovernmental grants, and government revenue

³⁵ U.S. Department of Transportation, Federal Highway Administration, “Safe, Accountable,
Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA — LU);
Opportunities for State and Other Qualifying Agencies To Gain Authority to Toll Facilities
Constructed Using Federal Funds,” 71 Federal Register, 965-969, January 6, 2006.
[ht t p : / / f r webga t e .access.gpo.gov/ c gi -b i n / getpage.cgi?position=all&page=965&dbname =

2006_register].

³⁶ U.S. Department of Transportation, Federal Highway Administration, Tolling and Pricing
Website, “Value Pricing Pilot Program.” [http://www.ops.fhwa.dot.gov/tolling_pricing/
value_pricing/index.htm] .
³⁷ U.S. Department of Transportation, Federal Highway Administration, Current Toll Road
Activity in the U.S.: A Survey and Analysis (Washington, DC, 2006). [http://www.fhwa.
dot.gov/ppp/toll_survey_0906.pdf].

bonds.³⁸ In ISTEA, Congress approved some new concepts in infrastructure
financing particularly in the use of user fees. This led to the creation in 1994 of the
Innovative Finance Test and Evaluation (TE-045) program that sought to implement
and evaluate some new financing tools in the federal-aid highway program. Some
of the ideas developed in this experimental program were subsequently enacted in
The National Highway System Designation Act of 1995 (P.L. 104-59) including the
State Infrastructure Bank (SIB) pilot program that permitted certain states to set up
revolving funds with federal money, with the intent of leveraging other public and
private resources for infrastructure projects.
Another major development came in the form of the Transportation
Infrastructure Finance and Innovation Act (TIFIA) of 1998, a part of TEA-21 that
created a program for federal credit assistance on major transportation projects.
TIFIA funding is designed to leverage non-federal funding including investment from
the private sector, and as originally conceived was for projects costing at least $100
million (or at least $30 million in the case of Intelligent Transportation Systems (ITS)
projects). TIFIA financing authorized under TEA-21 was extended by SAFETEA
and modified by permitting all public-private partnerships to apply directly,
expanding eligibility to freight rail and intermodal facilities, and by lowering the
eligibility threshold to $50 million in general and to $15 million in the case of ITS
projects.³⁹
SAFETEA also added to the federal tax code several private transportation
activities as eligible for federally tax-exempt state and local bond financing.
According to federal tax law, state and local bonds are classified as either
governmental bonds or private activity bonds. Government bonds are those issued
to finance public activities, such as building a school, and private activity bonds are
those issued to finance activities that are less public in nature, such as an investor
owned water utility. In general, the interest on government bonds is exempt from
federal tax, whereas interest on private activity bonds is taxable. A tax-exempt bond
can be issued at a lower interest rate and, therefore, provides cheaper financing for
a project than a taxable bond. Over the years, some types of private activities for
which state and local bonds are issued have been afforded tax-exempt status.⁴⁰ These
private activities are known as “qualified private activities.” Prior to SAFETEA, a
number of transportation facilities were classified in the tax code as qualified private
activities. These included airports, docks and wharves, mass commuting facilities,
and high-speed intercity rail facilities. Title XI, Section 1143 of SAFETEA added
qualified highway and surface freight transfer facilities.
In addition to limiting the type of private activities eligible for tax-exempt
financing, Congress has also typically placed a limit on the amount of such bonds

³⁸ U.S. Department of Transportation, Federal Highway Administration, Innovative Finance
Primer (Washington, DC, 2002). [http://www.fhwa.dot.gov/innovativefinance/ifp/ifprimer.
pdf].
³⁹ Hedlund, K.J. and N.C. Smith, “SAFETEA-LU Promotes Private Investment in
Transportation,” report prepared for Nossaman, Guther, Knox, & Elliott, LLP, August 1,

2005. [http://www.fhwa.dot.gov/PPP/safetea_lu_hedlund.pdf].

⁴⁰ CRS Report RL31457, Private Activity Bonds: An Introduction, by Steven Maguire.

that can be issued. Section 1143 of SAFETEA, therefore, also included a $15 billion
limit on the bonds that could be issued for qualified highway or surface freight
transfer facilities, although bonds issued under this section are exempt from the state
volume caps that exist for the general issuance of private activity bonds. Under the
law, the Secretary of Transportation is charged with deciding on bond allocations.
Despite the general expansion of tax-exempt bond financing, some have
questioned its cost effectiveness and have suggested that traditional federal grants or
carefully designed tax-credit bonds would provide the same amount of federal
subsidy at a lower overall cost to the U.S. Treasury.⁴¹
Innovative Contracting. Another area in which the federal government has
increasingly encouraged private participation in highway infrastructure is in
contracting and project delivery. FHWA began experimenting with innovative
contracting under Special Experiment Project 14 (SEP-14) and Special Experiment
Project 15 (SEP-15). SEP-14, begun in 1990, focused primarily on four methods of
innovative contracting: cost-plus-time bidding, lane rental arrangements, warranties,
and design-build contracts. SEP-15, begun in 2004, focuses on project delivery in
the areas of contracting, compliance with environmental regulations, right-of-way
acquisition, and project finance.⁴²
With a number of successes, legislation followed to make several of these
innovations mainstream methods for delivering infrastructure projects. One of the
most important of these for public-private partnerships, design-build contracting, was
made a permissible method of contracting in the federal-aid highway program in
1998 (by Section 1307 of TEA-21), albeit with certain conditions. These conditions
included limiting design-build contracting to projects over $50 million or over $5
million on ITS projects, and restricting the commencement of final design until after
meeting NEPA requirements. In 2005, Congress eliminated the $50 million floor for
design-build contracts and permitted agencies to enter into contracts with private
sector firms before NEPA approval. This allows private sector involvement at an
earlier stage than previously allowed. In 2005, Congress also enacted a 180-day
limitation on the time for challenging federal approvals, including environmental
approvals, aimed at reducing the risk for projects, a provision that is particularly⁴³
important for project revenue financed projects.

⁴¹ Testimony of JayEtta Hecker, Director, Physical Infrastructure Issues, General
Accounting Office (now the Government Accountability Office), in U.S. Congress, Senate
Committee on Finance and Committee on Environment and Public Works, September 25,

2002. [http://www.gao.gov/new.items/d021126t.pdf]; and Testimony of Peter Orzag,

Director, Congressional Budget Office, in U.S. Congress, House Committee on the Budget
and Committee on Transportation and Infrastructure, May 8, 2008. [http://www.cbo.gov/
ftpdocs/91xx/doc9136/05-07-Infrast ructure_T estimony.pdf].
⁴² U.S. Congress, House Subcommittee on Highways and Transit, Hearing on Public-Private
Partnerships: Innovative Contracting, “Summary of Subject Matter,” April 12, 2007.
[http://transportation.house.gov/ Media/File/Highways/20070417/SSM.pdf].
⁴³ Hedlund and Smith, 2005.

Transit Public-Private Partnerships
In transit, the use of, and interest in, public-private partnerships has been
somewhat more limited. Most likely this is because most transit projects are revenue
negative, that is they require some kind of ongoing financial support in addition to
passenger fares and other system-related revenues. Nevertheless, there have been a
number of federal legislative and regulatory initiatives encouraging private sector
involvement in transit, particularly in financing and contracting.
Innovative Financing. One of the earliest legislative initiatives in the realm
of innovative financing with implications for private sector involvement in transit can
be found in certain provisions of the National Urban Mass Transportation Act of
1974 (P.L. 93-503). The act permitted federal assistance for joint development
projects, projects that typically involved the commercial or residential development
of land on or near transit stations.⁴⁴ These types of projects, however, were
discouraged by an administrative decision by the Urban Mass Transportation
Administration (now know as the Federal Transit Administration or FTA) in the
1980s that federal subsidies could only be used to defray project costs after taking
into account contributions from private partners, effectively substituting private
dollars for federal dollars. But FTA’s policy on joint development was revised again
in 1997, as directed by Congress in ISTEA, to allow land acquired with federal
funding to be used in joint development projects and income derived from such
projects to be used for transit operation.⁴⁵ TEA-21 then made joint development
eligible for reimbursement in federal transit grant programs by incorporating such
activities into the definition of a transit capital project.⁴⁶ The law pertaining to joint
development was last modified by SAFETEA, with regulations promulgated in 2007.
Among other things, SAFETEA added intercity bus and rail terminals as permitted⁴⁷
uses for joint development authority.
Innovative Contracting. In the realm of innovative contracting, ISTEA
furthered the use of PPPs in transit by initiating a demonstration program to explore
the use of DB/DBOM in the New Starts program. FTA picked five projects to be a
part of the demonstration program: Los Angeles Union Station Intermodal Terminal,
Baltimore Light Rail Transit System Extensions, San Juan Tren Urbano, Bay Area
Rapid Transit (BART) Airport Extension, and Northern New Jersey Hudson Bergen
LRT. ISTEA also directed FTA to issue guidance on the use of DB/DBOM in the
Federal New Starts program. More recently, Section 3011(c) of SAFETEA

⁴⁴ U.S. Department of Transportation, 2004.
⁴⁵ U.S. Department of Transportation, Federal Transit Administration, Innovative Financing
Techniques for America’s Transit Systems (Washington, DC, 1998). [http://www.fta.dot.
gov/ planning/metro/planning_environment_3530.html ].
⁴⁶ U.S. Department of Transportation, Federal Transit Administration, “Joint Development
Guidance,” 71 Federal Register, 5107-5109, January 31, 2006. [http://a257.g.akamaitech.
net/7/257/2422/01j an20061800/edocke t.access.gpo.gov/2006/pdf/06-871.pdf].
⁴⁷ U.S. Department of Transportation, Federal Transit Administration, “Notice of Final
Agency Guidance on the Eligibility of Joint Development Improvements Under Federal
Transit Law,” 72 Federal Register, 5788-5800, February 7, 2007. [http://a257.g.akamaitech.
net/7/257/2422/01j an20071800/edocke t.access.gpo.gov/2007/pdf/E7-1977.pdf].

authorized the Secretary of Transportation to establish a pilot program to explore the
use of PPPs in new fixed-guideway capital projects (transit rail or BRT) involving
federal funds. This new program is known as the Public-Private Partnership Pilot
Program, or “Penta-P.” To date, FTA has invited applications from interested state
and local authorities for inclusion in the pilot program, and has selected two rail
projects in Denver, CO and two BRT projects in Houston, TX.
Issues for Congress
The two main issues for Congress with regard to public-private partnerships in
surface transportation are: (1) the extent to which PPPs can be relied upon to meet
the future resource needs of the surface transportation system; and (2) the effects of
long-term highway concessions on the operation and planning of the surface
transportation system. Some of the specific issues raised in transportation operations
include the effects of PPPs on national uniformity in highway operation, interstate
commerce, the mobility of low-income households, and traffic diversion. Issues
raised in transportation planning include non-compete provisions in PPP lease
agreements, unsolicited proposals, lease duration, and foreign control of
transportation assets. Each of these is discussed below, as is the issue of identifying
and protecting the public interest in general. This section begins with an evaluation
of the place of PPPs in the funding of surface transportation infrastructure.
Additional Resources for Transportation Infrastructure
One of the main attractions of PPPs, according to advocates, is that they provide
additional resources for the provision of transportation infrastructure. Some
advocates of PPPs argue that without additional sources of investment the nation
risks undermining the transportation system as a result of physical deterioration and
congestion. Primarily these additional resources are associated with a project-related
revenue stream such as vehicle tolls, container fees, or, in the case of transit station
development, building rents. Private sector resources may come from an initial
payment to lease an existing asset in exchange for future revenue, as with the Indiana
Toll Road and Chicago Skyway, or it may involve developing an asset along with a
new revenue stream. Either way, a facility user fee is often the key to unlocking
private sector participation and resources.
Of course, the public sector can build toll roads, raise tolls on existing facilities,
or, in some cases, even institute tolls on existing “free” roads, bridges, and tunnels
when reconstructing or replacing the facility. Proponents of PPPs argue, however,
that for two primary reasons the private sector can attract more capital to highway
infrastructure than the public sector.⁴⁸ First, a privately operated toll road can be
financed with both debt (bond) and equity financing, and that because equity
investors have an opportunity to share in the profits, they tend to be less conservative
than traditional municipal bond investors. In addition, private concessions are often
for terms longer than traditional municipal bond maturities of 25, 30, or 40 years,

⁴⁸ Samuel, Peter, “The Role of Tolls in Financing 21^st Century Highways,” Reason
Foundation Policy Study 359, May 2007. [http://www.reason.org/ps359.pdf].

hence, with an income stream over a longer period the concessionaire can raise extra
capital. Based on these principles, one estimate suggests that the $1.83 billion raised
in the 99-year concession of the Chicago Skyway, would only have raised $800
billion in traditional bond financing.⁴⁹
Second, PPP proponents argue that toll facilities are less successful when
operated by the public sector because political forces typically make it difficult to
raise tolls in line with costs. Not only does this create a potential further drag on
public coffers in the future, it also affects the ability of government to borrow money
to initiate construction. By contrast, it is sometimes argued, the private sector can
generate the necessary funds because lenders are more sure that toll revenues will be
stable when decisions are made primarily on a business rationale.⁵⁰ An exception to
the difference between the public and private sector in setting toll rates is the use of
dynamic tolling in congestion pricing schemes in which the toll is adjusted up and
down to maintain “free-flowing” traffic. In such cases, traffic demand determines the
price. Moreover, in leasing agreements, the toll rate is often regulated, thus the
private operator does not have complete freedom to choose when and by how much
to raise the toll. Nevertheless, proponents of private sector involvement argue “long-
term toll road concessions...are not simply a private-sector version of a public-sector
toll agency. They are a new and important innovation in U.S. highway finance.”⁵¹
The Secretary of Transportation Mary Peters has repeatedly stated that there is
at least $400 billion of private sector capital available for infrastructure investment.⁵²
One independent review of the evidence has suggested that this is a credible number,
even taking into account the current problems in global credit markets, with funds
available ranging from $340 billion to $600 billion.⁵³ However, this $400 billion of
private capital is available to be invested anywhere in the world and in any type of
infrastructure,⁵⁴ casting some doubt on how much realistically might be available to
be invested in highways and transit in the United States.⁵⁵ It is also unclear over what
period of time the $400 billion is available for investment, and how much more
might be available once that amount is committed. Nevertheless, supporters say even
a portion of this potential investment capital would provide a significant boost to
U.S. highways and transit infrastructure. DOT’s current estimate of capital spending
by all levels of government to maintain current highway conditions and performance
over the next 20 years is $78.8 billion annually, $8.5 billion more than is currently

⁴⁹ Ibid., p. 29.
⁵⁰ Poole, Robert W. “Tolling and Public-Private Partnerships in Texas: Separating Myth
from Fact,” Reason Foundation Working Paper, May 2007.
⁵¹ Ibid., p. 5.
⁵² U.S. Department of Transportation, “Over $400 Billion Available Today for Road, Bridge
and Transit Projects U.S. Secretary of Transportation Mary E. Peters Announces,” Press
Release, DOT 43-08, Wednesday, March 26, 2008.
⁵³ Orski, K., “A $400 Billion Solution,” Innovation Briefs, Vol. 19, No. 8, March 10, 2008.
⁵⁴ Ibid.
⁵⁵ See McNally, Sean, “Investors Look to Banks for Help With Infrastructure Deals,”
Transport Topics, April 21, 2008, p. 14.

being spent. In transit, spending needs are estimated to be $15.8 billion annually,
$3.2 billion more than is currently being spent.⁵⁶
While most agree that PPPs will likely attract new private capital to
transportation infrastructure provision, some argue that the scale of this capital is
likely to be relatively modest when viewed in the context of total highway and transit
infrastructure spending.⁵⁷ The American Association of State Highway and
Transportation Officials (AASHTO) notes, for example, that highway tolling, either
public or private, currently accounts for approximately 5% of highway revenues and
optimistically will meet 7% to 9% of future national investment needs.⁵⁸ Because
transit is revenue negative, it is likely that transit PPPs could never generate
anywhere near this share of investment. This suggests that when considering the
future needs of both highway and transit infrastructure nationally, PPPs are likely to
generate somewhat less than this estimated level of 7% to 9%.
A related point, and one not fully considered in these estimates, however, is
that the institution of a toll not only provides revenue to improve the supply of
infrastructure, but also tends to suppress and/or divert travel demand. With limited
toll road mileage, this effect may be relatively minor and may be more likely to result
in traffic diversion (see below). Widespread tolling, on the other hand, may result
not in route diversion, but in travelers switching to other modes, changing the time
of a trip to avoid a charge, or foregoing travel altogether. DOT has made a
preliminary attempt to estimate, theoretically, the effects of universal congestion
pricing on infrastructure demand, and suggests they would be substantial. As noted
earlier, DOT’s current estimate of the annual cost to maintain highway and bridges
over 20 years from 2005 through 2024 is $78.8 billion a year (in 2004 dollars), $8.5
billion more than the $70.3 billion spent in 2004 by all levels of government. Under
the universal congestion pricing scenario, DOT’s preliminary estimate of capital
spending needs over 20 years shrinks to $57.2 billion, $21.6 billion less than its
estimate of capital needs, and $13.1 billion less than is currently being spent.⁵⁹ Of
course, there is little likelihood that such widespread highway pricing could be
instituted anytime soon, nor do DOT’s estimates include the administrative and
startup costs that would be involved, or the technical difficulties of such as plan.
DOT’s analysis is also silent on the effects of universal congestion pricing on the

⁵⁶ To improve systems conditions and performance, DOT estimates annual increases in
capital spending by as much as $61.4 billion for highways and $9.2 billion for transit.
⁵⁷ Transportation Research Board, 2006, p. 4-1; see also Organisation for Economic
Cooperation and Development (OECD) and International Transport Forum, Transport
Infrastructure Investment: Options for Efficiency (Paris, 2008); and General Accounting
Office (now the Government Accountability Office), March 2004.
⁵⁸ Testimony of Pete Rahn, Director of the Missouri Department of Transportation and
President of the American Association of State Highway and Transportation Officials
(AASHTO), in U.S. Congress, House Committee on Transportation and Infrastructure,
Hearing on State Perspectives on Transportation for Tomorrow: Recommendations of the
National Surface Transportation Policy and Revenue Study Commission, February 13, 2008.
[http://transportation.house.gov/ Media/ File/Highways/20080213/Pete%20Rahn%

20T estimony.pdf].

⁵⁹ U.S. Department of Transportation, Federal Highway Administration and Federal Transit
Administration, 2007, chapter 10.

demand for other modes of passenger and freight travel, such as public transit and
freight rail. Nevertheless, the research does indicate that direct user fees, such as
congestion pricing, may reduce the demand for new highway infrastructure.
Diversion of Resources From the Transportation Sector. Another
concern in the transportation sector is that the resources generated from
transportation PPPs will not be used to finance transportation infrastructure needs.
State and local governments have significant demands for funding in many different
areas. Asset leases in particular provide a mechanism to generate large sums of
money that could be used to fund a wide range of social services. That is why some
have argued that unlike concessions in the provision of new toll roads that are “added⁶⁰
value,” the leasing of existing roads might be considered “revenue extraction.”
This concern has been realized in the case of the Chicago Skyway, discussed earlier,
as some of the lease payment has been used for non-transportation purposes. The
City of Chicago, however, has noted that, among other things, it has created a reserve
fund that generates in interest revenue what the road did in toll revenue, and that
excess toll revenues from the Skyway were previously directed to the city’s general⁶¹
fund. The GAO has stated that the city’s credit rating improved when it reduced its
general obligation debt, thereby reducing the future cost of borrowing.⁶² The
possibility remains, nevertheless, that the money generated by asset leases may end
up being used for current transportation and non-transportation needs and that future
facility users, in some cases three or four generations from now, may end up paying
higher tolls as a result.⁶³
Diversion of resources may also be of more general concern in that new private
resources attracted to transportation infrastructure may substitute for public resources
in the sector, not add to them. With competing demands for public funds, it is
possible that with increases in private funding, state and local governments will
divert public resources to other deserving public programs with no net gain in
transportation infrastructure. In a study of the effect of federal highway funding
increases on state highway funding between 1982 and 2002, GAO observed a
substitution effect, particularly between 1998 and 2002 when a 40% increase in
federal capital spending was accompanied by a 4% drop in state and local capital⁶⁴
spending.
Other Resource Benefits. As well as the potential for additional capital,
PPPs may also generate new resources for transportation infrastructure in at least two
other ways. First, PPPs may improve resource efficiency through improved

⁶⁰ Steckler, Steve A. “Squeezing Cash from Concrete: Navigating the Perils of Turnpike
Privatization.” Infrastructure Management Group. [http://www.imggroup.com/transport
ation/documents/Pennsyl va niaT ollwayLeasing.pdf].
⁶¹ Schmidt, John, “The Pros and Cons of Toll Road Leasing,” Public Works Financing, Vol.

2005, May 2006, p. 9.

⁶² Government Accountability Office, 2008, p. 21.
⁶³ Ibid., p. 34.
⁶⁴ Government Accountability Office, Federal-Aid Highways: Trends, Effect on State
Spending, and Options for Future Program Design, GAO-04-802 (Washington, DC, 2004).
[ h t t p : / / www.ga o.gov/ n ew.i t e ms / d04802.pdf ] .

management and innovation in construction, maintenance, and operation, in effect
providing more infrastructure for the same price. PPP proponents argue that private
companies are more able to examine the full life-cycle cost of investments, whereas
public agency decisions are often tied to short-term budget cycles. In the case of the
Hudson-Bergen Light Rail in New Jersey, procured under a DBOM contract, DOT
estimates that the project saved 30% over the more traditional design-bid-build
procurement method, a saving of about $345 million.⁶⁵ Skeptics point out, however,
that these savings may not materialize if the public sector has to spend a substantial
amount of time on procurement, oversight, and disputes that may result in litigation.
For example, the California DOT has had a number of costly disputes with its private
partners.⁶⁶ Furthermore, GAO argues that most state governments do not have the
necessary capacity to manage these contracts.⁶⁷
Second, through PPPs the private sector may bear many of the financial risks
that exist with building, maintaining, and operating infrastructure. Risks abound in
the development and operation of infrastructure, including the risk that construction
and maintenance will cost more and/or take longer than foreseen. Another risk with
toll facilities is that once built there will be less demand than estimated. Transferring
these risks to the private sector, according to proponents, will save public agencies
significant amounts of money, particularly as cost and schedule overruns are common
with transportation infrastructure projects. Detractors argue that in some cases this
transfer of risk may prove illusory as major miscalculations may force the public
sector to assume project ownership. Consequently, this line of reasoning goes, PPPs
may in fact be false partnerships in that profits will be retained in the private sector,
while major losses will be borne by the public sector.⁶⁸ Moreover, as the GAO points
out, not all the risks can or should be shifted to the private sector. For instance, a
major risk associated with transportation infrastructure projects that the private sector
is unlikely to be able to accept is the delay and uncertainty associated with the
environmental review process.⁶⁹

⁶⁵ U.S. Department of Transportation, 2004, pp. 38-39.
⁶⁶ Testimony of Alan Lowenthal, Chair, California Senate Transportation and Housing
Committee, in U.S. Congress, House Committee on Transportation and Infrastructure,
Subcommittee on Highways and Transit, Hearing on Public-Private Partnerships: State and
User Perspectives, May 24, 2007. [http://transportation.house.gov/Media/File/Highways/

20070524/Cal%20State%20Senate%20Lowenthal%20testimony.pdf].

⁶⁷ Government Accountability Office, Federal-Aid Highways: Increased Reliance on
Contractors Can Pose Oversight Challenges for Federal and State Officials, GAO-08-198
(Washington, DC, 2008). [http://www.gao.gov/new.items/d08198.pdf].
⁶⁸ Engel, E., R. Fischer, and A. Galetovic, “Privatizing Highways in the United States,”
Review of Industrial Organization, 2006, Vol. 29.
⁶⁹ Government Accountability Office, 2008.

Effects of Public-Private Partnerships on the Operation and
Planning of the Surface Transportation System
The other main issue that may be of interest to Congress is the effects of PPPs
on the planning and operation of surface transportation system, particularly the
highway network. This has been expressed by some as identifying and protecting the⁷⁰
“public interest” in transportation infrastructure.
Operation of the Highway Network. One of the main concerns of the
critics of public-private partnerships in highways is that it will create a patchwork
of tolled and non-tolled roads, undermining national uniformity in highway
operation, increasing travel costs (see below), and ultimately impeding passenger
travel and interstate commerce.⁷¹ Conceivably, this perceived “patchwork” will add
a good deal of complexity to everyday routing decisions, and possibly longer term
location decisions, that may mean the cheapest route is no longer the shortest,
quickest route. The American Trucking Associations (ATA) has also expressed the
concern that tolling and privatization will place an extra administrative burden on
national and regional trucking companies because of having to do business with a
multitude of public and private tolling entities.⁷² Others are concerned that the first
facilities to be candidates for leasing will be those that serve a high proportion of
users from other states or local jurisdictions.⁷³
In response, proponents of PPPs argue that the national highway system is
already a complex network of tolled and non-tolled facilities owned and operated by
a multitude of different public authorities and private companies, and that private
highway operators have a financial incentive to ensure efficient operations.
Moreover, as noted earlier, some PPP advocates argue that without additional sources
of investment the nation risks undermining the network as a result of physical
deterioration and congestion.⁷⁴

⁷⁰ U.S. Congress, House Subcommittee on Highways and Transit, Hearing on Public-Private
Partnerships: Innovative Financing and Protecting the Public Interest, February 13, 2007.
[http://www.house.gov/htbin/leave_site?ln_url=http://frweb ga t e . access.gpo.gov/cgi -bin/
getdoc.cgi?dbname=110_house_hearings&docid=f:34778.pdf]; Government Accountability
Office, 2008.
⁷¹ Testimony of Gregory M. Cohen, President and CEO, American Highway Users Alliance,
in U.S. Congress, House Subcommittee on Highways and Transit, Hearing on Public-
Private Partnerships: State and User Perspectives, May 24, 2007. [http://transportation.
house.gov/ Media/File/Highways/20070524/Greg%20Cohen%20T estimony.pdf].
⁷² Testimony of Bill Graves, President and CEO of the American Trucking Associations, in
U.S. Congress, House Subcommittee on Highways and Transit, Public-Private
Partnerships: State and User Perspectives, May 24, 2007. [http://www.truckline.com/
NR/ r donl yr es/ 5 E923973-9F4D-46A3-A599-71F47FC7C3BE/ 0 / PPPMay24_2007.pdf].
⁷³ Steckler; Cohen, 2007.
⁷⁴ Testimony of Tyler D. Duvall, Assistant Secretary of Transportation Policy, U.S.
Department of Transportation, in U.S. Congress, House Subcommittee on Highways and
Transit, Public-Private Partnerships: Financing and the Public Interest, February 13, 2007.
[ h t t p : / / f r webga te.access.gpo.gov/cgi -bin/ge t d o c . c gi ? dbname =110_house_hearings &

Highway Travel Costs. Probably of greatest concern to many users of the
highway system is that greater private sector involvement will lead to substantial
increases in travel costs through the proliferation of tolled roads and toll rates that
will rise more quickly than has typically been the case under public control. This is
of particular concern where no new service is provided, such as a new facility or the
addition of new lanes on an existing facility, and where there is no viable, non-tolled
alternative. Proponents of PPPs agree that private sector participation will most
likely lead to an increase in direct highway user costs, but note that this is the price
to be paid for not providing highway infrastructure through taxation. Morever,
proponents agree that tolls on privately operated toll roads are likely to increase more
than those on publicly operated roads. Supporters of PPPs argue that is not because
private operators charge too much, but that public operators tend to charge too little
because increasing tolls in line with inflation and other costs is politically difficult.
Of particular concern to critics of privately operated toll roads is any situation
where there is no viable travel alternative, or to put it another way, where the private
road operator has significant monopoly power. In such a situation, these critics argue
that, unless carefully regulated, toll rates can be set very high and the rate of return
on investment will be unreasonably large. ATA has expressed such concerns about
toll rates on the Indiana Toll Road, a part of the country where no alternative travel
route exists. PPP proponents argue that concession agreements typically cap toll
rates in line with growth factors in the broader economy. Moreover, they argue that
a concessionaire is unlikely to set rates at a level that reduces traffic to a level that⁷⁵
will cause its revenue to drop.
Traffic Diversion. Another concern with the network effects of PPPs, and
tolling in general, is that it has the potential for diverting traffic on to other routes,
possibly increasing congestion, contributing to possible roadway deterioration, and
reducing safety. Private control, it is argued, will lead to higher toll rates and,⁷⁶
therefore, more diversion. Diversion of truck traffic is seen as particularly
problematic, although diversion of all types of vehicles may occur. A recent study
suggests that the safety impacts and infrastructure damage resulting from diversion
may be substantial, although the scale of effects will vary by route and the size of the⁷⁷
toll. For example, it has been noted that because there is no viable alternative,
increased tolls on the Indiana Toll Road associated with its leasing are not likely to
impose costs on the surrounding routes and jurisdictions. Proponents of PPPs argue
that although some diversion may occur, it is in the private toll operator’s interest to
provide a service that will attract vehicles.
Equity. Critics of PPPs argue that new or higher highway tolls discriminate
against low income drivers who will be forced to use alternative routes, other means

⁷⁴ (...continued)
docid=f:34778.pdf].
⁷⁵ Poole, May 2007.
⁷⁶ Swan, Peter F. and Michael H. Belzer, “Empirical Evidence of Toll Road Traffic
Diversion and Implications for Highway Infrastructure Privatization,” Paper presented at the^th

87 Annual Meeting of the Transportation Research Board, Washington, DC, January 2008.

⁷⁷ Ibid.

of travel, or to forego travel altogether. The concern is that there will be one segment
of the highway network providing a high quality of service for those able and willing
to pay and another segment of the highway network with poor quality of service for
those unable or unwilling to pay. Proponents of PPPs argue that many income
groups stand to benefit from highways with a better level of service and point to
surveys of users on toll roads such as SR-91 that show a significant level of usage by
people from low income households.⁷⁸ Tolls, nevertheless, still place a greater
burden on lower-income than higher-income households, but some argue that tolls
may be less of a burden on lower-income households than extra fuel, sales, and
property taxes.⁷⁹
Infrastructure Planning. The network effects of some highway PPPs, as
discussed above, are consequences that might ensue in the short to medium term.
However, these same type of PPPs may also have a longer term effect on the network
as a result of their influence on decisions about what to build and where, that is the
infrastructure planning process. Proponents of PPPs argue that private sector
investment not only will generate more resources for transportation, but will result
in resources being committed to the most effective projects. It is frequently argued
that because of the political process, government funding of transportation
infrastructure is spread too widely, or worse, is spent on cost-ineffective projects. A
number of studies have shown, for example, that geographic equity is often a basis⁸⁰
for distributing transportation funding and selecting projects. Private sector
investments on the other hand, it is argued, would focus on projects that have the
greatest potential economic returns. Foremost among these are congestion relief
projects in places where demand is significantly greater than supply.
Skeptics, on the other hand, point out that one possible problem with relying on
private investment to fund infrastructure development, maintenance, and operation
is that large parts of the highway network carry relatively few vehicles and are
unlikely to attract much interest from the private sector. These types of PPPs,
therefore, are unlikely to address transportation issues in rural areas, issues that are
often focused on connectivity, maintenance, and safety. The hope among proponents
is that relieved of responsibility by the private sector for some parts of the heavily
traveled network, the public sector can concentrate on other parts of the network.
Conceivably, however, relying much more heavily on PPPs may eventually disrupt
the transportation network by directing too few resources to links that carry relatively
little traffic but provide important connections between the more heavily traveled
segments.

⁷⁸ U.S. Department of Transportation, “Low-Income Equity Concerns of U.S. Road Pricing
Initiatives.” [http://www.upa.dot.gov/resources/lwincequityrpi/index.htm].
⁷⁹ Testimony of R. Syms, County Executive of King County, Washington, in U.S. Congress,
House Subcommittee on Highways and Transit, Hearing on Transportation Challenges of
Metropolitan Areas, April 9, 2008.
⁸⁰ Edward Hill et al., “Slanted Pavement: How Ohio’s Highway Spending Shortchanges
Cities and Suburbs,” in Bruce Katz and Robert Puentes, eds., Taking the High Road: A
Metropolitan Agenda for Transportation Reform (Washington, DC: Brookings Institution
Press, 2005); U.S. General Accounting Office (now the Government Accountability
Office), Surface Transportation: Many Factors Affect Investment Decisions, GAO-04-744
(Washington, DC, June 2004), at [http://www.gao.gov/new.items/d04744.pdf].

Unsolicited Proposals. One of the ways in which concerns about the
planning effects of PPPs have surfaced is over whether or not a state will accept
unsolicited proposals. It is generally assumed that projects for which proposals are
solicited from the private sector will have come through the public planning process.
Unsolicited project proposals, on the other hand, are those initiated by the private
sector and may or may not reflect the priorities of the state, region, or locality as
contained in short and long-range plans. Consequently, some have suggested that
state PPP enabling legislation should not permit unsolicited proposals. Proponents
of PPPs argue that this would stifle innovative ideas, and that while a proposal may
be unsolicited, to come to fruition it would have to pass through the public review
process.
Non-Compete Provisions. Another possible effect on the transportation
system is that some PPP contracts restrict what types of improvements can be made
near a privately operated facility. In some cases, the private sector partner has
insisted on a non-compete clause restricting nearby improvements with the potential
for reducing traffic on the privately operated facility, or, if they are made, providing
compensation. Some have argued that these non-compete clauses impede the ability
of public agencies to increase capacity and their ability to devise coordinated⁸¹
congestion management policies. Proponents of PPPs argue that there must be
some protection from unlimited competition of “free-roads” provided by the
taxpayer, otherwise it would be very difficult to secure private sector involvement.
However, some proponents argue that agreements need to strike the right balance
between protecting the private sector interest and the public interest in mobility and
choice. Consequently, concession agreements “seldom, if ever, ban all ‘free road’
additions near the toll road. And they usually provide for compensation for reduced
traffic, rather than forbidding public-sector roadway additions.”⁸²
Lease Duration. Another effect on the transportation network, some argue,
may result from the very long-term nature of some lease agreements. Terms on
recent leases include 90 years for the Chicago Skyway, 75 years for the Indiana Toll
Road, and 80 years for the northern Virginia HOT lanes. PPP proponents argue that
long time horizons are needed to generate the returns necessary to compensate for the
risks. One concern is that this will tie the hands of policymakers for generations.
Another concern with the leasing of existing facilities and the payment of an up-front
concession fee is that future users may have to pay higher tolls to finance current
spending. Consequently, some have suggested that agreements should be relatively
short, and, as a general rule, should not extend beyond the design-life of a facility.
PPP proponents, on the other hand, argue that concession agreements typically
include provisions that allow for reasonable amendments and for third-party
arbitration of disagreements.⁸³

⁸¹ Testimony of John Foote, in U.S. Congress, House Subcommittee on Highways, Transit,
and Pipelines, Hearing on Understanding Contemporary Public Private Highway
Transactions — the Future of Infrastructure Finance, May 24, 2006.
⁸² Poole, May 2007, p. 8.
⁸³ Ibid.; See also “The Chicago Skyway Sale,” Public Works Financing, Vol. 205, May

2006, p. 4-11.

Foreign Control. Another concern of some opponents of PPPs is that they
often result in a concession controlled by a foreign company. The predominant
reason for this is that PPPs are more prevalent in other countries, particularly France,
Spain, and Australia, hence, there are more companies from these countries that have
experience with such transactions. Critics charge that this control might impede
national security in an emergency and that the profits will go to foreign investors.
Proponents of PPPs point out that there is no more risk to the United States from
foreign-owned companies than domestic ones. After all, they argue, these foreign
companies are willing to invest their money in an immovable asset. Proponents
argue that this is a good thing because it shows foreign investors have confidence in
the economic, political, and legal environment of the United States.
Protecting the Public Interest. In a study of PPPs in highway
infrastructure provision, the Government Accountability Office (GAO) states that
these institutional arrangements offer a number of benefits for states and localities
but also present a number of trade-offs and potential problems. They identify a
number of benefits such as the building of new facilities without using public funds
and more efficient operations, among others. They also identify the trade-offs and
problems with PPPs such as possible higher toll rates and lack of public control. As
a result, the GAO argues that, as with any highway project, there is not one easily
identifiable “public interest” but multiple stakeholders with overlapping interests that
must be weighed against each other. They note, to date, that protecting the public
interest in PPPs has been done on a project-by-project basis through the terms of
concession agreements. They suggest that a more systematic approach to identifying
and evaluating the public interest in PPPs be developed and employed, as has been
done in other countries such as Australia. They suggest that the federal government
needs to identify and evaluate the national public interest in highway projects that
employ a PPP.⁸⁴
Policy Options for Congress
There are at least three broad policy options that Congress could consider in the
formation and operation of PPPs in surface transportation infrastructure delivery: (1)
to continue with the current policy of incremental changes and experimentation in
program incentives and regulation; (2) to actively encourage PPPs with program
incentives, but with relatively tight regulatory controls; and (3) to aggressively
encourage the use of PPPs through program incentives and deregulation in the areas
of tolling, contracting, and financing. It should be pointed out that at the level of
detailed policy prescriptions these three options are not necessarily mutually
exclusive, as Congress could decide to deregulate in one area while enhancing
regulation in another, and may add funding to one program and cut funding to
another. For example, Congress might decide to do away with regulations in the
construction and operation of new highway capacity and at the same time develop

⁸⁴ Government Accountability Office, 2008; see also Buxbaum, Jeffrey N. and Iris N. Oritz,
“Protecting the Public Interest: The Role of Long-Term Concession Agreements for
Providing Transportation Infrastructure,” USC Keston Institute for Public Finance and
Infrastructure Policy, Research Paper 07-02, June 2007.

tighter regulations in the leasing of existing highways. Nevertheless, these three
broad policy options provide an overall framework for Congressional action on PPPs.
The first broad policy option is to essentially carry on the path that has been
followed over the past few authorizations, one of incremental changes and
experimentation. As part of such a policy, Congress may opt to generally reauthorize
the existing programs and retain existing regulatory controls. This cautious approach
might avoid the major pitfalls of private sector involvement, but would likely mean
slower growth in toll revenue and private equity investment than more aggressive
approaches to the development of PPPs. Consequently this approach would require
substantial reliance on other funding mechanisms. Some minor changes to existing
programs and regulations might include expanding the number of available slots in
the Interstate System Construction Toll Pilot program from the three currently
permitted, and continuing and expanding the Penta-P program in transit.
A second option for Congress would be to more aggressively promote the use
of PPPs, particularly certain types, but with a set of new regulations designed to
protect the public interest from their perceived problems. This option might be
considered a federally directed program of PPP development, and is an approach
broadly similar to the one advocated by the majority report of the NSTPRSC.
The NSTPRSC report argues that Congress should encourage the use of tolling,
congestion pricing, and PPPs, but with a number of conditions and restrictions. The
NSTPRSC proposes that states and their partners be given the authority to variably
toll new capacity on the Interstate system as a way to fund construction and to better
manage the new lanes. They also suggest that authority be given to implement
congestion pricing on new and existing Interstates in metropolitan areas with a
population of one million or more. The Commission argues that for proposals
concerning tolling and pricing on the Interstates, Congress should set up an approval
process with strict criteria that includes requirements that: revenue be used only for
transportation improvements in the same corridor; rates be set to avoid discrimination
against certain types of travelers such as interstate travelers or trucks; technology be
used to collect tolls; and planning must consider the effects of diversion.
In encouraging PPPs more generally, the Commission suggests Congress require
other criteria including a high level of transparency in the development of such
agreements, full public participation, and full compliance with planning and
environmental regulations. They also suggest that: PPP agreements should not
contain non-compete clauses; toll rates should be capped; states should share in
revenues over and above a certain set amount; concession agreements should not
exceed a “reasonable” length; and an analysis be done to insure that private sector
financing provides better value than public sector financing.
A minority of NSTPRSC commissioners issued a separate statement agreeing
that Congress should encourage the use of PPPs, but argued that these new
regulations would stifle their formation. As the minority statement in the report
stated, the Commission
proposes new Federal regulations of State contracts with the private sector. The
Commission Report includes recommendations to replace what would otherwise
be specifically negotiated terms and conditions with a national regulatory scheme

for public-private partnerships that goes well beyond any regulations currently
in place. In fact, despite finding substantial flaws with current programs and
policies, the Commission Report strangely subjects innovative forms of project
delivery to greater Federal scrutiny than traditional procurement approaches.
The Commission Report would also subject private toll operators under contract
with a State to greater Federal scrutiny than the scrutiny to which local public⁸⁵
toll authorities are subject. There is no basis for this distinction.
The Commission’s minority view, therefore, suggests a third broad policy
option for Congress to consider. This option would more aggressively encourage
PPPs by providing program funding to encourage innovation and generally
deregulating the use of tolling and private sector involvement, thereby letting states
decide when and how to enter into agreements. This is also, in general terms, the
position of the AASHTO officials. As they note in their policy report on revenue
source in transportation:
AASHTO has taken the position that every state should be given all options
possible for funding opportunities in the areas of tolling and public — private
ventures so states can determine for themselves what is in the best interests of
their citizens. AASHTO has also embraced a bold goal of increasing the
percentage of toll revenues to 9 percent of the total for highway revenues
nationally. AASHTO’s position is that federal policy should enable and⁸⁶
encourage innovative finance tools and innovative contracting tools as well.
The federal role in such a scenario may be mostly limited to providing guidance
about instituting good practices and avoiding common pitfalls. Some past legislative
proposals have linked deregulation in the area of tolling and public-private
partnerships with devolution of federal responsibilities in highways and transit back
to the states.⁸⁷
Other policy options may arise from work being done by many different groups
on surface transportation reauthorization proposals and recommendations. One of
the most important is the National Surface Transportation Infrastructure Finance
Commission (NSTIFC), a second national commission established in SAFETEA,
charged with developing recommendations for Congress on the future federal role in
funding surface transportation infrastructure. An interim report was released
February 1, 2008,⁸⁸ and a final report is expected in 2009. Among other things,
NSTIFC is expected to examine and make recommendations on the role that PPPs
might play in the future.

⁸⁵ National Surface Transportation Policy and Revenue Study Commission, 2007, p. 66.
⁸⁶ Association of State Highway and Transportation Officials, Revenue Sources to Fund
Transportation Needs (Washington, DC, September 2007), p. 12. [http://www.transportation

1.org/tif4report/T IF4-1.pdf].

⁸⁷ Utt, Ronald D. “Proposal to Turn the Federal Highway Program Back to States Would
Relieve Traffic Congestion,” Heritage Foundation Backgrounder, No. 1709, November 21,

2003. [http://www.heritage.org/Research/SmartGrowth/upload/52771_1.pdf].

⁸⁸ National Surface Transportation Infrastructure Finance Commission, The Path Forward:
Funding and Financing Our Surface Transportation System (Washington, DC, 2008).
[http://financecommi ssion.d o t . go v/ D o c u me n t s / In t e r i m% 2 0 R eport%20-%20T he%20Path%

20Forward.pdf].

In addition to policy decisions at the federal level, the future role of PPPs will
also depend in large measure on decisions at the state and local level. States and
localities rely on a wide variety of funding sources other than federal aid, including
fuels taxes, other motor-vehicle taxes and fees, sales and property taxes, and general
fund appropriations. The ability of states and localities to fund their systems with
these revenue sources may determine how far and how fast PPPs are deployed. State
and local innovation in PPPs, their successes and failures, and, ultimately, public
acceptance also will be key determinants of deployment.
Federal influence on the prevalence and structure of PPPs, to some extent, will
be related to the amount of federal funding flowing to state and local governments,
an amount that is still largely dependent on the future financial health of the Highway
Trust Fund. Declining inflation-adjusted revenues accruing to the trust fund, as a
result of trends in fuel consumption and the level of prices in general, may result in
a waning of federal influence on how highways and transit systems are built,
maintained, and operated and the importance of PPPs. Declining inflation-adjusted
revenues to the trust fund are not inevitable, however. The federal fuels tax is subject
to change; it has been raised several times in the past. Alternatively, other federal
funding mechanisms, such as national infrastructure bonds or even general fund
appropriations, may emerge to fund a greater share of federal programs.
Consequently, the federal role in shaping PPPs likely will be important for some time
to come.