MPC Testimony to the Senate Appropriations Hearing on Public Private Partnerships

Presented by Peter Skosey, MPC Vice President of External Relations, on behalf of the Metropolitan Planning Council on June 13, 2006.

By Guest Author
June 16, 2006
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Good morning. My name is Peter Skosey, and I am the Vice President of External Relations for the Metropolitan Planning Council, a nonprofit, nonpartisan group of business and civic leaders committed to serving the public interest through the promotion and implementation of sensible planning and development policies necessary for an economically competitive Chicago region.

Thank you for the opportunity to speak today.

The Metropolitan Planning Council has been interested in promoting the authorization of public-private partnerships in Illinois for a few years. Last year, as part of the Business Leaders for Transportation Coalition, we helped convene a task force of experts to examine the feasibility of partnerships to build new critical infrastructure, focusing in particular on the O’Hare Western Bypass and Elgin-O’Hare Extension. Earlier this year, we released a paper, “Making the Case for Public-Private Partnerships in Illinois,” and have since begun working with senators and representatives from both parties to authorize the use of public-private partnerships in Illinois; the lease of the Illinois tollway is one example of the type of public-private partnership that this enabling legislation could authorize.

My testimony today will focus on answering three questions:

What are potential benefits of public-private partnerships?
What are the potential drawbacks of public-private partnerships?
What process should be built into authorizing legislation to maximize the public benefit from public-private partnerships?

Before I address the first question, I want to reiterate an important point that Tom Morsch, speaking on behalf of Business Leaders for Transportation, made at the last hearing. That is, there are two major types of public-private partnerships—partnerships for existing infrastructure and partnerships for new infrastructure. Within these two major categories, there are also many sub-categories of partnerships.

1. What are the potential benefits of public-private partnerships?

New Infrastructure: The most important benefit of using a public-private partnership to build new infrastructure is that it allows the state to build projects that it cannot otherwise afford.

Like most states, the combination of current funding methods in Illinois is not sufficient to fully maintain the existing transportation system, let alone keep pace with increased demands. Money is becoming scarcer at every level of government, and critical sources of transportation funds are not keeping pace with demands. State motor fuel taxes have not matched inflation, and have lagged increased highway use by 20 percent since 1990. Overall, state and local governments have increased their reliance on general taxes such as sales, income and property to fund transportation, because the traditional sources of funding are not keeping up with demand.

The State of Illinois has not dedicated funds to invest in infrastructure since Illinois FIRST expired in 2004. Approved by the governor and General Assembly in 1999, Illinois FIRST dedicated funds over five years to update infrastructure, including $6 billion for railways and roads. This commitment helped secure federal transportation funding that would have been unavailable without the state matching funds. As impressive as Illinois FIRST was, by June 2004, the funds were exhausted, and the state has limped along without a capital funding program for the past two years. Without a new source of revenue, the state does not have sufficient funds to maintain the existing system, much less pay for needed new service or match funding that Congress has authorized for many new projects.

The Safe, Accountable, Flexible, and Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) passed by Congress last summer, included substantial increases in federal funding for Illinois public transportation, roads and bridges through 2009. Federal funding certainly helps, but it will not be enough to meet all of the region’s transportation needs. In addition to providing general funding to maintain and rebuild roads and transit, SAFETEA-LU “earmarked” funding for a large number of specific projects. But SAFETEA-LU money is no guarantee that projects will ever be built. In many cases, projects authorized in SAFETEA-LU include no construction funding or only a small portion of the total project cost, leaving the state and local governments to raise funds to complete them.

A good example of this is the Elgin-O’Hare Extension/O’Hare Bypass, which is a project that has been included in the long-range plans of the Chicago Area Transportation Study, Northeastern Illinois Planning Commission, DuPage County , O’Hare Modernization Plan, and other planning bodies for many years. Without the added benefit of the private dollars, Illinois would have to contribute nearly a billion more dollars to build the project and millions more to maintain it in the future. These precious capital dollars could be used as a match for other needed improvements in the state such as those already receiving federal funding through SAFETEA-LU.

Existing infrastructure: For existing infrastructure, there are two key benefits to using a public-private partnership. First, leasing an existing asset can provide a public entity with upfront funding to spend sensibly on approved transportation capital programs that are hurting for funding. As the Chicago Skyway deal shows, leasing an existing asset can provide a significant amount of funding for the wise reinvestment of the public entity; the City of Chicago used the money from the transaction to pay down debt and improve its bond rating while ensuring a publicly-acceptable level of performance of the Skyway.

The other benefit of using a public-private partnership for an existing road is that it does what the Illinois Toll Highway Authority has never been able to do, which is bring an apolitical approach to toll rates. Public agencies like the Toll Highway Authority generally face great political obstacles to adjusting tolls on highways. Putting toll roads under private management may help unlock trapped asset value, creating better performance while yielding a greater return on investment. This often means faster travel times and better maintained roads for the traveling public.

2. What are the potential drawbacks of public-private partnerships?

While public-private partnerships can benefit the public by unlocking significant and timely revenue for public use, they can also raise numerous concerns that must be thoroughly addressed.

New Infrastructure: For new infrastructure, there are three main concerns. First and most importantly, unless only projects that have already been approved by a regional planning process are considered, partnerships could be used to build wasteful and detrimental infrastructure that harms the rest of the system and quality of life. If projects proceed without considering alternatives or impacts on the environment and public health, partnerships could increase traffic, invade precious farm and open land, worsen air and water pollution and reduce access to jobs and public facilities.

Second, the public is often concerned that building infrastructure with tolling revenue dedicated solely to the road will be unfair to poorer residents. If toll revenues from a new road go only to building new lanes on that road, tolling programs may leave low income people worse off by putting more job and housing growth beyond reach of public transportation. On the other hand, if a project is designed to reduce the number of new toll lanes needed, and a portion of toll revenues is dedicated to public transit, using tolling for a new road built with a partnership can benefit all income groups.

The third main concern is ensuring that public-private partnerships for new infrastructure preserve compliance with state and federal laws, including labor, environmental and safety regulations.

Existing Infrastructure: Leasing an existing transportation asset also raises a number of concerns. Perhaps the biggest potential concern about using a public-private partnership for existing infrastructure is that the public partner will misuse the funding gained from the transaction so that the public is saddled with even more debt, perhaps almost immediately. Using revenue from the transaction to fund operating expenses or fund new, unnecessary projects for political purposes will likely increase debt; we must be able to afford to pay the operating and maintenance costs of any new project we build. Revenues from partnerships should not be viewed as a “windfall” or “budget reliever.”

The second concern is that neither the private nor the public partner is able to predict what will happen in the future and how it will affect the infrastructure. For example, what impact will the increasing cost of gasoline have over the period of the lease? Does anyone know what transportation will look like in our state in 99 years? Without flexibility built into the contract to address these changing circumstances, the public may suffer from the private partner’s inability to adapt the infrastructure. It is worth a smaller up front payment to have the flexibility built-in for the long run.

The third concern is that the private partner leasing the infrastructure will not necessarily be required to coordinate planning with other stakeholders. This also impacts our transportation system’s adaptability to changing circumstances. For example, would the private partner be required to allow train service to run on the highway should the relevant planning bodies and communities desire it in the future?

Finally, another reason to be accountable to coordinated planning efforts is the impact that traffic congestion will have to business in the area. A leased highway does not operate in isolation. All of the vehicle traffic that uses the highway also uses some parts of the roads and bridges that connect to the highway, which means that changes on the leased highway are likely to impact the connecting infrastructure. If the optimal vehicle traffic level for the revenue model of the leased highway induces more vehicle traffic, the public will be under pressure to spend its own money to alter the connecting roads and bridges to keep up with the induced traffic demands of the leased highway. This is a ripple effect that may extend far into the road system, and should be a cause for considerable analysis of the spin-off costs of the business and maintenance model of the leased highway.

3. What process should be built into authorizing legislation to maximize the public benefit from public-private partnerships?

Despite these concerns, we believe that public-private partnerships can be an effective tool for the preservation and development of our region’s transportation system if they are based on the following three principles:

Approved by a Regional Planning Process: Public-Private Partnerships only benefit the long-term interests of the state when they are used for projects that have already been approved by a transparent and rigorous regional planning process. Public-Private Partnership projects should reflect priorities set by metropolitan planning organizations, counties and municipalities and be in accord with regional plans for growth and transportation. Project details should be made public well in advance of local or state approval, including the use of the state and/or municipal revenue for and from the Partnership.
Subject to Special Scrutiny: Regional planning agencies should seek best practices and develop a special review process for projects that could attract Public-Private Partnerships, being especially sensitive to any hidden costs and public expectations of the parameters of such projects. The availability of private capital to help build new toll highways, in particular, should not skew the appropriate balance of mobility options of the region or state; an unregulated program of new toll highways could generate paralyzing financial costs and reverse a fledgling trend toward redevelopment and clustered, mixed use development. The regional planning agency should also work with the contracting agent on making sure that the public’s expectations of parameters are reflected in the contract and regulation process.
Reinvested in Appropriate Areas: The revenue generated by the state or municipal agent through a Public-Private Partnership should be reinvested in transportation facilities that meet the stated goals of regional planning bodies. Regional planning bodies should use Partnerships as an opportunity to generate more funding for long-term solutions to the region’s mobility issues, especially mass transit and rail freight. Furthermore, revenue generate from Partnerships should be used for capital purposes, not operating expenses as this revenue is essentially akin to bond financing.

I urge this committee to vigorously pursue these principles, keeping in mind that there are numerous examples of how to put them into practice from around the country and world. I have not presented these examples today for lack of time but would be happy to provide additional information about them.

Finally, I want to offer the committee a possible process for approving public-private partnerships. The process I will outline addresses some of the concerns I’ve raised above, but I would like to note that many of the other concerns will need to be addressed directly in the contract between the public and private entity.

Each year the Illinois Department of Transportation, Toll Highway Authority and other authorized agencies present a list to the General Assembly that will be considered for public-private partnerships. Only projects approved by a regional planning process can be presented to the General Assembly.
Once the authorized agency has decided upon a project list, it should send notice to the County Chair(s) affected by the project indicating that the project has been preliminarily approved for a public-private partnership.
Local legislators should sponsor public hearings on the proposed use of a public-private partnership for the project in district.
The authorized agency should complete an Environmental Impact Statement (if required) for the project before releasing a request for proposals.
Once the authorized agency completes the EIS, it releases the RFP for the project.
The authorized agency analyzes its responses to the RFP and produces a financial report to the Commission on Government Forecasting and Accountability with copies to general assembly leadership and the Governor based on the best response to the RFP.
After reviewing the authorized agency’s report to the Commission on Government Forecasting and Accountability, the General Assembly has final authority over the approval of the project.
The authorized agency will deliver a final report to the Commission on Government Forecasting and Accountability one year after completion of the deal analyzing the deal and identifying lessons for future application of the process.

In closing, I congratulate the panel on its interest in this very important financial tool, and I encourage the General Assembly to pass legislation authorizing the use of public-private partnerships to improve the transportation system in Illinois . Thank you again for the opportunity to testify today. I am happy to answer your questions.

Read Business Leaders for Transportation's testimony on May 31, 2006 to the Senate Appropriations Committee Hearing on public-private partnerships