Testimony on Public Private Partnerships by Mary Peters, Senior Vice President, HDR, to the Senate Appropriations Committee II
By Guest Author- July 20, 2006
Mr. Chairman, Members of the Committee, thank you for the opportunity to appear before you today to discuss public-private partnerships.
For the record, my name is Mary Peters. I am currently a Sr. Vice President with HDR, Inc., and serve as Co-Vice Chair of the National Surface Transportation Policy and Revenue Study Commission. The Commission is tasked with making recommendations to the President and Congress on the future needs, policy and revenue to support national surface transportation.
Experience
I have spent more than 20 years in public sector transportation, having served in both State and Federal transportation organizations.
I served at the Arizona Department of Transportation, beginning in 1985, in several positions before being appointed by Gov. Jane Hull as Director and Chief Executive Officer of that agency in 1998. In July 2001, I was nominated and subsequently confirmed by the U.S. Senate to serve as Administrator of the Federal Highway Administration at the U.S. Department of Transportation. I served in that position through July 2005.
As Federal Highway Administrator, I was responsible for the Federal Aid and Federal Lands Highway Programs, including the Interstate Highway System and the National Highway System. These programs, authorized by the United States Congress, involve nearly $35 Billion in annual budgets, and include many complex statutory and regulatory requirements.
During my tenure as Federal Highway Administrator, I led agency efforts to complete a multi-year authorization of surface transportation programs, which was signed into law last year. Recognizing the significant and growing gap between transportation needs and existing revenue sources, a key focus area of mine was improving the environment for developing successful public-private partnerships.
Evolution of Federal surface transportation funding
I believe it is instructive to briefly review the evolution of Federal surface transportation funding as background to discussing the opportunities available through public private partnerships.
Until the mid 1950’s, most road building in the United States was done by state and local transportation agencies. The predecessor agency to FHWA, the Bureau of Public Roads, existed mainly to build roadways on Federal lands, and to help facilitate military transportation.
President Eisenhower developed a great appreciation for the German autobahns he witnessed during World War II. He had taken a very lengthy and arduous cross country trip as a young Army officer, and recognized that if America were to grow and prosper economically we needed a safe and efficient system of highways to connect our nation.
President Eisenhower established the Clay Commission, and working with Governors, they proposed the Interstate Highway System to be funded with a Federal gasoline tax. The tax was increased periodically by Congress to equate to the cost to complete the Interstate system. The gas tax provided a good proxy for need at the time, and was considered to be fairly distributed based on the defined Interstate system which served the nation’s best interest.
Subsequent to substantial completion of the Interstate system in the early 1970’s, Congress elected to continue to collect the tax, allocating it by a distribution formula to States. They made transit and other uses eligible for Federal transportation funding, and later Congress directed that the National Highway System be defined and developed, making it also eligible for Federal funding.
Growing disparity between supply and demand
Today, States also collect a gas tax in addition to the Federal tax of 18.4 cents per gallon. These funds are sometimes supplemented with local-option funding, such as an increment of sales tax, and other fees. Unfortunately, however, the gap between defined needs and available revenue for surface transportation projects continues to widen.
There is little dispute that needs far outstrip revenues available under the largely fossil-based fuel systems in place today. Highway infrastructure is significantly undersupplied relative to demand. Traditional funding sources are neither adequate nor sustainable in terms of meeting our nations growing transportation requirements.
Much of the revenue available today from the gas tax funding goes toward simply maintaining and operating the existing system, leaving little money available for system improvements or investment in new infrastructure. Discussions during the reauthorization process suggested that a funding gap of between $20 - $50 billion per year exists.
Further, according to a National Chamber Foundation sponsored study, tax receipts into the Federal Highway Trust Fund will fall $55 billion short of covering the currently authorized federal funding of $286.5 billion by 2009 when the current authorization period ends.
Difficulty in passing SAFETEA-LU
The recently enacted SAFETEA-LU legislation was passed twenty-two months after the expiration of TEA-21, and required twelve extensions. Why was it so difficult, and why did it take so long for the legislation to pass? Much of the discussion and delay had to do with the perceived adequacy of funding in the overall bill, and the allocation formula to the States.
I believe that the lack of a compelling national interest has lead to an environment where Congress is reluctant to increase taxes, and where every grant recipient argues for his or her own self-interest. The Federal highway programs have increasing devolved to more of a public works program, as evidenced by the substantial level of earmarks in the recently passed legislation. That bill contained 6,371 earmarks at a cost of nearly $24 billion, or over 9% of the total bill.
21st Century solutions for 21st Century Challenges
Evidence is growing that the fuel tax based system that has served our nation well for much of the last 50 years is no longer adequate to meet our nations transportation infrastructure needs. With a growing rate of alternatively fueled and hybrid vehicles in the nation’s vehicle fleet, as well as greater fuel efficiency in many vehicles, the fuel taxed based system no longer provides adequate funding, nor will it in the future.
When the Interstate System was defined, the problem it sought to remedy was connecting our nation and our major cities. Today, the major transportation problems are congestion and lack of capacity. The systems and structures that served us well in the past must be revised to reflect today’s needs.
This is the purpose of the National Surface Transportation Policy and Revenue Study Commission on which I serve. Just as the name of the Commission implies, we are to study both national surface transportation policy, as well as sources of revenue to support national transportation needs. We need to develop 21st century solutions for 21st century transportation challenges.
In the interim, State and local governments have acted as incubators of innovation, and have engaged the private sector in bringing market based solutions and additional funding for transportation. We have learned that there are billions of dollars available to invest in our nations’ transportation infrastructure given the right environment. States like Indiana, Virginia, Texas, California, Florida and Virginia have already demonstrated this potential, as has the City of Chicago. Many others have or are developing legislation to enable them to explore the opportunities available in public private partnerships.
SAFETEA-LU provisions (emphasis on P3 & tolling)
Those of us involved in developing the SAFETEA-LU legislation recognized the need to create a successful environment for public private partnership on a Federal level as well. We wanted to encourage, not prevent, opportunities to bring additional funding sources to transportation.
The enacted bill contains the following provisions toward that end:
- $15 billion available through Private Activity Bonds for highways and surface transfer facilities, including concession agreements with the private sector
- Enhanced authority to use tolling to finance construction or reconstruction of Interstate highways, express lanes and value pricing pilot programs
- Improvements to innovative finance programs, including TIFIA and SIBs
- Increased flexibility to use design-build contracting
- The Highways for Life program to encourage application of innovative technologies, manufacturing processes, financing, or contracting methods that improve safety, reduce congestion, and extend the service life of transportation infrastructure.
It was our belief that these provisions, along with streamlined environmental clearance processes and Special Experimental Programs authorized administratively, would allow public private partnerships to be expanded to those States desiring to use these tools.
P3 Opportunities – making the business case
As has been demonstrated most recently in the City of Chicago and the State of Indiana, America’s transportation infrastructure offers an attractive long-term investment opportunity, especially for “patient” investors, such as pension funds. There is significant untapped investment opportunity in the transportation asset class, and that fact is apparent not only to Spanish and Australian firms like Cintra and Macquarie. Credit Suise/GE, the Caryle Group, J P Morgan, Goldman Sachs, Merrill Lynch, Citigroup, Morgan Stanley and UBS have either announced interest in or have established infrastructure investment asset portfolios. These firms recognize the potential to monetize the economic value of infrastructure and obtain a steady cash flow from those revenue producing assets.
For the public sector, participating in these deals requires an innovative approach to governance, based on life-cycle based asset management, and a greater focus on the economics of infrastructure. Leveraging these otherwise inactive capital assets provides funding to improve or expand infrastructure, bringing with it economic growth, employment opportunity, and an improved tax base. This approach is not limited to roadways and bridges, but is applicable to schools, courts, correctional facilities, and other vertical and horizontal infrastructure as well.
By diversifying the funding base through public private partnerships, there can be less dependence on current fiscal circumstances to determine infrastructure funding. There is increased opportunity for efficiency and effectiveness in financing, developing, delivery and operation of public infrastructure. In addition, market-based congestion or variable pricing is an excellent tool for managing congestion.
To date, 21 states and Puerto Rico have laws authorizing public private partnerships for transportation projects. These laws can vary considerably from state to state, both in terms of the type or number of projects that can be considered, the type of procurement process to be used, and the type of agreements that are authorized.
Many follow the public-private transportation act model authorized by Virginia in 1995, while more current legislation in states such as Utah can provide broader authority.
Project types vary from converting existing toll roads to concession agreements, project development agreements often used on “greenfield”, or undeveloped, projects, and converting current high-occupancy vehicle lanes to high-occupancy toll or “HOT” lanes. Denver recently became the 5th jurisdiction to implement express toll lanes, including Orange and San Diego Counties in California, and the cities of Houston and Minneapolis. At least twelve other locations are under development, including the I-395 and I-495 Beltway in the northern Virginia, DC and Maryland.
Protecting public interest
The public sector will always retain the responsibility for protecting public interest when engaging in public private partnerships. Accordingly, it is important that public private partnerships be considered as one of the tools available to meet infrastructure needs. It can be helpful to perform an analysis to determine if a public private partnership yields greater net economic and social benefits to the public, as compared to the traditional public sector model. This can be accomplished through a public sector comparator test, a rigorous quantitative test to compare the two.
This analysis can address questions such as why the public sector, with access to tax-exempt financing, is not better positioned to develop the project. The private sector can often offer improved efficiencies in operation, greater productivity and return on investment, innovation, and more timely investment and improvement. The debt-equity financing model rather than traditional bond financing provides greater flexibility, including the ability to restructure debt once performance has been established or stabilized. Asset depreciation and risk transfer are other factors to be considered in the analysis.
It is also important to recognize that there will be public concerns, and to address those up front in the process. For example, a common misperception is that public infrastructure assets are being sold. In fact the agreements to date are long-term leases in which the public retains asset ownership, and exercises control through specific contract terms and conditions.
There may be concern that a private company could sacrifice quality for the sake of profit, may take short cuts to increase profits, or be less accountable to the public. The contractual agreement governs these and other factors to protect public interest, and will include specific service level requirements and performance guarantees.
In addition, there may be concern with toll increases. These provisions are also governed by the contract, and are often tied to indices such as the consumer price index (CPI). Rational pricing, free from political constraints often present in the public sector, based on known and recognized indices addresses these concerns.
Governance is key – policy control and accountability will always rest with the public sector.
Conclusion
Mr. Chairman, Members of the Committee, thank you for the opportunity to provide testimony today. I again commend you for holding this hearing on public private partnerships.
As I once mentioned to Gov. Rick Perry in Texas, having the political will to move forward with innovative ideas such as public-private partnerships is not for the faint of heart.
It is, however, clearly important in terms of meeting Illinois’ infrastructure needs and thereby generating economic development and employment opportunities for your state both now and in the future.
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