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PURPOSE

BACKGROUND

WITNESSES

This hearing is intended to provide Members of the Committee with information regarding contemporary public private highway transactions. Recent high profiles lease agreements for highway toll facilities in Indiana, Virginia, and Chicago have brought these issues to the forefront of the debate on the future of infrastructure financing. This hearing will explain why state and local governments may find private involvement in highway financing attractive. It will also focus on how a particular method – namely, long-term lease of existing non-federal toll facilities to private operators – is structured. This hearing is intended to be the first in a series of hearings on this topic.

Highway Financing in the United States

In the United States the traditional manner in which highway projects were constructed is through public financing. States or local governments either use their own tax revenue to finance projects or in some cases use their bonding authority to finance projects. In these cases the route, technical aspects, and other contractual features of the transportation project would be generally free of federal requirements or conditions. State and local governments have the authority to charge tolls on these types of projects and to enter into private public partnerships, pursuant to state and local laws.

With the creation and growth of the Federal-Aid highway program, states began to build an increasing number of transportation projects, notably interstate projects, in partnership with the Federal Government. By accepting federal assistance to help finance highway construction projects, states also subjected themselves to federal requirements and conditions.

In the United States, as Federal and State highway funding becomes more constrained, and as the need for highly efficient surface transportation systems continues to grow, the private sector may provide additional financing options at the state and local level. Transportation officials in the United States are eager to find ways to capture the efficiency and financing opportunities that the private sector can provide. This has led to new forms of partnership in which public owners have transferred responsibility for activities, for which it has traditionally been responsible, to the private sector. These activities range from the maintenance and operations of individual highways or large highway networks to managing the financing and procurement of large highway capital expansion programs.

What is a Public Private Partnership

Public private partnerships (PPP), or public private ventures, refer to contractual agreements formed between a public agency and private sector entity that allow for private sector participation in the delivery of transportation projects. These types of partnerships offer Federal, State, and Local governmental agencies the opportunity to introduce innovative approaches to the way we build and maintain transportation projects in the United States.

Traditionally, private sector participation has been limited to separate planning, design or construction contracts on a fee for service basis – based on the public agency’s specifications. Recently the private sector has expanded its role in the delivery of transportation projects. Public agencies now tap the private sector’s technical, management and financial resources in new ways to achieve certain public agency objectives such as greater cost and schedule certainty, supplementing in-house staff, innovative technology applications, specialized expertise or access to private capital.

Why do Public Agencies Enter into Public Private Ventures or Partnerships?

Public agencies enter into public private partnerships for a variety of reasons. Some of the primary reasons for public agencies to enter into public private partnerships include:

• Accelerating the implementation of high priority projects by packaging and procuring services in new ways;

• Turning to the private sector to provide specialized management capacity for large and complex programs;

• Enabling the delivery of new technology developed by private entities;

• Drawing on private sector expertise in accessing and organizing the widest range of private sector financial resources;

• Encouraging private entrepreneurial development, ownership, and operation of highways and/or related assets; and,

• Allowing for the reduction in the size of the public agency and the substitution of private sector resources and personnel.

What Benefits do Public Agencies Receive from Entering into these Agreements?

Public private partnerships provide benefits by allocating the responsibilities to the party – either public or private – that is best positioned to control the activity that will produce the desired result. In these partnerships agreements are structured by specifying the roles, risks and rewards contractually, so as to provide incentives for maximum performance and the flexibility necessary to achieve the desired results.

The primary benefits of using these agreements to deliver transportation projects include:

• Expedited completion compared to conventional project delivery methods;

• Project cost savings;

• Improved quality and system performance from the use of innovative materials and management techniques;

• Substitution of private resources and personnel for constrained public resources; and,

• Access to new sources of private capital.

What are some types of Public Private Partnerships or Public Private Ventures?

There are a broad range of public private ventures or partnerships in the transportation sector. The most common are design-build agreements. Design-build is a method of project delivery in which the design and construction phases of a project are combined into one contract, usually awarded on either a low bid or best-value basis. But public agencies are also starting to turn to the private sector for other types of involvement including:

• Build-Operate-Transfer (BOT) / Design Build Operate Maintain (DBOM)

• Design-Build-Finance-Operate-Transfer (DBFO)

• Maintenance and Operation Fee Service Contracts

• Program Management Fee Service Contracts

• Build-Own-Operate (BOO)

Concession Agreements

More recently, States and local governments have begun to enter into concession agreements with the private sector. In these types of agreements -- popular in Europe, Australia, and Asia -- private concessionaires arrange financing, construct and maintain roadways, service their debt, and derive revenue from tolls collected directly from motorists. One of the main benefits of the toll concession approach is that it enables governments to tap into sources of private capital and reduce the amount of public monies to build highways. Toll road PPP precedents established in France and Spain have been replicated in such diverse locations as Iceland, Malaysia, South Africa, Croatia, Australia, China and Brazil. An equally wide range of countries is now poised to launch ambitious surface transport partnership projects, including Poland, Romania, Lebanon, Egypt, and Austria.

Indiana, Virginia, Texas and the City of Chicago have all entered into concession agreements with the private sector on toll projects recently. The partnerships in Indiana, Virginia and with the City of Chicago involve a financial agreement between a public agency and the private sector on the long term lease of an existing transportation asset (such as a toll road). Recent agreements in Texas and California involve the construction of a new asset by a private company and the lease of that asset to the private sector for a period of time.