News from the
Transportation Front
NO. 15 (MAY 2007)
By C. Kenneth Orski
This is a monthly news roundup covering developments of more than casual interest to the transportation community
The Public-Private Partnership Debate Takes a New Turn
The latest chapter in the continuing debate about the role of public-private partnerships featured an uncharacteristically blunt congressional reaction. In a May 10 letter sent to governors, state legislators and state transportation officials, House T&I Committee Chairmen James Oberstar (D-MN), and Highway and Transit Subcommittee chairman Representative Peter DeFazio (D-OR) warned the recipients against "rushing" into public-private partnerships that do not fully protect the public interest. "The Committee will work to undo any state PPP agreements that do not fully protect the public interest and the integrity of the national system." The bluntly phrased warning stunned people and caused an uproar among state officials and within the transportation community.
Reaction was quick in coming. "Mr. Oberstar had good intentions, but I disagree with his letter on two major points," said Virginia Secretary Pierce Homer in remarks before an international gathering of toll agency operators in Richmond, Virginia. "First, we need tolling to generate critically needed revenue for transportation. Second, we need tolling to help us manage congestion. There seems to be no recognition by Mr. Oberstar of the need for congestion management, and we will engage him in a debate on this issue." A fellow governor, Indiana's Governor Mitch Daniels expressed doubt that Congress could overturn existing concession agreements and called the PPP hearings "nothing but Congressional posturing." "We don't need their advice, frankly," Daniels said.
Others were less restrained in their criticism. "State officials do not need to be warned by U.S. Congressmen against signing agreements that are not in the public interest. They make their own judgments of what agreements are in the best interest of their publics... Federal legislators' role is to legislate, not to attempt to undo state contracts legitimately entered into," wrote Robert Poole, director of transportation studies at the Reason Foundation in a strongly worded commentary. Echoed Pennsylvania's Commonwealth Foundation President Matthew Brouillette, "What happened to federalism? How or why should Congress step in and prevent the states from making their own decisions regarding transportation and infrastructure needs?" The U.S. Department of Transportation, which came under special criticism from Messrs. Oberstar and DeFazio for "rushing" to embrace PPPs and drafting model legislation intended to encourage states to adopt PPPs had no official comment.
To be fair, Messrs Oberstar and DeFazio reserved their wrath for deals involving lease and "monetization" of existing assets, as exemplified by the Indiana Toll Road and Chicago Skyway deals. "PPPs that expand capacity and provide a service that otherwise cannot be provided by public resources may be a good idea," the chairmen wrote in their May 10 letter.
Perhaps the most convincing challenge to Messrs Oberstar's and DeFazio's position, aside from their questionable interference with what properly are state functions, is that they oppose private sector involvement without offering an alternative. Congress has failed to come up with adequate resources to help states meet their infrastructure funding needs, so states are moving on their own to fill the vacuum, observed Representative John Mica (R-FL), the committee's ranking member. The revenues from traditional sources are barely enough to maintain the existing road network and leave nothing to improve and expand the system. The prospect for significant increases in the fuel tax both at state and federal level at times of record high fuel prices is virtually zero (indeed, the recent spike in the price of gasoline has caused Connecticut's governor to call for a suspension of the state's 25-cent/gallon tax for the duration of the Summer, and two Indiana Congressmen have introduced a bill that would suspend the federal gasoline tax once the average price reaches $3 per gallon!) Given these circumstances, the search for alternative funding sources will continue, with tolls and public-private partnerships figuring importantly in the equation - notwithstanding the two Congressmen's skepticism.
Two weeks later, on May 24, the Highways and Transit Subcommittee of the House Transportation and Infrastructure Committee held its fourth and final oversight hearing on public-private partnerships, with chairman Peter DeFazio presiding. The star witness was Pennsylvania governor Ed Rendel who recently had made news of his own by releasing the conclusions of a study of financing options to relieve the state transportation funding crisis (see the following item.) In an exchange with chairman De Fazio, the Governor stated that he was "not totally without concerns" about public-private partnerships, but that the fiscal situation confronting the state left him no choice. "I am not pointing a finger at the federal government," said the Governor, "but there is no way the federal government will ever give to Pennsylvania the amount of money we need to bridge our funding gap." Alluding indirectly to DeFazio's criticism that public-private partnerships may not be "in the public interest," the Governor said, on the contrary, the public interest as he sees it, demands that he consider the lease option. "You cannot view the public interest in a vacuum," the Governor said. There are all sorts of public interests a governor must protect, such as fixing unsafe bridges and provid[ing] transit service to needy transit-dependent populations.
The Committee also heard from several other witnesses. Alan Lowenthal, chairman of the California Senate Transportation Committee told the committee his state will consider public-private partnerships - but only for new infrastructure. Private financing, he said, may be particularly appropriate for goods movement, thus adding his support to the growing consensus that the private sector should have a major role and responsibility for funding freight corridors infrastructure. Terri Austin, Chairman of the Indiana House Transportation Committee offered a four-point advice on structuring future toll road concession agreements, in light of the lessons learned from the Indiana Toll Road lease. Bill Graves, President of the American Trucking Association, repeated his oft-stated opposition to tolling existing roads, but said the trucking industry is ready to contribute to funding freight infrastructure.
Sharply questioning Governor Rendel at the outset, Chairman DeFazio seemed almost conciliatory toward the end of the hearing, after hearing the Governor's rationale for leasing the Turnpike, and receiving his assurance that the concession agreement would protect motorists from excessive toll hikes, involve an open and transparent selection process, and contain other safeguards to protect the public interest. Still, the Oberstar/DeFazio letter and the latest hearing have cast a shadow on future PPP transactions and left the transportation community scratching their heads and wondering about the Committee's true intentions.
The Pennsylvania Turnpike Concession Moves One Step Forward
In the meantime, a report released by Governor Rendell on May 21 moves the decision process on leasing the Pennsylvania Turnpike one step forward. The report, prepared by the Governor's financial advisor, Morgan Stanley, analyzed three financial options for filling the state's transportation funding needs and concluded that a long-term lease of the turnpike is the option that would best meet the state's annual highway and transit needs of $1.7 billion. The second option analyzed by Morgan Stanley envisioned creation of a new tax-exempt public benefit corporation to refinance the Turnpike. The third option was the proposal of the Pennsylvania Turnpike Commission to toll Interstate 80 and impose an additional toll surcharge at most heavily used turnpike exits. "The lease option would almost certainly provide the most money and, for that reason we have to take it seriously," the Governor said. Toll increases are inevitable under all three proposals, the Morgan Stanley report concluded, but the Turnpike Commission plan presents the most difficulty by requiring the passage and legislative approval of three separate toll hikes plus a separate revenue source for transit.
In his May 24 congressional testimony, the Governor speculated that if the auction brings an offer of $15 billion (the median value of the $12-$18 billion range of the Morgan Stanley estimate), the annuitized payments would yield $1.4 billion/year. A $20 billion offer would produce annuity payments of $1.9 billion/ year - in either case solving of the Commonwealth's highway and transit funding problems for the next 30 years. However, "if the bids come in too low, we will not go ahead," the Governor told the Committee. The only way to resolve the uncertainty over the value of a long-term lease is to solicit competitive bids, the Governor said. Prior to the auction, authorizing legislation will be sought from the state legislature in order to offer credible assurance to potential private investors that the state stands solidly behind the transaction.
The action now shifts to the legislature. Given the Governor's popularity; given further his assurances that any potential concession will fully protect the public interest and his commitment to an open and transparent process; and in view of the demonstrated need to find a solution to the Commonwealth's transportation funding problem, we agree with many state-level observers that the legislature will support the Governor's initiative.
AASHTO'S "Transportation Vision Summit"
Responding to calls for a "bold new vision," the American Association of State Highway and Transportation Officials took the initiative to convene a "Transportation Vision and Strategy Summit" to develop an industry-wide consensus on a national strategy for the future of America's transportation system. Co-sponsors included seven national transportation organizations: ARTBA, AAA, American Trucking Association, The Associated General Contractors of America, American Public Transportation Association, American Council of Engineering Companies, and Association of American Railroads.
The three-day conference, held May 21-23 on Maryland's Eastern Shore, attracted more than 150 high ranking state transportation officials and leaders from the transportation industry. Much of the "visioning" and formulation of recommendations took place in breakout sessions. Nine panels of experts had met earlier in the year to lay the groundwork by preparing position papers in specific topic areas for consideration by the conference participants. A set of 27 proposed vision statements and recommendations, refined in the breakout groups, were presented, discussed, and voted upon at a plenary session toward the end of the conference. Ten recommendations that received the strongest support will be featured in AASHTO's report to the National Transportation Policy and Revenue Commission.
Sprinkled throughout the conference were presentations by leaders of the participating trade associations and invited speakers. Two well known futurists - Glen Hiemstra and Michael Gallis - held the audience rapt with their speculations about the future. Several presentations struck us as particularly noteworthy. Stephen Lockwood of Parsons Brinckerhof summarized the conclusions of a year-long NCHRP study on "Future Options for the National System of Interstate Highways." The study identified (correctly we think) three key priorities of a 21st century surface transportation strategy: a national freight network; metropolitan congestion management; and connecting new population centers that have grown since the original Interstate system was conceived to the national Interstate highway network. The study estimated the need for an ultimate network in the year 2035, of 62,000 route miles of interstate mileage with a price tag of $3.1 trillion. Although not out of scale with an expected 80 percent increase in vehicle-miles of travel (VMTs), this target will appear to some observers as a product of abstract, financially unconstrained planning that fails to take into account the realities of a fiscally constrained real-world environment. Nevertheless, as the first comprehensive attempt to look beyond the present Interstate System, the study should become an important source of ideas in the formulation of the post-Interstate federal surface transportation program (full disclosure: your editor served on the NCHRP Review Panel for this project).
In the concluding conference session, two members of the National Surface Transportation Policy and Revenue Commission who were present throughout the conference - Vice Chairman Jack Schenendorf and Frank McArdle - shared some provocative thoughts about the challenges facing the Commission and Congress ahead. We are facing a triple national transportation crisis, Schenendorf observed. It's a crisis in system performance, in funding, and in policy. The federal program no longer has a sense of mission, and the lack of a national purpose has led to a competition for funds among the states and to a proliferation of earmarks for projects of purely local interest. The program has lost its credibility with the American public, and has to be sold to them again. Said Schenendorf, "We need to enter into a covenant with the American people. We need to tell them exactly what they will be getting in return for their investment and we need to explain our vision in simple understandable terms." Schenendorf made another thoughtful observation: 76 percent of the conference participants were over the age of 56 (ed. note: this data came from an informal electronic survey). What would the 20- and 30-year olds - the true inheritors and potential beneficiaries of long-term planning - tell us about their vision of the preferred future?
The "Bridge to Nowhere" may inadvertently have done us a favor, observed Frank McCardle. It has exposed in stark terms what the program has become, and why a new vision is necessary. The vision must include unconventional approaches such as public-private partnerships, pricing, tolling, and the use of private capital. Development of the vision must engage more than just the transportation community, said McCardle and must take into account the need to accommodate an additional 150 million people.
The Conference demonstrated the difficulty of "drafting a vision by a committee." Many participants openly expressed disappointment about the timid and conventional recommendations reached by the breakout groups. It would be hard to quarrel with the final ten goals the Conference came up with - such as: "Protect and enhance existing transportation infrastructure investment by significantly increasing funding for the core highway and transit programs," "Generate new funding sources to make bold new strategic national investments beyond the core program," "Aggressively invest in transportation capacity that is needed to support population and employment growth," "Make a transition from fuel taxes to a more diversified and reliable funding base." But these broad and largely obvious principles were hardly the "compelling new vision that would capture the public imagination" that conference participants were urged to come up with.
The truth is - as several participants pointed out to us - committees, in their desire to reach a consensus, tend to come up with the lowest common denominator. The dynamics of the negotiating process that takes place within a group of diverse interests produces inoffensive conventional wisdom that everybody can subscribe to, rather than bold, "transformational" ideas.
Be that as it may, AASHTO's attempt to combine diverse transportation interests into a collective vision deserves nothing but praise. By taking this initiative, the organization has shown true leadership and has earned the respect of the entire transportation industry. We hope that other interests, outside the transportation industry, notably the business, financial, and environmental communities will join in the dialogue and add their own wisdom and perspective to the unfolding debate about the future of surface transportation in the 21st century.
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C. Kenneth Orski is the Editor/Publisher of
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