Report: Public-private toll roads will not fill the funding gap

| 8/3/2011

Policymakers that promote new toll roads and the leasing of existing toll roads as public-private partnerships might be quick to champion this approach as a way to fill the infrastructure funding gap in the U.S. But the DOT’s own Office of Inspector General says the PPP method does very little to fill that funding gap.

For starters, public-private partnerships don’t really bring in “new” money, they merely call for healthy sum to be paid up front. The OIG points to Indiana, where the governor leased the Indiana Toll Road to private investors from Spain and Australia in exchange for $3.85 billion in up-front cash. Sure, the state got $3.85 billion up front, but the public is on the hook to pay ever-increasing tolls for 75 years to reimburse the private consortium.

That’s just one example given in the OIG’s latest report titled Financial Analysis of Transportation-Related Public-Private Partnerships.

The report generated models based on the Indiana Toll Road and nearby Chicago Skyway under a section detailing public-private partnerships involving existing roadway infrastructure. The OIG also studied so-called “greenfield” projects involving new infrastructure capacity and generated models based on tollway projects being built as PPPs in Texas and in other areas.

The authors of the report set out with three objectives: to identify financial disadvantages of PPPs over traditional public methods; identify factors that help PPPs derive value; and assess whether PPPs close the infrastructure funding gap.

For its first objective, the OIG highlighted several disadvantages to public-private partnerships.

Notably, PPPs cost more than traditional public financing. This is because private entities pay more in taxes than public entities do, and private entities seek higher rates of return than public forms of financing do. In addition, the longer the term of the agreement – 75 years in the case of Indiana and 99 years in the case of the Chicago Skyway – the more disadvantages there are to the public, the authors stated.

Next, the OIG identified ways that PPPs can overcome these cost disadvantages, and one of the preferred methods is through toll increases. But as the public knows, if the tolls get too high, the benefit of using the roadway diminishes and the traffic will divert to secondary roadways.

The OIG noted that the private sector has the ability to tap into federal loan programs such as TIFIA – the Transportation Infrastructure Finance and Innovation Act – while public entities do not. TIFIA basically works like a bank to grant or loan money for infrastructure projects. Typical uses for TIFIA funds involve projects that aim to relieve congestion.

Do public-private partnerships help close the infrastructure funding gap as some policymakers claim? The Office of Inspector General says no.

Under a PPP, the private investor is not generating any “new” money in most cases. The investor merely provides a sum of money up front and expects to be reimbursed with a profit over the length of the agreement, the OIG said.

“PPPs are not likely to significantly reduce the infrastructure funding gap because they change the timing with which funds become available, but generally do not increase overall funding levels,” the report’s authors wrote.

The report advises that a state entity considering a PPP should research and study the pros and cons on a case-by-case basis.

In response to the report, Federal Highway Administrator Victor Mendez agreed with the OIG that PPPs can provide benefits and should be considered on a case-by-case benefit. Mendez also said the report did not take risk-reward or project delivery times into account – both of which would favor private-sector agreements over traditional funding methods.

The Office of Inspector General’s report did not reject the concept of PPPs, but it was hardly a glowing endorsement, either.

OOIDA is opposed to the lease or sale of existing roadway infrastructure to the private sector, and cites the agreement in Indiana as an example. Just five years into that 75-year agreement, truckers are paying more than double the toll rate to operate on the Indiana Toll Road.

OOIDA does not categorically oppose new highway capacity that involves tolls to pay off the costs, but as the inspector general’s report cautions, it’s on a case-by-case basis.