[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
PUBLIC-PRIVATE PARTNERSHIPS: INNOVATIVE FINANCING AND PROTECTING THE
PUBLIC INTEREST
=======================================================================
(110-7)
HEARING
BEFORE THE
SUBCOMMITTEE ON
HIGHWAYS AND TRANSIT
OF THE
COMMITTEE ON
TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
FEBRUARY 13, 2007
__________
Printed for the use of the
Committee on Transportation and Infrastructure
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COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
JAMES L. OBERSTAR, Minnesota, Chairman
NICK J. RAHALL, II, West Virginia JOHN L. MICA, Florida
PETER A. DeFAZIO, Oregon DON YOUNG, Alaska
JERRY F. COSTELLO, Illinois THOMAS E. PETRI, Wisconsin
ELEANOR HOLMES NORTON, District of HOWARD COBLE, North Carolina
Columbia JOHN J. DUNCAN, Jr., Tennessee
JERROLD NADLER, New York WAYNE T. GILCHREST, Maryland
CORRINE BROWN, Florida VERNON J. EHLERS, Michigan
BOB FILNER, California STEVEN C. LaTOURETTE, Ohio
EDDIE BERNICE JOHNSON, Texas RICHARD H. BAKER, Louisiana
GENE TAYLOR, Mississippi FRANK A. LoBIONDO, New Jersey
JUANITA MILLENDER-McDONALD, JERRY MORAN, Kansas
California GARY G. MILLER, California
ELIJAH E. CUMMINGS, Maryland ROBIN HAYES, North Carolina
ELLEN O. TAUSCHER, California HENRY E. BROWN, Jr., South
LEONARD L. BOSWELL, Iowa Carolina
TIM HOLDEN, Pennsylvania TIMOTHY V. JOHNSON, Illinois
BRIAN BAIRD, Washington TODD RUSSELL PLATTS, Pennsylvania
RICK LARSEN, Washington SAM GRAVES, Missouri
MICHAEL E. CAPUANO, Massachusetts BILL SHUSTER, Pennsylvania
JULIA CARSON, Indiana JOHN BOOZMAN, Arkansas
TIMOTHY H. BISHOP, New York SHELLEY MOORE CAPITO, West
MICHAEL H. MICHAUD, Maine Virginia
BRIAN HIGGINS, New York JIM GERLACH, Pennsylvania
RUSS CARNAHAN, Missouri MARIO DIAZ-BALART, Florida
JOHN T. SALAZAR, Colorado CHARLES W. DENT, Pennsylvania
GRACE F. NAPOLITANO, California TED POE, Texas
DANIEL LIPINSKI, Illinois DAVID G. REICHERT, Washington
DORIS O. MATSUI, California CONNIE MACK, Florida
NICK LAMPSON, Texas JOHN R. `RANDY' KUHL, Jr., New
ZACHARY T. SPACE, Ohio York
MAZIE K. HIRONO, Hawaii LYNN A WESTMORELAND, Georgia
BRUCE L. BRALEY, Iowa CHARLES W. BOUSTANY, Jr.,
JASON ALTMIRE, Pennsylvania Louisiana
TIMOTHY J. WALZ, Minnesota JEAN SCHMIDT, Ohio
HEATH SHULER, North Carolina CANDICE S. MILLER, Michigan
MICHAEL A. ACURI, New York THELMA D. DRAKE, Virginia
HARRY E. MITCHELL, Arizona MARY FALLIN, Oklahoma
CHRISTOPHER P. CARNEY, Pennsylvania VERN BUCHANAN, Florida
JOHN J. HALL, New York
STEVE KAGEN, Wisconsin
STEVE COHEN, Tennessee
JERRY McNERNEY, California
(ii)
SUBCOMMITTEE ON HIGHWAYS AND TRANSIT
PETER A. DeFAZIO, Oregon
NICK J. RAHALL II, West Virginia JOHN J. DUNCAN, Jr., Tennessee
JERROLD NADLER, New York DON YOUNG, Alaska
JUANITA MILLENDER-McDONALD, THOMAS E. PETRI, Wisconsin
California HOWARD COBLE, North Carolina
ELLEN O. TAUSCHER, California RICHARD H. BAKER, Louisiana
TIM HOLDEN, Pennsylvania GARY G. MILLER, California
MICHAEL E. CAPUANO, Massachusetts ROBIN HAYES, North Carolina
JULIA CARSON, Indiana HENRY E. BROWN, Jr., South
TIMOTHY H. BISHOP, New York Carolina
MICHAEL H. MICHAUD, Maine TIMOTHY V. JOHNSON, Illinois
BRIAN HIGGINS, New York TODD RUSSELL PLATTS, Pennsylvania
GRACE F. NAPOLITANO, California JOHN BOOZMAN, Arkansas
MAZIE K. HIRONO, Hawaii SHELLEY MOORE CAPITO, West
JASON ALTMIRE, Pennsylvania Virginia
TIMOTHY J. WALZ, Minnesota JIM GERLACH, Pennsylvania
HEATH SHULER, North Carolina MARIO DIAZ-BALART, Florida
MICHAEL A ARCURI, New York CHARLES W. DENT, Pennsylvania
CHRISTOPHER P. CARNEY, Pennsylvania TED POE, Texas
JERRY MCNERNEY, California DAVID G. REICHERT, Washington
BOB FILNER, California CHARLES W. BOUSTANY, Jr.,
ELIJAH E. CUMMINGS, Maryland Louisiana
BRIAN BAIRD, Washington JEAN SCHMIDT, Ohio
DANIEL LIPINSKI, Illinois CANDICE S. MILLER, Michigan
DORIS O. MATSUI, California THELMA D. DRAKE, Virginia
STEVE COHEN, Tennessee MARY FALLIN, Oklahoma
ZACHARY T. SPACE, Ohio VERN BUCHANAN, Florida
BRUCE L. BRALEY, Iowa JOHN L. MICA, Florida
HARRY E. MITCHELL, Arizona (Ex Officio)
JAMES L. OBERSTAR, Minnesota
(Ex Officio)
(iii)
CONTENTS
Summary of Subject Matter........................................ vi
TESTIMONY
Page
Busalacchi, Hon. Frank, Wisconsin Department of Transportation,
Secretary, Madison, Wisconsin.................................. 4
Duvall, Hon. Tyler, U.S. Department of Transportation, Assistant
Secretary for Transportation Policy, Washington, D.C........... 4
Enright, Dennis, NW Financial Group, Principal, Jersey City, New
Jersey......................................................... 32
Hedlund, Karen, Esq., Nossaman, Gunther, Knox & Elliott LLP,
Partner, Arlington, Virginia................................... 32
Poole, Robert, Reason Foundation, Director of Transportation
Studies, Los Angeles, California............................... 32
Sawers, Alistair, RBC Capital Markets, Transportation and
Project Finance Specialist, San Franscisco, California......... 32
Wilson, Frank, Metropolitan Transit Authority of Harris County,
Texas, President and CEO, Houston, Texas....................... 4
PREPARED STATEMENT SUBMITTED BY A MEMBER OF CONGRESS
Napolitano, Hon. Grace F., of California......................... 116
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Busalacchi, Hon. Frank.......................................... 53
Duvall, Hon. Tyler.............................................. 65
Enright, Dennis................................................. 82
Hedlund, Karen.................................................. 108
Poole, Robert................................................... 118
Sawers, Alistair................................................ 126
Wilson, Frank................................................... 133
SUBMISSIONS FOR THE RECORD
Duvall, Hon. Tyler, U.S. Department of Transportation, Assistant
Secretary for Transportation Policy, Washington, D.C.,
responses to questions from Rep. Napolitano.................... 78
Enright, Dennis, NW Financial Group, Principal, Jersey City, New
Jersey:
The Chicago Skyway Sale, An Analytical Review, May 1, 2006..... 90
Indiana Toll Road vs. Chicago Skyway, An Analytical Review of
Two Public/Private Partnerships, November 1, 2006............ 98
ADDITION TO THE RECORD
Securities and Financial Markets Association, statement.......... 136
(vi)
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PUBLIC-PRIVATE PARTNERSHIPS: INNOVATIVE FINANCING AND PROTECTING THE
PUBLIC INTEREST
----------
Tuesday, February 13, 2007
House of Representatives,
Committee on Transportation and Infrastructure,
Subcommittee on Highways and Transit,
Washington, DC.
The subcommittee met, pursuant to call, at 10:00 a.m., in
room 2167, Rayburn House Office Building, the Honorable Peter
A. DeFazio [chairman of the subcommittee] presiding.
Mr. DeFazio. The Subcommittee will come to order.
This is a hearing of the Highways amd Transit Subcommittee
on Public Private Partnerships: Innovative Financing and
Protecting the Public Interest. This is hopefully the first in
a series of many hearings, as I mentioned at the last hearing.
We have challenges before us. We have an annual deficit in this
Country in terms of meeting our transportation infrastructure
needs both for maintenance of the existing system and
enhancements to that system to mitigate congestion and better
move our citizens and our freight and bolster the economy.
Confronted with these sort of twin problems, that is, the
need for more investment and the over-dependence upon the gas
tax, which has not been increased since 1991, is leading to the
point where we may not even have full funding for the last
transportation bill, let alone a new transportation bill for
the 21st century.
So what I intend to do with these hearings is explore that
deficit, the causes of it and the potential ways to fill that
gap. In particular, today we are focusing on private-public
partnerships. Some would say this is a panacea, it will somehow
supplant or eclipse the many tens of billions of dollars raised
and spent from Federal gas taxes and State gas taxes. It won't.
It can be an adjunct to that if properly used. And as I
expressed in the last hearing, I have real doubts about the
conversion of existing infrastructure, essentially the
modernization, the sale or long-term lease of that and what the
benefits might be and how, if you are going to do that, you
properly protect both the public interest and you assure that
we aren't fragmenting the national transportation system.
Then, secondly, we provided pilots in SAFETEA-LU where you
could, with addition of capacity, undertake some pilot tolling
projects. And, again, I am somewhat dubious about that but open
to discussion.
And then the third would be greenfields and the
construction of new projects, again, with private-public
partnerships, providing equity protection of the public
interest. There are a lot of questions regarding how one
protects both the integrity of the national transportation
system, how one protects the public interest and still involves
private capital in these projects. And I am hopeful that these
hearings will provide guidelines either for legislation or some
guidance to the States so that some of them in a rush to move
forward, for whatever reason, don't basically get taken to the
cleaners, which I think we have seen in a couple of the
previous agreements, Indiana and Chicago most notably.
So this Subcommittee does not have all the answers, but we
are looking for good information from testimony. I hope to have
lively discussion among the panelists. I prefer if the
panelists didn't just read their testimony. I have read all the
testimony that was submitted, and was submitted in a timely
basis. I have read all of it, and I assume the other members of
the Subcommittee have. So what would be most useful would be if
you summarize and make cogent points and/or respond to other
people who are on the panel or anticipate other panelists and
some of their major arguments, because we can all read and you
can't read more quickly than you can talk; most people can't
anyway.
So with that, I would recognize the Ranking Republican, Mr.
Duncan from Tennessee, for his opening remarks.
Mr. Duncan. Well, thank you very much, Mr. Chairman, and I
share many of the same concerns that you just expressed about
the need to protect the public interest when a State or local
government enters into a public-private partnership. I
particularly think we need to look very closely at whether or
not some State officials might try to get all the money in some
sort of up-front way, or most of the money up-front, so that
officials 25 or 30 or 50 years from now might be left holding
the bag.
I also have already heard a lot of concern expressed about
foreign ownership of our infrastructure. I think we need to
look into whether we need to put some limitations on that to
American ownership or perhaps even prohibiting the sale, years
down the road, to foreign companies.
This is a fast-moving development, as we were told in a
briefing last week by the GAO, and there is a lot of interest
in it. Tennessee, my home State, has no toll roads and has for
many years adopted a pay-as-you-go philosophy of spending no
more than comes into the State highway fund, and, frankly, if I
was to advocate a toll road in Tennessee, it would be one of
the most unpopular things that I could possibly do. This does
not mean that toll roads do not have a place, though,
particularly in States where the people have grown accustomed
to that.
It is important, I think, to remember, though, that public-
private partnerships are much more than just toll roads. Some
are contractual agreements for all kinds of things, really, and
many of the innovative procurement models of public-private
partnerships, such as design-build and design-build to operate
and maintain projects have a proven track record of saving time
and money and of being operated more efficiently.
I am also concerned about possible sweetheart deals for
private companies. When we first started seeing the private
sector take over many government operations, it was done
because it saved a lot of money and because the private sector
could perform almost anything in a more economical, more
efficient way than the government could. However, in recent
years we have been seeing that some very large corporations
have been hiring so many retired Federal employees or retired
admirals and generals and they have been getting sweetheart
deals with just ridiculous profits in them, so that we have to
see at times whether some of these are good deals for the
people or not. Some are and some, unfortunately, now, are not.
I guess we need to point out that we in this Country are
fairly new at the business of private sector financing for
infrastructure investment. I think we will get better at
managing these types of innovative financing tools with time
and experience.
But I thank you for holding this hearing, it is a very
important topic, and I will yield back the balance of my time.
Mr. DeFazio. I thank the gentleman for his succinct and
cogent remarks.
Does the gentleman, Mr. Petri, wish to be recognized?
Mr. Petri. Well, I just--I don't know if this is the time
to do it. I am here to introduce a panel member.
Mr. DeFazio. Well, you can do it now, because I believe
there--------
Are there other opening statements that people intend to
make? Members obviously can submit statements for the record.
[No response.]
Mr. DeFazio. Since there are no other opening statements, I
would be happy to recognize you, and then I will make the
formal introduction after you make the personal introduction.
Mr. Petri. Well, thank you. I just wanted to, on behalf of
my colleague, Steve Kagen, who is also from Wisconsin, a member
of the full Committee, welcome our Secretary of Transportation,
Frank Busalacchi, who has a distinguished career in public
service in Wisconsin. He comes from the Milwaukee area, where
he had for a number of years various leadership positions with
the local 200 of the Teamsters Union. He has led an agency with
a budget of roughly $2 billion and 3,600 or so employees. He
has been recognized and is now--and I think that is why he is
here today--a member of the National Surface Transportation
Policy and Review Study Commission that is going to be making
recommendations on a whole variety of ways of trying to
maintain and improve our national surface transportation
policy. I just want to welcome him and thank him for the effort
that he is putting in to help us.
Mr. DeFazio. I thank the gentleman for those remarks and
that introduction.
The formal introduction will be that on the first panel is
the Honorable Tyler Duvall, U.S. Department of Transportation
Assistant Secretary of Transportation Policy; the Honorable
Frank Busalacchi, Wisconsin Department of Transportation and,
as mentioned, a member of the Commission; and Mr. Frank Wilson,
Metropolitan Transit Authority of Harris County, Texas,
President and CEO.
With that, I would first recognize Mr. Duvall for his
opening statement.
Mr. Duvall.
TESTIMONY OF THE HONORABLE TYLER DUVALL, U.S. DEPARTMENT OF
TRANSPORTATION, ASSISTANT SECRETARY FOR TRANSPORTATION POLICY,
WASHINGTON, D.C.; THE HONORABLE FRANK BUSALACCHI, WISCONSIN
DEPARTMENT OF TRANSPORTATION, SECRETARY, MADISON, WISCONSIN;
AND FRANK WILSON, METROPOLITAN TRANSIT AUTHORITY OF HARRIS
COUNTY, TEXAS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, HOUSTON,
TEXAS
Mr. Duvall. Thank you, Chairman DeFazio, Ranking Member
Duncan, and members of the Subcommittee. I greatly appreciate
the opportunity to appear before you today to talk about one of
the most important trends in transportation: public-private
partnerships.
Under the leadership of Secretary Peters, and Secretary
Mineta before her, USDOT has made the expansion of public-
private partnerships a key component in our ongoing congestion
initiative, which we believe is one of the largest public
interest failures we face in surface transportation, along with
the high number of highway fatalities that continue to plague
us.
Based on a recent internal survey, the Federal Highway
Administration estimates that approximately 50 percent or more
of States either currently have laws in place or are
considering legislation to expand public-private partnerships.
This growing State level interest I think tracks closely with
congressional interest in promoting PPPs in all of the most
recent surface transportation bills dating back to ISTEA. In
addition, executive orders by President Clinton and former
President Bush have further asked agencies to reduce barriers
to these arrangements.
There has been a great deal of discussion, obviously, about
the two transactions, one in Chicago and one in Indiana, but I
think it is really important that we bear in mind that the
opportunities for PPPs extend well beyond long-term lease
agreements and certainly well beyond toll roads.
The basic opportunity is for the public sector to allocate
various project risks to the private sector that may be in a
better position to manage and reduce those risks, and the
ability to shift various risks to private operators increases
the public sector's ability to manage a large number of
projects while also reducing strains on government budgets and
the taxpayer. Creative risk-sharing arrangements are possible
whether or not the facility at issue generates revenues to pay
for its own costs.
The willingness of public authorities to go beyond
traditional procurement approaches has been driven largely by
several trends. First, as the Chairman noted, taxes that fund
transportation activities are being increasingly absorbed by
rising costs, the need to dedicate ever more resources to
system preservation and maintenance, an increased fuel economy
and flattening VMT trends. If anything, these trends are
expected to continue in the future.
Deteriorating highway system performance has reached crisis
levels in many parts of the country. The cost of wasted time
and fuel for travelers is five times the level it was in 1982,
and the economic costs are much higher if you add in
uncertainty and lost productivity costs.
Despite the strong policy arguments historically in favor
of a user pay system, a mix of political and administrative
complexities have pushed the United States towards a surface
transportation financial model that is currently dependent on
fees that have little or an indirect relationship to costs.
Technology breakthroughs in recent years, however, have really
reduced barriers, and a substantial change in public opinion
with respect to that has followed. Currently, we estimate that
the majority of projects over $500 million in the United States
will be financed using some toll revenues.
Coincident with these trends, it is very important that we
understand global economic patterns. Basically, huge increases
in global economic growth and changing demographics have really
created massive pools of savings around the globe that have
driven down long-term interest rates and increased the
attractiveness of medium-risk and medium-return infrastructure
assets in energy, telecommunications, and transportation
sectors. The certainty of the U.S. legal system and our strong
economic growth prospects are critical factors in why the U.S.
is such an attractive investment destination.
Any analysis of the policy merits or pitfalls of public-
private partnerships must be contrasted to how we are doing
now, not an idealized of how we are doing. It is critical that
we identify the public policy failures and ask the question: Do
public-private partnerships respond to those failures? I think
increasingly the answer is yes, they do respond. They are not
the answer, but they are a vital tool, we think, going forward.
Despite these opportunities--and obviously the purpose of
this hearing is to talk about the pressing public policy issues
that are presented--in my written statement I identified
several risks. I think the most important of these risks are
monopoly pricing risks. In addition, we have corruption risks,
thin market risks, system distortion lists, as the Chairman
notes, financial exposure risks, and inexperience risks on
behalf of the public sector.
The single-most important public interest concern with the
transactions that took place in Indiana and Chicago is the
inherent tension that is created when governments view the
leasing of existing transportation assets as a potential income
source. While these transactions can provide large public
benefits if properly structured, it is also true that
contractual terms that offer substantial pricing power and
protection from competition can increase the discounted present
value of the revenue stream associated with an asset. Other
critical assumptions go into asset valuations, such as traffic
growth projections, the ability to control costs, and the cost
of long-term borrowing. However, there is little question that
pricing flexibility in a potentially constrained market will be
a major driver of facility value. As a result, it is imperative
that public agencies gain some understanding of a facility cost
and risk profile, as well as the degree to which pricing will
be constrained by competing facilities or the threat of
competing facilities.
Every facility has different economic characteristics, and
State and local governments are strongly encouraged to analyze
these characteristics not just from an individual facility
perspective, but also from a network perspective, as the
Chairman noted. Specific contract provisions that limit the
prospect of competition will increase the up-front lease value,
but may run counter to the public interest if such a provision
is not commensurate with the risk being borne by the private
sector. The emerging trend in this area appears to be the
inclusion of either no protection at all for the private sector
or limited protections.
Public agencies implementing PPP programs are strongly
encouraged to run open and transparent processes, to seek input
from third parties, and to consult regularly with their
legislators and other relevant elected officials. We welcome
review by advocates of various kinds of these public sector
concerns, and we will all need to be sensitive to cases in
which important public sector concerns may not be adequately
protected.
I appreciate your attention to my testimony, and I would be
happy to answer any questions that you may have.
Mr. DeFazio. Thank you, Mr. Duvall.
Mr. Busalacchi.
Mr. Busalacchi. Thank you, Mr. Chairman. I am honored to
have this opportunity to comment on protecting the public
interest in public-private partnerships, or P3s.
I am also a member of the National Surface Transportation
Policy and Revenue Study Commission. The National Commission is
working to construct a new 50-year vision for our Nation's
transportation system. We are in the midst of our
deliberations, and my comments do not represent the views of
the Commission.
What has been made clear to me at the Commission hearings
and by the communities back home is that we have a lot of
needs. In Wisconsin, our annual unmet needs are in excess of
$500 million for highways alone. If we factor in transit, inner
city, and freight rail improvements, the needs increase.
This Nation's interstate system is at the end of its useful
life. It cannot be repaired. It must be reconstructed and, in
some areas, expanded. Where will we find the funding? Some
suggest that P3s can replace what has traditionally been a
Federal responsibility. I disagree.
Let me first clarify that P3s come in many forms, and the
private sector is a valued partner to Federal, State, and local
governments. My focus today is on the deals where a private
sector organization leases a highway. The private sector
partner is responsible for operating the roadway and they
collect the toll and other payments to gain a return on the
investments. Let me share four concerns that I have.
First, the public interest is different from the private
interest, and, in this case, it will be extremely difficult to
assure a win-win situation. In Wisconsin, the DOT partners with
private sector to design and construct highways. We have done
so for years. But the public sector is the one held accountable
for setting priorities, financing, and managing the highway.
Can we responsibly delegate some or all of that public sector
accountability to the private sector? If we can, how do we
integrate the needs of the private sector into what has
traditionally been a public sector system?
Some argue P3s will harness the power of the market for the
good of the public. But we come to the table with very
different interests. Do States have enough information to get
the best possible deal for the public? From what I have seen,
we do not. The private sector's legal responsibility to its
shareholders is to make money. Profit is their purpose. Our
responsibility is to ensure that we make wise choices for our
citizens. No contract, no matter how effective, can eliminate
risk. We simply do not know enough to price or manage such
long-term risks.
Second, the public has significant concerns with P3 deals.
The public sector needs better tools to evaluate the deals and
share the evaluations with the public. People don't seem to
like these deals. Citizens tell us they don't think the P3
approach is in their best interest. We need better information
to consider the long-and short-term costs and benefits
associated with these approaches to projects. We need to show
the public what they will pay with gas tax, compared to what
they will pay with private sector tolling. With this
information, we could all make better decisions.
P3s will likely not generate a predictable revenue stream
to replace the current Federal share. In the 1950's, the
Federal Government envisioned a national transportation system
and funded it. States, in turn, built a first-class system. If
the Federal Government had not paid the lion's share of the
construction costs for the system, it would not have been
built. States cannot create or fulfill the kind of vision on
their own, nor can the private sector. The Federal Government
should continue to pay its share of at least 45 percent of the
Nation's highway system. At National Commission hearings,
witnesses tell us the Federal Government's share should
increase.
Fourth, there should be considerable problems--there will
be considerable problems with integrating private sector
financing with public sector policy goals. Congress needs to
consider many issues. Will States that do not toll be left
behind, with no Federal partner? How will private sector
partners be integrated into current planning process? Are
Federal tax expenditures for private sector projects preferable
to Federal revenue increases for public sector projects?
The Committee also asked that I comment on USDOT's model
legislation designed to give States the authority to enter into
P3 agreements. Based on our review of the legislation, it poses
no restrictions and creates no public protections. States will
need to take care of the public interest in the deals they
craft with the private sector. The model legislation protects
the private sector's proprietary information.
In Wisconsin, these provisions conflict strongly with
strongly held values about openness and competition that
support a robust and competitive bidding process. The model
legislation requires State DOTs to review unsolicited proposals
within a certain time frame. P3 bidders are highly
sophisticated consortiums represented by large banks and
investment firms. We design and construct roads; we are not
experts in high finance and investment contracting. For States
to negotiate on a level playing field, we need to hire
investment finance advisors that will make every project cost
more.
The Committee will make critical choices that determine the
outcome of the debate on P3s. We do not believe P3s are ready
for prime time. In a supplement to my written testimony, I
included a list of policy questions that provide a starting
point for the debate.
I appreciate the opportunity to testify today, and I look
forward to the policy discussions that lay ahead. Thank you.
Mr. DeFazio. Thank you, Mr. Busalacchi, appreciate it.
Excellent testimony.
Mr. Wilson.
Mr. Wilson. Good morning, Mr. Chairman, Ranking Member
Duncan, and members of the Committee. First, I want to thank
you for giving us the opportunity to be with you today for this
important discussion of the Nation's transportation
infrastructure.
I represent Houston Metro, which is a fully integrated
multi-modal transportation system serving the fourth largest
city in the Country. This city is growing at the rate of 3,000
people a week. That is 3,000 a week. This has put our
transportation system under immense pressure. And, because of
that, we are forced to seek all legitimate alternatives to
funding the improvements and expansion of the system. Given the
inability to project adequate funding going forward, all
options for us are on the table for discussion and utilization.
My comments today are derived from my experience in working
both the public and private sector.
I have experienced a challenge of infrastructure delivery
both as an owner and as a contractor, and have participated in
12 design-build, design-build-operate-maintain in public-
private partnerships nationally and internationally, with a
combined construction value of over $10 billion in seven States
and two countries. I say this not as a summary of my resume,
but more to support an observation, and that observation is
this: public-private partnerships do work universally and they
do work well; however, they are not the silver bullet solution
for every infrastructure project.
I have learned that the most successfully structured
public-private partnerships are created by necessity, not by
ideology, and at the core of every partnership is a clear
understanding of control, accountability, and risk. Simply put,
the public agency controls policy; the private company controls
performance. Each is clearly accountable for the respective
roles under the commercial terms and conditions of a contract
and each shares a project risk which they are uniquely able and
equipped to identify, to mitigate, and control.
I am able to report that the public interest can be
protected in public-private partnerships. Good government and
good business are not mutually exclusive. In our discussions
later this morning, I would be happy to review a six-point
checklist of criteria that are used to judge when public-
private partnerships offer the most benefit in comparison to
the traditional design-bid-build methods of project delivery.
Where appropriately applied, public-private partnerships
will deliver remarkable advantages and benefits, starting with
a single point of contact and accountability, which provides
clear focus and discipline in managing and making decisions on
projects; reduce public agency staff and soft costs. These soft
costs can generally run as much as 35 percent of the cost of a
major infrastructure project, so it represents an incredible
area of economy. There is closer cooperation and collaboration
between designers and builders to improve constructibility and
lower risk. There is a conversion of ideas on approach to a job
so there are no surprises; what the designer designs, the
builder can build. Cost of project delivery can be cut as much
as 20 percent on major infrastructure projects using a
partnership approach, and project schedules can be cut as much
as 40 percent. So a project that might take seven years could
be implemented in less than four.
The key factor in public-private partnerships which can be
overstated is that it minimizes change orders, claims, and
litigation, which are project killers for traditionally
implemented infrastructure projects. Quality is often built in,
since the designer and builder is responsible for the operating
and performance and quality risk on infrastructure projects.
Private firms are enablers that can mobilize capital
markets, as appropriate, and add new source of income. This
income may range between three and ten percent. Not an
overwhelming large amount of money, but, in addition to the
cost savings, it most often is what--is a deciding factor in
the financing capability of a project.
And, finally, I would say the risk of profile due to the
single point of accountability and enhanced integration of all
the elements of work offer a more efficient method of
financing, and this is because the different players--whether
they be architects, engineers, contractors, material suppliers,
or the owner itself--do not have to add financial premiums to
the project to make sure that the have a viable outcome.
I would be happy to explore any and all of these issues
during our discussions, and, again, I want to thank you for the
privilege of joining you today.
Mr. DeFazio. Thank you.
I thank all the witnesses for remaining within the time;
that will give us a lot of opportunity for questions, which
hopefully will be more interesting than testimony.
I will lead off with the questions.
Mr. Duvall, I want to thank you for sort of personalizing
your testimony. I saw two references, one to Oregon, on our
early discussion on tolling versus fuel tax. And just perhaps
to edify you a little bit, we did actually have two toll
projects in Oregon; they were both public and the tolls went
away when the projects were paid for. There was no continuing
profit from those projects. Those were two bridges over the
Columbia River to our neighboring Washington State. So we have
some experience with tolling, but we don't believe it should be
for-profit tolling.
Secondly, Washington, I was more interested in that. I
mean, Washington actually--you have a recent poll, but recent
history sort of belies the poll. Washington actually, unlike
the Federal Government, increased its gas tax by a nickel in
2003 and nine and a half cents in 2005, and a number of
increases in registration, title fees, etc. It was referred to
the ballot and it was upheld on the ballot. So I think the real
poll of the people of Washington State is they were willing to
pay fourteen and a half cents more per gallon in gas tax, so
there is not the resistance that you are pointing to, which
comes to your charge.
You are Assistant Secretary of Transportation Policy. What
have you or the Administration done to augment or update the
Federal investment? We all admit that not having raised the gas
tax since 1991 isn't meeting it. This Committee unanimously, in
a bipartisan way, recommended an increase in the gas tax in the
last highway bill; it was rejected by the Republican leadership
and by the White House. So what are you proposing, what have
you proposed to increase Federal investment, since you are here
to advocate for private investment?
Mr. Duvall. Thank you, Chairman. Obviously, the last
highway bill public transportation legislation was the single
largest increase in--representing the largest--------
Mr. DeFazio. Right. But I am talking about the--you have
said in your testimony that we don't have enough money. There
is agreement, bipartisan agreement. We don't have enough
investment. What is the Administration proposing? What are you
proposing, other than private partnerships, to enhance the
investment in the Federal infrastructure? Are you proposing
anything at all to increase that investment?
Mr. Duvall. Thank you, Mr. Chairman. Obviously, the
discussion over future Federal funding is one that needs to
take place in the next two years between the Administration and
the Committee.
Mr. DeFazio. No, but I mean what has the Department
recommended or what are they recommending, what are you
studying other than the Commission's work?
Mr. Duvall. I mean, the Commission is obviously going to be
a major driver, I think, of the policy recommendations of the--
------
Mr. DeFazio. So right now your bottom line is the one thing
you are bringing us is public-private partnerships. Now, let's
go to your proposed working draft.
Now, I find it kind of--you raise--you laid out here today,
and I thought very well, some of the pitfalls and the potential
problems with private-public partnerships, but I don't find any
of that reflected in the guidance to the States here or on your
website materials in the guidance to the States. You did a good
job here today, but it seems like there was a sales job last
Thursday at the White House and today we are hearing something
else, which is there are real problems here: monopoly rents are
a problem, there are a number of other potential issues and
pitfalls. It seems that it would be instructive for the
Department to have a chart which lays out pro-con, good-bad,
pitfalls, prior experience. I don't see any of that. Are you
developing some of that real experience, as opposed to
something like this model legislation?
Mr. Duvall. Absolutely, Mr. Chairman. I think that is
something the Department is currently working on, and we need
to be much more aggressive about articulating what the risks
are. I will say that the legislation is intended to be a broad
authorizing statute. We have opened it up for public comments--
------
Mr. DeFazio. Sure. When could we expect seeing some sort of
enumeration of the risks posted up on your website linked to
the model legislation?
Mr. Duvall. Well, there actually are things on the website.
Mr. DeFazio. Well, I have reviewed it. I don't find it
anywhere near as cogent as your testimony today, which perhaps
was designed for a skeptical audience.
Now, let me go to another inherent conflict I see here. You
are a national transportation official. Do you find any
conflict, as Mr. Busalacchi points out, between maximization of
profits, particularly where you have in here--very puzzling to
me--that you would recommend to States that they should have to
accept unsolicited proposals outside their planning process and
they would have to evaluate them within a certain number of
days and go forward. Now, that seems to me overly prejudiced
toward an investor who comes along and wants to cherry-pick
something out of a State and submit it.
Why would we mandate to the States that outside of their
incredibly involved planning process, which has to meet with
Federal law, would we require that they accept any out-of-the-
air private proposal from a foreign firm or domestic firm,
anybody who wanders in the door who is qualified--i.e., they
have a pile of money--and have to process it within so many
days, when they actually already have a plan on the books?
Mr. Duvall. Right. To be clear, we are obviously not
mandating States do anything. These are provisions borrowed
from existing law. The State of Virginia probably has the most
comprehensive public-private partnership legislation. It is
precisely their willingness to take unsolicited proposals that
several of the most important capacity expansions--------
Mr. DeFazio. But don't you find that conflicts with the
idea of orderly planning? Let me read to you from the law. I am
certain you are familiar with it; you are a lawyer and you are
a Federal official, and not a private advocate or a State
official here.
Under U.S. Code, Section 135: ``Each State shall develop a
State-wide transportation plan, State-wide transportation
improvement plan for all areas of the State subject to Section
134''--I will skip ahead here--``that will function as an
intermodal transportation system for the State and an integral
part of an intermodal transportation system to the United
States.''
Don't you find, in particular, this kind of cherry-picking
and the whole private profit versus public interest issue that
Mr. Busalacchi has raised, don't you see some conflict here?
Don't you feel a need for balance? I know your background is in
business and law, and I am certain you will go back to that
when your job is done here, but right now you are charged with
the public trust to forward a system that meets public needs in
an integrated way, nationally and within States, not stopping
at State borders, not within a State, something cherry-picked
out. I just see an incredible conflict between what--I don't
care if Virginia has that or not. For a Federal official to
tell States, as a policy, as a model, they should say they will
take unsolicited proposals outside our States, outside our
plans and, hey, there go our profit centers for the next 99
years where we could have had a public return.
Mr. Duvall. Obviously, Mr. Chairman, any proposal from the
private sector would have to be--that was accepted would have
to be incorporated into the State-wide plan; Federal law
requires that.
Mr. DeFazio. Well, but you didn't give that in the model
legislation. You didn't say it has to be in accordance with,
incorporated in, or meet the requirements of the Federal law
here, you just say they have to accept these things.
Mr. Duvall. Actually, it does refer that it has got to be
compliant with Federal law. The legislation specifically says
that. I think it is very important to think about the
possibilities. I mean, we are a little pessimistic about the
opportunities for innovation here. The private sector has a
very strong interest in looking at what is not working in the
current network and making proposals to--------
Mr. DeFazio. Right. What is not working is in some places
people aren't making money on it.
Mr. Busalacchi, would you care to comment on this line of
questioning, because I think you have raised these concerns?
Mr. Busalacchi. Thank you, Mr. Chairman.
Yes. I mean, this is all about money. I mean, if anybody
thinks it is anything other than money is wrong. I mean, the
Indiana toll road, after the 10 years is up, for 65 years there
is not going to be any revenue. Whatever the--------
Mr. DeFazio. So you are saying, therefore, this current
governor gets some cash up-front, which may or may not equal
the value of this particular agreement, particularly with a
non-compete and other clauses, but you are saying future
governors couldn't revisit it? They have lost that revenue
stream?
Mr. Busalacchi. I don't know how they do, Mr. Chairman.
They have entered into a 75 year contract. The Skyway entered
into a 99 year contract. How do they turn their back on that?
The revenue is gone.
Mr. DeFazio. But these things are so much more efficient
than the way they were operated before, aren't they, except----
----
Mr. Busalacchi. I don't--------
Mr. DeFazio. As I remember the proposal from MIG, it said,
``no significant cost savings envisioned.'' So what was this
about?
Mr. Busalacchi. Well, I mean, I really don't know. This is
part of the unanswered questions, and this is why, Mr.
Chairman, there has to be debate. This is a very important
thing that is going on in transportation in this Country. In my
view, my personal view is this is not the panacea. And I know
that there are probably other DOT secretaries that disagree
with me, but, for example, in the State of Wisconsin, we don't
have tolls. We don't want tolls. Our governor doesn't want them
and they are not going to be there. So where do we stand as the
Federal Government shifts itself toward this policy? You know,
where do we end up? Do we end up out in the cold? That is why,
you know, we are asking these questions, that is why I am
asking these questions.
There needs to be a national debate on this, because the
amount of money that the 3Ps are going to raise is very, very
small compared to the overall needs that the Country has, and I
am worried that this is a diversion. That is what this is.
Let's not worry about the real problem, which is these huge
needs that we have; let's talk about P3s, because they will
raise this money and they will raise the funds for these needs
over here. And, you know, that is something that the Commission
is grappling with, Mr. Chairman. We have huge needs in this
Country. The last transportation bill came nowhere near to
funding those needs. That is the seriousness of what is going
on here, and that is what we need to talk about.
Mr. DeFazio. Well, thank you, Mr. Busalacchi. My time has
expired, but I do want to say you ended up where I started,
which was asking Mr. Duvall of any plans by the Administration
to enhance funding in the Federal system, and the answer, by
absence of an answer, was no, they are offering us public-
private partnerships, and you are underlying the same thing.
Thank you.
Mr. Duncan.
Mr. Duncan. Thank you, Mr. Chairman.
Mr. Secretary, let me just ask you this. You heard me
mention it last week. We had a briefing by the GAO in which
they said this was a very fast moving development in
transportation circles around the Country, and Mr. Busalacchi
just mentioned this, they called it a very important
development. We have heard a lot about the Indiana road and the
Chicago Skyway. Do you know of many other States or local
governments that are considering these types of public-private
partnerships at this point?
Mr. Duvall. Yes. I think there is a series of interests
across the Country ranging from new capacity, which the State
of Texas basically, I think programmatically, has declared that
virtually all major new capacity in the State will be done
through some public-private model; obviously, the Commonwealth
of Virginia. In terms of long-term leases, you know, there has
been a lot of press coverage of the State of New Jersey and the
Governor of Pennsylvania's interest in exploring the valuations
of those two facilities. There is a limited number of existing
toll roads in the United States, so I do not view that trend as
necessarily the be-all and end-all to solving our
transportation problems, despite some characterizations to the
contrary.
I think what is important is can the structures of these
transactions protect the public interest, as the Chairman has
outlined, and I think there are risks and there are
opportunities, and, if you structure them correctly, these
transactions can protect the public interest and you can free
up public resources to make high return investments in other
areas.
Mr. Duncan. You say there is a limited number of toll
roads. I have never heard a figure on that. Do you know how
many toll roads there are?
Mr. Duvall. How many toll roads? No. I can get you the
exact number, but obviously it is predominantly the Northeast
and Florida. Florida, for example, has not built a non-toll
road, a free road, I think, since the early 1980's, so they
have got a massive network of toll roads in Florida; and the
Northeast obviously has a lot of grandfathered toll facilities;
and then there are pockets of toll roads throughout the
Midwest.
Mr. Duncan. Let me ask you. You have come forward with this
model legislation and I wasn't clear. You told the Chairman you
put some things about risk up on your website or something.
Have you--there is some concern about State or local
governments not having the expertise to enter into these deals,
these high finance deals and so forth. Have you come forward
with any guidance to State or local governments? Have you sent
out some reports or suggestions in ways to handle these things,
or have you set up any meetings with State and local
transportation officials or are you considering doing things
like that?
Mr. Duvall. In terms of formal guidance by the Department,
we have not sent out formal guidance. I think we have had many,
many conversations in which we have talked to State and local
officials that are interested in this topic about the need for
understanding what you are getting into. And I agree with both
of you that there is a clear risk that State agencies are not
currently equipped to deal with complex financial questions. I
think that is solved, however. Obviously, Commissioner
Busalacchi mentioned the need to procure outside advice.
I think it is interesting to note that the two transactions
in Chicago and Indiana, actually, they had extensive internal
financial expertise that was used to contract with outside
entities to give them additional financial advice. But you are
a hundred percent correct that this is an issue that State
governments are going to need to deal with directly in coming
months, and we would be happy to think about ways to improve
our communications on that front.
Mr. Duncan. Well, I am not saying they couldn't develop the
expertise, but I think this is certainly an area that you
should look into, because, as I said in my opening statement, I
think there is some legitimate concern over whether a governor
may or might be attempted to take--might be tempted to take
some big money on the front end and leave officials holding the
bag a few years down the road.
Mr. Busalacchi, you say in your testimony it is not clear
that the deal in Indiana would happen if it were being
considered today. The last news report I saw, half the citizens
polled in New Jersey think the P3 approach to the turnpike is
not in their best interest. Why do you say that? What led you
to that conclusion, that the Indiana deal would not come about
if it was being done today?
Mr. Busalacchi. Well, I think the public outcry, Mr.
Chairman, is that they are very much against what happened in
Indiana. I think the governor's poll show that. We are hearing
the same thing coming out of New Jersey. And, of course, we
hear it in our own State. I travel through the State
extensively talking about this because, as I had said earlier,
you know, we are facing basically the same situation that the
entire Nation is facing: we have these astronomical needs and
how we are going to fund them.
And, you know, you touched on a real good point about the
complexity of these deals. In my department, we could not
handle these complex legal issues in our department. We have
got good lawyers, but there is no way they could handle this.
We would have to go on the outside and we would have to spend
an awful lot of money to get this done. That would have to be
approved by the governor and maybe even the legislator.
Mr. Duncan. Has the State of Wisconsin had or have you had
some particular difficulty with public-private partnerships on
some of your projects that you could give us some examples of?
Mr. Busalacchi. We have very little experience as far as
transportation goes. I have had personal experience with
public-private partnerships. I mean, we built Miller Park. That
was a public-private partnership, one that I am very proud of.
There are situations where this can work, but I think that we
are just moving way, way too quickly and we are forgetting
about the real problem here. The real problem is what is going
on with the needs in this Country. You know, we get into the
transportation bill and we get into this trap of talking about
dollars. We have got to talk about needs. And that is what I am
afraid is happening here, we are talking about dollars again.
Let's go back and talk about what needs to get done. We are
falling far behind.
Tyler is right, our global economy is going to get affected
here. I am concerned about congestion just like USDOT is. It is
going to hurt us.
Mr Duncan. All right, I have already run over my time, but,
Mr. Wilson, I understand that you were in New Jersey for a
while, is that correct?
Mr. Wilson. That is correct. Busalacchi that half the
people in New Jersey are upset with the way the turnpike
partnership is working out?
Mr. Wilson. I think there is a disturbing confusion
between--maybe it is semantics, maybe not--what is called a
public-private partnership and what in other terms is just
called tolling of free lanes. There are emotional issues; there
are economic issues; there are political issues. If you are
going to convert a toll road and sell it, those are economic
and political. If you are going to toll a free lane, those are
economic and political. Not to be confused with a delivery
method, which is public-private in terms of delivering any form
of infrastructure.
So, when I was in New Jersey, we formulated a piece of
legislation that did much the same as what this Federal
regulation is calling for, but, Mr. Chairman, we made it part
of the planning process. The notion was that the planning
process, as it exists in States--through the metropolitan
planning organizations, State Departments of Transportation,
local government involved in the cooperating, continuing
development of transportation plans--does not capture all the
wisdom in the world. And when the private sector can bring a
good idea forward, it needs to be vetted through that process.
So the legislation we adopted or the legislature adopted on
the basis of experimental endeavor--seven projects were
qualified--those encouraged ideas to come forward and then went
through this planning process and accepted or rejected. Just
because a project or proposal is offered doesn't mean it has to
be accepted if it is inherently flawed.
So in New Jersey and elsewhere, I would say the difference
is what are we really attempting to do. As I said, the
disturbing part about this is public-private partnerships
whereas where they might work gets a bad reputation, when
really what we are talking about is an economic or public
policy to toll free roads or to sell roads. And I don't believe
that they are synonymous and necessarily have to be discussed
in those terms.
Mr. Duncan. Let me ask one last question. You have been a
State and local transportation official for some time now. You
know, we found in here that mainly because of all of our
environmental rules and regulations and so forth, that all
these highway projects take an average of about 10 years to
complete, so you have to look way into the future. What do you
see if you had to look 10 or 25 years from now? What do you see
for the future? Do you think that this is a trend that is
really going to take off and explode, that most of our major
transportation projects, say, 25 years from now are going to be
public-private partnerships?
Mr. Wilson. Let me give you a startling fact that I had the
misfortune of discovering when Commissioner of Transportation
of the State of New Jersey. The average project there took
seven years from the beginning in the conceptual planning stage
to the notice to proceed. That is not the completion of
construction, that is just where construction began. Seven
years.
Mr. Duncan. Right.
Mr. Wilson. That is not the startling part; we kind of
expected that. The startling part was that the average size of
a project was $5 million.
What I am here to illustrate in response to your remarks is
that the process we used, implemented for structure projects
here, is inordinately expensive and wasteful.
Mr. Duncan. Right.
Mr. Wilson. And so we who come before Congress and local
legislatures asking you for more money should be sent back and
asked to ring out the inefficiencies in our delivery processes,
because more money just goes to more waste. So what we need to
be looking for is a more efficient, more effective way of
delivering this more money.
This is not a speech against additional gas tax or
additional revenues in the trust fund at the Federal or local
level, but it is a plea to allow folks like ourselves,
practitioners in this business, to embrace any delivery method
that gives us the leverage to implement projects in a much more
affordable way.
I mentioned in my statement here that typically you can
expect between 18 and 20 percent cost reduction on a project.
What is the difference between 20 percent cost reduction and 20
percent more revenue in a fund? So that is what we are looking
to accomplish with this notion of public-private partnerships.
Mr. Duncan. Thank you.
Mr. DeFazio. I thank the gentleman. Just in noting we did
adopt some significant modifications to the review process and
the environmental process in SAFETEA-LU--I don't believe they
have been fully implemented as yet by the Department of
Transportation--which should help with that time problem. And,
of course, whether it is public or private, it has to go
through the same process, so that is not going to save time.
DOT needs to fully implement the provision we provided.
Mr. Altmire was first on our side, from Pennsylvania,
perhaps the home of the next great public-private partnership.
Mr. Altmire. No questions, thank you, Mr. Chairman.
Mr. DeFazio. All right, then the second person--I am doing
questions in order of arrival on our side--Mr. Shuler.
Mr. Shuler. I pass.
Mr. DeFazio. All right. Find some Democrat. Mr. Lipinski,
any questions? Home of the first great public-private
partnership of the recent round.
Mr. Lipinski. Mr. Chairman, I want to thank you for doing
it in this manner. I was expecting you to go with seniority, so
I wasn't quite prepared to go yet, but I am always ready.
Mr. Wilson, you were talking about your cutting costs 18,
20 percent. How much did you say time was cut?
Mr. Wilson. About 40 percent.
Mr. Lipinski. About 40 percent. Now, are you saying that
there just are always inefficiencies when a government entity
does these projects? I mean, the suggestion is that things are
just done so poorly if it is being run through a government
entity that you sort of need to take it away from them because
they just add time, add wasteful spending. I mean, is that what
the suggestion is? Well, where is all this time and money saved
coming from?
Mr. Wilson. I don't think--having lived on both sides,
private and public, I don't think there is any question that
the discipline to begin and end a project is much more intense
on the private side. I am not going to say it is a dirty word,
but there is a profit motive to moving a project. That does not
say that you sacrifice quality or utility. You build those into
your contracts and make the private enterprise responsible for
those as well, and you do that through a variety of ways. One
is longer warranties or concessions where they are responsible
for the operation, performance, and quality of a job.
But I will say this--------
Mr. Lipinski. Are those things not done by public entities?
Mr. Wilson. Pardon me?
Mr. Lipinski. Are those not done by government entities,
governments?
Mr. Wilson. Is what not done?
Mr. Lipinski. Putting those kind of incentives in.
Mr. Wilson. Yes, I was going to get to the other point that
I wanted to make, is why there are inefficiencies.
Mr. Lipinski. OK.
Mr. Wilson. Typically, on a large infrastructure project,
you have the owners, engineers, architects, then you have the
builders, the material suppliers, the construction managers,
the quality control, quality assurance agents, the owner staff
itself; and all those are disconnects in a project. All those
are inefficiencies in a major infrastructure project, besides
the abundant of cost or redundant cost. To manage all those
interfaces is incredibly difficult and complex, and when you
have an owner that has a different motive than a builder, you
tend to run into trouble. And our industry, unfortunately, is
replete with examples of where that has consumed large chunks
of money and taken long, long periods of time, in some cases a
lot of mortality on projects.
When you consolidate the responsibility to deliver the
product and integrate the design, the construction, and the
operation, you tend to get a much more efficient package of
services delivered. That drives the schedules down because the
interfaces are managed by one entity, not multiple entities. So
the inherent advantage of a public-private partnership is not
necessarily in generating new income or magical financing
techniques, it is to bring discipline and focus to the effort
of delivering the infrastructure project on a respectable
budget, on a respectable schedule, not sacrificing quality. So
therein is why the public entity, as good as it is, needs to
stretch and invite the private sector in.
There are some things that the private sector cannot do and
only government can do, and those are policy-related issues,
environmental clearance, funding--not financing, but funding,
utility coordination, approvals, permits, real estate
acquisition. All those are legitimate functions of government
where the private sector doesn't belong. But once you have
decided what your project is and you have got a good scope, it
is time to let those who have that focus and discipline to
deliver that product and then stand behind it and warrant it
over a long period of time.
Mr. Lipinski. I want to ask Mr. Busalacchi is there
anything that you would want to add to that or any comments you
have on that?
Mr. Busalacchi. Well, I would just like to say this, and,
again, I can't speak for any other State, but I do know, in the
four-plus years that I have been the Secretary in Wisconsin, we
have changed dramatically how we deliver projects. We are
delivering projects that are much large now because of the
needs, and in delivery of those projects we have found that us
managing the project is the only way to go. I don't
particularly want to do a big project and let the private
sector control the project.
We have a large--one of the largest projects going in the
Country right now in the heart of Downtown Milwaukee, and that
project could have been ripe for cost overruns and you name it,
and that project is on time and it is on budget. It is a $810
million job. So I don't necessarily agree with when you turn
this stuff over to the private sector, that they are going to
do it better. I don't believe they can do it better. I believe
there has to be involvement. We have a responsibility to the
taxpayer. I just don't believe we can just take this
responsibility and hand it off to a contractor and say, OK, do
it and we are going to trust you. I just don't believe that
that is what we have to do. We have to hold their feet to the
fire, and we are doing that in our State. I can't speak for
anybody else.
Mr. Lipinski. Thank you.
Mr. DeFazio. Thank you.
Mr. Petri?
Mr. Petri. Thank you, Mr. Chairman. I guess I have a
question for the whole panel. I am thinking about this and the
question in my mind is what is it uniquely and in a superior
way the private people bring to this process. The Federal
Government is more efficient than anyone else at borrowing
money, it borrows it all over the world. So the argument that
there are pools of money out there that could be used for
American infrastructure through public-private partnerships,
well, it could be, couldn't it, that the Treasury could borrow
money and we could have a transportation financing bank the way
we do hundreds of banks, going back to the New Deal and before,
in agriculture and rural development and 101 other ways. This
would get rid of the need for investment bankers and
specialized fees and all this kind of thing. It would be a
place that States or municipalities--probably States--would go
to get approval and funding if we didn't want to use gas tax
revenue anymore. If we thought there is excess capital in the
world and the government could borrow the money and loan it
out, somehow or another, or even absorb the cost at the Federal
level as its contribution and give it interest-free to the
States, rather than let the private people get involved?
So could you discuss that? Is there some reason we have to
structure this in such a way that each State is supposed to
deal, or municipality, in the case of Chicago, with private
people? It seems to be dangerous with cherry-picking of fees,
complexity, using money up front that mortgages a State's
credit and one thing or another that could be avoided, by just
setting up some kind of financing bank and letting the
Treasurer borrow the money and then having in-house experts
manage it with the State and local people.
Mr. Duvall. Congressman Petri, it is a great question, and
I think one of your panelists in the later session is going to
get into this question about the cost of capital in public and
private sectors, and it is obvious that, certainly at the
Federal level, you can achieve very low at capital, and,
obviously at the State and local levels, you have taxes and
borrowing, which is significantly cheaper than taxable
borrowing.
I think that actually misses, though, the point about who
bears the risk, and I think, obviously, to the extent you are
doing government borrowing, you are putting taxpayers--and one
of the reasons that government borrowing is cheaper is because
you have got--you know, you are putting the general taxpayer at
risk. And I think one of the ideas here is to really shift
large amounts of financial risk to entities that want to bear
it. Aand can bear it, and that drives--in response to
Congressman Lipinski's questions--innovations and performance
incentives that simply--it is not in any way a dig at
government or government's inability to do things--it is just
that simply the rewards for performance and innovation cannot
be replicated perfectly in a public model. And I think the
point of the contracting mechanism and why it is so powerful is
that the public sector can really unleash fairly serious
performance requirements in connection with these contracts.
So you are correct that the cost of capital through pure
government borrowing can be lower, but it is much more
complicated, and ultimately the question is who is bearing risk
of failure and costs of failure and then, obviously, who is
bearing the upside for success is the policy issue you all are
confronting here.
Mr. Busalacchi. Congressman Petri, I think the point that
you are bringing up is really one of the reasons why I am here
today. I think there needs to be more debate about this topic.
I am not here saying don't do it. All I am saying is that I
think there may be other options here for us to accomplish our
goal, and that is one suggestion that you have. But I really
don't see that coming out of USDOT, I just see one solution
here, and that is what concerns me, and the fact that we are
forgetting about this massive problem that we have with needs.
So I think that you are absolutely right, and what we need
to do is we need to have more debate about this. I am not
saying debate it for 10 years. We can't wait that long; the
Country can't wait that long. But I think we need to talk a
little bit more about this to find out this to find out really
what is going on, because, by my testimony today, I can tell
you I am not convinced. Not by any means of the imagination am
I convinced.
Mr. Wilson. Congressman, may I just add one observation on
this element of risk? You asked what was uniquely attractive
with the private sector involvement in these kinds of programs,
and let me say that it may not be unique, but it certainly is a
different perspective when you consider the notion of ownership
and who has the ownership risk in the program. Typically, the
public entity is the owner. And after the project is designed
and built and is operational, they bear massive risks in terms
of quality and performance of the facility.
Through this partnership arrangement, you can effectively
transfer that risk for any period of time to the private
enterprise, and that becomes an attractive option for a public
entity in the sense that it does not have to buy and own the
facility in order to get beneficial use of the facility. You
can get the performance specified in your contract, you can get
the reliability specified, or you don't make payments. In other
words, what you are using is the productive capacity and
performance of the investment, but you don't have to have
``ownership'' of it, you don't have to hold the deed to get
public benefit from it.
You leave the risk of that performance with the private
entity that designed it and built it, and has to stand behind
its long-term performance. You can judge for yourself, locally,
what long-term is; in some facilities it may be no longer than
five to seven years when you have gone through the infant
mortality stage of a project, or it may be a longer period of
time because they are doing a good and adequate job. If not,
then you take it back in your contract you have the ability to
buy back, take back the facility, or own the facility at some
future date.
But I think it is the important--there are too many
examples in our industry where infrastructure built was left to
an owner that had to come in afterwards, make repairs they
didn't expect.
Mr. DeFazio. I thank the gentleman. Hopefully we can keep
the answers more brief so we can get to more members.
I would observe that in a project that has been operating
for 50 years, there is not a lot of risk; there is a lot known.
Taking greenfields, it is a different issue. And there is very
little to distinguish what is going on here between assuming
and operating existing--and monetizing existing assets--
Pennsylvania Turnpike, Indiana Toll Road, New Jersey Turnpike--
or building a new project.
Mr. Oberstar.
Mr. Oberstar. Thank you, Mr. Chairman.
I want to thank our witnesses for participating this
morning and the members for their participation.
And the gentleman from Tennessee, thank you for your
leadership in the past in aviation and in water resources, and
now lending your skills to highways. It has been always a
pleasure working with you.
And Mr. DeFazio, for yeoman service in the course of
SAFETEA-LU. We spent an enormous amount of time. I think I saw
more of him at times than I did of my wife.
[Laughter.]
Mr. Oberstar. I have a number of problems with this public-
private partnership idea. In this no tax atmosphere where
governors, legislators, the chambers of commerce paint halos
around their head, pose for holy pictures, and saying no taxes,
no new taxes. And then they turn around and say, but we are
going to toll this and impose a fee for that. The word toll is
spelled t-a-x. That is all it is. Don't try to sugarcoat it or
disguise it in something else, and don't try to something the
public.
Secretary Busalacchi, I want to compliment you on the
splendid leadership you have exercised on the Milwaukee
Interchange. That $800-plus million project has been
languishing for over two decades, and I spent enough hours
snarled in its mess, visiting two daughters who graduated from
Marquette, to know the job that you undertook and tackled with
great aplomb and with great skill. I have been back to
Milwaukee several times in the course of the construction,
simply flying in to visit my grandchildren down in Kenosha, and
also for events in Milwaukee. So you have really done a superb
job. And you are absolutely right, the role of the public
sector is to oversee.
Now, this idea of public-private partnerships, if we want
to go to something that the European countries use, that is a
different--that will be a sea tide change in the way we do
transportation. The idea of a warranted system, a warranted
construction program, where the national government says we
want a four lane road, we want it to go 50 miles, and we want
it to last 75 years, and you build it and you guarantee it,
contractor. We don't do that. We in the United States, in the
AASHTO manual, specify to States we are building a 20-mile
roadway. It is like a three layered chocolate cake, the
frosting will consist of this amount of bakers sugar and this
amount of chocolate, and there will be so much cake flour in it
and so many eggs and all the rest of the ingredients. We spell
them out and then we watch over the contractor to see that they
perform the job to those specifications, and we don't hold them
accountable except for fraud and corruption.
They are two very different ways of doing projects. And it
would take a sea tide change of processing, of management of
law and implementation of law to move to the European system,
and that is what the public-private partnership idea does; it
is a siren's song, frankly, of a quick fix way to put a lot of
money out and build a lot of roadways. But I want to tell you
that if we had started with the interstate system with each
State doing its own design, designing its own program with
public-private partnerships, we would not have a national
integrated highway system.
To his great credit, Dwight Eisenhower didn't throw his
hands up and say, oh my God, no taxes, build it with some
incantations and chants. No. Although his secretary of treasury
did propose funding it with--funding the interstate highway
system by bonds floated on the stock market. Humphreys had been
a private sector financier. The Congress said no. This
Committee said no. My predecessor, John Blatnik, over in that
corner, was one of the five coauthors of the interstate highway
system legislation, and they said we are going to impose a user
fee, call it a gas tax. Eisenhower signed it and it passed in
1956. It came back in 1957. It was four cents. It came back and
said this isn't going to be enough, we need another cent. It
passed on a voice vote in the House. I don't think you can pass
the prayer on a voice vote in the House anymore. But there was
consensus in this Country, there was political will to do
things. That is what this takes, is some kind of political
will.
And to say that our former chairman, Don Young, went to the
White House, went to the House Republican Conference to
advocate for a $375 billion bill that the Transportation
Department recommended, consequence of TEA-21. Study the needs,
come back and report it, which they did. We took that bill, we
introduced it in October of 2003. Gasoline was selling at $1.34
a gallon. Oh my God, the White House threw their hands up, the
House Republican Conference threw their hands up, said we can't
do this. And where did gas go within a year? It doubled. All
that money went overseas to OPEC. Take the five cents, invest
it in America. Those jobs are built with American labor,
American goods, American steel, American cement and aggregate
and asphalt. That is just baloney. We do it right, meet those
needs, we have got enough. But we need the political will to do
it.
And I heard Mr. Wilson talk about the project delivery.
Chairman Young asked me to work on this matter of project
streamlining, and so with 32 pages of legislative language we
did it. But now I ask Mr. Duvall what have you done? It is 18
months since the bill was enacted. Where are your regulations?
Mr. Duvall. I mean, obviously, there are a series of
regulations in connection with the 6002 process. We put out
proposed rules. We obviously greatly appreciate the flexibility
you have given the Department to accelerate that, and we will
work harder to get them out faster, but--------
Mr. Oberstar. It is 18 months. Where have you been? Mr.
Duvall, I mean, granted, it took me six months to work this
out, but I have worked it out with every interested group,
Associated General Contractors, ARTBA, AASHTO, Sierra Club,
National Trust for Historic Preservation, and go on all the
other interest groups, every one of them. I spent hours of my
time on this thing. And you have been on this thing for 18
months. Get the regulations done. At least come up and talk
with us if you have got a problem. But we are not going to
tolerate these projects--we have got the money, but it has
taken us seven years to do it because the project approval
process is too complicated. Baloney.
Mr. Duvall. I agree, Mr. Chairman.
Mr. Oberstar. Get the message?
Mr. Duvall. Well, I agree that we have got to work much
harder to get the regulations out in a timely fashion. It has
been a high priority. As you note, the 6002 regulations, there
is a myriad of other regulations, obviously, the Department is
putting out in connection with the bill, some of which have
been very timely, others have not. And we have got to do a
better job to make sure--------
Mr. Oberstar. I want to tell you the Seattle monorail
project, which unfortunately failed for other reasons,
projected 44 months of project approvals. They used this
process and did it in 40 weeks.
Mr. Duvall. It is a very important--I think that one of the
problems we have got is that the environmental process has
obviously become the mechanism to have the public discourse----
----
Mr. Oberstar. It is not just environmental.
Mr. Duvall. Right.
Mr. Oberstar. Don't blame it all on the environment.
Mr. Duvall. No, no.
Mr. Oberstar. There are lots of other issues.
Mr. Duvall. That is actually what I was saying, is that it
has become the mechanism to debate the project, and whether to
move forward, and it is an important policy--------
Mr. DeFazio. I think that the Chairman is making a great
point, and I think that the Subcommittee will request a
briefing on the status of the implementation of the
streamlining. We would think that this Administration would be
particularly interested in putting that forward, and perhaps if
they spent more time on that rather than developing model
legislation for a minor portion of the problem, which is
public-private partnerships, we would have the streamlining in
place and we wouldn't have to include that as part of this
debate. I thank the--------
Mr. Oberstar. Thank you, Mr. Chairman. It is message
delivery, not project delivery here.
Mr. DeFazio. Thank you.
Mrs. Drake.
Mrs. Drake. Thank you, Mr. Chairman. And I apologize for
missing the bulk of the meeting, and I am sure you have covered
this in detail. I only have one very simple question for you. I
am from Virginia. Virginia, I think, has used public-private
partnerships very well, and I wondered, from your perspective
of looking at the Nation and you look at States that do use it,
States that don't use public-private partnerships, if you can
draw the conclusion of are States like Virginia--I think in
Virginia we would say we are in a better position because we
have used public-private partnerships, but, looking around the
Nation, would that be a fair assessment?
And the other comment that I would make is what I have seen
from it too, because we have unsolicited proposals, is that
there are proposals coming forward on various plans that really
generate public debate, debate within the general assembly, and
get us looking at transportation a little bit differently and
what things might be out there.
So I apologize if you have already covered that in great
detail.
Mr. Duvall. No, thank you, Congresswoman. I did mention the
Commonwealth's activities, and there is little question that
the Commonwealth has been a leader in exploring these
partnerships and has the most comprehensive authorizing
legislation that was a substantial public debate with the
governor and with the State legislature in Virginia, and
continues to--the State legislature continues to provide strong
oversight over the implementation of that broad authorizing
legislation. But there is little question that Virginia' s
willingness to negotiate and enter into discussions has given
them a tremendous opportunity to improve their transportation
systems, both in the Hampton Roads region and up here in
Northern Virginia.
The three major projects that are proceeding--actually,
there are more than that, but the ones that are getting a lot
of attention are all going to involve some public-private
partnership arrangements, and it is unsolicited proposals, in
fact, that came forward, particularly with the Beltway widening
here in Washington, D.C., that came up with the creative
approach to take a fewer number of houses than the State had
considered and really stimulated, as you said, a public debate.
If you have told me 10 years ago that the State of Virginia
would have been in a position to proceed with a widening of the
Capital Beltway without enormous public negative reaction, I
would have said that there is no way. But what happened is the
private entity working with the government developed a very
streamlined and rational approach to the expansion that I think
has gained widespread public approval from all the members of
Congress, from the constituents in the region, and it is moving
forward at an aggressive pace at this point.
But you are right. I mean, I think that the template that
Virginia has used--and, again, I think it is clearly in the
public interest how Virginia has implemented it--is a really
impressive model that other States--in fact, it is what other
States have looked at in the U.S.
Mrs. Drake. Thank you for that.
Mr. Chairman, I yield back. Thank you.
Mr. DeFazio. I thank the gentlelady.
Mrs. Napolitano.
Mrs. Napolitano. Thank you, Mr. Chairman.
I have been listening with great interest to the testimony
that has been given, and coming from a State which has
undertaken private-public partnerships in the past, it is
really an interesting scenario to hear that now the DOT Federal
is wanting to make--fling the door open, if you will, not even
talking specifically on the 91 Freeway in Los Angeles that
began as a 3P and, unfortunately, did not continue in that
vein.
But one of the concerns I have is, Secretary Duvall, has
DOT sought information input, comments, held meetings with the
States Departments of Transportation folks to receive input as
to how they perceive this could work or not work, and any of
the areas that you have outlined that they feel might require
further comment or further input to be able to become more
effective?
Mr. Duvall. Thank you, Congresswoman. Yes, we have
absolutely sought advice and input, and, in fact, it is safe to
say that the States, at the DOT level, are really screaming for
additional flexibility in this area to really pursue
arrangements that current State law and legal mechanisms do not
allow them to consider. You are 100 percent correct that the
experience with SR-91, while receiving a lot of negative
attention, has actually been very vital to this national
debate, and I agree with Commissioner Busalacchi that we do
need a national debate about this topic.
Mrs. Napolitano. OK, but can you determine, can you maybe
quantify in terms of the bigger States are for it, the smaller
States are against it, or something to that effect? Because, in
essence, the larger States have already done the partnerships
in some form or another. The smaller States are beginning to
want to because of the expansion need, but do they know the
pitfalls that the larger States have become embroiled in and
have found information that could help them determine whether
or not that is the way to go?
Mr. Duvall. Yes. The small, mid-size, and large States--I
would not characterize all large States, though, as having done
this. There are actually still a very few number of large
States that have pursued this approach to expanding and
managing existing capacity. I think what is safe to say is
there is a significant degree of learning that has already
taken place among the career officials at State DOTs in the
past five to ten years and I am actually fairly well amazed at
how much they do know already about the risks, even in States
that have not done a single transaction. AASHTO has been a
great forum for discussion. There have been numerous
conferences in which this has been discussed and debated, and I
am constantly amazed, frankly, of how much people already know
about the risks. And SR-91, you are right, has been a poster
child that has actually helped us in many ways carve out what
the policy issues are with non-compete provisions.
Mrs. Napolitano. Well, I was one of the ones that voted
against it, and partly because it was built on public land and
somebody was going to take private benefit from it, and we knew
that it did not have all the questions answered nor coverage of
where the infrastructure maintenance was going to come from and
for how long. There were a lot of things that were not covered.
Do you have any way of being able to--and I have heard some
of the discussion that on your website you have some
information--to be able to help those that are seeking
information as to whether or not they can make informed
decisions or be able to be referred to those cities or States
that could assist them in being able to protect their public
interest?
Essentially, in 91, the non-compete clause, California has
a great need for expansion, yet we could not expand because of
that clause in that 91 contract, and that hurt our whole area.
In fact, they are still suffering from that; it has not
expanded. And I am sorry, but others are going to have to make
sure that they look at the non-compete clause, because if they
are able to expand, they can't by law.
Mr. Duvall. Right. I think you will have a panelist later
discuss non-compete clauses in potentially more detail, but I
think it is safe to say that the state of the practice has
evolved to the point where they are either not included or
sufficiently weakened relative to what was included in that
transaction.
As far as expanding outreach, I think it is important, and
I think I basically committed to the Chairman today to develop
some written materials related to the risks, and we will do
that. But I think it is clear, though, that we have been
engaging in a longstanding discussion with States who want--who
have asked us these questions, who are inquiring. We have done
a lot of conferences, a lot of outreach to States; we have
developed, obviously, model legislation, but we have also done
a significant number of reports. There is a lot of expertise
that does not reside in our Department, however, and I think
this is a longer term issue for us, as well as the States.
Mrs. Napolitano. Well, my time has run out, Mr. Chair, but
I will submit some questions.
Mr. DeFazio. I thank the gentlelady. I think that was a
particularly important question.
Mr. Busalacchi, would you like to respond to that?
Mr. Busalacchi. Yes. I would just like to say something,
Mr. Chairman, in talking about Virginia. And this is why I
think we have got to get out there and we have got to have this
debate, and I really appreciate what you are doing here today.
It is our understanding that Virginia is having real problems
raising revenues to get highway projects done, and that is
why--and, you know, I understand what Mr. Duvall is saying, but
that is why we have to get out there and we have to look at
these 3Ps and see if they really are this panacea that
everybody seems to think they are. I don't think they are. Our
legislature doesn't think they are. We are facing, in
Wisconsin, opposition to this program. People don't like the
idea that their roads may be owned by foreigners. Forgive me
for saying it, but that is really--that is part of the problem,
and--------
Mr. DeFazio. You will be on Lou Dobbs tonight, Mr.
Busalacchi, I guarantee it.
[Laughter.]
Mr. DeFazio. Thank you for that.
But I think, Mr. Duvall, Mrs. Napolitano made a great point
here, which is I would really like to see--I mean, you are
saying you have had these conversations. I have heard from
DOTs, a lot of them across the Country, and they are talking
about the hard sell they are getting from their regional
Federal officials on 3Ps, they are not saying, gee, they gave
us a great list of the pitfalls or problems. You said the
practice has evolved, you haven't said your guidance or your
advice to the States has evolved to say, hey, look out for non-
competes. You don't have to look very far back in history to
find non-competes, i.e., the Indiana Toll Road, that's a big
one with 10 miles each side non-compete or other projects.
It is not like this is some ancient historic artifact or
there aren't maybe some private companies out there trying to
get some gullible State DOT to sign off on a non-compete. And I
have not seen specific guidance from the Fed saying, hey, this
is a big problem, look what happened in California, look at the
problems it is creating elsewhere, look at the potential
problems.
Just one last question. I pointed out, when we had the
financiers in here and Macquarie, good company. I said, there
are two ways to meet a congestion standard, aren't there? One
is increase capacity, the other is to price people off your
asset. And in Indiana, if they priced people off the asset,
there is a 10-mile non-compete on either side of that. So you
are dumping the traffic into an area where you can't--just like
what happened in California. And this was just signed by Mr.
Daniels six months ago. So it isn't a historic artifact. Where
is the advice?
Mr. Duvall. Well, Mr. Chairman, again, as I said, we will
definitely put out some guidance document related to risk.
Mr. DeFazio. I appreciate that. That would be great. I have
got to go on to another--------
Mr. Cohen. Thank you, Mr. Chairman.
Mr. DeFazio. Microphone.
Mr. Cohen. Push my button and clear my throat.
I guess this is for the panel, and I am a little confused
on the whole issue, but if you get into these public-private
partnerships, does this change the process of determining
priorities and where these roads are built? Where you build
roads determines the value of property, and does this give the
private sector the ability to choose where these roads would be
built, whether there would be off-ramps, etc., and have
different issues concerning the land that is pertinent to the
road or near the road, and the value that might have? Have
those factors been considered or is that an appropriate issue?
Mr. Duvall. Congressman Cohen, obviously, any project that
advances has got to be agreed to by the government officials
that are administering the program in accordance with Federal
planning requirements. So I am not sure if that answers your
question, but there is no way a private project can move
forward without full consent and understanding of the officials
administering the program. So if it doesn't fit within their
transportation plan and proposal, it can't move forward.
I think it is important to note, increasingly, we are
seeing, obviously, resources not being allocated towards
projects that are really producing the highest returns, and
there have been a number of economic studies in recent years
that really point to this failure. And one of the reasons we
have been excited from a policy standpoint about this idea is
we think it will actually free up resources to make what may or
may not be considered a low-return investment, but that is
still in the public interest, but allocate some of the risk of
high-return projects and get resources flowing faster to
projects that produce high economic returns. That is the idea,
and we are seeing some of it being played out here in Virginia
and in Texas. We have a long way to go before that is
implemented nationwide, though.
Mr. Cohen. When the private sector gets involved, they make
their money by the tolls, is that correct; they invest in the
roads and then they get the return on tolls?
Mr. Duvall. It depends on the arrangement. Obviously, the
State of Florida is pursuing what is called an availability
payment model, where the State sets aside a set of resources
and then has the private entities bid on effectively a maximum
ceiling, and if the lowest bid effectively wins and they get a
concession for those public resources, however they are
generated. That is a model that is used in Europe. So as I said
in my opening statement, it is not confined to revenue-
generating projects, this concept of risk sharing. Yes, you are
correct that the ones that are getting the most media attention
are toll road projects, though.
Mr. Cohen. Is there ever an issue concerning the toll
roads? You have got to have law enforcement there to police, I
presume, and if there is a wreck which ties up traffic, you
have got to clear it. Is there ever a discussion about
utilizing the public's abilities to clear up road and who gets
priorities, and if there is any problems there?
Mr. Duvall. No. All the agreements provide for full access
to law enforcement officials. They also actually--several of
them fund the activities of the law enforcement officials as a
part of the contract. I also think it is important to talk
about the performance requirements that States can impose on
private entities to not only--to clear incidents, to move
traffic faster, to deploy electronic tolling, to create
reversible lanes. All those can be required as part of the
agreement. They are in the inherent interest of the private
entity because throughput maximization is a good idea if you
are trying to generate a high return, but it is also something
the public officials can require as a part of the performance.
And a breach of the agreement--I think this is an important
topic of further conversation--but a breach of the agreement
means that the facility, if it is material, can revert back to
public hands, and any payments that have been made to date do
not go back to the private sector. So the public sector--and
you have got very good lawyers that now are expert at doing
this and can greatly protect themselves in connection with
these issues.
Mr. Cohen. But does it ever skew the public resources? Has
there ever been a situation where you have got maybe political
influence and they put a priority on this toll road to go and
clear up this accident so that the traffic flow on that road is
better and it helps--as distinguished from a public road? Any
time you get this private-public distinction and you have got
public resources necessary for operation, you have got the
possibility that there will be influence used politically to
have those public resources used to help the private
entrepreneur. And the road-building industry, I don't know
about the Country, but in Tennessee we have had a couple of
scandals through the people that build roads; I mean, they have
kind of got a tendency to get together and decide what the best
price would be and do that. That doesn't work real well.
Mr. Duvall. Right.
Mr. Cohen. So if they kind of get together on that, might
they not get together on saying, you know, clear my road first?
Mr. Duvall. Right. Clear risk of those kind of side
backroom deals taking place, I think it just a risk that the
public officials have got to be aware of and make sure that
there is open transparency to what is being negotiated. As I
said, obviously, the private sector is increasingly a tool to
finance some of these public services, which, as you said,
presents some conflict questions. I just think it has got to be
managed on a case-by-case basis.
Mr. Cohen. There was a road I got on one time going from
L.A. down to Laguna, and it was a toll road. Was that a public-
private partnerships? OK.
Mr. Duvall. The 91, is that the one you are talking about?
Mrs. Napolitano. That is the one by Irvine, over in that
area.
Mr. Duvall. I think so, yes. OCTA? I don't know.
Mr. Cohen. Whatever. Thank you.
Mr. Duvall. All right, thanks.
Mr. DeFazio. I thank the gentleman.
Mr. Baird.
Mr. Baird. I thank the Chairman and our witnesses.
Mr. Duvall, is it your opinion that it is in the United
States' best interest to have a domestic fabrication capacity
for steel and other infrastructure needs?
Mr. Duvall. Yes, I believe it is in the Country's interest
to have capacity to do that.
Mr. Baird. Is it your understanding that part of the reason
for the Buy America Act provisions in Federal law are to help
preserve that domestic fabrication capacity and ensure that
Federal tax dollars are spent to help maintain the capacity and
employ American workers?
Mr. Duvall. That is my understanding, yes.
Mr. Baird. Is it your or the Administration's position that
private partnerships or privately funded transportation
projects should be exempt from Buy America provisions, even if
they become, in some fashion, part of the broader Federal
highway system?
Mr. Duvall. I think the question of application of all
Federal requirements, including Buy America, depends obviously
on the nature of the Federal involvement in the partnership to
begin with. So if there is Federal funding participation, if
there are other Federal elements of participation, the
requirements should attach with that participation. To the
extent the Federal Government is not involved in funding,
approving, or otherwise providing oversight to a project, the
requirements would not attach.
Mr. Baird. Do you see any potential problems if expansion
of public-private partnerships were to continue and possibly
evade, thereby, Buy America provisions? In terms of the
potential to maintain our domestic infrastructure.
Mr. Duvall. Again, to the extent the Federal funds are
flowing, the requirements have to be satisfied, so I don't see
that risk.
Mr. Baird. Let me give you an example. There is a bridge in
Tacoma, Washington being built, the new lane on the Tacoma
Narrows span. It is being built with Korean steel. It is a
tolled project And not far away are some of the best steel
fabricators in the United States of America. They happen to be
in my district. Not a bit, or very, very little of that new
span is being made domestically, and at some point, if we
continue this, we are going to lose our domestic steel
fabrication capacity. And one of my concerns about this public-
private partnership issue is that we are going to lose that
capacity, and when an earthquake comes or an international
conflict comes, we are going to be beholden to foreign
manufacturers and foreign fabricators.
Do you have any concern at all about that?
Mr. Duvall. I mean, again, I am not an expert on that
business, but I think to the extent the Federal Government's
interest--and I actually have not been intimately involved in
the day-to-day negotiations of that contract, so I can't speak
to the terms there--but clearly the Federal Government has
expressed, through the Congress, a clear interest in ensuring
the Buy America provisions are enforced, and I don't see the
public-private partnership trend as a threat to that in any
way, actually.
Mr. Baird. Really? In no way at all?
Mr. Duvall. I don't see it as a threat, no.
Mr. Baird. I would ask you to look into that a little and
get back to me.
Mr. Duvall. OK.
Mr. Baird. It just seems to me that if increasing numbers
of Federal transportation projects are built with private money
and thereby evade Buy America provisions, there will be less
market for domestic fabricators and construction people, and
that declining market would seem to possibly imperil their
financial viability and thereby, importantly, the security of
this Country. And I would encourage you to look seriously, as
you seem to be an advocate of public-private partnerships.
Let me throw out an idea that I have kicked around and
welcome the comments of the panelists. First of all, it is my
understanding that Macquarie gets a significant portion of
their funds from retirement funds from Australian citizens. Is
that an accurate understanding?
Mr. Duvall. Yes.
Mr. Baird. That is accurate.
Mr. Duvall. Yes.
Mr. Baird. It is paradoxical to me that we are going to
have American citizens driving on roads paid for by foreign
retirees and our tolls are going to go to those foreign
retirees. That strikes me as funny. We have, in this Country,
dual problems: one, an infrastructure deficit that exceeds
about $1.6 trillion dollars, according to engineers; and, two,
a big question about where we put the Social Security trust
funds. Those trust funds, as you know, are declining over the
next number of years. Many of us have said they should be put
into a lockbox. No one knows quite where that lockbox would be
stored; it is apparently stored as a payday loan operation that
funds the general fund to hide the cost of the deficit.
Let me throw this out there and see any response you have
got. What about putting the Social Security trust funds, over
the next 10 years, while we have still got a surplus in those
trust funds, into an infrastructure bank that would fund
infrastructure, create jobs, and that would be paid back on
some timetable to ensure that the baby boomers and others
receive benefits?
Mr. Duvall. I will get really far afield of my
responsibilities to comment on that question directly. I will
say, however, that the prospect of long-term money, U.S. long-
term money, entering into the infrastructure equation in the
U.S. is a huge opportunity and it is already happening.
CalPERS--my written statement notes--is becoming a major
intermodal freight investor in the Midwest. The three major
unions in the United States, the Operating Engineers, the
Teamsters, and one other--I can't remember the third--are
investing actually in Macquarie. Fifty-two percent of Macquarie
is U.S. Macquarie Infrastructure Partners is owned by U.S.
investors.
And I think you are absolutely right, the Canadian Pension
Fund, the equivalent of the Canadian social security, has
dedicated 10 percent of their fund, I believe to
infrastructure.
So, yes, I think you are onto a major point here, which is
that we have got a lot of long-term capital in the U.S. that
could be really aggressively, I think, deployed to improve our
infrastructure, if we get the policy framework right. And I
think that--to me, that is the big challenge for this
Committee, is how do we get the policy framework right to tap
into that. But you are right.
Mr. Baird. Thank you.
Mr. Chairman, can I ask if the others want to comment?
Mr. DeFazio. Certainly. Go ahead.
Mr. Busalacchi. Well, I just would, you know, again, as I
had said earlier, you are raising some really good points, and
I think that is what comes out of the debate that we have with
this, because, you know, you are right about the materials. You
are absolutely right on the mark. And we--this is all about
making money, and if they can get the steel cheaper and they
can get the concrete cheaper, they are going to get it cheaper.
And if they can get it overseas, you can bet they are going to
bring it over here if they control the job. And that is what we
have got to be careful about.
Insofar as having our own pension funds, you know, in this
Country doing this investing, you know, sure, if that is what
they want to do, but some of these pension funds are prohibited
from entering into these things. So that is another area that
you really have to--that you really would have to look at
domestically.
But you are raising some good points and it is something
that--that is why this Committee needs to really closely watch
what is going on with this.
Mr. DeFazio. I thank the gentleman from Washington State.
We are going to--this Committee is going to hold a hearing
this spring on the Buy America provisions, and I expect we will
fully investigate. And I think these are excellent questions
you are raising.
The other question you are raising about social security,
just for reference sake, I believe it would be like $1.2
trillion that is going to be borrowed and spent of so-called
social security surplus over the next decade. Now, just
imagine, here is a country of 16 million people, Australia, and
a major funder of infrastructure in a Country of nearly 300
million people. Kind of odd, isn't it?
Mr. Baird. It is actually, Mr. Chairman, if I may, I
believe it is about $1.2 trillion over the next five years.
Mr. DeFazio. Oh, it is five, I am sorry, five years. Right,
during the budget, yes. Member of the Budget Committee, I stand
corrected.
Mr. Baird. But the point being there is money there, and we
could invest it, create jobs, build an infrastructure, comply
with domestic laws, and I sure think the American taxpayers
would rather be paying into their own retirement fund, if they
are paying a toll, rather than the Australian retirement fund.
Mr. DeFazio. I thank the gentleman for that provocative
line of thought, and I would like to work with him on that.
I want to thank the panel for sitting and providing good
testimony and answers, and your obligations are completed.
We now have a vote on the rule, probably a five minute
vote, so hopefully we will reconvene--how many votes? I am
sorry, four votes.
I am really sorry about this for the next panel. There
apparently are four votes. I would expect--I am not sure how
many of those are fifteens. Just the first? And the others are
all fives or suspensions. OK. So we would expect it would take
a minimum of about half an hour. I won't set a time certain,
but we will convene as soon as possible after the last vote,
which will probably be about five after or ten after twelve.
Thank you.
[Recess.]
Mr. DeFazio. The Committee will come to order. It took
longer than we thought, but that is the way things are around
here.
I appreciate the next panel being patient, and we will
proceed immediately. We expect no more votes for the immediate
future, so I guess--I don't have the witness list in front of
me, but we will just go from left to right.
Ms. Hedlund, why don't you begin? Thank you.
TESTIMONY OF KAREN HEDLUND, ESQ., NOSSAMAN, GUNTHER, KNOX &
ELLIOTT LLP, PARTNER, ARLINGTON, VIRGINIA; DENNIS ENRIGHT, NW
FINANCIAL GROUP, PRINCIPAL, JERSEY CITY, NEW JERSEY; ALISTAIR
SAWERS, RBC CAPITAL MARKETS, TRANSPORTATION AND PROJECT FINANCE
SPECIALIST, SAN FRANCISCO, CALIFORNIA; AND ROBERT POOLE, REASON
FOUNDATION, DIRECTOR OF TRANSPORTATION STUDIES, LOS ANGELES,
CALIFORNIA
Ms. Hedlund. Thank you, Mr. Chairman, Ranking Member
Duncan, and members of the Committee. Thank you for inviting me
back. Today, I am going to try to address certain public policy
issues that arise in PPP transactions and how these are
resolved through statutory and contract requirements.
My firm has had the privilege of advising on PPPs in over
15 States, and our advice is frequently sought on PPP
legislation, which I know is of an interest to this Committee.
I do live here, but I probably spend more time in the State
capitals than I do in this one, and I am going to try to bring
you that perspective.
The authorizing legislation in many States I think reflects
real thoughtfulness about the proper processes that need to be
used to implement PPPs and to protect the public interest. And
public agencies also have at their disposal a wealth of
contract provisions that are accepted the world to ensure that
private partners keep their end of the bargain and do not take
unfair advantage of the public in operating public use
facilities.
As of today, over 24 States have adopted some form of PPP
legislation and, as with other governmental activities, such
laws vary greatly from State to State in scope and in detail.
What the States do have in common in their approach to PPPs is
that they view them as but one tool in the toolbox, not as a
panacea. Even if the gas tax were raised, I think we would find
PPPs being used to continue to advance important mobility
projects for which traditional sources of funding are lacking.
In my written statement, I tried to answer some of the hot
button issues related to public-private partnerships that this
Committee and others have raised. How can you--how can the
integrity of the procurement process be maintained by achieving
transparency for the public? How should the term of a PPP be
determined, should it be 35 years, should it be 99 years? How
can increases in user fees be limited? How can unreasonable
private operator profits be controlled? Are there reasonable
approaches to this issue of competitive facilities? How do we
assure long-term performance? And what is the private operator
defaults or becomes bankrupt?
Most legislation will either resolve these issues or
require that they be addressed in resulting agreements on a
case-by-case basis, so let me address just a couple of these.
To avoid sweetheart deals, State laws provide for
competition. Choosing solicited procurements over unsolicited
procurements now seems to be the trend, and the State of Oregon
is choosing solicited procurements; the State of Georgia has
gone from a statute that only permitted unsolicited
procurements to add solicited procurements.
As to the appropriate term of the agreement, most State
laws do provide from kind of maximum term, but the term of any
particular agreement should be established with regard to the
financial feasibility of the project. Projects with a weak
revenue stream may require a longer term to allow the private
operator to be able to achieve its targeted rate of return, and
that was the reason for the very long term in Pocahontas.
Projects with lower revenue risk can have relatively shorter
terms.
The decision on how much and how fast user fees should be
permitted to rise is a public sector decision involving
significant policy considerations. The final decisions can be
implemented through contract terms specifying maximum annual
toll rate adjustments, which can be tied to an appropriate
index. The maximum profits that a private entity can secure is
controlled through the use of other contractual devices such as
requiring the private entity, if its rate of return exceeds a
specific percentage, excess revenues be returned to the
sponsoring agency.
As to this issue of non-compete agreements, there was
actually only one project actually built in the United States
in the last 20 years that prohibited non-safety related
improvements on adjoining free lanes, that was the SR-91.
Safety improvements were permitted.
But the market has evolved dramatically from that in the
last 16 years. Instead, agreements typically now provide for,
if at all, possible compensation to be paid to the private
operator if, and only if, the construction of facilities that
are not included in the region's long-term revenue
unconstrained plan actually result in a proven reduction in a
project's revenue. So there is no bar to the public sector to
building additional facilities. Under certain circumstances,
unlikely to happen, there might be compensation that has to be
paid.
As to long-term performance, you will hear Dr. Poole, I am
sure, argue, as he has in the past, that the private entity is
highly motivated to maintain the facility in order to protect
its investment and keep its customers, but we don't have to
rely on economic theory. Instead, detailed performance
requirements have become standard in these transactions.
Finally, if the operator defaults and goes bankrupt because
traffic fails to meet its original projections, the State may
terminate the contract and step back in and operate the road.
In addition, most public agencies retain the right to terminate
a contract for convenience when they deem it in the public
interest or as a result of changed circumstances or a change in
public policy.
There are other issues that arise only in the context of
leasing existing assets. The States, I think, are approaching
this issue with a great deal of caution and after a lot of
study. If they determine to go forward, I think the governors
of New Jersey and Pennsylvania will probably seek specific
authorizing legislation that is no doubt going to address
issues such as the proper use of the proceeds and the tradeoff
to be made between the term and asset value and protecting
existing employees.
In conclusion, I would observe that developments in public-
private partnerships are just the kind of experiments that
Justice Brandeis said in 1935 are one of the happy incidents of
the Federal system. Properly executed, these experiments of
individual States are providing new funding to meet mobility
and safety challenges that hopefully will serve the social and
economic needs of the entire Country.
I look forward to your questions.
Mr. DeFazio. Thank you.
Mr. Enright.
Mr. Enright. Thank you, Mr. Chairman. Thank you for
inviting me to speak.
In listening to the prior panel, there seemed to be a lot--
in the questions that followed, there seemed to be a lot of
confusion between public-private partnerships as a concept and
monetization of assets as a concept, and that the rubric
between them has crossed. And there is a long history of very
successful public-private partnerships in the U.S., but until
the Chicago Skyway P3 transaction, success was measured largely
by a reduction in cost to the users and shorter terms of 5 to
30 years.
In the P3 asset sales like Chicago and Indiana, they
actually produced higher cost to users, not lower, and longer
terms of 75 to 99 years. That is a significant difference in
the definition of public-private partnership.
The key question, though, is can the public sector get more
value from self-help financing approaches, using traditional
toll road type of financing.
There is much talk about worldwide privatization
experience, it is not new in the United States. Non-U.S.
experience actually is driven by credit concerns around the
world. Most of the toll road privatizations around the world
are actually in third world countries, although there are quite
a few in Europe and Australia, and in those markets they cannot
possibly provide the governmental funding to build the road,
and private capital is an important source of funding. They
also have no market for U.S. style governmental enterprise
finance pretty much around the world. The U.S. is almost unique
in that regard, using revenue bonds as a funding source. And
low-cost public funding through tax-exempt bonds is not
available in the rest of the world.
In contrast, the U.S. experience has seen success in P3s
when there is significant technology, revenue demand, or
efficiency challenges. In the U.S., we have a large network of
high-quality public employees with extensive experience in the
implementation of large public works projects and, therefore,
are better able to match the private sector efficiency.
One U.S. P3 success story, which has been around for 20 or
30 years now, are waste energy plants. The key to success in
this sector was the sharing of risk between public and private
sectors. And I have spelled that out a little bit more in my
written testimony.
In the transportation sector, roads, anyway, there is
little technology risk to share. The only real risk is
production of future revenues to pay for the cost of the road,
and that has always been an acceptable risk to the public
entities that fund toll roads. The U.S. has a proven track
record of using revenue-backed governmental bonds for
enterprise finance. The U.S. public mission in toll roads has
been one of providing mobility through affordable tolls,
designed only to fund the needs of the road. U.S. toll roads
authorities have not been maximizing the bottom line with
inflation-adjusted increases, since they were never considered.
They have been driven by a public policy mandate that treasured
minimizing tolls.
Along comes Chicago. In Chicago, which was a groundbreaking
transaction for the transportation sector, it was really the
first time the P3 mandate was utilized to increase cost to
users in a major way, and that revenue stream was then
monetized. So what Chicago really proved was that capital
markets would accept a long-term projection of revenue
increases based upon economic indices as a basis of financing.
Then it was Indiana. They also used monetization of future
toll roads, and it is a Statewide roadway. This raised a bunch
of new public policy issues. This is a 150-mile stretch of
road, not a bridge like Chicago. It is a key link in the
interstate highway system, and it is probably the State's most
important economic development tool. In the future, as they
pursue economic development, they will need to negotiate with
the new owner of the road and return profit to the private
sector. The cost of capital to the private sector historically
and in the future is likely to be 60 percent more than the
public dollar, and the private sector has considerable leverage
and sophistication in negotiations that really doesn't exist on
the public side, as you heard some of the earlier speakers
indicate. And remember, the lease is not up for renewal anytime
soon, so who has the leverage?
So what convinced the governmental leaders in these two
States, two situations, to do these deals? It was really the
pitch. And the pitch was that they were going to be able to
monetize future growth today. This pitch is made by the private
participants most likely to benefit.
Well, surprise. The private sector is not willing to
overpay for toll road assets. Chicago and Indiana actually
prove that. They can't. The credit discipline in the capital
markets, particularly for transactions of this size, limits how
much they can do in debt, and that debt limitation then
requires additional equity capital to make it up, and equity
capital is more expensive. The combination of those two costs
of capital drives the valuation. And the valuations in Chicago
and Indiana are no greater than the amount of dollars that
could have been generated by a public finance option. Public
capital is about 60 to 70 percent lower than the private
option, and the public solution can deliver greater value or
require a significantly lower tolls to get the same dollars. So
the bonus of public ownership is really a public ownership
dividend: they get to keep the future cash flows the private
sector is not paying for.
How can the public interest be protected? Independent
evaluations, public agency monetizations without taxpayer risk,
capturing the public ownership dividend through future revenue
share ownership, and, if private, if you decide that it should
be private, you need more sophisticated procurement. You need
to evaluate in a combination of factors, including the length
of the deal, limits on the return to the investors, risk-
sharing parameters for unforeseen events, and the price
offered.
In the international world, P3 deals rarely exceed 30
years, and many are much shorter, even for to-be-built
projects. Some allow for termination of the concession when the
equity returns have been achieved and return the revenue-
producing asset to the public sector. Chicago and Indiana
transactions are so exciting because, like Columbus, they found
a new world: dollars today based upon a future revenue
monopoly. However, there is little risk. If higher toll
increases reduce traffic, then increases on free route--it
increases traffic on free routes and makes time advantage on
the toll route even more valuable. Are these platinum card
highways?
So the lessons learned from the public sector point of view
are: one, there is no need to sell assets and surrender
control; two, because publicly-funded monetization is
relatively available without taxpayer risk; three, until higher
valuations arrive, if ever, the public option should be the
preferred option; four, for existing toll road assets, there is
little reason to pursue the P3 option; five, capture the public
ownership dividend of future cash flows; six, to-be-built
roads, private sector may be more appropriate since there is
more inherent risk.
In summary--and I am sorry I went over my limit--the key
concerns are: the transportation system integrity, you know,
rich roads, poor roads types of problem--the private sector is
only going to want to do the rich roads; you are going to be
stuck with the poor roads--capturing future cash flows; cost of
capital evaluations; the actual toll regime imposed, meaning
the formulas for increases; and the term and lengths of the
monetization.
I hope I have provided some insight into potential
protections for the public sector, and thank you for inviting
me to speak.
Mr. DeFazio. Thank you, Mr. Enright.
Mr. Sawers.
Mr. Sawers. Thank you, Mr. Chairman. Just wanted to run
through some of the more European experience. You can tell by
the foreign accent that I have obvious reason for having
foreign experience, but I have worked for over three years in
the U.S. as well, so I have a certain amount of insight in both
jurisdictions.
I would like to make a distinction between public-private
partnerships and privatization. Privatization is much more
where markets and price mechanism defines the service provided.
With PPP, the public sector is set there to define what is
required to meet the public needs and remains the client
throughout the long-term. This speaks quite clearly to how the
public interest can be monitored in the PPP version.
In general, more international PPPs in the highway and
transit sectors are focused on greenfield projects rather than
brownfield ones. As we have been discussing, in the U.S. there
have been much more brownfield activity. These have varied from
the O&M style, the old such as Chicago Skyway, which has been
discussed, but they also include refurbishment style deals such
as the Missouri bridge's replacement PPP and also enhancement-
focused PPPs such as the I-495 managed lanes. So picking on
brownfield as being a sort of single homogenous type of project
is risky, and in terms of defining the public interest, they
all have slightly different characteristics.
In my written evidence I went into some detail describing
how public interest and, thus, the public sector objectives
have been defined in international PPP programs. In summary,
the sort of key points have been to a move to define output or
performance specifications. These reflect the user's needs and
the broader policy objectives such as minority employment or
congestion relief or encouraging innovation. The other issue
that has been very much a key focus in the U.K. is value for
money, and this has been where a concept that has been applied
to not just taking the initial low bid view of a bid coming
from the private sector, whether it is just pure construction,
but also taking into account all the risks and the whole life
costs of the project.
Additional account has been taken to the benefits and the
need for protection for public sector workers, though this has
been much more an issue on health care PPPs, which are not
really a feature here, rather than transportation.
And then the final issue has been as much of perception as
anything else, which is that PPP companies, being private, are
making an unreasonable profit, especially from user fees, but
also in the case of availability payment deals, which Tyler
touched on, also from the refinancings of the project debt,
which I know the Chairman has an issue with.
The process of defining and entering into a PPP contract
established some quite significant protections in the public
interest inherently. The U.S. Treasury made some significant
effort to study and evaluate these at one point. Their initial
experience was that large amounts of the benefit of PPP came
from reductions in change orders, as a previous witness
mentioned, and the process of writing the PPP contracts
required much better project definition than the traditional
design bid-build model.
Also, equity investors in the project, who typically
include the construction and operating companies, stand to lose
all of their investment and are strongly incentivized to remedy
problems. Similarly, debt provided to the project has only one
form of security, that is, the PPP contract, and typically they
hold 80 to 90 percent of the deal, so they are very strongly
incentivized to police that contract and reflect any of those
terms in the main contract in their subcontracts and do the
government's job for it.
A study by the U.K. Treasury in 2003 found these
protections resulted in something like 89 percent of projects
being delivered on time, contrasting with previous research,
which has shown that 70 percent of all non-PPP projects were
delivered late. So that is quite a significant difference.
Another frequently quoted example is the bankruptcy of U.K.
PPP construction firm Jarvis in 2005. All of its deals were
completed at no additional costs to the public sector, and,
while there were some delays, that was quite a result. And the
other famous or infamous example is the Eurotunnel, which did
not come back on to either country's balance sheet.
The problem of excessive returns has been addressed by
revenue share triggers, which trigger either high levels of
return or high levels of absolute revenue, or by, as just
mentioned, termination of the concession when a cumulative
return reaches a predefined target level. And that was Delford
Crossing on the beltway around London. In most cases, however,
toll or fare restrictions are the main focus, and the market is
sort of the key focus there.
Also, the majority of international projects are
availability payment deals, or shadow toll deals, which are
inherently capped. And that also speaks to why they are
generally around 30 years, rather than 50 or 75 years, because
you are just getting a straight payment from the government.
Quite often, these include additional incentive payments to
address public sector policy objectives such as safety payments
for reductions in accidents--and that is the case in Norway,
Portugal, and some of the U.K. deals--also, there have been
terms that have been put into PPP contracts to reflect
refinancing and make sure that the benefits of refinancing have
been shared with the government side. And, again, that has
mainly been on availability deals, but that is where the
government is obviously paying the up-front payment, so it has
a right to the refinancing benefit. And also several
jurisdictions--and I think this was touched on by a previous
witness--undertake value for money analysis and compare their
PPP project with an equivalent conventional method of
procurement, either called the public sector comparison or a
shadow bid, so they justify the difference between PPP and the
traditional way of doing it.
Another thing which I think has been a reoccurring theme
that lots of people have touched on is sharing best practice.
Several countries have set up public entities to promote
sharing best practice. An example is Partnerships BC in British
Columbia, partners between Victoria and Australia. These
authorities either do efforts to standardized contracts, reduce
bid costs, or to share knowledge and to advise people procuring
projects to make sure that the private sector does not have the
advantage of better information.
In conclusion, it should be noted that many of these
protections can increase risks, costs, and complexity of the
project and drive down the overall value coming from the
private sector. Thus, it is a tradeoff between the cheapest
price and the risk to the public sector.
I look forward to your questions.
Mr. DeFazio. Thank you, Mr. Sawers.
Mr. Poole.
Mr. Poole. Thank you, Mr. Chairman, Mr. Duncan. I
appreciate the opportunity to speak today. I am Robert Poole,
Director of Transportation Studies at Reason Foundation. I have
been researching PPP toll roads actually since the late 1980's,
starting with California's pilot program for toll road
concessions.
The past two years, as the previous speakers have just
said, the global capital markets had discovered the U.S.
highway sector. This comes about at an opportune time, just as
we are really realizing the magnitude of the gap between the
needs for highway investment and what available funding sources
will produce. And so, to help close that gap, States are
turning increasingly to tolling and PPPs.
The newest form is the long-term concession, which is going
to be the focus of my remarks. In exchange for a long-term
contractual agreement the toll road company will design,
finance, build, operate, market and rebuild a new or existing
toll road, and it is the same basic concept, the same basic
agreement form whether it is an existing road that is being
leased or a new one being built, although there are obviously
differences in risks involved.
This idea actually goes back to the 18th and 19th Centuries
when private companies under State franchises built toll roads,
turnpikes in Europe, in England particularly, and in the United
States. And it was revived in a modern form in the 1990's in
Virginia and California, but it has really taken off, as I
said, in the past two years between leases of some existing
toll roads and something like $25 billion worth of private
sector projects in various stages of negotiation for new toll
road capacity in about six States. This model has over 40 years
experience in Europe and nearly 20 years of use in Australia,
and that is why companies from overseas have been among the
pioneers of bringing the ideas to America.
Now some will argue that we don't really need this concept
of long-term toll concessions because State toll agencies can
do all the things that we need if we want toll roads, but my
research suggests there are six advantages that the private
sector concessions model brings.
Number one, access to new sources of capital. Toll road
companies can tap pension funds and other long-term investors
who don't buy tax exempt toll revenue bonds. It is a different
pool of capital and a potentially much larger one. S and P
estimates that up to $150 billion was raised just last year to
invest in infrastructure projects.
Number two, larger sums for toll projects. I am familiar
with lots of studies, feasibility studies for toll roads, and
many toll road projects don't pencil out using conventional
toll finance with 30 year revenue bonds, but some of the same
projects will work out under 50 or 60 year concession
agreements because of the differences in the financing model.
The long term really makes a big difference.
Number three is shifting risk from taxpayers to investors,
and previous witnesses have mentioned that. Large
transportation projects worldwide are notorious for cost
overruns and for having over-optimistic forecasts of traffic
and revenue. In concession agreements, in exchange for the long
term, the private sector will accept and take on construction
risk and traffic and revenue risk. These are huge advantages.
Number four has not been mentioned so far, multi-State
potential. In the goods movement area where we are doing a lot
of work, a lot of important projects are multi-State projects
from a shipping origin to a distribution point in other States.
State toll agencies can't operate across State lines, but
private companies under concession agreements can and are
particularly well suited to this.
Number five is a more businesslike approach. We do have
some businesslike toll agencies, but many of them are very
bureaucratic and not really operating as businesses with
customer service as their number one consideration.
The sixth point that I think is very, very important is
major innovations. Toll road companies are more likely to think
outside the box and come up with innovative approaches to
solving difficult problems, for example, traffic congestion. It
was a private company in California under California's original
concession program that came up with variable pricing as a
means of managing traffic flows. This is what has made HOT
lanes possible in America. No public agency was willing to take
the risk of introducing variable tolling. The private sector
did.
In France, a private toll company solved a 30 year impasse
over a missing link on the Paris ring road by building it as a
tunnel underneath Versailles instead of trying to cut the town
in two.
Now because these concessions are very new, there are a lot
of misconceptions, and I have addressed them at some length in
my written testimony.
None of these deals involve selling roads. They are all
leases. They are all governed by the concession agreements. I
have actually read the Chicago and Indiana concession
agreements hundreds of pages long, and they really do have a
lot of important provisions for protecting the public interest.
It is clear, foreign companies have been in the lead so far
because they have the expertise. They have the track record. We
don't have a private sector toll road industry in the United
States although we are starting to get there. We are starting
to see joint ventures between U.S. and global companies. So I
am confident that we will have a domestic industry probably
within the next five years. There is also a lot of U.S. capital
being raised today to invest in these kinds of projects.
Eminent domain: this power is never delegated to the
private sector. It is always one of the things that the public
sector uses on behalf of a PPP project.
Uncontrolled tolls: all the concession agreements provide
some controls over either the rate of annual increase or the
rate of return that can be earned in a project.
Up front payments, that obviously has been discussed. There
is a big tradeoff between how much money a State will get up
front versus sharing revenues over the life of the project. I
frankly am urging, I am recommending to State DOTs that they go
for the revenue sharing option. I think that is both better for
public policy and will be a more sustainable model long term.
It also gives the public sector partner a real stake in the
success of the project which I think is an important long-term
consideration.
Finally, the question, could a public toll agency raise
just as much money? Frankly, I doubt it. Nobody has figured out
how a public agency can give investors 50 years of certainty
that there can be annual increases of toll rates. Until
somebody figures that out, the capital markets will not raise
the same amount of money for a public sector agency as they
will for a private concession.
To sum up, I think it is actually very fortunate for
America's highway users that the capital markets including
pension funds have discovered the U.S. highway market just as
we realize how enormous the gap between needs and revenues is.
So I think it is going to take, as we know, hundreds of
billions of dollars to rebuild the Interstates, to expand
capacity where needed. But we now have a new source for a
considerable chunk of that investment. The challenge, of
course, is to develop the right public policy framework to be
sure the public interest is protected along the way.
Thanks very much, and I look forward to your questions.
Mr. DeFazio. Thank you.
I first recognize the gentleman from Tennessee.
Mr. Duncan. Well, thank you, Mr. Chairman. I have a series
of appointments, and I appreciate your letting me go first.
For the record, I need to ask unanimous consent that the
record be held open for 30 days for the submission of written
statements or follow-up questions to the witnesses. I have had
that request from some on our side.
Mr. DeFazio. Without objection.
Mr. Duncan. Now I have known of Mr. Poole's work for
several years, and he has done a lot of good work. I especially
like the revenue sharing suggestion, Mr. Poole, keeping the
public sector involved instead of taking all the money up
front.
Mr. Enright had, I thought, some pretty interesting
testimony, and I underlined these sentences. He said, the
combination of credit discipline imposed by the lending
community and the high cost of equity has assured that the
valuation utilized by these private buyers is no greater than
the amount of dollars that could have been generated by the
public agencies undertaking the monetization financing on their
own. As a matter of fact, the cost of capital in today's
markets for public financing is only 60 to 70 percent of the
cost of a private monetization, and therefore can either
deliver greater delivery or require significantly lower toll
increases.
What do you think about those two sentences?
Mr. Poole. Well, I think on paper you can make a comparison
of that sort and show mathematically that you could get
equivalent amounts of money and also that some ways of defining
the average cost of capital, the public sector will clearly
come out lower.
The question is: Could you actually realize that in
practice? In my written testimony I say a little bit more than
I said in the oral. I think what the markets are reacting to in
these concession agreements is the legal certainty of being
able to raise tolls every year over a long-term period.
With the public sector, the history of tolling by public
sector agencies is that it will go for a long, long time with
flat rate tolls even though inflation keeps rising and the
costs of running things and maintaining things and repairing
things keeps going up, but their revenues don't. Then they get
to a crisis point and have to do a big toll increase that is
very painful to the users.
I think there is a very interesting tradeoff and probably
better for the users to have steady annual predictable
inflation-related increases in the toll rates, but in turn,
that predictability is indeed what seems to be driving the
higher valuations that the private sector deals are getting.
I don't think, I cannot imagine a way to commit future
legislators, legislatures and governors over a 50 year period
to make sure that tolls can be increased by a public agency. I
just don't know a way to do that. So that is why I think you
are always in practice going to see a big difference in what a
private concession deal can raise versus what a public toll
agency can raise.
Mr. Duncan. Anything you want to add, Mr. Enright?
Mr. Enright. I would strongly disagree with Mr. Poole's
reasoning there. I have been in the public finance business for
over 30 years, and I did not undertake those statements without
doing significant analysis and also talking with many bankers
at large banks as to their view of this issue.
There is no question that the capital is available at lower
cost by doing a public deal. As a matter of fact, in doing
normal toll road financings, there is an expectation that they
have to meet an ongoing requirement to provide revenue to pay
the debt service. Nothing would be different if you did a
monetization deal.
The only difference is that the proceeds would not be going
directly into that roadway. They would be going for what other,
whatever public purpose they are going for. But there is no
question that that can be done in the capital markets, and I
have researched it quite thoroughly.
Mr. Duncan. All right. Ms. Hedlund, the staff tells me that
there has been a lot of negative publicity about the Indiana
deal and the Chicago Skyway. Why do you think that is and what
lessons do you think that they have learned about what they
have gotten into or what they have done?
Ms. Hedlund. Well, let me first say that I didn't work on
either of those transactions, so everything I know about them
is pretty much what I have read in the newspaper.
Mr. Duncan. Right.
Ms. Hedlund. I don't think the Chicago deal has gotten a
lot of negative publicity in Chicago. It is an unusual
transaction. It was not a core asset of the City. The City had
been trying to get rid of it for years.
Mr. Duncan. I did see George Will wrote a column last week,
criticizing the Chicago deal. Did you see that?
Ms. Hedlund. Yes, I did. Yes, I did, but the value in the
Chicago Skyway is something that arose only recently when a
couple of casinos were built at the south end of the lake. That
is a road that was built to take southsiders to the steel
mills. The steel mills aren't there anymore. It now takes
people to casinos.
You know it was the first deal. It was certainly the one
that got a tremendous amount of attraction, particularly
because it drew a bid that was well in excess of even what
Goldman Sachs, who was advising the City, expected.
Indiana, I know has been very, very controversial, and I
can assure that I am certain the other governors that are
looking at similar kinds of monetization are looking at that
transaction and seeing if there are ways of improving on it.
Mr. Duncan. I am sure you are familiar with the term,
shadow tolling?
Ms. Hedlund. Yes.
Mr. Duncan. Is that something that is starting to be used
in place or what can you tell us about it?
Ms. Hedlund. The concept is used in Great Britain. There
was a similar transaction done in Massachusetts on Highway 203
that was structured around a long-term lease payment, and the
State assured the contractors that they would make certain
payments to them over a period of time. The Miami Port Tunnel
which is in the middle of a procurement has availability
payments. So it is something that is being examined.
You do have to have a stream of revenues. It may be a
public stream of revenues, but you have to have some kind of
stream of revenues to compensate the private party for
providing the availability of that project over the long term.
Mr. Duncan. Mr. Poole, you mentioned that Standard and
Poor's said that $150 billion or almost $150 billion in private
capital was raised for infrastructure projects last year alone.
How much of that was in the U.S.? Something else, is that a big
jump over, say, five years ago?
Mr. Poole. I don't know for sure the answer to either of
those questions, Mr. Duncan. I suspect that a significant
fraction of that was in the U.S. I know Goldman Sachs just
announced they have raised $6.5 billion.
Mr. Duncan. You said that.
Mr. Poole. I believe that was almost all in the United
States. Carlyle Group has a fund that I think is almost all
U.S. money. I think Merrill Lynch has a fund.
The trend in the last few years, I mean really, literally
in the last year, is for major new U.S. money, capital, to be
raised in these kinds of investment funds because of the
overseas funds--the Australian pension funds discovering that
there is a market here for toll roads and that we have a secure
legal framework as opposed to lots of third world places where
the deal might be overturned after you have built the road and
taken away from you.
The U.S. is a very, potentially, very, very attractive
market, huge needs, stable rule of law and a willingness of
people to do some large scale projects. So I think we are going
to see a big trend, a further trend toward U.S. capital going
to this.
As I mentioned in the written testimony, I predict within
five years, we will see purely U.S. toll road companies if this
trend continues competing with the Macquaries and the Cintras
from overseas. We are already seeing a lot of joint ventures,
U.S. and foreign companies trading on the U.S. firm's knowledge
of the local market, the overseas company's actual hands-on
experience running, owning and operating toll roads for 15, 20
years and so forth. It is a market very much that is in
transition to a much more domestic one.
Mr. Duncan. But you see a lot of interest developing,
though.
Mr. Poole. Very definitely, I mean I speak at conferences
every month, and increasingly there are conferences in New York
with investor type people. I think the movement of U.S. pension
funds, as Tyler Duvall mentioned, into this field is a sea
change. It is a huge, huge development, I mean if there are
enough projects. I don't think there is going to be any
question there will be enough funding to do them if they lend
themselves to this sort of funding.
Mr. Duncan. I apologize. I have been told two different
ways to pronounce your name.
Mr. Sawers. Sawers.
Mr. Duncan. Let me ask you this. What is the European
experience?
I am told by the staff that there are several major highway
projects in Europe or different places around the world where
they have started out as a public-private partnership, but they
have reverted back to total public ownership or something. Is
this something? Is this growing in Europe?
Mr. Sawers. No. This is very much definitely spreading
through the European countries. It kind of started in France
and Spain and the U.K. as the three core countries that started
this. Some of them are public-private partnerships because they
had operating companies, but they have actually gone
increasingly towards more of the PPP model.
In terms of reversion, there have been a couple of toll
roads that have reverted to the public ownership, but they have
been because of expiry of contracts. In Spain, actually they
have been going for 30 years. So several of them were returned
to the public side and actually relet with additional
investment.
Mr. Duncan. They came to public ownership, but then they
started a new public-private partnership. Is that what you are
saying?
Mr. Sawers. That is what I am saying. The only country that
has had particular trouble is Portugal which had this shadow
toll system, and they couldn't afford to pay their shadow tolls
because their budgetary issues changed and the government
changes. Actually, they were seeking to convert their shadow
tolls to real tolls which is obviously riskier.
Mr. Duncan. Well, I appreciate all your testimony. I can
tell you there is a lot of interest in this. We have a
difficult time when our hearings get interrupted by four votes,
but nobody can control that. I thank each of you for being
here, and I turn it back to the Chairman.
Mr. DeFazio. I thank the gentleman from Tennessee for his
thoughtful questions and understand he has other commitments
and appreciate the time he invested today. We will have more
opportunities to invest time.
Ms. Hedlund, if I could refer to something in your
testimony that I find somewhat disturbing, and I think part of
what has occurred in Indiana and elsewhere is that if you
follow the model legislation proposed by the Administration,
States would attempt to get around public disclosure, freedom
of information and other things and basically declare these
agreements proprietary at the outset.
In your testimony, you say, following actual execution of
the contract, almost all agencies release to the public the
contracts themselves--wow--the proposals and relevant
information, excepting only proprietary data such as financial
statements of private companies.
Isn't that a little late for the public when a governor has
just given an asset away in the case of Mr. Daniels for 75
years?
The public gets to evaluate it after it is executed. What
good does that do since it is irrevocable? Wouldn't we want to
do that beforehand, before it is actually executed?
Ms. Hedlund. With respect to Indiana, I believe he did put
the entire contract in front of the legislature. I do know in
the case of Chicago, the contract was printed in the
proceedings of the city council for all of them to look at well
in advance of the time they took the vote.
Mr. DeFazio. Then why would you say this? Why wouldn't you
say that in fact most agencies actually release all the details
and they are approved and vetted in public?
I have been approached by analysts who say, well, now that
I have analyzed Indiana, given the constraints in it, it
actually was undersold. That wasn't anywhere near the price you
should have gotten with the non-competes and all the other
restrictions in it, since it wasn't reviewed publicly and
people didn't have an opportunity to comment on it other than
the legislature which was bullied into it very quickly.
Why would you say this? I am just puzzled.
Ms. Hedlund. I may have not expressed it correctly, and I
was really trying to get at a different point. With the old
traditional design-bid-build method of procurement, the State
puts out the RFP, puts out the entire design, the bids come in
and they are made public immediately upon the bids coming in.
You have a more complicated situation with a public-private
partnership, and the evaluation process takes a longer period
of time. I am talking about a competitive procurement here. We
can talk about negotiated procurements separately.
But in a competitive procurement, it is important that
during the evaluation process, that the proposals, not that
they be kept from the public--the public has an interest in
knowing what those proposals are--they need to keep the
proposals private from the other proposers, just to maintain
the integrity of the proposal process itself. Those proposals,
the RFP, the contracts are all made. In a competitive process,
the proposed contract terms are made public before the
proposals come in.
Mr. DeFazio. OK, well, I think then perhaps we are in more
agreement than the phrasing would have led me to believe. I
believe the public interest is best served if the public,
before an irrevocable 50 or 75 or 99 year contract is entered
into, has full opportunity to review it and that others who
might be interested, who bring more expertise to the issue,
could also have an opportunity to review it so people would be
fully aware of what was being entered into.
Ms. Hedlund. I think my State clients would agree with you
100 percent.
Mr. DeFazio. OK, that is good.
Mr. Poole, I think we have some grounds for agreement, that
if you are going to do these sorts of things, you should do
revenue sharing. I would agree there.
You talk about the markets reacting. I would say the
markets are reacting to what they see here as a really sweet
deal. In the case of Macquarie, they only put 10 percent into
Indiana. Now couldn't the State of Indiana have borrowed under
a general obligation bond, $380 million, and then gone out and
financed the rest of the project the way Macquarie did because
they only put 10 percent in?
Mr. Poole. Well, it is conceivable that they could have. On
the other hand, the team that actually, the Macquarie team, I
think it is Macquarie-Cintra that won the bidding, has taken on
risks even though it is not the same as initial construction
risk. Over 75 years, they are contractually committed to
maintain at least level of service C on some segments and level
of service D on other segments.
Mr. DeFazio. Right, on level of service, as I said earlier
and as an economist you would know, that there are two ways to
manage demand in case of congestion or level of service. You
would say, OK, we are going to expand the roadway.
Mr. Poole. Which is what the concession agreement requires
them to do to maintain those levels of service
Mr. DeFazio. Yes. But what if I raise the tolls regularly
and I just artificially depress demand, people will be diverted
into the 10 mile non-compete area on either side, how do you
measure that?
Mr. Poole. Well, I mean those are tradeoffs definitely.
Mr. DeFazio. Yes, those are big tradeoffs.
Mr. Poole. They are tradeoffs.
Mr. DeFazio. Right.
Mr. Poole. I mean I think the non-compete provisions are
modest and reasonable.
Mr. DeFazio. Unless you live within 10 miles on either side
of that asset.
Mr. Poole. They allow local, high speed--------
Mr. DeFazio. The people of Indiana don't seem to think so.
When you say the caps or ceilings, I guess I hope we don't
have to argue semantics. Have you seen the evaluation and would
you question it? There are two evaluations that strike me.
Mr. Poole. Right.
Mr. DeFazio. One is applying these ceilings or caps, which
I would call floors, and hopefully we don't have this much of a
semantic disagreement, but we might because I would look at
them as floors because is it no less than 2 percent GPD or CPI.
Now that sounds to me like a floor. It will never be less than
2 percent.
Next year, the economy tanks. The Bush Administration
attacks Iran. Oil goes to $200 a barrel. We see a great
depression in this Country. We have negative growth for 10
years, and you get 2 percent a year on your tolls. Now wouldn't
you call that a floor, not a ceiling?
Mr. Poole. No, I wouldn't for the following reason. I
actually know people who do toll road--------
Mr. DeFazio. We have gone through a period of devaluation
and adding 2 percent a year to the toll isn't a floor?
Mr. Poole. They will only charge the 2 percent more if
people are willing to pay it. If you have a recession, it is
quite--------
Mr. DeFazio. Right, if people are willing to pay it to
access the asset.
Mr. Poole. In a time of recession, it is quite possible
that traffic will fall off.
Mr. DeFazio. Yes, but just remember the premise. Oil has
gone to $200 a barrel. One of the big factors becomes distance
and fuel economy. That is the straightest route, so Macquarie
just keeps jacking up the tolls even though the rest of the
economy is in a depression. They can do that.
Mr. Poole. That is not how. That is not what you do in a
traffic and revenue study. You have to look at what is the
optimum toll to maximize revenue. It is not the highest
conceivable.
Mr. DeFazio. Right, I know what an economist can argue.
But let us look at it this way. Let us go back to what I
assume you have seen. There are two numbers that really stick
in my mind. The first is if we applied the ceiling, which I
call a floor, to the Holland Tunnel, today's toll could be as
high as $165 or $185.13 per car. Obviously, people wouldn't pay
that.
Mr. Poole. That is right.
Mr. DeFazio. But they might pay $10.
Mr. Poole. They might.
Mr. DeFazio. Right now it is only $6. So we are not
optimizing the asset.
Mr. Poole. I think a lot of environmentalists would say
that would be a very good thing.
Mr. DeFazio. Well, I don't happen to agree with that
particular sentiment of an environmentalist.
Now if we applied to the Indiana toll road from 1985, the
ceiling, which I call a floor, they could charge commercial
vehicles $38.19, those poor truck drivers, as opposed to
$14.60, and cars $12.16 as opposed to $4.65. Again, it seems to
me to leave an awful lot of latitude. How can we call that a
ceiling? It is not a ceiling.
Mr. Poole. Mr. Chairman, we had an actual experiment with
that a couple of years ago. The Ohio Turnpike which is the
continuation of the Indiana toll road, attempted a large one
time toll increase, and their truck traffic diverted in massive
numbers to parallel State highways. This was a big problem,
understandably so, and so the Ohio Turnpike Administration
basically decided this was terrible for them. They were losing
money. They were not getting the revenue increase they thought.
They actually lowered significantly the truck tolls to win back
the trucking traffic.
Mr. DeFazio. That is great.
Mr. Poole. The point is they cannot charge whatever they
feel like.
Mr. DeFazio. No, they can't, but they can certainly extort
a little bit more than they are extorting today with this sort
of monopoly situation. It could be more incremental like the
frog in the hot water as we turn the heat up to see at what
point are they going to jump, again, if you did so as
constructed.
If that is true, I guess I would wonder why is Governor
Daniels taking some of the money which is supposed to be spent
on capital projects and either with that or maybe he is
diverting State general revenues. I am not sure which, but he
is actually subsidizing the toll, as I understand, for a five
year period because they legislated an increase but they didn't
want it to hit them all at once because people would be mad.
Governor Daniels is already at 19 percent in the polls, and he
doesn't want to go to zero. So he says, oh, let us keep the
tolls down.
Do you know what this sounds like to me? I am sure you
probably supported this too. Energy deregulation in California,
I was one of the earliest and most frequent opponents of energy
deregulation. California borrowed money to keep the rates down
for a short period of time so the frogs wouldn't jump out of
the hot water and think this was a really sweet deal before the
whole Western United States collapsed on top of the scandal.
I am looking at kind of the same thing here in Indiana.
They could raise the toll. They are going to raise the toll,
but the state is going to subsidize the toll to keep the toll
down in the short term. Do you think that is good public
policy?
Mr. Poole. I think it is normal politics, Mr. Chairman.
Mr. DeFazio. Well, that is politics, but I thought we were
going to get policy.
Mr. Enright, would you care? I am really puzzled here. You
are saying public entities can raise this money. He says they
can't. You say they can. Where is the dissonance here?
Mr. Enright. I don't know Mr. Poole's resume in finance,
but I do know I have 30 years and I have talked to bankers at
virtually every major U.S. investment bank or commercial bank
who participates in this type of financing, and they all agree
that the money can be raised.
As to the issue of new pools of capital, it is nice that
pension funds are interested in infrastructure assets, and
certainly if the public sector wants to pay the cost of taxable
financing, they can sell bonds to pension funds. Toll roads
already do taxable financing occasionally and do sell to
pension funds. So the availability of capital shouldn't drive
the public policy decision, in my view.
The capital is available in the tax exempt sector, if the
proceeds are used in accordance with tax law, and if not, they
are available in the taxable sector to the toll roads as well
without equity. They can finance 100 percent financing. They
always have financed 100 percent financing.
Mr. Chairman, going back to your example of couldn't the
State of Indiana raise general obligation bonds, they wouldn't
have even needed to do that. Revenue bonds supported solely by
the revenues of a toll road are a highly acceptable and high
quality revenue bond in the industry.
Mr. DeFazio. But what about what Mr. Poole says, that the
investors won't accept the risk because the government might
not raise the tolls and choose to default instead? I guess that
is what he is saying.
Mr. Enright. The basis structure of any toll road financing
in the U.S. requires the entity that is running the toll road
to raise tolls in an amount necessary to meet its loan
covenants, typically a debt service coverage ratio of anywhere
from 1.2 to 1.5 percent depending upon how they structure their
documents.
Mr. DeFazio. That is enforceable on a public entity?
Mr. Enright. Absolutely, it is absolutely enforceable, and
the same thing is true for water systems, sewer systems.
Anything that is rate-oriented, that is enforceable, parking
authorities. They all have rate covenants, and they are
required in their documents to raise the rates.
The other point to distinguish from whether the legislature
and the governors have to raise the rates, they don't. It is
the toll road authority who raises the rates which is, in
theory anyway, an independent authority. The problem is that
they have been pressured to not raise the rates for the public
good.
But if you want to monetize the future revenues, then you
have to surrender the freedom to raise the tolls. Whether you
do it with public sector or you do it with private sector,
whatever administration makes that decision to give up the
control of tolls does it on the date the agreement is signed.
It is a massive future toll increase for the rate payers,
whether it is public or private. You can monetize that future
toll increase and get the cash today if you wish.
Mr. DeFazio. Mr. Poole, that was, I thought, one of your
arguments that I asked the staff to refute and they couldn't,
but I think it has been. Do you agree with Mr. Enright's
characterization that there would be a rate covenant and that
it could be issued either by a public entity or a private
entity?
Mr. Poole. No. I think that could be done in principle. I
think we will have an opportunity to observe over the next few
years. Mr. Enright has basically issued a challenge. I think
any public sector toll agency is free and their governor is
free to try to implement that, and we will see if anybody does.
My prediction is that none of them will.
Mr. DeFazio. Well, Mr. Daniels has implemented that for 75
years.
Mr. Poole. Exactly.
Mr. DeFazio. Of course, he is at 20 percent in the polls.
That is unfortunate, but he did implement it. Got it done.
Mr. Poole. I think when Governor Rendell implements his, he
will not be at 20 percent in the polls. He has bipartisan
support in his legislature, and they will include revenue
sharing in their deal.
Mr. DeFazio. Revenue sharing would certainly be an
improvement.
I guess my question, and perhaps Mr. Sawers could address
this, but other panel members could. Why wouldn't we adopt
something more along the lines of the British model where the
terms are generally limited?
They have also gone to this non-tolling version, but let us
just leave aside whether you want to call it availability
payment or shadow tolling because we don't want to strain
people here.
Let us look at the fact that basically their agreements are
generally a term of up to about 30 years. Many of these are
greenfields. They are not assuming existing assets. Somehow the
investors are making money. The control reverts back to the
public in 30 years or even less if the equity investment plus
profit is made back with unanticipated revenues before then. Is
that a fair characterization?
Mr. Sawers. More or less, but not quite, I think the issue
about the 30 year term is where it has been an availability
payment, so the government is paying the money. It is basically
paying back like a lease payment effectively with a whole bunch
of performance tweaks to it for the construction of a
greenfield asset.
Brownfields, there have been deals where, for example, a
major city, Birmingham, is putting out its road network for
highways maintenance, so contracting for a fixed price for
highways maintenance for 15, 20 years but including quite a lot
of major refurbishment and capital investment. It is that style
of deal, but there aren't any toll road deals which are done on
30 years. Toll road deals tend to be longer because there is
more risk, and that is the key, the risk.
I would say that is the difference between the project
finance market, as we call it, and the municipal market, the
risk and who bears the risk. You may say that on an existing O
and M deal like Chicago Skyway, there isn't much risk there.
Well, yes, that is your view, and therefore you are probably
even better off doing your own bonds. But if it was a
greenfield deal, you would be transferring a lot of risk to the
private sector for that difference.
Mr. DeFazio. I think there is room for agreement there, and
I have consistently said from the beginning, I can see more
likely public purposes and objectives being met by well crafted
agreements in the greenfield area as opposed to monetization of
existing assets.
I guess my question would be to both Mr. Enright and/or Mr.
Poole. It seems to me that in the case of the monetization of,
say, the Indiana Toll Road, that there must be a profit
involved. There is. Obviously, there are tax advantages. That
has to do with the term. There is only 10 percent equity in it.
That is true. We have already established the State could have
done the same thing. They could have done it with a GO bond
which Goldman Sachs says and you are saying. They could do it
without a GO bond with the rate covenants.
I guess the question is: What is the total cost over here
versus what I would look at as the cost of the State in
whatever tax relief they are giving?
Has anyone calculated what the public is foregoing, the
opportunity costs, the revenues, the taxes foregone and all
that versus had they done this themselves, operated it
efficiently and used the profits or kept the tolls down one way
or the other as they chose? Has anyone done that kind of
analysis, total cost analysis over the term and/or profit?
Yes, go ahead.
Mr. Enright. We have done that analysis. The difference
that occurs is in order to finance the asset, the asset
acquisition if you will in the case of the Chicago-Indiana
deal, again they have to live within the discipline of the
credit community and that discipline will allow them to only
indicate so much they can finance in the deal, regardless of
the pure net present value of expected cash flows. They are
going to be limited by that.
After the Chicago deal, which actually did a lot of things
in their refinancing structure that people thought weren't even
possible, the bond rating agencies changed the rules and
tightened up a lot of the requirements, so you can't have an
assumption of galloping high toll increases forever and traffic
increases forever to finance your deal.
The net realizable value of the deal is significantly less
than the actual present value of the cash flows over time. That
difference, that delta between what you get up front and what
the actual cash flows are going to be is a large amount. If it
is owned by the public sector, you capture all of that. You get
what we call the public ownership dividend by capturing that
and getting all the cash flows. Certainly revenue sharing is a
way to get them, but you have now given up part of the cash
flows you could otherwise capture. On existing asset deals,
that just doesn't seem to make sense.
Mr. DeFazio. In a revenue sharing, you would capture part
of that premium back but obviously not all of it or there
wouldn't be a profit motivation.
Mr. Enright. Correct. On to be built deals, on what are
called greenfield deals, I mean yes, OK, there is risk
involved--there is no question about that--but perhaps the
public sector doesn't want to take that risk although
traditionally in the U.S., they have been willing to. There
have been a few failures on toll roads over the years, but
pretty few. They can do that. They can share that risk if they
want.
But on existing asset deals, there are pretty well
established traffic flows. You kind of know what you can do in
toll increases. There could be limits practically. But in the
real world, do you care whether you get half the traffic at
double the toll or the expected traffic at the toll? You don't
care. It is revenue.
Mr. DeFazio. Right.
Mr. Enright. I think the more you increase a toll, the more
valuable your road is.
Mr. DeFazio. If you look at the Macquarie Infrastructure
Group disclosure which is very candid and well written--it is a
good company--over the long term, revenue growth is expected to
be substantially driven by toll growth rather than traffic
growth.
Mr. Enright. Our analysis would indicate that to be true.
Mr. DeFazio. Which means to some extent, since we all know
that our traffic projections according to the Federal
Government are like this, we must be driving some of that
traffic somewhere else because of the tolls.
Mr. Enright. In the Chicago case, it would drive it on to
roads not the responsibility of the City of Chicago. So the
State of Illinois would have to pick up the tab for that.
Mr. DeFazio. It also says no significant cost savings are
envisioned, so that doesn't go to the argument that they are so
much more efficient in the private sector.
Mr. Poole, would you care to comment on what he just said?
Mr. Poole. I think, again, there clearly are tradeoffs
involved. There is risk in a 75 year deal even with an existing
facility. There are risks involved in adding the necessary
capacity to meet the level of service requirements which are
spelled out in the concession agreement. So you are not getting
nothing in exchange for the private sector taking that risk and
making the profits. You are getting something because you are
transferring the risk of future expansions, changes in
technology, changes in business conditions. One of the
criticisms of the long term is don't know if people are even
going to be driving cars in 75 years. They are taking that
risk.
Mr. DeFazio. No, absolutely. I understand that, but again
we would say there is considerably less risk.
I have been told by the staff that we have to clear out for
another hearing which I am sure is equally interesting and
substantive.
One thing you said, Mr. Poole, I do want to say I hope that
Governor Rendell is entering into this carefully. As you said
bipartisan, bipartisan doesn't matter. It was unanimously
adopted that they would have energy deregulation in California,
unanimously by the legislature. Of course, you can talk to ex-
Governor Davis about that and others. Bipartisanship is no
indication of the wisdom or the protection of the public
interest in a particular deal.
My understanding with Governor Rendell is that he is saying
he doesn't raise the gas tax so he would rather have an
invisible tax which is a toll and would rather lock it in with
a contract over a long period of time, and then he can say,
well, gee, maybe I will do what Mitch Daniels did until I am
out of office. He will subsidize the tolls. Then when he gets
out of office, he will say, well, gee, who could have known?
In any case, I think these are incredibly complicated
things that need to be approached deliberately. I don't want to
see them abused because I think it is a useful tool. It is not
going to solve our infrastructure problems, but if we get some
bad deals, a few more Indianas, public sentiment is going to
demand the Federal Government step in and put an end to this
stuff. They have got to be approached carefully.
I appreciate the dialogue we had here today. I thank the
witnesses for their generous granting of time.
As was stated earlier, the record will be held open for 30
days.
Thank you.
[Whereupon, at 1:40 p.m., the subcommittee was adjourned.]
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