By: Josh Vorhees
Greenwire/E&E News
August 12, 2008
Unable to gain significant traction in previous attempts to directly pass the cost of the nation's roadwork onto American drivers, the Bush administration is now looking to private investors to act as middlemen in the transaction.
Transportation Secretary Mary Peters last month called for a massive overhaul of the national transportation strategy. At the heart of her proposal is a plan to entice the private sector to invest in transportation construction, maintenance and operations.
"The idea is simple," Peters said while unveiling the plan in Atlanta. "Have federal funds leverage new investments in transportation, instead of replacing them."
Pricing schemes have been trumpeted by transportation experts as a way to raise large amounts of revenue quickly to finance projects ranging from road maintenance to mass transit construction. In addition, by placing a price on driving, supporters argue market forces will work to curb traffic, reducing gridlock and cutting greenhouse gas emissions.
"Using existing infrastructure more efficiently must start with setting appropriate prices so that users ... bear the costs of their use," said Douglas Elmendorf, Brookings Institution senior fellow and an advocate for congestion pricing.
The Congressional Budget Office, the Government Accountability Office and a bipartisan commission of federal and regional transportation officials have all expressed support for pricing schemes.
"Now the [states] can't even keep up with operation and maintenance; they are being forced increasingly to the private market," said Bruce Agnew, policy director at the Cascadia Project, a Seattle-based transportation think tank. "The aging infrastructure around the country is going to have to be addressed through tolling."
Opponents often argue that the tolls - whether public or private - serve as a regressive tax that places an unfair burden on poor people, who must spend a larger percentage of their income on travel. Even proponents of the plan have suggested financial reimbursements might be necessary to offset the heavy impact the tolls could have on low-income households.
"These fees would have a larger adverse effect on the budgets of low-income drivers than high-income drivers, so some of the revenue collected should be used to compensate low-income drivers," Elmendorf said.
In the case of private investments, the revenue returned to compensate low-income drivers or to fund transit projects would be derived from the up-front payment to the state.
David Lewis, a former chief economist at the Congressional Budget Office and author of a paper advocating for congestion pricing, said instituting user fees on roadways poses a chicken-and-the-egg dilemma for midsize cities that might not already have reliable mass transit alternatives in place.
"The [mass] transit has to be there so as to enable people to exercise their vote with their feet, if you will," Lewis said.
Addressing the shortfall
Peters said taking advantage of the estimated $400 billion in available private-sector funding is the first step toward curing the nation's ailing transportation infrastructure and "will lead to more efficient roads and new transit systems in the nation's cities."
Attracting private investment dollars to finance roadwork addresses the looming multibillion-dollar shortfall facing the federal transportation budget. It also aligns flush with the Bush administration's stated goal of pricing roads like a utility and passing the cost of roadwork onto American drivers.
In public-private partnerships, construction and maintenance of public roadways are leased to private companies as a way to finance transportation work that lacks public funding. In exchange for a large up-front payment to the state, investors are able to collect tolls from drivers who use the privately operated roadways.
"The way these projects are typically designed, tolling is what the private equity is after," Cascadia Project's Agnew said.
DOT efforts to encourage states to implement pricing schemes of their own have been met with mixed results. A handful of federally sponsored projects are inching forward in cities like San Francisco, Miami and Minneapolis. But the department's highest-profile pricing scheme failed to break through the gridlock of state politics.
An aggressive congestion-pricing proposal for New York City that would have charged an $8 fee to drivers entering a set congestion zone in Manhattan during peak hours failed to be approved by New York's state Legislature earlier this year amid political wrangling among state lawmakers.
Funding 'that's running away from us'
Currently, the bulk of the nation's roadwork is funded by federal and state taxes on diesel and gasoline. The federal rate of 18.4 cents for a gallon of gasoline has stayed the same since 1993, and most state fuel taxes have remained unchanged for at least the last decade.
The static tax rates, along with a decrease in American driving and an increase in auto fuel economy, have left transportation accounts unable to generate enough revenue to keep up with needed maintenance and construction spending.
With Americans already being hit by the financial burden of $4 a gallon gas, there is almost zero public or political support for a fuel tax hike. As a result, said Agnew, many policymakers are eager to harness the power of the private sector.
"The fiscal reality is that where we are now, with absolutely no interest in Congress for increasing the gas tax hike ... it requires that you've got to develop a funding source to replace the dwindling revenues," Agnew said. "So tolling is slowly catching on."
Virginia Gov. Tim Kaine (D), one of several state governors who support private financing of their states' roadways, recently compared using the gas tax for financing roadwork to relying on cigarette tax revenues to fund health care.
"When you lean on a revenue source that you hope in some ways will decline, we're chasing after a revenue source that's running away from us faster than we can chase it," Kaine said at Washington forum last month.
The multibillion-dollar up-front payments from investors can provide a needed boost to an ailing state budget.
In 2006, Indiana secured $3.8 billion from the private sector by leasing the Indiana Toll Road for 75 years. In 2004, Chicago sold the rights to the Chicago Skyway for 99 years in exchange for $1.8 billion. More than 20 other partnerships are currently in some form of negotiations, according to the Transportation Department.
Private investors are willing to pay such high prices because the projects are considered relatively safe and provide steady and predictable returns over the life of the deal.
The private investment allows transportation planners more flexibility than municipal bonds, which often must be repaid in 20 or 30 years. "Pension funds are patience funds," Agnew said.
'No free money'
Investors must agree to a detailed set of government regulations addressing everything from how fast and how far tolls can rise to how quickly potholes must be patched.
Still, not everyone has been convinced.
Sen. Jeff Bingaman (D-N.M.), chairman of the Finance Subcommittee on Energy and Natural Resources and Infrastructure, expressed his doubts to a transportation panel last week.
"There is no denying the seriousness of America's surface transportation funding challenges," Bingaman said. "But the question is whether our federal response should be to encourage states to essentially sell off vital components of our interstate system."
Bingaman also took issue with the typically lengthy leases, usually 75 or 99 years, offered to the private sector. "I question how, with respect to a critical artery of interstate transportation, a state can possibly predict its future needs for a period that is twice that artery's operating history," he said.
At the same panel, JayEtta Hecker, director of physical infrastructure issues at the Government Accountability Office, reminded Bingaman and his colleagues that the private sector, by definition, seeks a return on its investment.
She said the money secured from the leases is merely a privately issued debt that still must be repaid in some way. "There is no free money in public-private partnerships," Hecker said.
Dennis Enright, a NW Financial principal, agreed. He told lawmakers that ultimately private investors will charge higher tolls than states would. "The private sector is incentivized to make a profit," he said. "That's their job."
Even Kaine, who called private investing "a great arrow in the quiver" of state lawmakers, warned that states cannot expect to get something for nothing.
"There are those in the policy world ... who say public-private is Jack's magic beans," Kaine said. "And all you have to do is say 'public-private partnership' and the private sector will magically build everything for you without a cost, and it's not going to happen."
