Public-Private-Partnerships Project Partner Perspective Jim Hatter Innovative Finance Technical Service Team
Presentation Outline Why Public-Private-Partnerships (PPPs)? The Big Picture The Evolving Federal Role SAFETEA-LU Innovative Finance Tools Goals and policies Summary 2
Transportation Finance P3 States and local governments starting to access private capital Toll Revenue Bonds States starting to rely on tolls Highway bonds (Secured by gas tax, license fees, Fed-aid, etc.) Bonding expands Program Pay As You Go State and Federal user tax Is the foundation of transportation system 3
Why Public-Private Partnerships? Growing congestion Increasing investment requirements Aging infrastructure Increasing construction costs Mounting budget pressures Revenue growth slowing Competing spending priorities Voter resistance to tax increases Poor system performance due to lack of pricing 4
The Big Picture Value of Highway Benefits $1 billion creates 47,000 jobs 1990 s annual rate of return was 17% Transportation accounts for 5% GDP 5
The Big Picture Cost of Highway Congestion In 2003, congestion caused 3.7B hours of travel delay 2.3B gallons of wasted fuel Total cost of $63B. Total costs would be much higher if unreliability, inventory and environmental costs were included 6
Hours Growth in Wasted Hours Congestion has increased dramatically over the past 2 decades. In the 13 largest cities, drivers spend the equivalent of almost eight work days each year stuck in traffic. 100 80 Annual Hours Lost to Congestion Per Peak Hour Driver Very Large Metro Areas, 1983 v. 2003 1983 2003 60 40 20 0 City Source: Texas Transportation Institute, 2005 Urban Mobility Report 7
Cost to Families and Civic Life As time spent commuting has grown, Americans have less time to spend with their families and friends. According to a survey by the Washington Family Council 55% of those surveyed with children at home miss one or more family functions per week due to traffic congestion. If they could spend less time in traffic, 85% would spend more time with their family. Congestion also negatively impacts the country's social fabric. The evidence suggests that each additional 10 minutes in daily commuting time cuts involvement in community affairs by 10 percent (Robert Putnam, Bowling Alone, 2000). 8
An Increasingly Frustrated Public National League of Cities survey of cities (2005) 35% reported that traffic congestion led all other categories as having the most deteriorated conditions in their cities over the last 5 years 85% responded that traffic congestion was as bad or worse than in the previous year. U.S. Conference of Mayors survey on traffic congestion (2001) 79% of Americans in ten metro areas believed that congestion had gotten worse over the last 5 years Survey specifically excluded California and the Northeast (the most congested areas). Bay Area Council poll (2006) 35% of residents surveyed ranked transportation as the most important problem facing the San Francisco Bay Area (housing was 2nd, at 19%). 9
Cost of Congestion to U.S. Businesses Portland General Electric estimates that it spends around $500K/year for additional travel time for maintenance crews due to congestion. In 2000, congestion at the Ambassador Bridge between Detroit, Michigan and Windsor, cost motor carriers between $150M and $200M. Intel has moved their last shipment departure time up two hours for outbound shipments through PDX due to increased pm peak congestion. Atlanta area distributor of pet food with an 11-truck fleet finds it difficult for one truck to make more than 12 daily deliveries; in 1984, one truck made as many as 20 deliveries each day. 10
A Threat to the Inventory Revolution Since deregulation, U.S. business inventory requirements have fallen precipitously, making the U.S. supply chain the most efficient in the world. This reduction has in turn reduced total logistics costs and improved U.S. corporate earnings. Macroeconomists assert that these trends have played a major role in supporting U.S economic growth. Growing congestion will require businesses to carry more inventory, effectively reversing these trends. 1 Source: Census Bureau. 2 Source: Bureau of Economic Analysis, 15 th Annual State of Logistics Report (June 2004). 11
Fundamental Causes of Highway Congestion The price of highway travel (gas taxes, registration fees, etc.) bears little or no relationship to the cost of congestion. Unlike in aviation or on rail networks, there is no mechanism (traffic controllers or dispatch systems) to control use and prevent gridlock. The highway industry has a long tradition of infrastructure building and has only recently begun to embrace the importance of system management and operations. 12
Public Funding for Highways is Enormous Since 1980, $1.4 trillion has gone into highways. $700 billion has come from the Federal government. Federal capital contribution for highways has been consistently above 40% since the 1990s 2002 the share reached 46%. SAFETEA-LU, provided record funding for surface transportation -- $286.5B through 2010 I-40/US-70 Interchange (NC) 13
Increasing investment requirements Aging Infrastructure and Mounting Budget Pressures The American Society of Civil Engineers estimates that 18% of the nation s roadways are in poor or mediocre physical condition. The State of New York, as an example, has nearly $70 billion in unfunded projects, including between $5 billion and $10 billion for a new Tappen Zee Bridge. Annual revenues from fuel tax and truck weight fees are insufficient to meet ongoing state highway maintenance, operations, and rehabilitation costs in California, let alone capacity expansion. 14
Yr/Yr Change (%) Increasing investment requirements Escalating Construction Costs Road construction costs in 2005 increased at three times the rate of the CPI. Since 2002, road construction costs have climbed a total of 31%. 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 CPI vs. Road Construction Index 2002 2003 2004 2005 Year Consumer Price Index Road Construction Costs 15
Construction of New Capacity is Only One-Fifth of Total Government Highway Spending Total Federal, State, and Local Government Highway Spending, by Major Category 4.0% Preservation 4.5% 5.3% 6.0% 4.0% 20.3% Expansion Maintenance Highway Patrol Administration 8.1% 8.4% 19.0% 20.3% Bridges Traffic Services Bond Retirement Debt Servicing Enhancements 16
Mounting Budget Pressures Revenue Growth Slowing Down The Federal gas tax was last raised in the 1993, and has lost much of its purchasing power since then, while road usage has increased dramatically. Under the current Federal gas tax system, improvements in vehicle fuel efficiency yield less revenue per mile of usage Trust Fund revenues therefore do not rise with increased highway usage. Federal Trust Fund s Highway Account will be in deficit by the end of FY09. 17
Why PPP Now? Surging public discontent with congestion. New advances in technology that can greatly improve system management and pricing. Successful congestion reducing demonstrations in major cities around the world. Strong private sector investment interest in U.S. infrastructure. Growing consensus that traditional financing mechanisms for highway and aviation infrastructure are unsustainable. Economic benefits of trucking, rail and aviation deregulation (estimated at $60B/year) increasingly threatened. 18
Benefits of Increased Private Participation in Transportation Infrastructure Acceleration of project start-up and more certainty on project completion timeline Freeing up of scarce State and Federal transportation resources for competing projects. Increased investment in transportation assets where demand exceeds supply Shifting of cost overrun risk from State and local governments to the private sector. Improved operational efficiency through greater use of pricing. Indiana Toll Road Entrance (Northbound) 19
States are Turning to PPPs Examples of Recent Transportation PPPs: Indiana Toll Road Chicago Skyway Pocahontas Parkway Concessions to develop and operate highways in Virginia and Texas About 80% of the country s current highway Mega Projects (greater than $500 million) involve tolling; 60% of these tolling projects involve PPPs. 20
State PPP Authority Needs to Expand Only a few States have comprehensive laws permitting a wide range of transportation PPPs, without restriction as to mode, geographic area, and number of projects. Private investment in transportation infrastructure has been robust in these States, particularly Florida, Texas and Virginia. The overwhelming majority of state statutes are either silent as to the leasing and operation of transportation infrastructure or significantly restrict the scope of private involvement. 21
Private Capital is Readily Available Examples of Foreign Firms with Infrastructure Investment Funds: Macquarie Infrastructure Group (Australia) Transurban (Australia) Cintra Concesiones de Infraestructuras de Transporte S.A (Spain) Abertis (Spain) BAA (UK) 22
Private Capital is Readily Available Examples of U.S. Firms exploring or in the process of setting up Infrastructure Investment Funds: The Carlyle Group JP Morgan Morgan Stanley Goldman Sachs GE Capital (with Credit Suisse) 23
Six-Point Plan Secretary Mineta s National Congestion Strategy 1. Relieve urban congestion. Focus on pricing, bus rapid transit, telework, bottlenecks. 2. Unleash private sector investment resources. Focus on public-private partnership legislation and formation of public-private partnerships. 3. Promote operational and technological improvements. Focus on traveler information, incident management, work zones, signal timing. 24
A Six-Point Plan (Continued) 4. Establish a Corridors of the Future competition. Focus on selected SAFETEA-LU funded projects and competition to select 3-5 new interstate corridors. 5. Target major freight bottlenecks and expand freight policy outreach. Focus on southern California and borders. Engage freight CEOs. 6. Accelerate major aviation capacity projects and provide a future funding framework. 25
Resources DOT Brings to the Table $15 Billion in Private Activity Bond Authority TIFIA Credit Assistance for Nationally or Regionally Significant Transportation Projects, with Lending Capacity of more than $10 billion. Increased Authority for States to Toll Interstate Highways Value-Pricing Pilot Program Interstate Reconstruction and Rehabilitation Blanket Authority for HOV to HOT Lane Conversion Interstate Construction Toll Pilot Program Express Lanes Demonstration Program 26
Resources DOT Brings to the Table (cont.) Presidential Order on Environmental Streamlining Increased Flexibility to Use Design-Build Contracting for Transportation Projects Special Experimental Program (SEP-15) 27
DOT s Plan for Unleashing Private Sector Investment Resources Proposed Actions Develop an organized effort to encourage states to enact legislation enabling them to enter into infrastructure agreements with the private sector. Overcome institutional resistance to reform through education, demonstrations and relationship building with state agencies and private investors/developers. Utilize existing Federal program authorities and SAFETEA-LU implementation to encourage formation of public-private partnerships. 28
PPP Project Goals Reduce congestion Improve safety Increase economic opportunity Improve air quality Enhance transportation assets 29
PPP Policy Considerations Risk balanced with investment return Revenue sharing Non-compete clause Toll & toll rates Availability payments 30
PPP Policy Considerations Electronic toll collection Project oversight Performance based contract Conflict of interest & confidentiality 31
In Summary USDOT & SAFTEA LU support PPP PPP is not for every project Establish goals and policies Educate the public 32
Federal Highway Administration Thank You Jim Hatter Phone: 404-562-3929 E-mail: jim.hatter@fhwa.dot.gov