CityFixer

The Uncertain Future of Public Roads

More and more states are privatizing highways and roads. Whether that's a good thing or a bad thing is a matter of increasing debate.

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A few weeks ago, the Colorado Department of Transportation reached a 50-year deal with a private investment group to handle the improvement, maintenance, and operation of US 36 between Denver and Boulder. On paper, everyone seems to have made out well. The state gets money up front, the investors get a share of the toll revenue, and commuters get an upgraded corridor 20 years ahead of schedule. CDOT officials are already hoping that this "first public-private partnership" is just the first of many.

"We certainly look at public-private partnerships as an opportunity to provide additional improvements and services to the traveling public," says spokeswoman Amy Ford, who adds that the department is actively considering similar arrangements for several other major roads — segments of I-70, C-470, and I-25, among them — in the metro area.

Public-private partnerships for infrastructure (often called PPPs or P3s) have been on the rise in recent years, and many experts believe the trend has yet to peak. If the activity of the past several weeks is any indication, they may be right. A billion-dollar PPP for the East End Crossing, in Indiana, was announced in late March. News of a $1.5 billion PPP overhaul of the Goethals Bridge, in New York City, came in April. The Pennsylvania D.O.T. placed an open call to private firms for PPP projects just last week.

PPPs provide a valuable public service while shifting the financial risk to private wallets. Advocates also mention efficiency: private developers, driven by an urgent push for profits, can keep costs lowers and complete work faster than the public sector. Supporters believe that in exchange for this revenue share they provide the public with the broader economic advantages of improved metro area mobility. Besides, states just don't have the money right now to do these projects on their own.

"There's a whole series of these efforts that involve both the public and the private sector," says transport scholar R. Richard Geddes of Cornell University. "A lot of this simply would not get built without some private sector investors coming in to put up the capital and to bear the risk of trying it."

But as public-private partnerships become more common, there's a heightened fear that local governments are giving away too much in the deal. Some scholars, public interest groups, and lawmakers caution that PPPs often fail to deliver the improvements they promise, cuff the hands of local officials for generations, undermine comprehensive urban planning, and threaten the core value of roads as a public service. For every new attempt at PPP success, they say, there are multiple examples of partnerships that failed.

"The notion right now is that PPPs are the solution to the problem of not being able to use public funding as much, and that it becomes a win-win situation," says Elliott Sclar, director of the Center for Sustainable Urban Development at Columbia University. "Right now that's the conventional wisdom, but if you actually look at what happened to so many PPPs, you begin to see where these problems are going to begin to creep up."

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The idea of putting public roads in private hands has a long and shaky history. In the late 18th century, during a surge in stagecoach travel, turnpike developers flooded local governments with petitions to lay toll roads for profit. Enough new miles of road were laid in New England alone during a fifteen-year building spree to nearly reach the Pacific. But the cost of construction and the proximity of free (if very poor) roads doomed these ventures en masse. Few turnpikes from this era ever returned the 12 percent profit that would have transferred them back to public ownership — though when they went bankrupt, that's what happened anyway.

By the early 20th century the federal government had determined road provision to be an essential taxpayer service. The public funding approach worked well through the long era of interstate highway construction, and beyond. That's not to say the private sector wasn't part of the equation — on the contrary, the individual projects were contracted out to engineers, construction workers, etc. — but with few exceptions roads were funded by the people for the people. Then in the late 1980s, with the interstate network filling out and public passion for big new roads running low, private investors made another go.

The first "major" public-private road partnership of this new era was the E-470 tollway in Denver in 1989, says William Reinhardt, editor of Public Works Finance. That $323 million project, organized by a highway authority distinct from the state DOT, didn't rely on public funding. In doing so it sent the country down a new road for new roads.

Since then the growth of private partnerships has been steady if not overwhelming. Twenty-four states plus Washington, D.C., have engaged in 96 public-private road partnerships worth about $54.3 billion. In 2011, PPPs accounted for roughly 11 percent of capital investment in highways, according to Reinhardt, and that's with about 20 state legislatures yet to permit these types of deals. In a brief history of PPPs for a road builders association in 2011 [PDF], Reinhardt concluded that PPPs "will likely be the primary model for building new highway capacity in heavily congested urban areas in the decades ahead" — particularly for mega projects valued in the billions.

"These are solutions to congestion that governments just haven't been able to do," he says. "The public is best served by having an improvement of mobility — a real transportation improvement delivered sooner rather than later."

Figure via "Moving Forward on Public Private Partnerships: U.S. and International Experience with PPP Units" (Brookings, 2011)

 

The political climate is certainly ripe. The user-pay, fuel-tax model of federal highway funding is damaged beyond repair, and raising revenue for road projects remains challenging at best across the nation. Meanwhile, in the latest highway authorization, Congress expanded a federal credit assistance program called TIFIA that's designed to leverage private investments in public infrastructure. And this past March the Obama administration called for a "Rebuild America Partnership" plan whose mission is to pair public infrastructure needs with private capital.

"There's a bunch of P3 projects bubbling up," says Reinhardt. "Probably 20 projects out there across the country. All of them huge, all complicated, all controversial."

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Denver residents certainly know something about PPP controversy. They found themselves on the wrong end of it just a few years back regarding a toll road called the Northwest Parkway. In 2007, a state highway authority leased the parkway to a private consortium for 99 years. (Once again, this authority was distinct from CDOT) Before long legislators became upset to discover that the terms of the deal prevented the state from improving a public road in the same corridor, because this upgrade might draw traffic away from the parkway — and toll revenue with it.

Despite this frustration, the stipulation had been right there in the official contract, clear as legal jargon [PDF]: "… the construction of a Competing Transportation Facility shall constitute an Adverse Action."

As it turns out, part of the reason there's so much debate about public-private partnerships is that these "adverse action" clauses are standard operating procedure. Law professor Ellen Dannin of Penn State University recently reviewed the fine print for a number of PPP contracts and, in a 2011 paper, concluded that various provisions in road partnership contracts effectively made the public "the guarantor of private contractors’ expected revenues" [PDF]. In other words, private infrastructure investors weren't taking nearly as much risk as they'd have the public believe.

"This is being sold as the latest, greatest thing," says Dannin. "The more I dug into this stuff, the more I was blown away by it. It just seemed really astounding to me. These finance people know what's going on, but the rest of us don't."

Dannin's work outlined several types of PPP provisions designed to expose investors to as little danger as possible. The most objectionable of the bunch is a non-compete clause, which expressly prohibits local authorities from building more attractive transportation options — from other roads to mass transit — in the same corridor. The Northwest Parkway is one example of a non-compete unfavorable to the public, but the poster child is SR 91 in Orange County, California [PDF]. After these express lanes opened in the mid-1990s, word got out that the deal prevented officials from improving the free roads nearby until the year 2030. The ensuring uproar led Orange County to purchase the road back from investors in 2002.

Then there are compensation clauses. Though less directly pernicious than non-compete clauses, these provisions also had the power to harm the public good, writes Dannin. Take the example of new toll lanes on the Virginia Beltway. That PPP deal called for the state to pay investors whenever carpooling exceeded 24 percent of traffic (ending after 40 years or $100 million in profit). As Dannin points out, this and similar compensation clauses create a scenario in which public officials must choose between their larger responsibility of promoting more sustainable transport or forking over some cash — the very cash they hoped the PPP deal would save them in the first place.

What these adverse action clauses really do, argues Dannin, is compromise the integrity of the entire transportation network — and elected office as a whole — to ensure investors a profit. "We're sort of selling off part of our democracy as part of the cost" of PPPs, she says. "It's hard to put a financial tag on that."

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The scholar Geddes, who is author of the 2011 book The Road to Renewal: Private Investment in U.S. Transportation Infrastructure, says adverse action clauses are necessary precisely because road partnerships are "truly risky ventures." Over time, he says, they've evolved to become more fair. Gone are the days of SR 91-style non-compete clauses. Now reimbursement often cuts both ways: if the government does something to increase traffic on a toll road, for instance, the private partner might be the one compensating the public.

Still, he says, the fact is that private investors come to the negotiation with many things the states both need and want: quick cash, and the ability to fund projects without raising debt, and the flexibility to use limited public resources in other ways. At the end of the day there's just too much on the line for investors to complete these deals without some reasonable safeguards for success. State pension funds across the country — the massive California Public Employees’ Retirement System notable among them — have made enormous investments in infrastructure precisely because the payoff feels sizeable yet certain.

"Big public sector pension funds that want a long-term cash flow that the toll road generates — that's who's on the other side of the table," says Geddes. "I'm going to put the fireman's pension fund away for 30 years in this toll road, and what do I need to make that a sensible decision."

Wall Street certainly feels confident that the risk will bear rewards. Before the crash, Businessweek wrote that investment banks had "fallen in love with public infrastructure," and the New York Times said they'd prepared for a "tidal wave of infrastructure projects." That gusto seems to have weathered the recession intact; this March, the Wall Street Journal reported that wealth advisors were still nudging clients into infrastructure.

Sclar, the Columbia professor who's author of the 2000 book You Don't Always Get What You Pay For: The Economics of Privatization, casts a wary eye at these overtures. In a paper from 2009 [PDF], he drew parallels between the way bankers and investors are bundling public-private infrastructure partnerships and the way they handled mortgages just a few years ago. He even went so far as to wonder if PPPs had become the "new subprime."

"If sub-prime is no longer the magic elixir that produces money, what's beginning to happen is the public-private partnership is becoming that, and nobody is looking closely at them," he says. "The problem becomes, in a stagnating economy, when there aren't very many private opportunities to get return on investment, the last thing left standing is the public stream of revenues. And that's what they're going after."

Still, as an urban scholar, Sclar is more frustrated that public-private partnerships tend to interfere with comprehensive approaches to city planning. He uses the example of State Highway 130 near Austin, Texas, a public-private toll road that made traffic worse because truckers chose to take the free I-35 through the city rather than pay the toll. The point is that seeing roads as individual profitable projects distracts from their role as part of the greater public network — capable of influencing everything from transport equity to urban density to environmental sustainability.

"What's financially beneficial to the private party doesn't necessarily easily coincide with what's beneficial in terms of the public interest," says Sclar.

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No amount of concern is likely to curtail the rising interest in public-private partnerships. Rather, their use only stands to increase as governments at all levels continue to struggle with new methods for funding transportation projects. Besides, PPPs offer elected officials the glitter of ribbon-cutting with the grit of fiscal austerity — all while limiting their responsibility for any toll hikes that might occur. They're high-quality political catnip.

In light of this reality, a number of think tanks have offered suggestions on how to protect the public from bad PPP deals. In a 2011 report [PDF], Brookings advised states to establish dedicated PPP units with the knowledge to match wits with private investors at the negotiating table. According to Dannin's work, some states currently seek advice on these deals from investment firms that lose the bids — creating a genuine if indirect conflict of interest.

U.S. PIRG recently offered six principles for road privatization agreements. Among them is the belief that no deal should last more than 30 years, since no one knows what transportation will look like that far down the line. If automatic cars become the norm halfway through an agreement, for instance, who will be on the hook for upgrading the highway's mobile network accordingly? PIRG prefers another analogy to demonstrate the danger of multi-generational deals: in 50 years time, American travel went from the release of the Model T to the beginning of the interstate highway era.

Public awareness of PPPs does seem to have increased with their prevalence. Just last week, a group of concerned residents in Portsmouth, Virginia, successfully challenged a public-private project called the Midtown Tunnel. A circuit court ruled the tunnel deal "unconstitutional" — casting doubt on Virginia's entire menu of PPPs. (The state attorney general has already announced the intent to appeal.)

Some lawmakers have tried to address the problem, too. Former House transportation chief James Oberstar issued a series of PPP guidelines as early as 2007, calling for an end to non-compete clauses, toll relief (or transit provisions) for low-income residents, and a general rule not to "undermine broadly supported social and public policy goals." In 2011, Senator Dick Durbin of Illinois proposed a bill for PPP transparency (he also wanted states that lease federal roads to pay back any taxpayer funding). That idea hasn't gone anywhere, though, just like a 2012 state bill to end non-compete clauses — which failed, of all places, in the Colorado legislature.

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For its part, of course, the Colorado Department of Transportation believes the new deal for U.S. 36 is a step in the responsible direction. Outside observers might see reason for caution as well as hope. While the 50-year terms exceed the 30-year recommendations, CDOT has a dedicated PPP office leading the way (called the High-Performance Transportation Enterprise), and the experience of the Northwest Parkway can't be far from local memories. The contract is also a minnow by PPP standards: the private investor will pay for two thirds of phase two of the U.S. 36 improvement, which CDOT spokeswomen Ford estimates will cost $120 million.

(Plenary Roads Denver, the private consortium in the deal, didn't return requests to discuss the project.)

Beyond these basics, C.D.O.T. says it's outlined very strict maintenance standards and imposed penalties if they're not met. The state has given Plenary the right to collect tolls on the newly built U.S. 36 express lanes as well as I-25, but Ford says there's no guaranteed rate of return (contrary to reports), and that any toll hikes must be pre-approved. Officials have also created some encouraging multi-modal protections: road improvements will include bus-rapid transit and H.O.V. lanes in addition to tolled express lanes, and the toll can never dip below the regional bus fare — a measure designed to discourage single-occupancy driving.

As for compensation or non-compete clauses, Ford insists the agreement doesn't have any worth noting. She adds that C.D.O.T. plans to make the contract available to the public, with the exception of certain confidential financial details, in the coming weeks. "There's a number of different points and triggers within the contract that protect us, the traveling public, and assure that we're moving forward in ways everyone agrees to," says Ford. May we all still be around in half a century to find out just how far they've come.

Top image: Konstantin Sutyagin /Shutterstock

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