Public–Private Partnerships Case Studies on Infrastructure Development Sidney M. Levy Library of Congress Cataloging-in-Publication Data Levy, Sidney M. Public–private partnerships : case studies on infrastructure development / Sidney M .Levy. p. cm. Includes bibliographical references and index. ISBN 978-0-7844-1013-4 1 Public–private sector cooperation—United States—Case studies. 2. Infrastructure (Econom- ics)—United States—Case studies. 3. Public works—United States—Case studies. I. Title. HD3885.L48 2011 338.8—dc23 2011022349 Published by American Society of Civil Engineers 1801 Alexander Bell Drive Reston, Virginia 20191 www.asce.org/pubs Any statements expressed in these materials are those of the individual authors and do not necessarily represent the views of ASCE, which takes no responsibility for any statement made herein. 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ISBN 978-0-7844-1013-4 Manufactured in the United States of America. 18 17 16 15 14 13 12 11 1 2 3 4 5 Preface America’s aging infrastructure, its roads, bridges, and tunnels, is in dire need of upgrading and expansion, but with federal and state funding stretched to the break- ing point, the private sector has been invited to lend their resources—technical, managerial, and financial—to partially fill this gap. When the American Society of Civil Engineers (ASCE) issued their 2005 Report Card on America’s Infrastructure, it revealed an overall grade of D for the 15 infra- structure categories it covered, which included highways, bridges, energy, water and waste water treatment, schools, parks, and recreation. At that time, ASCE esti- mated that a total investment of about $1.6 trillion would be required for all infra- structure upgrades. The 2009 ASCE report reflected a similar overall grade of D, but because of the deteriorating conditions of America’s infrastructure and the effect of infla- tion, the costs to remediate were now placed at $2.2 trillion. Transportation Funding as a Percentage of Gross Domestic Product As an industrial nation, America directs 0.76% of its gross domestic product (GDP) toward the country’s transportation infrastructure. The Highway Trust Fund por- tion accounts for 0.26% of GDP, but that number is projected to decrease to 0.20% by the year 2018, according to the Congressional Budget Office (CBO). The Transport section of the World Bank’s website reported that industrial- ized nations around the world typically spend slightly more than 1.0% of GDP on their road sectors and that the largest industrialized nations spend 0.4% of GDP on road maintenance and 1.3% on new construction. Even developing and transition countries spend more than the United States on their roads and bridges. African nations spend 0.78% of their GDP, on aver- age, on their highways, and eastern Europe spends 0.84%. Only Latin America, at 0.49%, and Asia, at 0.67%, spend a smaller portion of their GDP on roads than does the United States. vii viii PUBLIC–PRIVATE PARTNERSHIPS Fitch Ratings Looks at the State of U.S. Highways Fitch Ratings, a global credit rating company, looked at our U.S. highway system in August 2008, when toll traffic began to fall because of the spike in fuel prices that began in 2007. On Feb. 18, 2009, Fitch Ratings issued a report on global infrastructure projects and rated our toll roads sector outlook as negative. This report included events that bear watching in the coming decades: • A potential continuing decrease in vehicle miles traveled (VMT) may create further reductions in toll-road revenue. As a by-product, though, free alterna- tives may become less congested and more competitive on a travel time basis. • Publicly operated toll roads may face increased political resistance to raising tolls at a time when increases are necessary to maintain their financial viability. • Interstate tolled turnpikes with a significant commercial traffic component may experience a loss in revenue because of the drop in retail sales and lower consumer spending. These views appear to be looking at the short term while the U.S. economy was in the doldrums, but this slowdown, expected to continue for several years, is most likely temporary, and the infrastructure problems and financing shortfall experienced in that 2008–2009 period will only be exacerbated when the econ- omy picks up. How the Congressional Budget Office Views the Problem On July 10, 2008, Peter Orszag, then-director of the Congressional Budget Office, appeared before the U.S. Senate Committee on Finance to discuss public spend- ing on infrastructure and the options for meeting the demands that sector will place on the economy. He set forth several options: • Increase federal spending by raising the tax on gasoline and diesel fuel. A one- cent per gallon increase would yield $1.8 billion annually, and an increase of $0.25 would bring in $44 billion per year. • Improve the cost-effectiveness of tax expenditures by changing some forms of debt instruments. Tax-exempt bonds will cost the federal government an aver- age of $31.2 billion per year in lost taxes for the period 2007–2011. A new debt instrument, the tax credit bond, pays no interest but allows the purchaser to receive a credit equal to 100% of the interest that would have otherwise been paid. If these tax credit bonds were replaced with tax-exempt bonds, the gov- ernment could save $3 billion to $6 billion. • Reduce the cost of providing infrastructure by minimizing low-value projects. Almost $5.7 billion of the $36.6 billion set aside for Federal Highway Adminis- tration projects in 2006 were earmarked, and about $2.4 billion of the $8.6 bil- lion set aside for the Federal Transit Administration were also earmarked. PREFACE ix • Promote reductions in demand by asking users to pay the full cost of the ser - vices provided, which translates into higher costs for those services. An exam- ple would be congestion pricing, which allows drivers to use express lanes at an additional cost. CBO also suggested that basing truck fees on the number of miles traveled and the weight per axle could induce freight carriers to reconfigure their trucks or to ship them intermodally. The Marketplace at Work Market forces in our country performed well in that 2007–2008 period when the rising cost of fuel changed the travel habits of the American public. The gas-guzzling SUVs and pickup trucks began to accumulate on the dealers’ lots, and the waiting list for hybrid cars grew longer. Public transportation ridership increased dramatically across the country. Americans took 10.7 billion trips on public transit systems in 2008, the highest level of ridership in 52 years, according to a March 2009 report by the American Public Transportation Association. But at a time when light rail, trolley, and bus use increased, operating and maintenance funding for these public transportation systems was woefully short. The potential for fare increases and/or cutbacks in service threatened the viability of these transit systems at the time when they were needed the most. The American Recovery and Reinvestment Act of 2009 On Feb. 17, 2009, President Barack Obama signed the American Recovery and Reinvestment Act (ARRA) and Vice President Joe Biden and U.S. Department of Transportation Secretary Ray LaHood announced that $26.6 billion of this total $787 billion funding would be made available to the states for highway investment. Although far short of what was needed to bring our crumbling highway infrastruc- ture back to acceptable quality levels, it was welcomed by state governments as a good start. Additionally, $8.4 billion, as part of the overall $787 billion, would be made available for transit, $8.0 billion for high-speed rail, and $1.3 billion for Amtrak. Within this more than $26 billion was a $1.5 billion “discretionary” fund, that when announced on May 18, 2009, was known as TIGER (Transportation Investment Generating Economic Recovery). This money would be made available to states as grants, based on several criteria, aimed at creating jobs quickly, called shovel-ready projects. The grant size would vary from $20 million to $200 million. As of June 15, 2009, $14.465 billion of the ARRA money had been obligated, and the federal government was turning its attention to monitoring the oversight of fund distribution to avoid future claims of fraud.