GAO – Identifying Costs and Cautions of Highway Privatization

In its latest report on highway privatization, the GAO is mostly upbeat about the benefits of public-private partnerships in building and managing highways – but it also issues some strong warnings of serious problems that states are mostly ignoring.

By the way, the Senate Subcommittee on Energy, Natural Resources, and Infrastructure held a hearing July 24 on related issues – Tax and Financing Aspects of Highway Public-Private Partnerships. More on that soon.

While overall the new report raises a number of important issues, it gets there in part by assuming that the public sector must turn to the private sector to provide good highway management and new technology and ideas. These assumption seems to overstate the case and to be rooted in the far Right assumption that government can do nothing good. It needs to think back a bit to the major force government has been for innovation and for achieving stunning results when it was given support. Government still plays an important role in innovations and public services, even despite being crippled and hampered in every way under this current administration.

In any case, here are some of the points I think are particularly interesting in the report.

Goal setting and identifying the national public interest

GAO notes that the federal government has, in recent years, been absent from the decisions and work of creating transportation infrastructure. This includes a drop in federal funding and leaving the work and funding to the states. As a result of this renunciation on the part of the federal government, we now have a nation whose roads and bridges are crumbling. We can expect to see continued costs as we see more tragedies directly related to this abandonment of responsibility.

The irony is that with roads, if you do not have a national system, you cannot get from here to there. The irony is that roads are naturally an interstate issue.

GAO calls for the federal government to take on this view and to step back to identify our national interests.

GAO has called for a fundamental reexamination of our surface transportation policies, including creating well-defined goals based on identified areas of national interest. This reexamination provides an opportunity to identify emerging national public interests (including tax considerations), the role of the highway public-private partnerships in supporting and furthering those national interests, and how best to identify and protect national public interests in future highway public-private partnerships.

The Federal role has been partisan

Can you say “Rah! Rah”? Then you can work for the federal DOT.

Despite the need for careful analysis, the approach at the federal level has not been fully balanced, as DOT has done much to promote the benefits, but comparatively little to either assist states and localities weigh potential costs and trade-offs, nor to assess how potentially important national interests might be protected in highway public-private partnerships. We have suggested that Congress consider directing the Secretary of Transportation to develop and submit objective criteria for identifying national public interests in highway public-private partnerships, including any additional legal authority, guidance, or assessment tools that would be appropriately required.

There is no avoiding federal responsibility

Recent highway public-private partnerships have involved sizable investments of funds and significant facilities and could pose national public interest implications such as interstate commerce that may transcend whether there is direct federal investment in a project.

For example, both the Chicago Skyway and the Indiana Toll Road are part of the Interstate Highway System; the Indiana Toll Road is part of the most direct highway route between Chicago and New York City and, according to one study, over 60 percent of its traffic is interstate in nature. However, federal officials had little involvement in reviewing the terms of either of these concession agreements before they were signed.

In the case of Indiana, FHWA played no role in reviewing either the lease or national public interests associated with leasing the highway, nor did it require the state of Indiana to review these interests.

Texas envisions constructing new international border crossings and freight corridors using highway public-private partnerships, which may greatly facilitate North American Free Trade Agreement-related truck traffic to other states. However, no federal funding had been expended in the development of the project. Given the minimal federal funding in highway public-private partnerships to date, few mechanisms exist to consider potential national public interests in them. For example, FHWA officials told us that no federal definition of public interest or federal guidance on identifying and evaluating public interest exists.

The role of tax give-aways
Tax give-aways are just part of the reason that the true cost of highway privatization must far, far exceed the cost of public highway management and provision. For example:

Unlike public toll authorities, private-sector firms pay federal income tax. Current tax law allows private sector firms to deduct depreciation on assets involved with highway public-private partnerships for which they have “effective ownership.” Effective ownership of assets requires, among other things, that the length of a concession agreement be equal to or greater than the useful economic life of the asset. According to financial and legal experts, including those who were involved in the lease of the Chicago Skyway in Chicago, Illinois, and the Indiana Toll Road, the useful economic life of those facilities was lengthy. The requirement to demonstrate effective asset ownership thus required lengthy partnership concession periods and contributed to the 99-year and 75-year concession terms for the Chicago Skyway and Indiana Toll Road, respectively. These financial and legal experts told us that as effective owners, the private investors can claim full tax deductions for asset depreciation within the first 15 years of the lease agreements.

Determining the extent of depreciation deductions associated with highway public-private partnerships, and the extent of foregone revenue to the federal government, if any, from these deductions is difficult to determine because they depend on such factors as taxable income, total deductions, and marginal tax rates of private-sector entities involved with highway public-private partnerships. Financial experts told us that in the absence of the depreciation benefit, the concession payments to Chicago and Indiana would likely have been less than the $1.8 billion and $3.8 billion paid, respectively.

However, foregone revenue to the federal government from tax benefits associated with transportation projects can potentially amount to millions of dollars. For example, as we reported in 2004, foregone tax revenue when the private-sector used tax-exempt bonds to finance three projects with private sector involvement — the Pocahontas Parkway, Southern Connector, and Las Vegas Monorail — were between $25 million and $35 million.

Loss of public control and acting in the public interest

Consider the role of noncompete agreements and other factors that force the public to take the private highway or no way.

Tolls are generally set in accordance with concession agreements and, in contrast to public-sector practices, allowable toll increases can be frequent and automatic. The public sector may lose control over its ability to influence toll rates, and there is also the risk of tolls being set that exceed the costs of the facility, including a reasonable rate of return if, for example, a private concessionaire gains market power because of the lack of viable travel alternatives.

In addition, highway public-private partnerships also potentially require additional costs to the public sector compared with traditional public procurement, including the costs associated with (

1) required financial and legal advisors, and

(2) private-sector financing compared with public-sector financing.

Loss of an important asset and of revenues

In addition to potentially higher tolls, the public sector may give up more than it receives in a concession payment in using a highway public-private partnership with a focus on extracting value from an existing facility. In exchange for an up-front concession payment, the public sector gives up control over a future stream of toll revenues over an extended period of time, such as 75 or 99 years. It is possible that the net present value of the future stream of toll revenues (less operating and capital costs) given up can be much larger than the concession payment received. Concession payments could potentially be less than they could or should be. Conversely, because the private sector takes on substantial risks, the opposite could also be true — that is, the public sector might gain more than it gives up.

The new report is Highway Public-Private Partnerships: Securing Potential Benefits and Protecting the Public Interest Could Result from More Rigorous Up-front Analysis GAO-08-1052T, July 24, 2008

Comments are closed.