Who Will Pay

Pennsylvania's experience shows how hard it is to find common ground on highway funding. The Keystone State mirrors the national funding crisis: Two years ago a bipartisan commission said the state needs an additional $1.66 billion for highways, bridges and public transit. Since then, Gov. Ed Rendell has noted, the cost of road construction materials has gone up 36 percent.

Rendell, a Democrat, says there is no way to raise fuel taxes high enough or quickly enough to catch up. "What are our options? Making Pennsylvania the highest gas tax in the nation? Not acceptable. Doing nothing? Absolutely not acceptable."

Two solutions are on the table: Either lease the Pennsylvania Turnpike to a private operator or put tolls on portions of I-80.

In May, Rendell accepted a $12.8 billion bid for a 75-year lease of the turnpike from a Spanish company, Abertis Infraestructras, and its partners Citi Infrastructure Investors and Criteria CaixCorp.

"This is a great day for Pennsylvania," Rendell said at the time. "Leasing the turnpike will deliver more per year than the I-80 tolling plan. Pennsylvanians will get more and pay less, and that's a good deal as far as I am concerned."

But the deal must be approved by the General Assembly and Pennsylvanians are not convinced that it is a good idea.

The chairman of the state House Transportation Committee has said that the plan will not be accepted. "The majority of members of the committee are dead-set against the lease," Rep. Joseph Markosek said in one news account.

Rendell is not giving up. He said in response to Markosek that opinions can change. But the opposition will not be easily overcome, according to Jim Runk, president and CEO of the Pennsylvania Motor Truck Association.

"There does not appear to be a lot of support for it," Runk said. "In fact, I have not seen anybody other than a couple of people have any support for it at all."

One concern, Runk said, is that 75 years is a long time to be paying back a debt. Also, although toll increases would be regulated by the contract - in the near term they would match increases already planned by the Pennsylvania Turnpike Commission - Runk wonders if that can last.

"It's private enterprise and they are going to do things that are going to generate income for them, obviously, to pay their investors and to protect themselves," he said. "What are they going to do to generate that money? A lot of the people here in Harrisburg (the state capital) aren't even going to be around and that lease is still going to be going on."

And people worry that it will be hard to protect the integrity of the deal, Runk added. The money is supposed to go only to bridges and roads, but ... "you put a billion dollars a year in the hands of a legislature and who knows where some of that money goes."

The alternative to the lease deal - tolling I-80 - is now in the hands of the Federal Highway Administration. After rejecting the state's initial application, FHWA is looking at a revised version to decide whether or not Pennsylvania's plan complies with a federally authorized tolling program.

The application is one part of a three-part plan called Act 44 approved by the Pennsylvania General Assembly last year. Besides converting I-80 to a toll road, Act 44 calls for higher tolls on the turnpike and borrowing money against future toll revenues. All together it would produce a revenue stream of $116 billion over 50 years, slightly less than what the bipartisan commission said the state needs.

If FHWA approves the application, Pennsylvania will be cleared to implement tolling, said Carl DeFebo of the Turnpike Commission. It will take years to complete the project, however. The state will have to hold public hearings on the details of the plan, including location of tolls, traffic diversion and the economic impact. The schedule calls for completion in the late summer of 2010.

Opposition to tolling is strong, particularly among businesses along I-80. The Alliance to Stop the Tolling of I-80 says the plan will put the businesses at a disadvantage by raising transportation costs.

PMTA members also oppose the plan, Runk said. "Tolling could lead to economic disaster along that route, and diversion of traffic." State officials believe diversion will be minimal, but his members have told him they will start using alternative routes.

Pennsylvania motor carriers are not opposed to fixing bridges and roads, Runk said. "We understand our responsibility to get it done."

PMTA's suggestion is that the funds be raised through the existing system of fuel taxes. One of the state's taxes, the Oil Franchise Tax, is capped by an archaic law, Runk said. The tax is calculated based on the prior year's wholesale price, but under the law the price multiplier cannot be higher than $1.25, no matter what the fuel actually costs. The association does not want to eliminate the cap but would support raising it, Runk said.

"That way the legislature could say, we didn't raise fuel taxes, we modernized the wholesale cost of fuel," he said.

As a matter of philosophy, the Pennsylvania carriers believe the responsibility for highway funding should be shared throughout the state, rather than separated by location, Runk said.

A fuel tax is the fairest way, but the political will to raise taxes is not there, he said. "There's no question about that. Everybody's interested in a quick fix with quick money - they don't have to go through the things they are supposed to do, so they get private enterprise to come in and offer billions of dollars up front. Then those who are in eventually get out and it's left with grandchildren to pay that kind of money back."

Runk also questions the wisdom of acting now on the turnpike lease or I-80 tolling. Next year there will be a new administration in Washington, and Congress is gearing up for a wholesale rewrite of surface transportation policy.

"Why take a valuable asset like the turnpike or toll an Interstate ... why make those national decisions now when a new administration may have new ideas that may be better suited for funding, instead of relying on someone who's going out of office?"

PUBLIC OR PRIVATE?

A key battle in the fight over highway program will be over private versus public money.

Public/private partnerships will certainly be part of the highway funding solution that Congress is now debating. The Department of Transportation reports that more than 20 such programs are in various stages of implementation, and there is general consensus in the transportation community that there is a role for the programs. The question is, how big should that role be?

The Bush administration and some state governors are pushing partnerships as an alternative to fuel taxes, but powerful interests - including the trucking industry - are leery of the idea.

The governor of Pennsylvania, for example, has accepted a $12.8 billion bid by a private consortium for a 75-year lease of the Pennsylvania Turnpike, but approval of the plan has been blocked by opponents in the General Assembly.

Potential investors apparently have not been deterred by the political obstacles. According to the Department of Transportation, more than $400 billion of private capital is available for infrastructure investment globally.

An overview of the infrastructure financing industry published by Harvard Business School cited one estimate that public/private deals in the U.S. will grow by $1.6 trillion in the next decade. Another estimate is that 20 percent of all future transportation assets in the country will be built through public/private partnerships.

The same report says that investment banks are raising billions of dollars for infrastructure. Within the past year, for example, Credit Suisse and General Electric established a $1 billion fund, and Goldman Sachs Group raised $5.6 billion.

Among the partnerships already in place are the $3.8 billion lease of the Indiana Toll Road and the $1.8 billion Chicago Skyway to private investors. In Virginia, the state, the U.S. Department of Transportation and a private group recently came to terms on a $589 million deal as part of a project to construct high occupancy toll lanes on the Capitol Beltway. The money comes from tax-exempt bonds issued under a $15 billion federal program that allows private companies to borrow for public highway projects.

All that money waiting to be invested will tend to create its own momentum as the debate unfolds on Capitol Hill, but some voices are urging caution.

The Harvard overview, for example, referenced concern by bond rating agencies that as the valuations for infrastructure assets increase, investors run the risk of their debt positions outrunning their equity.

Quoting Standard & Poor's, the Harvard review said: "It is clear that, as a result of rampant demand, the infrastructure sector is in danger of suffering from the dual curse of overvaluation and excessive leverage - the classic symptoms of an asset bubble similar to the dotcom era of the last decade."

S&P warned investors to undertake "due diligence and robust credit analysis" to protect themselves.

There are risks, also, from the highway user perspective. The Government Accountability Office says that while partnerships can provide benefits to state and local governments, they come with trade-offs. It is likely, for example, that tolls on a privately operated highway will go up more than tolls on a public road, GAO said.

"Highway public-private partnerships are also potentially more costly to the public than traditional procurement methods and the public gives up a measure of control, such as the ability to influence toll rates," the agency said.

GAO said the DOT's system of evaluating partnerships needs to be more rigorous and urged Congress to order DOT to come up with objective criteria to protect the public interest.

Tim Lynch, senior vice president of the American Trucking Associations, believes the partnership issue will ultimately come down to whether the project is for an existing facility or a new one.

"As far as we are concerned, (privatizing) an existing asset is just a non-starter," he said. And he wonders how excited investors will be about putting their money into new projects where the returns don't start until the project is completed.