Federal, state and local governments in the US are struggling to meet their transportation infrastructure needs in a challenging economic environment. At the federal level, numerous proposals to redress the substantial deficit in US transportation infrastructure, ranging from expanding existing pro­grammes to the establishment of a federal infrastructure bank, are being discussed with increased seriousness, but few such proposals have made meaningful progress in the US Congress.

On the other hand, primary responsibility for the development of specific transpor­tation infrastructure projects in the US gener­ally rests at the state level, and each state is largely free to determine whether and how to structure its own PPP pro­gramme. Impelled partly of economic necessity, but also due to the gradual accumulation of knowhow and expertise gained in successful precedent trans­actions in many states, the US PPP market is now developing at an accelerating pace. It is therefore an opportune time, if the necessary political will can be mustered, for the adoption of appropriate federal and state programs to help catalyse and leverage this growing market.

This article provides a brief overview of the evolving use of PPPs in US transportation infrastructure projects, discusses the status of state and federal legislation affect­ing PPPs, and summarises recent key US transportation infrastructure PPP projects.

The evolution of PPPs in US transportation infrastructure

Since the 1990s, PPPs have been estab­lishing a credible track record in many US jurisdictions. The well-publicised monetisations of the Chicago Skyway toll bridge and the Indiana Toll Road, as well as the use of PPPs to procure numerous other significant transportation facilities, such as the Dulles Greenway, SR-91 in California, the new international air terminal (Terminal 4) and its recent expansion at JFK International Airport, the Port of Miami Tunnel, the North Tarrant Expressway and I-635/LBJ Freeway in Texas, and Denver’s FasTracks commuter and light-rail project, have all been note­worthy PPPs.

Each of these projects has had important demonstration effects, including most notably the fact that PPP procurement compels all parties to plan and budget for the full life cycle costs of maintaining and operating (and not just building) the project in question. This is a significant change from the traditional model of transportation infrastructure procurement, in which the life cycle costs to be incurred years and decades into the future are neither considered nor budgeted for at the time of procurement. Aside from leaving state and local governments with a potentially significant over­hang of unfunded operation and maintenance obligations, the traditional pro­cure­ment model has not always focused the parties’ attention on the fact that design decisions at inception can have important effects on life cycle costs.

There is also growing appreciation by state governments that PPPs can be used to effect an efficient transfer of various risks (eg. construction overruns and revenue shortfalls) and obligations (eg. operating an airport in accordance with rigorous stan­dards) to the private sector, thereby allow­ing the government to focus its resources and efforts on core governmental services. The private sector is also willing and able to contribute significant equity to PPPs, which can be used to lever debt financing for transportation infrastructure projects, reliev­ing the government of substantial financial commitments.

Although several states have experiment­ed with PPPs since the 1990s, the more recent resurgence of this market can be traced to the Chicago Skyway and Indiana Toll Road transactions, each of which was essentially a monetisation of a valuable government asset. Such deals have become increasingly unpopular, however, because they can be perceived by the public (or portrayed by opponents) as little more than sales of valuable assets at bargain prices, resulting in increased user fees without construction of meaningful new transportation capacity or visible service enhancement.

As a result, a number of recent similar transactions, such as the Pennsylvania Turnpike and Pittsburgh parking PPPs, have failed to close for lack of political support. In view of this evolving track record, it will be interesting to see whether the state of Ohio moves forward with a monetisation of the Ohio Turnpike, which could yield an estimated $3 billion for the state. In late August, 2011, letters of interest were received from fourteen firms vying to advise the Ohio state government on whether a monetisation or other PPP initiative could most effectively unlock the value of the roadway. A shortlist of potential advisors is expected in early September.

There has been much greater success with PPPs based on a different model in which the private party undertakes con­struc­tion of meaningful incremental capacity for users willing to pay for enhanced ser­vice, and agrees to operate and maintain to a high standard a less congested toll-free option for other users. HOT and managed lanes projects are examples of this type of transaction. Its political success is founded on the ability to deliver benefits to all relevant constituencies.

Such projects are not without their chal­lenges, however. Aside from the usual risks inherent in new construction, it is not an easy matter to project traffic and revenues for urban facilities whose use depends on the value ascribed by users to what may be a relatively modest reduction in travel time. Where such risks are difficult or impossible to quantify, governments can opt to struc­ture such projects on the basis of avail­ability payments. Entirely greenfield pro­jects structured on this basis, such as the Port of Miami Tunnel, comprise a further class of PPPs that are gaining traction in the still nascent US market.

Legislation affecting PPPs

As a general matter, governmental entities in the United States must be authorised by statute to use PPPs to procure transportation infrastructure projects.

States

Over 30 states and Puerto Rico have enacted some form of PPP-enabling legislation. However, the scope and substance of state PPP-enabling statutes tends to differ significantly from state to state. Some statutes are broad and permit an array of projects, while other statutes are narrowly drafted, sometimes specifically identifying permitted projects and/or requiring prospective projects to be approved by a specified officer or agency. The scope of a state’s PPP-enabling legislation directly affects the viability of PPPs in its jurisdiction.

In late-August 2011, Illinois governor Pat Quinn signed a law enabling the Illinois Department of Transportation to engage in PPPs for new surface transportation projects. Among other things, the law requires that the state’s General Assembly approve all potential PPPs. Earlier in 2011, governor Quinn signed a bill into law allowing the use of a PPP to procure a prospective commuter rail line, and in 2010, governor Quinn and Indiana governor Mitch Daniels each signed bills authorising their respective state to use a PPP for the proposed Illiana Expressway pro­ject, a $1 billion, 37km eight-lane ex­press­way connecting existing interstate highways in Illinois and Indiana.

In mid-June 2011, Texas returned to the spotlight when governor Rick Perry signed senate bill 1420 into law, which permits the Texas Department of Transportation (TxDOT) to use PPPs for 11 major highway projects. Texas had previously enacted a moratorium on privately financed toll roads in 2007, which effectively chilled PPP activity in the state for nearly four years.

In late May 2011, legislation was pro­posed in the New York senate that would give various state and local transportation agencies greater flexibility to enter into PPP agreements to finance and deliver trans­por­tation infrastructure projects. The bill is now before various state legislative committees.

In addition, some jurisdictions have creat­ed offices to administer their PPP programs. In June 2011, Virginia announc­ed the crea­tion of the Office of Transportation Public-Private Partnerships and, in 2009, Puerto Rico created the Puerto Rico Public-Private Partnerships Authority (PRPPPA). Both Vir­ginia and Puerto Rico have made imme­diate and efficient use of their new PPP offices.

However, there have also been setbacks at the state legislative level. Most significantly, in May 2011, the Pennsylvania legis­lature rejected a bill that would have authorised PPP transportation projects. In June 2011, PPP-enabling legislation for the New International Trade Crossing was intro­duced in the Michigan state senate, but by late June it was clear that the senate would not vote on the bill until the next legislative session convenes later this year.

Federal: Highways

US law generally restricts the tolling of roads that are constructed using federal funding, a class that includes most inter­state highways in the country. As such, statu­tory exemptions to federal law are necessary in order to allow PPPs to charge tolls on such roads. On 10 August 2005, the Safe, Accountable, Flexible, Efficient Trans­por­tation Equity Act: A Legacy for Users (SAFETEA-LU) was signed into law and provided a number of such exemptions to federal law, in many cases in the form of limited pilot programmes.

One of the most important exemptions under SAFETEA-LU is an express lanes demonstration programme, which authorises 15 express toll lane projects on congested interstates. Other notable SAFETEA-LU pro­grams include the authorisation of high occu­pancy toll (HOT) lanes projects where existing high occupancy vehicle (HOV) lanes may charge tolls to vehicles that do not meet the passenger requirements, an inter­state con­struction toll pilot programme, under which up to three states may impose tolls on new interstates to support the financ­ing for their construction, and up to $15 billion of tax-exempt private activity bonds (PABs) for long-term PPPs. The most recent tem­porary extension of SAFETEA-LU is set to expire on 30 September 2011, and pres­ent­ly there are two primary competing bills for long-term reauthorisation of SAFETEA-LU.

Representative John Mica, chairman of the House of Representatives transportation and infrastructure committee, has introduc­ed legislation that would overhaul SAFETEA-LU. This proposal will limit spending to $230 billion over the next six years, which is the amount of federal gasoline tax revenue projected to be deposited into the Highway Trust Fund during that time. Representative Mica’s plan also calls for increasing annual TIFIA funding from $122 million to $1 billion, incentives for state infrastructure banks, the elimination or consolidation of dozens of federal transpor­tation programs, and streamlining the pro­ject approval process.

Senator Barbara Boxer, chairman of the environment and public works committee, has proposed a 2-year extension of SAFETEA-LU that is intended to provide a foundation for long-term improvements to US transportation infrastructure. Senator Boxer’s legislation would also consolidate numerous SAFETEA-LU programmes and increase TIFIA funding to $1 billion per year. However, unlike Representative Mica’s proposal, it would continue funding at cur­rent levels, which are higher than the rev­enues deposited into the Highway Trust Fund on an annual basis.

In addition to the various programmes available under SAFETEA-LU, the Transpor­tation Infrastructure Finance and Innovation Act of 1998 (TIFIA) authorises the US Department of Transportation to assist in financing up to 33% of the cost of trans­portation infrastructure projects, includ­ing PPPs, with a value of at least $50 million. TIFIA has proven to be one of the most effective federal funding tools for transportation projects and, in addition to proposals to increase the annual TIFIA funding limits, many have suggested that the maximum loan amount should be increased from 33% to 49% of the cost of the related project.

Federal: Aviation

In the airport sector, the key constraint on state experimentation with PPPs is a general federal prohibition against the use of airport revenues for non-airport purposes. Thus, as with the federal prohibition against tolling existing interstate highways, PPPs in this sector depend on the availability of an exemption under Federal law. For airports the relevant exemption is found in the Federal Aviation Administration’s (FAA) airport privatisation pilot programme, which authorises the privatisation of up to five US airports, including one large hub airport, and permits the private participant to make a reasonable profit from airport revenues.

Unfortunately, at present not a single US airport is privatised under the pilot pro­gramme. This is due in significant part to a requirement under the programme that any airport privatisation must be approved by airlines representing 65% of both the sched­uled airlines serving the airport and the total landed weight of all aircraft landing at the airport. Not surprisingly, airlines handed this significant bargaining leverage have used it to their advantage and this has made it more difficult to structure viable transactions.

In early August 2011, the FAA legislation was again extended, for the 21st time, through mid-September 2011, after lapsing on 22 July 2011. While Congress continues to debate long-term FAA reauthorisation legis­lation, one very positive note for airport PPPs is that reauthorisation bills in both houses of Congress would ease some of the restrictions that have burdened the FAA’s airport privatisation pilot program. Most sig­nificantly, the airline approval requirement would be eliminated. Instead, the airport grantor would be required to consult with air carriers serving the subject airport, and the consent of the US secretary of trans­portation would be required in order for any airport privatisation to proceed. These bills would also increase the permitted number of privatised airports from five to ten, and remove the one large hub limitation.

Federal: Rail

The Federal Railroad Administration (FRA) has statutory authority to administer a number of federal rail funding programs. For example, the railroad rehabilitation and im­provement financing programme authorises up to $35 billion of direct loans and loan guarantees to the private sector for the rehabilitation of existing rail infrastructure and the development of new rail infrastructure. This programme, although not specifically designed as a PPP initiative, could en­courage and facilitate private investment in US railroad infrastructure.

Recent US transportation infrastructure PPP projects

Despite obstacles, PPPs continue to play a major role in significant US transportation infra­structure projects.

California

In January 2011, the California Department of Transportation (Caltrans) and a Meridiam/ Hochtief-led consortium reached commercial closed on the 30-year concession for the approximate $1 billion Presidio Parkway project that will refashion the south access to the Golden Gate Bridge. This is the first PPP project under California’s broad PPP-enabling legislation that was enacted in 2009. The project has been allocated $592 million in PABs, Caltrans has submitted a letter of interest for $309 million in TIFIA financing, and 18 banks expressed interest in financing the project. Financial close is expected by the end of the year.

Colorado

On 12 August 2010, the initial $1.6 billion phase of Denver’s $6.5 billion FasTracks commuter rail development achieved finan­cial close with a financing package that included roughly $400 million in PABs and $52.3 million of PPP sponsor equity, in addition to roughly $1.15 billion in debt financing from the Denver Regional Trans­portation District.

Georgia

In June 2010, Georgia Department of Trans­portation (GDOT) short-listed three consortiums to bid on the West by Northwest project. The project involves a 50-year con­cession for the construction and operation of a new, $1.3 billion managed lane system on segments of I-75 and I-575 and other attached roadways. GDOT plans to issue a request for proposals (RFP) to the three short-listed consortiums in late September 2011, with responses expected to be due by early 2012. The project has been pre­approved for $275 million of TIFIA assis­tance, and GDOT has reportedly sub­mit­ted an application for $700 million of PABs.

New Jersey/New York

In June 2011, the Port Authority of New York and New Jersey shortlisted three con­sortiums for the 30- to 40-year concession to con­struct and maintain a replacement for the Goethals Bridge. The Port Authority is reportedly pro­curing the project with a PPP due to internal bonding constraints, and is expected to apply for PABs to fund the $1.1 billion project.

Puerto Rico

In June 2011, the PRPPPA achieved com­mercial close on its first PPP project – the 40-year concession for the existing PR-22 and PR-5 toll roads with a consortium comprised of Goldman Sachs Infrastructure Partners II and Abertis. The consortium will make an upfront payment of $1.08 billion and is required to make roughly $356 million of improvements over 25 years.

In August 2011, the PRPPPA received statements of qualifications from twelve consortiums responding to the request for qualifications for the 40- to 50-year concession to operate and manage Puerto Rico’s Luis Munoz Marin International Airport. The concession will also require the concessionaire to finance and implement various improvements throughout the concession term. A shortlist of preferred bidders is expected soon. Puerto Rico has a number of other PPP projects in the pipeline.

Texas

Included among the transportation infra­struc­ture projects covered by Texas’ new PPP-enabling legislation are a $4.4 billion project on Interstate Highway 35E in Denton county, a $1.8 billion project on State Highway 183 between Dallas and Irving, and the continuation of the $2.5 billion North Tarrant Expressway.

In June 2010, the 52-year concession for the managed lane system along I-635/LBJ Freeway reached financial close. The $2.7 billion deal was financed by, among other sources, $615 million in PABs, a $496 million loan from TxDOT, $665 million of sponsor equity and a $850 million TIFIA loan – the second-largest loan in the history of the TIFIA programme.

Virginia

In July 2011, Virginia Department of Trans­por­tation (VDOT) and a Macquarie/Skanska consortium achieved commercial close on the $1.9 billion Midtown Tunnel project. The concessionaire has committed $1.235 billion in financing, comprised of $318 million in equity, $495 million of bank loans and $422 million of TIFIA funding, although the TIFIA piece has not been confirmed. The state will contribute $395 million to limit toll increases, and roughly $300 million of addi­tional funding is expected to be available from tolls at existing tunnels. The concessionaire will deliver the project under a fixed-price contract, and will bear traffic and revenue risk during the 58-year concession.

In July 2011, VDOT also released the RFP to the three consortiums that had submitted conceptual proposals for the 89km greenfield US 460 toll road project. Technical pro­pos­als are due in January 2012, financial pro­posals are due February 2012, and VDOT plans to sign a comprehensive agreement for the concession by May 2012. The project is estimated to cost approximately $1.75 billion and VDOT has submitted a letter of interest for $650 million of TIFIA financing.

Airports

At present there are three active airport privatisations in the US PPP pipeline, all of which fall under the FAA’s airport privatisation pilot programme. The preliminary appli­cation for the privatisation of Puerto Rico’s Luis Munoz Marin International Airport, dis­cussed earlier in this article, received FAA approval in late December 2009. In May 2010, the FAA approved the preliminary application for the privatisation of Briscoe Field Airport in Gwinnett County, Georgia, which is located about 64km from Atlanta, Georgia, and in May 2011, the Gwinnett County Board of Commissioners approved the issuance of an RFP for the privatisation of the airport. In October 2010, the FAA approved the preliminary application for the privatisation of AirGlades Airport in Hendry County, Florida. AirGlades is a general aviation reliever airport with a new general aviation terminal and a number of corporate hangars.

In addition, the proposed privatisation of Chicago’s Midway Airport remains a possi­bility, although it is not being actively pur­sued at the moment. This transaction was preliminarily approved by the FAA in Octo­ber 2006, and the city selected a consortium to operate Midway under a 99-year lease in exchange for an upfront payment to the city of $2.521 billion. However, the trans­action never reached financial close and the win­ning bidder forfeited its security deposit of nearly $126 million. Despite this set­back, Midway’s application remains in effect.

The only completed transaction under the current pilot programme was the privatisation of New York’s Stewart International Airport pursuant to a 99-year lease granted to National Express in 2000. However, in late 2006, the Port Authority purchased the lease and control of the airport was returned to the public sector.

Airport terminals

Although privatisations of entire airports have proved challenging, there has been noteworthy success in the application of PPP techniques at the level of individual terminals within a larger airport. The prime example is the widely acclaimed Terminal 4 project at John F Kennedy International Air­port in New York. The underlying arrangement reflects a true, custom-tailored PPP between a private entity (as lessee) and the Port Authority (as lessor). The private lessee of Terminal 4 was responsible for construct­ing the original, $1.2 billion terminal, and is now responsible for constructing a $800 mil­lion expansion project that achieved finan­cial close in December 2010. In addition to its construction obligations, the private lessee is responsible for the daily operation and maintenance of the terminal pursuant to a long-term lease.

Rail

Representative Mica and others have called for the privatisation of Amtrak’s Northeast Corridor service. After years of government relief, the federal government now owns the once-private Amtrak. Whether the corridor will be privatised, and whether the private sector will have an appetite for the deal, remain to be seen. Some believe the private sector could shy away from an investment that is unlikely to produce returns for many years, and others have observed that the private sector will require a greater public commitment than Amtrak currently receives.

Conclusion

In order for PPPs to flourish, PPP-enabling legi­slation must be effective, workable and compatible with private sector concerns and objectives. Reliance on the private sector for trans­portation facilities long-provided by gov­ernmental authorities may seem risky at first blush. However, dismal economic con­ditions and the escalating need for reliable trans­portation facilities with sufficient capa­city currently faced by many state and muni­cipal governments may well allow PPPs to have a promi­nent role in the development of significant trans­por­tation infrastructure facilities in the US. ■