[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




 
  UNDERSTANDING CONTEMPORARY PUBLIC PRIVATE HIGHWAY TRANSACTIONS: THE 
                   FUTURE OF INFRASTRUCTURE FINANCE?

=======================================================================

                                (109-75)

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                    HIGHWAYS, TRANSIT AND PIPELINES

                                 OF THE

                              COMMITTEE ON
                   TRANSPORTATION AND INFRASTRUCTURE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 24, 2006

                               __________

                       Printed for the use of the
             Committee on Transportation and Infrastructure






                                 _____

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28-290 PDF              WASHINGTON : 2006
_________________________________________________________________
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             COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

                      DON YOUNG, Alaska, Chairman

THOMAS E. PETRI, Wisconsin, Vice-    JAMES L. OBERSTAR, Minnesota
Chair                                NICK J. RAHALL, II, West Virginia
SHERWOOD L. BOEHLERT, New York       PETER A. DeFAZIO, Oregon
HOWARD COBLE, North Carolina         JERRY F. COSTELLO, Illinois
JOHN J. DUNCAN, Jr., Tennessee       ELEANOR HOLMES NORTON, District of 
WAYNE T. GILCHREST, Maryland         Columbia
JOHN L. MICA, Florida                JERROLD NADLER, New York
PETER HOEKSTRA, Michigan             CORRINE BROWN, Florida
VERNON J. EHLERS, Michigan           BOB FILNER, California
SPENCER BACHUS, Alabama              EDDIE BERNICE JOHNSON, Texas
STEVEN C. LaTOURETTE, Ohio           GENE TAYLOR, Mississippi
SUE W. KELLY, New York               JUANITA MILLENDER-McDONALD, 
RICHARD H. BAKER, Louisiana          California
ROBERT W. NEY, Ohio                  ELIJAH E. CUMMINGS, Maryland
FRANK A. LoBIONDO, New Jersey        EARL BLUMENAUER, Oregon
JERRY MORAN, Kansas                  ELLEN O. TAUSCHER, California
GARY G. MILLER, California           BILL PASCRELL, Jr., New Jersey
ROBIN HAYES, North Carolina          LEONARD L. BOSWELL, Iowa
ROB SIMMONS, Connecticut             TIM HOLDEN, Pennsylvania
HENRY E. BROWN, Jr., South Carolina  BRIAN BAIRD, Washington
TIMOTHY V. JOHNSON, Illinois         SHELLEY BERKLEY, Nevada
TODD RUSSELL PLATTS, Pennsylvania    JIM MATHESON, Utah
SAM GRAVES, Missouri                 MICHAEL M. HONDA, California
MARK R. KENNEDY, Minnesota           RICK LARSEN, Washington
BILL SHUSTER, Pennsylvania           MICHAEL E. CAPUANO, Massachusetts
JOHN BOOZMAN, Arkansas               ANTHONY D. WEINER, New York
JIM GERLACH, Pennsylvania            JULIA CARSON, Indiana
MARIO DIAZ-BALART, Florida           TIMOTHY H. BISHOP, New York
JON C. PORTER, Nevada                MICHAEL H. MICHAUD, Maine
TOM OSBORNE, Nebraska                LINCOLN DAVIS, Tennessee
KENNY MARCHANT, Texas                BEN CHANDLER, Kentucky
MICHAEL E. SODREL, Indiana           BRIAN HIGGINS, New York
CHARLES W. DENT, Pennsylvania        RUSS CARNAHAN, Missouri
TED POE, Texas                       ALLYSON Y. SCHWARTZ, Pennsylvania
DAVID G. REICHERT, Washington        JOHN T. SALAZAR, Colorado
CONNIE MACK, Florida                 JOHN BARROW, Georgia
JOHN R. `RANDY' KUHL, Jr., New York
LUIS G. FORTUNO, Puerto Rico
LYNN A. WESTMORELAND, Georgia
CHARLES W. BOUSTANY, Jr., Louisiana
JEAN SCHMIDT, Ohio

                                  (ii)

?

            SUBCOMMITTEE ON HIGHWAYS, TRANSIT AND PIPELINES

                  THOMAS E. PETRI, Wisconsin, Chairman

SHERWOOD L. BOEHLERT, New York       PETER A. DeFAZIO, Oregon
HOWARD COBLE, North Carolina         NICK J. RAHALL II, West Virginia
JOHN J. DUNCAN, Jr., Tennessee       JERROLD NADLER, New York
JOHN L. MICA, Florida                GENE TAYLOR, Mississippi
PETER HOEKSTRA, Michigan             JUANITA MILLENDER-McDONALD, 
SPENCER BACHUS, Alabama              California
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
SUE W. KELLY, New York               EARL BLUMENAUER, Oregon
RICHARD H. BAKER, Louisiana          ELLEN O. TAUSCHER, California
ROBERT W. NEY, Ohio                  BILL PASCRELL, JR., New Jersey
FRANK A. LoBIONDO, New Jersey        TIM HOLDEN, Pennsylvania
JERRY MORAN, Kansas                  BRIAN BAIRD, Washington
GARY G. MILLER, California           SHELLEY BERKLEY, Nevada
ROBIN HAYES, North Carolina          JIM MATHESON, Utah
ROB SIMMONS, Connecticut             MICHAEL M. HONDA, California
HENRY E. BROWN, Jr., South Carolina  RICK LARSEN, Washington
TIMOTHY V. JOHNSON, Illinois         MICHAEL E. CAPUANO, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania    ANTHONY D. WEINER, New York
SAM GRAVES, Missouri                 JULIA CARSON, Indiana
MARK R. KENNEDY, Minnesota           TIMOTHY H. BISHOP, New York
BILL SHUSTER, Pennsylvania           MICHAEL H. MICHAUD, Maine
JOHN BOOZMAN, Arkansas               LINCOLN DAVIS, Tennessee
MARIO DIAZ-BALART, Florida           BEN CHANDLER, Kentucky
JON C. PORTER, Nevada                BRIAN HIGGINS, New York
TOM OSBORNE, Nebraska                RUSS CARNAHAN, Missouri
KENNY MARCHANT, Texas                ALLYSON Y. SCHWARTZ, Pennsylvania
MICHAEL E. SODREL, Indiana           JAMES L. OBERSTAR, Minnesota
DAVID G. REICHERT, Washington          (Ex Officio)
JEAN SCHMIDT, Ohio
DON YOUNG, Alaska
  (Ex Officio)

                                 (iii)































                                CONTENTS

                               TESTIMONY

                                                                   Page
 Daniels, Hon. Mitch, Governor of the State of Indiana...........     4
 Florian, Mark, Managing Director, Goldman, Sachs & Co...........    26
 Foote, John, Senior Fellow, Kennedy School of Government, 
  Harvard University.............................................    26
 Garrett, Hon. Matthew, Director, Oregon Department of 
  Transportation.................................................    26
 Gribbin, D.J., Director, Macquarie Holdings (USA) Inc...........    26
 Grote, Bryan, Principal, Mercator Advisors, LLC.................    26
 Hedlund, Karen J., Partner, Nossaman, Gunther, Knox, Elliot, LLP    26
 Kaine, Hon. Tim, Governor of the Commonwealth of Virginia.......     4

          PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

Carnahan, Hon. Russ, of Missouri.................................    51
Costello, Hon. Jerry F., of Illinois.............................    52
Cummings, Hon. Elijah E., of Maryland............................    63
Pascrell, Hon. Bill, Jr., of New Jersey..........................   142
Porter, Hon. Jon, of Nevada......................................   146

                PREPARED STATEMENTS SUBMITTED WITNESSES

 Daniels, Hon. Mitch.............................................    70
 Florian, Mark...................................................    75
 Foote, John.....................................................    82
 Garrett, Hon. Matthew...........................................    86
 Gribbin, D.J....................................................    94
 Grote, Bryan....................................................   104
 Hedlund, Karen J................................................   114
 Kaine, Hon. Tim.................................................   126





















     HEARING ON UNDERSTANDING CONTEMPORARY PUBLIC PRIVATE HIGHWAY 
          TRANSACTIONS: THE FUTURE OF INFRASTRUCTURE FINANCE?

                              ----------                              


                        Wednesday, May 24, 2006

        House of Representatives, Committee on 
            Transportation and Infrastructure, Subcommittee 
            on Highways, Transit and Pipelines, Washington, 
            D.C.

    The subcommittee met, pursuant to call, at 9:30 a.m., in 
Room 2167, Rayburn House Office Building, Hon. Thomas E. Petri 
[chairman of the subcommittee] presiding.
    Mr. Petri. Good morning. The Subcommittee will come to 
order. I would like to welcome all of our members and our 
witnesses to today's hearing on ``Understanding Contemporary 
Public Private Highway Transactions: The Future of 
Infrastructure Finance?''
    We have a joint session of Congress, as I think everyone is 
aware, with the Prime Minister of Israel, which begins at 11 
this morning, so we had to move the starting time for the 
hearing up to 9:30 from 10:00, which I think has inconvenienced 
a number of our members who will be arriving shortly, but who 
had other meetings scheduled.
    In the interest of getting through our first panel before 
the joint session begins, I encourage members to submit their 
opening statements for the record, which will be kept open for 
submissions by members and others for 30 days. And they can 
also give their opening statements after the session, if they 
would prefer.
    In the interest of hearing from the Governors and allowing 
enough time for members to ask questions, I have abbreviated 
this opening statement.
    The hearing is intended to provide members of the 
Subcommittee with information regarding contemporary public-
private highway transactions. Recent high-profile lease 
agreements for highway toll facilities in Indiana, Virginia, 
and Chicago have brought these issues to the forefront of the 
debate on the future of infrastructure financing. Our witnesses 
will explain why State and local governments may find private 
involvement in highway financing attractive. They will also 
focus on how a particular method, namely, long-term lease of 
existing non-Federal toll facilities to private operators, is 
structured.
    This hearing will be the first in a series of hearings on 
public-private partnership. We have two very interesting panels 
for today's hearing. Our first panel is comprised of two 
Governors who have first-hand experience with public-private 
highway transactions, Governor Mitch Daniels from Indiana, 
Governor Kaine from Virginia. Indiana is in the process of 
finalizing a long-term lease agreement on the Indiana Toll 
Road. Virginia has public-private partnerships on highway 
projects in Richmond and in Northern Virginia.
    The second panel is comprised of experts on how these 
public-private partnerships are structured. I encourage all of 
our members to return for the second panel, after the joint 
session, as these witnesses will provide valuable insight on 
this new transportation financing concept.
    And that second panel will begin at what time? Right after 
the session, around 11:30 today.
    Now I yield to Mr. DeFazio for an opening statement.
    Mr. DeFazio. Thank you, Mr. Chairman. Mr. Chairman, the 
subject matter is, indeed, fascinating and this is an important 
day. The Commission that we created in SAFETEA-LU to look at 
future and alternate sources of funding will hold its first 
meeting today, unfortunately, at the same time as we will be 
meeting here. We are on parallel tracks, I guess. But this is, 
as you said, the first of a number.
    There are a number of questions that are raised by the 
private-public partnerships. Basically, I break it down into 
two areas. One would be investments in projects that have not 
made State or Federal priority lists for whatever reason, 
whether there is just inadequate funds and they are high 
priorities or they are projects that don't meet the highest 
priorities in those States, but they are still desirable to 
move forward. These projects are new construction. And then, as 
we are going to hear today, questions about assuming the 
obligations to operate existing assets and monetizing those 
assets up front.
    The questions that pertain to these projects I think are 
somewhat different, but in the end what we need to know is what 
sort of net public benefit we are creating and how we are going 
to continue to have a coordinated and integrated national 
transportation network when these projects are constructed, 
because obviously the private companies want to optimize their 
investment. Sometimes it requires up-front restrictions on the 
public bodies in terms of non-compete clauses regarding 
alternate routes.
    My State was looking at tolling existing routes in order to 
try and have a neutral--you know, make a neutral playing field 
for the newly constructed project. I think that will be very 
objectionable to my State legislature.
    But there are a host of questions like that, and in the 
interest of hearing from the panel and directing more specific 
questions, I will suspend with my opening statement at this 
point.
    Mr. Petri. Thank you very much.
    We will now turn to the first panel, comprised of the 
Honorable Tom Kaine, Governor of Virginia, and the Honorable 
Mitch Daniels, Governor of Indiana.
    I think, before we turn to you, gentlemen, I would like to 
recognize a very active, aggressive, and effective member of 
Congress and of this Committee representing Southern Indiana, 
Mike Sodrel, who wanted to present to the Committee his 
Governor, Governor Daniels.
    Mr. Sodrel. Thank you, Mr. Chairman.
    Welcome, Governor, my governor.
    Mr. Chairman and members of the Subcommittee, it is a great 
pleasure to introduce to you Indiana's 49th Governor. He has 
been serving as our Governor since January 2005 and has brought 
a lot of changes to Indiana in his short tenure as chief 
executive of our State. I think members of this Subcommittee 
are familiar with the service he performed as Director of the 
Office of Management and Budget under President Bush, but 
Governor Daniels has a distinguished resume in both the public 
and private sector. He has been successful in both walks of 
life because of his strong Hoosier values and hard work.
    During his career in public service, he was an advisor to 
former Indianapolis Mayor Richard Lugar and later became his 
chief of staff when Senator Lugar was elected to the U.S. 
Senate. In addition, Governor Daniels was a senior advisor to 
President Ronald Reagan.
    His success carried over into the private sector. Governor 
Daniels served as president for North American Operations of an 
Indiana-based company, Eli Lilly and Company. He also served as 
CEO of the Hudson Institute.
    Mr. Chairman, Governor Daniels has a wealth of experience 
to offer this Subcommittee today to discuss an issue not just 
facing Hoosiers, but America as a whole: financing the 
construction of our transportation infrastructure. The Highway 
Trust Fund is set to go into a deficit situation by 2010. There 
are many reasons for this trend, but instead of focusing on why 
we face the problem, I think we should focus on how we solve 
it. That is why Governor Daniels is here today. He will be able 
to share a unique experience he recently spearheaded back home 
that offers an alternative to solving the infrastructure crisis 
we face as a Nation.
    Indiana was experiencing a shortfall in its highway trust 
fund before he entered office. Governor Daniels had basically 
three options: you can raise taxes substantially, you can do 
without the infrastructure, or you can find an alternative that 
did not raise taxes and still allowed roads and bridges to be 
built. He was able to accomplish the last item by seeking a 
public-private partnership, and Indiana will begin investing 
this year almost $4 billion for infrastructure development and 
create jobs for Hoosiers.
    As many of you know, I was a truck driver and was in the 
trucking industry before serving in Congress, and I can tell 
you I am not a big fan of tolls or fuel taxes. The drivers and 
operators of heavy duty vehicle already pay user fees and 
excise taxes to move goods over our highways. The thought of 
asking them to pay increased tolls is not a pleasant one.
    However, I believe this debate is as much about credibility 
in government as it is financing our infrastructure. If we 
raise fuel taxes and tolls, we must guarantee those receipts 
are used only for its intended purposes: to build and maintain 
roads and bridges. We should not be raising tolls or fuel 
excise taxes to spend later on community pools, horse trails, 
city parks, or other unrelated transportation projects. 
Governor Daniels' Major Moves Program ensures that proceeds of 
the lease agreement are used solely for transportation 
infrastructure development.
    The U.S. highway system is vital to our economy and our 
national security. If you want to see what a country looks like 
without adequate transportation infrastructure, I suggest you 
visit Afghanistan. I visited the country, and I can tell you 
the roads are in sad shape. It can take almost an hour to drive 
10 or 15 miles, holding up transportation of goods and 
restricting their economy, and it is very difficult to have a 
robust economy if you don't have adequate transportation.
    If we don't find a more successful way to fund our future 
infrastructure needs, our economy can face similar challenges.
    With that said, Mr. Chairman, I want to thank you for 
having this hearing and for inviting my Governor to testify on 
his experience, and I yield back the balance of my time.
    Mr. Petri. Thank you.
    Gentlemen, we appreciate the prepared statements that you 
have submitted, and we ask you to summarize them for 
approximately five minutes, beginning with Governor Daniels.

     TESTIMONY OF THE HONORABLE TIM KAINE, GOVERNOR OF THE 
COMMONWEALTH OF VIRGINIA; THE HONORABLE MITCH DANIELS, GOVERNOR 
                    OF THE STATE OF INDIANA

    Governor Daniels. Mr Chairman and Congressman DeFazio, I 
appreciate the opportunity. I will summarize the material I 
have sent you, and I will start just by venturing to say that I 
imagine everyone in the room agrees about the nature of the 
problem and probably its dimension. It is a national problem 
ultimately requiring national action. I think that you have 
invited Governor Kaine and me here today to talk about ways in 
which we have wrestled with it and attempted to address this 
very practical dilemma of a transportation shortfall at the 
State level.
    Indiana's share of the national shortfall we reckon to be 
around $3 billion over the next 10 years. Our State has been 
filled with empty promises over the recent decades. We have had 
necessary and important projects on the books, money spent 
sometimes to plan and certainly to talk about them, and no 
action and none in prospect. This is especially important to a 
State like ours. The State nickname is ``The Crossroads of 
America.'' Located where we are and with more interstate 
highways intersecting in our State than anywhere else, 
transportation logistics and distribution are a critical part 
of our hopes for an economic resurgence.
    We looked at every option to address our shortfall, more 
than 30, as I recall, the conventional ones of taxing and 
borrowing, and also some fee-based revenue sources. None of 
them remotely came close to closing the gap that we found on 
our arrival in office, and that is what led us to look at the 
public-private partnership, or P3, approach. We secured passage 
in our legislature of, first of all, permission to build our 
largest single project, which is the completion of I-69 from 
northeast to southwest in our State through a partnership, if 
one can be reached.
    Secondly, as already has been mentioned, we went and asked 
the market if anyone was interested in operating our existing 
toll road under contract, under a long-term lease. I looked at 
this toll road, in a business sense, as an underperforming 
asset. It had lost money five of the last seven years; never 
paid off its long-time debt; tolls were at the levels--had not 
changed since 1985; we had tolls as low as 15 cents in booths 
where it cost 34 cents to collect the toll; and it was by every 
measure the least expensive toll road in America.
    We did ask the market. The result was that we received four 
bids. The winning, our highest bid, was $3.8 billion, and I 
should say it includes commitments that will lead to a much 
better toll road, additional billions invested over the years 
in upgrades and technology that are long overdue. We reckon 
this bid to be approximately three times the net present value 
of the road in State hands and run by public authorities in the 
way it has been run in the past.
    What is the result? I like Congressman DeFazio's question 
about net public value or net public benefit. When the 
transaction closes, we will deposit a check for $3.8 billion. 
We will begin collecting interest, parenthetically, at the rate 
of a half a million dollars a day. All of this will be 
reinvested. We considered it a cardinal principle from the 
beginning that, if we were to do such a transaction, we would 
be liberating capital value from an underperforming capital 
asset, and that should not be spent on any priority of the 
moment, however high, but should be reinvested in the long-term 
future of our State, in hard, public assets that we will leave 
to our children and grandchildren.
    And last week, with the benefit of this program, and only 
because of this project, which we call Major Moves, we 
announced a regular road building year in Indiana this year. We 
will break that record next year and every year for the next 
ten. Twelve billion dollars in total, a quadrupling of new 
construction over the previous record, more than 70 years of 
acceleration of projects that were already scheduled to be 
built, and other projects that might never have been built will 
now happen.
    We don't know what single step we could have taken to 
create more long-term jobs and hope in our State. The value of 
infrastructure and its necessity to a modern economy is well 
known in this room, and I thank the Committee for raising this 
question to the level you have. I certainly want to say how 
grateful I am to be here with the Governor of Virginia. We 
studied his State, Mayor Daley's actions in Chicago, and others 
very carefully before taking the steps we did.
    Mr. Petri. Thank you.
    Governor Kaine.
    Governor Kaine. Thank you, Mr. Chairman, members of the 
Subcommittee. It is an honor to be here today talking about 
this critical issue. I think Virginia is a logical choice to be 
here because we now have two decades of experience in private 
financing of transportation infrastructure.
    Just briefly, background. The Governor of Virginia is 
responsible for the third largest highway system in the United 
States, 70,000 miles; the fastest growing port on the east 
coast; some of the fastest growing airports and public transit 
systems in the Country. I was formerly the mayor of Richmond 
and had local roads, toll roads, bus system, port, airport, and 
passenger rail under my jurisdiction. Obviously, we have to 
work very closely together. The responsibilities require a 
constant stream of very difficult decisions, all very much in 
the public eye, and all subject to review by Federal agencies, 
local governments, advocacy groups and the legislative branches 
of government.
    If I can give you a single message today about two decades 
of experience in Virginia dealing with public-private financing 
of transportation structure, it would be that no one size fits 
all. What works in Northern Virginia or Richmond is different 
than what works in Southwest or Southern Virginia, and 
certainly wouldn't automatically apply to Indiana or Illinois 
or any other State. These are business deals that have a very 
specific quality to them.
    I will focus a little bit on the highway issue because I 
know that is the main concern of the Committee, but some of the 
most exciting public-private partnerships we have now in 
Virginia are in non-highway programs: port expansion, airport 
expansion, private landowners paying the first quarter of a 
Metrorail extension to Dulles Airport, and freight railroads 
meeting defined public benefits as a condition of State capital 
investment.
    With this sort of broader context out of the way, let me 
now get into what we have learned in two decades of public-
private financing. First, public-private partnerships in the 
road area are not free; someone has to pay a toll or a tax, 
share in the risk of a project, or dedicate private funds that 
might otherwise go to private profitability. So there are 
sometimes discussions about public-private as if it is a way to 
avoid paying the piper. There is a piper to be paid, and the 
only question is how, if you want to invest in infrastructure.
    Second, the public sector has got an obligation to ensure 
that a public-private partnership addresses a very specific 
public need. For example, we believe that public-private 
partnerships--and we are pushing them vigorously in Virginia, 
primarily through tolling, but through some other mechanisms as 
well--could address about 20 percent of Virginia's unmet 
transportation need. However, we can't, and shouldn't, ignore 
the remaining 80 percent of the unmet transportation need.
    Third, the benefits of public-private partnerships should 
accrue to the toll payers or the taxpayers or the risk takers 
in proportion to their contributions, and that is what makes 
all these deals special: you have got to have a serious 
business model. Not the customary method that we sometimes use 
of making everybody a little bit happy, but real-life business 
decisions that are different for each project.
    And then, fourth, the decision to enter into a public-
private partnership, as well as implementation, has to be open 
to the public. This can be a challenge because you have to 
protect bargaining rights and proprietary information of 
private providers, but at the same time you have to do that in 
an overall framework that promotes transparency and 
accountability.
    Finally, even within public-private financing of highway 
projects, it is really important to be innovative and look at 
multi-modal opportunities, which we are focused on. Just to 
give you a couple of examples: our private partnership programs 
on the roadside are starting to integrate a number of very 
innovative land use mechanisms to make sure that we are 
planning the right way before we implement projects; a 
Pocahontas Parkway, which is our first highway concession, and 
the third in the Country, in the Richmond area provided for 
access to the Richmond airport, linking road and airport 
improvements; we are working on HOT Lane projects on I-95, I-
395, and I-495 in Northern Virginia. Some of you may have had 
the pleasure of using those corridors or experienced challenges 
there, and we are going to integrate the different 
transportation modes in those projects. We have got a current 
solicitation for a highway in Southeastern Virginia, Route 460, 
that will bring together, hopefully, as we reach a deal, 
highway infrastructure, freight rail improvements, and 
intermodal service to the Port of Virginia, the Atlantic Fleet 
in Norfolk, and metropolitan areas of Richmond and Hampton 
Roads; and, then, finally, the Dulles Corridor program we are 
working on right now, a large and complicated and very exciting 
project, brings together and funds connections among Metrorail, 
the Dulles Airport, and the Dulles Toll Road, which is a 
significant element in the national highway system and the 
economic fate of this region. Finally, we have a transportation 
opportunity loan fund that we are using to capitalize and 
incentivize private participation in projects such as Route 28 
here in Northern Virginia.
    I will just conclude in the opening by acknowledging that 
Virginia has a special relationship with the Federal Government 
and your projects. Like all States, we are stewards of Federal 
funds, transit systems funded by the Federal Government. We are 
home to the Atlantic Fleet, the Pentagon, and the majority of 
the Federal workforce in Washington, and we take our 
stewardship and partnership role with you very seriously and 
appreciate the chance to be with you today.
    Mr. Petri. Thank you.
    We will begin questioning with my colleague, Mr. DeFazio 
from Oregon.
    Mr. DeFazio. Thank you, Mr. Chairman.
    Governor Daniels, I guess the question that overshadows all 
this is why wouldn't the public, the State of Indiana, 
undertake this on its own? Why wouldn't you use--this is not a 
new development, so there is no risk. You have been operating 
it successfully; it is a known entity.
    Macquarie, a foreign entity, has come in and they expect 
that they can give you this rather large up-front payment and 
still get an investment rate of return between 12.5 percent and 
13.5 percent, which means if the government were operating it 
and you could borrow the money at the same rate, and you didn't 
want the excess profits that they are getting, you could have 
lower tolls.
    So I guess the question is why wouldn't the State do it and 
continue to operate a coordinated system? Why wouldn't the 
State use the asset to go out and borrow the money and set up a 
fee schedule that would show the investors that there would be 
no risk, that is, the toll increases that you have granted to 
Macquarie?
    Governor Daniels. First, I like collecting interest better 
than paying interest.
    Mr. DeFazio. You what?
    Governor Daniels. I like collecting interest better than 
paying interest.
    Mr. DeFazio. Well, how about profits? They are going to get 
12.5 percent profit a year. Wouldn't you like to collect that?
    Governor Daniels. Not a dirty word in our State, 
Congressman. Let me just say you--
    Mr. DeFazio. No, I know, but, I mean, what if that benefit 
accrued to the public, Governor?
    Governor Daniels. Well, first of all, the entire history of 
the Indiana toll road documents that we would never achieve 
this level of benefit--
    Mr. DeFazio. If I could. So you are saying that there is no 
political will to raise the tolls, but if you enter into a 
binding contract which gives a private entity the right to 
infinitely raise tolls, then it will happen, but politically 
you couldn't go out and say we are going to raise the tolls, 
you can say we have contracted to a foreign entity, they have 
the right of 2 percent CPI or GDP, whatever is higher, and that 
is better? And they get 12.5 percent profit on top of it?
    Governor Daniels. Well, you are a busy man, Congressman. I 
don't expect you to understand our State, but since 19--
    Mr. DeFazio. No, sir, I am just asking a question. Is it 
outsourcing political will?
    Governor Daniels. I am trying to give you an answer.
    Mr. DeFazio. Are we outsourcing political will to a private 
entity here?
    Governor Daniels. Well, it is not a partisan statement, it 
is a statement of fact.......
    Mr. DeFazio. I didn't say anything partisan. What do you 
say?
    Governor Daniels. No, no, the one I am about to make, if 
you will give me that chance.
    Mr. DeFazio. Okay. Sure.
    Governor Daniels. Governors of both parties declined to 
raise tolls by 1 cent since 1985. You make an assumption about 
human nature that all future governors will be different than 
all past governors, and--
    Mr. DeFazio. But didn't you raise the tolls before you 
entered into the agreement with Macquarie?
    Governor Daniels. We were going to raise the tolls whether 
there was a suitable offer or not.
    Mr. DeFazio. All right.
    Governor Daniels. This is a very important point. We could 
no longer go on with a road that was deteriorating, that was 
becoming congested, that had no new technology, of the kind 
that is now the rule in American toll roads. So we put into 
motion a modernization, I am going to say, of these antique 
tolls before we had any idea whether we would receive the kind 
of offer that we did. By any calculation, the most generous 
calculation anybody made, assuming changes in future political 
behavior, was not half as much money as we were offered.
    Now, you say excess profits, which is a--
    Mr. DeFazio. No, I didn't say excess. They are expecting a 
rate of return of 12.5 percent. That is a pretty nice rate of 
return on that investment.
    Governor Daniels. Well, you used the word excess, but I 
will just indicate that I have no idea if they will make any 
profit at all, and I don't much care. The point is that we have 
locked in and limited their ability to raise prices. The only 
way they will make money on that road is by building a road 
that pleases its customers and that increases volume there, and 
the risk has been entirely transferred to them.
    Mr. DeFazio. Right. But if I could, to that point, they say 
inter-urban road, minimal bypass risk. That kind of speaks--you 
know, they feel there is a monopoly or a near monopoly so that 
they can raise rates, and you reference that. I don't know if 
you are familiar with--and, granted, what they did in Chicago 
is really outrageous, because they have diverted the money to 
other purposes, and I congratulate you on using the money for 
transportation infrastructure. But in an analysis of that, a 
gentleman by the name Charles Foote--excuse me--well, Northwest 
Financial Group--since these are very long-term agreements, 
they looked for something they could use as a parallel. They 
went back to the construction of the Holland Tunnel, 1927. They 
applied the same rents that Macquarie is demanding. They have 
an identical agreement with Chicago that they have with you, 2 
percent GDP or CPI. And under that, if you used, with the 
minimum floor, the dollar toll would have escalated, using the 
minimums, to 185.13. If you use CPI only, it 11.42, and GDP 
would be 49.45.
    So I don't think it is much of a limit that we are putting 
in here, unless our economy isn't going to grow or we are not 
going to have inflation. It is going to be quite a potentially 
high escalation if you look at what happened with the Holland 
Tunnel analysis.
    Governor Daniels. Well, you are overlooking the fact that 
the tolls on our toll road are less than half of those today on 
competing roads. Even after the increase is phased in over the 
next several years, we will still be cheaper. The inflationary 
increases you are talking about, the limits you are talking 
about, wouldn't even be available until then.
    Mr. DeFazio. Well, starting in 2010 they apply this new 
factor, is that correct?
    Governor Daniels. Yes, but in 2010 we will still be cheaper 
than the tolls on competing roads are today, let alone what 
they may be by then. So it will all come down ultimately to 
value to the motorist. If people charge too much, folks will 
find other ways of getting around.
    Mr. DeFazio. But they don't seem to think there are 
competing--minimal bypass risk, they are saying. So they don't 
seem to think there are real competing routes. What are--
    Governor Daniels. Well, in order to maintain a minimal 
risk, they will have to build a road that doesn't take four 
days to travel across, and I believe, in pursuit of future 
customers, they will do that.
    You know, but your whole question I think misses an 
enormous point, which is that even if--which is ludicrous--we 
could have captured this much value over time in our State, we 
could not have achieved, we would have missed the opportunity 
to build roads we need today, roads that are decades overdue, 
and bridges in our State that we have been waiting for for far 
too long. And I am just not willing to wait 10 years or 20 or 
30, even assuming that future governors magically are 
transformed into good businessmen.
    Mr. DeFazio. Okay, just one other, Mr. Chairman. In Ohio, 
when truck tolls were increased to 18 cents a mile, there was a 
huge diversion of truck traffic onto secondary roads, and the 
State was able to roll back those tolls. In this case you won't 
control the tolls, and in 2010 your truck charge will be 20.04 
cents per mile. So if there is a huge diversion of traffic onto 
secondary roads, how are you going to get Macquarie to roll 
back their tolls?
    Governor Daniels. First of all, 20 cents five years from 
now will still be dramatically less than in Illinois, for 
instance, or in most States in the Country. The Indiana toll 
road at that level will still be a bargain. But--
    Mr. DeFazio. Well, you are assuming there won't be 
competition and other people might not lower their tolls. But, 
in any case, just if you could, I mean, does the State have a 
contingency if there is something you didn't anticipate that 
happens because of the private ownership? I am worried about 
the coordination between the private and the public sector. 
They are there to make money; you are there to benefit the 
public and minimize congestion. And if those two come in 
conflict, do you have a way to control what they do or revisit 
anything they might have caused inadvertently?
    Governor Daniels. The three-inch document that binds them 
requires them to maintain a traffic flow which is equal to or 
better than today's, in other words, add lanes and maybe other 
technology to make this road better than it is today.
    Mr. DeFazio. But does it require traffic or just capacity?
    Mr. Petri. I think--
    Mr. DeFazio. Okay, thank you, Mr. Chairman.
    Mr. Petri. We will attempt to have another round, but time 
is limited and there are a number of members who would like to 
ask questions as well.
    Mr. Sodrel.
    Mr. Sodrel. Thank you, Mr. Chairman.
    Based on your experiences, what are the biggest obstacles 
in putting together these public-private partnerships? I might 
ask of both our witnesses. Governor Kaine, if you want to 
start.
    Governor Kaine. Good question. Finding routes that have 
significant enough volume to entice the private sector to be 
interested, that is a key one. A number of parts of the State 
we have transportation needs, but we don't have traffic volumes 
that would be sufficient to get the private sector involved. So 
that is always a key issue up front.
    When you have corridors where there is sufficient volume 
just weighing the decision about public investment that you 
might be able to make versus a private participant that is 
going to expect a profit motive. Those are hard business 
decisions. One of the things we have to weigh is debt 
limitations. Limitations on State debt that sometimes, 
theoretically, we might like to do a project on State debt, but 
if we have a debt imitation problem, that is one where we then 
look to the private sector to try to come in and advance us.
    So I would say probably the biggest challenge that we have 
next to the volume of traffic challenge is capturing the right 
deal. There are things we want to do in rural parts of Virginia 
to help economic development, where we just don't have a volume 
that would support tolls, but in areas like Northern Virginia, 
where there is the volume, it is just the kind of hard business 
decision about what is the right way to do it. We don't have 
any project that looks like any other project, even in 
Virginia, the particulars are all varied, and being able to 
make a smart business decision about, yes, this makes sense, 
let us go down this path and do it.
    I authorized a loan recently out of a transportation 
capitalization fund we have to complete a public-private 
partnership to construct interchanges on Route 28 out near 
Dulles. One of the reasons for that loan is we had the private 
sector there doing some of the interchanges and they were at a 
critical mass, and rather than have them go away and then try 
to get them back after construction costs had gone up a lot, we 
felt like a loan that would enable them to stay working and 
taking advantage of their current working conditions would be 
helpful.
    But I would say the biggest obstacle is just kind of 
knowing what the right deal is at the time and not having a 
one-size-fits-all approach.
    Mr. Sodrel. Governor Daniels?
    Governor Daniels. I think that says it well. In our case, I 
think maybe the novelty. Virginia is a 20-year, I think the 
Governor said, veteran of these approaches, and it was new in 
our case. And this probably led to some folks misunderstanding 
the size of the opportunity or the long-term value. I think 
what our comments reflect is we are simply trying to solve a 
practical problem here.
    In our State, there was never an alternative proposed--
zero--and there has not been to this day to closing the gap we 
had. And I don't know what options at the national level the 
Committee may consider, but they are not easy to identify. As 
you say, there is some limit to what fuel taxes ought to be, or 
other fees, and that is what I think leads folks like us to 
look for these alternatives and in some cases, selectively, 
they apply.
    Mr. Sodrel. Thank you, Mr. Chairman.
    Mr. Petri. Thank you.
    Ms. Schwartz?
    Ms. Schwartz. Thank you, Mr. Chairman.
    And I am from Pennsylvania, so we just heard an 
announcement from our Governor that he is interested in looking 
at this. It is sort of as open as that. So my interest in this 
is to really find out from you--and I think the questions tried 
to be asked in a way is, one, what is the downside? And if you 
could be a little more specific about this.
    I mean, I understand the upside: you are going to be able 
to get private investment to do the capital improvements, 
create roads in high-volume, profitable areas, which then, of 
course, leaves the public sector to take care of areas that are 
not profitable. So you are still going to have a problem at the 
State level. How are you going to find the capital dollars to 
improve the roads in areas that are not profitable?
    So one of my questions is does that just put a greater 
burden on the State, leaving only the areas that are really 
problematic, if you want to put it that way, at least from a 
financial point of view? And, secondly, what happens when it 
doesn't work out so well? When in fact the profits don't come 
the way they might, or the tolls go up so much that they don't 
get the profits they want to, and you are in a 99-year deal 
here. So can you just give us some advice a little bit on the 
downside, what isn't working, what we ought to be looking out 
for, ways in which we at the Federal level ought to be watching 
this a little more carefully if we should at all?
    My guess is that you might have different answers on that, 
but if you could give us a little guidance on it, it would be 
helpful.
    Governor Kaine. I think one of the down sides, 
Congresswoman, is there are those who beliee public-private 
partnership could be kind of a magic language. I see this from 
a political standpoint where it makes some that I deal with in 
Virginia government and the public think, well, we can do it 
all by public-private partnership.
    And that is a little bit of a political downside and we 
don't think that that is accurate. The U.S. Chamber of Commerce 
did a study. They are favorable to the notion of public-private 
partnerships, but they believe that the tolling and other 
financing mechanisms in these partnerships could address about 
20 percent of our unmet need, but not the remaining 80 percent. 
You used the example earlier in a high-density corridor with a 
lot of traffic, much tougher in a rural part of the State.
    So public-private partnership isn't a magic word that you 
can just say and then it solves all the transportation 
financing challenges. You know, I am dealing with my 
legislature much as Congress is now, trying to find long-term 
funding solutions. We are aggressive on public-private 
partnerships. We also believe that we need more core revenue 
into our transportation funding so that we can take care of our 
other needs, particularly some of the rural parts of the State.
    So I think that that is a political downside. But I don't 
believe that that political downside outweighs the fact that 
these can be very good deals. They can help you deal with 
limitations on State debt capacity, they can get you the 
creative energies of financing partners that you don't have at 
the State level. But you just have to know when a deal works 
and when it doesn't.
    We have had experience with doing public-private deals 
where the scenario you raised as the second half of your 
question came to pass, that the ridership projections didn't 
pan out. This was on a piece of new infrastructure, so there 
were other options for people to travel around the Richmond 
metropolitan area. They chose not to take this new 
infrastructure because the tolls were too high. And we had to 
then step in, get involved in that deal. We refinanced it with 
another private partner, put some pretty significant 
limitations on tolls. We also put in a walkaway clause for 
convenience that we could use if we needed to. We learned a lot 
from the first deal, so that the second deal was a lot better 
negotiated. So that is a downside.
    Ms. Schwartz. But you really raise a very important point, 
which is the tolls can go too high and the market isn't 
interested in paying those kind of tolls, they go elsewhere. So 
they either put more of a burden on other public roads that are 
not so that we end up seeing this beautiful new road that isn't 
getting used, they can say, fine, companies do that all the 
time, and you walk away. They walk away. We see that. But it is 
a bigger problem, it seems to me, that if we have actually 
sanctioned this project and they walk away from a large road 
that is not being used. So I think your point that it has got 
to be an opportunity for oversight for renegotiation so that, 
in fact, your role as Governors, our role, of course, in 
protecting the public's interest. I mean, the whole issue here 
is these are now private roads.
    People still, I think, our constituents would perceive a 
problem not being able to get on our roads. So if we end up 
having this two system of nice fancy roads, too expensive, 
maybe, for most of us to use, and other roads that are still 
not well maintained, is it a question of political will that we 
just haven't created the political will in the State level to 
make the kind of--or the Federal level to make the kind of 
investments to have roads people can afford that are well 
maintained?
    Governor Kaine. I think political will, being willing to 
invest is a huge issue, certainly is in my State, certainly is 
federally. That is a big piece of it. It is a little bit easier 
in dealing with a project that you are not as "concerned are 
the tolls going to be too high" if it is in an area where there 
are clear, other viable ways that people can get around, that 
the pay private option isn't the only way that they can get 
from point A to point B. That makes you feel a little more 
comfortable in doing a deal on a new piece of infrastructure. 
Hey, if folks want to use it, they can; they will have to pay 
to use it, but if they don't, they can continue to use the road 
network that we have that we are trying hard to maintain.
    Ms. Schwartz. I think my time is up, but sort of 
interesting challenges. I think it is a whole new world out 
there that you are suggesting, and I think there are a lot of 
lessons to be learned from that we ought to keep a careful on 
at the Federal level.
    Mr. Petri. The reason we are having this hearing, in part, 
the Indiana toll road exists not to serve Indiana, really. I 
mean, you would not have a toll road across Northern Indiana if 
there was not an Ohio on one side and Illinois and the whole 
national economy. So this is an opportunity Indiana has to 
upgrade that, extract some money from it and improve 
infrastructure across Indiana. It is an opportunity other 
States don't necessarily have, and other regions, so that 
becomes a national concern.
    And I guess I have a couple of questions. One is if Federal 
policy changes or laws change or we do different things in the 
infrastructure area that may impact this contract, are there 
escape clauses, or is this in any way a constraint on what we 
are doing, a risk that Indiana is assuming? How does the 
Federal program interface with this private contract that 
Indiana has entered into with--as far as this public facility 
is concerned?
    Governor Daniels. In no way I can foresee right now, Mr. 
Chairman. This road was constructed by the State of Indiana 
with bonds that the State of Indiana let and is still paying 
off. We will finally retire them because of this latest 
transaction. So I don't foresee that happening. It is an 
important point to us that two-thirds of the traffic on the 
road, two-thirds of the tolls paid on the road are paid by out-
of-State motorists today. That is another reason we found this 
effective from our State standpoint, an effective way to close 
our gap.
    Mr. Petri. We have a lot of transportation hot spots all 
around the United States. One of the areas of greatest demand 
actually is out in California, which has particular problems 
because of Proposition 13 and a variety of other constraints on 
their ability to raise revenue. So we have had, repeatedly, 
regions in California coming out here, talking about how they 
have convinced their voters, despite the anti-tax climate and 
everything else, to impose taxes upon themselves by two-thirds 
votes for billions of dollars in just one individual county, 
Riverside County, California, for example. And they not only do 
it once, they do it every four or five years. But they do it 
through very painful, difficult, complicated political 
leadership involving building coalitions, meeting a variety of 
needs, and, finally, achieving enough of a consensus to go 
forward, something that was attempted in Northern Virginia. It 
is very complicated and they are still working toward that.
    But it is a good model as to what--and the bottom line, 
though, is--and I would like your comments on this--that when 
you go through that process, you end up with public support and 
understanding of the need for this infrastructure. If you 
short-circuit that, despite the interim pain, you may, over a 
very long period of time, be undermining our economy because 
there is not real public support for infrastructure, you are 
extracting it from the private sector, using it at sort of 
cheap because they are not paying for it as it is going forward 
directly, and the public understanding and appreciation of this 
role of government is gradually being diminished, and it could 
make us less vital as a polity, so to speak.
    Could either of you comment on that? Is this an expedient 
that is necessary in the short-run but unwise in the long-run, 
or is this the way of the future?
    Governor Daniels. Well, that is an interesting question. I 
don't deny the importance of abstractions like public 
appreciation. I am trying to build it all the time. I think it 
is fairly obvious to most citizens of a State like ours, but I 
am constantly talking, and have long before this transaction, 
about the central importance of public assets, transportation 
infrastructure of all kinds, to the future success of our 
State.
    I wasn't prepared to wait years to try to build this. We 
had coalitions, all right. We had every group that spoke on 
this subject, including strong support of building trades 
unions, for instance, all of local government, and we will 
continue trying to rally people to this notion, because as 
Governor Kaine says, this is not a complete solution, and we 
have many other hurdles to cross to have the kind of 
transportation network that we want.
    But, again, to return to what I said again, people keep 
asking about risks and so forth. Does no one notice the risk of 
inaction, the enormous cost of inaction? And we had already 
paid it for decades in our case, waiting for an I-69, waiting 
for a north central to northern corridor we call 31, waiting 
for a transverse road we call the Hoosier Heartland Corridor. 
And no one seems to have calculated the cost, the lost jobs and 
the economic activity, that Indiana paid for sitting around 
waiting for a miracle under the old system.
    So I support strongly, and I hope to contribute in my days 
in this job, to an ever-stronger appreciation by people about 
the importance of roads and bridges and about the fact that 
they are never free. We are only talking about which way to pay 
for them, and the extent to which users should pay more 
directly or spread it to everyone. And that is a useful debate, 
but I didn't want to have it for years and leave office leaving 
the same empty promises behind.
    Governor Kaine. Mr. Chair, if I could just answer the same 
question. It could be a matter of political expediency if we 
promote the notion that public-private partnerships are going 
to be the full answer, because they are not. And one of the 
things that I find frustrating is that, you know, there are 
some who will talk about public-private partnerships as if that 
means that the State doesn't have to be a leader.
    I am involved in a very, very difficult special session now 
about State funding for transportation, but I still have some 
real optimism that we will get there. The timing is up in the 
air. But public-private partnerships are part of the solution; 
local empowerment is part of the solution; coming, hat in hand, 
to the Federal Government is part of the solution. But the 
State also has to make some, you know, hard decisions about the 
level of our investment.
    And if we push the notion that public-private partnerships 
are going to be the salvation of it and that no one else has to 
make any hard political decisions, then we will have used an 
expediency that is inaccurate. It can solve a very important 
chunk of our problem, but much of the problem will still be on 
our shoulders in terms of making some hard political calls.
    Mr. Petri. Thank you.
    Mr. Pascrell?
    Mr. Pascrell. Thank you, Mr. Chairman. Mr. Chairman, I find 
it interesting when we are--to find out what is the best way we 
can get the most out of a public asset. I think that is at the 
core of what we are talking about, whether we are talking about 
privatizing a road or privatizing a water system. I want to 
know what the public is going to get out of this. I think that 
is the rub in all of this.
    I believe in a market economy, but privatization of the 
infrastructure, to me, is very serious business. If we 
privatize the road, would that road be eligible for Federal 
dollar directly? What form of subsidizing does this take?
    You know, New Jersey has looked at a very similar plan. At 
this point, has rejected it, for the most part. You are having 
on the gubernatorial level. We have problems on the Federal 
level dealing with our trust fund. The trust fund, by 2009, 
will be in the red by $2.3 billion. We have a very serious 
problem, on the Federal level, maintaining our leverage here. 
And, as you see, we are really anxious to deal with it.
    On top of that, States are facing severe constraints with 
their own budgets. My home State of New Jersey toll roads have 
been ubiquitous since 1950s. The Turnpike and the Garden State 
Parkway bring the State $829 million from tolls annually. These 
are temporary tolls, at least they were supposed to be--like 
the tolls on the George Washington Bridge. Temporary tolls on 
the George Washington Bridge. But they have become a staple for 
transportation financing.
    The Federal-State partnership I believe has been a 
productive one for financing and planning our Nation's roads. 
Privatization roadways may result in a loss of control over 
management and the operation of the facilities, like toll rate 
setting or even the improvement of the other roads in the 
geographic proximity. So we are a long way from resolving, and 
this is an option.
    In the biggest highway privatization deal in U.S. history, 
Indiana signed an agreement last month, as you know, to turn 
the 157-mile Indiana toll road over to a foreign consortium--
ah, that rings a bell--and it will operate for a profit for the 
next 75 years. Under the lease, the Spanish-Australian 
consortium, Cintra Macquarie, will pay the State $3.8 billion 
up front and will be responsible for operating and maintaining 
the highway. It will get to keep the toll revenue it collects. 
It is my understanding that this is already a toll road, so the 
initial construction of the road is presumably already paid 
for.
    I have a couple of questions. Will the lease make up for 
lost revenue, toll revenue normally received by the State? How 
about the Federal Highway matching funds? What plans are there 
to ease congestion, since this is going to be a private road 
owned by a foreign consortium; was this a motivating factor? 
What steps, if any, have been taken to ensure our homeland 
security when contracting with a foreign interest on a vital 
piece of our Nation's infrastructure? Governor Daniels, I would 
ask you to respond to that. That is four questions I asked.
    Governor Daniels. I don't know if I counted four, but let 
me deal with some of them. First of all, we need construction 
today; our toll road loses money fairly accounted for. And the 
second benefit in--I think you said earlier on what does the 
public get. Our public gets $5 billion of new roads and bridges 
it wouldn't have had otherwise. That is what we get. We get a 
quadrupling of the new construction from current levels; we get 
projects that have been on the drawing boards of our State for 
a long time. That is what--
    Mr. Pascrell. Now, Governor, when you say the public gets 
$5 billion--
    Governor Daniels. Four billion dollars plus interest.
    Mr. Pascrell. Yes. What do you mean the public gets it? The 
State treasury gets it, correct?
    Governor Daniels. Well,--
    Mr. Pascrell. And then are we supposed to use that money, 
the money that you get, how are you supposed to use that money, 
is that categorical money, is it universal money?
    Governor Daniels. You weren't here for the opening, 
Congressman, but I said--
    Mr. Pascrell. I read your statement.
    Governor Daniels. And I said that it was a cardinal 
principle for us that the money would not be spent on any 
purpose other than reinvestment in, we hope, the highest 
priority and the best chosen projects we can leave--
    Mr. Pascrell. Is that defined in the contract--
    Governor Daniels. Yes, it is.
    Mr. Pascrell. Is that defined in the contract that you 
established with the private company that--
    Governor Daniels. Well, they have nothing to do with that. 
It is defined in the law that we passed in the general assembly 
of our State. There was only one exception which I did agree 
to, and that was to immunize passenger cars from any increase. 
Think of it as a dividend back. So in 2016, the passenger 
motorists of Indiana will pay the same toll they paid in 1985. 
Pretty good deal; 15 cents at least at certain toll booths.
    Mr. Pascrell. And that toll money goes to the private 
consortium, correct?
    Governor Daniels. They will collect the tolls, and if there 
is any--and they may make money, they may not, but, again, the 
risk of that is entirely on them.
    You asked about congestion. Good question, important to us. 
We have been struggling to prevent congestion from building on 
that road, haven't been able to do the maintenance and 
expansion that we like. They are bound to do that; they have 
committed to billions over the course of the lease. And as I 
frequently reminded people, that is written into the agreement. 
There is a definition of traffic flow, an A through E system, 
as I recall, and they are required to add capacity or to 
maintain or improve the speed with which traffic moves across 
that road. But I think it is important to note that that is 
really the State's second line of defense. The first line of 
defense is if that road becomes undrivable or less tolerable, 
they lose money, and they will be driven, in my opinion, by 
their own requirement, the market's requirement, to please 
their customers, to see that that never happens.
    Mr. Pascrell. Governor, just respond, in conclusion, about 
the Federal Highway matching funds. How about those funds?
    Governor Daniels. Well, I am not sure how they are--
    Mr. Pascrell. They are our tax dollars.
    Governor Daniels. Well, the toll road was built with 
Indiana dollars, and not Federal dollars; it was built with 
bonds. And maybe New Jersey's was the same, I don't know. But I 
am sorry if I am missing a point here, but I don't believe 
there is an implication with regard to, for instance, the 
return of dollars or anything like that. They were built with 
bonds the State borrowed against its own full faith and credit, 
and has continued to pay interest on all these years.
    Mr. Pascrell. When I talked about matching funds, you are 
changing ingresses and egresses along the highways constantly 
for safety reasons, etc., etc. Whose responsibility is that, 
and will there be matching Federal dollars you will seek, the 
company would seek, the consortium would seek?
    Governor Daniels. No. If you are talking about the toll 
road it is their responsibility out of their pocket.
    Mr. Pascrell. So they will not have the ability to seek 
Federal dollars?
    Governor Daniels. I guess anybody can come down here and 
ask, but that is not a question--
    Mr. Petri. We will have another round. Thank you.
    Mr. Duncan.
    Mr. Duncan. Well, thank you, Mr. Chairman, and I will be 
very brief. I have got just a couple of questions.
    I was in a congressional delegation chaired by Chairman 
Rogers about two and a half years ago, and one of the places we 
went was Australia, and we met with one of the companies that 
is going to testify in the next panel, and I am a little bit 
curious. Do either one of you see a problem or have a concern 
about foreign companies leasing some of our major roads or 
investing in that way, and do you think the public would accept 
that type of thing if it was shown it was pretty good financial 
deal? I know they are doing that in some other countries. Have 
either one of you looked into that or considered that?
    Governor Kaine. Congressman Duncan, we have, in Virginia, 
wrestled with that question. We have kind of a uniform 
principle that if we are dealing with an investment group that 
is foreign owned, that we require them to incorporate in the 
United States and have a U.S., on-the-ground presence that is 
incorporated here. That is at a minimum of what we look for.
    One of the principles that we feel very strongly about--
and, again, this is--this kind of changes deal to deal, because 
there are not just cookie cutters on these deals. But we want 
the value that is generated in a corridor to stay in that 
corridor, so we are not spending the money in the corridor on 
general fund activities it is for transportation; we are not 
spending it in other parts of the State, we want to keep it in 
the corridor. And even the notion will there be a profit margin 
that will go somewhere else, we weigh that issue and sometimes 
decide not to go with a private investor or even a foreign 
investor if there was a way we could keep every dollar of value 
in the corridor where the project takes place. But we resolve 
that question somewhat differently depending on the deal and 
who is coming to the table to offer it or participate. 
Sometimes you have a lot of interest, sometimes you have a 
little bit of interest, and we have to tailor it depending on 
the project.
    Mr. Duncan. Is that similar to the way you handle it, 
Governor Daniels?
    Governor Daniels. Yes. I mean, this consortium is an 
American corporation that will have a board and there will be 
local representation on that. As I understand it, we will put 
an oversight commission in place at the State level to make 
sure that this very thick agreement is lived up to 
scrupulously. I personally insisted on a ``buy Indiana'' 
requirement on the consortium so that virtually all of their--
certainly all of their hiring, but virtually all of their goods 
and services will be bought in our State.
    And I guess, lastly, I am at a loss to know what to say 
about this concern about foreigners. For openers, Congressman, 
Australians have fought beside us in every war and died for the 
same freedoms we cherish, and I think it is an insult to them 
to suggest that somehow they would--some company from there, 
not a country, it is not a public entity we are dealing with--
would in any way undermine that, not to mention it would 
undermine their own business interest to do something injurious 
to the interest of this Country.
    I mean, I will just tell you on behalf of our State--and I 
bet New Jersey is no different--I consider a significant part 
of my job to successfully compete for foreign investment. We 
are proud to have hundreds of companies in our State from 
Europe, from Japan, and elsewhere, and I consider it a victory 
for Indiana when those dollars come here and put Hoosiers to 
work, as opposed to go somewhere else. So maybe the mind could 
conjure some situation that ought to be guarded against, but it 
is not this one.
    Mr. Duncan. Well, I think those are very good answers. Let 
me quickly ask you about something else.
    I chaired the Aviation Subcommittee for six years and we 
found that, well, the worst example was the main runway at the 
Atlanta Airport took 14 years from conception to completion, 
but only 99 days of actual construction, and we found that 
highway projects and all these projects take three or four 
times as long as they should because of all these environmental 
laws and rules and regulations. We tried to put some 
environmental streamlining in the last highway bill, but do any 
of you--have you seen problems like that and do you have any 
specific suggestions about how we could speed those processes 
up?
    Governor Kaine. Congressman, I have to admit I am still 
pretty new on the governor job; I have just been in for four 
months, so I haven't experienced problems yet that would give 
me suggestions. You know, we do have one significant public-
private partnership under consideration dealing with Interstate 
81 in the western half of Virginia, and there are some serious 
environmental issues raised by the citizenry in that area 
concerning that infrastructure we are having to work through in 
public comment. Thus far, it has seemed to me that the 
environmental issues are significant enough that we ought to be 
considering them, but I don't have any particular suggestions 
about that here today.
    Mr. Duncan. All right. All right, my time is up. Thank you 
very much.
    Mr. Petri. Ms. Carson.
    Ms. Carson. Thank you very much, Mr. Chairman, and thank 
you very much, Ranking Member DeFazio, for holding this 
hearing.
    Welcome to the two Governors who are here to enlighten the 
Committee on this public-private partnership and explain in 
detail what all these toll roads are going to do for America 
once they are turned over to private enterprise.
    Indiana is the crossroads of America, and, like the rest of 
America, Indiana is in dire need of transportation investment. 
I personally feel like transportation is one of the greatest 
investments that any public entity could make on behalf of its 
citizens. I have my reservations about leasing all of our toll 
roads to private investors to raise money, but we in Indiana 
can certainly all agree that we have some critical projects 
that need funding and that will provide high-paying jobs, 
hopefully, with excellent results for Hoosiers. And while I 
have the floor, because I probably won't ever get it again from 
the Chairman, with the contract contains a clause that 
prohibits Indiana to build or improve roads that might compete 
with the Indiana toll road, will the contract do that? 
According to the GAO report, all previous public-private and 
toll leasing partnerships range on that from 30 to 50 years. 
Why is Indiana on a 75-year contract, so much longer than the 
rest? And if this 75-year deal goes through, it will earn $3.8 
billion for the State, but the total cost of your 10-year plan 
is $11.8 billion. Doesn't that even come close to funding the 
project, or does it?
    I know you thought I was going to be mean to you, but I am 
not, I am welcoming my Governor here, and appreciate very much 
you taking the time. And I will yield back and let you answer 
my questions.
    Governor Daniels. Thank you, Julia. Always fun to see you.
    The answers are, yes, we have a non-compete clause. I think 
they are fairly typical. Ours is pretty narrow, it says no 
interstate quality road within 10 miles of the toll road. There 
is nothing on the books, in the plans, in the dreams of 
Indiana. In fact, the only road that could be used or corridor 
that could be used conceivably to touch that clause, every 
mayor along it is determined will never be expanded; it would 
bulldoze through the middle of their towns. So we don't believe 
we gave up a thing in the non-compete clause.
    The 75-year question is a good and frequent question, and 
the answer has to do with tax law, frankly. We still own this 
road, and always will; this is a lease, not a sale. And for the 
tax advantages in various jurisdictions of a lease to pass 
along to investors, as I understand it, depreciation and 
interest costs and other deductions, that lease has to be of a 
certain term. The Chicago lease is 99 years, which struck me, 
as it would anyone, as an extraordinary time period. We were 
told by counsel that they were nervous at anything less than--
at 50 years or less, and opted for a midpoint. I don't know, 
and you would have to ask an expert, whether something shorter 
than 75 could still achieve the value for Indiana that we 
achieved. But I know that if the lease had been much shorter 
than that, it wouldn't have been 3.8, it might not have been 
2.8 or 1.8 or anything really worth accepting.
    Lastly, yes, 3.8 is less than 12 billion, but that is the 
gap we were talking about. Somewhere I even brought a chart, I 
don't know. Without that money, Congressman Carson, we would 
have continued, as we have in Indiana, limping along, funding 
less than half the new construction we need. We are going to 
quadruple new construction as we catch up. And we have done 
less of the maintenance we need, less of the preservation we 
need, just continued to sort of put patches on a system that 
really needed to be rebuilt. So it makes all the difference in 
the world between the hand-to-mouth world we have been living 
in and actually funding--in advance, I should say--the plans 
that we have always dreamed about.
    Mr. Petri. Thank you.
    Mr. Coble.
    Mr. Coble. Thank you, Mr. Chairman.
    Governors, good to have you all with us.
    Mr. Chairman, I apologize. I had two other meetings, so I 
am a belated arrival.
    My colleague, my friend from Tennessee, read my mind. I was 
going to ask you all about the foreign transportation 
operators, but I think you all adequately responded to that. 
That appears to be hot copy now.
    Let me ask you this, gentlemen. How realistic or fair is 
it--strike that. Let me say it a different way. Advocates of 
toll roads oftentimes say the good future is that you realize 
revenue from out-of-State motorists, which, of course, is 
realistic. Opponents, of course, won't know toll roads at all 
to be in existence. How realistic or fair, Governors, is it to 
have a toll road in one portion of the State and use the 
proceeds therefrom to construct projects in other portions of 
the State? In other words, you are having motorists on the 
eastern end of Virginia or Indiana paying the toll, and then 
you divert those monies to the western end of Virginia or 
Indiana to construct new projects. How realistic and fair is 
it, (a); and, (b), is it difficult to sell to the public 
taxpayers?
    Governor Daniels. I will give you our experience. A very 
realistic and fair question, one of the first ones we asked. In 
our case, we committed 34 percent of the value that we are 
going to receive to 7 counties out of 92, those 7 being the 
ones the toll road passes through. Thirty-four percent is the 
amount of tolls paid by all Indiana motorists from all 92 
counties. I am up there frequently, and the tolls that I might 
pay or a motorist from anywhere else might pay would be in the 
34 percent figure.
    And with just your question in mind, we said that the areas 
which have been host to and supported this road these years 
ought to come first, and we gave them every penny of value that 
any Indiana motorist created in this arrangement. Actually, it 
is far more than that, because some of the major projects that 
will directly benefit that part of our State will connect it to 
other parts of the State, and I am not even counting that in 
the calculation.
    So that is the way we addressed it. It was batted around 
extensively in the legislature, how much is fair, and that, I 
think, became the consensus point of view.
    Governor Kaine. Congressman, in Virginia we have a very 
fixed rule that we don't take any value out of the corridor 
where it is raised. We have to use it for transportation in the 
corridor where it is raised. All the transportation investments 
do not have to be highway, they can be transit or rail, but the 
value has to stay in the corridor.
    And we are involved in a complicated one right now, the 
discussion about the Dulles Toll Road and rail to Dulles. That 
may well be the most valuable corridor, in terms of its density 
of use, in Virginia, and there would be opportunities to use 
revenues from that corridor to do projects elsewhere in the 
State, but I have taken the position that Northern Virginia 
commuters shouldn't be paying tolls and then not getting the 
benefit of the tolls they are getting. So we, by law, do not 
ship value to any other part of the State other than the 
corridor where it is raised.
    Mr. Coble. Gentlemen, do you see that this is a partisan 
issue for either one of you, I mean, Democrat and Republican?
    Governor Daniels. I think it definitively is not. This is--
    Mr. Coble. I would think it would not be either.
    Governor Daniels. This is a debate, as I see it, between--
about a practical solution to a problem, and, frankly, I find 
the objections to it ideological and not pragmatic. I think it 
is a debate between--I think governors tend to be fairly 
pragmatic because that is the nature of our job, it really 
permits nothing else.
    I will say it did become partisan in our State, and I am 
sorry it did, and I tried hard to prevent that. But aside from 
some members of our Black Caucus who voted for the bill, it did 
become partisan, but I don't think other debates need to be. I 
just simply look around. Most of the activity has happened 
under Democratic governors and mayors; Mayor Daley in Chicago, 
the last couple governors of Virginia, and now in Illinois and 
now in Pennsylvania.
    So honest people can differ about the practicalities of 
this approach. I think well done; they speak loudly for 
themselves. But this whole matter of solving our national 
infrastructure problem I would hope would be the least partisan 
of our debates. The need for it is something that affects us 
all and we are simply talking about the best way to get to a 
good outcome.
    Mr. Coble. Governor?
    Governor Kaine. Congressman, if I could say I would agree 
with what Governor Daniels says. I do not think it is partisan. 
I think it can be ideological, though, because, again, the one 
danger I see in this discussion--and I am a proud proponent of 
using these partnerships when they are right. There can be an 
ideological danger because there are some who say public-
private partnerships are going to solve 100 percent of our 
transportation financing challenges, and that is an ideological 
position that some advance that is just wrong.
    I believe that these partnerships have the capacity to 
solve a healthy percentage, 20, 25 percent of our challenges. 
They are not going to solve challenges in rural parts of the 
State or places where there is not sufficient density of 
traffic. And so there is no substitute, then, for State leaders 
and Federal leaders having reliable sources of infrastructure 
funding in addition to public-private. So it can be ideological 
that way, but I agree, the Dems and Republicans mayors and 
governors, you know, we are deal makers and we are going to 
look for the best way to advance a need to serve our citizens, 
and in some cases this is the best way.
    Mr. Coble. Well, you all have sought employment, as have 
we, where the word partisan is not unknown, and I thought that 
was a pertinent question. Gentlemen, thank you all for being 
with us.
    Thank you, Mr. Chairman.
    Mr. Petri. Thank you.
    Mr. Michaud.
    Mr. Michaud. Thank you very much, Mr. Chairman and Ranking 
Member, for having this hearing.
    I want to welcome both Governors here. I have several 
questions for both of you, if you can answer them. My first is 
I understand that while there has been controversy related to 
project labor agreements, I believe that they are effective at 
keeping project costs down and ahead of schedule, in a timely 
manner. Where can we as a Committee find an analysis of project 
labor agreements as it relates to highway and bridge 
construction as far as the cost-effectiveness?
    My second question is what happens to the Davis-Bacon Act 
when you look at public-private sector investment?
    The third question is, Governor Daniels, you had mentioned 
about working with the building trades, and I assume that has 
been successful, you moved forward.
    I guess my question to Governor Kaine would be have you 
worked with the building trades as you move forward on these 
public-private sector agreements?
    My next question is on weight limits on public-private 
sector roads. What is the weight limits on those roads?
    And my last question is, Governor Kaine, you had mentioned 
that they are paid primarily through tolling and other ways. My 
question would be what are the other ways.
    Thank you.
    Governor Kaine. Just to tackle the specific questions 
directed, other than tolling, what are ways we pay for public-
private partnerships? We have a significant project near the 
Dulles Toll Road, it is Route 28; 10 interchanges, a sizeable 
project. The way we have done that in a public-private venture 
without tolls is that adjoining landowners, the value of whose 
land would be benefitted by the project, have agreed to pay an 
enhanced property tax assessment, with the guarantee that all 
those monies would go into corridor improvements.
    And that will be a feature of funding the rail expansion to 
Dulles as well. There will be tolls, but there will also be 
property owners who, by a vote, have agreed to have a special 
assessment that they would be assessed to help with the 
infrastructure improvements.
    On some of the labor related questions, we have not done 
project labor agreements in Virginia. Our PPTA projects tend to 
be on Federal roads where the Davis-Bacon Act applies, so that 
law does apply to most of the PPTAs that we have looked at.
    And then, finally, in terms of our working relationship 
with the building trades on some of these projects, the one 
that I am very involved in now is the rail expansion to Dulles, 
and we have made a decision, after a fairly careful review, 
that the right project manager for that project is the 
Metropolitan Washington Airports Authority, and they have a 
long history of working with building trades on capital 
construction projects at the two airports under their 
jurisdiction. So while we are still working on the details, 
there is a comfort level, I think, among the labor community 
with the way that the deal is being structured and the big 
picture, because it is a known relationship; they are doing 
work at the airport right now.
    Governor Daniels. Quickly, no PLA required on the 
transaction we did, and, as a practical matter, I think it is 
all but certain, it is just the nature of the marketplace in 
our State, that this work will be done by union contractors; if 
not every penny of it, very close.
    Davis-Bacon will apply whenever Federal dollars are 
involved. That will be most of the projects we do. We will 
certainly take these proceeds and, as I explained, fill out the 
huge gap that we faced. But in most cases it will be a mix of 
funds, as I understand it or it will be on a Federal road 
directly, so Davis-Bacon should apply in virtually every case, 
if not all.
    And on weight limits and all other such things, 
Congressman, we specified at least the current standards, 
whether it is congestion, traffic flow, everything down to snow 
removal and how long it takes to get a dead animal off the road 
is covered, and we specified at least today's standards, which 
we have been struggling to maintain because the road is, at 
today's toll levels, is not really covering its full cost.
    Mr. Michaud. So is that 100,000 pounds or 80,000 pounds?
    Governor Daniels. You are above my pay grade now.
    Governor Kaine. Yes, I am not sure either. I am sorry, I 
can't answer that, Congressman Michaud.
    Mr. Michaud. Okay. On the Davis-Bacon, so you said it 
applies for where Federal dollars are used. But on these 
public-private partnerships, are all those agreements that both 
States have, are there any Federal dollars involved in that or 
are they primarily just private sector dollars? And if they 
are, do you apply Davis-Bacon to that?
    Governor Daniels. Well, of course, today we have not 
constructed one, so we have not encountered this yet. The one 
we are looking at and have authority for would absolutely have 
Davis-Bacon involved, for both reasons: it would be a Federal 
corridor, I-69, and we don't imagine that tolls could defray 
more than a significant fraction of the cost. So there would be 
a lot of Federal dollars used on the project, and Davis-Bacon 
absolutely would be required.
    Governor Kaine. And the projects that we are looking at are 
all part of the Federal system as well, and Davis-Bacon applies 
to them.
    Mr. Michaud. Okay. Thank you very much.
    Mr. Petri. Thank you. We are going to have to wrap the 
hearing up fairly shortly, but Mr. Shuster.
    Mr. Shuster. Thank you, Mr. Chairman.
    And thank both you Governors for being here today. And I 
thank, Governor Daniels, you are correct in your statement that 
infrastructure shouldn't be a partisan issue. In this Committee 
we try not to make it that way.
    The question I have for Governor Kaine, congestion is why 
we are--and I know, driving down here to Washington from 
Pennsylvania, I deal with it every week. My question is, 
though, about alternatives to building roads. Does the railroad 
offer--and I know here in Virginia you have talked about that 
81 corridor rail line running along there; there are 
discussions going on. How much of an impact do you think that 
will have and is that a real relief to getting freight off of 
highways onto the railroad tracks?
    Governor Kaine. Certainly. Thank you for the question, 
Congressman. We do believe rail offers two very important 
solutions for us as we tackle congestion. The first, in some of 
the high-density corridors--Richmond, Washington, and 
ultimately Richmond to the Virginia Beach-Hampton Roads area--
instead of more congestion on Interstate 64 and Interstate 95, 
there is rail corridor there. We do have a State-funded rail 
system, the Virginia Railway Express in the I-95 corridor down 
to Fredericksburg, and we will continue to expand that so that 
passengers will have some option other than being on the road.
    And, second, with respect to the freight rail systems in 
Virginia, Congress, in the transportation bill last year, did a 
significant amount of funding for the Heartland Corridor 
project, which is an upgrade of the freight rail system 
essentially from the Port of Virginia all the way out to 
Chicago, allowing double stacking of freight containers, and we 
are very engaged in that; just announced an intermodal facility 
in the Roanoke area, because every double stack we can put on 
takes about three trucks off Interstate 64 through the tunnel 
in Hampton Roads, and so we believe east to west along that 
corridor. And then also potentially north to south along 
Interstate 81, the dedicated rail fund that we have put into 
our budget for the first time in Virginia history will enable 
us to make some capital investments for guaranteed investments 
and returns by our freight rail partners, and that we can then 
use those investments to reduce congestion.
    So we do see, you know, these things all tying together, 
and enhancing rail, both passenger and freight, is going to be 
one of our strategies to congestion reduction.
    Mr. Shuster. Well, thank you for insight on that.
    Governor Daniels, I know that selling or leasing assets, 
infrastructure assets I think is something we need to be 
looking at, and I know you have done that in Indiana. The 
question I have is in Ohio they raised the rates on the Ohio 
Turnpike by about 18 cents and truck traffic significantly went 
onto the secondary roads, and I guess Ohio had to go back and 
adjust those to get them back on the Ohio Turnpike. In your 
lease agreement do you have a clause in there that will--
because I understand in 2010 Indiana is going up by 20 cents. 
If that same kind of diversion goes on, what can you do to 
address that in your lease?
    Governor Daniels. Well, obviously, we studied the issue of 
diversion very carefully and, of course, so did the investor. 
If people divert, it comes out of their hide and they lose 
money. So they have every interest--their interest is exactly 
aligned with the State's in trying to have a road which is 
free-flowing and encourages people and seems to be a bargain at 
the price.
    Congressman, our tolls are antiquated, they haven't changed 
since 1985, they are a fraction of the tolls in Ohio, 
Pennsylvania, Illinois. Even after the increase they will be 
well below those. Even after--even a few years from now they 
will be below the level that I understand Ohio is about to 
return to. And we visited very carefully with every sector of 
the trucking industry and, in fact, changed our initial 
proposal. We had put a proposal in the regulatory process--
incidently, you don't have to pass a bill in our State to 
change the tolls, this could have been done any time in 20 
years administratively. And we put a rule in the process, which 
we subsequently modified, to guard against diversion, and we 
have been told by the leaders of the trucking industry they are 
quite comfortable starting with this very low base and then 
stepping in over the course of years, tolls which will still, 
as I say, make us, we think, very competitive.
    I look at this as an issue of competitive pricing. You only 
shoot yourself in the foot if you--as perhaps some other States 
have. If you raise the price of something too far, your 
customers find another option at some stage, and I hope we have 
been careful to avoid that.
    Mr. Shuster. Well, thanks for the answer, and appreciate 
your being here today and look forward to working with both of 
you as we move forward on these issues. Thank you.
    Thank you, Mr. Chairman.
    Mr. Petri. Governor Kaine, Governor Daniels, thank you for 
your leadership in helping to meet our Nation's vital 
infrastructure needs. We are looking to your experience and 
example, and that of others, as we struggle at the national 
level to maintain our competitiveness and provide for our 
population going forward.
    I thank you for your flexibility as well in adjusting the 
schedule of this hearing.
    The hearing is recessed until 12:30. Well, we will start 15 
minutes after the Prime Minister of Israel concludes.
    [Recess.]
    A F T E R N O O N S E S S I O N
    Mr. Petri. The Subcommittee will come to order.
    We will now introduce our second panel. We will hear today 
from Bryan Grote, a Principal with Mercator Advisors, LLC; D.J. 
Gribbin, who is the Director of Macquarie Holdings, USA, Inc.; 
Mark Florian, Managing Director of Goldman, Sachs and Company; 
Karen J. Hedlund, a partner with Nossaman, Guthner, Knox, 
Elliot; John Foote, Senior Fellow at the Kennedy School of 
Government; and the Honorable Matthew Garrett, Director, Oregon 
Department of Transportation.
    We welcome you all. We thank you for the prepared 
statements that you and your organizations have prepared and 
submitted for the record. They will make a real contribution. 
And, as you know, our Committee puts them out; they are 
available for public review, and this is a subject that a lot 
of people are studying and reviewing all around our Country, 
and we appreciate that effort doubly as well.
    I think, if it is all right, we will start with the 
Director of the Oregon Department of Transportation, Mr. 
Garrett.

 TESTIMONY OF BRYAN GROTE, PRINCIPAL, MERCATOR ADVISORS, LLC; 
  MARK FLORIAN, MANAGING DIRECTOR, GOLDMAN, SACHS & CO.; D.J. 
  GRIBBIN, DIRECTOR, MACQUARIE HOLDINGS (USA) INC.; KAREN J. 
 HEDLUND, PARTNER, NOSSAMAN, GUTHNER, KNOX, ELLIOT, LLP; JOHN 
  FOOTE, SENIOR FELLOW, KENNEDY SCHOOL OF GOVERNMENT, HARVARD 
  UNIVERSITY; THE HONORABLE MATTHEW GARRETT, DIRECTOR, OREGON 
                  DEPARTMENT OF TRANSPORTATION

    Mr. Garrett. Chairman Petri, Ranking Member DeFazio, 
Chairman Young, I am Matthew Garrett. I am the Director of the 
Oregon Department of Transportation, and I truly appreciate the 
opportunity to share some thoughts with you on our efforts 
related to public-private partnerships.
    I will tell you Oregon has engaged in the public-private 
partnership conversation out of necessity. We are challenged on 
many levels. We are challenged by growth in our major 
metropolitan areas, we are challenged by the congestion and the 
economic implications that it brings--and this was validated by 
a study done by the Portland Business Alliance called ``The 
Cost of Congestion,'' businesses actually saying they are 
having to make business decisions affecting where they build 
their warehouses, where they and how they staff their various 
shifts. Bottom line, issues that, in the end, have implication 
to their bottom line. So the cost of congestion is much more 
than just a transportation conversation, it is an economic 
conversation.
    We are challenged by an aging infrastructure and we are 
challenged financially. And this was validated by our current 
Oregon Transportation Plan. That plan is our 25 year policy and 
vision document that has identified an annual $1.3 billion 
shortfall that is needed in order for us just to properly 
maintain and grow the State's transportation system.
    Simply put, Oregon's transportation infrastructure needs 
far exceed our revenues. These realities demand that we look 
beyond the traditional funding mechanisms we have available at 
the State.
    Our approach has taken two pathways. The first--and this is 
a conversation that has already played in front of this 
Committee, the road user finance fee. Our efforts to look into 
the future, to look at an alternative to the gas tax and move 
toward a per mile tax, a true user fee. This pilot project is 
engaged, we are about a month into a year-long trial where we 
have identified 280 folks who have placed transponders in their 
cars. We have identified two gas stations in the greater 
Portland Metro area that have transponders on their equipment, 
and we are starting to tally the vehicle miles traveled between 
fill ups, so to speak. Look forward to sharing these thoughts 
about a year from now, as the report and the assessment plays 
itself out come April of 2007.
    The second pathway we are walking down is indeed our focus 
today, public-private partnerships. In 2003 we received 
legislative authority or direction to be much more aggressive 
in engaging the private sector in terms of innovative design, 
innovative delivery, financing. Bottom line, speed, delivery, 
leveraging private sources of capital to expand the highway 
system was the direction and the tenor and tone of the 
conversation from our State legislature.
    We have been somewhat strategic in our approach. Oregon has 
focused on three public-private projects. They are major 
capacity projects, projects that would be considered mega-
projects to Oregon having costs associated into about the half 
billion dollar price range. They have been on project lists for 
decades. Just our financial streams haven't been robust enough 
to fund these type of projects..
    Thus, we are looking at reintroducing tolling. We are 
looking at value capture, as well as access to private equity 
capital to help augment the existing revenue streams, thus 
allowing us to fully fund and construct these type of projects. 
We are currently engaged in the pre-development phase with a 
consortium of companies led by the Macquarie Infrastructure 
Group. This effort is to evaluate the financial and the 
technical feasibility of the various options to build these 
projects. Their work in this pre-development phase will bring 
the projects to a point where they can secure private sector 
funding.
    In addition to demonstrating the technical and feasibility 
or, excuse me, financial feasibility, it must be shown that it 
is acceptable to the public. This is extremely important to my 
commission, to my Governor, that third leg of the stool: what 
is the feeling of the public at large and how does that 
influence the conversation, because, when all is said and done, 
the public will tell us whether the need for the projects are 
compelling enough to walk down this new avenue for funding.
    Now, should this be accomplished, playing out a scenario 
that we move through this first phase, our private partner 
would earn the exclusive right to enter negotiations with ODOT 
to implement a contract to build and perhaps operate the 
facility. Those are negotiations that will take place into the 
future.
    Now, even turning to public-private partnerships, we are 
not giving up our role as the stewards of the public interest. 
ODOT would retain control over the direction of the projects. 
All these projects will comply with all the Federal and State 
requirements. We will not lower the bar on land use issues, on 
environmental issues, on labor issues.
    Let me conclude by saying that I have mentioned the 
challenges of feeding this transportation appetite. It is 
formidable, to say the least, and we see the public-private 
partnership as a strategic and surgical tool to be used. It is 
a piece of the solution, it is not the whole solution.
    With that, Mr. Chairman, I am happy to answer any 
questions.
    Mr. Petri. Thank you.
    Mr. Grote.
    Mr. Grote. Thank you, Mr. Chairman and Mr. DeFazio and 
Chairman Young. My name is Bryan Grote. I am a principal with 
Mercator Advisors. My company helps develop financial plans for 
major projects. We also work with government agencies to design 
and evaluate financial assistance programs.
    Over the last 15 years, public officials have begun turning 
to the private sector to share management responsibility and 
supplement government resources for transportation 
infrastructure. In my remarks today, I am going to briefly 
focus on three questions to help summarize the nature and 
extent of public-private highway transactions, and hopefully to 
put PPPs in a useful context for examining their potential to 
generate new capital.
    What types of PPPs are being employed? The generic term, 
public-private partnership, encompasses a wide range of 
relationships, contractual, through which public entities and 
private entities collaborate in the delivery, operation, 
financing, and/or ownership of an infrastructure project. 
Different arrangements can be thought of from a spectrum: 
traditional government delivery at one end to the private 
concession model at the other. In my written testimony, Exhibit 
1 illustrates a basic array of the possible arrangements.
    PPPs appear to be best suited for those large, complex 
projects with acknowledged need and strong support. Private 
sector involvement can provide substantial benefits in terms of 
accelerating development, taking on construction and 
performance risk, providing efficient operation and superior 
service, introducing new technologies, and even attracting new 
capital.
    So how much private investment can be generated by PPPs? 
Some arrangements involve projects capable of generating their 
own revenues, whether direct user charges like tolls or 
indirect beneficiary fees, what people call value capture, such 
as development impact fees or special district assessments. 
They are of particular interest. They do have the potential to 
generate new resources for capital investment.
    But despite the visibility of several large toll-backed 
financings in recent years, highway capital investment in the 
U.S. is still dominated by traditional public funding. About 94 
percent of the nearly 750 billion invested in highway capital 
nationwide between 1993 and 2005 has come in the form of either 
public grant funding or tax supported bonds. Only about 6 
percent has been in the form of what could be considered 
private, that is, non-tax supported investment, through toll-
funded grants, tax-exempt toll revenue bonds, or taxable debt 
and equity capital.
    While their national investment effect is modest thus far, 
the usefulness of PPPs in advancing particular projects, 
especially things like major corridors and urban connectors, is 
considerable and growing. Nationwide, some 21 billion of 
investment in 43 highway facilities has been accomplished using 
various public-private templates over the last dozen years. 
California, Florida, Texas, and Virginia are leaders in this 
field, having accounted for 50 percent of that total dollar 
volume.
    So why might a concession or long-term franchise approach 
make sense for some projects? The rationale for using 
concession type approaches lies with the revenue risk profiles 
of the projects being financed. Large start-up toll projects 
tend to face significant construction and revenue ramp-up 
risks. But in the long run these projects generally are able to 
generate net revenues in excess of operating and maintenance 
requirements. The more flexible and patient capital provided 
through private concessions may better match these project 
profiles than the municipal market.
    Also, as we have seen with the Chicago Skyway and the 
Indiana Toll Road lease transactions, such a capital structure 
can monetize up front sometimes a significantly larger sum from 
a given revenue stream than a traditional municipal bond 
approach.
    This Subcommittee has been at the forefront of efforts to 
bolster Federal support for PPP approaches in recent years, 
from design build contracting and environmental streamlining, 
to providing greater flexibility to charge tolls and implement 
pricing, most recently to enabling lower cost debt financing 
for certain public-private highway and intermodal projects with 
private activity bonds. Continuing to focus on improved asset 
management and service performance, and to support private 
investment in user-backed facilities, perhaps through tools 
such as governmental seed capital, credit enhancement and tax 
subsidies, will help project sponsors utilize PPPs to their 
best advantage, and that is in addressing important public 
infrastructure needs.
    Thank you for your time this afternoon.
    Mr. Petri. Thank you. And I apologize for not saying Grote.
    Mr. Florian.
    Mr. Florian. Thank you, Mr. Chairman and Subcommittee 
members, for the opportunity to speak today. I am Mark Florian. 
I am a managing director at Goldman, Sachs and manage our 
infrastructure advisory business. I had the privilege of 
serving Mayor Daley and his staff in the sale of the Chicago 
Skyway Concession as their advisor, and the privilege of 
serving Governor Daniels and his staff in the sale of a long-
term concession in the Indiana Toll Road.
    I am going to frame my comments in three or four different 
buckets: one, what is the problem that we face in 
transportation finance today; second, what is a PPP, or a 
public-private partnership, and how can that potentially be a 
solution; third, why are they viable in today's market; and, 
finally, how do you protect the public and the public good.
    The problem, as we have all identified, is that there is a 
widening gap between transportation needs and funding sources. 
As you know, the Federal Government was actually quite generous 
in the 1950s and 1960s in providing a national highway system, 
and that system now needs renewal as it is very expensive to 
maintain that existing system. Second, there is congestion in 
the system, there are pinch points. We have all seen it, we 
have all experienced it. We need more capacity in our 
transportation system. Third, construction inflation. 
Construction inflation, just in the last few years because of 
steel costs and other costs, has been in the order of 8 percent 
to 12 percent. As a result, we have an accelerating need for 
investment.
    At the same time, the primary funding vehicle, as you all 
know, is motor fuel taxes, which are pennies per gallon. It is 
a volume-based tax, it does not increase with inflation or with 
need. So the gap is yawning and growing bigger.
    One potential solution is a public-private partnership. As 
you have heard today, a public-private partnership really is a 
long-term lease of a road. The private operator takes all the 
operating and maintenance risk, while also taking on all the 
capital expenditures that are necessary for the road. In the 
case of the State of Indiana, they expect that over a 75-year 
term of the lease the private operator, will spend $4.5 
billion, on maintaining the road and expanding it. In return, 
the private operator gets the toll revenue.
    The public governmental body keeps the right to enforce the 
contract and all the operating standards, which are quite 
detailed in the case of Chicago, over 300 pages of operating 
standards created to ensure that the road is operated properly. 
The public body maintains control over the tolls and is in a 
position to constantly monitor the operation. What happens if 
the private operator does not perform? They do have an 
opportunity to cure the issue. If they do not, the 
municipality, the government takes back the road. It is a very 
powerful hammer to make sure that the operating standards are 
abided by.
    Why is this viable today? Well, there are a couple 
different factors that drive this. First, around the world 
there are many private entities that have a lot of domain 
expertise in managing these types of facilities. It is also 
very typical in Europe, if you want to build a new road 
facility, that the government would ask the private sector to 
come in, give proposals to build a facility and to maintain it 
over a 50 year or longer period of time. So there is a lot of 
domain expertise. There is also a lot of expertise in the 
United States with regard to these types of facilities.
    Secondly, these types of private entities are supported by 
a tremendous influx of dollars from pension funds and other 
investors that want to invest in infrastructure assets, and 
they want to do this because they are long-term assets that 
provide a steady stream of revenue. It is a very, very 
attractive investment as a slice of a pension fund or other 
investment pool. In fact, there has been over $50 billion 
dollars allocated in the last few years to invest in this type 
of infrastructure, which creates a lot of demand, and 
ultimately better pricing for the governmental bodies that are 
interested in possibly entering into these transactions.
    How do you protect the public? In the concession or lease 
agreement, which is typically 100 or 150 pages, there are many 
different triggers that the public body retains. One is the 
term of the contract; the second is the limits on tolls; and 
third is operating standards, as I referenced before, where it 
is very, very detailed. As Governor Daniels mentioned, it gets 
down to even how quickly do you clean graffiti or a dead 
squirrel off the road--and also capital mandates, how much 
maintenance capital has to be expended and how does the road 
have to be expanded by the private operator over the term. This 
is a living and breathing document. It truly is a public-
private partnership, and, therefore, the public body is 
integrally involved in the management of the road over the long 
term.
    Finally, in conclusion, I think this is a very viable 
alternative for our transportation industry in this Country; it 
fills a critical need. It is not the panacea for all ills, it 
is just a piece of the puzzle. And I think we have already seen 
examples and will see examples of success in this area in the 
future. Thank you.
    Mr. Petri. Thank you.
    Mr. Gribbin.
    Mr. Gribbin. Thank you, Mr. Chairman, Ranking Member 
DeFazio. Thank you for this opportunity to join this panel to 
discuss the future of infrastructure finance.
    For those not familiar with Macquarie, we are a leader in 
the ownership and management of important infrastructure assets 
around the world. Macquarie has operations in 24 countries and 
16 offices here in the United States. Our Infrastructure 
Division manages a $24 billion portfolio, which includes 
investments in over 90 assets in more than 20 different 
countries around the world.
    In my time here today, I will briefly outline how the 
private sector can play a role, and potentially a significant 
role, in helping overcome the lack of funding for highway 
infrastructure.
    What brings us here today really are two fascinating 
transactions: the long-term concessions contracts for the 
Indiana Toll Road and the Chicago Skyway. Allow me, given the 
brevity of time here, to focus just on Indiana.
    The State, after this concession agreement, commissioned an 
independent audit of the toll road to study what the road would 
be worth had it stayed in public hands. The study found that 
the toll road would be worth approximately $1.8 billion if 
tolls had been raised and the concession in fact had remained 
with the Indiana Finance Authority.
    Yet, Statewide Mobility Partners, a Macquarie Cintra 
partnership, has signed a concession agreement offering $3.8 
billion. So how do we explain the $2 billion difference? I 
think it can be explained as an economic concept of dead 
capital.
    In writing about poverty in the developing world, renowned 
economist Hernando de Soto explains the concept of dead 
capital. Dead or captive capital is comprised of investments 
made within a legal structure that prohibits those investments 
from being used as capital. For example, de Soto pointed to 
workers in developing countries who invested in building homes 
on land which they did not have title to. Those workers' 
investments are captive capital; they cannot borrow against 
their investment and it is very difficult for them to sell. The 
homes have value but that value is legally captive. De Soto 
estimates that trillions of dollars are locked up in 
investments of this type, investments that could be used to 
develop businesses, create jobs, and lift people out of 
poverty.
    Highway infrastructure here in the United States is 
analogous. Inadequate markets and inflexible legal systems in 
this Country have locked up billions of taxpayer dollars and 
our transportation infrastructure, billions of dollar that 
could be used to create jobs and fuel economic growth. 
Fortunately, concession agreements have demonstrated that, with 
modest changes, the captive capital invested in these assets 
can be freed.
    So how did Indiana liberate $2 billion, which is a 
significant sum, in captive capital? The partnership was able 
to find additional value in this asset in two ways. First, a 
dead equity financing model allowed the partnership to pay more 
for the asset than the State's traditional bond financing 
approach; and, secondly, private sector operators are able to 
achieve more efficient operations through innovation and timely 
investment in maintenance.
    Let me focus on the first point. The traditional bond 
financing approach has layers of conservatism built into it 
which tend to undervalue the asset. In addition, bond covenants 
require a debt coverage ratio; that is, revenues of the asset 
must exceed debt payments by a defined percentage. The debt 
coverage ratio provides a cushion for investors, but it 
prevents that cushion from being used to help finance the 
asset.
    By contrast, a debt equity model is able to use the equity 
investment as the cushion and, as a result, the debt equity 
financers are able to free up more capital than those using 
traditional bond financing, producing a significantly greater 
payment to the owner.
    In my written testimony I cover a number of the benefits to 
the concession model. Let me just cover three here. First, and 
kind of the most obvious, is that concession models, as 
mentioned before, can free up billions of dollars in capital 
for other investments, or can be used to help make projects 
that are not viable viable because of the additional financing 
it provides.
    Second, concession agreements also transfer operating and 
maintenance risks away from the public, eliminating future 
liabilities. Some people miss this point. They think if they 
lose the toll revenue stream, how will the State then maintain 
the facility. Well, all the maintenance liabilities for that 
facility go to the concessionaire. The State, or in the case of 
Indiana, Indiana Financing Authority or the City of Chicago had 
no liability, now have no liability under the concession 
agreement to maintain or expand those facilities.
    Finally, concession agreements create positive incentives 
for improved operations and better service.
    Well, Mr. Chairman, members of this Committee, thank you 
for holding this hearing today. At the appropriate time, I will 
be pleased to answer any questions you may have.
    Mr. Petri. Thank you.
    Ms. Hedlund.
    Ms. Hedlund. Thank you, Mr. Chairman, Ranking Member 
DeFazio. My name is Karen Hedlund, and I a member of the law 
firm of Nossaman, Guthner, Knox & Elliott. My firm has had the 
great privilege of advising over a dozen State departments of 
transportation and local transportation agencies on public-
private partnerships primarily for new projects.
    In the spirit of the day, I might also mention that I 
recently represented a U.S. company competing for a transit 
project in the State of Israel.
    The Skyway and the Indiana Toll Road deals are the ones 
that have garnered the big headlines, but, in actuality, most 
of the PPP activity in the States has involved financing new 
transportation facilities, and this is where I am going to 
focus my remarks. I want to address how the States are crafting 
their legislation, how they procure private investment, some of 
the lessons learned from past endeavors, and the critical role 
that is being played by the Federal Government.
    Today, over 21 States have enacted important public-private 
partnership laws, and the list grows each year. Just in the 
last few months, Indiana, Utah, and Alaska have authorized 
PPPs. California, building on the success of the toll corridors 
in Orange County, has authorized additional PPPs to benefit 
goods movement projects. And PPP authority has been proposed in 
New York, Ohio, New Jersey, Pennsylvania, Missouri, and 
Illinois.
    As detailed in my written statement, these laws and the 
related regulations provide specific guidance to the DOTs as to 
the procedures they should follow in procuring private 
partners, submission requirements, and evaluation criteria. 
They mandate competition and they require that contracts be 
awarded on the basis of best value, taking into account both 
short-and long-term commitments from the project sponsors.
    This morning you heard about new projects that are being 
advanced in Virginia and Indiana, and this afternoon in Oregon. 
Other active States include Texas, the plans to use PPPs as the 
primary method for delivering new highway projects throughout 
the State. They have no less than 10 major projects in 
procurement.
    Florida is seeking concession proposals for a tunnel under 
Biscayne Bay that will speed port traffic directly to the 
interstate highway system and get container trucks off the 
streets in Downtown Miami.
    Georgia is considering PPP proposals for HOT Lanes, truck 
only toll lanes, and BRT lanes to relieve the heavy congestion 
around Atlanta.
    What are the lessons that have been learned from the 
earlier PPP endeavors? Well, the earliest franchise laws were 
premised on the notion that private toll roads shouldn't 
require any contribution of public funds and a corollary to 
this that was alluded to day was that the opportunities for 
private investment should only be offered for projects that are 
low on the State's priority list. Today, however, the States 
understand that few new projects can be financed solely on the 
basis of toll revenues. New projects are not cash cows. The 
States also recognize that by combining both public and private 
investment dollars in highly congested corridors is the most 
effective tool to advance their most urgent projects over the 
shortest time horizon.
    The States are now benefitting from substantial support 
from the Federal sector thanks to the forward-looking 
provisions that you included in SAFETEA-LU, the $15 billion in 
private activity bonds, improvements to TIFIA, and expanding 
the ability to innovatively finance new projects on our 
interstate highway systems that have become congested and 
deteriorated.
    In addition, at Federal highways, under the leadership of 
former Administrator Mary Peters and former Chief Counsel 
Gribbin, they have helped to remove administrative barriers to 
public-private partnerships while maintaining very effective 
Federal oversight.
    Finally, I would like to stress that, in our experience, 
the State DOTs take great care in managing these PPP 
procurements. These are time-intensive undertakings. They 
assign their most senior and qualified public servants to the 
task. They spend a lot of time thinking about the very 
questions that were asked this morning. They devote months of 
effort to developing procurement documents and getting input 
from all stakeholders, public and private. They know how to 
drive a hard bargain and always with the public interest as 
their one and only goal.
    Thank you for inviting me to be here this morning, and I 
would be happy to answer any questions.
    Mr. Petri. Thank you.
    Mr. Foote.
    Mr. Foote. Good afternoon, and thank you for the 
opportunity to testify about the sale of concession rights for 
existing publicly owned highways to private investors.
    There have been two such transactions in the last year, the 
Chicago Skyway and the Indiana Toll Road, and both have 
generated a great deal of interest from the press, the 
financial community, and, most importantly, State and local 
governments around the Country.
    Over the last year, as a Senior Fellow at the Kennedy 
School of Government, and after 15 years as an executive of a 
company serving a toll road industry, I have been looking at 
these transactions through a public policy lens. In keeping 
with this, my role today is not to explain how these deals work 
or to recap the financial benefits that may accrue to the 
various parties. Instead, it is to lay out a framework to 
examine the public policy aspects of these sales. In other 
words, to answer the question: Are these concession sales in 
the public interest?
    At this point, everyone in this room is familiar with the 
first of these concession sales, the Chicago Skyway. The 
winners in this deal are the taxpayers; the City of Chicago, 
who received a windfall equal to about one-third of the total 
size of the city's annual operating budget; the mayor and the 
city council, who were able to solve an immediate budget crisis 
without resorting to tax increases; and private investors who 
have what they hope will be an attractive investment.
    While there are winners, there are also losers. In the case 
of the Skyway, the losers are the Skyway users, who will be 
paying significantly higher tolls than they would have paid 
under city ownership. The other loser is the region.
    First, the Skyway users. Tolls on the Skyway will more than 
double in the next 12 years and continue to increase through 
the 99-year term of the concession. The increased revenues 
resulting from these toll hikes will be used by the private 
owner to service the debt and equity for the financed $1.8 
billion purchase price. In effect, the future tolls created on 
the Skyway have been monetized to fund the operating budget of 
the City of Chicago.
    The other loser is the region. First, not one dollar of the 
sales proceeds realized by Chicago was earmarked for investment 
in transportation projects, despite the fact that Chicago is 
one of the Country's most congested urban areas. The city also 
has abdicated the control of a major transportation artery, and 
along with it the ability to manage its regional transportation 
network in a coordinated fashion. To see how this might 
adversely impact the public interest, let me cite two examples.
    Under the concession agreement, the private owner has the 
ability to use time of day pricing to discourage trucks from 
using the Skyway during daytime hours. One possible consequence 
of this is to force trucks onto neighboring roads, generating 
externalities--traffic, congestion, pollution--for which the 
private owner is not accountable and does not have to concern 
itself. Second, the alternative routes for drivers who do not 
want to use Skyway are non-tolled limited access roads that are 
currently operating at or near capacity, thus allowing Skyway 
to operate, in effect, as a monopoly.
    What happens if a decision is made in the next several 
years to toll these alternative free roads in order to manage 
congestion? To do this effectively would require a coherent and 
coordinated regional toll policy. With the Skyway out of the 
public's control, this is no longer possible.
    I have tried not to mask my opinion that the Chicago Skyway 
sales scores poorly in terms of the public interest. This low 
score is not because the Skyway is now in private hands, but 
because of the particular motivation for the sale and the 
intrinsic nature of the Skyway.
    In contrast with the Skyway, the Indiana Toll Road 
situation has significantly different characteristics that, in 
my view, change the balance. First of all, the sale proceeds 
will be invested by the State to improve its transportation 
infrastructure. True, these new roads will be paid for, in 
effect by the people that use the Indiana Toll Road, but these 
users, as well as the taxpayers of Indiana, will benefit from 
an enhanced statewide transportation system. Second, given 
where the toll road is situated and its relationship with other 
roads, it is my opinion that there is not much opportunity for 
the owner's actions to impose cost on the surrounding 
communities. Also, the toll road is not part of a network of 
roads that would benefit from being managed in a coordinated 
fashion. For all these reasons, the Indiana Toll Road 
concession tilts in favor of the public interest.
    The last point I want to make is that it is important for 
all of us to understand why investors are willing to pay large 
sums for these concessions. The reason is simply that these 
investors have been granted a franchise to increase tolls, an 
action that State and local governments are reluctant to take. 
These increases are not subject to voter approval and are the 
consequence what have been tagged the outsourcing of political 
will.
    I am not arguing against the involvement of the private 
sector in the provision of public services such as 
transportation. The sale of existing roads should meet, 
however, three tests. First, a significant portion of the 
proceeds of the sale should be reinvested in improving and 
enlarging the particular region's transportation 
infrastructure. Second, the private owner should be held 
accountable for the externalities, the non-cash costs of 
operating the toll road. And, finally, if the road is part of a 
regional network, the toll regulation needs to accommodate 
regional solutions.
    Applying these tests may reduce the amount of money that 
can be raised by State and local governments through these 
sales. But maximizing the dollars should not be the sole 
objective. Improving the mobility of our citizens should be the 
overriding goal.
    Thank you.
    Mr. Petri. Thank you.
    Mr. Young.
    Mr. Young. Thank you, Mr. Chairman. Thanks for holding 
these hearings. I thank the witnesses.
    I have repeated this slogan many times, that there is no 
free roads. And under TEA-LU, we have tried to set up a 
commission to recommend a solution to the financing of our 
problems. I do think that the private investment in roads is 
part of that solution. That is personal. I have been involved 
in Highway 81 in Virginia and a big supporter of.
    I am sorry I wasn't here for Governor Kaine. I think that 
is one of our solutions when it comes to congestion, and I do 
think the private sector will have to play a major role, or the 
public has to stay and step up to the plate and say I am 
willing to pay for. I tried that and never got anywhere. I am 
disappointed in some States, my State is one. We charge 8 cents 
tax, the lowest of any State in the union, yet they want to 
have a highway system; and that concerns me.
    But I do have three short questions for Mr. Gribbin, 
probably. What are some of the barriers you encounter in 
negotiating these agreements when you get into these 
agreements? What do you find the most difficult thing--anybody 
else can comment too--in this process?
    Mr. Gribbin. Thank you, Mr. Chairman. I think one of the 
larger barriers is the fact that this is new. Governor Daniels 
touched on this during his testimony. The public is used to 
these assets being held in public hands; they don't really 
understand kind of the costs and benefits of moving them to the 
private sector. There tends to be, in the case of Indiana, 
particularly a fair amount of fear of how things will change, 
and will we still have access to the road and will there be 
significant diversion. I think what will happen over the course 
of time, as people get more comfortable with these 
transactions, as they have on projects around the world, that 
those barriers will be dropped.
    Another barrier, coming from working for a company that 
does work around the world, is the United States, as you know, 
has very diverse political decision-making. We spread power 
out. So every State has its own set of rules, communities get 
involved. Everyone really, kind of from the homeowner to the 
White House can have a say in how a road is built, and that is 
a public policy decision, it is probably a good thing, but it 
does make it a little harder to penetrate this market.
    Mr. Young. Are you solely interested in concessions or 
existing toll ways, or are you interested in new capacity?
    Mr. Gribbin. Mr. Chairman, we are actually interested in 
both. In fact, right now, as we speak, we are building the 
South Bay Expressway south of San Diego. It is an investment 
that Macquarie has made in a road out there that will be a 
greenfield project that will open up next year.
    Mr. Young. The case of the greenway here between Dulles and 
Leesburg, that was a private investment. I am sure you are 
aware of that.
    Mr. Gribbin. Yes.
    Mr. Young. Have you looked into that possibility of 
approaching States or a corridor concept of doing a project 
that would be much larger than that, or is that on your drawing 
board?
    Mr. Gribbin. Actually, the size of the facility is not 
really a determining factor. So we have looked at everything 
from relatively very small projects to projects the size of the 
Indiana Toll Road. We would be interested in if it fits the 
public policy objectives of that locality, any facility that 
has a revenue stream.
    Mr. Young. Well, you know, when they built that greenway, I 
thought they were absolutely idiots, but--and I was right the 
first year.
    [Laughter.]
    Mr. Young. But it has turned to be a real going machine and 
a public license, because you have to drive from Route 7 up to 
Leesburg. It is a nightmare because of that growth out there, 
but they saw that growth coming and they have used that 
greenway, and it has worked out quite well. In fact, the people 
now are commuting to D.C. that are clear out past Leesburg, 
which would be an impossibility just on Route 7.
    Have you got a team, have any of you got teams that looks 
at this potential growth factor and where you could purchase 
land and make a corridor available? Are you that far advanced 
or are you sort of behind--
    Mr. Gribbin. No, actually, that is one of the driving 
factors that we look at, is we will look at, if it is an 
existing facility, potential traffic growth, and for new 
facilities. Obviously, what we want to find is a part of the 
Country where there is increasing demand over time. Macquarie 
is interested in kind of having mid-return, mid-risk 
investments. Our investors, for the most part, are pension 
funds that are looking for a stable return over the course of 
decades, and toll roads match that extremely well. And part of 
that is you are looking for that steady growth over time.
    Mr. Young. All right, I thank you.
    One of the things, again, I stress, there are no free 
roads, and I do believe the number one problem, Mr. Chairman, 
we have in this Country is congestion. We talk about the high 
price of fuel. If we were able to move our cars and trucks on 
time, the price of fuel would diminish quite rapidly; the 
demand would go down, the supply would be available. It is 
sitting in traffic is killing us now more than anything else, 
and, of course, moving a product. I mean, every time--I used to 
be in that business, and any time I had to stay docked more 
than five minutes after I was supposed to leave, I usually left 
on time, but I was losing money. And in this world of moving 
goods, unstability of fuel costs, I think the elimination of 
congestion is so crucially important, and we are going to be 
looking--I am going to be looking at this not only the 
remaining of this year, but in the near future to see if we 
can't solve it. I do think that private investment is one of 
the major solutions, too. It may not be the only one, but one 
of the major solutions.
    Thank you, Mr. Chairman. I will have to excuse myself; I 
have got a bunch of people upstairs in our other Committee room 
wanting to talk about other transportation problems, so thank 
you.
    Mr. Petri. Thank you.
    Mr. DeFazio, any questions?
    Mr. DeFazio. Thank you, Mr. Chairman.
    It is a very interesting question. As I said earlier, I 
think, we need to try and see that we are balancing the public 
interest, and I see a place for private equity, but we have got 
to think of all the contingencies now. The job of the private 
folks is to maximize profits, and we have other tasks that we 
must engage in here in terms of public safety, you know, 
creating inadvertent effects, moving congestion from one point 
to another and that.
    So, sort of that as background, I am just curious. Normally 
we would hear, well, the private sector does things more 
efficiently, so get government out. But as I look at 
Macquarie's statement on the Indiana road, essentially it says 
no significant cost savings are envisioned in terms of 
operating costs. In fact, there are some incremental--I mean, 
the improvements have an incremental cost, but beyond that you 
would have to carry the cost of insurance, which the State 
didn't because I guess they were self-insured.
    So it seems to me it boils down to this question that I 
asked Governor Daniels, given the mandated increases in tolls 
in the contract, what if the government had mandated those same 
increases and then went out to borrow the money? And he didn't 
really answer that question, but I will put it again. But as I 
understood the answer here today, it was, well, because we are 
putting a significant amount of equity in, in addition to the 
debt financing, which means you can get a larger infusion of 
cash up front. But I guess my question is what percentage of 
the Chicago project and the Indiana project are equity versus 
debt? And as I also understand Chicago, initially there was one 
amount of equity, and then, once the project was finalized, 
some of that equity was turned to debt and that equity was 
withdrawn. So what is the percentage of equity that is in--and 
then Mr. Gribbin or Mr. Florian. Mr. Florian put the deals 
together, you are the financer. Whoever can--
    Mr. Gribbin. Well, I will turn to him for the answer, if he 
gave it.
    Mr. DeFazio. Oh, okay.
    Mr. Florian. The percentage of equity that is typically put 
in these projects--not only for Chicago Skyway, or the Indiana 
Toll Road, but for other project financings for these types of 
roads around the world--tends to be in the range of 75 percent 
debt, 25 percent equity.
    Mr. DeFazio. But that would still seem to be larger than--I 
mean smaller than the difference between what is being stated 
as the monetized value for the state of the asset versus the 
private monetization.
    Mr. Florian. That is correct, sir. Part of it is that when 
equity investors invest in these types of assets they are 
looking for what they think the future growth of the asset will 
be. They tend to take a pretty optimistic view in terms of what 
that growth will be, and they pay in the concession agreement, 
for that future growth. Now, that being said, they are taking 
the risk as to whether or not that growth ever occurs.
    Mr. DeFazio. Right. I have something here, I think it is a 
chart provided by Mr. Foote regarding the model for the sale of 
the Indiana Toll Road. I mean, you can't see it from there, 
obviously, but it has been attributed to you. And it is 
interesting to me when I look at some of the out years. And one 
of the points I was trying to make to Governor Daniels is you 
do forego a future revenue stream, which is being converted 
instead to private profits in this case. And he said, well, I 
don't want to pay interest, I want to collect interest. But 
obviously they are paying interest on at least 75 percent and 
expecting a return to equity on the other. I mean, they are not 
putting the equity in for a zero percent rate of return; I 
don't think their stockholders would be real thrilled, their 
shareholders.
    So when I look at this, I mean, the numbers are pretty 
startling in the not too distant future. Say 2030, on the 
Indiana Toll Road, before taxes, it was over half a billion 
dollars a year in income, over and above operating costs and 
everything. Is that--
    Mr. Foote. That appears to be the way the numbers work out 
based upon the toll increases as well as the projected traffic 
increases for the Indiana Toll Road, yes.
    Mr. DeFazio. And you used pretty conservative assumptions 
here, you used 1.1 percent growth, 3 percent in years 5 to 15, 
1.1 percent after.
    Mr. Foote. These were the assumptions that the purchaser of 
the concession used.
    Mr. DeFazio. So we are talking big numbers with pretty 
conservative assumptions. And then if we jump ahead to, say, 
2050, it is a billion 458 in a year. And, again, this was 
obviously money that is going to be taxed at some level and 
then returned to the investors. But, again, the State is 
foregoing that future revenue stream to use at that point for 
whatever purposes it so desires, because this includes all of 
the improvement costs of the system, and this is net, right? 
So--
    Mr Foote. That is correct.
    Mr. DeFazio. So but you think this project is a--you know, 
I mean, you said Chicago in particular because they converted 
the money to other purposes other than transportation 
infrastructure and other concerns you raised about moving the 
congestion and those things is not a very good deal for the 
region, but you think this is. I mean, you really think that 
the State shouldn't have looked at the option of monetizing 
this on their own and, therefore, trying to capture what 
becomes profit? Because there is no allegation here--the usual 
allegation I hear from people who want to privatize is 
government can't do it, we can save money on operating costs, 
and in this case that is net, the same.
    Mr. Foote. Well, I think the Indiana Toll Road transaction 
does pass the three tests I put forward. But you are asking 
another question, that is, whether or not, to use a term that 
was used earlier--whether or not the private sector is better 
able to liberate the dead capital or can the public sector do 
that. And I think under certain circumstances the public sector 
can come close to it and should be considered as an 
alternative, and I think, again, it may not maximize the amount 
of money that can be liberated, but I think if you lay in some 
of the other public policy issues or concerns, it might become 
a better deal for the public interest.
    Mr. DeFazio. Mr. Gribbin, I have particular concern--I 
expressed it earlier--on the non-compete clauses. I just think 
of it this way, you know, I have got to protect the public 
interest, and if I were entering into this deal-- Governor 
Daniels said, well, you have got to meet congestion standards. 
Okay, we understand that. But there are a couple of ways to 
meet a congestion standard. One is you add capacity; the other 
is you constrain demand. So since you have got a fairly 
generous, shall we say--they call it a cap, or floor, on future 
toll increases, what would there be to prevent your folks 
from--I mean, you have to maximize returns, and say your folks 
say, actually, if we add that extra lane because of the growth 
in traffic we are starting to bump up against a congestion 
standard that is going to mandate we do something, we don't 
really see in the time we will have the project that the return 
is going to be that great. But if we raise the tolls now, you 
will have less utilization and we will drop below the required 
standard, and then we figure we will move gradually back up. 
And, actually, we penciled that out as a net for us, we are 
going to come out ahead by driving traffic elsewhere with 
higher tolls.
    Now, how would you answer that public policy question? I 
mean, because you are there to maximize profit, you are not 
there to take care of my congestion problems over here. And you 
have got the no-compete in your corridor. So how would you 
answer that?
    Mr. Gribbin. I mean, the key to these agreements is 
aligning incentives between the public and private sector and 
making sure that we are all working together toward the same 
goals. That is why you have a large concession agreement that 
governs all types of operations. As far as congestion relief, 
it is actually very much in our interest to have no congestions 
on our roads, because we get more throughput. The more 
throughput you get, the more tolls we collect, the better off 
we do. In fact, in the Chicago Skyway, we just recently took 
that over and truck traffic is already up about 25 percent. 
Queues on Friday and Sundays have been cut from half an hour to 
about five minutes.
    Mr. DeFazio. Well, that is the electronic toll collection I 
would assume that has been a tremendous--
    Mr. Gribbin. Part of that is electronic toll collection. On 
the weekends, actually what we did is instead of collecting 
just at the toll booths, we stuck another guy out there in 
traffic and collected tolls on two cars at a time. Again, the 
State could have done that. But we are heavily incentivized to 
maximize throughput on the facility.
    Mr. DeFazio. Right. But what I am getting at--and just 
grant me my question here, which is you are confronted at some 
point in the future, on the Indiana Toll Road, with the very 
expensive prospect that you would have to add another lane. Say 
it is in the thirtieth year of your concession. You have only 
got 45 years to go. Your people say, look, we are not going to 
get that money back, and it is going to be nowhere near the 
12.5 percent rate of return; it is going to drag down our 
entire rate of return on the project. But there is an 
alternative here. We are kind of at the optimal level now, we 
are jamming as much through as we can. If we raise the tolls a 
little bit more, we may drop down a little, but, actually, 
since we are getting a higher per unit cost, we are going to 
make it up and pretty quickly we are going to bump back up to 
the edge of that required constraint to add capacity, and then 
maybe we will do--and you just sort of keep avoiding it by 
raising the tolls.
    What would there be--since you don't have--I mean, this 
isn't economics, it is an externality. That is not your cost, 
the congestion that is created somewhere else, that is the 
State's cost, the local community's cost, and it is an economy 
that doesn't belong to you. So what would prevent that 
circumstance from happening? There is nothing that says you 
have to look at this in a coordinated way, looking at the 
alternate routes, looking at what congestion is created 
elsewhere. There is nothing to prevent that.
    Mr. Gribbin. Well, there are two things that govern that 
externality. The first is the length of the concession 
agreement. A lot of people are critical of long congestion 
agreements, but 75 years forces us to act more like an owner 
than a renter, so we care about the life cycle cost of that 
asset.
    Mr. DeFazio. Right. But I am positing this, say, in the 
thirtieth year out is when you are bumping against capacity.
    Mr. Gribbin. That is the second thing, is that the 
concession agreement requires that we return the facility to 
its owner in a certain condition that is specified in the 
concession agreement, because similar to traffic congestion, 
you could also say, well, what happens if we just let the road 
run into ruin--
    Mr. DeFazio. Right. No, we are not talking about--I am 
talking about you are very responsible, better pavement 
conditions and a lot of States don't--but what I am saying is 
if at some point your internal people say we could continue to 
have a higher rate of return if we didn't build another lane 
with the remaining term we have and we diverted traffic with 
higher tolls, what would stop that? Nothing. I mean, it is not 
your cost, right?
    Mr. Gribbin. The concession agreement and the condition we 
have to turn the road back in to.
    Mr. DeFazio. Yes, but the condition--we are not talking 
about condition. The condition doesn't say you have to add a 
lane, right?
    Mr. Foote, would you want to address that from your more 
public policy perspective? I have got to worry about these 
things from the public policy side. You squeeze it here and it 
goes there.
    Mr. Foote. Sure. Well, I am sure that these roads will be 
operated as a business, and use market dynamics to maximize 
profits, which is fine. But it may be that you get more profits 
by having fewer cars at a higher unit price, thus raising the 
possibility of externalities for which the private owner is not 
responsible.
    Mr. DeFazio. Right. Okay. There is nothing to--I mean, you 
guys are there to make money. There is nothing there to condemn 
it. I am just saying we have to look at it in a bigger picture 
way here.
    Mr. Foote. And, actually, Mr. Florian--
    Mr. Florian. Congressman, there is one provision that we 
put in the Indiana Toll Road concession which I think deals 
with the kind of challenge that you are grappling with here. 
The State can mandate improvements to the road at any point in 
time that it deems fit. Therefore, Macquarie and/or the State 
has the right to expand the road, put in new interchanges, or 
do whatever it deems necessary. Now, if the State--
    Mr. DeFazio. But if the State mandates, how is it paid for?
    Mr. Florian. That is an excellent question. Typically, 
today, when the State expands a road it is paying for it from 
its various sources.
    Mr. DeFazio. Right.
    Mr. Florian. So in the contract, if the State mandates 
something, the State has to pay. However, we put in a provision 
where, if the concessionaire benefits from that State-mandated 
expansion or change to the road, that the concessionaire has to 
compensate the State for the economic benefit it receives.
    Mr. DeFazio. So we would get an extended kind of 
negotiation here. If the State said we have got to add a lane, 
we are going to pay for it, then we will end up squabbling a 
little bit over rate of return and how it benefits you, but it 
is possible they could add the lane.
    Mr. Florian. And the concessionaire, ultimately, if there 
is more traffic or other benefits to compensate the State back 
for that portion of the economic benefit they gain.
    Mr. DeFazio. Okay. Thank you.
    Mr. Chairman, do you want to take a round, then we will 
have a second round?
    Mr. Petri. Sure, I will take a try at it.
    This isn't going on in North Dakota. It is clearly a 
phenomenon where there are certain not bottlenecks, but 
conditions in the transportation network where people can 
extract additional--you can put it however you want to, provide 
additional management benefits and extract additional rent from 
the overall system. We had the same system in our State years 
ago. People argued a lot about they called them tax islands for 
nuclear power plants, which were a great benefit to the local 
community, they didn't have to pay any real estate tax and they 
got really good schools and everything else. We got rid of 
those and the State assumed the revenue from the high capital 
power plants and no one wanted a power plant in their backyard. 
So the other side of it was we didn't get any more nuclear 
power plans. So it is not a free transaction. But people didn't 
like the idea that all the benefits of this facility that was 
providing, in this case electricity to a broader region, 
accrued in a very narrow area.
    We have somewhat the same phenomenon. You can privatize 
bits and pieces of the system, you are not going to privatize 
the whole system, and people will be able to extract some rent 
or benefit for a pension fund or something else from it. Does 
this make sense overall? Is this making our transportation 
system better? Is there some way of channeling this phenomenon 
to take care of choke points and to return money back into the 
system in terms of greater transportation efficiency? I guess, 
Mr. Foote, professor, that is what your role in studying all 
this is in part. If you care to comment.
    Mr. Foote. Well, I think this goes to the first test I put 
forward, that and Governor Daniels also reiterated. His belief 
is that if you are recapitalizing a transportation asset, the 
realized dollars should be reinvested in the transportation 
network. In the case of the State of Indiana those dollars will 
be captured within the State and reinvested, and, again, I 
think that is one of the primary reasons why the Indiana Toll 
Road is probably in the public interest.
    Now, you are thinking somewhat more broadly, that those 
dollar will stay within the State of Indiana, but will not 
benefit residents of the State of North Dakota. And certainly 
it is not Governor Daniels' job to--you know, he is not 
accountable to those residents. So there probably are some 
inequities that are built into this State-by-State system of 
financing our transportation infrastructure, and presumably it 
is this Committee in the Federal Government that actually 
redistributes some of those dollar in places where it can be 
better used but is not available.
    Mr. Petri. If I were in the investment business, I would go 
to Delaware, for example. They are already collecting high 
tolls, but they have got a small hold on the whole east coast, 
and they can probably extract additional revenue by privatizing 
it and saying that it is this pension fund that is raising all 
the tolls, but they are getting their share out of it.
    Is there any role in--there is something that is raised by 
some of this which is in the area of moral hazard, and that is 
you who are elected for a short term are making long-term 
commitments which may or may not be of long-term benefit to the 
community they are served. And I guess we never can really 
totally deal with that, but that does raise that issue, and it 
is sort of systemic. Is there anything we can do at the Federal 
level to reduce that risk?
    Ms. Hedlund. I am not sure what we can do at the Federal 
level, but I think it should be noted that there are 
contractual techniques that are available to the public sector 
to protect the public over the long term. Everyone recognizes 
that we don't really know what is going to happen in the 
future. Some of these projects may be financial failures, and 
so what happens if the road comes back to the public sector. 
They may make so much money that they become an embarrassment 
to the public sector. What happens if the traffic gets very 
heavy? How are you going to incentivize the private parties 
going forward? And there are a number of techniques.
    One that the Commonwealth of Virginia is going to use in 
connection with the assignment of the Pocahontas Parkway to a 
private entity is to have revenue sharing. Once the returns on 
that road--which are not very robust at the moment, but they 
might be in the future--once they reach a certain level, then 
the Commonwealth of Virginia is going to share in the returns 
that that road generates.
    In terms of what do you do if the road becomes congested, 
another technique--and this has been used in California, also 
in Virginia--to the extent that these roads benefit from non-
compete provisions, if the road becomes congested and the owner 
of the road refuses to make the investment in additional lanes, 
they will simply lose the benefit of the non-compete, and the 
public sector can go and do whatever it wants.
    A third technique--and this is one that is used very 
commonly in Europe and is being studied here--one device that 
the private companies use for taking their profits out of these 
projects early on is refinancing. In Europe it is typical that 
50 percent of all refinancing profits go back to the public 
sector.
    So there are ways, financial devices used for keeping the 
public sort of in the game over the long haul.
    Mr. Petri. Any other responses to that?
    Mr. Grote. Mr. Chairman, I think those are good ideas, and 
in some ways the decision of a concession financing reminds me 
of decisions of debt financing, except we are talking about a 
longer term, and maybe, largerconsequences at the end of the 
day. But over the years, State and local governments have 
gotten some of them, anyway, have gotten--pretty comfortable 
with using debt and there are, as you may know, certain debt 
issuing policies and decisions about when it is appropriate to 
leverage an asse. Maybe some of our private investors think 
that those restrictions, while appropriate for municipal debt, 
might be a little too restrictive or conservative for a long-
term asset lease.
    But in some ways the decision-making is kind of the same. 
You have decided that there is a compelling enough public need, 
an investment backlog, a choke point, whatever, that you are 
actually going to leverage something over 50 or 99 years 
through taxable debt and equity. But, you are still making that 
first key decision, that the benefits of accelerating whatever 
you are trying to do are worth losing the flexibility over 50 
or 99 years of leveraging an asset that generates revenues.
    Mr. Petri. Just one--excuse me, yes.
    Mr. Gribbin. Just one thing very quickly. I do think 
contractual mechanisms--and we have thought through a lot of 
these in a lot of detail to try to balance putting together a 
business transaction with public policy. I think contractual 
mechanisms are very, very important, as Karen mentions.
    The one thing that has slowed down some of this type of 
activity where the Federal Government could be quite helpful is 
just the environmental process. And it is obviously incredibly 
important to protect the environment. At the same time, the 
length and the challenges of going through the environmental 
process has slowed some of this interest and some of this 
investment in transportation in this Country.
    Mr. Petri. One last question. Several observers in the 
transportation construction industry indicated that when these 
deals were done, the price that was realized ended up being two 
or three times more than what they anticipated was likely. Are 
there some assumptions that the investors are making? How do 
you explain that? Someone clearly is trying to figure out how 
these deals really are going to pay off, and there seems to 
be--Indiana has one set of assumptions and the people who bid 
on it have a little different set of assumptions, evidently. Is 
there any way of making that understanding why people are 
willing to pay so much for these assets up front or what they 
are assuming how they are going to extract--I mean, there is no 
free lunch, they are going to have to--they are assuming they 
are going to come out okay on this.
    Mr. Florian. They are definitely taking that risk in terms 
of the future revenues of the road. For the City of Chicago, 
for example, we did an analysis that said if we raise the tolls 
on exactly the same schedule that we anticipate we will let the 
concessionaire raise the tolls, how much debt could the City of 
Chicago put on the road if it held the road itself and how much 
funding would that provide the city for whatever purpose. And 
the number that we came up with is we thought that the city 
could put perhaps $800 million, $900 million of debt on the 
road, and that is the amount it could front-load to reinvest. 
And, as you know, the city ended up getting $1.8 billion. So 
the tax-exempt municipal bond market doesn't allow an entity 
like the City of Chicago to fully garner the value of the road.
    The other thing that is actually quite striking is that if 
you look at the projections that the City of Chicago had for 
the volume growth, the traffic growth on the road, they were 
conservative, maybe 1 percent growth over a long, long period 
of time. The concessionaires in this case took a much more 
aggressive view. They think that the traffic growth might be 3 
percent, 4 percent, 5 percent over a long period of time, and 
they are taking risk on that. Well, if you look at the 
difference between a 1 percent, 3 percent or a 5 percent 
growth, there is a tremendous amount of value created. That is 
really what the City of Chicago did, it captured more 
aggressive assumption in terms of what the growth would be over 
time and shifted the risk of that projection to a private 
operator.
    Mr. Petri. Very well.
    Mr. DeFazio.
    Mr. DeFazio. Thank you, but that sort of begs the question 
what if the City of Chicago had engaged the same traffic 
engineers to make the more aggressive projections than the 900 
million number would have gone up in terms of initial 
capitalization, because you would have been assuming a larger 
revenue stream sooner.
    Ms. Hedlund, I just want to be sure I got this. So at what 
point in the lease does the State start to share in the 
revenues?
    Ms. Hedlund. It is a negotiated percentage, and I don't 
recall exactly what the number is in Virginia, but there is a 
minimum percentage that is essentially guaranteed to the 
contractor; above that the State shares in 50 percent of it; 
and then there is a final number above which they actually take 
80 or 90 percent of it.
    Mr. DeFazio. Okay, so it is graduated..
    Ms. Hedlund. It is graduated.
    Mr. DeFazio. Okay. But the Indiana and Chicago agreements 
do not have any clause like that.
    Ms. Hedlund. That is right.
    Mr. DeFazio. Right. Okay. And then the other one about the 
conversion of the I guess was it the equity, if the equity is 
converted to debt, then--
    Ms. Hedlund. If there are certain types of refinancings, 
where the owners are getting--essentially accelerating the 
benefits of the transaction, that a portion of those 
refinancing profits can go back to the public sector. And that 
is something that is--
    Mr. DeFazio. Standard in Europe?
    Ms. Hedlund.--is standard in Europe.
    Mr. DeFazio. So in the case of Chicago, where there already 
has been some conversion of equity to debt, there already would 
have been an additional return to the City of Chicago for some 
of the value of that.
    Ms. Hedlund. These refinancings are typically defined as 
ones that are not contemplated in the original plan. Now, I was 
not involved in Chicago, but my understanding is that the 
refinancing that was done within the first year was something 
that was contemplated.
    Mr. DeFazio. Oh, okay, so it wouldn't have fallen into 
that.
    Okay, Mr. Garrett, I hope you--since I know that we have 
engaged Macquarie, who I think is a very reputable but also 
tough negotiator, I hope you have been listening to Ms. Hedlund 
here. And I am wondering, given some of what you have heard 
today, how would you balance the interests here in looking at 
these projects in Oregon?
    Mr. Garrett. I think, Congressman, what we would do is we 
would try to get Ms. Hedlund on our side of the table to help 
inform us.
    Mr. DeFazio. All right.
    Mr. Garrett. Congressman, I think we are in a fortunate 
position to watch these conversations evolve, and obviously 
there are lessons learned. And, indeed, this conversation has 
evolved since we were engaged in it. So our discussions, again, 
if we reach that point--we are early in the stage; we are just 
seeing if indeed the projects we have identified are feasible 
to pursue this pathway, but if indeed they are, I think we are 
well positioned to learn from some of our brethren throughout 
the States, better inform our negotiations, and we will make 
sure we have the appropriate people on our side.
    Mr. DeFazio. Well, at this point we just have a consulting 
negotiation and sort of a developing proposal,--
    Mr. Garrett. That is correct.
    Mr. DeFazio.--so we have ample time to benefit.
    Mr. Garrett. You bet.
    Mr. DeFazio. Good.
    Ms. Hedlund, you alluded to one thing, and, again, I don't 
know if this is common, and I will ask the others. But you said 
if there was a failure and a reversion. Now, would there always 
be--I mean, there isn't necessarily--do all these contracts 
have to revert, or could there be a failure and then you would 
be in bankruptcy, and then it becomes an available--
    Ms. Hedlund. What the contracts contemplate if there is a 
financial problem and the owners of the road can no longer pay 
their debt--that is the thing that you are concerned about--
    Mr. DeFazio. Right.
    Ms. Hedlund.--is an opportunity to the debtholders to step 
in and remedy the problem, and at that point the concern is 
going to be that perhaps operation and maintenance has not been 
kept up to the standards required under the contract. You give 
the debtholders an opportunity to come in and fix it, but if 
they don't fix it, the owners and the debtholders lose the 
benefit of the franchise. So there is a very serious downside 
and the debtholders are pretty strongly motivated to come in 
and make things right at that point.
    Mr. DeFazio. Is that true of the agreements for Indiana and 
Chicago?
    Mr. Florian. It is, sir. You know, basically, there are 
these operating standards that are quite detailed, and those 
operating standards have to be met. If they are not, for some 
period of time, a secure period, the concessionaire has a right 
to fix it, but if they don't, they lose the road and all the 
investment and all the money they put into it.
    Mr. DeFazio. Just to respond to a concern you raised and 
then I know, Mr. Chairman, we have another member who has 
questions, but we did include--and they are not yet fully 
actualized--very significant changes and environmental 
streamlining in SAFETEA-LU, and I don't know whether DOT has 
finished writing the implementing regs yet or not, but the 
point is we have heard that and we are--I think you will find 
that there have been changes made to very carefully balance 
between protecting the environment and the public interest and 
expediting some of these projects. And I would assume that 
Macquarie is either familiar with or will become very familiar 
with those sorts of things if it is looking at new projects, as 
it potentially is in Oregon.
    Thank you, Mr. Chairman.
    Mr. Petri. Thank you.
    Ms. Schmidt.
    Ms. Schmidt. Thank you, Mr. Chairman.
    And I apologize if this has already been addressed, because 
I came in late, but I would like to address my questions to 
probably Mr. Gribbin and Mr. Florian.
    I came from a local government background and a State 
government background, and in both cases we talked about 
public-private partnerships, and we didn't really see the 
savings for us at the local level or at the State level, and we 
were confused as to how a private partnership, private 
developer could actually make money. I mean, I understand that 
you don't have the constraints that local governments and State 
governments have in building roads, bridges, and other 
configurations, but even toward that end the savings were 
minuscule in comparison to what we thought we would lose in the 
prospect. So, you know, I apologize if you have already 
addressed this, but could you kind of like walk me through how 
you are going to make money off of this and how the respective 
States that you have these joint ventures in are also going to 
make money in this, and how this really is a win-win?
    Mr. Gribbin. Sure, I will take a first stab at that, and 
Mark can follow on and fill in some gaps.
    The benefit of a concession model is you get your savings 
up front, so in Chicago they got a $1.83 billion check; Indiana 
will get $3.8 billion. So you take all of the guesswork out of 
will this public-private partnership actually result in savings 
to the State, because that is front-loaded. The way that the 
private sector is able to value this higher is, first of all, 
we are able to do some financial engineering and get more debt 
out of the facility than the public sector can. Secondly, as 
Mark mentioned earlier, we will have what we believe is more 
accurate traffic forecasts, which in these cases tend to be 
more aggressive, or higher traffic forecasts, so we see more 
value in the facility than the public entity does. And, 
finally, there are operational efficiencies.
    Now, Congressman DeFazio was correct in saying that we did 
not value those heavily as part of our model for the value of 
Indiana, but ultimately there will be some upgrading 
efficiencies as we introduce electronic tolling and as we 
streamline some of the operation systems there. But, again, 
from the public standpoint, there is no guesswork over whether 
there are savings or not. Whether there are savings or not is 
actually all of our risk, because we have made this up-front 
payment. So then the obligation and the onus is on us to come 
up with those savings.
    Ms. Schwartz. May I follow up? I guess my concern is, 
again, coming from my background and also from my personal 
background in land holdings and dealings, when I have been 
confronted with an opportunity, whether from a private sector 
in a private role or in a public sector with a private person 
coming in and offering me money up front for a deal, when I 
have amortized it out over the long run, I would make more 
money if I did it on my own. Now, I understand you would put in 
tolling capabilities that will allow you to capture more of the 
dollars and those kind of things, but can't a State do that as 
well?
    Mr. Gribbin. That is an excellent question. That is sort of 
a reoccurring question and it is a question that the States and 
localities should ask themselves, you know, can we capture the 
same value ourselves. In the case of Indiana,--I am not aware 
if Chicago did something similar, but the State actually took 
the auditor of the toll road, the company that was auditing the 
toll road, and gave them that question; go out there, take 
these assumptions, and come back and tell us what value we 
could capture out of this asset. And the answer was $1.8 
billion. The ultimate lease transaction amount will be $3.8 
billion. So in this case they did that study and they found out 
that the public sector, from our standpoint of view, kind of 
undervalued it. You know, time will tell, maybe we overvalued 
it on the private side.
    Mr. Florian. I would just add that I don't believe any of 
these transactions should occur unless there is a benchmark in 
terms of what the public governmental body believes the value 
of that asset is to them and holding on to that asset. And once 
you have that as a benchmark, you can go through a process, see 
if you can get value that is greater, significantly greater, 
and if you can't, you don't do the transaction. Mayor Daley, as 
well as Governor Daniels, basically said to the marketplace and 
to their voters we are going to do an experiment here, we are 
going to see if we can get incremental value. If we don't get 
it, we are not moving forward with the transaction. They both 
did create benchmarks for what they thought the value of the 
concession was if they held on to it, and in both cases that 
was exceeded significantly by the private sector because of 
these assumptions.
    Ms. Schwartz. I just have one quick comment. $3.8 billion 
sounds like a lot of money, but when it is put in the hands of 
government, sometimes it is not as wisely reinvested into the 
community, and I think that is the greater risk, is capturing 
those dollars up front and then that is incumbent upon the 
States or the local governments to reinvest those dollars 
wisely for those citizens. That is not your responsibility, but 
that is theirs.
    Mr. Petri. Maybe you could--you have been very patient, but 
we are going to be voting in a few minutes. We might as well, 
if you are willing to answer a few more questions.
    Why is it that Chicago can't hire the same people that the 
bidders do in terms of making traffic projections? I mean, I 
would assume that that is really not Chicago's decision, it is 
the bondholder's. I mean, if you are going to finance Chicago 
Skyway through the city, you are going to look at the traffic 
projections as part of your package for investors and do your 
due diligence, and you must employ independent people who do 
that. Why should the projections be any different when they are 
made by a public entity as opposed to a private investor?
    Mr. Florian. I think, at the end of the day, you have two 
different entities that are thinking about the value of the 
road, and you can hire feasibility consultants, the same 
feasibility consultants. But really what we are saying here is 
the private sector is willing to put a bigger price on these 
assets than the governmental bodies typically believe these 
assets are worth. If you own an asset that is worth $1 and 
somebody else thinks it is worth $2, are you willing to sell it 
for $2? Likely, you will.
    Mr. Petri. But it is not really Chicago I mean, Chicagoans 
say they are going to have 10 percent a year growth, and they 
can go to Goldman, Sachs and say sell us some bonds based on 
those projections, and you say we are not going to do it, we 
will only submit on 1 percent growth because you hire someone 
who looks at it or you have statistics on which you base it. So 
why does that analysis differ when Chicago goes in as opposed 
to the people that they are selling this to?
    Mr. Florian. I think there is a difference--
    Mr. Petri. Is there less confidence in a public owner for 
the next 75 years than a private owner? Is that it? They think 
the people won't drive over the roads if they are owned by 
Chicago as opposed to being owned by this--I don't think people 
care when they are driving in their cars.
    Mr. Florian. You bring up a great question. I think it is 
just the difference between an owner in the public sector and 
how they view these types of assets and wanting to be 
conservative with regard to those assets, and then investors, 
public pension funds and other entities, they are investing as 
an equity owner and they are looking for growth. They take a 
different view.
    Mr. Petri. But I am an investor.
    Mr. Florian. Yes.
    Mr. Petri. I can buy Chicago bonds.
    Mr. Florian. Yes, you can.
    Mr. Petri. And maybe I can even negotiate a bond with--I 
know if you do this, municipal bonds, where there is some 
revenue kicker or whatever. Or I can lend my money to the 
private buyer. So it shouldn't make that much difference.
    Mr. Florian. I understand what you are saying. They are 
different pools of capital, frankly. There are municipal bond 
investors that are quite conservative in the way they view the 
world, so they historically have really not allowed people to 
finance aggressively against anticipation of future growth. 
These are pension funds and others from around the world that 
take a much different view and a much more aggressive view.
    So you are right, you can make either decision, but they 
are actually two different pools of capital. This new pool of 
capital that is more aggressive and really wants to invest in 
infrastructure as an equity player is, frankly, relatively new, 
just in the last three to five years.
    Mr. Petri. So couldn't we advise Chicago or Indiana or 
others to structure their bonds to appeal to this new pool 
rather than selling the assets?
    Mr. Florian. Well, one of the alternatives that we have 
talked to these clients about, as well as others, is do you 
sell a piece of the road or a minority share to somebody who 
would be willing to take an aggressive view, and garner value 
that way but still maintain a substantial ownership stake. That 
may be one way of splitting the baby, so to speak.
    Mr. Gribbin. Well, one of the things that Mark touched on I 
think deserves underscoring, and that is even in the private 
sector it is not unusual to have two people view the same 
business and value that business differently, and that happens 
quite frequently.
    Mr. Petri. That is why they do business with each other, 
because they each think they are winning.
    Mr. Gribbin. Exactly.
    Mr. Petri. And you won't find out for a few years who is 
right.
    Mr. Gribbin. Exactly.
    Mr. Petri. Let us see, any other questions? Do any of the 
panelists have an additional comment you would like to make? 
Not at this time?
    In that case, we thank you very much. You have been very 
responsive. I suspect this will not be the last word on this 
subject, but it has been an interesting first word for this 
Subcommittee. Thank you very much.
    The hearing is adjourned.
    [Whereupon, at 1:40 p.m., the subcommittee was adjourned.]


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