Highway Public-Private Partnerships: Securing Potential Benefits 
and Protecting the Public Interest Could Result from More	 
Rigorous Up-front Analysis (24-JUL-08, GAO-08-1052T).		 
                                                                 
The private sector is increasingly involved in financing and	 
operating highway facilities under long-term concession 	 
agreements. In some cases, this involves new facilities; in other
cases, firms operate and maintain an existing facility for a	 
period of time in exchange for an up-front payment to the public 
sector and the right to collect tolls over the term of the	 
agreement. In February 2008 GAO reported on (1) the benefits,	 
costs, and trade-offs of highway public-private partnerships; (2)
how public officials have identified and acted to protect the	 
public interest in these arrangements; and (3) the federal role  
in highway public-private partnerships and potential changes in  
this role. The Senate Finance Committee asked GAO to testify on  
this report and to highlight its discussion of tax issues. GAO	 
reviewed the experience of projects in the U.S. (including the	 
Chicago Skyway and Indiana Toll Road agreements), Australia,	 
Canada, and Spain.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-1052T					        
    ACCNO:   A83049						        
  TITLE:     Highway Public-Private Partnerships: Securing Potential  
Benefits and Protecting the Public Interest Could Result from	 
More Rigorous Up-front Analysis 				 
     DATE:   07/24/2008 
  SUBJECT:   Concessions contracts				 
	     Cost analysis					 
	     Cost effectiveness analysis			 
	     Depreciation					 
	     Facility management				 
	     Federal aid for highways				 
	     Federal/state relations				 
	     Financial analysis 				 
	     Highway planning					 
	     Highway research					 
	     Joint ventures					 
	     Private sector					 
	     Program evaluation 				 
	     Public key infrastructure				 
	     Public roads or highways				 
	     Road construction					 
	     Strategic planning 				 
	     Toll roads 					 
	     Transportation planning				 
	     Transportation policies				 
	     Cost estimates					 
	     Program goals or objectives			 
	     Public/private partnerships			 

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GAO-08-1052T

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Testimony: 

Before the Subcommittee on Energy, Natural Resources, and 
Infrastructure, Committee on Finance, U.S. Senate: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 2:00 p.m. EDT:
Thursday, July 24, 2008: 

Highway Public-Private Partnerships: 

Securing Potential Benefits and Protecting the Public Interest Could 
Result from More Rigorous Up-front Analysis: 

Statement of JayEtta Z. Hecker, Director: Physical Infrastructure 
Issues: 

GAO-08-1052T: 

GAO Highlights: 

Highlights of GAO-08-1052T, a testimony before the Subcommittee on 
Energy, Natural Resources, and Infrastructure, Committee on Finance, 
U.S. Senate. 

Why GAO Did This Study: 

The private sector is increasingly involved in financing and operating 
highway facilities under long-term concession agreements. In some 
cases, this involves new facilities; in other cases, firms operate and 
maintain an existing facility for a period of time in exchange for an 
up-front payment to the public sector and the right to collect tolls 
over the term of the agreement. In February 2008 GAO reported on (1) 
the benefits, costs, and trade-offs of highway public-private 
partnerships; (2) how public officials have identified and acted to 
protect the public interest in these arrangements; and (3) the federal 
role in highway public-private partnerships and potential changes in 
this role. The Senate Finance Committee asked GAO to testify on this 
report and to highlight its discussion of tax issues. GAO reviewed the 
experience of projects in the U.S. (including the Chicago Skyway and 
Indiana Toll Road agreements), Australia, Canada, and Spain. 

What GAO Found: 

Highway public-private partnerships provide potential benefits, such as 
sharing risks with the private sector, more efficient operations and 
management of facilities and, through the use of tolling, increased 
mobility and more cost-effective investment decisions. There are also 
potential costs and trade-offsï¿½there is no ï¿½freeï¿½ money in public-
private partnerships and it is likely that tolls on a privately 
operated highway will increase to a greater extent than they would on a 
publicly operated toll road. There are also financial trade-offs. 
Unlike public toll authorities, the private sector pays federal income 
taxes and can deduct depreciation on assets for which they have 
effective ownership. The extent of these deductions and the amount of 
foregone revenue, if any, to the federal government is difficult to 
determine. Demonstrating effective ownership may require lengthy 
concession periods and, according to experts involved in the lease of 
the Chicago Skyway and Indiana Toll Road, contributed to the 99-year 
and 75-year concession terms on these two facilities, respectively. 
Experts also told us that in the absence of the depreciation benefit, 
the concession payments to Chicago and Indiana would likely have been 
less than $1.8 billion and $3.8 billion, respectively. 

Highway public-private partnerships in the U.S. that GAO reviewed 
sought to protect the public interest largely through concession 
agreement terms prescribing performance and other standards. While 
these protections are important, governments in other countries, such 
as Australia, have developed systematic approaches to identifying and 
evaluating public interest and require their use when considering 
private investments in public infrastructure. Similar tools have been 
used to some extent in the United States, but their use has been more 
limited. Using up-front tools can also assist public agencies in 
determining the expected benefits and costs of a project and an 
appropriate means to deliver the project. Not using such tools may lead 
to certain aspects of protecting the public interest being overlooked. 

While direct federal involvement has been limited to where federal 
investment exists and while the DOT has actively promoted them, highway 
public-private partnerships may pose national public interest 
implications such as interstate commerce that transcend whether there 
is direct federal investment in a project. However, given the minimal 
federal funding in highway public-private partnerships to date, little 
consideration has been given to potential national public interests in 
them. GAO has called for a fundamental reexamination of our surface 
transportation policies, including creating well-defined goals based on 
identified areas of national interest. This reexamination provides an 
opportunity to identify emerging national public interests (including 
tax considerations), the role of the highway public-private 
partnerships in supporting and furthering those national interests, and 
how best to identify and protect national public interests in future 
highway public-private partnerships. 

What GAO Recommends: 

This testimony makes no new recommendations. In February 2008, GAO 
recommended that Congress consider directing the Secretary of 
Transportation, in consultation with Congress and other stakeholders, 
to develop objective criteria for identifying potential national public 
interests in highway public-private partnerships, in order to allow the 
Department of Transportation (DOT) to play a targeted role in ensuring 
that national interests are considered. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-1052T]. For more 
information, contact JayEtta Hecker at (202) 512-2834 or 
[email protected]. 

[End of section] 

July 24, 2008: 

Mr. Chairman and Members of the Subcommittee: 

We appreciate the opportunity to testify on public-private partnerships 
and their role in the surface transportation system. As you know, 
America's transportation system is the essential element that 
facilitates the movement of both people and freight within the country. 
Nevertheless, the current federal approach to addressing the nation's 
surface transportation problems is not working well. Despite large 
increases in expenditures in real terms for transportation, the 
investment has not commensurately improved the performance of the 
nation's surface transportation system, as congestion continues to grow 
and looming problems from the anticipated growth in travel demand are 
not being adequately addressed. We have called for a fundamental 
reexamination of our surface transportation policies, including 
creating well-defined goals based on identified areas of national 
interest, incorporating performance and accountability into funding 
decisions, and more clearly defining the role of the federal government 
as well as the roles of state and local governments, regional entities, 
and the private sector. 

The private sector has long been involved in surface transportation as 
contractors in the design and construction of highways. In recent 
years, the private sector has become increasingly involved in assuming 
other responsibilities including planning, designing, and financing. 
Under some of these arrangements, the private sector is being looked to 
not only to construct facilities, but also to finance, maintain, and 
operate facilities under long-term concession agreements--up to 99 
years in one case. In some cases, this involves financing and 
constructing a new facility and then operating and maintaining it over 
a specified period of time. In other cases, this involves operating and 
maintaining an existing toll road for a period of time in exchange for 
an up-front payment provided to the public sector and the right to 
collect tolls over the term of the agreement. 

We recently issued a report on public-private partnerships in the 
highway sector. For this hearing, you asked us to discuss this report-
-in particular, the financing and tax issues it raised. My remarks 
today are based on this February 2008 report[Footnote 1] and focus on 
(1) the benefits, costs, and trade-offs to the public sector associated 
with highway public-private partnerships; (2) how public officials have 
identified and acted to protect the public interest in highway public- 
private partnerships; and (3) the federal role in highway public- 
private partnerships and potential changes in this role. We performed 
our work in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

We limited the term "highway public-private partnerships" to highway- 
related projects in which the public sector enters into a contract, 
lease, or concession agreement with a private sector firm or firms, and 
where the private sector provides transportation services such as 
designing, constructing, operating, and maintaining the facility, 
usually for an extended period of time. This definition included long- 
term concessions for toll roads in which the private sector firm(s) 
receives some or all toll revenues over the life of the lease or 
concession agreement with the public sector. There are numerous other 
types of arrangements classified as "public-private partnerships" that 
we did not include. For example, we did not include fee-for-service 
arrangements in which effective ownership of a transportation facility 
does not transfer to the private sector. We also recognize that there 
may be other forms of highway public-private partnerships. We did not 
include these types of public-private partnerships in the scope of our 
work, and the findings and conclusions of our work cannot be 
extrapolated to those or other types of public-private partnerships. 

In summary: 

* Highway public-private partnerships have resulted in advantages for 
state and local governments, such as obtaining new facilities and value 
from existing facilities without using public funding. The public can 
potentially obtain other benefits, such as sharing risks with the 
private sector, more efficient operations and management of facilities, 
and, through the use of tolling, increased mobility and more cost- 
effective investment decisions. There are also potential costs and 
trade-offs. There is no "free" money in public-private partnerships. 
They are potentially more costly to the public and it is likely that 
tolls on a privately operated highway will increase to a greater extent 
than they would on a publicly operated toll road. There is also the 
risk of tolls being set that exceed the costs of the facility, 
including a reasonable rate of return, should a private concessionaire 
gain market power because of the lack of viable travel alternatives. 
There are also financial trade-offs. Unlike public toll authorities, 
the private sector pays federal income taxes and can deduct 
depreciation on assets for which they have effective ownership for tax 
purposes. The extent of these deductions and the amount of the foregone 
revenue, if any, to the federal government is difficult to determine. 
Obtaining these deductions may also require lengthy concession periods. 
According to experts involved in the lease of the Chicago Skyway and 
the Indiana Toll Road, demonstrating effective ownership contributed to 
the 99-year and 75-year concession terms for the two facilities, 
respectively. Financial experts also told us that in the absence of the 
depreciation benefit, the concession payments to Chicago and Indiana 
would likely have been less than the $1.8 billion and $3.8 billion, 
respectively. 

* Highway public-private partnerships in the U.S. we have reviewed 
sought to protect the public interest largely through concession 
agreement terms prescribing performance and other standards. While 
these protections are important, governments in other countries, 
including Australia and the United Kingdom, have developed systematic 
approaches to identifying and evaluating public interest before 
agreements are entered into, including the use of public interest 
criteria, as well as assessment tools, and require their use when 
considering private investments in public infrastructure. For example, 
a state government in Australia uses a public interest test to 
determine how the public interest would be affected in eight specific 
areas, including whether the views and rights of affected communities 
have been heard and protected and whether the process is sufficiently 
transparent. While similar tools have been used to some extent in the 
United States, their use has been more limited. Using up-front public 
interest analysis tools can also assist public agencies in determining 
the expected benefits and costs of a project and an appropriate means 
to deliver the project. Not using such tools may lead to certain 
aspects of protecting the public interest being overlooked. 

* Direct federal involvement in highway public-private partnerships has 
generally been limited to projects in which federal requirements must 
be followed because federal funds have or will be used. While direct 
federal involvement has been limited, the Department of Transportation 
(DOT) has done much to promote highway public-private partnerships, but 
comparatively little to either assist states and localities in weighing 
potential costs and trade-offs, or to assess how potentially important 
national interests might be protected in such arrangements. Given the 
minimal federal funding in highway public-private partnerships to date, 
little consideration has been given to potential national public 
interests in them. Highway public-private partnerships may pose 
national public interest implications such as interstate commerce that 
transcend whether there is direct federal investment in a project. The 
historic test of the presence of federal funding may have been relevant 
at a time when the federal government played a larger role in financing 
highways but may no longer be relevant when there are new players and 
multiple sources of financing, including potentially significant 
private money. We have called for a fundamental reexamination of 
federal programs to address emerging needs and test the relevance of 
existing policies. Such a reexamination provides an opportunity to 
identify emerging national public interests (including tax 
considerations), the role of highway public-private partnerships in 
supporting and furthering those national interests, and how best to 
identify and protect national public interests in future public-private 
partnerships. We believe DOT has the opportunity to play a targeted 
role in ensuring that national interests are considered, as 
appropriate, and have suggested that Congress consider directing the 
Secretary of Transportation to develop and submit objective criteria 
for identifying national public interests in highway public-private 
partnerships, including any additional legal authority, guidance, or 
assessment tools that would be appropriately required. We recognize 
this is no easy task--any potential federal restrictions on highway 
public-private partnerships must be carefully crafted to avoid 
undermining the potential benefits that can be achieved. 

Highway Public-Private Partnerships Can Potentially Provide Benefits 
but Also Entail Costs, Risks, and Trade-offs: 

Highway public-private partnerships have the potential to provide 
numerous benefits to the public sector. There are also potential costs 
and trade-offs. 

Potential Benefits: 

Highway public-private partnerships created to date have resulted in 
advantages from the perspective of state and local governments, such as 
the construction of new infrastructure without using public funding and 
obtaining funds by extracting value from existing facilities for 
reinvestment in transportation and other public programs. For example, 
the state of Indiana received $3.8 billion from leasing the Indiana 
Toll Road and used those proceeds to fund a 10-year statewide 
transportation plan. As we reported in 2004, by relying on private- 
sector sponsorship and investment to build roads rather than financing 
the construction themselves, states (1) conserve funding from their 
highway capital improvement programs for other projects, (2) avoid the 
up-front costs of borrowing needed to bridge the gap until toll 
collections became sufficient to pay for the cost of building the roads 
and paying the interest on the borrowed funds, and (3) avoid the 
legislative or administrative limits that govern the amount of 
outstanding debt these states are allowed to have.[Footnote 2] All of 
these results are advantages for the states. 

Highway public-private partnerships potentially provide other benefits, 
including the transfer or sharing of project risks to the private 
sector. Such risks include those associated with construction costs and 
schedules and having sufficient levels of traffic and revenues to be 
financially viable. Various government officials told us that because 
the private sector more reliably analyzes its costs, revenues, and 
risks throughout the life cycle of a project and adheres to scheduled 
toll increases, it is able to accept large amounts of risk at the 
outset of a project, although the private sector prices all project 
risks and bases its final bid proposal, in part, on the level of risk 
involved. In addition, the public sector can potentially benefit from 
increased efficiencies in operations and life-cycle management, such as 
increased use of innovative technologies. 

Highway public-private partnerships can also potentially provide 
mobility and other benefits to the public sector, through the use of 
tolling. The highway public-private partnerships we reviewed all 
involved toll roads. These benefits include better pricing of 
infrastructure to reflect the true costs of operating and maintaining 
the facility and thus improved condition and performance of public 
infrastructure, as well as the potential for more cost effective 
investment decisions by private investors. In addition, through 
congestion pricing, tolls can be set to vary during congested periods 
to maintain a predetermined level of service, creating incentives for 
drivers to consider costs when making their driving decisions, and 
potentially reducing the demand for roads during peak hours. 

Potential Costs, Risks, and Trade-offs: 

Although highway public-private partnerships can be used to obtain 
financing for highway infrastructure without the use of public sector 
funding, there is no "free money" in highway public-private 
partnerships. Rather, this funding is a form of privately issued debt 
that must be repaid. Private concessionaires primarily make a return on 
their investment by collecting toll revenues. Though concession 
agreements can limit the extent to which a concessionaire can raise 
tolls, it is likely that tolls will increase on a privately operated 
highway to a greater extent than they would on a publicly run toll 
road. Tolls are generally set in accordance with concession agreements 
and, in contrast to public-sector practices, allowable toll increases 
can be frequent and automatic. The public sector may lose control over 
its ability to influence toll rates, and there is also the risk of 
tolls being set that exceed the costs of the facility, including a 
reasonable rate of return if, for example, a private concessionaire 
gains market power because of the lack of viable travel alternatives. 
In addition, highway public-private partnerships also potentially 
require additional costs to the public sector compared with traditional 
public procurement, including the costs associated with (1) required 
financial and legal advisors, and (2) private-sector financing compared 
with public-sector financing. 

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

Using a highway public-private partnership to extract value from an 
existing facility also raises issues about the use of those proceeds 
and whether future users might potentially pay higher tolls to support 
current benefits. In some instances, up-front payments have been used 
for immediate needs, and it remains to be seen whether these uses 
provide long-term benefits to future generations who will potentially 
be paying progressively higher toll rates to the private sector 
throughout the length of a concession agreement. Both Chicago and 
Indiana used their lease fees, in part, to fund immediate financial 
needs. Both also established long-term reserves from the lease 
proceeds. Conversely, proceeds from the lease of Highway 407 ETR in 
Toronto, Canada, went into the province's general revenue fund. 

Financial Trade-offs: 

Trade-offs from the public perspective can also be financial, as 
highway public-private partnerships have implications for federal tax 
policy. Private firms generally do not realize profits in the first 10 
to 15 years of a concession agreement. However, the private sector 
receives benefits from highway public-private partnerships over the 
term of a concession in the form of a return on its investment. Private-
sector investors generally finance large public-sector benefits early 
in a concession period, including up-front payments for leases of 
existing projects or capital outlays for the construction of new, large-
scale transportation projects. In return, the private sector expects to 
recover any and all up-front costs, as well as ongoing maintenance and 
operation costs, and generate a return on investment. Furthermore, any 
cost savings or operational efficiencies the private sector can 
generate, such as introducing electronic tolling, improving maintenance 
practices, or increasing customer satisfaction in other ways, can 
further boost the return on investment through increased traffic flow 
and increased toll revenue. 

Unlike public toll authorities, private-sector firms pay federal income 
tax. Current tax law allows private sector firms to deduct depreciation 
on assets involved with highway public-private partnerships for which 
they have "effective ownership." Effective ownership of assets 
requires, among other things, that the length of a concession agreement 
be equal to or greater than the useful economic life of the asset. 
According to financial and legal experts, including those who were 
involved in the lease of the Chicago Skyway in Chicago, Illinois, and 
the Indiana Toll Road, the useful economic life of those facilities was 
lengthy. The requirement to demonstrate effective asset ownership thus 
required lengthy partnership concession periods and contributed to the 
99-year and 75-year concession terms for the Chicago Skyway and Indiana 
Toll Road, respectively. These financial and legal experts told us that 
as effective owners, the private investors can claim full tax 
deductions for asset depreciation within the first 15 years of the 
lease agreements.[Footnote 3] 

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

However, foregone revenue to the federal government from tax benefits 
associated with transportation projects can potentially amount to 
millions of dollars.[Footnote 4] For example, as we reported in 2004, 
foregone tax revenue when the private-sector used tax-exempt bonds to 
finance three projects with private sector involvement--the Pocahontas 
Parkway, Southern Connector, and Las Vegas Monorail--were between $25 
million and $35 million.[Footnote 5] 

Highway Public-Private Partnerships Have Sought to Protect Public 
Interest in Many Ways, but Use of Public Interest Criteria Is Mixed in 
the United States: 

The public interest in highway public-private partnerships can and has 
been considered and protected in many ways. State and local officials 
in the U.S. projects we reviewed heavily relied on concession terms. 
Most often, these terms were focused on, among other things, ensuring 
performance of the asset, dealing with financial issues, and 
maintaining the public sector's accountability and flexibility. 
Included in the protections we found in agreements we reviewed were: 

* Operating and maintenance standards: These standards are put in place 
to ensure that the performance of the asset is upheld to high safety, 
maintenance, and operational standards and can be expanded when 
necessary. For example, based on documents we reviewed, the standards 
on the Indiana Toll Road require the concessionaire to maintain the 
road's condition, utility, and level of safety including a wide range 
of roadway issues, such as signage, use of safety features such as 
barrier walls, snow and ice removal, and the level of pavement 
smoothness that must be maintained. 

* Expansion trigger requirements: These triggers require that a 
concessionaire expand a facility once congestion reaches a certain 
level. Some agreements can be based on forecasts. For example, on the 
Indiana Toll Road, when service is forecasted to fall below certain 
levels within 7 years, the concessionaire must act to improve service, 
such as by adding additional capacity at its own cost. 

* Revenue-sharing mechanisms: These mechanisms require a concessionaire 
to share some level of revenues with the public sector. For example, on 
one Texas project, if the annual return on investment of the private 
concessionaire is at or below 11 percent, then the state could share in 
5 percent of all revenues. If it is over 15 percent, the state could 
receive as much as 50 percent of the net revenues. 

While these protections are important, governments in other countries, 
including Australia and the United Kingdom, have developed systematic 
approaches to identifying and evaluating public interest before 
agreements are entered into, including the use of public interest 
criteria, as well as assessment tools, and require their use when 
considering private investments in public infrastructure. These tools 
include the use of qualitative public interest tests and criteria to 
consider when entering into public-private partnerships. For example, a 
state government in Australia uses a public interest test to determine 
how the public interest would be affected in eight specific areas, 
including whether the views and rights of affected communities have 
been heard and protected and whether the process is sufficiently 
transparent. These tools also include quantitative tests such as Value 
for Money and public sector comparators, which are used to evaluate if 
entering into a project as a public-private partnership is the best 
procurement option available. 

While similar tools have been used to some extent in the United States, 
their use has been more limited. For example, Oregon hired a consultant 
to develop public-sector comparators to compare the estimated costs of 
a proposed highway public-private partnership with a model of the 
public sector's undertaking the project. According to the Innovative 
Partnerships Project Director in the Oregon DOT, the results of this 
model were used to determine that the added costs of undertaking the 
project as a public-private partnership (given the need for a return on 
investment by the private investors) were not justifiable given the 
limited value of risk transfer in the project. While this study was 
conducted before the project was put out for official concession, it 
was prepared after substantial early development work was done by 
private partners. Neither Chicago nor Indiana had developed public 
interest tests or other tools prior to the leasing of the Chicago 
Skyway or the Indiana Toll Road. 

Using up-front public interest analysis tools can assist public 
agencies in determining the expected benefits and costs of a project 
and an appropriate means to undertake the project. Not using such tools 
may lead to certain aspects of protecting public interest being 
overlooked. For example, concerns by local and regional governments in 
Texas helped drive statewide legislation requiring the state to involve 
local and regional governments to a greater extent in future highway 
public-private partnerships. Elsewhere, in Toronto, Canada, the lack of 
a transparency about the toll rate structure and misunderstanding about 
the toll structure of the Highway 407 ETR facility was a major factor 
in significant opposition to the project. 

Direct Federal Involvement with Highway Public-Private Partnerships Has 
Generally Been Limited, but Identification of National Interests in 
Highway Public-Private Partnerships Has Been Lacking: 

Direct federal involvement in highway public-private partnerships has 
generally been limited to projects in which federal requirements must 
be followed because federal funds have or will be used. At the time of 
our February 2008 report, minimal federal funding has been used in 
highway public-private partnerships. While direct federal involvement 
has been limited, the administration and the DOT have actively promoted 
highway public-private partnerships through policies and practices, 
including the development of experimental programs that waive certain 
federal regulations and encourage private investment. For example, 
until August 2007, federal regulations did not allow private 
contractors to be involved in highway contracts with a state department 
of transportation until after the federally mandated environmental 
review process had been completed. Texas applied for a waiver to allow 
its private contractor to start drafting a comprehensive development 
plan to guide decisions about the future of the corridor before its 
federal environmental review was complete. These flexibilities were 
pivotal to allowing highway public-private partnership arrangements in 
both Texas and Oregon to go forward while remaining eligible for 
federal funds. The Federal Highway Administration (FHWA) and DOT also 
promoted highway public-private partnerships by developing publications 
to educate state transportation officials about highway public-private 
partnerships and to promote their use, drafting model legislation for 
states to consider to enable highway public-private partnerships in 
their states, creating a public-private partnership Internet Web site, 
and making tolling a key component of DOT's congestion mitigation 
initiatives. 

Recent highway public-private partnerships have involved sizable 
investments of funds and significant facilities and could pose national 
public interest implications such as interstate commerce that may 
transcend whether there is direct federal investment in a project. For 
example, both the Chicago Skyway and the Indiana Toll Road are part of 
the Interstate Highway System; the Indiana Toll Road is part of the 
most direct highway route between Chicago and New York City and, 
according to one study, over 60 percent of its traffic is interstate in 
nature. However, federal officials had little involvement in reviewing 
the terms of either of these concession agreements before they were 
signed. In the case of Indiana, FHWA played no role in reviewing either 
the lease or national public interests associated with leasing the 
highway, nor did it require the state of Indiana to review these 
interests. Texas envisions constructing new international border 
crossings and freight corridors using highway public-private 
partnerships, which may greatly facilitate North American Free Trade 
Agreement-related truck traffic to other states. However, no federal 
funding had been expended in the development of the project. Given the 
minimal federal funding in highway public-private partnerships to date, 
few mechanisms exist to consider potential national public interests in 
them. For example, FHWA officials told us that no federal definition of 
public interest or federal guidance on identifying and evaluating 
public interest exists. 

The absence of a clear identification and furtherance of national 
public interests in the national transportation system is not unique to 
highway public-private partnerships. We have called for a fundamental 
reexamination of the nations surface transportation policies, including 
creating well-defined goals based on identified areas of national 
interest, incorporating performance and accountability into funding 
decisions, and more clearly defining the role of the federal government 
as well as the roles of state and local governments, regional entities, 
and the private sector. Such a reexamination provides an opportunity to 
identify emerging national public interests (including tax 
considerations), the role of the highway public-private partnerships in 
supporting and furthering those national interests, and how best to 
identify and protect national public interests in future public-private 
partnerships. 

Concluding Observations: 

Highway public-private partnerships show promise as a viable 
alternative, where appropriate, to help meet growing and costly 
transportation demands. The public sector can acquire new 
infrastructure or extract value from existing infrastructure while 
potentially sharing with the private sector the risks associated with 
designing, constructing, operating, and maintaining public 
infrastructure. However, highway public-private partnerships are not a 
panacea for meeting all transportation system demands, nor are they 
without potentially substantial costs and risks to the public--both 
financial and nonfinancial--and trade-offs must be made. 

Highway public-private partnerships are fairly new in the United 
States, and, although they are meant to serve the public interest, it 
is difficult to be confident that these interests are being protected 
when formal identification and consideration of public and national 
interests has been lacking, and where limited up-front analysis of 
public interest issues using established criteria has been conducted. 
Consideration of highway public-private partnerships could benefit from 
more consistent, rigorous, systematic, up-front analysis. Benefits are 
potential benefits--that is, they are not assured and can only be 
achieved by weighing them against potential costs and trade-offs 
through careful, comprehensive analysis to determine whether public- 
private partnerships are appropriate in specific circumstances and, if 
so, how best to implement them. 

Despite the need for careful analysis, the approach at the federal 
level has not been fully balanced, as DOT has done much to promote the 
benefits, but comparatively little to either assist states and 
localities weigh potential costs and trade-offs, nor to assess how 
potentially important national interests might be protected in highway 
public-private partnerships. We have suggested that Congress consider 
directing the Secretary of Transportation to develop and submit 
objective criteria for identifying national public interests in highway 
public-private partnerships, including any additional legal authority, 
guidance, or assessment tools that would be appropriately required. We 
are pleased to note that in a recent testimony before the House, the 
Secretary indicated a willingness to begin developing such criteria. 
This is no easy task, however. The recent report by the National 
Surface Transportation Policy and Revenue Study Commission illustrates 
the challenges of identifying national public interests as the Policy 
Commission's recommendations for future restrictions--including 
limiting allowable toll increases and requiring concessionaires to 
share revenues with the public sector--stood in sharp contrast to the 
dissenting views of three commissioners.[Footnote 6] We believe any 
potential federal restrictions on highway public-private partnerships 
must be carefully crafted to avoid undermining the potential benefits 
that can be achieved. Reexamining the federal role in transportation 
provides an opportunity for DOT, we believe, to play a targeted role in 
ensuring that national interests are considered, as appropriate. 

Mr. Chairman, this concludes my prepared statement. I would be pleased 
to respond to any questions that you or other Members of the 
Subcommittee might have. 

GAO Contact and Staff Acknowledgment: 

For further information on this statement, please contact JayEtta Z. 
Hecker at (202) 512-2834 or [email protected]. Individuals making key 
contributions to this testimony were Steve Cohen (Assistant Director), 
Bert Japikse, Richard Jorgenson, Carol Henn, Matthew Rosenberg, and 
James White. 

[End of section] 

Footnotes: 

[1] GAO, Highway Public-Private Partnerships: More Rigorous Up-front 
Analysis Could Better Secure Potential Benefits and Protect the Public 
Interest, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-44] 
(Washington, D.C.: Feb. 8, 2008). 

[2] GAO, Highways and Transit: Private Sector Sponsorship of and 
Investment in Major Projects Has Been Limited, [hyperlink, 
http://www.gao.gov/cgi-bin/getrpt?GAO-04-419] (Washington, D.C.: Mar. 
25, 2004). 

[3] Depreciation is the accounting process of allocating against 
revenue the cost expiration of tangible property, plant, and equipment. 
Under straight-line depreciation, an equal amount of depreciation 
expense is taken annually over the life of the asset. Under accelerated 
depreciation, a depreciation expense is taken that is higher than 
annual straight-line amount in the early years and lower in later 
years. 

[4] [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-419]. 

[5] According to DOT officials, these projects were financed through 
models different than the public-private partnerships that are were the 
focus of our February 2008 report. 

[6] Transportation for Tomorrow, National Surface Transportation Policy 
and Revenue Study Commission, Dec. 2007. 

[End of section] 

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