Highway Public-Private Partnerships: More Rigorous Up-front	 
Analysis Could Better Secure Potential Benefits and Protect the  
Public Interest (08-FEB-08, GAO-08-44). 			 
                                                                 
The United States is at a critical juncture in addressing the	 
demands on its transportation system, including highway 	 
infrastructure. State and local governments are looking for	 
alternatives, including increased private sector participation.  
GAO was asked to review (1) the benefits, costs, and trade-offs  
of 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 public-private	 
partnerships and potential changes in this role. GAO reviewed	 
federal legislation, interviewed federal, state, and other	 
officials, and reviewed the experience of Australia, Canada, and 
Spain. GAO's work focused on highway-related public-private	 
partnerships and did not review all forms of public-private	 
partnerships.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-44						        
    ACCNO:   A80616						        
  TITLE:     Highway Public-Private Partnerships: More Rigorous       
Up-front Analysis Could Better Secure Potential Benefits and	 
Protect the Public Interest					 
     DATE:   02/08/2008 
  SUBJECT:   Cost analysis					 
	     Highway planning					 
	     Interstate highways				 
	     Performance measures				 
	     Primary highways					 
	     Public roads or highways				 
	     Risk management					 
	     State highways					 
	     Strategic planning 				 
	     Toll roads 					 
	     Transportation					 
	     Transportation costs				 
	     Transportation industry				 
	     Transportation planning				 
	     Transportation policies				 

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GAO-08-44

   

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Report to Congressional Requesters: 

United States Government Accountability Office: 

GAO: 

February 2008: 

Highway Public-Private Partnerships: 

More Rigorous Up-front Analysis Could Better Secure Potential Benefits 
and Protect the Public Interest: 

Highway Public-Private Partnerships: 

GAO-08-44: 

GAO Highlights: 

Highlights of GAO-08-44, a report to congressional requesters 

Why GAO Did This Study: 

The United States is at a critical juncture in addressing the demands 
on its transportation system, including highway infrastructure. State 
and local governments are looking for alternatives, including increased 
private sector participation. GAO was asked to review (1) the benefits, 
costs, and trade-offs of 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 public-private 
partnerships and potential changes in this role. GAO reviewed federal 
legislation, interviewed federal, state, and other officials, and 
reviewed the experience of Australia, Canada, and Spain. GAOï¿½s work 
focused on highway-related public-private partnerships and did not 
review all forms of public-private partnerships. 

What GAO Found: 

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-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 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. Highway public-private partnerships are also potentially 
more costly to the public than traditional procurement methods and the 
public sector gives up a measure of control, such as the ability to 
influence toll rates. Finally, as with any highway project, there are 
multiple stakeholders and trade-offs in protecting the public interest. 

Highway public-private partnerships we reviewed protected the public 
interest largely through concession agreement terms prescribing 
performance and other standards. 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. While similar tools have 
been used to some extent in the United States, their use has been more 
limited. Using up-front public interest evaluation tools can assist in 
determining expected benefits and costs of projects; not using such 
tools may lead to aspects of protecting the public interest being 
overlooked. For example, while projects in Australia require 
consideration of local and regional interests, concerns by local 
governments in Texas that they were being excluded resulted in state 
legislation requiring their involvement. 

While direct federal involvement has been limited to where federal 
investment exists, and while the Department of Transportation 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 federal programs to address emerging needs and test 
the relevance of existing policies. This reexamination provides an 
opportunity to identify and protect potential national public interests 
in highway public-private partnerships. 

What GAO Recommends: 

Congress should 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. The Department of Transportation raised 
concerns and disagreed with several of the findings and conclusions, as 
well as one of the recommendations. GAO clarified the report and 
continues to believe more rigorous up-front analysis could better 
protect public interests. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.GAO-08-44]. For more information, contact 
JayEtta Z. Hecker at (202) 512-2834 or [email protected]. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

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

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: 

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: 

Conclusions: 

Matter for Congressional Consideration: 

Recommendation for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Profile of GAO Public-Private Partnership Case Studies: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Description of U.S. Highway Public-Private Partnerships 
Reviewed by GAO: 

Table 2: Potential Benefits, Costs, and Trade-offs Associated with 
Highway Public-Private Partnerships: 

Table 3: Selected Performance Mechanisms to Protect the Public 
Interest: 

Table 4: Selected Financial Mechanisms to Protect the Public Interest: 

Table 5: Selected Noncompete Provisions: 

Table 6: Highway Public-Private Partnerships with SEP-15 Approval, as 
of June 2007: 

Figures: 

Figure 1: Total Capital Spending on Highways, by Level of Government, 
Fiscal Year 2005: 

Figure 2: Evolution of Private Sector Involvement with Highway 
Projects: 

Figure 3: Private Equity Investments in Highway Public-Private 
Partnerships: 

Figure 4: Worldwide Highway Infrastructure Projects Funded and 
Completed Using Public-Private Partnerships, 1985 to October 2004, by 
Region: 

Figure 5: Change in Chicago Skyway Tolls, 1967 to 2047: 

Figure 6: Various Stakeholder Interests Associated with Highway Public- 
Private Partnerships: 

Abbreviations: 

CDA: comprehensive development agreement: 

CPI: consumer price index: 

DOT: Department of Transportation: 

ETR: Express Toll Road: 

FHWA: Federal Highway Administration: 

GDP: gross domestic product: 

ISTEA: Intermodal Surface Transportation Efficiency Act of 1991: 

ITRCC: Indiana Toll Road Concession Company: 

LOS: level of service: 

NEPA: National Environmental Policy Act: 

OMB: Office of Management and Budget: 

OTIG: Oregon Transportation Improvement Group: 

PAB: private activity bond: 

PSC: public sector comparator: 

RFP: request for proposals: 

SAFETEA-LU: Safe, Accountable, Flexible, Efficient Transportation 
Equity Act--A Legacy for Users: 

SCC: Skyway Concession Company: 

SEP: Special Experimental Project: 

SR: State Road: 

TEA-21: Transportation Equity Act for the 21ST Century: 

TIFIA: Transportation Infrastructure Finance and Innovation Act of 
1998: 

TE-045: Innovative Finance Test and Evaluation Program: 

TTC: Trans-Texas Corridor: 

U.S.C.: United States Code: 

VfM: Value for Money: 

United States Government Accountability Office: 

Washington, DC 20548: 

February 8, 2008: 

Congressional Requesters: 

America's transportation system is the essential element that 
facilitates the movement of both people and freight within the country. 
Both economic activity and mobility are dependent upon an efficient 
transportation system. The United States is at a critical juncture 
regarding its ability to address demands on the transportation system. 
The Safe, Accountable, Flexible, Efficient Transportation Equity Act-- 
A Legacy for Users (SAFETEA-LU) authorized about $286 billion for 
highway, transit, and other transportation system spending for the 6- 
year period ending in fiscal year 2009. However, the Highway Trust 
Fund, the principal mechanism for providing federal funds for highway 
programs, could have a negative balance as early as 2012.[Footnote 1] 
More specifically, under current law, the Highway Account, which makes 
up the majority of Highway Trust Fund receipts, is projected to have a 
negative balance by 2009 due to a growing difference between projected 
receipts--the federal excise tax on motor fuel and truck-related taxes 
are primary sources of revenue for the Highway Account--and outlays. 
Baring changes to the tax structure, the situation will likely be 
further exacerbated by inflation and more fuel efficient vehicles that 
will act to further erode the resources available to meet 
transportation system demands. In 2005, the federal government 
accounted for about 40 percent of highway program capital spending (see 
fig. 1). State and local governments accounted for about 60 percent of 
highway program capital spending. 

Figure 1: Total Capital Spending on Highways, by Level of Government, 
Fiscal Year 2005: 

This figure is a pie chart showing the total capital spending on 
highways, by level of government, during fiscal year 2005. 

Federal government: 41.6%: $31.3 billion; 
State governments: 32.1%: $24.1 billion; 
Local governments: 26.3%: $19.8 billion. 

[See PDF for image] 

Source: Federal Highway Administration. 

[End of figure] 

The nation is also on an imprudent and unsustainable fiscal path. As 
the baby-boomer generation retires, entitlement programs will grow and 
require increasing shares of federal spending in the years ahead. 
Absent significant changes to tax and spending programs and policies, 
we face a future of unsustainable deficits and debt that threatens to 
cripple our economy and quality of life. This looming fiscal crisis 
requires a fundamental reexamination of all government programs and 
commitments by reviewing their results and testing their continued 
relevance and relative priority in the twenty-first century. This 
reexamination offers the prospect of addressing emerging needs (1) by 
weeding out programs and policies that are outdated or ineffective and 
(2) by modernizing those programs and policies that remain relevant. 
The federal programs for highways are particularly ripe for 
reexamination. The Interstate Highway System has been completed, yet 
the basic structure of the federal-aid highway program has not changed. 
As we have reported, federal transportation programs do not have 
mechanisms to link funding levels with the accomplishment of specific 
performance-related goals and outcomes related to mobility, and most 
highway grant programs are apportioned by formula, without regard to 
the needs or capacity of recipients.[Footnote 2] Transportation and 
other experts on a panel recently convened by the Comptroller General 
stated that the nation's transportation policy has lost focus and that 
the nation's overall transportation goals need to be better defined and 
linked to performance measures that evaluate what the respective 
policies and programs actually accomplish.[Footnote 3] There was broad 
consensus among the participants on the need for a transformation of 
our current approach to transportation policy to better meet current 
and future mobility needs in a strategic, integrated, and sustainable 
manner. 

Finally, the nation faces increasing congestion on the nation's 
highways. According to a February 2007 American Association of State 
Highway and Transportation Officials report, Federal Highway 
Administration (FHWA) has forecasted that over the next 50 years 
highway vehicle miles of travel will more than double from 3 trillion 
to 7 trillion.[Footnote 4] To meet the growing demand for new 
transportation capacity, states and localities are looking for 
alternatives to direct government provision of transportation 
infrastructure and services. One of these alternatives is increased 
private sector participation in delivering the infrastructure and 
services that the public sector is struggling to keep up with. 

The private sector has traditionally been involved 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. The 
private sector has also entered into a wide variety of highway public- 
private partnership arrangements with public agencies. According to 
FHWA, the term "public-private-partnership" is used for any scenario 
under which the private sector assumes a greater role in the planning, 
financing, design, construction, operation, and maintenance of a 
transportation facility compared to traditional procurement 
methods.[Footnote 5] Under some of these alternative arrangements, the 
private sector is increasingly being looked at to not only construct 
facilities but also to finance, maintain, and operate such 
infrastructure under long-term leaseholds--up to 99 years in some 
cases. In some cases, this involves financing and constructing a new 
facility and then operating and maintaining it over a specified period 
of time, while in other cases it 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. Proponents of these forms of 
highway public-private partnerships contend that they offer the 
potential advantages of obtaining critical new or expanded 
infrastructure sooner than if provided solely by the public sector, at 
a potentially lower cost given the efficiencies and innovation of 
market-driven private companies, and the use of private rather than 
public funds. In addition, risks of major infrastructure projects, such 
as risks associated with constructing highways and risks of generating 
sufficient traffic and revenue for financial viability, can be shifted 
from the public to the private sector. Since these arrangements are 
often used in relation to toll roads, the private sector return is 
achieved through the collection of future toll revenue. However, 
highway public-private partnership arrangements are not "risk free," 
and concerns have been raised about how well the public interest has 
been evaluated and protected. Concerns have also been raised about the 
potential loss of public control over critical assets for up to 99 
years. 

In January 2008, the National Surface Transportation Policy and Revenue 
Study Commission issued its report on the surface transportation 
system.[Footnote 6] The commission was required, among other things, to 
conduct a comprehensive study of the current condition and future needs 
of the surface transportation system and develop a conceptual plan, 
with alternative approaches, to ensure that the surface transportation 
system continues to serve the needs of the United States. The report 
made a number of recommendations for restructuring and financing the 
nation's surface transportation programs, in order to align federal 
leadership and federal transportation investments with national 
interests in the areas of highways, transit, passenger rail, freight, 
and other areas. The report also contained recommendations on tolling, 
congestion pricing, and the use of public-private partnerships. These 
recommendations included providing states and localities the 
flexibility to use tolls to fund new capacity on the Interstate Highway 
System and the flexibility to implement congestion pricing on this 
system--on both new and existing capacity in metropolitan areas with 
populations greater than 1 million. The report encouraged the use of 
public-private partnerships, including concessions, for highways and 
other surface transportation modes, and stated that "public-private 
partnerships should play an important role in financing and managing 
our surface transportation system." The commission recommended criteria 
to be included in public-private partnership concessions, including 
requirements that states cap toll rates (at the level of the consumer 
price index (CPI) minus a productivity adjustment), prohibit the use of 
revenues for nontransportation purposes, avoid toll rates that 
discriminate against certain users, and fully consider the effect 
tolling might have on diverting traffic to other facilities. The 
commission also recommended that there be increased transparency and 
adequate public participation in the decision to use public-private 
partnerships, revenue sharing between states and private 
concessionaires, and a demonstration that private sector financing 
provides better value for money than if the concession were financed 
using public funds. 

To assist Congress as it assesses the future of federal surface 
transportation and highway programs, you asked us to identify the 
issues associated with increased use of private sector participation in 
providing transportation infrastructure to the public. In response to 
your request, this report addresses (1) the benefits, costs, and trade- 
offs associated with highway public-private partnerships; (2) how 
public officials have identified and acted to protect the public 
interest in highway public-private partnership arrangements; and (3) 
the federal role in highway public-private partnerships and potential 
changes in this role. 

For purposes of this report, 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 which the Department of 
Transportation (DOT) classifies 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, nor did we include 
arrangements where concessionaires are only paid for services provided 
or public-private partnerships that might be used to allow the private 
sector to improve federal real property. This report is focused on the 
use of public-private partnerships in highways, although we recognize 
that such public-private partnerships can be used to provide other 
transportation (e.g., transit) and outside the transportation sector, 
such as hospitals and prisons. We also recognize that there may be 
other forms of highway public-private partnerships, such as shadow 
tolling in which the public sector pays a private sector company an 
amount per user of a roadway and there is no direct collection of a 
toll by the private company, or availability payments in which a 
private company is paid based on the availability of a highway to 
users. We did not include any of these types of public-private 
partnerships in the scope of our report, and the findings and 
conclusions of this report cannot be extrapolated to those or other 
types of public-private partnerships. 

To address these issues, we reviewed pertinent federal legislation and 
regulations, including SAFETEA-LU, as well as federal guidance and 
relevant modifications of FHWA procedures to permit the use of highway 
public-private partnerships on federally supported projects. We also 
collected data and analyzed information related to one project in 
Canada--the 407 Express Toll Road (ETR) near Toronto--and four projects 
in the United States--two were leases of existing transportation 
facilities and two were new construction projects--where such highway 
public-private partnerships had been, or were expected to be, used: (1) 
Chicago Skyway, Chicago, Illinois; (2) Indiana Toll Road, Indiana; (3) 
projects in and around the Portland, Oregon, area; and (4) the Trans- 
Texas Corridor (TTC), Texas. This included obtaining descriptions of 
these projects, copies of the concession or development agreements, and 
documentation related to the financial structure of such projects. 
These projects were selected because they were recent examples of 
highway public-private partnerships, were large dollar projects, or 
used different approaches. We also interviewed other states that were 
considering highway public-private partnerships for their highways, 
including California, New Jersey, and Pennsylvania. Our work also 
collected data and information on the use of highway public-private 
partnerships in Australia, Canada, and Spain. Further, we collected 
information on how public interest is evaluated in privately financed 
initiatives in the United Kingdom. All of these countries are leaders 
in using highway public-private partnerships to obtain transportation 
infrastructure. Finally, we interviewed FHWA and other federal 
officials, state and local officials associated with the three projects 
we selected, and with private sector officials involved with U.S. 
highway public-private partnership arrangements. We also conducted 
extensive interviews with government and private sector officials in 
Australia, Canada, and Spain. (See app. I for a more detailed 
discussion of our scope and methodology.) 

We conducted this performance audit from June 2006 to February 2008 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. 

Results in Brief: 

Highway public-private partnerships have the potential to provide 
numerous benefits to the public sector as well as potential costs and 
trade-offs. 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. 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. In addition, 
the public sector can potentially benefit from increased efficiencies 
in operations and life-cycle management, such as increased use of 
innovative technologies. Finally, through the use of tolling, highway 
public-private partnerships offer the potential to price highways to 
better reflect the true costs of operating and maintaining them and to 
increase mobility by adjusting tolls to manage demand, as well as the 
potential for more cost effective investment decisions by private 
investors. There are also potential costs and trade-offs to highway 
public-private partnerships. There is no "free" money--while highway 
public-private partnerships can be used to obtain financing for highway 
infrastructure without the use of public sector funding, this funding 
is a form of privately issued debt that must be repaid to private 
investors seeking 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 operated toll road. To the extent that a private 
concessionaire gains market power by control of a road where there are 
not other viable travel alternatives that would not require 
substantially more travel time, the potential also exists that the 
public could pay tolls that are higher than tolls based on cost of the 
facilities, including a reasonable rate of return. Furthermore, by 
leasing existing facilities, the public sector may give up more than it 
gains if the net present value of the future stream of revenues (less 
operating and capital costs) given up exceeds the concession payment 
received. Conversely, because the private sector takes on potentially 
substantial risks, the opposite could also be true--that is, the public 
sector might gain more than it gives up. Additionally, because large up-
front concession payments have in part been used to fund immediate 
needs, it remains to be seen whether these agreements will provide long-
term benefits to future generations who will potentially be paying 
progressively higher toll rates throughout the length of a concession 
agreement. Highway public-private partnerships also potentially require 
additional costs compared with traditional public procurement-
-for example, the costs associated with the need to hire financial and 
legal advisors. Further, while risks can be shared in highway public- 
private partnerships, not all risks can or should be shared, such as 
environmental or political risks. Finally, as with any highway project, 
there are multiple stakeholders and potential objectives and trade-offs 
in protecting the public interest. 

Public officials in the highway public-private partnership projects 
that we reviewed identified and protected the public interest, largely 
through terms contained in concession contracts, and in the United 
States we found more limited use of more formal tools such as those 
used in some other countries to evaluate and protect the public 
interest. Most often the terms of the contract focused on ensuring the 
performance of the facility (e.g., requirements for maintenance and 
expansion) and dealing with issues such as toll rates, public sector 
flexibility to provide future transportation services to the public, 
and workforce issues. Furthermore, the terms contained oversight and 
monitoring mechanisms to ensure that private partners fulfilled their 
obligations. Financial analyses, such as public sector comparators 
(PSC) that can be used to compare the costs of a proposed highway 
public-private partnership project with expected costs of procuring the 
project publicly, have also been used by some projects in the United 
States. 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. 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 resulted in 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 407 ETR facility was a major factor in significant 
opposition to the project. 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 undergo the 
project. 

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 to date in the highway public- 
private partnerships we reviewed, 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. 
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, although the Indiana Toll Road is part of the Interstate 
Highway System, minimal federal funds were used to construct it, and 
those funds were repaid to the federal government. Thus, although over 
60 percent of the traffic on the road (according to one study) is 
interstate in nature, federal officials had little involvement in 
reviewing the terms of this concession agreement, and FHWA did not 
review any potential impacts on interstate commerce--or require the 
state of Indiana to review these issues--before it was signed. Texas 
envisions constructing new international border crossings and freight 
corridors as part of the TTC, which may greatly facilitate North 
American Free Trade Agreement-related truck traffic to other states. 
However, no federal funding has been expended in the development of the 
project to date. 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 federal role in highways, including a clear 
identification of specific national interests in the system. Such a 
reexamination would provide an opportunity to establish the national 
public interest in highway public-private partnerships and form the 
basis for how this interest can best be furthered. We also found that 
highway public-private partnerships that have or will use federal funds 
and involve tolling may be required by law to use excess toll revenues 
(revenues that are beyond that needed for debt service, a reasonable 
return on investment to a private party, and operation and maintenance 
of a toll facility) for projects eligible for federal transportation 
funding. However, the methodology for calculating excess toll revenues 
is not clear. 

To ensure that future highway public-private partnerships meet federal 
requirements concerning the use of excess revenues for federally 
eligible transportation purposes, we recommend that the Secretary of 
Transportation direct the Federal Highway Administrator to clarify 
federal-aid highway regulations on the methodology for determining 
excess toll revenue, including a reasonable rate of return to private 
investors in highway public-private partnerships that involve federal 
investment. In order to balance the potential benefits of highway 
public-private partnerships with protecting public and national 
interests, Congress should consider directing the Secretary of 
Transportation, in consultation with Congress and other stakeholders, 
to develop and submit to Congress objective criteria for identifying 
national public interests in highway public-private partnerships. In 
developing these criteria, the Secretary should identify any additional 
legal authority, guidance, or assessment tools required, as appropriate 
and needed, to ensure national public interests are protected in future 
highway public-private partnerships. The criteria should be crafted to 
allow the department to play a targeted role in ensuring that national 
interests are considered in highway public-private partnerships, as 
appropriate. 

We provided copies of the draft report to the Department of 
Transportation for comment. The Assistant Secretary for Transportation 
Policy and the Deputy Assistant Secretary for Transportation Policy 
provided comments in a meeting with us on November 30, 2007. DOT raised 
substantive concerns and disagreed with several of the draft report's 
findings and conclusions, as well as one recommendation. We clarified 
the report and made other changes, as appropriate. For example, we 
revised the report to better clarify the potential benefits of pricing 
and resource efficiencies of highway public-private partnerships that 
DOT cited in its comments and added information about initiatives that 
certain states have taken to identify and protect the public interest 
in highway public-private partnerships. We recommended that the 
Secretary of Transportation direct the Administrator of FHWA to clarify 
federal-aid highway regulations on the methodology for determining 
excess toll revenue, including a reasonable rate of return to private 
investors in highway public-private partnerships. DOT said it would 
reexamine the regulations and take appropriate action, as necessary, to 
ensure the regulations are clear. Therefore, we made no change to the 
recommendation. Our draft report also recommended that DOT develop a 
legislative proposal containing objective criteria for identifying the 
national public interests in highway public-private partnerships. DOT 
disagreed with this recommendation, stating it would involve intrusion 
by the federal government into inherently state activities and a more 
expansive federal role. We believe the reexamination of federal 
transportation programs, which we have previously called for, provides 
an opportunity to identify national interests in the transportation 
system and determine the most appropriate federal role. Once 
established, we believe the federal government can play a more 
targeted, not necessarily more expansive, role. We have, therefore, 
deleted our recommendation and instead are suggesting that Congress 
consider directing DOT to undertake this action. DOT and other agencies 
(including state and foreign governments we spoke with) also provided 
technical comments that were incorporated, as appropriate. DOT's 
comments and our evaluation are discussed at the end of this report. 

Background: 

Private sector participation and investment in highways is not new. In 
the 1800s, private companies built many roads that were financed with 
revenues from tolls, but this activity declined due to competition from 
railroads and greater state and federal involvement in building tax- 
supported highways. Private sector involvement in highways was 
relegated to contracting with states to build roads. In the absence of 
private toll roads, states and local governments were responsible for 
road construction and maintenance. In the 1930s many states began 
creating public authorities that built toll roads such as the 
Pennsylvania Turnpike that relied on loans and private investors buying 
bonds to finance construction. The Federal-Aid Highway Act of 1956 
established a federal tax-assisted National System of Interstate and 
Defense Highways, commonly know as the Interstate Highway System. 
Further, the federal Highway Revenue Act of 1956 established a Highway 
Trust Fund to be funded using revenue from, among other sources, motor 
fuel taxes. The Federal-Aid Highway Act of 1956 generally prohibited 
the use of federal funds for the construction, reconstruction, or 
improvement of any toll road. 

States retain the primary responsibility for building and maintaining 
highways. While states collect revenues to finance road construction 
and maintenance from a variety of sources, including fuel taxes, they 
also receive significant federal funding. For example, in 2005, of the 
$75.2 billion spent on highways by all levels of government, about 
$31.3 billion (about 42 percent) was federal funding. Federal highway 
funding is distributed mostly through a series of formula grant 
programs, collectively known as the federal-aid highway program. 
Funding for the federal-aid highway program is provided through the 
Highway Trust Fund--a fund that was used to finance construction of the 
Interstate Highway System on a "pay as you go" basis. Receipts for the 
Highway Trust Fund are derived from two main sources: federal excise 
taxes on motor fuel and truck-related taxes. Receipts from federal 
excise taxes on motor fuel constitute the single largest source of 
revenue for the Highway Account. Funds are provided to the states for 
capital projects, such as new construction, reconstruction, and many 
forms of capital-intensive maintenance. These funds are available for 
eligible projects and pay 80 percent of the costs on most projects. 
Additionally, the responsibility for planning and selecting projects is 
handled by the states and metropolitan planning organizations. 

Over time, federal programs and legislation have gradually become more 
receptive to private sector participation and investment. For example, 
the Surface Transportation and Uniform Relocation Assistance Act of 
1987 established a pilot program allowing federal participation in 
financing the construction or reconstruction of seven toll facilities, 
excluding highways on the Interstate Highway System. Construction costs 
for these projects were eligible for a 35 percent federal-aid match. 
The Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA) 
removed the pilot project limitation on federal participation in 
financing the initial construction or reconstruction of tolled 
facilities, including the conversion of nontolled to tolled facilities. 
ISTEA raised the federal share of construction costs on toll roads to 
50 percent and allowed federal participation in financing privately 
owned and operated toll roads, provided that the public authority 
remained responsible for ensuring that all of its title 23 
responsibilities to the federal government were met. ISTEA also 
included a congestion pricing pilot program that allowed the Secretary 
of Transportation to enter into cooperative agreements with up to five 
state or local governments or public authorities to establish, 
maintain, and monitor congestion pricing projects. 

In 1998, the Transportation Equity Act for the 21ST Century (TEA-21) 
renamed the congestion pricing pilot, calling it a "value-pricing pilot 
program," and expanded the number of projects eligible for assistance 
to 15. TEA-21 also created a pilot program for tolling roads in the 
Interstate Highway System. Under this pilot, up to three states can 
toll interstates if the purpose is to reconstruct or rehabilitate the 
road and the state could not adequately maintain or improve the road 
without collecting tolls. Finally, the Transportation Infrastructure 
Finance and Innovation Act of 1998 (TIFIA) created a new federal 
program to assist in the financing of major transportation projects, in 
part by encouraging private sector investment in infrastructure. The 
TIFIA program permits the Secretary of Transportation to offer secured 
loans, loan guarantees, and lines of credit. 

In 2005, SAFETEA-LU reauthorized appropriations to fund all of the 
previously established toll programs. SAFETEA-LU also allowed the 
combining of public and private sector funds, including the investment 
of public funds in private sector facility improvements for purposes of 
eligibility for TIFIA loans. SAFETEA-LU also created the Express Lanes 
Demonstration Program, which authorizes the Secretary of Transportation 
to fund 15 demonstration projects to use tolling of highways, bridges, 
or tunnels--including facilities on the Interstate Highway System--to 
manage high congestion levels, reduce emissions in nonattainment or 
maintenance areas under the Clean Air Act, or finance highway expansion 
to reduce congestion. Finally, SAFETEA-LU amended the Internal Revenue 
Code to add qualified highway or surface freight transfer facilities to 
the types of privately developed and operated projects for which exempt 
facility bonds (also called private activity bonds, PABs) may be 
issued.[Footnote 7] According to FHWA, passage of the PAB provisions 
reflected the federal government's desire to increase private sector 
investment in U.S. transportation infrastructure. SAFETEA-LU authorized 
the Secretary of Transportation to allocate up to $15 billion in PABs 
for qualifying highway and freight transfer facilities. As of January 
2008, about $3.2 billion in PABs had been approved by DOT. 

The private sector has historically been involved in the construction 
phase as a contractor. Over time, the private sector has been 
increasingly involved in other phases of projects serving as either 
contractors or managers (see fig. 2). The private sector has become 
more involved in a wide range of tasks, including design, planning, 
preliminary engineering, and maintenance of highways. In addition, 
contractors have been given more responsibility for project oversight 
and ensuring project quality through increased use of contractors for 
engineering and inspection activities, as well as quality assurance 
activities. This increasing use of contractors can, in part, be 
attributed to the need for staff and expertise by state highway 
agencies. Existing surveys of state highway departments from 1996 to 
2002 show an increase of tasks completely outsourced from about 26 
percent to about 36 percent.[Footnote 8] 

Figure 2: Evolution of Private Sector Involvement with Highway 
Projects: 

This figure is a chart showing the evolution of private sector 
involvement with highway projects. 

Types of private sector involvement: Construction historically 
outsourced; 
Project tasks; 
Preplanning; (Task performed in-house): 
Finance; (Task performed in-house): 
Design; (Task performed in-house): 
Construction (Outsourced); (Task outsourced to consultant or 
contractor): 
Operations and Maintenance; (Task performed in-house): 
Upkeep and Improvements; (Task performed in-house). 

Types of private sector involvement: Growth in outsourcing; 
Project tasks: Preplanning and acquisition (Outsourced); (Task 
outsourced to consultant or contractor): 
Finance; (Task performed in-house): 
Design (Outsourced); (Task outsourced to consultant or contractor): 
Construction (Outsourced); (Task outsourced to consultant or 
contractor): 
Operations and maintenance (Outsourced); (Task outsourced to consultant 
or contractor): 
Upkeep and improvements (Outsourced); (Task outsourced to consultant or 
contractor). 

[See PDF for image] 

Source: GAO. 

Note: Dark shading indicates private sector involvement. 

[End of figure] 

Private sector participation can also involve highway public-private 
partnerships. As highway public-private partnerships can be defined to 
include any private sector involvement beyond the traditional 
contracting role in construction, there are many types of highway 
public-private partnership models. For example, design-build contracts, 
in which a private partner both designs and then constructs a highway 
under a single contract, is considered by DOT to be a highway public-
private partnership. Some highway public-private partnerships involve 
equity investments by the private sector (see fig. 3). In construction 
of new infrastructure, commonly called "greenfield projects," the 
private sector may provide financing for construction of the facility 
and then has responsibility for all operations and maintenance of the 
highway for a specified amount of time. The private operator generally 
makes its money through the collection of tolls. Private investments 
have also been made in existing infrastructure through the long-term 
leases of currently existing toll roads. These transactions, often 
called "brownfield" projects, usually involve a private operator 
assuming control of the asset--including responsibilities for 
maintenance and operation and collection of toll revenues--for a fixed 
period of time in exchange for a concession fee provided to the public 
sector. The concession fee could be in the form of an up-front payment 
at the start of the concession, or could be provided over time through 
a revenue sharing arrangement, or both. While many long-term public-
private partnerships involve tolled highways, that is not necessarily 
always the case. For example, under a "shadow tolling" arrangement, the 
private sector finances, constructs, and operates a nontolled highway 
for a period of time and is paid a predetermined fee per car by the 
public sector. 

Figure 3: Private Equity Investments in Highway Public-Private 
Partnerships: 

This figure is a flowchart showing private equity investments in 
highway public-private partnerships. 

Types of private sector involvement: Private equity investment; Design-
build-finance-operate; 
Project tasks: Preplanning and acquisiton; (Task performed in-house): 
Finance (Outsourced); (Task outsourced to consultant or contractor): 
Design (Outsourced); (Task outsourced to consultant or contractor): 
Construction (Outsourced); (Task outsourced to consultant or 
contractor): 
Operations and maintenance (Outsourced); (Task outsourced to consultant 
or contractor): 
Upkeep and improvements (Outsourced) (Task outsourced to consultant or 
contractor). 

Types of private sector involvement: Private equity investment; Long-
term lease for existing toll facility; 
Project tasks: Preplanning and acquisiton; (Task performed in-house): 
Finance (Outsourced); (Task outsourced to consultant or contractor): 
Design; (Task performed in-house): 
Construction; (Task performed in-house): 
Operations and maintenance (Outsourced); (Task outsourced to consultant 
or contractor): 
Upkeep and improvements (Outsourced) (Task outsourced to consultant or 
contractor). 

[See PDF for image] 

Source: GAO. 

Note: Dark shading indicates private sector involvement. 

[End of figure] 

The projects included as part of our review primarily involved the long-
term concessions of toll roads involving private sector equity. This 
model has seen strong interest in the past few years as many states 
have considered using this model to construct new highway 
infrastructure. For example, Texas is currently developing a number of 
new highways through this model. In addition, many states have explored 
private involvement for the long-term operation and maintenance of 
existing toll roads. For example, the city of Chicago and the state of 
Indiana recently entered into long-term leases with the private sector 
for the Chicago Skyway and Indiana Toll Road, respectively. Since we 
began our review, other states have begun exploring leasing existing 
toll roads to the private sector. For example, Pennsylvania has 
considered many options, including a long-term lease, for extracting 
value from the Pennsylvania Turnpike. In 2006, Virginia entered into a 
long-term lease agreement with a private company for the Pocahontas 
Parkway in the Richmond area and, in 2007, the Northwest Parkway Public 
Highway Authority entered into a long-term concession in the Denver 
region. 

The U.S. highway public-private partnership projects included in our 
review were varied (see table 1). Two of the projects--the TTC and 
Oregon--involved construction of infrastructure. The Texas project, in 
particular, was envisioned as an extensive network of interconnected 
corridors that involved passenger and freight movement, as well as 
passenger and freight railroads. The Oregon projects were primarily in 
the Portland area and involved capacity enhancement. Two of the 
projects we reviewed also involved leases of existing facilities--the 
Indiana Toll Road and the Chicago Skyway. In both instances, local or 
state officials were looking to extract value from the assets for 
reinvestment in transportation or other purposes. (See app. II for more 
information about the highway public-private partnerships that were 
included in our review.) 

Table 1: Description of U.S. Highway Public-Private Partnerships 
Reviewed by GAO: 

Name and location: New construction: TTC, Texas; 
Description: The TTC is envisioned in total to be a 4,000 mile 
statewide network of interconnected corridors containing tolled 
highways and separate tolled truckways, as well as freight, intercity, 
and commuter rail lines and possible utility easements. In June 2002, 
the Texas Transportation Commission adopted an action plan identifying 
priority segments of the TTC. In 2005, the Texas DOT awarded a 
comprehensive development agreement to a private consortium to develop 
preliminary concept and financing plans for the first portion of the 
TTC (TTC-35) from Oklahoma to Mexico. This agreement also allows the 
concessionaire to bid on other projects known as "connecting 
facilities." In 2007, the Texas DOT also awarded a 50- year concession 
to the private consortium to develop State Highway 130, segments 5 and 
6. This is expected to be a connecting facility to the TTC. State 
Highway 130 is a new highway being built in segments between Austin and 
San Antonio in central Texas; 
Date leased or project initiated: June 2002. 

Name and location: New construction: Oregon; 
Description: In January 2006, the Oregon Transportation Commission 
approved agreements with the Oregon Transportation Improvement Group (a 
private sector partner) for predevelopment work on three proposed 
projects--construction of roads east of Portland (Sunrise Corridor), 
South I-205 widening, and construction of an 11-mile highway in the 
Newberg-Dundee area; 
Date leased or project initiated: January 2006. 

Name and location: Chicago Skyway, Chicago, Illinois; 
Description: The Chicago Skyway was originally built in 1958 and was 
operated and maintained by the city of Chicago Department of Streets 
and Sanitation. It is a 7.8 mile elevated toll road connecting I-94 
(Dan Ryan Expressway) in Chicago to I-90 (Indiana Toll Road) at the 
Indiana border. In October 2004, it was leased to a private 
concessionaire under a 99-year lease for about $1.8 billion; 
Date leased or project initiated: October 2004. 

Name and location: Lease of existing facilities: Indiana Toll Road, 
Indiana; 
Description: The Indiana Toll Road has been operational since 1956 and 
stretches 157 miles along the northern most border of Indiana. From 
1981 to 2006, it was operated by Indiana DOT. Since June 2006, it has 
been operated by a private concessionaire under a 75-year lease. 
Indiana received $3.8 billion from the lease; 
Date leased or project initiated: June 2006. 

Source: GAO analysis of project data. 

[End of table] 

There has been considerable private participation in highways and other 
infrastructure internationally. Europe, in particular has been a leader 
in use of these arrangements. Spain and France pioneered the use of 
highway public-private partnerships for the development of tolled 
motorways in Europe. Spain began inviting concessionaires to build a 
national autopista network in the 1960s, while private autoroute 
concessions in France date from the 1970s. Public-private partnership 
arrangements for infrastructure project financing or delivery of 
highway-related projects is widespread among the regions of the 
world.[Footnote 9] Highway public-private partnership initiatives 
support continued economic growth in more developed parts of the world 
or foster economic development in the less developed parts of the 
world. Over the period 1985 to 2004, the highest investment in road 
projects (includes roads, bridges, and tunnels) funded and completed 
using public-private partnerships was in Europe ($58.1 billion) 
followed by Asia ($44.5 billion) and North America ($32.2 billion). 
(See fig. 4.) FHWA attributed the predominant role of Europe to the 
absence of a dedicated funding source for highways and a rapid 
transition in the 1990s from a largely public infrastructure system to 
a more privately financed, developed, and operated system, among other 
things. 

Figure 4: Worldwide Highway Infrastructure Projects Funded and 
Completed Using Public-Private Partnerships, 1985 to October 2004, by 
Region: 

This figure is a combination of two pie charts. They represent 
worldwide highway infrastructure projects funded and completed using 
public-private partnerships between 1985 and October 2004, by region. 

Projects: 

North America: 106 projects: 30%; 
Europe: 91 projects: 25%; 
Latin America: 83 projects: 23%; 
Asia: 72 projects: 20%; 
Africa: 7 projects: 2%. 

Cost: 

Europe: $58.1 billion: 37%; 
Asia: $44.5 billion: 28%; 
North America: $32.2 billion: 20%; 
Latin America: $18.9 billion: 12%; 
Africa: $3.7 billion: 2%; 

[See PDF for image] 

Source: FHWA. 

Note: The term "highway infrastructure" includes roads, bridges, and 
tunnels. 

[End of figure] 

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

While highway public-private partnerships have the potential to provide 
numerous benefits, they also entail costs and trade-offs to the public 
sector. The advantages and potential benefits of highway public-private 
partnerships, as well as their costs and trade-offs are summarized in 
table 2. Highway public-private partnerships that involve tolling may 
not be suited to all situations. In addition to potential benefits to 
the public sector, highway public-private partnerships can potentially 
provide private sector benefits as well through investment in a long- 
term asset with steady income generation over the course of a 
concession and availability of various tax incentives. 

Table 2: Potential Benefits, Costs, and Trade-offs Associated with 
Highway Public-Private Partnerships: 

Advantages and potential benefits for the public sector: Finance the 
construction of new highways without the use of public funding; 
Potential costs/trade-offs for the public sector: Tolls paid by road 
users, regardless of whether the collector is in the private sector or 
the public sector; 
Potentially higher tolls under private operation. 

Advantages and potential benefits for the public sector: Obtain up- 
front payments through the long-term lease of existing toll roads; 
Potential costs/trade-offs for the public sector: Public may give up 
more than it gains if tolls over time exceed the value of up-front 
payments; 
Use of proceeds for short-term compared with long-term uses; 
Intergenerational inequities--future users might potentially pay higher 
tolls to support current benefits. 

Advantages and potential benefits for the public sector: Transfer and 
sharing of project risks to the private sector: 
* construction cost and schedule,; 
* sufficient traffic and revenue levels, and; 
* increased transparency of project costs; Potential costs/trade-offs 
for the public sector: Not all risks can or should be shared: 
* environmental risks, and; 
* political risks; Potential loss of control: 
* noncompete provisions, and; 
* toll rate setting. 

Advantages and potential benefits for the public sector: Secure private 
sector efficiencies in operations and life-cycle management; 
Potential costs/trade-offs for the public sector: Higher public sector 
costs: 
* costs of advisors,; 
* costs of private finance, and: potential tax losses. 

Advantages and potential benefits for the public sector: Obtain a 
facility that better reflects the true costs of operating and 
maintaining the facility in setting tolls and better acknowledges the 
costs and impact to drivers of using the roadway system during times of 
peak demand; Increase mobility through tolling, congestion pricing, and 
more efficient decision making; 
Potential costs/trade-offs for the public sector: Risk that the public 
could pay tolls that are higher than tolls based on the costs of the 
facilities, including a reasonable rate of return, should a private 
concessionaire take advantage of market power gained by control of a 
road for which there are few alternatives that do not require 
substantially more travel time; Traffic diversion; User equity concerns 
from tolling. 

Source: GAO. 

[End of table] 

Highway Public-Private Partnerships Have Been Used to Provide New 
Infrastructure and Funding for Transportation and Other Needs and Have 
the Potential to Provide Other Benefits: 

Highway public-private partnerships have resulted in advantages from 
the perspective of state and local governments, such as the 
construction of new facilities without the use of public funding and 
extracting value--in the form of up-front payments--from existing 
facilities for reinvestment in transportation and other public 
programs. In addition, highway public-private partnerships can 
potentially provide other benefits to the public sector, including the 
transfer of project risks to the private sector, increased operational 
efficiencies through private sector operation and life-cycle 
management, and benefits of pricing and improved investment decision 
making that result from increased use of tolling. 

Finance New Construction and Receive Up-front Payments through Asset 
Monetization: 

In the United States and abroad, public-sector entities have entered 
highway public-private partnership agreements to finance the 
construction of new roadways. As we reported in 2004, by relying on 
private sector sponsorship and investment to build the roads rather 
than financing the construction themselves, states (1) conserved 
funding from their highway capital improvement programs for other 
projects, (2) avoided 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) avoided the legislative or administrative limits that governed the 
amount of outstanding debt these states were allowed to have.[Footnote 
10] All of these results were advantages for the states. For example, 
the TTC is a project that Texas plans to finance, construct, operate, 
and maintain through various private sector investors. The project is 
based on competitive bidding and procurement processes, and it will be 
developed in individual segments as warranted over 50 years. 

While relatively new in the United States, leveraging private resources 
to obtain highway infrastructure is more common abroad. Since the 
1960s, Spain has been active in highway public-private partnerships, 
using approximately 22 toll highway concessions to construct its 3,000- 
kilometer[Footnote 11] (approximately 1,860 mile) national road network 
at little cost to the national government.[Footnote 12] By keeping the 
capital costs off the public budget, Spain mitigated budgetary 
challenges and met macroeconomic criteria for membership in the 
European Union's Economic Monetary Union. More recently, Australian 
state governments have entered into highway public-private partnerships 
with private sector construction firms and lenders to finance and 
construct several toll highways in Sydney and Melbourne. Officials with 
the state of Victoria, Australia, have said that government preferences 
to limit their debt levels, particularly following a severe recession 
in the early 1990s, would have made construction of these roads 
difficult without private financing, even though some of the roads had 
been on transportation plans for several years. 

Some governments in the United States and Canada are also using highway 
public-private partnerships to extract value from existing 
infrastructure and raise substantial funds for transportation and other 
purposes. For example, in 2005 the city of Chicago received about $1.8 
billion by leasing the Chicago Skyway to a concession consortium of 
Spanish and Australian companies for 99 years. The city used the lease 
proceeds to fund various social services; pay off remaining debt on the 
Chicago Skyway (about $400 million) and some of the city's general 
obligation debt; and, create a reserve fund which, according to the 
former Chief Financial Officer of Chicago, generates as much net 
revenue in annual interest as the highway had generated in annual 
tolls. By paying off the city's general obligation debt, the city's 
credit rating improved, thus reducing the cost of debt in the future. 

In another example of extracting value from existing infrastructure, 
the state of Indiana signed a 75-year, $3.8 billion lease of the 
Indiana Toll Road in 2006 with the same consortium of private sector 
companies that had leased the Chicago Skyway. The proceeds will 
primarily be used to fund the governor's 10-year statewide "Major 
Moves" transportation plan. Indiana officials told us that Indiana was 
the only state with a fully funded transportation plan for the next 10 
years. Indiana also established reserves from the lease proceeds to 
provide future funding. Finally, the Provincial Government of Ontario, 
Canada, preceded both of these concession agreements in 1999 when it 
entered into a long-term lease with a private consortium for the 
Highway 407 ETR in the Toronto area in exchange for $3.1 billion 
Canadian dollars (approximately $2.6 billion U.S. dollars in 1999, or 
$3.2 billion U.S. dollars in 2007).[Footnote 13] According to Ontario 
officials, proceeds from the 407 ETR lease were added to the province's 
general revenue fund but were not dedicated to a long-term investment 
or other specific capital projects. 

Potential Benefits Associated with Transferring Risks: 

The public sector may also potentially benefit from transferring or 
sharing risks with the private sector. These risks include project 
construction and schedule risks. Various government officials told us 
that because the private sector 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. 

The transfer of construction cost and schedule risk to the private 
sector is especially important and valuable, given the incidence of 
cost and schedule overruns on public projects. Between 1997 and 2003, 
we and others identified problems with major federally funded highway 
and bridge projects and with FHWA's oversight of them.[Footnote 14] We 
have reported that on many projects for which we could obtain 
information, costs had increased, sometimes substantially, and that 
several factors accounted for the increases, including less than 
reliable initial cost estimates. We further reported that cost 
containment was not an explicit statutory or regulatory goal of FHWA's 
oversight and that the agency had done little to ensure that cost 
containment was an integral part of the states' project management. 
Since that time both Congress and DOT have taken action to improve the 
performance of major projects and federal oversight; however, 
indications of continuing problems remain. In 2004, DOT established a 
performance goal that 95 percent of major federally funded 
infrastructure projects would meet cost and schedule milestones 
established in project or contract agreements, or achieve them within 
10 percent of the established milestones. While federally funded 
aviation and transit projects have met this goal, federally funded 
highway projects have missed the goal in each of the past 3 
years.[Footnote 15] 

Overseas, an example of a successful transfer of construction risk 
involves the CityLink highway project in Melbourne, Australia. This 
project faced several challenges during construction, including 
difficult geological conditions and a tunnel failure, which caused 
project delays and added costs. According to officials from the 
government of Victoria, Australia, because construction risks were 
borne by the private sector, all cost and schedule overruns came at the 
expense of the private concessionaire, and no additional costs were 
imposed on the government. Another benefit of highway public-private 
partnerships related to the costs of construction is that because 
highway public-private partnership contracts are public and cost and 
schedule overruns are generally assumed by the private sector, there 
can be more public transparency about project costs and timelines than 
under public projects. 

Traffic and revenue risks can also be transferred to the private 
sector. In some highway public-private partnership projects, traffic 
and revenues have been low, imposing costs on the private sector but 
not leading to direct costs to the public sector. For example, the 
Pocahontas Parkway opened to traffic in stages beginning in May 2002. 
Revenues have been less than projected on this road because traffic has 
been lower than projected. Virginia used public and private funds for 
operating and maintaining the Parkway until it had sufficient revenue 
to repay initial state funds used for construction and pay for the 
operation and maintenance through tolls. Traffic projections for 2003 
indicated there would be about 840,000 transactions per month (about 
$1.4 million in revenue). However, as of January 2004, traffic was 
about 400,000 transactions per month (about $630,000 in revenue). In 
June 2006, under an amended and restated development agreement, a 
private concessionaire that believed the road was a good long-term 
investment assumed responsibility for the road for a period of 99 
years. The private concessionaire is now responsible for all debt on 
the Pocahontas Parkway and the risk that revenues on the highway might 
not be high enough to support all costs. Similarly, in Australia, 
construction of the Cross City Tunnel in Sydney was privately funded; 
but, the project began to experience financial problems when actual 
traffic and revenues were lower than forecasted. Within the first 2 
years of operation, the private operator went into receivership. In 
September 2007, the Cross City Tunnel project was sold to new owners 
following a competitive tender process. Government officials from New 
South Wales told us that, as of spring 2007, there had been no costs to 
the government because the traffic and revenue risks were borne by the 
private sector. 

Potential Efficiencies in Operations and Life-Cycle Management: 

Highway public-private partnerships may also yield other potential 
benefits, such as management of assets in ways that may yield 
efficiencies in operations and life-cycle management that may reduce 
total project costs over a project's lifetime. For example, in 2004, 
FHWA reported that, in contrast to traditional highway contracting 
methods that have sometimes focused on costs of individual project 
segments, highway public-private partnerships have more flexibility to 
maximize the use of innovative technologies. Such technologies will 
lead to increases in quality and the development of faster and less 
expensive ways to design and build highway facilities. According to 
DOT, highway public-private partnerships can also reduce project life- 
cycle costs.[Footnote 16] For example, in the case of the Chicago 
Skyway, the private concession company invested in electronic tolling 
technologies within the first year of taking over management of the 
Chicago Skyway. This action was taken because, in the long term, the up-
front cost of new technologies would be paid off through increased 
mobility, higher traffic volumes, a reduced need for toll collectors, 
and decreased congestion at the toll plaza by increasing traffic 
throughput. According to the Assistant Budget Director for Chicago, the 
high initial cost for installing electronic tolling was likely a 
prohibiting factor for the city to make the same investment, based on 
the city's limited annual budget. Foreign officials with whom we spoke 
also identified life-cycle costing and management as a primary benefit 
of highway public-private partnerships. 

Highway public-private partnerships can also better ensure more 
predictable funding for maintenance and capital repairs of the highway. 
Under more traditional publicly financed and operated highways, 
operations and maintenance and capital improvement costs are subject to 
annual appropriations cycles. This increases the risk that adequate 
funds may or may not be available to public agencies. However, under a 
highway public-private partnership, concessionaires are generally held, 
through contractual provisions, to maintain the highway up to a certain 
level of standard (sometimes as good as or better than a state would 
hold itself to) throughout the course of the concession, and the 
concessionaire must fund all maintenance costs itself. Furthermore, 
capital improvements, including possible roadway expansions, may also 
be contractually required of concessionaires ensuring that such works 
will be conducted as needed. Finally, the desire for a safe and well- 
maintained roadway in order to attract traffic (and, therefore, 
revenues) may incentivize a private operator to useful and efficient 
operations and maintenance techniques and practices. 

Potential Pricing and Investment Decision-Making Benefits: 

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. Highway public-private partnerships potentially 
provide benefits by better pricing infrastructure to reflect the true 
costs of operating and maintaining the facility and thus realizing 
public benefits of improved condition and performance of public 
infrastructure. In addition, through the use of tolling, highway public-
private partnerships can use tolling techniques designed to have 
drivers readily understand the full cost of decisions to use the road 
system during times of peak demand and potentially reduce the demand 
for roads during peak hours. Through congestion pricing, tolls can be 
set to vary during congested periods to maintain a predetermined level 
of service. Such tolls create financial incentives for drivers to 
consider costs when making their driving decisions. In response, 
drivers may choose to share rides, use transit, travel at less 
congested (generally off-peak) times, or travel on less congested 
routes to reduce their toll payments. Such choices can potentially 
reduce congestion and the demand for road space at peak periods, thus 
allowing the capacity of existing roadways to accommodate demand with 
fewer delays. For example, a representative of the government of 
Ontario, Canada, told us that the 407 ETR helped relieve congestion in 
Toronto by attracting traffic from a parallel publicly financed 
untolled highway. In fact, advisors to the government said that the 
officials established a tolling schedule for the 407 ETR based on 
achieving predetermined optimal traffic flows on the 407 ETR. 

Tolling can also potentially lead to targeted, rational, and efficient 
investment decisions. National roadway policy has long incorporated the 
user pays concept, according to which roadway users pay the costs of 
building and maintaining roadways, generally in the form of excise 
taxes on motor fuels and other taxes on inputs into driving, such as 
taxes on tires or fees for registering vehicles or obtaining operator 
licenses. Increasingly, however, decision makers have looked to other 
revenue sources--including income, property, and sales tax revenues--to 
finance roads in ways that do not adhere to the user pays principle. 
Tolling, however, is more consistent with user pay principles because 
tolling a particular road and using the toll revenues collected to 
build and maintain that road more closely aligns the costs with the 
distribution of the benefits that users derive from it. Furthermore, 
roadway investment can be more efficient when it is financed by tolls 
because the users who benefit will likely support additional investment 
to build new capacity or enhance existing capacity only when they 
believe the benefits exceed the costs. In addition, toll project 
construction is typically financed by bonds sold and backed by future 
toll revenues, and projects must pass the test of market viability and 
meet goals demanded by investors, thus better ensuring that there is 
sufficient demand for roads financed through tolling. However, even 
with this test there is no guarantee that projects will always be 
viable. 

Potential Private Sector Benefits: 

The private sector, and in particular, private investment groups, 
including equity funds and pension fund managers, have recently 
demonstrated an increasing interest in investing in public 
infrastructure. They see the sector as representing long-term assets 
with stable, potentially high yield returns. While these private sector 
investors may benefit from highway public-private partnerships, they 
can also lose money through a highway public-private partnership. 
Although profits are generally not realized in the first 10 to 15 years 
of a concession agreement, 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.[Footnote 17] 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 (whether construction costs of new 
facilities or concession fees paid to the public sector for existing 
facilities), as well as ongoing maintenance and operation costs, and 
generate a return on investment. According to investment firms with 
whom we spoke, future toll revenue from tolled transportation projects 
can provide reliable long-term investment opportunities. 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. 

The private sector can also receive potential tax deductions from 
depreciation on assets involving private sector investment and the 
availability of these deductions were important incentives to the 
private sector to enter some of the highway public-private partnerships 
we reviewed. Obtaining these deductions, however, may require lengthy 
concessions periods. In the United States, federal tax law allows 
private concessionaires to claim income tax deductions for depreciation 
on a facility (whether new highways or existing highways obtained 
through a concession) if the concessionaire has effective ownership of 
the property. Effective ownership requires, among other things, that 
the length of a concession be greater than or equal to the useful 
economic life of the asset. Financial and legal experts, including 
those who were involved in the Chicago and Indiana transactions, told 
us that since the concession lengths of the Chicago Skyway and the 
Indiana Toll Road agreements each exceed their useful life, the private 
investors can claim full tax deductions for asset depreciation within 
the first 15 years of the lease agreement.[Footnote 18] The requirement 
to demonstrate effective asset ownership contributed to the 99-year and 
75-year concession terms for the Chicago Skyway and Indiana Toll Road, 
respectively. One tax expert told us that, in general, infrastructure 
assets (such as highways) obtained by the private sector in a highway 
public-private partnership may be depreciated on an accelerated basis 
over a 15-year period.[Footnote 19] 

Private investors can also potentially benefit from being able to use 
tax-exempt financing authorized by SAFETEA-LU in 2005. Private activity 
bonds have been provided for private sector use to generate proceeds 
that are then used to construct new highway facilities under highway 
public-private partnerships.[Footnote 20] This exemption lowers private 
sector costs in financing highway public-private partnership projects. 
As of January 2008, DOT had approved private activity bonds for 5 
projects totaling $3.2 billion[Footnote 21] and had applications 
pending for 3 projects totaling $2.2 billion. DOT said it expects 
applications for private activity bond allocations from an additional 
12 projects totaling more than $10 billion in 2008. 

Finally, the private sector can potentially benefit through gains 
achieved in refinancing their investments. Both public and private 
sector officials with whom we spoke agreed that refinancing is common 
in highway public-private partnerships. Refinancing may occur early in 
a concession period as the initial investors either attempt to "cash 
out" their investment--that is, sell their investment to others and use 
the proceeds for other investment opportunities--or obtain new, lower 
cost financing for the existing investment. Refinancing may also be 
used to reduce the initial equity investment in highway public-private 
partnerships. Refinancing gains can occur throughout a concession 
period; as project risks typically decrease after construction, the 
project may outperform expectations, or there may be a general decrease 
in interest rates. In the case of the Chicago Skyway, the concession 
company had to secure a large amount of money in a short period of time 
to close on the agreement with the city. According to the Chief 
Executive Officer of the Skyway Concession Company, the company 
obtained a loan package with the best interest rates available at the 
time and refinanced within 7 months of financial close on the 
agreement. He said this refinance resulted in a better deal, including 
better leverage and interest rates.[Footnote 22] An investment banker 
involved in the Chicago Skyway concession told us that refinancing 
plans are often incorporated into the original investment business case 
and form an important part of each bidders' competitive offer. For 
example, if the toll road is not refinanced, the investment will 
underperform against its original business case. The investment banker 
said that there was no refinancing gain on the Chicago Skyway because 

the gain was already planned for as part of the initial investment case 
and was reflected in the financial offer to the city of Chicago. In 
some cases, refinancing gains may not be anticipated or incorporated 
into the financial offer and may be realized later in a concession 
period. The governments of the United Kingdom and Victoria and New 
South Wales, Australia, have acknowledged that gains generated from 
lower cost financing can be substantial, and they now require as a 
provision in each privately financed contract that any refinancing 
gains achieved by concessionaires--and not already factored into the 
calculation of tolls--be shared equally with the government. For 
example, the state of Victoria, Australia, shared in refinancing gains 
from the private investor's refinancing of a highway public-private 
partnership project in Melbourne called EastLink project. 

Highway Public-Private Partnerships May Not Be Applicable to All 
Situations: 

Highway public-private partnerships may not be applicable to all 
situations, given the challenges of tolling and the private sector's 
need to make profits. While tolling has promise as an approach to 
enhance mobility and finance transportation, officials face many 
challenges in obtaining public and political support for implementing 
tolling. As we reported in June 2006, based on interviews with 49 state 
departments of transportation, opposition to tolling stems from the 
contention that fuel taxes and other dedicated funding sources are used 
to pay for roads, and thus tolling is seen as a form of double 
taxation.[Footnote 23] In addition, concerns about equity are often 
raised, including the potential unequal ability of lower-income and 
higher-income groups to pay tolls, as well the use of tolling to 
address the transportation needs in one part of a state while freeing 
up federal and state funding in tolled areas to address transportation 
needs in another part of a state.[Footnote 24] State officials also 
face practical challenges in implementing tolling, including obtaining 
the statutory authority to toll and addressing the traffic diversion 
that might result when motorists seek to avoid toll facilities. Our 
June 2006 report concluded that state and local governments may be able 
to address these concerns by (1) honestly and forthrightly addressing 
the challenges that a tolling approach presents, (2) pursuing 
strategies that focus on developing an institutional framework that 
facilitates tolling, (3) demonstrating leadership, and (4) pursuing 
toll projects that provide tangible benefits to users. 

Although highway public-private partnerships could conceivably be used 
for reconstructing existing roadways, in practice this could be very 
difficult, due, in part, to public and political opposition to tolling 
existing free roads. Aside from bridges and tunnels, existing 
Interstate Highway System roads generally cannot be tolled, except 
under specific pilot programs. One such program, the Interstate System 
Reconstruction and Rehabilitation Pilot Program, was authorized in 1998 
to permit three states to toll existing interstate highways to finance 
major reconstruction or rehabilitation needs. Two states applied for 
and received preliminary approval to do so--Virginia in 2003 and 
Missouri in 2005--and Pennsylvania submitted an application in 2007. 
While Virginia's toll project is proceeding through environmental 
review, Missouri's project remains on hold, and Pennsylvania's 
application awaits approval. In addition, three other states submitted 
applications and withdrew them, owing in part to public and political 
opposition to tolls. A fourth state sent in an "Expression of Interest" 
for this pilot program, but the state never formally submitted an 
application. An official with the metropolitan planning organization 
for Chicago said tolling highways is difficult in Illinois, especially 
when the public is use to free alternatives, and an official with the 
California DOT echoed this sentiment, saying that highway public- 
private partnerships are not a substitute or final solution for ongoing 
funding of transportation infrastructure. FHWA officials agreed that 
highway public-private partnerships are not suitable in all situations. 

Another reason highway public-private partnerships may not be 
applicable to all situations is that the private sector has a profit 
motive and is likely to only enter highway public-private partnerships 
for new construction projects that are expected to produce an adequate 
rate of return on investment. Therefore, highway public-private 
partnerships appear to be most suited for construction of new 
infrastructure in areas where congestion may be a problem and traffic 
is expected to be sufficient to generate net profits through toll 
revenues. For example, we found that Oregon has decided to forego a 
highway public-private partnership for one possible highway public- 
private partnership project in the Portland area because the forecasted 
revenues were not high enough to make the route toll viable for private 
investors. Similarly, Texas has concluded that not all segments of the 
TTC are toll viable; these segments might not receive direct private 
interest and might need to be subsidized with concession fees from 
other segments or other funds, including public dollars, if they are 
available. According to the Texas DOT, some projects will be partially 
toll viable and may require both public and private funds. DOT 
officials told us that, in both Oregon and Texas, funds are currently 
not available to procure these projects through a public procurement. 

Highway Public-Private Partnerships Also Come with Potential Costs and 
Trade-offs to the Public Sector: 

Highway public-private partnerships come with potential costs and trade-
offs to the public sector. The costs include the potential for higher 
user tolls than under public toll roads and potentially more expensive 
project costs than publicly procured projects. While the public sector 
can benefit through the transfer or sharing of some project risks with 
the private sector, not all risks can or should be transferred; and, 
the public sector may lose some control through a highway public-
private partnership. Finally, because there are many stakeholders with 
interests in a public-private partnership as well as many potential 
objectives--and many governments affected--there are trade-offs in 
protecting the public interest. 

Potential Financial Costs 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. For example, during the time the Chicago Skyway was publicly 
managed, tolls changed infrequently and actually decreased by 
approximately 25 percent in real terms (2007 dollars) between 1989 and 
2004 (see fig. 5). According to the former Chief Financial Officer of 
Chicago, the Chicago Skyway had not historically increased its tolls 
unless required by law, even though the Skyway had been operating at a 
loss and had outstanding debt. On the other hand, under private 
control, maximum 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 concession agreements for 
both the Chicago Skyway and Indiana Toll Road permit toll rates to 
increase each year, based on a minimum of 2 percent and a maximum of 
the annual change of either the CPI or per capita U.S. nominal gross 
domestic product (GDP), whichever is higher.[Footnote 25] Based on 
estimated increases in nominal gross domestic product and population, 
the tolls on the Chicago Skyway will be permitted to increase in real 
terms nearly 97 percent from 2007 through 2047--from $2.50 to $4.91 in 
2007 dollars.[Footnote 26] This is also shown in figure 5. These future 
toll projections reflect the maximum allowable toll rates, which have 
been authorized by the public sector in the concession agreements. 

Figure 5: Change in Chicago Skyway Tolls, 1967 to 2047: 

This figure is a combination line graph showing change in Chicago 
Skyway tolls between 1967 and 2047. The X axis is the year, and the Y 
axis is the toll rate for passenger vehicles. The lines represent 
historic nominal toll rates, projected nominal toll rates with growth 
equal to growth in nominal per capita (GDP), projected nominal toll 
rate with 2 percent growth per year, historic toll rates in 2007 
dollars), projected toll rates in 2007 dollars with growth equal to 
growth in nominal per capita GDP, and projected toll rates in 2007 
dollars with 2 percent growth per year.  

[See PDF for image] 

Source: GAO analysis of Chicago and OECD data. 

Note: Historical data are from 1986 to 2006; scheduled maximum toll 
rates are from 2007 to 2017; and projected toll rates from 2008 to 
2047. Projections to 2047 are based on 2 percent growth, or forecasted 
per capita GDP growth, adjusted to 2007 dollars. 

[End of figure] 

Depending on market conditions, the potential exists that the public 
could pay higher tolls than those that would more appropriately reflect 
the true costs of operating and maintaining the facilities, including 
earning a reasonable rate of return. Within the maximum allowable toll 
rates authorized by the public sector in the concession agreements, 
toll rate changes will be driven by such market factors as the demand 
for travel on the road, which, in turn, will be influenced by the level 
of competition that toll road concessionaires will face. This 
competition will vary from facility to facility. In cases where an 
untolled public roadway or other transportation mode (e.g., bus or 
rail) is a viable travel alternative to the toll road, these competing 
alternatives may act to constrain toll rates. In other instances, where 
there are not other viable travel alternatives to a toll road that 
would not require substantially more travel time, there may be few 
constraints on toll rates other than the terms of the concession. In 
such instances, a concessionaire may have substantial market power, 
which could give the concessionaire the ability to set toll rates that 
exceed the costs of the toll road, including a reasonable rate of 
return, as long as those toll rates are below the maximum rates allowed 
by the concession agreement. We have not determined the extent to which 
any concessionaire would have substantial market power due to limited 
alternatives, although this is an appropriate consideration when 
entering possible highway public-private partnerships. 

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. 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. 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. In 
Indiana the state hired an accounting and consulting firm to conduct a 
study of the net present value of the Indiana Toll Road and deemed its 
value to the state to be slightly under $2 billion. This valuation 
assumed that future toll increases would be similar to the past-- 
infrequent and in line with the road's history under public control. An 
alternative valuation of the toll road lease performed by an economics 
professor on behalf of opponents of the concession changed certain 
assumptions of the net present value model and produced a different 
result--about $11 billion. This valuation assumed annual toll rate 
increases by the public authority of 4.4 percent, compared with the 2.8 
percent used in the state's valuation.[Footnote 27] We did not evaluate 
this study and make no conclusions about its validity; other studies 
may have reached different conclusions; however, the results of this 
study illustrate how toll rate assumptions can influence asset 
valuations and, therefore, expected concession payments. 

Similarly, unforeseen circumstances can dramatically alter the relative 
value of future revenues compared with the market value of the 
facility. In 1999, the government of Ontario, Canada received a $3.1 
billion concession fee in exchange for the long-term lease for the 407 
ETR. In the years following the concession agreement, as commercial and 
residential development along the 407 ETR corridor exceeded initial 
government projections, the value of the roadway increased. In 2002, a 
valuation conducted by an investor in the concession estimated that the 
market value of the facility had nearly doubled--from $3.1 billion 
Canadian to $6.2 billion Canadian. This valuation included a new 40 
kilometers that had been added to the 407 ETR since it was originally 
built, as well as additional parking lots and increased tolls. 

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. Chicago, for example, used lease proceeds to finance various 
city programs, while Indiana used lease proceeds primarily to fund its 
"Major Moves" 10-year transportation program. However, Chicago also 
used the proceeds to retire both Chicago Skyway and some city debt, and 
both Chicago and Indiana 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, and 
officials in the Ministry of Transport were unaware of how the payment 
was spent. Consequently, it is not clear if those uses of proceeds will 
benefit future roadway users. 

Highway public-private partnerships also potentially require additional 
costs to the public sector compared with traditional public 
procurement. These costs include potential additional costs associated 
with (1) required financial and legal advisors, and (2) private sector 
financing compared with public sector financing. A June 2007 study by 
the University of Southern California found that because the U.S. 
transportation sector has little experience with long-term concession 
agreements, state departments of transportation are unlikely to have in-
house expertise needed to plan, conduct, and execute highway public- 
private partnerships. FHWA has also recognized this issue--in a 2006 
report it noted that, in several states, promising projects have been 
delayed for lack of staff capacity and expertise to confidently 
conclude agreements. Furthermore, public sector agencies must also 
exercise diligence to prevent potential conflicts of interest, if the 
legal and financial firms also advise private investors. In addition, 
highway public-private partnership projects are likely to have the 
higher cost of private finance because public sector agencies generally 
have access to tax-exempt debt, while private companies generally do 
not. 

Financial trade-offs can also involve federal tax issues. As discussed 
earlier, unlike public toll authorities, the private sector pays income 
taxes to the federal government and the ability to deduct depreciation 
on assets involved with highway public-private partnerships for which 
they have effective ownership for tax purposes can reduce that tax 
obligation. The extent of these deductions and amounts of foregone 
revenue, if any, to the federal or state governments are difficult to 
determine, since they depend on such factors as the taxable income, 
total deductions, and marginal tax rates of private sector entities 
involved with highway public-private partnerships. Nevertheless, 
foregone revenue can also amount to millions of dollars.[Footnote 28] 
For example, there may be foregone tax revenue when the private sector 
uses tax-exempt private activity bonds. As we reported in 2004, the 
2003 cost to the federal government from tax-exempt bonds used to 
finance three projects with private sector involvement--Pocahontas 
Parkway, Southern Connector, and the Las Vegas Monorail--was between 
$25 million and $35 million.[Footnote 29] There can also be potential 
costs of highway public-private partnerships using public finance since 
state and local debt is also tax deductible. Regardless of the tax 
impact on government revenues, the availability of depreciation 
deductions can be important to private sector concessionaires. As 
discussed earlier, financial experts with whom we spoke said that 
depreciation deductions associated with the Chicago Skyway and Indiana 
Toll Road transactions were significant, and that it is likely that in 
the absence of the depreciation benefit, the concession payments to 
Chicago and Indiana would have been less than $1.8 and $3.8 billion, 
respectively. 

Potential Loss of Control: 

In highway public-private partnerships the public sector may lose some 
control over its ability to modify existing assets or implement plans 
to accommodate changes over time. For example, concession agreements 
may contain noncompete provisions designed to limit competition from or 
elicit compensation for highways or other transportation facilities 
that may compete and draw traffic from a leased toll road. The case of 
SR-91 in California illustrates an early and extreme example of a 
noncompete provision's potential effect. In 1991, the California DOT 
used a highway public-private partnership to construct express lanes in 
the middle of the existing SR-91. The express lanes were owned and 
operated by a private concessionaire, and the public sector continued 
to own the adjacent lanes. The concession contained provisions that 
prevented improvements or expansions of the adjacent public lanes. 
Eight years after signing the concession agreement, the local 
transportation authority purchased the concessionaire's rights to the 
tolled express lanes, thus enabling transportation improvements to be 
made.[Footnote 30] It appears that noncompete clauses in projects that 
followed SR-91 have generally provided more flexibility to modify 
nearby existing roads and build new infrastructure when necessary. This 
issue is discussed further in the next section of the report. 

The public sector may also lose some control of toll rate setting by 
entering into highway public-private partnerships. Highway public- 
private partnership agreements generally allow the private operator to 
raise tolls in accordance with provisions outlined in the concession 
contract. The private operator may be able to raise tolls on an annual 
basis, without prior approval. To the extent that the public sector may 
want to adjust toll rates--for example, to manage demand on their 
highway network--they may be unable to do so because the toll setting 
capability is defined exclusively by the concession contract and the 
private operator. 

Not All Risks Can or Should Be Transferred in Highway Public-Private 
Partnerships: 

While the public sector may benefit from the transfer of risk in a 
highway public-private partnership, not all risks can or should be 
transferred and there may be trade-offs. There are costs and risks 
associated with environmental issues, which often cannot or should not 
be transferred to the private sector in a highway public-private 
partnership. For example, if a project is to be eligible for federal 
funds at any point throughout the project lifetime, a lengthy 
environmental review process must be completed, as required for all 
federally funded projects, by the National Environmental Policy Act 
(NEPA). There can also be various federal permits and approvals 
required. The financial risk associated with the environmental 
assessment process (and whether the project will be approved) generally 
resides with the public sector, in part, because the environmental 
review process can add to project costs and can cause significant 
project delays. In addition, the private sector may be unwilling to 
accept the risk and project uncertainty associated with the publicly 
controlled environmental review process. An example of the delay that 
can be experienced in projects undergoing environmental review includes 
the South Bay Expressway in California. The state selected a private 
sponsor for this project in 1991. However, litigation challenging the 
final record of decision on the environmental impact statement for the 
project was not resolved until March 2003, and construction did not 
begin until July 2003. In another example, private sector officials in 
Texas have told us they are not involved with the environmental 
assessment process for the TTC, given the added costs and the increased 
project delivery times. According to the Texas DOT, environmental 
review is a core function of government and a risk that to date appears 
best suited to the public sector. 

Finally, there may also be political trade-offs faced by the public 
sector when involved in highway public-private partnerships. For 
example, public opposition to the TTC and other highway public-private 
partnerships in Texas remains strong. Although the governor of Texas 
has identified a lack of funds as a barrier to meeting the state's 
transportation needs, public outcry over the TTC and the lack of 
involvement of local governments was so substantial that in June 2007 
the state legislature enacted a 2-year moratorium on future highway 
public-private partnerships in the state.[Footnote 31] In the case of 
the 407 ETR in Toronto, a consultant to the Ontario Ministry of 
Transportation told us the government was publicly criticized for the 
transaction and road users had little understanding of the reasons the 
government entered the agreements or what the future toll rates could 
be. As a result, the government suffered public backlash. Similarly, 
the New South Wales government, as part of its agreement with the 
concession company of the Cross City Tunnel in Sydney, Australia, 
closed some city streets in order to mitigate local congestion in the 
downtown area as part of the tunnel project. Although the government's 
intent was to alleviate congestion from downtown Sydney, many drivers 
felt that they were diverted into the tolled tunnel, and the government 
was criticized for its actions. 

It Is Important to Consider the Opportunities of Highway Public-Private 
Partnerships Against Public Objectives, Potential Costs, and Trade- 
offs, as well as Public Interests: 

The diversity and uncertainty of both the benefits and costs of highway 
public-private partnerships of the type we reviewed--long-term 
concessions--are complex and suggest that the merits of future 
partnerships will need careful evaluation on a case-by-case basis. As 
noted above, highway public-private partnerships have the potential to 
provide benefits, such as construction of new facilities, without the 
use of public finance, the transfer or sharing of project risks, and 
achievement of increased operational efficiencies through private 
sector operation and life-cycle management. However, also as discussed 
earlier, there are costs and trade-offs involved, including loss of 
public-sector control of toll setting and potentially more expensive 
project costs than publicly procured projects. State and local 
governments pursue highway public-private partnerships to achieve 
specific public objectives, such as congestion relief and mobility or 
increasing freight mobility. In some instances, the potential benefits 
of highway public-private partnerships may outweigh the potential costs 
and trade-offs, and the use of highway public-private partnerships and 
long-term concessions would serve the public well into the future. In 
other instances, the potential costs and trade-offs may outweigh the 
potential benefits, and the public interest may not be well served by 
using such an arrangement. In instances where public officials choose 
to go with a highway public-private partnership accomplished through a 
long-term concession, realizing potential benefits will require careful 
structuring of the public-private partnership agreement and identifying 
and mitigating the direct risks of the project. 

From a public perspective, an important component of any analysis of 
potential benefits and costs of highway public-private partnerships and 
long-term concessions is consideration of the public interest. As with 
any highway project, there can be many stakeholders in highway public- 
private partnerships, each of which may have its own interests. 
Stakeholders include regular toll road users, commercial truck and bus 
drivers, emergency response vehicles, toll road employees, and members 
of the public who may be affected by ancillary effects of a highway 
public-private partnership, including users of nearby roads, land 
owners, special interest groups and taxpayers, in general (see fig. 6). 
Identification of the public interest is a function of scale and can 
differ based on the range of stakeholders and the geographic and 
political domain considered. At the national level, the public interest 
may include facilitating interstate commerce, as well as meeting 
mobility needs. State and regional public interest, however, might 
prioritize new infrastructure to meet local demand or maximum up-front 
payments to reduce debt or finance transportation plans above and 
beyond national mobility objectives. With competing interests over the 
duration of the concession agreement, trade-offs will be necessary. For 
example, if mobility is an objective of the project, high toll rates at 
times of peak travel demand may be necessary to deter some users from 
driving during peak hours and thus mitigate congestion. But, if rates 
are too high, traffic diversion to free alternate public routes may be 
an unintended outcome that could adversely affect drivers on those 
roads. 

Figure 6: Various Stakeholder Interests Associated with Highway Public- 
Private Partnerships: 

This figure is an illustration of various stakeholder interests 
associated with highway public-private partnerships. 

[See PDF for image] 

Source: GAO analysis of FHWA data. 

[End of figure] 

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 projects we reviewed heavily relied on concession terms. Most 
often, these terms were focused on ensuring performance of the asset, 
dealing with financial issues such as toll rates, maintaining the 
public sector's accountability and flexibility to provide 
transportation services to the public, addressing workforce issues, and 
maintaining the ability to address these concession terms over the life 
of the contract. Additionally, oversight and monitoring mechanisms were 
used to ensure that private partners fulfill their obligations. In 
addition to concession terms, certain financial analyses were used to 
protect the public interest. For example, PSCs, which attempt to 
compare estimated project costs as a highway public-private partnership 
with undertaking a project publicly, have been used for some highway 
projects. We found that some foreign governments have also used formal 
public interest tools as well as public interest criteria tests. 
However, use of these tests and tools has been more limited in the 
United States. Not using formal public interest criteria and assessment 
tools can potentially allow aspects of the public interest to be 
overlooked and use of formal analyses before entering into highway 
public-private partnerships can help lay out the expected benefits and 
costs of the project. 

Highway Public-Private Partnerships We Reviewed Have Used Concession 
Terms to Protect the Public Interest: 

The highway public-private partnerships we reviewed have used various 
mechanisms to protect the public interest by holding concessionaires to 
requirements related to such things as performance of an asset, 
financial aspects of agreements, the public sector's ability to remain 
accountable as a provider of public goods and services, workforce 
protections, and concession oversight. Because agreeing to these terms 
may make an asset less valuable to the private sector, public sector 
agencies might have accepted lower payments in return for these terms. 

Asset Performance Measures: 

Public sector agencies involved in highway public-private partnerships 
have attempted to protect the public interest by ensuring that the 
performance of the asset is upheld to high safety, maintenance, and 
operational standards and can be expanded when necessary (see table 3). 
Operating and maintenance standards were incorporated in the Indiana 
Toll Road and Chicago Skyway concession agreements. Based on documents 
we reviewed, the standards on the Indiana Toll Road detail how the 
concessionaire must maintain the road's condition, utility, and level 
of safety with the intent to ensure that the public would not see any 
reduction in the performance of the highway over the 75-year lease 
term. The standards also detail how the concessionaire must address 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. According to a Deputy Commissioner 
with the Indiana DOT, the standards actually hold the lessee to a 
higher level of performance than when the state operated the highway, 
because the state did not have the funding to maintain the Indiana Toll 
Road to its own standards. For the Chicago Skyway, the concessionaire 
is required to follow detailed maintenance and operations standards 
that are based on industry best practices and address maintenance 
issues such as roadway maintenance, drainage maintenance, and roadway 
safety features, as well as operational issues such as toll collection 
procedures, emergency planning, and snow and ice control procedures. 
According to an engineering consultant with the city of Chicago who was 
involved in writing the standards used in the concession, when the 
Chicago Skyway had been under public control, employees were not 
required to follow formal standards. 

Table 3: Selected Performance Mechanisms to Protect the Public 
Interest: 

Issue: Detailed operating and maintenance standards; 
Project: Chicago Skyway; 
Details: The concessionaire must follow detailed technical and 
operational specifications based on industry best practices that 
address maintenance issues such as roadway maintenance, drainage 
maintenance, and roadway safety features, as well as operational issues 
such as toll collection procedures, emergency planning, and snow 
removal. 

Issue: Expansion triggers; 
Project: Indiana Toll Road; 
Details: Concessionaire must act to improve Level of Service (LOS) on 
Indiana Toll Road when Level of Service[A] forecasted to reach Level C 
in rural areas or Level D in urban areas. 

Source: GAO analysis of concession contracts. 

[A] LOS is a measure of traffic congestion. In LOS C, the influence of 
traffic density becomes marked and the ability to maneuver within the 
traffic stream is affected by other vehicles. In LOS D, the ability to 
maneuver is severely restricted due to traffic congestion and travel 
speed is reduced by the increasing volume of traffic. 

[End of table] 

Concessions may include requirements to maintain performance in terms 
of mobility and capacity by ensuring a certain level of traffic 
throughput and avoiding congestion. Highway public-private partnerships 
may also require that a concessionaire expand a facility once 
congestion reaches a certain level and some agreements can include 
capacity and expansion triggers based on LOS forecasts. LOS is a 
qualitative measure of congestion; according to the concession 
agreement, on the Indiana Toll Road, when LOS is forecasted to fall 
below certain levels within 7 years, the concessionaire must act to 
improve the LOS, such as by adding additional capacity (such as an 
extra lane) at its own cost, to ease the future projected congestion. 
Because the provisions call for expansions in advance of poor mobility 
conditions, it appears this agreement aims to prevent a high level of 
congestion from ever happening. According to Texas DOT officials, the 
concessionaire for the State Highway 130, segments 5 and 6 project (see 
table 1) will be required to add capacity through expansion, or better 
manage traffic, to improve traffic flow if the average speed of 
vehicles on the roadway falls below a predetermined level. According to 
government officials in Toronto, Canada, the private operator of the 
407 ETR is also required to maintain a certain vehicle flow and traffic 
growth on the road or face financial penalties. 

Financial Mechanisms: 

Public sector agencies have also sought to protect the public interest 
in highway public-private partnerships through financial mechanisms 
such as toll rate setting limitations (see table 4). However, the toll 
limitations used in U.S. highway public-private partnerships that we 
reviewed may be sufficiently generous to the private sector that they 
might not effectively limit toll increases. Toll limitations constrain 
the high profit-maximizing toll levels that a private concessionaire 
might otherwise set. As discussed earlier, tolls on the Chicago Skyway 
can be increased at predetermined levels for the first 12 years of the 
lease (rising from $2.50 to $5 per 2-axle vehicle). Afterward, tolls 
can then increase annually at the highest of three factors: 2 percent, 
increase in CPI, or increase in nominal per capita GDP. According to 
the concession agreement, tolls on the Indiana Toll Road can be 
increased at set levels until mid-2010 and then can rise by a minimum 
of 2 percent or a maximum of the prior year's increase in CPI or 
nominal per capita GDP. In general, these limitations are meant to 
restrict the rate of toll increases over time. Since nominal GDP has 
generally increased at an annual rate of between 4 and 7 percent over 
the last 20 years, the restrictions may not effectively limit toll 
increases. 

Some foreign governments have taken a different approach to limiting 
toll increases that may create more constraining limits. For example, 
in Spain, we were told that concessionaires are limited to increasing 
tolls by roughly the rate of inflation in Spain every year (although 
slight adjustments may be made based on traffic levels). In contrast, 
since the annual rate of inflation in the United States has typically 
been lower than nominal GDP growth (except during years of negative 
real GDP change), the maximum allowable toll increases in Chicago and 
Indiana will likely exceed the U.S. inflation rate. We were told that 
in the EastLink project in Australia, toll rates have been kept low by 
having prospective bidders for a concession bid down the level of toll 
rates; the contract is awarded to the bidder that agrees to operate the 
facility with the lowest toll. Government officials told us that this 
process resulted in the lowest per kilometer toll rate of any toll road 
in Australia. However, using a process that constrains bidders to the 
lowest tolls may involve government subsidies. Although no closure of 
competing roads or government subsidies were involved with the EastLink 
project in Victoria, Australia, the potential for government subsidies 
was involved in the Cross City Tunnel project in Sydney, Australia. An 
official with the New South Wales government said the government was 
adopting a new policy in light of the Cross City Tunnel project 
specifying that the government should be prepared to provide subsidies 
on toll road projects to keep tolls at certain predetermined levels. In 
commenting on a draft of this report, DOT officials said that different 
government agencies may have different goals for highway public-private 
partnerships besides keeping tolls low. These other goals could include 
maximizing the number of new facilities provided, earning the largest 
up-front payment or annual revenue sharing, or using higher tolls to 
maximize mobility and choice. 

Revenue-sharing mechanisms have also been used to protect the public 
interest by requiring a concessionaire to share some level of revenues 
with the public sector. For example, in Texas, revenues on the State 
Highway 130, segments 5 and 6, concession will be shared with the state 
so that the higher the return on investment of the private 
concessionaire, the higher the share with the state. For example, after 
a one-time, up-front payment of $25 million, 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, then Texas could receive 50 percent of the net revenues. 
Higher returns would warrant higher revenue shares for the state. 
Officials with the Texas DOT said they see revenue sharing, as opposed 
to one large up-front payment at lease signing, as protecting the 
public interest in the long run and ensuring that the public and 
private sectors share common goals. Both Chicago and Indiana officials 
told us there were no revenue sharing arrangements in either the 
Chicago Skyway or Indiana Toll Road concessions. 

Table 4: Selected Financial Mechanisms to Protect the Public Interest: 

Type of control: Revenue sharing: Toll rate limitations; 
Project: TTC: Indiana Toll Road; 
Details: Based on return on investment of concessionaire: Fixed 
increases until mid-2010, afterwards allowed annual increase of the 
higher of 2 percent, nominal per capita GDP growth, or CPI growth. 

Source: GAO analysis of Indiana and Texas data. 

[End of table] 

Foreign governments have also used other financial mechanisms, such as 
controls on public subsidies to private projects and the sharing of 
refinancing gains, to protect the public interest in highway public- 
private partnerships. For example, in Spain, we were told that 
concessionaires for highway projects that require public subsidies 
often bid for the lowest subsidy possible to lower costs to the 
government. In other highway projects, the government of Spain will 
provide loans for private projects for which the interest rate on 
repayment is based on traffic levels: the lower the traffic level the 
lower the interest rate. According to documents we reviewed, in highway 
public-private partnerships in both Victoria and New South Wales, 
Australia, any profits the concessionaire earns by refinancing of the 
asset must be shared with the government. In May 2007, the government 
of New South Wales, Australia, issued guidance in relation to 
refinancing gains.[Footnote 32] According to a New South Wales 
official, the general position of the government on highway public- 
private partnership refinancing is that all refinancings, other than 
those contemplated at financial close, require government consent. 
Government consent plays a fundamental role in project refinancing 
since refinancing may increase project risk by increasing debt burden 
and reducing investors' long-term financial incentives, among other 
things. In Canada, federal policy requires that any federal funds used 
to construct a road that is then leased to a private concessionaire 
must be repaid to the federal government. 

Accountability and Flexibility: 

Governments entering into highway public-private partnerships have also 
acted to protect the public interest by ensuring that they are not 
fully constrained by the concession and are still able to provide 
transportation infrastructure (see table 5). This flexibility has been 
achieved in part by avoiding fully restrictive noncompete clauses. 
Since Orange County bought back the SR-91 managed lanes because it was 
no longer willing to be bound by the restrictive noncompete clause it 
originally agreed to, governments entering into highway public-private 
partnerships have sought to avoid such restrictive clauses.[Footnote 
33] Some more recent noncompete clauses can be referred to as 
"compensation clauses" because they require that the public sector 
compensate the concessionaire if the public sector proceeds (in certain 
instances) with an unplanned project that might take revenues from the 
concessionaire's toll road. For example, for the State Highway 130 
concession in Texas, both the positive and negative impacts that new 
public roads will have on the toll road will be determined and, 
potentially, Texas DOT will compensate the concessionaire for losses of 
revenues on the concession toll road. However, that payment might be 
counterbalanced by Texas DOT receiving credits for new publicly 
constructed roads that are demonstrated to increase traffic on the 
concession toll road. Additionally, according to the Texas DOT, on the 
State Highway 130 concession, projects already on the state's 20-year 
transportation plan when the concession was signed are exempt from any 
such provisions. Certain other projects are also exempt, such as 
expansions or safety improvements made to I-35 (a parallel existing 
highway on the Interstate Highway System); any local, city, or county 
improvements; or, any multimodal rail projects. According to the Texas 
DOT, in no case is it, or any other governmental authority, precluded 
from building necessary infrastructure. A noncompete clause lowers 
potential competition from other roadways for a private concessionaire, 
thereby increasing their potential revenues. Therefore, a contract 
without any noncompete provisions, all else equal, is likely to attract 
lower concession payments from the private sector. 

Table 5: Selected Noncompete Provisions: 

Project/site: Texas; 
Details: Compensation clause--State must compensate concessionaire for 
loss of revenues resulting from new construction; 
projects on existing transportation plans are exempt. 

Project/site: Indiana; 
Details: Clause prevents state from building a highway of 20 or more 
miles in length that is within 10 miles of the Indiana Toll Road; 
all other work is allowed. 

Project/site: Chicago Skyway; 
Details: No noncompete clause. 

Source: GAO analysis of selected highway public-private partnership 
contracts. 

[End of table] 

According to an Indiana official, a noncompete clause for the Indiana 
Toll Road requires the state to compensate the concessionaire an amount 
equal to the concessionaire's lost revenue from a new highway if the 
state constructs a new interstate quality highway with 20 or more 
continuous miles within 10 miles of the Indiana Toll Road. Indiana 
officials told us that the concession agreement for the Indiana Toll 
Road does not prevent the state from building competing facilities and 
provides great latitude in maintaining and expanding the state's 
transportation network around the toll road and that they do not expect 
this restriction to place serious constraints on necessary work near 
the toll road. Others have suggested that the state could face 
difficulties if toll rates on the Indiana Toll Road begin to divert 
significant levels of traffic to surrounding roads. In such a case, the 
state could be constrained in making necessary improvements or 
constructing new facilities to handle the additional traffic. City of 
Chicago officials did not sign a noncompete provision in the Chicago 
Skyway contract. While city officials decided not to have a noncompete 
provision in order to keep their options open for future work they 
might find necessary, city officials told us that the concessionaire 
agreed to a lease agreement without such a provision because geographic 
limitations (the Chicago Skyway being located in a very heavily 
developed urban area and close to Lake Michigan) make construction of a 
competing facility very unlikely. 

Spanish officials told us that they preserve flexibility by retaining 
the ability to renegotiate a concession agreement if it is in the 
public interest to do so. They referred to this as "rebalancing" a 
concession agreement. For example, if the government believes that 
adding capacity to a certain concession highway is in the public 
interest, it can require the concessionaire to do so as long as the 
government provides adequate compensation for the loss of revenues. 
Likewise, the government may rebalance a contract with a concessionaire 
if, for example, traffic is below forecasted levels, to help restore 
economic balance to the concession. In this case, the government might 
offer an extension to the concession term to allow the concessionaire 
more time to recover its investments. An executive of one 
concessionaire in Spain told us that it is important for the government 
to have that ability of renegotiation and concessionaires generally 
agree to the government's requests. 

Workforce: 

Protection of the public interest has also extended to the workforce, 
and concession provisions have been used in this area as well. In some 
cases, public sector agencies entering into highway public-private 
partnerships with existing toll roads have contractually protected the 
interest of the existing toll road workforce by ensuring that workers 
are able to retain their jobs, or are offered employment elsewhere. 
Some public sector agencies have also addressed benefits issues. For 
example, in the Chicago Skyway concession there were 105 city employees 
when the concession began. According to the concession agreement, the 
city required the concessionaire to (1) comply with a living wage 
requirement;[Footnote 34] (2) pay prevailing wages for all construction 
activities; and (3) make its best effort to interview (if requested), 
though not necessarily offer employment to, all Chicago Skyway 
employees for jobs before the asset was transferred. A Chicago official 
told us that once the concessionaire commenced operation five employees 
chose to maintain employment with the Chicago Skyway, while 100 took 
other city jobs.[Footnote 35] Those employees that took other city jobs 
retained their previous benefits. 

The state of Indiana also used concession provisions to help protect 
the workforce on the Indiana Toll Road. According to the concession 
agreement, these provisions required the concessionaire to follow 
certain laws such as nondiscrimination laws and minority-owned business 
requirements. Indiana officials told us that, prior to the lease 
agreement, the Governor of Indiana had made a commitment that each 
Indiana Toll Road employee would either be offered a job with the 
private concession company or with the state without a reduction in pay 
or benefits occurring with the new job. According to the Indiana DOT, 
all employees of the Indiana Toll Road (about 550 employees at the time 
the lease agreement commenced) were interviewed by the concessionaire; 
and about 85 percent of the employees transitioned to the private 
operator, but did so at equal or higher pay. According to an official 
with the toll road concessionaire, the average wages of an Indiana Toll 
Road employee increased from $11.00 per hour to between $13.55 and 
$16.00 per hour. Indiana officials indicated about 115 employees were 
offered placement with the state of Indiana and those that retained 
employment with merit or nonmerit state agencies maintained all 
outstanding vacation and sick time. Those toll road employees that left 
state agencies (including moving to the concessionaire) were paid for 
outstanding vacation time they had accrued, up to 225 hours. Indiana 
officials also indicated that, although those employees that left state 
agencies no longer are part of the state's pension plan, their 
contributions and their vested state contributions were preserved, and 
these employees are now offered a 401(k) plan by the concessionaire. 

Another highway public-private partnership we examined, the TTC, 
involved new construction and, at the time of our review, had not yet 
reached the point of a concession. Oregon also involved new 
construction and was not at the point of a concession. Unlike existing 
facilities, new construction does not involve an existing workforce 
that could lose its jobs or face significantly different terms of work 
when the private sector takes over operations. However, concession 
terms can be used to protect the future workforce that is hired to 
construct and operate a highway built with a highway public-private 
partnership. For example, in a different highway public-private 
partnership project in Texas that has signed a concession, State 
Highway 130, segments 5 and 6, the concession agreement states that 
prevailing wage rates will be set by the Texas DOT and that the 
concessionaire should meet goals related to the hiring of women, 
minorities, and disadvantaged business enterprises. According to the 
Texas DOT, the concessionaire is also required to establish and 
implement a small business mentoring program. 

Other countries have also acted to protect employees in highway public- 
private partnerships. For example, the United Kingdom has taken actions 
to ensure that the value gained in its highway public-private 
partnership projects is not done so at the expense of its workforce. 
According to the United Kingdom's Code of Practice on workforce 
matters, new and transferred employees of private concessionaires are 
to be offered "fair and reasonable" employment conditions, including 
membership in a pension plan which is at least equivalent to the public 
sector pension scheme that would apply. According to an official with 
the United Kingdom Treasury Department, this Code of Practice has been 
agreed to by both employers and trade unions and was implemented in 
2003. 

Oversight and Monitoring of Concessions: 

The public sector also undertakes oversight and monitoring of 
concessionaires to ensure that they fulfill their obligations to 
protect the public interest. Such mechanisms can both identify when 
requirements are not being met, and also provide evidence to seek 
remediation when the private sector does not do so. In Indiana, an 
Indiana Toll Road Oversight Board was created as an advisory board 
composed of both state employees and private citizens to review the 
performance and operations of the concessionaire and potentially 
identify cases of noncompliance. This Oversight Board meets on at least 
a quarterly basis and has discussed items dealing with traffic 
incidents, concerns raised by state residents and constituents, and the 
implementation of electronic tolling on the facility. The Chicago 
Skyway concession also incorporates oversight. Oversight includes 
reviewing various reports, such as financial statements and incident 
reports filed by the concessionaire, and hiring independent engineers 
to oversee the concessionaire's construction projects. In both Indiana 
and Chicago the concessionaire reimburses the public sector for 
oversight and monitoring costs--in Indiana up to $150,000 per year 
adjusted for inflation. 

Oversight and monitoring also encompass penalties if a concessionaire 
breaches its obligations. For example, the highway public-private 
partnership contracts in Chicago and Indiana allow the public sector to 
ultimately regain control of the asset at no cost if the concessionaire 
is in material breach of contract. Additionally, the public sector has 
sometimes retained the ability to issue fines or citations to 
concessionaires for nonperformance. For example, according to the Texas 
DOT, in Texas an independent engineer will be assigned to the TTC 
concessionaire who will be able to issue "demerits" to the 
concessionaire for not meeting performance standards. These demerits, 
if not remedied, could lead to concessionaire default. 

Foreign governments have also taken steps to provide oversight and 
monitoring of concessionaires. In Spain, the Ministry of Public Works 
assigns public engineers to each concession to monitor performance. 
These engineers not only monitor performance during construction to 
ensure that work is being done properly, but also monitor performance 
during operation. They do so by recording user complaints and incidents 
in which the concessionaire does not comply with the terms of the 
concession. Accountability and oversight mechanisms have also been 
incorporated in Australian concessions. In both Victoria and New South 
Wales, projects must demonstrate that they incorporate adequate 
information to the public on the obligations of the public and private 
sectors and that there are oversight mechanisms. In some instances, a 
separate statutory body, which may be chaired by a person outside of 
government, provides oversight, as was done on the CityLink toll road 
in Melbourne, Australia.[Footnote 36] Officials with a private 
concessionaire in Australia told us that they generally meet monthly 
with the state Road and Traffic Authority to review concession 
performance. In addition, both the Victoria and New South Wales Auditor 
Generals are also involved with oversight. In both states the Auditor 
General reviews the contracts of approved highway public-private 
partnerships. In New South Wales, the law requires publication of these 
reviews and contract summaries. In Victoria, government policy requires 
publication of the contracts, together with project summaries, 
including information regarding public interest considerations. 

Financial Analyses and Bidding Processes Have Also Been Used to Protect 
the Public Interest: 

Governments have also used financial analyses, such as asset 
valuations, and procurement processes to protect the public interest. 
We found that states and local governments entering into the two 
existing highway public-private partnerships that we reviewed largely 
limited their analyses to asset valuation. For example, both the city 
of Chicago and the state of Indiana hired consultants to value the 
Chicago Skyway and the Indiana Toll Road, respectively, before signing 
concessions for these assets. In Indiana, the state's consultant 
performed a net present valuation of the toll road that determined that 
the toll road was worth about $2 billion to the state. Because the 
winning bid of $3.85 billion that the state received was far more than 
the consultant's assessed value, Indiana used that valuation to justify 
that the transaction was in the public interest. The assistant budget 
director for Chicago told us that in Chicago an analysis showed the 
city could leverage only between $800 and $900 million from the toll 
road. The officials then compared that amount to the $1.8 billion that 
the city received from the winning bidder and determined that the 
concession was in the public interest. Both valuations assumed that 
future toll rates would increase only to a limited extent under public 
control. 

Additionally, steps have been taken to protect the public interest 
through procurement processes. Both Chicago and Indiana used an auction 
bidding process in which qualified bidders were presented with the same 
contract and bid on the same terms. This process ensured that the 
winning bidder would be selected on price alone (the highest concession 
fee offered) since all other important factors and public interest 
considerations--such as performance standards and toll rate standards-
-would be the same for all bidders. Texas has also taken steps to 
protect the public interest through the procurement process for the 
TTC. While the Texas DOT signed the comprehensive development agreement 
with a private concessionaire for the TTC-35, it does not guarantee 
that the private firm will be awarded the concession for any segment of 
the TTC. All segments may be put out for competitive procurement; and, 
while the master development concessionaire has a right of first 
negotiation for some segments, it must negotiate with Texas and present 
a detailed facility plan. Additionally, according to the Texas DOT, the 
concessionaire is required to put together a facility implementation 
plan that, among other things, analyzes the projected budget and 
recommends a method for project delivery. 

Foreign Governments Have Developed Public Interest Criteria and 
Assessment Tools: 

Some foreign governments have recognized the importance of public 
interest issues in public-private partnerships and have taken a 
systematic approach to these issues. This includes developing 
processes, procedures, and criteria for defining and assessing elements 
of the public interest and developing tools to evaluate the public 
interest of public-private partnerships. These tools include the use of 
qualitative public interest tests and criteria to consider when 
entering into public-private partnerships, as well as quantitative 
tests such as Value for Money (VfM) and PSCs, which are used to 
evaluate if entering into a project as a public-private partnership is 
the best procurement option available. According to a document from one 
state government in Australia (New South Wales), guidelines for private 
financing of infrastructure projects (which includes the development of 
public interest evaluation tools) supports the government's commitment 
to provide the best practicable level of public services by providing a 
consistent, efficient, transparent, and accountable set of processes 
and procedures to select, assess, and implement privately financed 
projects. 

Some governments have laid out elements of the public interest in 
public-private partnerships and criteria for how those elements should 
be considered when entering into such agreements. These steps help 
ensure that major public interest issues are transparently considered 
in the public-private partnerships from the outset of the process, 
including highway public-private partnerships. For example, the state 
of Victoria in Australia requires all proposed public-private 
partnership projects to evaluate eight aspects of the public interest 
to determine how they would be affected.[Footnote 37] These eight 
aspects include the following: 

* Effectiveness. Whether the project is effective in meeting the 
government's objectives. Those objectives must be clearly determined. 

* Accountability and transparency. Whether public-private partnership 
arrangements ensure that communities are informed about both public and 
private sector obligations and that there is oversight of projects. 

* Affected individuals and communities. Whether those affected by 
public-private partnerships have been able to effectively contribute 
during the planning stages and whether their rights are protected 
through appeals and conflict resolution mechanisms. 

* Equity. Whether disadvantaged groups can effectively use the 
infrastructure. 

* Public access. Whether there are safeguards to ensure public access 
to essential infrastructure. 

* Consumer rights. Whether projects provide safeguards for consumers, 
especially those for which the government has a high level of duty of 
care or are most vulnerable. 

* Safety and security. Whether projects provide assurance that 
community health and safety will be secured. 

* Privacy. Whether projects adequately protect users' rights to 
privacy. 

Similarly, the government of New South Wales, Australia, also formally 
considers the public interest before entering into public-private 
partnerships. Public interest focuses on eight factors that are similar 
to Victoria's: effectiveness in meeting government objectives, VfM, 
community consultation, consumer rights, accountability and 
transparency, public access, health and safety, and privacy. The public 
interest evaluation is conducted up front prior to proceeding to the 
market and is updated frequently, including prior to the call for 
detailed proposals, after finalizing the evaluation of proposals, and 
prior to the government signing contract documents. 

Additionally, foreign governments have also used quantitative tests to 
identify and evaluate the public interest and determine if entering 
into a project as a public-private partnership is the best option and 
delivers value to the public. In general, VfM evaluations examine total 
project costs and benefits and are used by some governments to 
determine if a public-private partnership approach is in the public 
interest for a given project. VfM tests are often done through a PSC, 
which compares the costs of doing a proposed public-private partnership 
project against the costs of doing that project through a public 
delivery model. VfM tests examine more than the financial value of a 
project and will examine factors that are hard to quantify, such as 
design quality and functionality, quality in construction, and the 
value of unquantifiable risks transferred to the private sector. VfM 
tests are commonly used in Australia, the United Kingdom, and British 
Columbia, Canada. 

PSCs are often used as part of VfM tests. Generally speaking, a PSC 
test examines life-cycle project costs, including initial construction 
costs, maintenance and operation costs, and additional capital 
improvement costs that will be incurred over the course of the 
concession term. A PSC can also look at the value of various types of 
risk transfer to the private sector, whereby the more risk transferred 
to the private sector the more value to the public sector. For example, 
in the United Kingdom, use of the PSCs is mandated for all public- 
private partnership projects at both the national as well as local 
levels. British Columbia, Canada, also conducts a PSC for all public- 
private partnership proposals that compares the full life-cycle costs 
of procuring the proposed project as a public-private partnership, 
compared with a traditional design-bid-build approach. The British 
Columbia PSC not only compares the project costs but also evaluates the 
value of various risks. According to a Partnerships British Columbia 
official, the more risk transferred from the public to the private 
sector in a public-private partnership proposal, all else being equal, 
the better the value for the public. For example, this official said 
that the PSC they use will value a certain level of construction risk 
and determine the value (based on the costs and probability of that 
risk occurring) to the public sector of having the private sector 
assume that risk through a public-private partnership. The Partnerships 
British Columbia official also told us that the values of risks 
occurring are often not included in traditional public cost estimates, 
which is a reason that cost overruns are so common in public sector 
infrastructure projects. British Columbia uses the results of PSCs to 
help determine a project's procurement method. An official with British 
Columbia told us that many projects have been done through a 
traditional public procurement rather than privately because the 
results of the PSCs indicated that there was not enough value for money 
in the private approach. 

Although PSCs can be helpful in identifying and evaluating the public 
interest, they have limitations. According to officials in Australia, 
Canada, and the United Kingdom, PSCs are composed of numerous 
assumptions, as well as projections years into the future. PSCs may 
have difficulty modeling long-term events and reliably estimating 
costs. Additionally, discount rates used in PSCs to calculate the 
present value of future streams of revenue may be arbitrarily chosen by 
the procuring authority if not mandated by the government. Officials 
with the Audit Office of New South Wales, Australia, raised similar 
concerns and said the volume and volatility of assumptions raise 
questions about the validity and accuracy of PSCs.[Footnote 38] A 
government official with the U.K. told us that a limitation of its PSC 
is that it is a generic tool that applies to all privately financed 
projects, from transportation to hospitals, and therefore, there are 
some standard assumptions built into the model that may not be accurate 
for a transportation project. The official added that the government is 
considering working on creating a sector-specific PSC. However, despite 
these concerns there was general agreement among those with whom we 
talked that PSCs are useful tools. 

While foreign governments may have extensive experience using PSCs and 
other public interest assessment tools, these tools continue to evolve 
based on experience and lessons learned. The use of formal tools and 
processes also does not guarantee that highway public-private 
partnerships will not face significant challenges and problems. For 
example, although a document we reviewed indicated that a formal 
assessment process and PSC was used to evaluate the Cross City Tunnel 
in Sydney, Australia, before it was built and operated through a 
concession agreement, this evaluation did not prevent the problems of 
low traffic, public opposition to the toll road, and bankruptcy that 
were discussed earlier in this report. The problems experienced led to 
changes in how public-private projects will be handled and evaluated in 
the future. According to the Director of the New South Wales Department 
of Treasury and Finance, one of the big lessons learned from the Cross 
City Tunnel experience was the importance of public outreach and 
communication. Documents from the New South Wales government also 
showed that public interest tools were strengthened. For example, in 
December 2006, the New South Wales guidelines for public-private 
partnerships were updated to, among other things, strengthen VfM tests 
by conducting them from the perspective of the user or taxpayer and 
requiring updates of the tests through the tender process. In addition, 
the New South Wales Department of Treasury and Finance issued new 
guidance on how to determine appropriate discount rates--an important 
component of PSCs. Evolution of tools has occurred in other countries 
as well. According to an official with British Columbia, the 
methodology of their PSC tests is reviewed by an independent auditor, 
and improvements to the methodology are continually made. Change in 
public interest evaluation tools has also occurred elsewhere. According 
to an official with the United Kingdom Treasury Department, after 
criticism about potential VfM benefits and the use of PSC models 
developed by consultants, the United Kingdom has moved from an advisor- 
driven PSC to a Treasury-driven two-part, four-stage VfM model that 
involves a simple spreadsheet and qualitative assessment. Even this new 
model is being considered for change due to complex contracting issues. 

Use of Formal Public Interest Processes and Tools in the United States 
Are More Limited: 

We found a more limited use of systematic, formal processes and 
approaches to the identification and assessment of public interest 
issues in the United States. Both Oregon and Texas have used forms of 
PSCs. For example, Oregon hired a consultant to develop a PSC that 
compared the estimated costs of the private sector proposal for the 
Newburg-Dundee project with a model of the public sector's undertaking 
the project, using various public financing sources, including 
municipal debt and TIFIA loans. 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 PSC was 
conducted before the project was put out for official concession, the 
PSC was prepared after substantial early development work was done by 
private partners. 

Similar to a PSC, Texas has developed "shadow bids" for two highway 
public-private partnerships in the state. These shadow bids included 
detailed estimates of design and construction costs, as well as 
operating costs and a detailed financial model, the results of which 
were compared against private sector proposals. While the model used by 
Texas is unique to each individual project, the methodology used (such 
as the estimation of future costs) is similar. In addition, the 
Director of the Texas Turnpike Authority of the Texas DOT told us that, 
while there are no statutory or regulatory provisions defining the 
public interest in public-private partnerships, when procuring public- 
private partnerships, the department develops specific evaluation 
procedures and criteria for that specific procurement, as well as 
contract provisions that are determined to be in the interests of the 
state. Public-private partnership proposals the department receives are 
then evaluated against those project criteria. However, these criteria 
are project-specific, and there are no standard criteria that are 
equally applied to all projects. 

Neither Chicago nor Indiana had developed public interest tests or used 
PSCs prior to leasing of the Chicago Skyway or the Indiana Toll Road. 
Instead, analyses for these deals were largely focused on asset 
valuation and development of specific concession terms. Other state and 
local governments we spoke with said they have limited experience with 
using formal public interest criteria tools and tests. For example, the 
Chief Financial Officer of the California DOT told us that while the 
department is currently working with the California Transportation 
Commission to develop guidelines for public interest issues, this 
effort has not been finalized. Additionally, officials in New Jersey 
and Pennsylvania, two states that are exploring options, including 
private involvement, to better leverage existing toll roads, said that 
they have not yet created any formal public interest criteria or 
assessment tools such as PSCs. An official with the Illinois DOT also 
said that his state had not yet developed public interest criteria or 
assessment tools. 

Not using formal public interest tests and tools means that aspects of 
the public interest can potentially be overlooked. For example, because 
VfM tests can allow the government to analyze the benefits and costs of 
doing a project as a public-private partnership, as opposed to other 
more traditional methods, not using such a test might mean that 
potential future toll revenues from public control of toll roads are 
not adequately considered. Neither Chicago nor Indiana gave serious 
consideration to the potential toll revenues they could earn by 
retaining control over their toll roads. In contrast, Harris County, 
Texas, in 2006 conducted a broad analysis of options for its public 
toll road system. This analysis was somewhat analogous to a VfM test. 
The analysis evaluated and conducted an asset valuation under three 
possible scenarios, including public control and a concession. This 
analysis was used by the county to conclude that it would gain little 
through a long-term concession and that through a more aggressive 
tolling approach, the county could retain control of the system and 
realize similar financial gains to those that might be realized through 
a concession. 

Since public interest criteria and assessment tools generally mandate 
that certain aspects of the public interest are considered in public- 
private partnerships, if these criteria and tools are not used, then 
aspects of public interest might be overlooked. These aspects include 
such things as the following: 

* Transparency. According to documents we reviewed, both Victoria and 
New South Wales, Australia, require transparency in public-private 
partnership projects so that communities and the public are well 
informed. Officials in Toronto, Canada, however, told us there was no 
such requirement and a lack of transparency about the 407 ETR 
concession--including information about the toll rate structure--meant 
that some people did not understand the objectives of the concession, 
as well as the tolling structure, and led to significant opposition to 
the project. The former Director of the Indiana Office of Management 
and Budget (OMB) told us that the Indiana legislature, as well as 
others, complained that the Indiana Toll Road lease was done in 
"secrecy." 

* Consideration of communities and affected interests. Local and 
regional governments believe that there was limited coordination with 
them as well as the public on the TTC project. This lack of 
consideration of local and regional interests and concerns led to 
opposition by local and regional governments. That reaction helped 
drive statewide legislation that requires the state to involve local 
and regional governments to a greater extent in public-private 
partnerships. While Chicago considered the city's interests in the 
Chicago Skyway lease, it did not necessarily consider the interests of 
other parties, such as regional mobility. The Executive Director of the 
Chicago Metropolitan Agency for Planning (the metropolitan planning 
organization for the greater Chicago area) told us that regional 
interest issues, such as the traffic diversion onto local streets that 
might occur as a result of higher tolls on the Chicago Skyway, were not 
addressed in consideration of the lease. He added that, as a result, 
other routes near the Chicago Skyway might not be able to absorb the 
diverted traffic, causing regional mobility problems. 

The use of formal public interest tests can also allow public agencies 
to evaluate the projected benefits, as well as the costs and trade- 
offs, of public-private partnerships. In addition, such tests can help 
determine whether or not the benefits outweigh the costs and if 
proceeding with the project as a partnership is the superior model, or 
if conducting the project through another type of procurement and 
financing model is better. 

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. While federal 
funding in highway public-private partnerships to date has been 
limited, the administration and DOT have actively promoted such 
partnerships through policies and practices, including developing 
experimental programs that waive certain federal regulations and 
encourage private investment. Although federal involvement with highway 
public-private partnerships is largely limited to situations where 
there is direct federal investment, recent highway public-private 
partnerships may, or could, have implications on national interests 
such as interstate commerce and homeland security. However, FHWA has 
given little consideration of potential national public interests in 
highway public-private partnerships. We have called for a fundamental 
reexamination of federal programs, including the highway program to 
identify specific national interests in the transportation system to 
help restructure existing programs to meet articulated goals and needs. 
This reexamination would provide an opportunity to define any national 
public interest in highway public-private partnerships and develop 
guidance for how such interests can best be protected. The increasing 
role of the private sector in financing and operating transportation 
infrastructure raises potential issues of national public interest. We 
also found that highway public-private partnerships that have, or will, 
use federal funds and involve tolling may be required by law to use 
excess toll revenues (revenues that are beyond that needed for debt 
service, a reasonable return on investment to a private party, and 
operation and maintenance) for projects eligible for federal 
transportation funding. However, the methodology for calculating excess 
toll revenues is not clear. 

Direct Federal Involvement in Highway Public-Private Partnerships Has 
Generally Been Limited to Projects in Which Federal Funds Have Been 
Invested: 

Direct federal involvement in highway public-private partnership 
projects is generally determined by whether or not federal funds were 
or will be involved in a highway project. As a result, FHWA has had a 
somewhat different involvement in each of the four U.S. highway public- 
private partnership projects we reviewed. 

Indiana Toll Road: 

Since June 2006, the Indiana Toll Road has been operated by a private 
concessionaire under a 75-year lease. The Indiana Toll Road was 
constructed primarily with state funds and then incorporated into the 
Interstate Highway System. Although about $1.9 million in federal funds 
were used to build certain interchanges on the highway, Indiana 
subsequently repaid these funds. FHWA officials told us they did not 
review the lease of the highway to the private sector because there 
were no federal funds involved and no obligation on FHWA under title 23 
of the U.S.C. to do so. 

Chicago Skyway: 

The Chicago Skyway was leased in October 2004 to a private 
concessionaire. FHWA officials told us that they did not review the 
Chicago Skyway lease agreement before it was signed. Only a limited 
amount of federal funding was invested in the Chicago Skyway. According 
to FHWA, the state of Illinois received about $1 million in 1961 to 
construct an off-ramp from the Chicago Skyway to Interstate 94. In 
addition, about $14 million in federal funds were received in 1991 
through an earmark in ISTEA. The Assistant Budget Director for Chicago 
told us the latter was for painting and various other improvements. 
FHWA officials stated that since the lease transaction did not involve 
any new expenditure of federal funds, there was no requirement that 
FHWA review and approve the lease before it was executed. According to 
FHWA officials, FHWA's primary role in the transaction was the 
modification of a 1961 toll agreement to allow Chicago to continue 
collecting tolls on the facility. 

However, because federal funds were involved, FHWA did determine that 
two portions of federal law were applicable, one governing how proceeds 
from the lease of the asset--the up-front payment of $1.8 billion--were 
used and the other governing use of toll revenues. 

* Use of lease proceeds. Proceeds from the lease of property acquired, 
even in part, with federal funds would be governed by section 156 of 
title 23 U.S.C. This section requires that states charge fair market 
value for the sale or lease of such assets and that the percentage of 
the income from the proceeds obtained from a sale or lease that 
represents the federal share of the initial investment (about $15 
million in this case) be used by the state for title 23 eligible 
projects. Title 23 eligible projects can include construction of new 
transportation infrastructure. According to FHWA, the federal share in 
the Chicago Skyway ranged between 0.88 percent and 2.95 percent, 
depending on whether money from the ISTEA earmark was considered an 
addition to the real property or not and assuming control over the I-94 
connector had been transferred to the contractor.[Footnote 39] Title 23 
of the U.S.C. covers a broad range of activities that are eligible for 
federal-aid highway funds, including reconstruction, restoration, 
rehabilitation, and resurfacing activities and the payment of debt 
service for a title 23 eligible project. FHWA determined that Chicago 
met its obligations under title 23 section 156 merely by retiring the 
Chicago Skyway debt ($392 million or nearly 25 percent of the lease 
proceeds). 

* Use of toll revenue. When tolling is allowed on federally funded 
highways, the use of toll revenues is generally governed by section 129 
of title 23 U.S.C. Under section 129, toll revenue must first be used 
for (1) debt service, (2) to provide a reasonable return on investment 
to any private party financing a project, and (3) the operations and 
maintenance of the toll facility. If there are any revenues in excess 
of these uses, and if the state or public authority certifies that the 
facility is adequately maintained, then the state or public authority 
may use any excess revenues for any title 23 eligible purpose. 
According to FHWA, since federal funds were expended in the Chicago 
Skyway, a toll agreement has been executed between FHWA, the Illinois 
DOT, city of Chicago, and Cook County providing that the toll revenues 
will be used in accordance with title 23 section 129. 

Although FHWA determined that provisions governing excess toll revenues 
were met, it did not independently determine whether the rate of return 
to private investors would be reasonable. The rate of return is a 
critical component in determining whether excess revenues exist or not. 
According to FHWA officials there is no standard definition of what 
constitutes a "reasonable rate of return." Therefore, FHWA concluded it 
had no basis to evaluate the reasonableness of the return. In addition, 
FHWA officials stated that under guidance issued by the agency's 
Executive Director in 1995, the reasonableness of rate of return to a 
private investor is a matter to be determined by the state. FHWA 
officials said they relied on assurances from the city of Chicago that 
the rate of return was reasonable. According to DOT officials, FHWA 
determined that since the value of a concession was established through 
fair and open competitive procedures, the rate of return should be 
deemed to be reasonable. A review of the concession agreement indicates 
that the lease agreement was expected by the city of Chicago to 
"produce a reasonable return to the private operator" and that the city 
pledged "not to alter or revoke that determination" over the 99-year 
period of the lease. The Assistant Budget Director for Chicago also 
told us that the rates of return will be reasonable because a 
competitive bid process was used prior to signing a lease and that the 
concession agreement contains limitations of how much tolls can change 
over time--an important limitation since toll levels can significantly 
affect rates of return. 

FHWA officials have recognized that concession arrangements governing 
facilities paid for largely with federal funds face a more difficult 
time meeting the requirements of sections 156 and 129 of title 23. For 
example, if a state received a $1 billion up-front payment to lease a 
highway built with 80 percent federal funds, the state would be 
required to invest $800 million of that payment in other title 23 
eligible projects. 

Trans-Texas Corridor: 

According to the Director of the Texas Turnpike Authority Division of 
the Texas DOT, Texas's intent is to make all transportation 
infrastructure projects eligible for federal aid whenever possible. 
While at the time of our review no federal funds had been expended on 
the Trans-Texas Corridor (TTC-35) project, Texas is considering using 
federal funds to complete parts of the corridor. 

For the project to be eligible for federal funds, unless otherwise 
specified by FHWA, it must meet all federal requirements, including the 
environmental review process required under NEPA. The TTC-35 project is 
currently undergoing a two-tiered review process under NEPA. In Tier I, 
the Texas DOT has identified a potential 10-mile wide corridor through 
which the actual corridor will run, completed a draft environmental 
impact statement, which evaluates the impact of the project on the 
local and regional environment, and is awaiting federal approval 
through a record of decision. The record of decision, among other 
things, identifies the preferred alternative and provides information 
on the adopted means to avoid, minimize, and compensate for 
environmental impacts. The Tier I process is expected to be completed 
by early 2008. Tier II of the process will be used to determine the 
actual alignment of the road or rail line and will be completed in 
several parts for each facility, or unique segment of the facility. 
This process, like Tier I, includes identification of specific corridor 
segments, solicitation of public comments for each segment, and final 
approval, which will authorize construction. As we reported in 2003, 
environmental impact statements on federally funded highway projects 
take an average of 5 years to complete, according to FHWA.[Footnote 40] 

The state of Texas has also entered into a Special Experimental Project 
No. 15 (SEP-15)[Footnote 41] agreement with FHWA for the TTC-35. 
According to FHWA, under this agreement FHWA has permitted the Texas 
DOT to release a request for proposals (RFP) and award the design-build 
contract prior to completion of the environmental review process. This 
sequence would not have been allowed under federal highway regulations 
existing at the time.[Footnote 42] In accordance with the SEP-15 
agreement, Texas entered into a contract with a private sector 
consortium to prepare a Master Development Plan for the TTC-35 and to 
assist in preparing environmental documents and analyses. The Master 
Development Plan is intended to help the state identify potential 
development options for the TTC-35 and to begin predevelopment work 
related to the project. The Master Development Plan also allows the 
private consortium to develop other highway facilities. In conjunction 
with this agreement, in March 2007, the private consortium was awarded 
a 50-year concession to construct, finance, operate and maintain State 
Highway 130, segments 5 and 6 (a highway that is expected to connect to 
the TTC-35). 

Oregon: 

Similar to Texas, the Oregon Innovative Public-Private Partnerships 
Program is a program for the planning, acquisition, financing, 
development, design, construction, and operation of transportation 
projects in Oregon using the private sector as participants. Three 
projects have been identified under this program: (1) a potential 
widening of a 10-mile section of Interstate 205 (I-205) in the Portland 
area, (2) development of highways east of Portland serving existing 
industrial development and future residential and commercial 
development (called the Sunrise Corridor), and (3) construction of an 
11-mile highway in the Newberg-Dundee corridor. 

Oregon sought and received an FHWA SEP-15 approval for these projects. 
According to FHWA, the SEP-15 approval was to provide the Oregon DOT 
the flexibility to release an RFP and award a design-build contract 
prior to completion of the environmental review process, which was not 
permitted under federal highway regulations at the time. As discussed 
above, this requirement has changed. Subsequent to the SEP-15 approval, 
in October 2005, the state entered into an Early Development Agreement 
with FHWA that also permitted the state to engage the private sector in 
predevelopment activities prior to completion of the environmental 
review process. In January 2006, Oregon entered into preliminary 
development agreements with a private sector partner (Oregon 
Transportation Improvement Group) to proceed with predevelopment work 
on the three proposed projects. As of January 2007, Oregon had decided 
not to pursue the Sunrise Corridor project because it determined that 
projected toll revenue was not enough to cover the cost of operation or 
construction. Rather, Oregon plans to seek traditional funding sources. 
In July 2007, the state announced that it and the Oregon Transportation 
Improvement Group had ceased pursuing public-private development of the 
Newberg-Dundee project. According to the Oregon Department of 
Transportation, as of November 2007, the third project (I-205 lane 
widening) was not yet in the regional transportation plan but was 
expected to be added to the plan without difficulty. As of May 2007, 
federal funding ($20.9 million) had been used for such things as 
environmental assessment, planning, and right-of-way acquisition on the 
Newberg-Dundee project. 

Federal Government Encourages and Promotes Highway Public-Private 
Partnerships through Policy and Practice: 

Although federal involvement with highway projects and highway public- 
private partnerships is largely governed by whether there is a direct 
federal investment in a project or not, the administration and DOT have 
actively encouraged and promoted the use of highway public-private 
partnerships. This effort has been accomplished through both policies 
and practices such as developing SEP-14 and SEP-15 procedures and 
preparing various publications and educational material on highway 
public-private partnerships. 

Administration and DOT Actively Encourage and Promote Highway Public- 
Private Partnerships: 

Encouraging highway public-private partnerships is a federal 
governmentwide initiative articulated in the President's Management 
Agenda and implemented through the Office of Management and Budget 
(OMB). OMB promotes, among other things, increasing the level of 
competition from the private sector for services traditionally done by 
the public sector. DOT has followed this lead by incorporating highway 
public-private partnerships into its own policy statements. Its May 
2006 National Strategy to Reduce Congestion on America's Transportation 
Network states that the federal government should "remove or reduce 
barriers to private investment in the construction or operation of 
transportation infrastructure."[Footnote 43] 

FHWA has used its administrative flexibility to develop three 
experimental programs to allow more private sector participation in 
federally funded highway projects. The first, SEP No. 14, or SEP-14, 
has been in place since 1990 to permit contracting techniques to be 
employed that deviate from the competitive bidding provisions of 
federal law required for any highway built with federal funds.[Footnote 
44] As those techniques have been approved for widespread use by FHWA 
since its enactment, the program has changed to allow other alternative 
contracting techniques, such as best value contractor 
selection[Footnote 45] and the transfer of construction risk to the 
private construction contractor. States have used the techniques 
allowed under SEP-14 to allow more private sector involvement in 
building and maintaining transportation infrastructure than under 
traditional procurement methods. For example, states used design-build 
contracting[Footnote 46] in almost 300 different construction and 
maintenance projects that were approved by FHWA between 1992 and 2003, 
including repavement of existing roads, bridge rehabilitation and 
replacement, and construction of additional highway lanes. 

The second experimental program, the Innovative Finance Test and 
Evaluation Program (TE-045), was established in April 1994. This 
program was initially designed and subsequently operated to give states 
a forum in which to propose and test those concepts that best met their 
needs. Since TE-045 did not make any new money available, its primary 
focus was to foster the identification and implementation of new, 
flexible strategies to overcome fiscal, institutional, and 
administrative obstacles faced in funding transportation projects. 
States were encouraged to consider a number of areas in developing 
proposals under the program, including income generation possibilities 
for highway projects and alternative revenue sources, which could be 
pledged to repay highway debt. States were also encouraged to consider 
the use of federal-aid to promote highway public-private partnerships. 
According to FHWA, several types of financing tools were proposed by 
states and tested under TE-045. These included tools that provided 
expanded roles for the private sector in identifying and providing 
financing for projects, such as flexible matches and section 129 
project loans. 

The third experimental program, SEP No. 15, or SEP-15, is broad in 
scope and was designed to facilitate highway public-private 
partnerships and other types of innovation in the federal-aid highway 
process. SEP-15 allows for the modification of FHWA policy and 
procedure, where appropriate, in four different areas: contracting, 
compliance with environmental requirements, right-of-way acquisition, 
and project finance. According to FHWA, SEP-15 enables FHWA officials 
to review state transportation projects on a case-by-case basis to 
"increase project management flexibility, encourage innovation, improve 
timely project construction, and generate new revenue streams for 
federal-aid transportation projects."[Footnote 47] While this program 
does not eliminate overall federal-aid highway requirements, it is 
designed to allow FHWA to develop procedures and approaches to reduce 
impediments to states' use of public-private partnerships in highway-
related and other transportation projects. Table 6 summarizes the 
highway projects in which FHWA has granted SEP-15 approvals. 

Table 6: Highway Public-Private Partnerships with SEP-15 Approval, as 
of June 2007: 

Project: TTC-35, Texas; 
Date of SEP-15 approval: February 2004; 
Description: Proposed development of a new north-south highway, rail 
and public utilities corridor from the Mexican to Oklahoma borders in 
Texas. 

Project: Oregon Innovative Partnerships Program, Oregon; 
Date of SEP-15 approval: May 2005; 
Description: An umbrella highway public-private partnership program 
under which three projects--South I-205 Corridor, Sunrise Project and 
Newberg-Dundee Transportation Improvement Project-
-have been identified for implementation. 

Project: Texas Toll Roads Statewide Open-Road Toll Collection System 
Project (Texas Toll Collection System), Texas; 
Date of SEP-15 approval: May 2005; 
Description: Approval for contractor to design, build, operate, and 
maintain a statewide open-road tolling system. 

Project: Waiver of TIFIA requirements for several Texas DOT projects, 
Texas; 
Date of SEP-15 approval: February 2006; 
Description: Approval for a private entity to develop, design, 
construct, finance, operate, maintain, and charge user fees for I-635 
in the Dallas/Fort Worth metropolitan area, U.S. 281/Loop 1604 Toll 
Project in San Antonio, and the State Highway 161 project through 
Irving and Grand Prairie. 

Project: TTC-69, Texas; 
Date of SEP-15 approval: April 2006; 
Description: Establishment of a new transportation corridor from 
northeast Texas to the United States-Mexico border, including tolled 
truck and car lanes, commuter, freight and high-speed passenger rail 
tracks, utilities and intermodal facilities. 

Project: Pocahontas Parkway, Virginia; 
Date of SEP-15 approval: August 2006; 
Description: For the operation, maintenance, and toll collection for 
the existing Pocahontas Parkway and for the construction, maintenance, 
and operation of the new Richmond Airport Connector. 

Project: U.S. Highway 290, Texas; 
Date of SEP-15 approval: September 2006; 
Description: Conversion of existing four-lane highway into a tolled 
highway with nontolled frontage roads in Travis County, Texas. 

Project: Connecting Idaho, Idaho; 
Date of SEP-15 approval: May 2007; 
Description: Provision of Grant Anticipation Revenue Vehicle bonds to 
advance 260 miles of roadways located on 13 corridors in the state. 

Project: Knik Arm Crossing, Alaska; 
Date of SEP-15 approval: June 2007; 
Description: Crossing links the municipality of Anchorage with the 
Matanuska-Susitna Borough. 

Source: GAO analysis of FHWA data. 

[End of table] 

The SEP-15 flexibilities have been pivotal to allowing highway public- 
private partnership arrangements we reviewed in Texas and Oregon to go 
forward while remaining eligible for federal funds. For example, until 
August 2007, federal regulations did not allow private contractors to 
be involved in highway design-build contracts with a state department 
of transportation until after the federally mandated environmental 
review process under NEPA had been completed. The Texas DOT applied for 
a waiver of this regulation under SEP-15[Footnote 48] for its TTC 
project 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. FHWA 
approved this waiver, which allowed the contractor's work to proceed 
during the environmental review process and which could ultimately 
shorten the corridor's project time line. According to the Texas DOT, 
at all times, it and the FHWA maintain control over the NEPA decision- 
making process. The developer's role is similar to other stakeholders 
in the project. Similarly, Oregon used the SEP-15 process to experiment 
with the concept of contracting with a developer early in the project 
development phase for three potential projects in and around Portland, 
Oregon. Like Texas, Oregon wanted to involve the private sector prior 
to completion of the NEPA process. 

FHWA and DOT Practices Also Promote Highway Public-Private 
Partnerships: 

FHWA and DOT have reinforced its legal and policy initiatives with 
promotional practices as well. These activities include the following: 

* Developing publications. Publications include a public-private 
partnership manual that has material to educate state transportation 
officials about highway public-private partnerships and to promote 
their use. The manual includes sections on alternate federal financing 
options for highway maintenance and construction and outlines different 
federal legal requirements relating to highway public-private 
partnerships, including the environmental review process.[Footnote 49] 
It also includes a public-private partnership user guide.[Footnote 50] 
The user guide describes the many participants, stages of development, 
and factors (such as technical capabilities and project prioritization 
and selection criteria and processes) associated with developing and 
implementing public-private partnerships for transportation 
infrastructure projects. 

* Drafting model legislation for states to consider to enable highway 
public-private partnerships in their states. The model legislation 
addresses such subjects as bidding, agreement structure, reversion of 
the facility to the state, remedies, bonds, federal funding, and 
property tax exemption, among other things. 

* Creating a public-private partnership Internet Web site. This Web 
site serves as a clearinghouse of information to states and other 
transportation professionals about public-private partnerships, 
pertinent federal regulations, and financing options.[Footnote 51] It 
has links to FHWA's model public-private partnership legislation, 
summaries of selected highway public-private partnerships, key DOT 
policy statements, and the FHWA public-private partnership manual, 
among other things. 

* Making public presentations. DOT and FHWA officials have made public 
speeches and written at least one letter to a state in support of 
highway public-private partnerships. For example, when Texas was 
considering modifying its public-private partnership statutes, FHWA's 
Chief Counsel, in a letter to the Texas DOT, warned that if Texas lost 
its initiative on highway public-private partnerships that "private 
funds flowing to Texas will now go elsewhere." DOT has also provided 
congressional testimony in support of highway public-private 
partnerships. For example, in a recent testimony to Congress, DOT's 
Assistant Secretary of Transportation for Policy stated that highway 
public-private partnerships are "one of the most important trends in 
transportation" and that DOT "has made expansion of public-private 
partnership[s] a key component" in DOT's on-going initiatives to reduce 
congestion and improve performance.[Footnote 52] 

* Making tolling a key component of congestion mitigation. Such a 
strategy could act to promote highway public-private partnerships since 
tolls provide a long-term revenue stream, key to attracting investors. 
One major part of DOT's May 2006 national strategy to address 
congestion is the Urban Partnership Agreement. Under the Urban 
Partnership Agreement, DOT and selected metropolitan areas will commit 
to aggressive strategies to address congestion. The key component of 
these aggressive strategies is tolling and congestion pricing. 
Congestion pricing could involve networks of priced lanes on existing 
highways, variable user fees on entire roadways, including toll roads 
and bridges, or area-wide pricing involving charges on all roads within 
a congested area. 

National Interests in Highway Public-Private Partnerships Need to Be 
Identified: 

Although federal involvement with highway public-private partnerships 
is largely limited to situations where there is a direct federal 
investment, highway public-private partnerships can have implications 
on broader national interests, such as interstate commerce. FHWA 
officials told us that various federal laws and requirements that 
states must follow to receive federal funds are designed to protect 
national and public interests--for example, federally funded projects 
must receive environmental approval through the NEPA process. In 
addition, TIFIA loans must be investment grade and meet policy 
considerations they have some public interest criteria. However, FHWA 
officials told us that no specific federal definition of national 
public interest or federal guidance on identifying and evaluating 
national public interest exists. Thus, when federal funds are not 
involved in a project, there are few mechanisms to ensure that national 
public interests are identified, considered and protected. As a result, 
given the minimal federal funding in highway public-private 
partnerships we reviewed, little consideration has been given to 
potential national public interests in these partnerships. 

Recent highway public-private partnerships have involved sizable 
investments of funds and significant facilities and suggest that 
implications for national public interests exist. 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. Similarly, 
development of the TTC may greatly facilitate North American Free Trade 
Agreement-related truck traffic nationwide. Although the TTC is going 
through the NEPA process, to date, no federal funding has been expended 
in the development of the project. In commenting on a draft of this 
report, DOT correctly noted that many of these same issues could be 
raised if the states involved had undertaken major projects with 
potential implications for national interests as publicly funded 
projects, using only state funds. Nevertheless, both state and DOT 
officials have also asserted that without a public-private partnership, 
these projects would not have advanced. In addition, public-private 
partnerships may present distinct challenges because they can and have 
involved long-term commitments of up to 99 years and the loss of direct 
public control--issues that are not present in state financed projects-
-and the fact that private entities are not accountable to the public 
in the same way public agencies are. 

The absence of a clear definition 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 
federal role in highways and a clear definition of specific national 
interests in the system, including in such areas as freight mobility. A 
fundamental reexamination of federal surface transportation programs, 
including the highway program, presents the opportunity to address 
emerging needs, test the relevance of existing policies, and modernize 
programs for the twenty-first century. The growing role of the private 
sector in both financing and operating highway facilities raises the 
question of what role the private sector can and should play in the 
national transportation system and whether the presence of federal 
funding is the right criteria for federal involvement or whether other 
considerations should apply. For example, DOT has recognized the 
national importance of goods movement and the challenges of large, 
multimodal projects that cross state lines by establishing a "Corridors 
of the Future" program to encourage states to think beyond their 
boundaries in order to reduce congestion on some of the nation's most 
critical trade corridors. DOT plans to facilitate the development of 
these corridors by helping project sponsors reduce institutional and 
regulatory obstacles associated with multistate and multimodal corridor 
investments. Whether such corridors, which could be seen as being in 
the national interest, could be developed if portions of them were 
under effective private ownership is just one of many questions that 
could be addressed in identifying national public interests in general 
and public-private partnerships in particular. Once the national 
interest in highway public-private partnerships is more clearly 
defined, then an appropriate federal role in protecting and furthering 
those defined interests can be established. 

The recent report by the National Surface Transportation Policy and 
Revenue Study Commission illustrates the challenges of identifying 
national public interests both in general and in public-private 
partnerships in particular. The report encouraged the use of public- 
private partnerships as an important part of financing and managing the 
surface transportation system as part of an overall strategy for 
aligning federal leadership and federal transportation investments with 
national interests. As discussed earlier, the commission recommended 
broadening states' flexibilities to use tolling and congestion pricing 
on the Interstate system but also recommended that that the public 
interest would best be served if Congress adopted strict criteria for 
approving public-private partnerships on the Interstate Highway System, 
including limiting allowable toll increases, prohibiting non-compete 
clauses, and requiring concessionaires to share revenues with the 
public sector. This definition of the public interest stands in sharp 
contrast to the dissenting views of three commissioners and to comments 
provided by DOT on a draft of this report. In their minority report, 
the dissenting commissioners stated that the Commission's 
recommendations would replace negotiated terms and conditions with a 
federal regulation and subject private toll operators to greater 
federal scrutiny than local public toll authorities. In commenting on a 
draft of this report, DOT stated that national interests are served by 
limiting federal involvement in order to allow these arrangements to 
grow and provide the benefits of which they are capable. These sharply 
divergent views should assist Congress as it considers the appropriate 
national interests and federal role in highway public-private 
partnerships. 

Conclusions: 

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. While private 
investors can make billions of dollars available for critical 
infrastructure, these funds are largely a new source of borrowed funds, 
repaid by road users over what potentially could be a period of several 
generations. There is no "free" money in highway public-private 
partnerships. 

Many forms of public-private partnerships exist both within and outside 
the transportation sector, and conclusions drawn about highway public- 
private partnerships--those involving long-term concession agreements-
-cannot necessarily be drawn about partnerships of other types and in 
other sectors. 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. This is in many respects a function of the design of the 
federal program as few mechanisms exist to identify potential national 
interests in cases where federal funds have not or will not be used. 
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. However, potential federal restrictions must 
be carefully crafted to avoid undermining the potential benefits, such 
as operational efficiencies, that can be achieved through the use of 
highway public-private partnerships. Reexamining the federal role in 
highways provides an opportunity to identify the emerging national 
public interests, including the national public interests in highway 
public-private partnerships. 

Finally, in the future, states may seek increased federal funding for 
highway public-private partnerships or seek to monetize additional 
assets for which federal funds have been used. If this occurs, then it 
is likely some portion of toll revenues may need to be used for 
projects that are eligible for federal transportation funding. 
Clarifying the methodology for determining excess toll revenues and 
reasonable rates of return in highway public-private partnerships, 
would give clearer guidance to states and localities undertaking 
highway public-private partnerships and help reduce potential 
uncertainties to the private sector and the financial markets. 

Matter for Congressional Consideration: 

A reexamination of federal transportation programs provides an 
opportunity to determine how highway public-private partnerships fit in 
with national programs as well as an opportunity to identify the 
national interests associated with highway public-private partnerships. 
In order to balance the potential benefits of highway public-private 
partnerships with protecting key national interests, Congress should 
consider directing the Secretary of Transportation to consult with them 
and other stakeholders to develop and submit objective criteria for 
identifying national public interests in highway public-private 
partnerships. In developing these criteria, the Secretary should 
identify any additional legal authority, guidance, or assessment tools 
required, as appropriate and needed, to ensure national public 
interests are protected in future highway public- private partnerships. 
The criteria should be crafted to allow the department to play a 
targeted role in ensuring that national interests are considered in 
highway public-private partnerships, as appropriate. 

Recommendation for Executive Action: 

To ensure that future highway public-private partnerships meet federal 
requirements concerning the use of excess revenues for federally 
eligible transportation purposes, we recommend that the Secretary of 
Transportation direct the Federal Highway Administrator to clarify 
federal-aid highway regulations on the methodology for determining 
excess toll revenue, including the reasonable rate of return to private 
investors in highway public-private partnerships that involve federal 
investment. 

Agency Comments and Our Evaluation: 

We provided copies of the draft report to DOT for comment prior to 
finalizing the report. DOT provided its comments in a meeting with the 
Assistant Secretary for Transportation Policy and the Deputy Assistant 
Secretary for Transportation Policy on November 30, 2007. DOT raised 
substantive concerns with several of the draft report's findings and 
conclusions, as well as one of the recommendations. Specifically, DOT 
commented that the draft report did not analyze the benefits of highway 
public-private partnerships in the context of current policy and 
traditional procurement approaches. DOT stated that highway public- 
private partnerships are a potentially powerful response to current and 
emerging policy failures in the federal-aid highway program that both 
DOT and GAO have identified over the years. For example, DOT asserted 
that the current federal-aid program (1) encourages the misallocation 
of resources, (2) does not promote the proper pricing of transportation 
assets, including the costs of congestion, (3) is not tied to achieving 
defined results and (4) provides weak incentives for innovation. DOT 
also stated that--in addition to supplying large amounts of additional 
capital to improve U.S. transportation infrastructure--public-private 
partnerships are responsive to a crisis of performance in government 
stewardship of the transportation network and traditional procurement 
approaches. DOT noted that highway public-private partnerships can 
bring discipline to the decision-making process, result in more 
efficient use of resources, and produce lower capital and operating 
costs, resulting in lower total costs of projects than under 
traditional public procurement approaches. DOT stated that traditional 
procurement approaches produce comparatively inferior results. 

We agree with DOT that highway public-private partnerships have the 
potential to provide many benefits and that a number of performance 
problems characterize the current federal-aid highway program. Our 
draft report discusses the potential benefits cited by DOT, although we 
revised our draft report to better clarify the potential benefits of 
pricing and resource efficiencies of highway public-private 
partnerships that DOT cited in its comments. However, we also believe 
that all the benefits DOT cited are potential benefits--they are not 
assured and can be achieved only through careful, comprehensive 
analysis to determine whether public-private partnerships are 
appropriate in specific circumstances and, if so, how best to structure 
them. Among the benefits that DOT cited was the ability of highway 
public-private partnerships to supply additional capital to improve 
transportation infrastructure. As our report states, this capital is 
not free money but is rather a form of privately issued debt that must 
be repaid to private investors seeking a return on their investment by 
collecting toll revenues. Regarding DOT's comment about policy failures 
in the federal-aid highway program, we believe the most direct strategy 
to address performance issues is to reexamine and restructure the 
program considering such factors as national interests in the 
transportation system and specific performance-related goals and 
outcomes related to mobility. Such a restructuring would help (1) 
better align and allocate resources, (2) promote proper pricing, (3) 
achieve defined results, and (4) provide incentives for innovation. We 
believe our report places highway public-private partnerships in their 
proper context as viable potential alternatives that must be considered 
in such a reexamination and, therefore, made no further changes to the 
report. 

Regarding DOT's characterization of a crisis of performance in 
government stewardship of the transportation network and assertion that 
the traditional procurement approaches produce comparatively inferior 
results, our past work has recognized concerns about particular 
projects and public agencies, as well as improvements that are needed 
to public procurement processes in general. It was not within the scope 
of our review to systematically compare the results of projects 
acquired through public-private partnerships with those acquired 
through traditional procurement approaches. Nevertheless, we believe 
neither our work--nor work by others--provides a foundation sufficient 
to support DOT's sweeping characterization of public stewardship as a 
"crisis," or its far-reaching conclusion that traditional procurement 
approaches produce inferior results compared with public-private 
partnerships. We, therefore, made no further changes to our report. 

DOT also disagreed with much of our discussion concerning protection of 
the public interest in highway public-private partnerships. DOT stated 
that many federal and state laws govern how transportation projects are 
selected and delivered, including highway public-private partnerships, 
and that the draft report did not explain why highway projects 
delivered through public-private partnerships pose additional 
challenges to protecting the public interest, or why there should be a 
greater interest in such projects than in highways built and operated 
by state and local governments. In response to DOT's comments, we added 
additional information to the final report about initiatives that 
certain states have taken to identify and protect the public interest 
in highway public-private partnerships. We agree that federal and state 
laws governing traditional highway procurement contain mechanisms to 
protect the public interest and that many of the public interest 
concerns are the same regardless of how the project is delivered. 
However, we continue to believe that additional and more systematic 
approaches are necessary with highway public-private partnerships given 
the long-term nature of concession agreements (up to 99 years in some 
cases), the potential loss of public control, and the fact that private 
entities are not accountable to the public in the same way public 
agencies are. 

Similarly, DOT disagreed with our discussion of national public 
interests and stated that our draft report did not explain why highway 
projects undertaken through highway public-private partnerships raise 
issues of potential national interests more so than if a state or local 
government undertook them. DOT stated that the report did not 
adequately explain how highway public-private partnerships impact 
national interests, such as interstate commerce, that would allow 
policy makers to clearly understand the nature of those concerns and 
assess what actions are needed to address them. As stated above, we 
agree that highway projects delivered through state and local 
governments raise many of the same concerns but that additional and 
more systematic approaches are necessary with highway public-private 
partnerships. Furthermore, it was not the objective of our report to 
define what the national interest concerns were on particular projects 
or to suggest what actions were needed to address such concerns. 
Rather, our report illustrates that such projects may have implications 
for national interests, and that it is important to consider such 
interests and their implications up-front as part of the decision- 
making process in order to ensure that any potential concerns are 
identified, evaluated, and resolved. At the current time, there is 
little mechanism to allow such consideration when federal funds are not 
involved with a project. As discussed in our report, the reexamination 
of federal transportation programs, which we have called for in 
previous reports, provides an opportunity to determine the most 
appropriate structure of these federal programs, where highway public- 
private partnerships fit into this structure, and the identification of 
national interests associated with highway public-private partnerships. 

Finally, DOT indicated that the scope of our work focused primarily on 
a subset of public-private partnerships involving long-term concession 
agreements and, as a result, our conclusions cannot be generalized to 
other types of public-private partnerships. We agree with DOT that the 
scope of our work only focused on a subset of all types of public- 
private partnerships. Our report acknowledges that there are also 
public-private partnerships in nontransportation areas, as well as in 
other modes of transportation (such as mass transit). We also 
acknowledge that there are other types of highway public-private 
partnerships, such as availability payments, that are not included in 
our scope. In response to DOT's comments, we made these scope 
limitations clearer in our report and acknowledged that the findings 
and conclusions of our report cannot necessarily be extrapolated to 
other types of public-private partnerships. 

Our draft report recommended that DOT develop and submit to Congress a 
legislative proposal that establishes objective criteria for 
identifying national public interests in highway public-private 
partnerships, including any additional legal authority required by the 
Secretary of Transportation necessary to develop regulations, guidance, 
and assessment tools, as appropriate, to ensure such interests are 
protected in future highway public-private partnerships. DOT disagreed 
with this recommendation, stating that the draft report did not provide 
sufficient evidence to explain why the federal government should 
intrude on inherently state activities or to justify a more expansive 
federal role. Instead, DOT stated that federal involvement should be 
limited in order to allow these arrangements to grow and provide the 
benefits of which they are capable. As discussed in our report, the 
reexamination of federal transportation programs provides an 
opportunity to determine the most appropriate structure of these 
federal programs, where highway public-private partnerships fit into 
this structure, and the identification of potential national interests 
that are associated with highway public-private partnerships. We 
believe that once these specific national interests have been 
established, instead of necessarily leading to a more expansive federal 
role, the federal government can play a more targeted role--including 
ensuring that identified national interests in highway public-private 
partnerships are considered by states and localities, as appropriate. 
We have, therefore, deleted our recommendation but have instead 
suggested that Congress consider directing DOT to undertake these 
actions. 

We also recommended that the Secretary of Transportation direct the 
Administrator of FHWA to clarify federal-aid highway regulations on the 
methodology for determining excess toll revenue, including a reasonable 
rate of return to private investors in highway public-private 
partnerships. DOT indicated, in response to this recommendation, that 
it would reexamine the regulations and take appropriate action, as 
necessary, to ensure the regulations are clear. Therefore, we made no 
change to the recommendation. 

DOT also provided technical comments that were incorporated, as 
appropriate. We also obtained comments from states, localities, and 
organizations in the foreign countries included in our review. In 
general, these comments were technical in nature and were incorporated 
where appropriate. 

We are sending copies of this report to appropriate congressional 
committees; the Secretary of Transportation; the Administrator of the 
Federal Highway Administration; and the Director, Office of Management 
and Budget. We also will make copies available to others upon request. 
In addition, the report will be available at no charge on the GAO Web 
site at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions concerning this report, please 
contact me at (202) 512-2834 or [email protected]. Contact points for our 
Office of Congressional Relations and Public Affairs Office may be 
found on the last page of this report. GAO staff that made major 
contributions to this report are listed in appendix III. 

Signed by: 

JayEtta Z. Hecker: 
Director Physical Infrastructure Issues: 

Congressional Requesters: 

The Honorable James M. Inhofe: 
Ranking Member: 
Committee on Environment and Public Works: 
United States Senate: 

The Honorable Peter A. DeFazio: 
Chairman: 
Subcommittee on Highways and Transit: 
Committee on Transportation and Infrastructure: 
House of Representatives: 

The Honorable Richard J. Durbin: 
United States Senate: 

[End of section] 

Appendix I: Scope and Methodology: 

Our work was focused on federal surface transportation and highway 
programs and the issues associated with use of private sector 
participation in providing public transportation infrastructure. In 
particular, we focused on (1) the benefits, costs, and trade-offs 
associated with highway public-private partnerships; (2) how public 
officials have identified, evaluated, and acted to protect the public 
interest in public-private partnership arrangements; and (3) the 
federal role in highway public-private partnerships and potential 
changes needed in this role. Our scope was limited to identifying the 
primary issues associated with using public-private partnerships for 
highway infrastructure and not in conducting a detailed financial 
analysis of the benefits and costs of specific arrangements. We 
selected recent projects to review, such as the lease of the Chicago 
Skyway and the Indiana Toll Road and planning for the Oregon and Trans- 
Texas Corridor (TTC), to understand decision-making processes. These 
projects were selected because they were recent examples of highway 
public-private partnerships, were large dollar projects, or used 
different approaches to highway public-private partnerships. We also 
spoke with states that were considering highway public-private 
partnerships, including California, New Jersey, and Pennsylvania. 

It was not our intent to review all highway public-private partnerships 
in the United States. We also did not review all types of highway 
public-private partnerships. For example, we did not review highway 
public-private partnerships involving shadow tolling or availability 
payments. In shadow tolling, the public sector pays a private sector 
company an amount per user of a roadway as opposed to direct collection 
of a toll by the private company. In availability payments, a private 
company is paid based on the availability of a highway to users. These 
were not included in our scope and the findings and conclusions of this 
study cannot necessarily be extrapolated to those or other types of 
public-private partnerships. In reviewing highway public-private 
partnerships, it was not our intent to either endorse or refute these 
projects but rather to identify key public policy issues associated 
with using public-private partnerships to provide highway 
infrastructure. 

To identify the benefits, costs, and trade-offs associated with public- 
private partnerships for tolled highway projects, we collected and 
reviewed relevant documents including concession agreements, planning 
documents, toll schedules, guidance, and academic, corporate, and 
government reports. We obtained toll schedule data from the Chicago 
Skyway concession company and used them to project a range of future 
maximum toll rates using Congressional Budget Office estimates of 
future growth rates for gross domestic product (GDP) and the consumer 
price index (CPI) and Census Bureau forecasts for population growth (in 
order to determine forecasted per capita GDP). We also conducted 
interviews with public-sector representatives from state departments of 
transportation; elected officials; public-interest groups; municipal 
planning organizations; Federal Highway Administration (FHWA) 
representatives; and other representatives at municipal, state, and 
federal levels. We also spoke with foreign government representatives 
in the United Kingdom, and we visited relevant public-and private- 
sector representatives in Canada, Spain, and Australia to understand 
the foreign perspective and to identify common benefits, costs, and 
trade-offs experienced in other countries. The countries we visited to 
obtain information on highway public-private partnerships was based on 
those countries that had a history of using highway public-private 
partnerships to obtain highway infrastructure, had highway public- 
private partnerships in place for a period of time so lessons learned 
could be determined, or had developed tools to assess public interest 
issues. These foreign public-private partnership experiences were 
compared with experiences in the United States. We conducted interviews 
with the private-sector concessionaires, financial investors, and 
legal, technical and financial advisors to the public and private 
sectors. Finally, we visited public-private partnership projects, 
including the Chicago Skyway, the Indiana Toll Road, and the 407 
Express Toll Road (ETR) in Toronto, Canada. 

To assess the reliability of the Chicago Skyway historic toll data, we 
(1) reviewed sources containing historic toll information, including 
the city's request for qualifications from potential concession 
companies, an academic paper, and a relevant journal article and (2) 
worked closely with the Assistant Budget Director for the city of 
Chicago to identify any data problems. We found a discrepancy in the 
toll rates and brought it to the official's attention and worked with 
him to determine the correct historic toll rates. We determined that 
the data were sufficiently reliable for the purposes of this report. To 
estimate each year's population in order to estimate annual GDP per 
capita, we used the Census Bureau's interim population projections, 
which were created in 2004, and which project population growth in 10- 
year increments. We computed the average annual rate of increase in 
estimated population for every 10-year period and then used each 10- 
year period's annual average rate of increase to estimate the 
population for each year in that period. As a base population estimate, 
we used the Census Bureau's population estimate of just over 303 
million on January 1, 2008. We divided the forecasted nominal GDP for 
every year by the projected population in that year to determine the 
forecasted per capita nominal GDP. We determined the Census Bureau data 
were reliable for use by checking for obvious errors or omissions, as 
well as anomalies such as unusual data points. We used the CPI to 
convert past and projected toll rates to 2007 dollars. To convert 
amounts denominated in foreign currencies, we converted to 2007 U.S. 
dollars using the Organization for Economic Cooperation and 
Development's purchasing power parities for GDPs. To obtain information 
on the value of concession agreements and the use of lease proceeds, we 
obtained financial information from the concession companies and state 
representatives. 

To determine how public officials have identified, evaluated, and acted 
to protect the public interest in public-private partnership 
arrangements, we conducted site visits of highway public-private 
partnerships and visited selected foreign countries with long-term 
experience of conducting highway public-private partnerships. We 
visited the state of Oregon to examine three potential public-private 
partnership projects in the metropolitan Portland region. We also 
conducted site visits for the Chicago Skyway and Indiana Toll Road, as 
well as the TTC in Texas, and the 407 ETR in Toronto, Canada. We also 
conducted visits to Spain, the states of New South Wales, and Victoria 
in Australia. For each site visit, we met with relevant officials from 
public sector agencies, such as state departments of transportation and 
state financial agencies, consultants and advisors to the public 
sector, including legal, financial, and technical advisors; the private 
sector operators; and other relevant stakeholders, such as users 
groups. Interviews covered a wide range of topics, including a 
discussion of how the public interest was defined, evaluated and 
protected in the relevant public-private partnership project. In 
addition to conducting interviews, we collected relevant documents, 
including legal contracts, public interest assessment tool guidance, 
procurement documents, financial statements, and reports, and analyzed 
them as necessary. Where appropriate, we reviewed contracts for certain 
public interest mechanisms. In addition to those site and country 
visits, we met with officials from British Columbia, Canada, and the 
United Kingdom to discuss their processes and tools for evaluating and 
protecting the public interest. We also held interviews with officials 
of FHWA and collected and analyzed policy and legal documents related 
to public interest issues. 

To address the federal role in highway public-private partnerships, we 
reviewed pertinent legislation; prior GAO reports and testimonies; and 
other documents from FHWA, state department of transportation (DOT), 
and foreign national and provincial governments. This included policy 
documents from DOT, the public-private partnership Internet Web site 
developed by FHWA, model legislation prepared by FHWA, the FHWA public- 
private partnership manual, and various public presentations made by 
FHWA officials about highway public-private partnerships issues. We 
also obtained data from FHWA on the use of the SEP-14 and SEP-15 
processes, including a list of projects approved to use these 
processes. Further, we obtained data from FHWA on the use of private 
activity bonds in the context of highway-related projects. After 
checking for obvious errors or omissions, we deemed these data reliable 
for our use. We discussed federal tax issues, including deduction from 
income of depreciation for highway public-private partnerships, with 
both FHWA and a tax expert associated with the Chicago Skyway lease. 
Our discussion of national interests in highway projects was based on a 
review of DOT's fiscal years 2006 to 2011 strategic plan, documentation 
of the Department of Defense Strategic Highway Network, and pertinent 
legislation related to the National Highway System. We also interviewed 
FHWA officials, officials from state DOTs and local governments, 
officials from private investment firms, and officials from foreign 
national and provincial governments that have entered into highway and 
other public-private partnerships. Discussions with FHWA included 
clarifying how it determines such things as reasonable rates of return 
on highway projects where there is private investment and the use of 
proceeds when there is federal investment in a highway facility that is 
leased to the private sector. Where feasible, we corroborated these 
clarifications with documents obtained from FHWA. 

We conducted this performance audit from June 2006 to February 2008 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. 

[End of section] 

Appendix II: Profile of GAO Public-Private Partnership Case Studies: 

Case Study: Chicago Skyway, Chicago, Illinois: 

Project description: The Chicago Skyway is a 7.8-mile elevated toll 
road connecting Interstate 94 (Dan Ryan Expressway) in Chicago to 
Interstate 90 (Indiana Toll Road) at the Indiana border. Built in 1958, 
the Skyway was operated and maintained by the city of Chicago 
Department of Streets and Sanitation. In March 2004, the city of 
Chicago issued a request for qualifications from potential bidders 
interested in operating the facility on a long-term lease basis. It 
received 10 responses and in May 2004 invited five groups to prepare 
proposals. Bids were submitted in October 2004, with the long-term 
concession awarded to the Skyway Concession Company (SCC) that included 
Cintra and Macquarie on October 27, 2004. This was the date the 
contract was signed. 

Project concession fee: Cintra/Macquarie bid $1.83 billion. 

Concession term: 99 years. 

Institutional arrangements: Cintra is a part of Grupo Ferrovial, one of 
the largest infrastructure development companies in Europe and 
Macquarie Infrastructure Group, a subsidiary of Macquarie Bank Limited, 
Australia's largest investment bank. SCC assumed operations on the 
Chicago Skyway on January 24, 2005. SCC is responsible for all 
operating and maintenance costs of the Chicago Skyway but has the right 
to all toll and concession revenue. This agreement between SCC and the 
project sponsor, city of Chicago, was the first long-term lease of an 
existing public toll road in the United States. 

Financing: Original financial structure was: Cintra equity---$485 
million; Macquarie equity--$397 million; and bank loans--$1 billion 
(approximately). SCC subsequently refinanced the capital structure in 
2005, which reduced the equity holdings of Cintra and Macquarie to 
approximately $500 million. Originally financed by European banks, the 
$1.550 billion refinancing also included Citgroup. The refinancing 
involved capital accretion bonds ($961 million) with a 21-year maturity 
with an interest rate equivalent to 5.6 percent. There is an additional 
$439 million in 12-year floating rate notes, and $150 million in 
subordinated bank debt provided by Banco Bilbao Vizcaya Argentaria and 
Santander Central Hispano of Spain, together with Calyon of 
Chicago.[Footnote 53] 

Revenue sources: Based on tolls: up to $2.50 until 2008; $3.00 until 
2011, $3.50 until 2013, $4.00 until 2015, $4.50 until 2017, $5.00 
starting in 2017. 

Lease proceeds: Proceeds from the agreement paid off $463 million of 
existing Chicago Skyway debt; $392 million to refund long-and short- 
term debt and to pay other city of Chicago obligations; $500 million 
for long-term and $375 million for a medium-term reserve for the city 
of Chicago, as well as a $100 million neighborhood, human, and business 
infrastructure fund to be drawn down over 5 years. 

Case Study: Indiana Toll Road, Northern Indiana: 

Project description: The Indiana Toll Road stretches 157 miles across 
the northernmost part of Indiana from its border with Ohio to the 
Illinois state line, where it provides the primary connection to the 
Chicago Skyway and downtown Chicago. The Indiana Toll Road links the 
largest cities on the Great Lakes with the Eastern Seaboard, and its 
connections with Interstate 65 and Interstate 69 lead to major 
destinations in the South and on the Gulf Coast. For the past 25 years, 
the Indiana Toll Road has been operated by the Indiana DOT. In 2005, 
the Governor of Indiana tasked the Indiana Finance Authority to explore 
the feasibility of leasing the toll road to a private entity. A Request 
for Toll Road Concessionaire Proposals was published on September 28, 
2005. Eleven teams submitted proposals by the October 26 deadline. The 
lease concession was awarded to Indiana Toll Road Concession Company 
LLC (ITRCC) comprised of an even public-private partnership between 
Cintra and Macquarie. 

Project concession fee: ITRCC submitted the highest bid of $3.8 
billion. 

Concession term: 75 years. 

Institutional arrangements: ITRCC is composed of a 50/50 public-private 
partnership between Cintra, which is part of Grupo Ferrovial, and 
Macquarie Infrastructure Group. The Indiana Toll Road lease transaction 
was contingent upon authorizing legislation. House Enrolled Act 1008, 
popularly known as "Major Moves," was signed into law in mid-March 
2006. On April 12, 2006, the Indiana Toll Road and the Indiana Finance 
Authority executed the "Indiana Toll Road Concession and Lease 
Agreement." Pursuant to its terms, the Indiana Finance Authority agreed 
to terminate the current operational lease to the Indiana DOT. A 10- 
member board of directors oversees ITRCC and its operations of the 
Indiana Toll Road. ITRCC formally assumed operational responsibility 
for the toll road on June 29, 2006. 

Financing: The financing structure is Cintra Equity--$385 million; 
Macquarie Equity--$385 million; and bank loans--$3.030 billion. Loans 
were provided by a collection of seven European banks: (1) Banco Bilbao 
Vizcaya Argentaria SA; (2) Banco Santander Central Hispano SA; and (3) 
Caja de Ahorros y Monte de Piedad de Madrid, all of Spain; BNP Paribas 
of France; DEPFA Bank of Germany; RBS Securities Corporation of 
Scotland, and Dexia Crï¿½dit Local, a Belgian-French bank. 

Revenues: Based on tolls: $8.00 through June 30, 2010, for two-axle 
vehicles with higher tolls for three-to seven-axle vehicles. From June 
30, 2011, tolls can be based on 2 percent or the percentage increase of 
the CPI or per capita nominal GDP whichever is greater. 

Lease proceeds: The concession fee will provide funding for the Major 
Moves program, which will support about 200 new construction and 200 
major preservation projects around the state, including beginning 
construction of Interstate 69 between Evansville and Indianapolis. The 
proceeds will also fund projects in the seven toll road counties and 
provide $150 million over 2 years to all the state's 92 counties for 
roads and bridges. 

Case Study: Trans-Texas Corridor, Texas: 

Project description: The TTC program is envisioned to be a 4,000-mile 
network consisting of a series of interconnected corridors containing 
tolled highways for automobile traffic and separate tolled truckways 
for motor carrier traffic; freight, intercity passenger, and commuter 
rail lines; and various utility rights-of-way. The Texas Transportation 
Commission formally adopted a TTC action plan in June 2002, which 
identified four priority segments of the TTC, which roughly parallel 
the following existing routes: Interstate 35 from Oklahoma to San 
Antonio and Interstate 37 from San Antonio south to the border of 
Mexico; Interstate 69 from Texarkana to Houston to Laredo and the lower 
Rio Grande Valley; Interstate 45 from Dallas-Fort Worth to Houston; and 
Interstate 10 from El Paso in the west, to the border of Louisiana at 
Orange. Plans call for the TTC to be completed over the next 50 years 
with routes prioritized according to Texas' transportation needs. Texas 
DOT, the state transportation agency, will oversee planning, 
construction, and ongoing maintenance although private vendors can 
deliver the services including daily operations. 

In 2005, the Texas DOT selected a consortium led by Cintra and Zachry 
Construction Corporation under a competitively procured comprehensive 
development agreement (CDA) to develop preliminary concept and 
financing plans for TTC-35, including segments comprising the 600-mile 
Interstate 35 corridor in Texas. Included in this plan are facilities 
adjacent to Interstate 35 between Dallas and San Antonio consisting of 
a four-lane toll road that could eventually include separate truck toll 
facilities, utilities, and freight, commuter, and high-speed rail 
lines. Under the terms of the CDA, Cintra-Zachry produced the master 
development and financial plan for TTC-35. Once the master plan is 
complete, individual project segments--be they road, rail, utilities, 
or a combination of these--may be developed, as specified in the 
separate facility implementation plans as part of the master plan. 
Cintra-Zachry will have the right of first negotiation for development 
of some facilities developed in the master plan subject to Texas DOT's 
approval. According to the Texas DOT, the contract only required the 
department to negotiate in good faith for possible concession contracts 
valuing at least $400 million. The award of the State Highway 130, 
segment 5 and 6 agreement discussed above fully meets the requirements 
of the CDA. However, Cintra-Zachry is eligible for consideration on 
future TTC-35 facilities. 

Project cost: Initial cost estimates for the full 4,000 mile TTC 
project range from $145 billion to $184 billion in 2002 dollars, as 
reported in the Texas DOT's June 2002 TTC Plan. According to the Texas 
DOT, this would include all highway and rail modes fully built as 
envisioned in the 2002 plan. The Texas DOT acknowledges that many of 
the proposed facilities or modes may not be needed. Implementation of 
this plan includes the flexibility to build only what will be needed. 

Institutional arrangements: The consortium Cintra-Zachry, LP is 85 
percent owned by Cintra Concesiones de Infraestructuras de Transporte, 
S.A. and 15 percent owned by Zachry Construction Corporation. Zachry 
Construction Corporation is a privately owned construction and 
industrial maintenance service company located in San Antonio, Texas. 
The Cintra-Zachry team produced the master development plan and 
financial plan for TTC-35. This plan was accepted by the Texas DOT in 
2006. The team may opt to perform additional activities such as 
financing, planning, design, construction, maintenance, and toll 
collection and operation of segments of the approved development plan 
for the corridor, as approved by the Texas DOT and FHWA. 

Project financing: To be determined for entire TTC program. The final 
Cintra-Zachry TTC-35 proposal called for a capital investment of $6 
billion in a tollroad linking Dallas and San Antonio, and $1.2 billion 
in concession payments to Texas DOT for the right to operate the 
facility for 50 years. According to the Texas DOT, the current Master 
Development Plan shows approximately $8.8 billion and $2 billion, 
respectively. 

Revenue sources: Tolls. The CDA between Cintra-Zachry and Texas DOT 
does not specify how toll rates will be set and adjusted or the term of 
any toll concessions for the corridor. According to the Texas DOT, 
state statute and department policy require the Texas DOT to approve 
all rate setting and rate escalating methodologies. The CDA requires 
Cintra-Zachry to be compliant with these regulations. The State Highway 
130 agreement specifically sets toll rates and the formula for future 
adjustments. 

Lease proceeds: To be determined. 

Case Study: Oregon: 

Project descriptions: In January 2006, the Oregon Transportation 
Commission approved the Oregon DOT agreements with the Oregon 
Transportation Improvement Group (OTIG) for predevelopment work on 
three proposed public-private partnership highway projects--Sunrise 
Corridor, South Interstate 205 Widening, and Newberg-Dundee 
Transportation Improvement Projects. The proposed Sunrise Corridor is 
construction of a new four-lane, limited access roadway facility to SE 
172nd (segment 1) and additional transportation infrastructure to serve 
the newly incorporated city of Damascus (segment 2). The proposed South 
Interstate 205 Corridor Improvements project is a widening of this 
major north-south freight and commuter route in the Portland 
metropolitan region. The proposed Newberg-Dundee project is an 
identified alternative corridor (bypass) that is approximately 11 miles 
long, starting at the east end of Newberg and ending near Dayton at the 
junction with Oregon 18. 

Under an agreement with Macquarie, Macquarie will do the predevelopment 
work for all three projects as three separate contracts and will 
internalize the predevelopment costs for each project if that project 
proceeds into implementation. If the project does not proceed, then 
Oregon DOT will reimburse Macquarie for the predevelopment work for 
that project. 

Project updates: 

Sunrise corridor: OTIG and Oregon DOT determined that the Sunrise 
Corridor would not be toll-viable, and decided to indefinitely postpone 
the project. This decision was based on the project not offering 
substantial time savings to other alternative routes in the area and 
the predictability of traffic on the proposed project was uncertain. 
According to an Oregon DOT official, the project will be put on hold 
and may be reconsidered in the future, but it is not considered a 
priority at this time. Oregon DOT paid Macquarie $500,000 for the 
study. 

South Interstate 205 widening: According to an Oregon DOT official, 
this project is not yet listed in the regional transportation plan but 
the environmental review process has already begun. Final decisions on 
whether this project will proceed will not occur until the 
environmental assessment is completed. 

Newberg-Dundee: In July 2007, OTIG and Oregon DOT agreed to cease 
pursuing public-private development of a Newberg-Dundee tolled bypass 
after an independent analysis confirmed that the plan to charge a toll 
on the bypass alone would not produce sufficient revenue to finance the 
planned project under a public-private concession agreement. Instead, 
according to an Oregon DOT official, the project will likely be 
continued under a traditional public sector procurement approach using 
the private sector as contractors. According to this official, the road 
is still expected to be tolled. 

Case Study: Highway 407 ETR, Toronto, Canada: 

Project description: Highway 407 ETR stretches 108 kilometers through 
the Greater Toronto Area. In 1998, as part of the largest privatization 
project in Canadian history at that time, the Province of Ontario put 
out a tender for the operation of the original 68 kilometers of highway 
and the requirement to build the remaining 40 kilometers. Following an 
international competition, the 407 ETR consortium led by Cintra of 
Grupo Ferrovial, SNC-Lavalin and Capital D'Amerique CDPQ was awarded 
the 99-year contract in 1999. 

Project cost: $3.1 billion Canadian dollars for a 99-year lease. 

Institutional arrangements: The 407 ETR consortium was initially led by 
Cintra of Grupo Ferrovial, SNC-Lavalin and Capital D'Amerique CDPQ. In 
2002, Macquarie Infrastructure Group purchased all of Capital 
D'Amerique CDPG's interest in the toll road. 

Revenue sources: Tolls are based on level of traffic flow. Toll rates 
are guaranteed to increase at 2 percent per year for the first 15 years 
and by an amount set by the concessionaire if traffic exceeds certain 
traffic levels. 

Lease proceeds: Most of the proceeds were deposited into a general 
consolidated revenue fund and each resident of Ontario received a $200 
check from the government for the sale. 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

JayEtta Z. Hecker, (202) 512-2834 or [email protected]: 

Staff Acknowledgments: 

In addition to the individual named above, Steve Cohen, Assistant 
Director; Jay Cherlow; Colin Fallon; Greg Hanna; John Healey; Carol 
Henn; Bert Japikse; Richard Jorgenson; Maureen Luna-Long; Teague Lyons; 
Matthew Rosenberg; Michelle Su; Richard Swayze; and James Wozny made 
key contributions to this report. 

[End of section] 

Footnotes: 

[1] GAO, Performance and Accountability: Transportation Challenges 
Facing Congress and the Department of Transportation, GAO-07-545T 
(Washington, D.C.: Mar. 6, 2007). The Highway Trust Fund is made up of 
two accounts, the Highway Account and the Mass Transit Account. In 
fiscal year 2005, the Highway Trust Fund had total receipts of about 
$37.9 billion of which the Highway Account represented $32.9 billion 
and the Mass Transit Account about $5.0 billion. 

[2] GAO-07-545T. 

[3] GAO, Highlights of a Forum Convened by the Comptroller General of 
the United States: Transforming Transportation Policy for the 21st 
Century, GAO-07-1210SP (Washington, D.C.: Sept. 19, 2007). 

[4] American Association of State Highway and Transportation Officials, 
Transportation - Invest in Our Future: Future Needs of the U.S. Surface 
Transportation System (February 2007). 

[5] For example, FHWA views "design-build" contracting, under which a 
single contractor designs and constructs a facility under the same 
contract, as a public-private partnership. 

[6] National Surface Transportation Policy and Revenue Study 
Commission, Report of the National Surface Transportation Policy and 
Revenue Study Commission, Transportation for Tomorrow, December 2007. 
This commission was created under SAFETEA-LU. 

[7] Qualified PABs are tax-exempt bonds issued by a state or local 
government, the proceeds of which are used for a defined qualified 
purpose by an entity other than the government that issued the bond. 

[8] See GAO, Federal-Aid Highways: Increased Reliance on Contractors 
Can Pose Oversight Challenges for Federal and State Officials, GAO-08-
198 (Washington, D.C.: Jan. 8, 2008), for more information about 
contracting of highway work. 

[9] U.S. Department of Transportation, Federal Highway Administration, 
Synthesis of Public-Private Partnership Projects for Roads, Bridges & 
Tunnels From Around the World-1985-2004, Aug. 30, 2005. This report was 
prepared by AECOM Consult Team. According to FHWA, the data used for 
this report was based on information developed and maintained by the 
editor of Public Works Financing, a periodical that provides 
information and views regarding financing issues, trends, methods, and 
projects involving public-use infrastructure, and should be considered 
approximate. 

[10] GAO, Highways and Transit: Private Sector Sponsorship of and 
Investment in Major Projects Has Been Limited, GAO-04-419 (Washington, 
D.C.: Mar. 25, 2004). 

[11] As of April 2007. 

[12] Spain did not pursue new public-private partnerships during the 
period 1985 to 1995 because the government in power during that period 
pursued toll-free roads instead. 

[13] This amount has been converted to U.S. dollars from Canadian 
dollars using the Organization for Economic Cooperation and 
Development's purchasing power parities for gross domestic products. 

[14] GAO, Transportation Infrastructure: Cost and Oversight Issues on 
Major Highway and Bridge Projects, GAO-02-702T (Washington, D.C.: May 
1, 2002); GAO, Federal-Aid Highways: FHWA Needs a Comprehensive 
Approach to Improving Project Oversight, GAO-05-173 (Washington, D.C.: 
Jan. 31, 2005). 

[15] Seventy-four percent of highway projects met the goal in 2004; 79 
percent met the goal in 2005; and 82 percent met the goal in 2006. 

[16] U.S. Department of Transportation, Report to Congress on Public- 
Private Partnerships (December 2004). 

[17] However, profits are not always guaranteed and bankruptcies have 
resulted, as discussed earlier. 

[18] According to the Chief Executive Officer of the Chicago Skyway, 
"concession rights" is treated as an Internal Revenue Code section 197 
intangible and is amortized in 15 years, regardless of the lease term 
or the useful life of the asset. However, costs allocated to "tangible 
assets" are subject to the normal depreciation rules. This official 
also told us that about $1.5 billion of the Chicago Skyway lease amount 
was for concession rights, and $334 million was allocated to the 
tangible asset. 

[19] 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. 

[20] Prior to the passage of SAFETEA-LU in 2005, only public agencies 
could issue federal tax-exempt bonds. 

[21] FHWA has approved another private activity bond for $1.866 billion 
for SH-121 in Texas. However, Texas is currently awarding that contract 
to the North Texas Toll Authority, a public toll authority, which has 
stated that it will not use private activity bonds for this project. 

[22] This official also told us that the refinancing occurred to reduce 
the initial equity investment in the project (which was nearly 50 
percent) and increase the debt investment. Investment officials told us 
that typically private investment in highway public-private 
partnerships is 40 percent equity and 60 percent debt. 

[23] GAO, Highway Finance: States' Expanding Use of Tolling Illustrates 
Diverse Challenges and Strategies, GAO-06-554 (Washington, D.C.: June 
28, 2006). 

[24] According to FHWA officials, some states have dealt with toll 
equity and income levels with various assistance packages for low- 
income users. 

[25] In Chicago, tolls are subject to scheduled increases until 2017 
and, in Indiana, until mid-2010. 

[26] Potential future tolls on the Chicago Skyway in this analysis were 
limited to a 40-year horizon due to the unreliability of GDP 
projections beyond this time period. See appendix I for further 
information on toll projections used for this analysis. 

[27] As discussed earlier, under terms of the concession agreement and 
estimated increases in nominal GDP, our analysis shows that tolls on 
the Chicago Skyway will be permitted to increase in real terms nearly 
97 percent (about 1.7 percent annually) from 2007 to 2047. In nominal 
terms, this is a total increase of nearly 397 percent (or about an 
average annual increase of just over 4 percent). 

[28] GAO-04-419. 

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

[30] The Chief Financial Officer of the California DOT noted that the 
cost of buying back the road was still below what it would have cost 
the public sector to build it and that the road has proven to be a 
valuable asset. 

[31] The Texas DOT noted that the moratorium included a number of 
exceptions. 

[32] As discussed earlier in this report, refinancing may occur early 
in a concession period as the initial investors either attempt to "cash 
out" their investment--that is, sell their investment to others and use 
the proceeds for other investment opportunities--or obtain new, lower 
cost financing for the existing investment. Refinancing may also be 
used to reduce the initial equity investment in public-private 
partnerships. 

[33] As discussed earlier, the Orange County Transportation Authority 
purchased the rights to operate the SR-91 managed lanes so it would no 
longer be constrained by the noncomplete clause preventing it from 
conducting needed work on the adjacent untolled publicly operated 
lanes. 

[34] A living wage is a wage that is above federal or state minimum 
wage requirements and is considered the wage needed for a full-time 
worker to support a family at some level above the federal poverty 
line. 

[35] According to the Skyway Concession Company, none of the five 
employees stayed with the concessionaire. 

[36] The Melbourne City Link Authority was initially responsible for 
oversight of the CityLink toll road. This organization was ultimately 
absorbed into VicRoads, the public agency responsible for all of 
Victoria's roads. 

[37] For more information, see Public-Private Partnerships Victoria, 
Information Brochure, Government of Victoria, [hyperlink, 
http://www.vic.gov.au/treasury] (undated). 

[38] An official with the New South Wales Department of Treasury stated 
that New South Wales has a well-established methodology for determining 
discount rates, which is based on the Capital Asset Pricing Model. In 
addition, in February 2007, the New South Wales government released a 
technical paper to assist in the determination of appropriate discount 
rates in evaluating private financing proposals for public sector 
projects. 

[39] According to a concessionaire official, the connector ramp from 
the Chicago Skyway to Interstate 94 was not transferred as part of the 
lease. 

[40] GAO, Highway Infrastructure: Stakeholders' Views on Time to 
Conduct Environmental Reviews of Highway Projects, GAO-03-534 
(Washington, D.C.: May 23, 2003). 

[41] Under SEP-15, FHWA allows a waiver of certain federal regulations 
to permit private sector involvement in projects prior to completion of 
the environmental review process. A more detailed discussion of SEP-15 
can be found later in this report. 

[42] FHWA officials told us that, since the FHWA's SEP-15 approval of 
this project, Congress enacted section 1503 of SAFETEA-LU requiring 
FHWA to revise its design-build regulations to permit the release of an 
RFP and the award of a design-build contract prior to the completion of 
the environmental review process. On August 14, 2007, the FHWA 
published a final rule implementing the new regulations. 

[43] U.S. Department of Transportation, National Strategy to Reduce 
Congestion on America's Transportation Network (May 2006). 

[44] These alternative techniques include cost-plus-time bidding, lane 
rental, design-build contracting, and warranty clauses. 

[45] In best value contracting, the selection of a contractor is based 
on a combined technical score and price. 

[46] In design-build contracting, the contracting agency specifies the 
end result, and the design criteria and the prospective offerors submit 
proposals based on their selection of design, materials, and 
construction methods. The design-build contracting approach results in 
one award for both the design and construction of a project, thus 
eliminating the need for a separate bidding process for the 
construction phase. 

[47] DOT, FHWA, Manual, p. 36. 

[48] Texas originally applied under SEP-14 but was transferred by FHWA 
to the SEP-15 program. 

[49] Federal Highway Administration, Department of Transportation, 
Manual for Using Public-Private Partnerships on Highway Projects. 

[50] U.S. Department of Transportation, Federal Highway Administration, 
Office of Policy and Governmental Affairs, prepared by AECOM Consult 
Team, User Guidebook on Implementing Public-Private Partnerships for 
Transportation Infrastructure Projects in the United States, Final 
Report Work Order 05-002 (July 7, 2007). 

[51] This Web site can be found at [hyperlink, 
http://www.fhwa.dot.gov/ppp/]. 

[52] Statement of Tyler Duvall, Assistant Secretary of Transportation 
for Policy, U.S. Department of Transportation, Before the Committee on 
Transportation and Infrastructure, Subcommittee on Highways and 
Transit, U.S. House of Representatives, February 13, 2007. 

[53] According to the SCC, some of the interest rates are based on the 
London Interbank Overnight Rate plus various percentages. 

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