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THE P3 IMPERATIVE
Jeffrey N. Shane
Under Secretary for Policy
U.S. Department of Transportation
US P3 Infrastructure Finance Forum 2007
June 22, 2007
New York, New York
I am pleased to have this opportunity to speak to the P3 Infrastructure Finance Forum. Under the leadership of Secretary of Transportation Mary Peters, DOT has made expanding the use of public-private partnerships – “P3’s” -- to finance transportation infrastructure a key component of the Administration’s efforts to improve the transportation system and reduce congestion.
There is more and more interest in forming transportation infrastructure-related public-partnerships. Based on a recent Federal Highway Administration survey, the majority of States are either participating in — or exploring the creation of — a public-private partnership program. Currently, 23 States have some form of legislation that authorizes P3’s for transportation. The 2005 federal surface transportation legislation also took important steps to encourage further development of public-private partnerships by expanding state tolling flexibility, allowing up to $15 billion in private activity bonds to be issued outside state volume caps for highways and intermodal freight facilities, and directing USDOT to streamline design-build regulations.
But none of this is happening without controversy. In some State legislatures and in some parts of the U.S. Congress, elected representatives are questioning the wisdom of encouraging private investment in transportation infrastructure. That’s why, in my remarks this morning, I want to go back to basics and talk about: (1) why we are interested in private investment in the first place – the critical policy challenges for our transportation system and how private investment can help to address those challenges, (2) recent legislative challenges to private sector investment in transportation, and (3) what can or should be done to respond to these challenges.
Critical Policy Challenges
Public-private transportation partnerships are best thought of as another tool in our toolbox. The issue isn’t whether P3’s represent some “silver bullet” that will solve all our transportation problems. It is whether they have the potential to help address those problems -- declining system performance, growing resource scarcity, decision complexity, and weak incentives for innovation.
Declining System Performance. First and foremost, we are suffering an intolerable decline in system performance in the form of travel delays and unreliability. Deteriorating performance in the Nation’s surface transportation infrastructure is acute and widespread, and it affects both passenger travel and freight movement.
For many years, the U.S. enjoyed substantial amounts of excess capacity in many parts of our transportation system. While deregulation gave us a temporary reprieve, that’s all over. In the past 20 years, hours of delay and wasted fuel have each increased by more than four times. The cost of wasted time and fuel for travelers in 2003 was over $60 billion, about 5 times the amount in 1982. If we add the extra time people must allow in planning for congestion delay and the lost productivity associated with it, the annual costs rise to roughly $170 billion. These costs have been growing at about 8 percent per year – almost triple the rate of growth of the economy.
The duration and intensity of delay associated with these costs have all skyrocketed over the past two decades. For example, between 1982 and 2003 U.S. highway congestion increased from affecting 33 percent of travel in 1982 to 67 percent of travel in 2003. Rush hours increased in duration from 4.5 hours per day in 1982 to 7 hours per day in 2003. And the delay associated with the average rush hour driver’s trip increased nearly three-fold -- from 13 percent of normal trip time in 1982 to 37 percent in 2003.
We are far too tolerant of this deterioration. Too many people assume that nothing can be done, that congestion is just a fact of modern life. But if we allow this deterioration to continue, it will have real and significant effects on our economy and quality of life. An increased private sector role can help reverse these negative trends. Because revenues vary directly with throughput, private operators have powerful incentives to reduce congestion and increase the number of vehicles served per hour.
Growing Resource Scarcity. Governments at all levels are finding it very difficult to keep up with the demand for transportation investment. Transportation taxes are increasingly absorbed by rising costs, system preservation, and maintenance needs.
As a matter of long-standing national policy, our principal tool for financing surface transportation infrastructure at the federal level and in most states is a tax on gasoline. But it is also national policy to created more fuel efficient cars and to develop alternatives to fossil fuels. President Bush has called for a 20 percent reduction in the consumption of fossil fuels in the next decade – the so-called “20 in 10” program.
Thus, our wherewithal to add capacity to our vital transportation system – the circulatory system of our national economy – depends mostly on a tax that we impose on a substance the consumption of which we are trying to discourage.
Even if we weren’t actively trying to discourage the use of fossil fuels, the growth in gasoline consumption would continue to be limited by increases in its retail price as well as increases in fuel economy throughout the vehicle fleet.
An obvious response to this dilemma, some observers think, is to raise the gas tax. But political resistance to raising fuel taxes has increased at both the state and federal levels. A recent survey by Washington State’s DOT found that 58 percent of respondents prefer tolls to fund future transportation improvements. Only 26 percent favored higher gas taxes.
At the same time, highway construction costs are growing faster than prices in general, with the cost of construction materials being bid up by the demand from China and India. The cost of construction materials increased 8.5 percent in 2004 and 12.6 percent in 2005. Since 1998, construction costs have increased by 35 percent.
Decision Complexity/Decision Paralysis. Today it takes an average of 13 years to complete a project from the beginning of project planning to ribbon-cutting. You don’t need much more evidence than that to see that the process is broken. Project development and delivery are too complex, bogged down in process requirements, and thus too slow. Politics too often trumps sound planning -- the effort to balance competing interests and maximize societal benefits. Funding availability becomes highly unpredictable, even for the most worthy projects.
The private sector, in contrast, can provide funding that’s far more reliable. Private investors know how to measure economic costs and benefits to ensure that the public interests are being met. Better yet, by being results-driven, private investors have the wherewithal to discipline the project development process in ways that few politicians can, particularly at a time when so many projects are competing for capital.
Weak Incentives for Innovation and Competition. The prevailing policy framework for expanding transportation infrastructure provides insufficiently attractive incentives for innovation and competition. The rewards of technology – for example, extended-life pavements or more sophisticated traveler information systems – accrue broadly to the public at large rather than to specific firms or shareholders. As a result, the current approach rarely delivers the pace of innovation that we are seeing in other infrastructure sectors like telecommunications and energy. P3’s, because there is such a robust and competitive market for these investments, can improve the incentives to innovate, thereby bringing new efficiency and throughput to the highway and public transportation sectors.
Recent Legislative Challenges
In sum, it should be clear to everyone that private investment, properly conceived and administered, can help to address many of the problems that confront our transportation system. But private sector investment is increasingly facing legislative challenges.
On May 10 Chairman Jim Oberstar of the House Transportation and Infrastructure Committee joined with Chairman Peter DeFazio of the House Highways and Transit Subcommittee in sending a letter to governors, state legislators, and state transportation officials through out the United States. The purpose of the letter was to discourage state and local government -- “…from entering into public-private partnership (PPP) agreements that are not in the long-term public interest in a safe, integrated national transportation system that can meet the needs of the 21st Century.”
They said “…that many of the arrangements that have been proposed do not adequately protect the public interest.”
They went on to warn that “[t]he Committee will work to undo any state PPP agreements that do not fully protect the public interest and the integrity of the national system.”
Now nobody thinks it would be a good idea to execute a public-private partnership for transportation infrastructure that isn’t in the public’s interest, so the letter’s importance wasn’t in the information it contained. The letter’s real significance was in the chilling effect it was intended to have on future P3 developments.
Somebody must have complained. Less than a month later the two Congressmen wrote a second letter and addressed it to the same officials. The second letter was more moderate than the first. It did not threaten to “undo” agreements that they deemed not to be in the public interest. In fact, the letter acknowledged that, “Under the right circumstances and conditions, public-private partnerships (PPPs) can lead to more efficient and effective construction, management, operation, and maintenance of transportation facilities.”
Nothing wrong with that. But the letter also made several new suggestions on how P3’s should be limited or regulated that were not included in the May 10 letter. For example, the letter calls for limiting the rate of return on projects, limiting the life of concessions to the design life of the facility, and prohibiting unsolicited proposals.
DOT officials – including this one -- have testified before Congress a number of times about risk factors that State and local officials should consider to protect the public interest when designing P3 projects. We have listed those risk factors on the Federal Highway Administration’s web site together with a lot of other guidance. We will augment that with even more assistance in the near future.
In general, however, we believe the planning and regulatory framework in place now is sufficient to protect the public interest as it is affected by P3’s. Moreover, we think that state and local governments have the primary responsibility for protecting the public interest in such transactions, and find talk of Congress “undoing” P3’s highly unusual. We also think the way in which the “nuts and bolts” specifications of P3 projects are resolved must be flexible so as to respond to the needs of each project.
I could go on in this vein, but I think it is important to step back and try to take these challenges seriously.
Addressing The Challenge
I don’t think we’re doing a very good job of explaining why public-private partnerships are needed, how they can address the problems with the transportation system, where they are most effective, and the mechanisms that can be used and are being used to protect the public interest.
In particular, I believe the investment and construction communities have been conspicuously absent from the public debate on P3’s. Can you imagine how effective a coordinated public information campaign on this issue could be? I challenge you to engage in the public debate.
Contrary to what you may believe, public policy is not the exclusive province of the public sector. The investment community has an important responsibility to explain these approaches more clearly, more frequently, and in terms that are comprehensible to the public at large. You need to do your own op-eds. You need to get involved in the public debate and demonstrate more effectively the potential value that P3’s can bring to a community, or a state, or a region.
We are doing our part. I mentioned earlier the Federal Highway Administration’s website. It now serves up model P3 legislation as a starting point, together with helpful materials on how to protect the public interest in P3 agreements. Secretary Peters has made system performance one of DOT’s central themes, and speaks frequently in her appearances about the importance of non-traditional forms of infrastructure financing.
But the investment banking community needs to step up to the plate too, and it needs to do so now.
Thank you for allowing me to share these thoughts with you this morning.
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