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Transportation finance: With cut in federal dollars looming, states mull value of public-private partnerships

by Sean Slone ~ MLC Annual Meeting Edition ~ Stateline Midwest
The possibility of reduced federal transportation funding and the potential of public-private partnerships as a tool for infrastructure development were two issues on the minds of participants in a roundtable discussion held during this summer’s Midwestern Legislative Conference Annual Meeting in Indianapolis.

Indiana Republican Rep. Ed Soliday, who led the discussion, said a plan put forward by U.S. House Transportation and Infrastructure Committee Chairman John Mica puts the future funding challenges for states in sharp focus.

“Congressman Mica has proposed a six-year surface transportation reauthorization act, and it limits federal spending to $38 billion a year flat for the next six years,” Soliday told MLC attendees. “For my state, that would be a 40 percent cut in federal funding … from current levels.”

The potential of a reduced federal commitment comes at a time of increasing infrastructure needs across the Midwest — including in the region’s agricultural areas, where farm-to-market roads are in need of a significant upgrade.

“When I was a boy, farmers brought their crops to market in a two-and-a-half-ton truck or less and a big farm was 500 acres,” Soliday recalled. “Today, farms of 4,000 acres are not uncommon, and crops go to market in an ‘18-wheeler’ — and the roads were not designed for an 18-wheeler.”

In seeking to meet their infrastructure needs, some Midwestern states and cities have turned to the private sector.

The Indiana Toll Road and Chicago Skyway, for example, have both been leased to private firms. In return, Indiana and the city of Chicago received billions of dollars to spend on other infrastructure projects. The city of Chicago has also leased its parking meters to private investors. This year, Michigan Republican Gov. Rick Snyder proposed a public-private partnership to build a new bridge connecting Detroit with Ontario.
And in Ohio’s new two-year budget, Republican Gov. John Kasich has been given the authority to lease the Ohio Turnpike.

But public-private partnerships, or P3s, have had some growing pains. Chicago’s parking meter deal, for example, brought with it significant rate increases that vexed downtown commuters.

“I think we’ve learned from that lesson,” Illinois Democratic Rep. Robyn Gabel told fellow roundtable participants. “Any kind of contract we set up in the future, I don’t think we’re going to again say they can raise rates as high as they want.”

Illinois lawmakers passed legislation this year that authorizes P3s for the construction of new transportation projects while limiting the leasing of existing assets. If signed by the governor (he hadn’t acted on the bill as of early August), HB 1091 would require the General Assembly to approve all potential P3 projects.

Soliday warned, though, that extended state approval processes can scare off investors, as Indiana discovered with its $3.8 billion Toll Road deal.

“We had an offer of $4.6 billion for the Toll Road, and while the legislature … debated, we lost $800 million,” he said. “In the business community, when you have a guy who’s got a billion dollars, he’s going, ‘You’re either in or you’re out.’”

“You want to make certain you don’t so burden your P3 with redundant approvals that you lose investment opportunities.”

Just as legislators have tried to reshape P3s to better protect the public interest, the investment community is pushing back and making demands of their own, said Indiana Democratic Rep. Terri Austin.

“When P3s were first introduced, it was almost as if the private sector was assuming the majority of risk,” she said. “Now that we’ve got a recession and states are scrambling for dollars, and we’re going to see a much reduced allocation probably from the transportation reauthorization bill, what’s happening is the investment community senses that and they are pushing back and demanding more.

“Hence the ability [for them] to raise tolls or raise parking meter rates or whatever. They’re saying, ‘We’ll give you our money, but we want you to share more of the risk.’”