INNOVATIVE FINANCECongrssional Office sees niches for road investors -- pessimistic about widespread privatization

INNOVATIVE FINANCE

Congressional Budget Office sees niches for road investors — pessimistic about widespread privatization

A Congressional Budget Office report on “Innovative Financing of Highways” is pessimistic about the prospects for largescale private equity participation in US highways so long as they have to compete with untolled roads. But it endorses the idea of bringing roads into the marketplace, and sees niches that highway investors can usefully and profitably fill.

“When a road is congested, each additional motorist imposes costs related to delays on all other motorists. By acting as price signals, tolls can moderate the demand for use of the road, espeically when premium rates are charged at peak hours...” 91-X is discussed in illustration of the opportunity for value-priced lanes.

Investors can cut costs: “In many situations, private firms can react more nimbly than governments, which are constrained by procurement regulations, employment policies and other red tape; hence firms can be more rsponsive to users’ demands.”

Private sector roads face more scrutiny: “.The profit motive leads private firms to invest in projects that they think will be valued highly enough by users to recoup costs. Private or public/private road projects generally charge tolls; if the tolls are set at the right level, they can help allocate resources among those who are willing and able to pay for them. (They help) to provide incentives for keeping costs under control and to assign risks to the party with the most information and ability to control them...Before a private or a private/public road project is undertaken, it is put to more of a market test, in that it must attract investors, than a public road is ordinarily subjected to. Potential investors will be unwilling to take the risk of financing and building a road for which the expected demand is insufficient to recoup the investment.”

Privatization has some good distributional effects: “Private investment in roads shifts some or all of the cost and risk from government and taxpayers to private investors and usersw of the road.”

Taxpayers should support private involvement: “From the taxpayers standpoint, letting private investors bear the risk and financial burden of building new roads is attractive. Private investors can take advantage of a variety of institutional arrangements for obtaining funds...”

But the report says: “The number of projects that have the potential to offer enough value to motorists that they will be willing to pay tolls when toll-free alternatives are available appears relatively small.”

It finds that the “most promising candidates for tolls in the near term appear to be new roads or additional lanes on existing roads in congested corridors.” The CBO notes that to the extent the highest payoff roads are already built or will be built with tax money, that will leave investors “only lower-priority projects that will be less able to recoup costs through tolls.” However to the extent that political priorities such as georgaphic fair shares have determined taxpayer supported roads “some good candidates (for the private sector) may remain.”

The DC-compost heap: The 68 page paper also contains a useful detailing for Wall Street/DC-nerds of the history and rationale for the grab-bag of different contrivances that go under the banner “innovative financing.” Many of these have little to do with the private sector and are just loopholes for states to get through the bureaucratic tangles of federal conditions and categorizations of funding — new rules to get around old rules. Some is about tax dodges. This is esoteric stuff to master. There are TE-045 matching share requirements, phased funding and tapered matches, flexible matches, partial conversions of advanced funding, toll credits, bond reimbursement, credit enhancements, and lots and lots of varieties of creative (always creative or innovative) leveraging devices. It is Washington composting in which layer upon layer of legalistic litter are laid down on the forest floor, each season’s leaf fall different in subtle ways from the last but the same in essence, the layers being creatively degraded, metamorphosed, the refuse of one fertilizing another, the process wafting ripe odors, while making work and providing food and housing for all manner of busy little bugs.

Private sector fertilizer applied judiciously to the complex ecosystem of federal-state-local financial relations is thought capable of accelerating some of these processes and of making them more productive for roadies. But it is a competitive environment in which it is not easy to anticipate the results of a single intervention because other little actors quickly react, or take their own initiatives to turn the new situation to their advantage. Unintended consequences abound...so the paper is wisely tentative in most of its pronouncements.

An exception is this candid comment on the rationale for state infrastructure banks (SIBs): “By using a SIB, a state may bypass its own constitutional or legislative limits on debt...” (p23) So by sponsoring SIBs the US Govt is helping to subvert the states’ constitutional provisions against state politicians profligacy. There you have it in a nutshell — a quote to be carefully warehoused by fiscal conservatives for ready retrieval. (Contact author Elizabeth Pinkston CBO 202 226 2600 www.cbo.gov ISBN 0-16-049413-3)