ARTBA CONFERENCE PUBLIC/PRIVATE VERNTURES - GRAT OPPORTUNITY GREAT DANGER

ARTBA CONFERENCE:

Public/private ventures — great opportunity & great danger

A conference on Public-Private Ventures held by the road builders lobby ARTBA Oct 30-31 in Washington DC saw widespread agreement that tolling needs to move from building mere fringe area additions to highway capacity into rebuilding and managing the core expressways of American cities and suburbs. It's where the real traffic is! And the traffic problems. And many of these expressways are physically deteriorating, most are grossly overloaded, and all are candidates crying out for congestion pricing. Boston's Central Artery project that replaces a rusting, ugly, and terribly overloaded 6-lane elevated with a 8 and 10-lane underground road system around the eastern fringe of the central business district is the kind of project most older U.S. cities would like to undertake to enhance both mobility and the quality of the inner city. But the Central Artery which took all the log-rolling skills of the late House Speaker Tip O'Neill to finance — it will cost around $10b — is likely to be one of the last major rebuilds which will be financed with the 90/10 mix of federal and state gas-tax funding that has been the norm for major U.S. highway projects since the 1956 Federal Aid Highway Act.

At ARTBA speaker after speaker talked of the decline in funding from gas tax sources, partly because car fuel economy improvements are eroding the revenue base and partly because at both state and federal levels of government there is great resistance to higher gas taxes. And at the federal level it isn't even just a revenue issue. The bigger problem is that there isn't the support for federal spending on roads, so outlays are slated in the current U.S. budget to drop 20 to 25% over the next six years, while gas tax revenues go to support other kinds of government spending and to reduce the overall budget deficit. Politicians and officials who personally favor higher tax financing say it just won't fly politically.

Norman Mineta, the veteran congressman, now senior at Lockheed said at ARTBA: "The times have changed, and whichever party (is) in control of Congress next year, a gas tax increase is simply not on the cards." He noted projections that the Highway Trust Fund will grow massively to $50b as spending on highway lags behind receipts. So gasoline taxes are inexorably being converted from that uniquely American idea of being a highway user tax into the rest-of-the-world's governments' idea of it being a general revenue raiser.

Everyone's answer is that success in maintaining and improving transport requires private funding. But how to get it in serious amounts?

One idea is public-private ventures in which government grants or subordinate debt will help level the playing field for major tranches of private funds. But the commingling of taxpayer and investor funds is going to be extremely difficult to manage without major scandals and a political backlash that could abort the whole highway reform process. Investors want governments to take the early risks (funding feasibility studies, project proposals, environmental clearances, right of way acquisition), to reduce the cost of borrowing (by accepting subordinate debt) and to participate in (subsidize) projects. All may be fine and well with the projects that go according to plan. Motorists will gladly pay the tolls when they see them as a price for improved highway service. Motorists have proven they will pay to get out of stop&go traffic to get that smoother quicker ride. That isn't an issue. The issue is that inevitably some projects will go sour. They will be built too soon, too lavishly, or they'll be delayed and messed around so they cost more than anyone calculated. They won't attract the traffic expected or support the toll levels assumed...a host of things can go wrong. The zeal that is needed to promote such projects against opposition and difficulty requires the kind of optimistic personality that discounts downside risks. Consultants though they usually attempt to be objective have an incentive to tell the client what he wants to hear. So there will often be a bias towards over-investment. And just by the law of averages there will be failures, and therefore defaults on loans.

In parts of the highway policy fraternity it has become almost an article of faith that there's an important role to be played by state infrastructure banks (SIBs) to which the federal government is contributing $150m this year and state governments more. At the ARTBA conference there was very little discussion of how these SIBs will handle inevitable defaults — beyond jokes about leaving those problems to your successors, and statements that contributions to 'free' roads are currently "100% defaults." People understand that 'free' roads have been built with grants or subsidies in which there is no expectation of repayment, and so there's nothing to default on. The SIBs are supposedly lending, not giving. Taxpayers faced with defaults to SIBs will want to know why their funds have been committed to limit the losses of investors. They aren't used to the comingling of risk. They don't like it when monies taken from them by force (taxes) go to bail out investors (who voluntarily assumed a risk of loss in return for the opportunity to profit.) It is denounced as an intolerable racket, a ripoff.

State banking! Politicians running a bank! Accusations of special-dealing and political scandals will begin to surface soon, and are inevitable once projects go bad, as some must. At the ARTBA conference all the talk, and from lenders (state officials) as well as from potential borrowers, was that these banks have to be very "flexible" in their lending. That's another way of saying: "They must have no criteria for lending, no agreed principles, no bankers' rules and guidelines. They must be free to support anything they want to support." The federal government encourages this freewheeling approach with statements like: "States can customize banks to feature only those financial concepts that best suit a state's needs. States can use just a few or many of the innovative concepts available...." (Innovative Financing Handbook, TE-045" FHWA, Oct 95)

A case can be made for government taking some highway risks and for some highway subsidies, so long as those risks and subsidies are clear at the outset and the distinctions are made between a subsidy and a risk. However the SIB form obfuscates what is risk-taking and what is subsidy. It mixes them all in a single pot and that mix could turn out to be high explosive politics, when the inevitable losses have to be explained. Loss-making banks are acceptable politically so long as the money being lost is that of voluntary investors, but when government is discovered by the electorate to be liable for carrying the losses caused by investor mistakes and 'greed' then a mega-scandal is brewing. Freewheeling state infrastructure banks could blacken the reputation of toll roads in the next five years in the way government-backed S&Ls did to real estate development in the late 1980s. We could get a phony boom, then a spectacular bust when serious defaults occur generating major media coverage and popular indignation. It will be revealed that the government has fueled the boom in the first place by quietly but recklessly agreeing to subordinate debt and hence set itself up for heavy losses. Then with recriminations flying it will feel forced by political pressures to intervene in the industry in an arbitrary heavyhanded fashion to try limiting the scale of the losses.

This is supposed to be a time when government acknowledges its limits, yet with infrastructure banks many state governments are tottering into the treacherous swamps of banking, in which they have no expertise, but many political temptations to make bad loans. The strongest highway projects will be financed without a need for the SIBs, which will inevitably be the banks of last resort, the financiers of projects that investors couldn't make work. So only those highway developers willing to take big political risks will get into these SIBs, which exude the aroma of political pig troughs.

The better way may be: (1) creation of a more level playing field in which by use of electronic tolling competitive presently 'free' highways are made to pay their way like new toll roads or where (2) competition from the 'free' roads is limited in open agreements between DOTs and tollsters such that the 'free' competitors will be limited in their ability to undercut the toll facility with legally enforceable no-capacity-enhancement commitments or even lanage reduction, extra red-time on intersection signals, liberalized curbside parking, more restrictive truck weight limits, lower speed limits etc. (3) scope-of-work rules in which government agencies assume the costs of some clearly-defined parts of new highway projects leaving the rest of the cost to investors. (4) Government should help investors overcome some of the hurdles they themselves raise — like the power they give small jurisdictions to veto projects, and environmental mitigation work that is not really part of the highway project, by funding pre-approval work (5) Any add-ons that governments want to an otherwise economic project like extra interchanges, HOV facilities, and transit right-of-way should be the responsibility of the government to finance. Comment welcome.