The unsuccessful effort last year to lease the Pennsylvania Turnpike to private investors provides valuable lessons for other cash-strapped states seeking to fund their highways and bridges, according to a new report by the Pew Center on the States. With an annual funding gap of $47 billion between the roadway projects the nation needs and those it can afford, states with large deficits and an urgent need to fix aging infrastructure are looking closely at public-private partnerships—a financing approach used in other countries for years but only recently adopted in the United States.
In Pennsylvania, lawmakers debated a proposal to lease the cross-state turnpike to Citi Infrastructure Investors and the Spanish firm Abertis Infraestructuras for an upfront payment of $12.8 billion. The high-profile deal was shelved last fall after a number of legislators refused to support the plan over concerns about the state's financial assumptions and oversight, among other reasons. Pew conducted an in-depth analysis of the state's effort to help policy makers around the country learn from the Pennsylvania experience. The report identifies the information states need and the issues they should consider when evaluating proposed agreements with private companies to fund infrastructure improvements.
“If states want to compete economically, they need sound infrastructure that helps businesses thrive and improves residents' quality of life,” said Susan Urahn, managing director of the Pew Center on the States. “The failure of the Pennsylvania Turnpike lease proposal offers important lessons because private capital is likely to play a growing role in helping states pay for their infrastructure needs.”
Evaluating the Pennsylvania Turnpike Proposal
Public-private partnerships are complex, with no one element automatically rendering a deal “good” or “bad.” The Pew analysis found both positive and negative aspects of the Pennsylvania experience.
Pennsylvania acted responsibly in some key ways:
- The state thoroughly identified its infrastructure needs and conducted due diligence before negotiating with bidders.
- The bidding process was well run and produced the highest possible bid, given the lease terms set by the state and prevailing market conditions at the time.
- Detailed performance standards were set for the life of the lease.
But in other ways, Pennsylvania could have done better:
- Discussions between the executive and legislative branches could have been better handled.
- The financial assumptions related to the deal were overly optimistic.
- The state lacked a clearly articulated plan for how the proceeds would have been invested and spent.
- The proposed oversight mechanism for deciding where to invest the upfront payments and how to spend the proceeds raised questions about transparency, accountability and adequate planning.
- The debate focused disproportionately on the state's short-term financial interests, and lacked adequate consideration of the long-term effects of a lease on taxpayers, the economy and the environment.
Lessons Learned for Future Public-Private Partnerships
Although the federal stimulus package provides $27.5 billion for highway and bridge projects and other legislative proposals promise additional assistance, states still face a considerable funding gap. State and local governments continue to provide more than half of highway and transit funding in America. The share of state government highway funding paid by user fees has declined by nearly 20 percent since 1965, putting more pressure on states' general revenues to close that gap. With as much as $180 billion in private dollars targeted for infrastructure investment, an increasing number of states are likely to consider public-private partnerships in the coming months.
States investigating the feasibility of public-private infrastructure deals should apply the following lessons drawn from the Pennsylvania experience, according to the Pew analysis.
- Passage of enabling legislation that establishes the state's general interests and terms for a public-private partnership before negotiations begin can help set the ground rules as a state considers a specific proposal.
- Transparency and inclusion are crucial to achieving buy-in from policy makers, the public and other stakeholders.
- A state's decision makers must have a clear understanding of the principal goals of a deal, because different goals will require different tradeoffs.
- A proposed deal must be based on realistic financial assumptions.
- Proposals should specifically describe how the revenues a lease will generate will be invested and spent, and how the private operator's performance will be monitored.
- States should consider a long-term lease's effects on the economy, the environment and the next generation of taxpayers.
“Long-term infrastructure deals are often debated with a short-term perspective,” said Michele Mariani Vaughn, a Pew Center on the States researcher who led the effort. “These proposals typically involve billions of dollars and stretch over decades. It's critical that state policy makers and the public have all of the information and answers they need to make a thoughtful and sound decision.”
For the report, Pew Center on the States analysts, working with national and state-level experts, interviewed Pennsylvania officials and advisors, legislators, representatives of the bidders and the Turnpike Commission, and transportation and finance experts. Pew reviewed the lease proposal and relevant documents, and researched similar deals in other states and countries.