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PPP Dot Oig Final Report 7-28-2011 508 PDF (from MN Trucking Association)

PPP Dot Oig Final Report 7-28-2011 508 PDF (from MN Trucking Association)

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PPP Dot Oig Final Report 7-28-2011 508 PDF (from MN Trucking Association)
PPP Dot Oig Final Report 7-28-2011 508 PDF (from MN Trucking Association)

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12/25/2013

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Office of Inspector General 
 
FINANCIAL ANALYSIS OFTRANSPORTATION-RELATED PUBLICPRIVATE PARTNERSHIPS
Federal Highway AdministrationReport Number: CR-2011-147 Date Issued: July 28, 2011
 
 
Memorandum
 
U.S. Department of Transportation
Office of the Secretaryof Transportation
Office of Inspector General
Subject:
INFORMATION: Financial Analysis of Transportation-Related Public Private PartnershipsFederal Highway AdministrationReport No. CR-2011-147
Date:
July 28, 2011
From:
Mitchell BehmAssistant Inspector General for Rail, Maritime andEconomic Analysis
Reply toAttn. of:
JA-50
To:
Federal Highway Administrator Between 2004 and 2006, two toll roads built in the 1950's—a 157-mile road inIndiana and a shorter road in Illinois known as the Chicago Skyway—were leasedto Cintra/Macquaire, a private consortium. These leases were established throughunique financing mechanisms known as Public Private Partnerships (PPPs).Under these agreements, Cintra/Macquarie made multibillion dollar payments tothe State of Indiana and the City of Chicago, and obtained control of the IndianaToll Road and the Chicago Skyway for 75 and 99 years, respectively.In general, PPPs create contractual arrangements between public agencies and private companies, and lead to greater private-sector participation in the financingand delivery of public projects than traditional public financing arrangements.These arrangements have spurred debate among stakeholders. Some questionwhether PPPs serve the public interest, while others point to PPPs as a means toaddress the nation's infrastructure funding problems. In February 2009, the National Surface Transportation Infrastructure Financing Commission reportedthat the nation’s surface transportation system is in “physical and financial crisis”due to shortfalls in Government infrastructure spending, and estimated that theannual average shortfall, or funding gap, from 2008-2035 would be approximately$138 billion.
1
 
1
This represents the total funding necessary to both maintain and improve the highway and transit systems, expressedin 2008 dollars, under the Commission's baseline revenue forecast.
 
2
This report presents the results of our financial analyses of transportation-relatedPPPs. Our objectives were to: (1) identify financial disadvantages to the publicsector of PPP transactions compared to more traditional public financing methods;(2) identify factors that allow the public sector to derive financial value from PPPtransactions; and (3) assess the extent to which PPPs can close the infrastructurefunding gap.To conduct our analyses, we worked with a team of contractors led by CharlesRiver Associates International and financial consultants, Scott Balice Strategies.We based our analyses on representative examples of projects that illustratefeatures of typical transportation infrastructure projects. We patterned theseexamples after, but did not exactly replicate, seven proposed or implemented PPPhighway projects–six in the United States and one in Europe. We compared thecost of financing our example projects through PPPs and traditional financing. Weconducted our analysis from the perspective of a state or local governmentdecision maker selecting a financing alternative However, our analyses did notconsider the impacts of factors such as risk sharing arrangements or the ability of the private sector to deliver a project more expeditiously, which can be significant,and are necessary to arrive at an effective financing decision. We also developed aflowchart of our analysis for decision makers to consider in choosing between PPPfinancing and traditional financing. Exhibit A describes our scope andmethodology in more detail.
RESULTS IN BRIEF
PPPs have several financial disadvantages when compared to traditional publicsector financing. Specifically, PPPs have a higher cost of capital than traditional public financing, and they incur certain tax obligations that do not exist for publicentities. PPPs experience higher costs of capital because interest on PPP debt istaxable while interest on municipal bonds, used by public agencies to pay for infrastructure projects, is tax exempt. Consequently, bond purchasers will acceptlower returns on municipal debt in exchange for the advantages they gain from thetax exemptions. PPPs also face higher costs of capital because, unlike publicfinancing, they involve equity investors who own stakes in the projects, share inthe profits, and expect to earn higher rates of return for the risk they undertake.The private sector also must pay Federal, state and local taxes on certain assetsand net revenues that the public sector generally does not. Our analysis found thatthe impact of these taxes on the relative value of a PPP can be as significant as thehigher cost of capital.Certain private sector efficiencies can meaningfully offset PPPs' costdisadvantages. Principal among these efficiencies are those which lower new

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