8/12/2016Report Examines Equity In Toll Road Deals
Policy paper from the Center for American Progress addresses misconceptions about the way toll roads are financed.
States have increasingly turned to tolling as a solution to heir funding and infrastructure problems. Private tolling companies end up with very little skin of their own in the game when making deals to take over roads, according to a report released Wednesday by the Center for American Progress, a liberal think tank. The group reviewed the US Department of Transportation's Transportation Infrastructure Finance and Innovation Act (TIFIA) federal loan program and found that the two dozen toll road projects it financed with taxpayer dollars had an average value of $1.3 billion but the average equity investment was just $183 million, or 14 percent.
Toll roads are the most common form of public-private partnership in which a state and local governments turn over control of a new or existing road to a company, often based outside the United States. The company that wins the concession is usually (but not always) responsible for maintaining the road, and, in return, the company keeps all or most of the money collected in tolls for 50 to 100 years. In addition, "non compete" provisions in the contract prevent road expansion in nearby side streets or freeways, ensuring there will always be enough congestion to provide an incentive for motorists to pay the toll.
The new report focused on the financial incentive that has been pushing state toward tolling. The most common claim is that public-private partnerships unlock private equity capital that is "sitting on the sidelines" so that it can be invested in badly needed infrastructure.
"The single most important factor constraining overall government investment in infrastructure is not access to credit but rather insufficient government revenues," report author Kevin DeGood explained. "The problem is fundamentally political: The public has a finite willingness to pay the taxes and fees necessary to service project debts."
The paper points out that negative interest rates are a clear sign that governments actually do not have a problem in raising money from capital markets to build a project.
"Investors are paying the federal government to hold their money," DeGood wrote. "The municipal bond market -- as well as the Treasury securities market -- does not have a liquidity problem."
The difference between the traditional financing model in which a local or state government pays for a road with bonds and a public private partnership tolling deal is that investors in the tolling deal have "equity," or a claim on the project's revenue.
"Thus, while municipal bonds and equity investments have different characteristics, the important point is that both are private dollars financing infrastructure projects," DeGood wrote.
The paper concludes that toll roads are not a solution to government funding problems. Instead, the report suggests the public-private funding mechanism is appropriate when handing over management of complex and unfamiliar projects to the private sector.
The Center for American Progress was founded by John Podesta, a former top aide to Presidents Clinton and Obama. A copy of the report is available in a PDF file at the source link below.