Rethinking public-private partnership concession fees on greenfield projects

In April, I read Public Works Financing’s article on the groundbreaking for the long-awaited State Route 400 Express Lanes project in the Atlanta metro area. It’s the largest surface transportation public-private partnership thus far, with the largest-ever Transportation Infrastructure Finance and Innovation Act (TIFIA) loan ($3.89 billion), the largest-ever tax-exempt private activity bond issuance ($3.32 billion), and the largest amount of equity in such a project ($3.36 billion).

All this for 16 miles of barrier-separated express toll lanes. So what’s not to like? 

The article also reported the project’s engineering, procurement, and construction (EPC) cost as $4.6 billion. I’m sure there are good reasons the financing exceeded $12 billion, but that is not my concern here. What actually troubles me is the additional $3.8 billion “concession fee” that SR 400 Peach Partners paid to the Georgia Department of Transportation (GDOT). That sum has no relation to the financing of this record-setting public-private partnership project. And it cannot possibly be a gift to GDOT.

Consequently, the cost of that payment to GDOT will eventually be borne by customers who pay tolls to travel in the new express toll lanes. 

After doing a bit more research, I found two additional instances of concession fees for P3 transportation projects. Another large one is the $1.5 billion fee paid to the Virginia Department of Transportation in connection with the addition of express toll lanes to I-66 Outside the Beltway (OTB).

The other is a proposed $200 million concession fee payable to the Pennsylvania DOT as part of an unsolicited proposal to add express toll lanes to a portion of the highly congested I-76 (Schuylkill Expressway) in Pennsylvania.

To the best of my knowledge, these are the first concession fees paid to state departments of transportation for greenfield projects. 

Concession fees have a long history of funding brownfield transportation projects.

In these projects, a transportation agency had an aging asset (e.g., the Chicago Skyway or the Indiana Toll Road). The agency seeks a P3 company to take over, on a long-term basis, the operation, management, and upgrade of the aging facility. In such cases, the generally large concession fee is the P3 company’s initial cost of leasing the asset for the designated period, typically 30 to 99 years. In this kind of brownfield project and transaction, the P3 company is buying the right to collect tolls and manage the toll road, including needed upgrades and additions.

This model is used worldwide across all kinds of government assets and enterprises. In a relatively small fraction of cases, the asset (airport, highway, railroad, seaport, etc.) is sold, either through competitive bidding or through a public share offering.

During her years as the United Kingdom’s prime minister, Margaret Thatcher used all of these methods to “privatize” existing government assets and enterprises. But the predominant model worldwide is the long-term P3 lease (sometimes referred to as a concession).

Concession fees are used in transactions referred to as asset recycling. Candidates for this kind of public-private partnership (P3) are typically brownfield assets with a revenue stream. The government owner may wish to be free of the obligation to maintain and refurbish such an asset, and it realizes that, because of the revenue stream and reasonable oversight of future rates and charges, the asset may attract companies prepared to enter into a long-term lease.

In such cases, the concession fee is a long-established element in asset recycling. The government that “recycles” the asset typically uses the up-front concession fee for new infrastructure that does not lend itself to user fees (e.g., a major new public park).

Still, it may alternatively use the proceeds to (1) pay down existing debt, or (2) to beef up an underfunded public-employee pension system.

When the state of Indiana privatized the Indiana Toll Road 20 years ago, it used the upfront concession fee to pay off outstanding toll road bonds and fund a 10-year statewide highway investment program.

Brownfield asset recycling is the appropriate setting for a state transportation entity to seek a concession fee. It’s the price a P3 consortium pays for the long-term rights to operate, maintain, improve, and eventually hand back an existing brownfield asset. This is an accepted practice worldwide.

I think a concession fee is inappropriate in a greenfield project, such as adding express toll lanes to a congested highway. In this setting, the cost of the concession fee must be recovered from toll revenues. That is one reason the I-66 Outside the Beltway express lanes have high toll rates, leading to lower usage than on most other express toll lane P3s. 

There is no free lunch. A concession fee on a greenfield toll project is a recipe for considerably higher tolls. Express toll lanes, especially those built and operated by for-profit entities, always have critics. Artificially high toll rates are a gift to toll lane opponents, giving them ammunition to attack and discredit such projects, especially when for-profit entities are developing them.

Concession fees are widely accepted for brownfield P3 infrastructure leases. But concession fees are inappropriate for, and damaging to, the viability of greenfield express toll lanes.

The P3 community would be making a serious mistake by continuing to add concession fees to express toll lane projects.

A version of this column appeared in Public Works Financing.

The post Rethinking public-private partnership concession fees on greenfield projects appeared first on Reason Foundation.

Source: https://reason.org/commentary/rethinking-public-private-partnership-concession-fees-on-greenfield-projects/