Study rips flaws in PA Turnpike deal

Study rips flaws in PA Turnpike deal

A new report picks apart the unsuccessful effort last year to lease the Pennsylvania Turnpike to private investors -- illustrating the good and not-so-good elements of using large scale public-private partnerships to fund roadway infrastructure

A new report picks apart the unsuccessful effort last year to lease the Pennsylvania Turnpike to private investors -- illustrating the good and not-so-good elements of using large scale public-private partnerships to fund roadway infrastructure.

"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, which compiled the report. "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."

Pennsylvania lawmakers debated a proposal to lease the historic and crucially important cross-state highway to Citi Infrastructure Investors and the Spanish firm Abertis Infraestructuras for an upfront payment of $12.8 billion. But the high-profile deal was shelved last fall after a number of legislators refused to support the plan largely over concerns about the state's financial assumptions and oversight of the public-private partnership deal, noted Pew's Urahn.

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A new report picks apart the unsuccessful effort last year to lease the Pennsylvania Turnpike to private investors -- illustrating the good and not-so-good elements of using large scale public-private partnerships to fund roadway infrastructure.

"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, which compiled the report. "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."

Pennsylvania lawmakers debated a proposal to lease the historic and crucially important cross-state highway to Citi Infrastructure Investors and the Spanish firm Abertis Infraestructuras for an upfront payment of $12.8 billion. But the high-profile deal was shelved last fall after a number of legislators refused to support the plan largely over concerns about the state's financial assumptions and oversight of the public-private partnership deal, noted Pew's Urahn.

Jim Runk, who heads the Pennsylvania Motor Truck Association, said the trucking organization objected to the leasing proposal because of low monetary return. "Our thought from the beginning is that this was a 'get rich quick' scheme to get money to repair the Turnpike's roads and bridges," he told FleetOwner. "We've got no problem with raising funds to fix our roads and bridges; our disagreement was over the right way to go about it. And leasing the toll road turned out not to be as good monetarily as thought."

Runk pointed out that the proposal of Pennsylvania Gov. Ed Rendell (D) for leasing the roadway initially claimed the deal would net the state $30 billion in funding—but that figure was revised down to $18 billion and finally to $12.8 billion.

That overly optimistic funding estimate is one of the fatal flaws in Pennsylvania's approach to the highway leasing issue, the Pew Center report found. "Public-private partnerships are complex, with no one element automatically rendering a deal 'good' or 'bad,'" noted Urahn. "As a result, our analysis found both positive and negative aspects of the Pennsylvania experience."

On the plus side, the Pew Center found Pennsylvania thoroughly identified its infrastructure needs and conducted due diligence before negotiating with bidders; that 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; and it laid down detailed performance standards for the life of the lease.

But the Pew report found Pennsylvania could have done better, said Urahn, in these regards

  • 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.
  • And 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.

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 U.S., the Pew Center noted in its report.

"Long-term infrastructure deals are often debated with a short-term perspective," stated Michele Mariani Vaughn, the Pew 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."

"Part of the problem with the Turnpike leasing plan was that it dealt with an existing road – one already built and paid for – so there wasn’t a lot of risk involved," John Lynch, vp of federation relations for the American Trucking Assns., told FleetOwner. "The other was the return on investment [ROI]. The bidding[to lease the turnpike] maxed out at $12.8 billion, whereas several economist reviewing the lease deal said nothing less than $26 billion would be adequate. The deal was far short of that."

The ROI issue centered around the best way to raise funds to maintain and expand the Turnpike. "We’ve looked at this from every angle and, at the end of the day, fuel taxes remain the best way to generate the necessary funds at the lowest cost," Lynch said. "For every $100 of revenue you generate from fuel taxes, it costs you 80 to 90 cents in administrative costs. By contrast, administrative costs eat up 20% to 30% of every $100 generated from tolls. And, for those who say fuel taxes are outdated or inadequate, if you haven’t increased the fuel tax since 1993, then sure, it will be outdated and inadequate as a funding mechanism."

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