[Senate Hearing 114-280]
[From the U.S. Government Publishing Office]
S. Hrg. 114-280
UNLOCKING THE PRIVATE SECTOR:
STATE INNOVATIONS IN FINANCING
TRANSPORTATION INFRASTRUCTURE
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HEARING
before the
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
JUNE 25, 2015
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
______
U.S. GOVERNMENT PUBLISHING OFFICE
20-445-PDF WASHINGTON : 2016
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COMMITTEE ON FINANCE
ORRIN G. HATCH, Utah, Chairman
CHUCK GRASSLEY, Iowa RON WYDEN, Oregon
MIKE CRAPO, Idaho CHARLES E. SCHUMER, New York
PAT ROBERTS, Kansas DEBBIE STABENOW, Michigan
MICHAEL B. ENZI, Wyoming MARIA CANTWELL, Washington
JOHN CORNYN, Texas BILL NELSON, Florida
JOHN THUNE, South Dakota ROBERT MENENDEZ, New Jersey
RICHARD BURR, North Carolina THOMAS R. CARPER, Delaware
JOHNNY ISAKSON, Georgia BENJAMIN L. CARDIN, Maryland
ROB PORTMAN, Ohio SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania MICHAEL F. BENNET, Colorado
DANIEL COATS, Indiana ROBERT P. CASEY, Jr., Pennsylvania
DEAN HELLER, Nevada MARK R. WARNER, Virginia
TIM SCOTT, South Carolina
Chris Campbell, Staff Director
Joshua Sheinkman, Democratic Staff Director
(ii)
C O N T E N T S
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OPENING STATEMENTS
Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman,
Committee on Finance........................................... 1
Wyden, Hon. Ron, a U.S. Senator from Oregon...................... 3
.................................................................
WITNESSES
Daniels, Hon. Mitchell E., Jr., president, Purdue University,
West Lafayette, IN............................................. 7
Bhatt, Hon. Shailen P., Executive Director, Colorado Department
of Transportation, Denver, CO.................................. 9
Narefsky, David, partner and co-leader, Infrastructure Practice
Group, Mayer Brown LLP, Chicago, IL............................ 11
Feigenbaum, Baruch, assistant director for transportation policy,
Reason Foundation, Los Angeles, CA............................. 13
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Bhatt, Hon. Shailen P.:
Testimony.................................................... 9
Prepared statement........................................... 35
Responses to questions from committee members................ 38
Daniels, Hon. Mitchell E., Jr.:
Testimony.................................................... 7
Prepared statement........................................... 39
Feigenbaum, Baruch:
Testimony.................................................... 13
Prepared statement........................................... 44
Responses to questions from committee members................ 47
Hatch, Hon. Orrin G.:
Opening statement............................................ 1
Prepared statement........................................... 49
Narefsky, David:
Testimony.................................................... 11
Prepared statement........................................... 50
Responses to questions from committee members................ 55
Wyden, Hon. Ron:
Opening statement............................................ 3
Prepared statement........................................... 57
Communications
American Society of Civil Engineers.............................. 59
Public Citizen................................................... 63
(iii)
UNLOCKING THE PRIVATE SECTOR:
STATE INNOVATIONS IN FINANCING
TRANSPORTATION INFRASTRUCTURE
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THURSDAY, JUNE 25, 2015
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:05
a.m., in room SD-215, Dirksen Senate Office Building, Hon.
Orrin G. Hatch (chairman of the committee) presiding.
Present: Senators Cornyn, Coats, Heller, Wyden, Menendez,
Carper, Brown, Bennet, Casey, and Warner.
Also present: Republican Staff: Chris Campbell, Staff
Director; James Lyons, Tax Counsel; and Nicholas Wyatt, Tax and
Nominations Professional Staff Member. Democratic Staff: Ryan
Abraham, Senior Tax and Energy Counsel; Robert Andres, Research
Assistant; and Jocelyn Moore, Deputy Staff Director.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
UTAH, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The committee will come to order. I would
like to welcome everyone to today's hearing on alternatives and
additions to Federal and local infrastructure funding.
Last week we had a hearing on infrastructure funding
specifically focusing on the status of the Highway Trust Fund
and our looming deadline for renewal at the end of July. Today
we will discuss a separate but important topic, which is how
States are using innovative financing to facilitate
construction of infrastructure projects.
At the outset, I want to make sure that it is clear that,
while they are important, these financing alternatives and
ideas are not meant to address the immediate shortfalls in the
Highway Trust Fund. As long as our Federal highway program is
based upon reimbursements to States made on a formula basis,
there is no workable substitute for Federal funding, in the
opinion of many.
Instead, today's discussion will be about additional tools
that States can use to better determine and respond to their
own infrastructure needs. I think we also need to be clear on
what financing is and what it is not. Because of the large
capital costs associated with infrastructure, financing
alternatives can give States more flexibility in producing the
capital they need to build projects faster. However, we should
also remember that financing carries with it the expectation of
repayment and future return.
During last week's hearing, Dr. Kile from the Congressional
Budget Office noted that, ``Regardless of its source, financing
is only a mechanism for making future tax or user fee revenues
available to pay for projects sooner. It is not a new source of
revenues.''
Pulling taxes and other revenues from the future into the
present does not create new resources. It is also important to
remember that there are various ways to use alternative
financing mechanisms to shift risk, but financing tools alone
do not get rid of risks.
Having said that, as Mr. Narefsky, who is on our panel
today, notes in his written testimony, ``There is bipartisan
support for public-private partnerships at both Federal and
State levels.''
Now this is certainly true, and I think this distinguished
panel of witnesses we have here today demonstrates that
interest. However, while there is bipartisan consensus on
examining alternative ways of financing for infrastructure
projects, many obstacles facing infrastructure projects remain,
including significant obstacles imposed by the Federal
Government itself.
For example, as Governor Daniels notes in his written
testimony today, it takes an average of 7 years for the Federal
Highway Administration to complete an environmental impact
statement on a single proposed highway project. By comparison,
the Hoover Dam, often cited as an exemplar of robust
infrastructure policy, was built and completed in only 4 years.
We need to do better. I hope today we can have a robust
discussion on what we can do at the Federal level to make these
processes more efficient. Working with States on innovative
infrastructure financing allows for decisions to be made closer
to the people whom the projects are intended to benefit.
I have an example from my own home State of Utah. In 2008,
the Utah Department of Transportation, or UDOT, was in the
process of designing and constructing the first phases of the
Southern Corridor near St. George. The Southern Corridor is a
brand new highway that provides regional transportation among
multiple communities, plus a new access point for those
communities to Interstate 15 and improved access to a new,
larger airport constructed in St. George to accommodate the
growing communities.
During the design of the Southern Corridor, a private
developer expressed a desire for an interchange to access his
property. This interchange was not in the original plans.
However, the developer was willing to pay for the construction
of the additional interchange himself.
Using a State Infrastructure Bank, UDOT partnered with both
the city of St. George and the private developer in order to
finance the interchange. Under the arrangement required by the
State Infrastructure Bank, UDOT entered into a loan agreement
with the city of St. George in the amount of $3.7 million to
construct a bridge for the interchange.
Afterward, the developer repaid the cost of the loan to St.
George and chipped in another nearly $2 million of his own
capital to build the ramps and street network required for the
new interchange.
I am recounting these transactions not because they
represent high political drama or intrigue, but because they
demonstrate how innovative financing arrangements with the
private sector can be useful in improving our infrastructure by
making new opportunities possible and relieving the burden on
taxpayers.
For me, the larger questions for today's hearing are not
whether we should encourage public-private partnerships and
innovative financing, but how we can ensure that the taxpayers
are the ultimate beneficiaries of these deals and not just
bearers of risk. It is clear that done right, these types of
financing mechanisms can help us cut through red tape and
promote local control of infrastructure development.
Now, I hope that we can have a good discussion of these
issues and work toward improving a system that clearly could
benefit from increased efficiency.
[The prepared statement of Chairman Hatch appears in the
appendix.]
The Chairman. With that, I yield to our ranking member,
Senator Wyden.
OPENING STATEMENT OF HON. RON WYDEN,
A U.S. SENATOR FROM OREGON
Senator Wyden. Thank you very much, Mr. Chairman.
Mr. Chairman and colleagues, I am sure a lot of Americans
this morning wonder if the Congress can put together a two-car
parade. When you look at 33 consecutive short-term patches for
infrastructure, it certainly seems that the Congress may not be
able to pave the parade route either.
Now, this is the second time in 8 days the Finance
Committee has come together to take a hard and careful look at
the Nation's infrastructure challenge. By now, there is a
pretty good consensus with respect to the dire condition of our
roads, highways, bridges, railways, and ports. You simply
cannot have a big league economy with little league
infrastructure. Yet, our transportation networks are crumbling.
The price tag of maintenance down the road is growing, and
America's infrastructure is falling far behind our competitors.
Now, last week our hearing focused on the drastic shortfall
in transportation infrastructure funding, which leaves the
Highway Trust Fund running on fumes every few months. Finding a
pathway to a long-term source of revenue for the trust fund is
absolutely essential so that projects can get underway and
construction workers can stay on the job.
To solve this challenge, the Highway Trust Fund has to be
solvent and healthy. But I want to make clear this morning,
that is only one part of the solution. Our country needs more
than $1 trillion of new investment just to get our
infrastructure up to a level of good repair.
Even with a steady stream of revenue, there is still a big
gap between the work that needs to be done and the resources
needed to make it happen. That is why it is so critical that
the Congress find some fresh ideas to get projects off the
ground, including financing tools with proven records of
success.
That is why today's hearing is going to focus on getting
private dollars off the sidelines and into the game on
infrastructure. Six years ago, when the Senate was looking for
a way to spark investment in infrastructure, it turned to a
proposal that I and a bipartisan group of colleagues had been
supporting for some time, called Build America Bonds.
At that time, I think I was sitting down with my friends
Senator Brown and Senator Casey. I was a little surprised I got
called on. And people said, ``Ah, that is kind of a nice little
idea that the fellow has that might generate $4 billion or $5
billion in private investment.''
That was a pretty big underestimation. In less than 2
years, Build America Bonds sparked more than $180 billion worth
of investment. My State took advantage of the program to build
a new interchange in Eugene, improve the highways around
Clackamas County and Bend, and a whole host of other projects
around the State.
States all across America used these dollars to put similar
projects together. So there should not be any question as to
whether there is an appetite for effective financing tools for
infrastructure.
Last month, Senator Hoeven of North Dakota and I introduced
a bipartisan bill called the Move America Act to provide an
effective new approach to financing. It picks up on several of
the best features of Build America Bonds, and our new proposal,
according to the Joint Committee on Taxation,* which is sort of
our scorekeeper around here, states that our proposal would
turn an $8 billion taxpayer investment into $226 billion worth
of infrastructure projects.
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* For more information, see also, ``Overview of Selected Provisions
Relating to the Financing of Surface Transportation Infrastructure,''
Joint Committee on Taxation staff report, June 23, 2015 (JCX-97-15),
https://www.jct.gov/publications.html?func=startdown&id=4796.
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Our bipartisan proposal cuts red tape that has been a
bureaucratic nightmare for States, localities, and the private
sector in the past. But unlike Build America Bonds, this is not
a 2-year proposal. This is a proposal that would be permanent.
The Congress should not put an expiration date on sensible
bipartisan ideas.
I believe the Move America Act, and the smart approach to
financing it represents, can be a key part of the long-term
plan that solves our transportation infrastructure crisis.
There is a lot of work to be done, and it cannot begin as long
as the Congress keeps falling back on short-term funding
patches. On this issue, the Congress has punted more times than
the Oakland Raiders.
So it is time to do better. And I just want to make one
last point, because I know Governor Daniels is here, and I just
want to say that I think the Governor, in particular, has been
a real force for State innovation in a whole host of fields.
I remember his tenure at the Office of Management and
Budget, and the Governor helped me, in particular, with
focusing on approaches to encourage State innovation in health
care, the approach I got in the Affordable Care Act, which
fortunately has now been sustained by the Supreme Court.
We are going to be able to build on that. We are going to
be able to build on State innovation. States with progressive
ideas and States with conservative ideas, they are all going to
be able to use the States as a laboratory of ideas. And
Governor Daniels had that conversation with me a number of
years ago.
So I really welcome him here. I think he is going to get a
formal bouquet-tossing from my friend and colleague, Senator
Coats, but, Governor, we are glad you are here. And I want to
thank all of you from the private sector as well, because I
understand you sort of burned up the phone lines with my staff
working on Move America.
[The prepared statement of Senator Wyden appears in the
appendix.]
The Chairman. Thank you, Senator.
Yes. King v. Burwell was sustained, something I said this
morning to a group that I thought would happen, and we can live
with that, whatever the Court does.
But we have a very distinguished panel here this morning,
and I want to thank all of you in particular for being with us
today.
Our first witness is the former Governor of Indiana and
current president of Purdue University, Mitch Daniels. Let me
just say that Mitch came with Senator Lugar and me to the
United States Senate back in 1977, and I have known him ever
since and have been very privileged to know him as one of the
truly great people on Capitol Hill, but also one of the truly
great staffers, and also a really wonderful Governor.
A lot of us have always been a little bit miffed that you
did not run for President so far. So if that is a little prod,
pay attention.
We are glad to have you here. We have Senator Coats, who is
our Senator from Indiana now, and he will introduce the
Governor formally.
Senator Coats. Mr. Chairman, thank you. I really appreciate
you chairing this hearing this morning. It is an important one
as the committee continues to address the very critical needs
of America's infrastructure and particularly the issue of
building highways, repairing highways, and repairing bridges
that are crumbling across the United States.
I am really pleased to have our former Governor and now
president of Purdue here to testify. We in Indiana do not like
to go into debt. We do not like to raise taxes. Governor
Daniels found a way to address the issue of repairing and
building roads in Indiana and repairing and building bridges in
Indiana without having to do either one of those.
The purpose of our hearing is how we can address issues
that would incorporate the private sector into helping us
advance transportation improvements. Public-private
partnerships, or P3s as they are called, get the private sector
off the sidelines and create new resources to meet our growing
transportation needs, and they also accelerate the process of
addressing these needs.
Obviously, P3s do not solve all of our infrastructure
problems, but they can play an important role.
So I am pleased to introduce Governor Daniels to talk about
a major P3 success in my home State of Indiana that
demonstrates the benefits offered by such partnerships. After
his election in 2004, Governor Daniels tasked his Cabinet to
find a way to fund the hundreds of road and bridge projects
that had been promised to Hoosiers for years, but not
accomplished.
They needed a solution that did not involve raising taxes
or taking on more debt, and they began exploring the
feasibility of leasing the Indiana toll road to a private
entity. After a bidding process involving 11 proposals, a 75-
year lease concession was awarded to a private consortium for a
single lump-sum payment of $3.8 billion. That figure is nearly
four times the yearly allocation that Indiana receives from the
Federal highway programs under MAP-21.
Governor Daniels used the proceeds from the lease to fund a
large number of highway construction and preservation projects
under his monumental Major Moves initiative. Major Moves fully
funded the State's 10-year transportation plan, including 65
roadway projects and 720 bridges rehabilitated or replaced by
2012.
Major Moves accelerated critical projects throughout the
State, such as Interstate 69, the Hoosier Heartland Highway,
US-31 from Indianapolis to South Bend, Fort to Port, and the
Ohio River bridges. In addition, the seven counties through
which the toll road ran received payments of between $15
million and $40 million for local transportation projects.
The 75-year lease that Governor Daniels secured was an
extraordinary accomplishment with spectacular results for our
transportation system. This is just one example of Governor
Daniels's many visionary moves for the State of Indiana during
his tenure. During that tenure, Indiana went from a bankruptcy
situation to a AAA credit rating. He led the Nation in
infrastructure-building and passed sweeping education reforms,
as well as the Nation's first Statewide School Choice voucher
program.
Governor Daniels is currently the 12th president of Purdue
University. He has gone forward with his vision to prioritize
affordability and student success. He froze tuition hikes and
has committed to maintain that freeze for 4 years. He has
called for greater accountability in higher education, and in
recognition of that and his leadership, both as a Governor and
now as a university president, he was named among the Top 50
World Leaders by Fortune magazine just recently.
His public service, Mr. Chairman, as you have acknowledged,
included his engagement with Senator Lugar. He went on to be
senior advisor to President Reagan, and then Director of the
Office of Management and Budget under President George W. Bush.
I would like to welcome Governor Daniels to the committee.
And again, Mr. Chairman, thank you for the opportunity for me
to introduce our Governor.
The Chairman. Thank you, Senator. I thought you did a great
job for a very fine, great man, as far as I am concerned.
Our next witness is the Executive Director of the Colorado
Department of Transportation, Shailen Bhatt. He has previously
served as the Cabinet Secretary of the Delaware Department of
Transportation and served as an Associate Administrator at the
Federal Highway Administration.
I recognize Senator Bennet to introduce Director Bhatt.
Senator Bennet. Thank you, Mr. Chairman. I am very
grateful.
It really is my pleasure to introduce our second witness,
Shailen Bhatt, Executive Director of the Colorado Department of
Transportation.
CDOT maintains and repairs over 23,000 lane miles of
highway and more than 3,400 bridges. Our roadways handle more
than 28 billion vehicle miles of travel per year, and, if you
are on our roads this weekend, the likelihood is you would see
a license plate from almost any State in the Union, people who
have come from all over the country to visit what we consider
to be the most beautiful State in the country.
Before he moved to Colorado for this job earlier this year,
Director Bhatt served as the Cabinet Secretary for the Delaware
Department of Transportation. In that role, he developed a
prioritization process for capital projects, tracked
performance management, and reduced his agency's debt by nearly
40 percent.
Before then, he served as Associate Administrator at the
Federal Highway Administration. There he established the Every
Day Counts initiative, which helps States to identify and
deploy proven innovations that shorten the project delivery
process, enhance roadway safety, and reduce congestion.
He also served as Deputy Director of the Kentucky
Transportation Cabinet and as chair of the I-95 Corridor
Coalition.
As you can tell from his resume, he has a lot of experience
with identifying innovative financing solutions for
infrastructure projects. That is why I know the Governor wanted
him to come to Colorado, even though he was coming from a State
that is smaller than some of the counties in Colorado.
In Colorado, we have a few projects that we are
particularly proud of that I believe can serve as models for
the country in terms of multimodal transportation and public-
private collaboration. I look forward to his testimony, as well
as the other panelists.
Thank you, Mr. Chairman, for the honor of introducing this
witness.
The Chairman. Thank you, Senator.
Next, we will hear from David Narefsky, who is a partner
and co-leader of the Infrastructure Practice Group at Mayer
Brown LLP. Mr. Narefsky is a graduate of the University of
Michigan law school and has been involved in infrastructure
agreements in both States represented here, Indiana and
Colorado. He has also advised on numerous projects, including
the Chicago Skyway Toll Bridge.
Last, we will hear from Baruch Feigenbaum, the assistant
director for transportation policy at the Reason Foundation.
Prior to that, Mr. Feigenbaum handled transportation issues for
Representative Lynn Westmoreland. He has a master's degree in
transportation from the Georgia Institute of Technology.
I want to thank you all for being here.
I also want to take a minute to recognize the roles of
Senator Coats and Senator Bennet in putting this hearing
together with the excellent panel we have before us.
So, Governor Daniels, we will start with you. Go ahead with
your testimony.
STATEMENT OF HON. MITCHELL E. DANIELS, JR., PRESIDENT, PURDUE
UNIVERSITY, WEST LAFAYETTE, IN
Mr. Daniels. Thanks, Mr. Chairman.
These days I do wear the uniform of Purdue University,
which, as it happens, has probably produced more engineers,
specifically civil engineers, than any university in the
country. But I know I was invited here for a different reason,
and that is because of Indiana's unique status as a State which
has, not solved its infrastructure problems forever and all
time, but has advanced more directly against them than any I
know of.
Indiana is now in year 9 of the 10-year program that
Senator Coats referenced. By the time it is done, more than 100
new projects will have been completed, more than 1,000 bridges
will have been repaired or replaced, and more than 6,000 miles
of roadway will have been resurfaced.
It was a great joy of public service to watch literally the
dreams of decades become real. Project after project that
people said would never happen are now being completed in
Indiana.
This was only possible because of the lease which we were
able to secure. We essentially converted a toll road losing
money to a tightly regulated public utility. The tolls on that
road, by the way, are the same today that they were in 1985 and
will only rise under regulated rates throughout the duration of
the lease.
We received--and there was some good fortune and good
timing involved--three times the status quo present value of
that road in government hands. It is very important to say that
every penny, we insisted from the beginning, had to be
reinvested for long-term purposes.
So, having paid off the 50-year-old debt still on the books
of the State and setting aside $.5 billion as a trust fund to
augment highway money in perpetuity, all the rest went into
long-term investment. Not one penny, I have to reiterate, was
allowed to be spent on current operational problems or
priorities.
This is a practice which is familiar in the rest of the
world and is spreading, in fact, often with the active
encouragement of government. I refer you to Australia as
perhaps the single best example. But this was simply, as we saw
it, a way to liberate the trapped value from an underperforming
asset and then to reinvest it in assets, these new projects I
talked about, that we thought were in the long-term interest of
our State.
Along the way, we experimented with a variety of other ways
to involve private capital, that capital which, as Senator
Wyden correctly said, is sitting eagerly still on the sidelines
in this country, although actively employed in other places,
and each of those experiments was a big success.
At this moment, one of the mega-projects that I talked
about is within a year or so of completion: two new bridges
across the Ohio River at Louisville. Thousands of new jobs have
already been associated in southern Indiana with the projects,
and the bridges are not even open yet.
But by using a P3 approach, so-called availability payment
approach, the bridge Indiana was responsible for came in 23
percent, which was $225 million, below the estimate. Plus,
Indiana will never pay a nickel for the maintenance of that.
That is all part of the winning bidder's proposal.
In another case, a bridge which was built conventionally
years ago and turned out to be unsafe when it should have had
another 2 or 3 decades to run, we are replacing with an
entirely private bridge, where the constructor and operator
will be entirely at risk.
Now, these approaches, I do not think even the strongest
proponents, certainly not I, will ever suggest are a complete
answer to the very real problem the committee is here to talk
about, but I just submit that no answer will be complete
without them.
Without the involvement, the creative involvement, of
private financing--it is so ironic that this Nation, which
prides itself on being the world's innovation leader, is such a
laggard in this area, and even a cursory look around the world
will show you that we are trapped in old practices when the
rest of the world has left them behind.
I have mentioned in my written testimony other obstacles
that I hope earnestly the Congress will deal with. The absurd,
almost surrealistic permitting regime has sooner or later got
to change.
I will just conclude by reminiscing that I was invited to
talk about this very same subject 9 years ago. I sat here with
then-Governor Kaine of Virginia, and I got that testimony out
and looked at it, and I am discouraged to say that I almost
could have Xeroxed it and submitted it again. Little or nothing
has changed in the interim except the severity of the problem.
I will just say that, as I did then, in a Nation that is
sometimes so divided over so many questions, this strikes me
not only as an urgent national priority, but a huge opportunity
for bipartisan cooperation, and I appreciate the chance to come
here and implore the Congress once again to seize this
opportunity and to do it in a cooperative way.
[The prepared statement of Mr. Daniels appears in the
appendix.]
The Chairman. Thank you so much.
Mr. Bhatt, we will turn to you next.
STATEMENT OF HON. SHAILEN P. BHATT, EXECUTIVE DIRECTOR,
COLORADO DEPARTMENT OF TRANSPORTATION, DENVER, CO
Mr. Bhatt. Thank you, sir. I first want to thank Chairman
Hatch for the invitation to testify and to acknowledge our
Colorado Senator who had to step away from the committee,
Michael Bennet. I thank him for his many years of service to
the State of Colorado and to my boss, who was then Mayor
Hickenlooper.
And I am sorry that Senator Carper is not here. He is one
of the nicest recovering Governors I know in the Senate, and I
know transportation is very important to him.
It has already been listed where I have worked before. I
will just say that I have been appointed by three Governors, I
have worked as a presidential appointee, and I do it because,
in public transportation and public service in transportation,
you have this amazing ability to impact people's lives,
hopefully in a good way. And I am just grateful for the
opportunity to talk about ways that we can find more resources
to make that happen.
I just want to begin with a story that illustrates the
transportation situation or dilemma in Colorado. During my
first 3 days as CDOT's executive director, I took an 1,100-mile
tour around the State, which was not possible in Delaware.
As those of you who are familiar with Colorado know, I-25
is the major north-south artery tying urban communities
together along our front range. It is also an important freight
corridor for the United States, running all the way from Canada
to Mexico.
The first leg of the journey was on I-25 heading north out
of metro-Denver, and I got stuck in my first traffic jam in
Colorado, not in the Denver metro area, but in a rural section
of Colorado on I-25. I thought there might have been an
accident. I asked my regional engineer where the crash was. He
said, ``This is just everyday traffic.'' And then I said,
``Well, when will this road get widened,'' and I was told
2070--2070.
So, 18-year-olds who are getting their drivers' licenses
today will be 73 years old before that road gets widened. That
is just unacceptable. There is a commercial impact, there is a
jobs impact, and there is a safety impact.
So, based on that story, it should be no surprise that this
year, during the Colorado State legislative session, there was
a bill introduced that was promoted by both the business
community and primarily Republican elected officials along the
north I-25 corridor that I just mentioned. The bill would have
asked Colorado voters to bond against future Federal revenues
for $3.5 billion and to take about $1 billion of that and widen
I-25.
Now, we had to oppose that bill because expanding capacity
by essentially doing a GARVEE bond, which would have pulled
some of our Federal revenues, would have decimated our ability
to maintain existing infrastructure assets. But the example
illustrates how important the Federal revenues are to Colorado,
where we spend 2 out of every 3 of our Federal dollars on
construction. But more importantly, if we had some more
revenue, we could enter into more of these public-private
partnerships and quickly seek a bonding solution to accelerate
some of these important improvements.
The bottom line and the most important thing I want to
leave you with today is that, similar to Colorado's proposed
bonding bill, Congress cannot fix a funding problem just
through financing alone, and I know the chairman had mentioned
some of that earlier on.
I cannot emphasize enough what is a critical point:
financing mechanisms cannot correct what is essentially a
funding problem due to revenue shortfalls. We need a stable
funding source, first and foremost, if we want to move ahead in
transportation.
I believe it is critical that we address these
infrastructure improvements not only in Colorado, but for all
the States in the Nation.
Mr. Chairman, by necessity, Colorado has turned to a
variety of creative financing methods in an effort to move
these critical projects forward. This week we had the ribbon-
cutting on our first P3 project from the highway side, the
first phase of US-36, which connects the urban centers of
Denver and Boulder. Even with the great Federal and local
support for this $450-million multimodal project, it would not
have been possible without the State entering into a P3.
US-36 is one example of a P3, and it is one where our
private partner is taking on the toll risk. Toll risk is not
the only risk you are looking to transfer. Sometimes there is a
lot of construction risk as well.
I have cited several other examples in my written testimony
where CDOT is using managed toll lanes. We do not have a lot of
appetite nor the ability to toll the entire interstate, but
what we are saying is, we can add capacity, and we will toll
that capacity that we are adding.
In one example, I-70 through Denver, we do not expect to
move forward on the P3. We do expect to move forward on a P3 on
another corridor, C-470. We did a Value for Money study, and we
do not know that a P3 will provide the best value. So we are
trying to find the right situations. In that case, a TIFIA loan
we believe will be the right solution.
Mr. Chairman and members of the committee, it is important
that States have different financing tools in the toolbox,
driven by a constrained funding reality, to meet the
transportation investment needs of the State and the Nation.
Colorado certainly needs to step up and do our part, and we
are trying, but our transportation system has Federal
interests, including interstate commerce and quality of life of
all of our citizens, and we need to continue to have a strong
Federal partner in transportation.
I appreciate the committee's time and attention to the
important topic of transportation funding and financing, and I
am happy to answer any questions you may have.
[The prepared statement of Mr. Bhatt appears in the
appendix.]
The Chairman. Thank you so much, Mr. Bhatt.
Mr. Narefsky, we will now turn to you.
STATEMENT OF DAVID NAREFSKY, PARTNER AND CO-LEADER,
INFRASTRUCTURE PRACTICE GROUP, MAYER BROWN LLP, CHICAGO, IL
Mr. Narefsky. Thank you, Chairman Hatch. It is an honor for
me to be here today to discuss the increased use of public-
private partnerships to finance transportation infrastructure.
I prepared a map to just highlight representative
transactions that we have seen implemented or in process over
the last decade. There are many transactions to talk about.
Many of them are described in some detail in my written
testimony.
What I was hoping to do this morning was to highlight for
the committee a number of what I think are the key lessons
learned from this last decade of State and local governments
partnering with the private sector to develop transportation
infrastructure. And in most cases, many of the most significant
infrastructure projects that have been undertaken in the United
States in the last decade have, in fact, benefitted from this
use of the public-private partnership model that has been
developed and refined in Europe, Australia, and Canada and now
increasingly is being used in the United States.
So, to highlight what I think are the key lessons learned,
as the chairman noted before, there is bipartisan support for
public-private partnerships at both the Federal and the State
level. Federal financing incentives and regulatory flexibility
have been encouraged by each of the Clinton, Bush, and Obama
administrations and both Republican and Democratic Governors,
who have been strong advocates for public-private partnerships
supporting transportation infrastructure.
Protecting the public interest is paramount. Successful
public-private partnerships require the private partner to
comply with detailed and comprehensive operating standards,
with noncompliance resulting in monetary penalties and/or
default and the loss of the right to continue to operate the
project.
A reliable legal framework is a critical precondition to
getting things done. Private parties investing in a
jurisdiction need to know that the identified sources of
revenue will be available throughout the term of the agreement
and that when the project procurement is initiated, it will get
to the finish line.
Having a public champion is critical. Jurisdictions that
have been successful in developing public-private partnerships
have had a public champion who clearly articulated policy
rationale for the project, moved forward with bold initiatives
to develop new projects, and developed a vision in the face of
uncertainty and oftentimes opposition.
And I really have to note, because Governor Daniels is
sitting to my right and Shailen Bhatt, who works for Governor
Hickenlooper, is also sitting here, that having had the
pleasure of working on many transactions in both Indiana and in
Colorado, they really represent kind of the best in class of
public champions who have made these projects work and have
really resulted in both Indiana and Colorado being models for
how to get P3s done.
Continuing on, though, with lessons learned. Federal
financing incentives, in particular tax-exempt private activity
bonds and low-cost TIFIA financing, have been critical for the
successful implementation of transportation public-private
partnerships.
Important and critical government policy objectives can and
are regularly incorporated into public-private partnership
transactions. These objectives include labor protections, such
as offers of employment to existing employees, and maintaining
wages and benefits of current public-sector employees. They
also include contracting requirements for women, minority,
disadvantaged, and veterans' business enterprises, and they
often include limitations on tolls or other fees that can be
charged by the private-sector partner.
Successful public-private partnerships often result in
significantly reduced construction costs, as well as lower and
more predictable life cycle, operation, and maintenance costs
over the useful life of the asset.
Finally, the successful models that have been developed for
the transportation public-private partnerships that are on the
map are being increasingly applied to other types of
infrastructure in the United States, including water supply and
public buildings, such as courthouses and university
facilities.
As I noted, there are a lot of projects that have been
accomplished in the last decade. I would be happy during the
question-and-answer period to focus on any one in particular,
and a number of them are described in my written testimony.
So, again, thank you very much for the invitation to speak
today on what is a really important topic for U.S.
transportation infrastructure.
[The prepared statement of Mr. Narefsky appears in the
appendix.]
The Chairman. Thank you for being here.
Mr. Feigenbaum, we will now turn to you.
STATEMENT OF BARUCH FEIGENBAUM, ASSISTANT DIRECTOR FOR
TRANSPORTATION POLICY, REASON FOUNDATION, LOS ANGELES, CA
Mr. Feigenbaum. Thank you, Chairman Hatch, Ranking Member
Wyden, and fellow members, for the opportunity to testify
today.
While the Federal Government continues to delay action on
meaningful transportation reform, States are leading the way.
Understandably, raising taxes is unpopular. While several
States have increased their gas tax, moved to a gas tax/sales
tax combo or begun testing mileage-based user fees, many others
have chosen to stretch their resources further with innovative
financing.
Given scant political support for funding increases at the
Federal level, Congress should examine what States are doing to
stretch their resources. At the same time, innovative financing
is not a panacea for our transportation problems.
Financing is the act of obtaining full project funding up
front from investors, while funding is the actual revenue
itself. While financing can stretch resources, States must have
some underlying funding, such as gas taxes, tolls, or mileage-
based user fees.
States want to avoid a situation, such as New Jersey's,
where the State has become so overly leveraged through
borrowing that 100 percent of its annual gas tax revenue must
go to repay its debt. And that is still insufficient, so the
State would need to actually tap other funding in order to
fully repay the debt.
Most of the innovative financial activity has taken place
through public-private partnerships using TIFIA and private
activity bonds, and a smaller source of innovative financing
has been State infrastructure banks.
A powerful tool that fewer than a dozen States are actively
using so far is the long-term public-private partnership, in
which the private sector designs, builds, finances, operates,
and maintains a major highway or bridge, typically on the scale
of $500 million to several billion dollars in cost.
Over the past 12 years, the largest 16 P3 projects have
involved a total investment of nearly $28 billion. Most of
these projects involve some degree of State investment on the
order of 20 percent to 25 percent, the rest privately financed
by the winning concession team using a mix of debt and equity.
There are many advantages to this type of procurement.
Because the same entity will be constructing and then operating
the project over many decades, the incentive is to build the
project more durably so as to minimize the life-cycle costs
rather than minimizing only the initial construction costs.
The P3 company also accepts many of the risks that are
usually borne by taxpayers: construction costs, overruns, late
completion, inadequate maintenance, and, in many cases, traffic
and revenue. Because these are examples of project finance, the
total cost is raised up front and the bonds are paid off over
many years, as highway users benefit from the improved
infrastructure, and proper maintenance is contractually
guaranteed for these high-profile projects.
A toll concession P3 is the best deal for taxpayers, as the
toll can provide most of the revenue to repay the financing for
the project. Availability payments, the other type of P3s, also
need a source of revenue. However, both types of P3 projects
transfer risk to the private sector, which is the biggest
advantage of all P3s.
P3 contractors also deliver projects more cost-effectively.
The I-70 Value for Money report prepared for the Colorado DOT
HPTE unit looked at six projects, comparing the actual project
costs with the costs estimated by the procuring agency if the
project were delivered internally. All five U.S. projects,
including I-595 in Florida, FasTracks in Denver, the Port of
Miami Tunnel, the Goethals Bridge in New York, and Presidio
Parkway in San Francisco, were delivered at a lower cost,
typically 12.5 percent to 20 percent.
There are two financing tools which help make these
projects possible: private activity bonds and TIFIA loans. The
private activity bond program in recent years has been well
used. At the end of 2014, about $5 billion of these bonds had
been issued, another $5 billion have been approved for issuance
by DOT, which leaves only $5 billion of the original $15
billion available. So if Congress were to enact a 6-year bill,
we would recommend increasing the cap to $30 billion, with
lower amounts for a lower bill.
The TIFIA program is also popular as a source of
subordinated loans. We recommend several reforms to the TIFIA
program, including reducing the total amount of loan coverage
from 49 percent to 33 percent and streamlining the program so
that more projects can get covered. We think some of the
restrictions used by USDOT are perhaps a tad onerous.
I also want to briefly touch, in the time I have left, on
State infrastructure banks. State infrastructure banks were
authorized in SAFETEA-LU and in T-21. They were not authorized
in MAP-21.
We think they are an important tool. There are 32 States,
plus Puerto Rico, that have Federally capitalized SIBs. There
are four other States that have either State-capitalized SIBs--
Georgia and Kansas--or State and Federal--Florida and Ohio. The
leader in SIB activity has been South Carolina, with $3.3
billion. Most of the State activity has taken place in
Florida--$762 million.
Thank you for the opportunity to testify today on
transportation finance. I would be happy to answer any and all
questions either orally or in writing.
[The prepared statement of Mr. Feigenbaum appears in the
appendix.]
The Chairman. Thank you so much.
Governor Daniels, your testimony identifies the remarkable
statistic that it typically takes 7 years for the Federal
Highway Administration to complete an environmental impact
statement. And as you identified, by comparison, in countries
like Canada and members of the European Union, none of which
you would think of as lacking in environmental protection,
those environmental reviews take far less time.
Now, lag times before infrastructure projects can even
break ground associated with permits and reviews and studies
and the like are simply inefficient and hard to justify.
Now, Governor Daniels, would you talk a little about the
needless Federal red tape, inefficient wait times, and delays
associated with clearing Federal hurdles and getting to the
groundbreaking stage of an infrastructure project? I know you
have covered it to a degree. And do you think it would be
difficult to eliminate some hurdles and make the processes more
efficient?
Mr. Daniels. It would be hard to have a less efficient
process than what we have now, Senator. And while there are
people far more expert on the details of this, I can testify
that I watched it get worse, not better, during the years in
which I was actively involved in trying to make infrastructure
and other projects real.
The multiplicity of agencies with hands on in this
situation has aggravated the problem. I know one suggestion
that makes common sense to me is that there really needs to be
a lead agency designated, and I would absolutely prefer a
system which we see elsewhere in the world in which there is a
presumption of approval. We should shift the burden from those
who would build, who would thereby trigger employment and
growth and upward mobility for Americans, shift the burden off
of them onto those who would stop a project, with some sort of
time limit attached to that.
All these practices are in operation elsewhere, as you say,
in places which do not take a back seat to anyone in their
concern for the environment. But if we had set out to design a
system guaranteed to thwart, delay, and often, therefore, kill
needed projects of all kinds, we could hardly have done better
than what we have today.
The Chairman. Thank you.
Mr. Feigenbaum, could you follow up on Governor Daniels's
remarks and tell us which red tape is the most detrimental to
infrastructure?
Mr. Feigenbaum. I think probably just the overall timeline
and some of the environmental reviews that projects have to go
through. The fact that it takes 12 to sometimes 15 years from
conception of a project to actual completion increases the
cost. And if there is a way that we can streamline the
environmental process, some of which I think we did do in MAP-
21, I think that is probably the biggest thing that we can do
to help speed these things along and lower costs as well.
The Chairman. That is great.
Governor Daniels, let me come back to you again. Your
testimony describes the Indiana toll road project as a large
success for your State, the State of Indiana. The project
brought in nearly $4 billion in revenue to Indiana while
providing for hundreds of millions of dollars in improvements
to be made to the toll road.
Now, despite this success, public-private partnerships have
been slow to catch on in the rest of the States, and even last
week the CBO said that the U.S. had relatively little
experience with these deals when compared to the rest of the
world.
Now, given your stated success with this arrangement, why
do you think more States have not followed Indiana's example?
Mr. Daniels. They would have to speak for themselves,
Senator, but first of all, there were unique aspects to our
opportunity. Not everybody has an existing asset of that size
that would be subject to the actions that we took, although one
of the great tragedies I saw was when Pennsylvania, with a toll
road worth probably three to four times ours and with a
tremendous infrastructure problem, when Governor Rendell was
unable to persuade people in both parties to come along with
it.
If people would simply start with the questions of, what
result are we trying to reach and what tools, tools plural,
will be necessary to solve a problem this big, I think you
would see a lot more of these. But there are people with a
theological, I would describe it, commitment to the old-
fashioned mode who cannot see their way clear to anything that
is not government-owned, government-built, and government-
operated all the way through, and that is very shortsighted and
I think ultimately very damaging to the interests of our
country and particularly low-income Americans.
The Chairman. I loved your idea about presumption, your
presumption of approval idea.
Senator Wyden?
Senator Wyden. Thank you, Mr. Chairman.
Mr. Narefsky, let me start with you. It seems to me what
you are saying is, with the right government policies, there is
a mother lode of potential for the private sector to invest in
infrastructure; is that right?
Mr. Narefsky. Yes it is, Senator. I think that is quite
right. There is no question that there is a large amount of
capital, investment capital, private-sector investment capital,
available to be deployed for the type of infrastructure
projects we have been talking about. So what is really
important is to find the right tools to incentivize the
deployment of capital, which, in some cases, is either sitting
on the sidelines or, frankly, is being deployed in Canada or in
other jurisdictions where sometimes the projects are easier to
move forward and get done.
Senator Wyden. Let me get your suggestion on this question
of the government tools. This committee has jurisdiction over
one, and that is tax-exempt private activity bonds that can
help the private investor put their money in infrastructure
projects.
In your view, what is the potential of that tool, and do
you have some ideas that our committee could pursue to improve
that?
Mr. Narefsky. Yes. So I think building on the success of
the current private activity bond program is one area to focus
on. This was authorized back in 2005, a $15-billion
authorization very much designed to encourage private-sector
investment and public-private partnerships in transportation
infrastructure.
As often happens, I think, with new Federal programs, it
took a little while for the market to understand how the
program could be utilized. But if you fast-forward, in the last
couple of years, this is a very active program.
As Baruch had said, of the $15 billion, more than $5
billion has been issued. There is another $5 billion that has
been allocated. So the inventory is really being spoken for.
So the Move America Act that you are a cosponsor of, I
think is a very good way to build on the private activity bond
program that is in place now. It builds on it, it expands it,
it provides for additional types of projects that can benefit
from tax-exempt financing.
It gets rid of the alternative minimum tax penalty that is
associated with certain of the private activity projects. And
the other aspect, I guess, of the Move America bill that is
interesting to me is the potential use of tax credits.
I have worked before on some of the other tax credit
programs for public-sector infrastructure, for energy projects.
There was an earlier one for school construction. And they
tended to suffer from being very small, so it was hard for a
market to develop, and it was not clear that the pricing, the
credit pricing, really was at the right level.
From what I have seen of the Move America bill, this could
take place on a much larger scale and might allow the credits
to be sold separately from the project itself.
Senator Wyden. That is the key. That is one of the major
features that Senator Hoeven and I have been pursuing.
Mr. Narefsky. Well, it is an important concept, because
rules were never developed for some of the prior tax credit
bond programs. There has been talk about the separate sale of
the tax credits, but that never really happened. So I think
this is a potentially interesting opportunity to raise
additional capital and have it deployed in the service of these
large-scale infrastructure projects.
Senator Wyden. I appreciate your kind words for it. And in
one of the other key areas, colleagues, Senator Hoeven, a
former Governor--and this is apropos of Governor Daniels--said,
in particular, one of the lessons learned from Build America
Bonds is, we have a chance to use the States and localities to
play a bigger role than was pursued in the Build America
program. So I think that ought to be attractive as well.
I see Governor Warner down there as well, and he too very
much wants to pursue this area and to have the States and
localities play a bigger role.
Now, it is probably not a Finance hearing without at least
one controversy. So I want to kind of start it a little bit,
and perhaps we can have you comment on this, Mr. Bhatt.
You talked about the promising projects that you all had
pursued in Colorado, the I-25 corridor between Denver and Fort
Collins and the like. We have had some in the Senate and
certainly in the academic community talk about the concept of
devolution and, in effect, turning back the Federal highway
program to the States.
What would have happened in Colorado if you were looking at
a project like that, the one that you have considered so
promising, if you had gone to this devolution concept?
Mr. Bhatt. Thank you for allowing the controversy to start
here. [Laughter.]
A couple of things. To build off of what Governor Daniels
had talked about, you need two things to build a major project.
You need the funding, and you need a record of decision to say
that you have cleared through the environmental process.
In this case, we actually have a record of decision to
build this project, which is a big hurdle. What we do not have
is the funding.
On the devolution side--and I had heard this when I was in
Kentucky, when I was in Delaware--the whole donor-donee State
thing has sort of now gone by the wayside, since everybody is
now getting these general fund transfers. I think that, to me,
the Colorado example--and I think this would be true of
Delaware as well--is that, if you devolve the Federal role--and
I think that the way I understand this is that you just say,
well, we will get rid of the Federal gas tax and we will let
the States collect it themselves.
The particular challenge in Colorado is around this idea of
TBOR, the Taxpayer Bill of Rights. So any gas tax increase, any
tax increase, would have to go to a vote of the people. And so
what you would have to then do is take that 18.3 cents and say
to the Colorado voters, ``Hey, would you like to just switch
this over,'' right? ``It is a Federal tax now, would you like
to switch it over here? '' And my fear is, just like there is
no appetite for a gas tax increase, or limited appetite, there
is no guarantee that when that Federal money was then no longer
Federal, it would be at the State level, that the State itself
would take the chance to make those investments. I think that
is one issue.
The second part on the devolution side is one of the things
that we are very focused on in Colorado right now, which is
technology: connected vehicles, autonomous vehicles, how we can
squeeze more toothpaste through this tube using technology.
I think there needs to be a strong Federal role in making
sure that the technology that is adopted in Colorado works with
the technology that gets adopted in Utah or works with
technologies that are being adopted by many States so that you
have consistency across the country.
Senator Wyden. I am over my time, Mr. Chairman. Thank you.
Thank you all.
The Chairman. Thank you.
Our next person will be Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Mr. Chairman, I have been a long and consistent supporter
of harnessing private-sector financing to invest in our
infrastructure, and, to this end, we have introduced
legislation to roll back the Foreign Interest in Real Property
Tax Act, FIRPTA, to increase the use of private activity bonds
in various ways.
But, while I recognize the role of the private sector, we
should not lose sight of the fact that financing is not a
replacement for funding. We saw this when, despite the fact
that MAP-21, which I helped draft, increased the TIFIA
financing program nearly tenfold, tenfold, but it failed to
address the central problem, which is a lack of adequate
funding.
And that fundamental problem is not going to go away. We
are going to have to work together and make some tough choices
in order to find the revenue necessary to fully invest in 21st-
century infrastructure. I hope we do not fall into the trap of
taking legitimate options off the table regardless of how
unpopular they might seem at the moment.
I know that there has been some talk in this body about the
need to focus on financing rather than funding because the
House has no appetite for revenue increases, but I do not think
the Senate Finance Committee should be giving the House veto
power over its work.
There is a lot of support on this committee for investing
in our infrastructure, and I would challenge the House at the
end of the day as to where, in fact, they are willing to go as
it relates to the critical infrastructure challenges we have in
this country. I do not want to wait for the next bridge to
collapse for them to come to an awakening of that need.
The private sector is not going to choose its investments
based on whether it will bail Congress out of a funding crisis,
whether it is good for the U.S. economy, or whether it will
benefit the society as a whole. They are going to choose their
investments based on their financial interests. That is the
essence of why they exist, and that is what they are supposed
to do.
So that is not going to cover every element of our
transportation system, particularly if you are talking about
smaller projects, if you are talking about rural projects, or
projects that preserve access for the elderly or disabled.
So to that point, in a recent hearing of the Banking
Committee Transit Subcommittee, which I serve as the ranking
member on, we heard testimony from Jane Garvey, who has held
senior roles in both the public and private sectors, and her
testimony argued that if the only reason a public-sector agency
is considering a P3 is for financial reasons, it is probably
not the right model.
So, Mr. Bhatt, your State has a range of transportation
challenges: highway and transit, rural and urban. Do you agree
with Ms. Garvey's statement? Can private-sector financing serve
as a replacement for any of your State's funding needs?
Mr. Bhatt. Sir, I think the private sector plays an
important role and a critical role, and in Colorado, over the
next 20 years, we have about a $1 billion a year shortfall in
transportation investment. We have projects, and these are not
fluff projects. These are really good projects that could go. I
think the challenge in transit is that transit does not pay for
itself. When I was in Delaware, our fare box recovery is the
metric that people look at, and it was around 20 percent, 20
cents on every dollar that we put in is what we would get out.
And lots of people point to that and say, look, transit does
not pay; we should not pay for it.
But there are millions of people in this country who do not
make a decision on how they get to their destination based on
the choice of taking a car or taking transit. They rely on
transit to get to jobs.
So to me, I think that there needs to be a mix of private-
sector profit motive and government sense of what is a social
responsibility in terms of providing for----
Senator Menendez. I agree with you that the private sector
is important. I started my prefatory comments in that regard.
The question is fundamental, though. Can financing solve all of
your transportation problems in your State?
Mr. Bhatt. No, because there has to be the profit motive in
the transportation property to get out----
Senator Menendez. So you mentioned that Colorado is
considering a public-private partnership for the viaduct along
I-70, and you go on to say you do not expect the private-sector
partner to take on the toll risk.
Given the Indiana toll road concession, where the private-
sector partner assumed the toll risk and ultimately went
bankrupt, why would the State not seek to put more of the toll
risk on the private sector?
Mr. Bhatt. Well, sir, they are two very different projects.
Obviously, the Indiana toll road, and I do not want to speak
for Governor Daniels, was much longer and the entire facility
was tolled. This is a managed lane. So this is one lane in each
direction that is being tolled, and it just does not throw off
enough revenue.
So on a $1.2-billion project, the State and local partners
are putting in, I want to say, $900 million of that.
Senator Menendez. So the bottom line is, there is not
enough potential profit in order for the private sector to come
in.
Mr. Bhatt. Only if you toll the entire facility, and that
is just not allowed.
Senator Menendez. Right. And then finally, when the private
sector invests in a project, they are rightly working to earn a
return on investment. That is the very essence of what they do,
and I applaud that. But the role of the public sector is much
broader. It is more than getting people from point A to point
B. It includes questions of access, equity, and service quality
for people of all incomes and all abilities.
So is that not part of the factor that we have to put into
these equations as it relates to how we are going to go ahead
and achieve some of the transportation projects that are
critical, whether it be for your State of Colorado or mine in
New Jersey or others similarly situated?
Mr. Bhatt. Yes, in my opinion.
Senator Menendez. Thank you, Mr. Chairman.
The Chairman. Thank you. I have to go to the floor for an
important reason. So I am going to turn the committee over to
Senator Coats, who has graciously agreed to follow up.
I am grateful to all four of you for being here. Your
testimony has been very important.
So I will turn it over to Senator Coats, and he is next
anyway.
Senator Coats?
Senator Coats. Mr. Chairman, I have only been a member of
the committee for 6 months. To be given the gavel for a short
amount of time is one of the singular accomplishments of my
service in the United States Senate. [Laughter.]
The Chairman. You make me feel very, very powerful.
[Laughter.] But I know better. We are really happy to have you
on the committee.
Senator Coats. My concern is, once I have the gavel in my
hand, you might have to pry my cold dead fingers from it.
[Laughter.]
The Chairman. I could not be succeeded by a better person,
is all I can say. [Laughter.]
Senator Coats [presiding]. Mr. Chairman, thank you.
I am up next. In deference, though, to my colleagues here,
as my first action as chairman, I am going to defer my
questions and turn to the next in line, Senator Cornyn, who is
significantly more senior than I, and seniority means something
in the Senate.
Senator Cornyn. I am enjoying the tenure of Chairman Coats
already. [Laughter.]
This is great. Well, the Environment and Public Works
Committee recently passed a $278-billion 6-year highway bill,
and we are only $90 billion short--$90 billion short.
It strikes me that we have gotten into a bad habit here in
Congress of thinking tactically in terms of how to deal with
our transportation infrastructure, rather than coming up with
some sort of strategy, because what invariably happens is that
Environment and Public Works passes a highway bill and then
they kick it over to the Finance Committee and say, you pay for
it, and we are not really thinking, I think, in a big way about
what the Federal role in the Nation's infrastructure and
highways and bridges should be.
The ranking member talked about devolution as if it were
all or nothing, and I just would be interested in your
comments, starting with Governor Daniels.
But here is the problem we have, particularly in a big
State like mine. In Texas, we get about 95 cents back on the
dollar. So why should we raise the Federal gas tax so we get 95
cents back? As a matter of fact, like your State, Governor, and
like other States represented here, we have not been waiting on
the Federal Government. Governor Abbott and the Texas
Legislature and Texas voters have taken important steps to put
$4 billion to $5 billion additional State funds into our
transportation infrastructure, because frankly the Federal
Government has been unreliable when it comes to those funds.
But if you talk about the red tape issue that has also been
raised here, a lot of that red tape comes from the fact that it
is Federal dollars. And if it was done at the State level,
these projects could be done much more quickly and in a less
costly sort of way.
But can you help us think about this in a way that would
deal with those problems? Is there some sort of way to think
about what is the Federal versus State responsibility when it
comes to this?
Mr. Daniels. Well, I will try. We are a long way from the
Interstate Highway Act and the benefits it brought to the
Nation, but yet we are living with basically the regime that it
created.
It is a legitimate question how much of that we still need.
I cannot speak for anybody in Indiana these days but myself,
but I will say, and did then, that if the Federal Government
had been willing to step back from some of its gas tax, I would
have advocated for its replacement at the State level.
But I will give you a small example. Because we managed to
harvest such an enormous amount of money for reinvestment
through the toll road success, we undertook, almost as an
experiment, some projects, smaller road projects and trails. I
said, use entirely State money; I want to know what the result
is. And the result was, they were built in less than half the
time at about half the cost, just as a rough measure of what
one might expect if we could disentangle, to some extent, the
necessary reconstruction of America from the Federal
requirements and limitations that are placed on States.
I would also say that that committee you talked about, in
an indirect way, could do a lot here. If we would commit to
exploit the magnificent opportunity that is right in front of
us for a long-term run of more affordable energy prices, if we
were to liberate fully, maximize that opportunity, you could
make a lot stronger case for the gas tax at today's levels or a
higher level if the cost of the underlying product you knew was
going to be moderate on a sustained basis.
Senator Cornyn. I would be delighted to hear from each of
you in turn if you have some views about the question I have
posed to Governor Daniels.
Mr. Bhatt. Sir, just very briefly, I would applaud Texas
and any other State that is raising its own resources, because
I do not think people are doing it because it is a nice thing
to do. I think it is not only the right thing to do, it is an
economic imperative and an economic competitiveness question,
and countries around the world are making massive investments
in transportation.
They are not doing it because they like to have these
things. They want to compete with us. They want to take our
jobs and they want to come after the U.S. economy, and we need
to compete. So I applaud any investment like that.
I think, on the red tape issue, I have worked now in three
different States and struggled with some of the Federal
requirements, but I also say that the people who attend the
school beside the highway that we want to widen, if my children
went to that school, I would want them to have a forum, a place
to be able to stand up to the government, to the State that
wants to widen that road, and that is one of the things that
the Federal Government provides through the National
Environmental Policy Act.
Yes, it takes more time and, yes, we can probably be much
more efficient with doing it and doing things concurrently, but
like I said, there are lots of people who do not get to testify
and who do not get to come to these sorts of hearings, and
those laws protect their interests.
Senator Cornyn. I apologize. It looks like my time has
expired, Mr. Chairman. Thank you.
Senator Coats. Senator Bennet?
Senator Bennet. Thank you, Mr. Chairman. I am happy to
support a coup, if that is what you want. [Laughter.]
Senator Coats. A bipartisan coup has more chance of
succeeding. [Laughter.]
Senator Bennet. Just picking up on where Senator Cornyn
was, I think that maybe we should be having a debate about what
the Federal and State role is. In fact, I would invite that.
The problem that we have is that, because of the stasis
here in Washington and because we keep extending highway bills
month to month to month more than 20 times now, I think we have
created huge uncertainty in America at a moment when our
competitors are investing heavily in their infrastructure.
As I often say, at this point, because of our politics--and
it really is because of our politics; I am not blaming anybody;
it is just true--we do not even have the decency to maintain
the assets and infrastructure that our parents and grandparents
built for us, much less build the infrastructure that our kids
and grandkids are going to need in the 21st century, and time
is wasting.
When you look at the last 6 years and you consider how low
interest rates have been over that period of time, the idea
that we were allowing deferred maintenance to pile up and pile
up on the roadways and bridges of America is a travesty from a
fiscal point of view.
If all you cared about was the fiscal condition of the
country, you would not defer maintenance that could have been
dealt with at a relatively cheap price, because every dollar
that we did not spend 6 years ago is a dollar we are going to
have to spend 6 years from now or 10 years from now, unless we
really are going to let our infrastructure crumble into dust,
which is what is happening.
This is the committee that has to figure out how to pay for
this, and I hope this committee will do its job.
Even though our State is recovering, our economy is doing
incredibly well, the businesses that are engaged in building
roads in our State are actually laying people off during this
economic recovery because of the uncertainty being caused by
this Congress and, to be precise about it, this committee.
So I hope we can act in a bipartisan way to create a 6-year
bill. And with that, what I would just ask the panel is to
describe for the committee what kinds of projects are better-
suited for public-private partnerships than others and which
kinds do we need to continue to rely on the public sector to
underwrite?
Mr. Narefsky. That is a very good question.
Senator Bennet. Finally, I asked a good question. Sorry for
the long windup.
Mr. Narefsky. But it is a very good question. I often say
that it is important to note that, when you are talking about
whether to do a P3 or not, you should not flip the coin in the
air and always assume it is going to come up heads. You really
need to think carefully, Senator, about exactly the question
you pose: what projects are the ones that make the most sense?
So I think part of it is a size issue and maybe a
complexity issue, because I had the good fortune, for example,
to work on the Denver FasTracks project in your State, and I
think that is a perfect example of where a P3 does make good
sense.
There was, first of all, the need to accelerate project
delivery. It obviously was very important for the region to get
that transit line going between the airport and downtown Union
Station. Also, there were some real engineering challenges in
how the line was going to be constructed, and there were cost
constraints.
One thing that we have seen in that project, and I think
you see in a lot of successful P3s, is the creativity of the
private sector reducing construction costs considerably. And in
the Denver project, it was probably about 25 percent under what
were the original Regional Transportation District estimates.
And I think the last point--and this actually ties into
what you were saying in your earlier remarks--is projects where
it is so important not just to have the project constructed
well, but to have it maintained well, require the private
sector in the agreement to have long-term operation and
maintenance responsibility and avoid the problem you described
of having infrastructure built well, but maintained poorly, if
at all.
Mr. Feigenbaum. Building on what Mr. Narefsky just said,
the big projects--what we call mega-projects of $500 million or
more--are the ones that most lend themselves to the private
sector, because usually there is some profit in those projects.
Usually there is a lot of risk, and so it is easy to transfer.
And usually, as was just said, the maintenance is better.
I think your point about maintenance is really excellent.
Oftentimes, there is a sort of public give-and-take between
building a new sexy infrastructure project which people want
and maintaining the roads which people need, and I think most
State DOTs have actually done a really good job of trying to
maintain roads. But anytime you have sort of that political
decision there, it is really tough. So when you have the
private sector involved, they can make those decisions.
I would also say Pennsylvania has done what I think is a
really innovative project they are just entering into with
their bridges--and Pennsylvania had a large number of
structurally deficient bridges. And what they have done is, by
bundling the contract with these bridges together, they have
actually been able to get some of these smaller bridges which
might not normally work as a P3 bundled with the larger
bridges. And for smaller projects, I think that is a really
good model.
Mr. Bhatt. I would just say I agree that with larger
projects, there has to be a profit motive. There usually has to
be some toll revenue that is involved, but there is risk. There
is risk on the construction side, and there is risk on the
revenue side, and that is where you want to defer that risk.
That is where the P3 model makes sense.
Nobody wants to put money into maintenance and resurfacing.
It is just not sexy.
Senator Coats. Senator Warner?
Senator Warner. Thank you, Mr. Chairman.
I want to build off what my friend, Senator Bennet, said;
first, that financing is great--and I have a proposal I want to
talk about--but we have to have funding as well.
It is also great to see Governor Daniels, somebody whom I
have enormous respect for. I want to add to what Senator Hatch
said. If you want to run for President, you have a lot of folks
on your side, so jump on in. The pool is pretty big, and you
would be a great addition.
I think there are a couple of things that have not been
brought out in the testimony yet. We actually have an office in
the Treasury Department--I am not sure you know about this--
that advises American pension funds on how to invest in
European or Canadian infrastructure, because there is not a
real tool on a national basis to do it here, number one.
Number two, on Monday, 57 nations are going to sign, led by
China, a $100-billion Asian infrastructure bank deal. It is
fundamentally changing--we do not have any such tool here on
our side.
I appreciate what Governor Daniels said about his testimony
a number of years back with Governor Kaine. I would remind him
there was another Governor there who started on these public-
private partnerships, and I think Virginia has, Mr. Narefsky,
probably as much history as anybody, some going back into the
1990s. And while we celebrate our successes today on public-
private partnerships, we have also had some dogs, and, quite
honestly, one of the things I am concerned about is that we
have relatively large States here that can do sophisticated
financings.
But sometimes there is a lack of sophistication at the
State level. I remember when I was Governor and some people
came and there was a proposal, say, we will give you $100
million for the Dulles Toll Road or the Dulles Access Road, and
the legislators felt like they were coming out of an Austin
Powers movie--$100 million! [Laughter.] If you put pen to paper
on it--and anybody with a first-
year MBA would have realized it was a total sucker deal.
So I think we need to have, at the Federal level, an
infrastructure financing authority, and I support what Senator
Wyden has done on Move America Bonds, but we need an
infrastructure financing authority.
Senator Coats is familiar with my effort. We have actually
got legislation that has 11 Senators on it--six Democrats, five
Republicans--and there are others, if we get a better pay-for,
whom I think we could add to the effort.
For a $10-billion initial capitalization, $6 billion
scored--this would only be a debt support program--we could
leverage $300 billion of projects. And one of the things that
is important is, if you look at your map, Mr. Narefsky, most of
these are larger States. Smaller States sometimes do not have
the expertise.
I think there is a place, as Mr. Feigenbaum said, where we
could do smaller projects, but you have to have the expertise
to go toe-to-toe with Wall Street.
So the idea of this financing authority that would only
have creditworthy projects, that would only have public debt
guarantees on the 49 percent, that would have first dollar
loss, so it would have to be the private-sector partner, that
would also have a set-aside so smaller projects would be in the
mix, I really think ought to be on the agenda.
If we start with 11 Senators--and there are a number more
who I think would be supportive--this ought to be something
subject to discussion. It is called the BRIDGE Act. I am going
to try to get to a question here, but I want to finish my
commercial.
Because really, at the end of the day, a lot of these
projects do not get done for three reasons. One, we need long-
term debt, which we can sometimes only get, I think, with a
bigger entity; second, we need a lower debt price, and
obviously some level of guarantee lowers that price; and
third--and I do not think we can emphasize this enough--you
have to have the expertise to go toe-to-toe with Wall Street.
I believe from a financing standpoint--and I am a great
supporter of the TIFIA program, and TIFIA is a kind of a one-
off inside of DOT--the idea that someone is going to have the
expertise to be able to go toe-to-toe at the State level or as
a one-off in TIFIA is just wrong.
This needs to be a long-term career path so that we can
guarantee the taxpayer the best value, because what we do not
have on this, while we do have the Midtown Tunnel project, we
do not have the project in Virginia, the Route 460 project that
the State spent, under a certain Governor, not this one or
Kaine, $200-and-some-plus million on and did not move an ounce
of dirt, and we basically put an end to it because the deal was
not negotiated well.
So the question, Governor Daniels, is, we all applaud good
projects, but do we not have to be careful that not all
projects fit the bill?
Mr. Daniels. Senator, just to put it delicately, dogs are
not the exclusive province of the private sector or P3
projects, and I will be wise enough not to name any, but the
biggest canine experiences I can remember happened under
conventional funding and financing mechanisms.
Senator Warner. There is a certain project in Boston that
might fit in that category.
Mr. Daniels. I will not specify. I see a couple more coming
on the other coast, but each of us can think of his own
examples.
I will just use the opportunity to say I have appreciated
our past conversations. You know from them that I see a lot of
appeal in the approach that you are suggesting. I think
properly crafted, it too should be a part of the solution. This
problem is so big and so urgent that there is not going to be
any one fix, in my opinion, and each of the ideas that I have
heard mentioned here today and elsewhere I think is legitimate
for consideration.
But I will just say that it would be a huge missed
opportunity to sit out while the rest of the world takes
advantage of the possibility of major private participation in
addressing this shortfall. But no solution will be complete
without that being a significant part.
Senator Warner. I know I have gone over, Mr. Chairman. I
would simply ask to make a final comment. Based on Governor
Daniels's suggestions, in our BRIDGE proposal, we did put in
that any project that would qualify for this financing would
have an expedited permitting process.
Senator Coats. Thank you, Senator.
Senator Carper has dedicated an extraordinary amount of
time to this issue, calling on me numerous times and bringing
me up to date. Senator Carper, you are on.
Senator Carper. Thank you, Your Eminence. [Laughter.]
From one recovering Governor to another, welcome. From one
Delawarean to an immediate past Delawarean, Shailen, it is
great to see you too. Our other colleagues who are here today,
welcome.
I think one of the things that Senator Warner said at the
beginning of his comments is that, while financing is
important, funding is critical. And the financing, it is not
that it is easy, but it is easier, and the really tough thing
is, how are we going to fund these investments that we all know
we need?
The President has actually said--here is his idea. He has
given us a big idea, and basically it says that $2 trillion is
part of the overseas profits of American companies, that they
are just not bringing it home. Why do we not deem it
repatriated and tax it at 14 percent and use the revenues
derived therefrom to fund a robust transportation and
infrastructure program?
At least he has an idea, and it is not just a cheap idea.
It is something that would create a whole lot of money for
investment.
Several years ago, when Bowles-Simpson was being stood up,
they invited input from all of us, and George Voinovich and I
suggested that we raise the gas tax and the diesel tax by a
penny a month for 25 months, and 10 cents of that would go for
deficit reduction, and 15 cents would go for roads, highways,
bridges, and transit.
They took that idea and said, we are not going to do it by
a penny a month for 25 months, but a penny a quarter, every 3
months, for 15 quarters and then index it to the rate of
inflation going forward. If we had done that 5 or 6 years ago,
we would not be sitting here having this conversation today. We
would be well on our way to meeting the concerns.
I think long-term increases in the gas or diesel tax are
not the solution. They are not the solution. They can be and
need to be part of the solution for the next 5 or 10 years or
so. But I think at the end, what we want to do is come up with
a better tool, a better way to ensure that folks who are using
these services, using the roads, highways, bridges, transit
systems are actually paying for them and we have a fair way to
do that. And that is our ultimate goal.
Speaking of responsibilities, I serve on the Environment
and Public Works Committee, and I am privileged to serve here
as well. The Environment and Public Works Committee reported
out yesterday unanimously a bill. I think Senator Cornyn may
have said it was a $750-billion bill. It is not. It is about a
third of that. He overstated it by threefold, I believe, if I
heard him correctly. But it is still a decent amount of money
we could spend. Obviously, we could use a whole lot more.
But the Environment and Public Works team, in reporting out
the authorizing bill, is like a kickoff team, and this
committee, in football, is the receiving team. I serve on both.
I get to be both. Imagine in a football game, I am on the
kickoff team, and serving here I would help receive the ball
and try to move it up the field.
I think if things are worth having, they are worth paying
for, and I have heard so many of my colleagues at hearings like
this just bemoan the situation that we face: the awful roads,
highways, bridges, transit systems we face. And people come up
with ideas to finance this stuff, but not to really fund it.
So, having said that, let me just ask a couple of
questions, if I could.
I am a believer in private-public partnerships. I believe
in tolling and trying to find ways to do this, rogue user
charges, vehicle miles--I am all for doing that. I think some
of the financing works. It is not a majority solution. It may
help, 5 or 10 percent of it, but it is not the real deal.
Would each of you give us one idea on funding, just one
piece? If we are going to, what should we do?
Governor, just give us really briefly one good funding
idea, please.
Mr. Daniels. Well, I think the fairest and most efficacious
way is a major expansion of user fees and tolling. There is
nothing novel about it. It is more equitable and it is more
flexible, and I have advocated for it in multiple contexts now
and am perfectly prepared to do it again. I think that is the
single biggest opportunity I see.
Senator Carper. Thank you, sir.
Secretary Bhatt?
Mr. Bhatt. The gas tax, for all of its inequities, is
incredibly efficient, and I think that, to me, the easiest and
the right thing to do is just to take a tough vote and raise
the gas tax. I think that tolling and user charges are another
way.
Any way you slice it, it is a tough choice. The money has
to come from somewhere. So I think, to me, we have a gas tax,
it should just be raised.
Senator Carper. Thank you.
Please?
Mr. Narefsky. I think one idea worth consideration that I
think is already on the table in one of the administration's
proposals is to significantly expand the ability to toll
existing interstates. That idea combined with some additional
flexibility for how those projects could be financed and to
keep existing tax-exempt debt outstanding, I think could
provide States with an additional significant source of money.
Senator Carper. Good. Thank you.
Mr. Feigenbaum. I agree with the idea of expanding tolling
on the interstates. I think that is something that is really
needed. I think there is a lot of interest. It is not forcing
States to do it. It is an option that might allow them to shift
the gas taxes around to other projects. And, over the long
term, it is definitely mileage-based user fees. There is
testing in Oregon right now. We are not there nationwide, but
in 10 to 15 years we should be there.
Senator Carper. Oregon has been doing this for 10 years.
They are a good laboratory of democracy, and hopefully we can
learn from them.
My time has expired. Could I ask just one quick follow-up
on tolling, Mr. Chairman?
Senator Coats. Given the privilege of being the chairman, I
can say, yes, you surely may.
Senator Carper. Thank you so much.
With respect to tolling, if we were to loosen the Federal
restrictions on tolling highways--several of you mentioned
tolling--how would that impact the ability to develop strong
public-private partnerships? Anyone, please.
Mr. Narefsky. Well, I will be happy to speak to that,
Senator. So it would not necessarily require public-private
partnerships. Obviously, the State could choose to proceed in
the way existing toll road and toll authorities exist purely in
the public sector.
But I believe that if the States had this enhanced
authority to toll existing interstates, with the right
financing solutions that either exist now or could be provided,
I think you would be able to have a real opportunity for States
to expand these public-private partnerships and use the toll
revenues to pay for all this badly needed infrastructure that
we have all been talking about that we cannot find a way to pay
for.
Senator Carper. Maybe one more view, please.
Mr. Feigenbaum. Yes. I actually think that is a critical
tool, because in my view, the best kind of public-private
partnerships are the ones supported by revenue.
We have all discussed how there is a revenue problem. You
can enter into an availability-payment P3, but that is
supported by gas taxes. So you are doing some financing, but
you are not really solving the revenue.
If you have tolling, you are going to have a lot more
States that can make use of that and are going to enter into
P3s. So, as we talk about how the U.S. is in some way behind on
P3s, I think that tolling is both a great source of funding and
a way to allow States to enter into more P3s.
Senator Carper. Good. Thanks.
Mr. Chairman, could I just say, Shailen Bhatt was our
Secretary of Transportation for not long enough, and he has
left us for Colorado. We miss him and have a good successor,
but we will always be grateful for his service.
The other thing I would say, on the bill that we reported
out yesterday unanimously, out of the Environment and Public
Works Committee, in the authorizing legislation, one of the
things--and I have met with everybody on this committee, asking
what would you do, what should we do, what do you think we
ought to do to help fund this stuff, and among the ideas that I
got were, find out and figure out how to build roads, highways,
bridges, transit systems in a more cost-effective way.
And one of the things I asked Secretary Anthony Foxx, our
U.S. Transportation Secretary, is, ``Do you guys have any
ideas? '' As it turns out, they do, and the bill we reported
out of committee yesterday includes a number of those ideas,
for what it is worth.
Thank you, and thanks very much for being so generous with
the time. Shailen, nice to see you; Governor, everyone, thank
you.
Senator Coats. Thank you, Senator.
Senator Casey?
Senator Casey. Thank you, Mr. Chairman. I am grateful for
the opportunity. I know we are late in the morning, and I will
be probably under my time.
I wanted to say to Senator Coats, you gave a great
introduction of Governor Daniels, but you did not mention that
he has roots in Pennsylvania. Monongahela?
Mr. Daniels. Yes. My dad is from Monessen, and I have an
uncle from Charleroi.
Senator Casey. So we just want to add that to the record.
But we are grateful for the opportunity to talk about what I
think is among the most pressing issues we have in the country,
both from a safety perspective, but also because of the
economic benefit that we derive from these investments.
Several of the witnesses referred to an effort in
Pennsylvania. In fact, Mr. Narefsky mentioned in his testimony,
and I am quoting, ``The Pennsylvania Department of
Transportation undertook a new initiative to address the
State's growing inventory of structurally deficient bridges,
the initiative to replace 558 of those bridges in just 3
years.''
The reason why we need efforts like that is because we have
a big problem. Pennsylvania leads the country, unfortunately,
in a category we do not want to lead in, and that is the number
of structurally deficient bridges.
We are not alone though, just looking at a number of
States, frankly, that are smaller by way of population but
proportionately have an even greater problem than we have:
Iowa, structurally deficient bridges 5,022; Missouri 3,310;
Nebraska 2,654; Mississippi 2,275; Oklahoma 4,216; North
Carolina, just a little less than 2,200. So we have a major
problem with bridges and a good idea in Pennsylvania.
I guess for my first question, I would start with Mr.
Narefsky. Analyzing this Pennsylvania idea, this initiative,
what would you hope or what do you think the Federal Government
could do to encourage more ideas like this? And I realize that
some of this is redundant, but I just want to go through it
again.
Mr. Narefsky. One idea is to provide more of the financing
incentives. With the Federal Government, that has been one
consistent role that they have played, whether it is through
the TIFIA program or through an expansion of tax-exempt
financing opportunities.
The Pennsylvania Rapid Bridge Replacement Project is the
kind of project that certainly can benefit--both the public
sector and the private sector can benefit from additional
access to those programs.
Senator Casey. Is there anything that you are seeing, any
idea that has been proposed lately here or as part of the new
transportation initiative or actually the new transportation
bill that would match this, or do you think we have the
existing authority or programs to do that?
Mr. Narefsky. No. I think we should be building on the
existing authority, but we need to expand it. I know the
administration has its QPIB proposal, Qualified Public
Infrastructure Bonds, and there is the Move America Forward Act
that Senator Wyden was talking about before. Both of those
build, I think, on what has been a very successful framework.
Senator Casey. I appreciate that. I want to leave that
question open to the panel but also add a question on the
challenges that State and local governments might have when
they are trying to enter into public-private partnerships.
Are there any concerns there from the panel? Maybe just
start from my right to left.
Mr. Feigenbaum. I guess one thing that I think is
important, especially for States and also for local
governments, is to have someone in the State government who is
really an expert on P3s.
I know one of the Senators before mentioned the frustration
that sometimes the State does not know if it is getting a good
deal, and it has to be a two-way street. The State has to have
someone who knows what is going on partnering with the private
sector, because public-private partnerships are a great tool
and I think a big solution.
But obviously, nothing is right for everything, and so
sometimes there has to be someone in the State who can make the
decision whether this is good or not for the taxpayers.
Mr. Narefsky. Sometimes when people ask me this question, I
say, ``Make sure you hire good lawyers.'' But personal
promotion aside, I think beyond what Baruch said, it is not
just having the right people to decide whether to do the deal
or not, it requires a kind of different skill set, and I think
Governor Daniels saw this in Indiana.
It requires a different skill set to manage these projects
in the implementation and oversight stage, because it really is
a long-term agreement. And you can have the best-drafted
agreement with the best public-sector protections, but you
really need to have people in the government who know how to
manage those kinds of long-term arrangements and make sure that
the private sector is doing what it committed to do and the
public is really getting the benefit that was negotiated.
Senator Casey. Mr. Bhatt?
Mr. Bhatt. I think one of the challenges is that there is a
lot of distrust among the public for public-private
partnerships. I think that they just have this picture of
bankers in suits skimming money out of their pockets as they
drive by, and we have to do a very good job of explaining to
them why it is a good deal.
Second, I think that there is a perception that, in the
public sector, we bring a knife to a gun fight, that we are
going up against these sharks in suits and we just do not stand
a chance, and that is why it is important to have the right
people in place.
We have a high-performance transportation enterprise, and
we have some good people on it, but it is tough because there
are some of the sharpest, brightest minds talking about LIBOR,
50 basis points, and that is not the conversation that a lot of
the public have often. So we have to be careful of that.
Senator Casey. Governor?
Mr. Daniels. I just do not buy it. Potential incompetence
is not an excuse for inaction. And besides, you can hire, and
we did, advisors. You can hire people with the same pricey
suits as the other side. But it is just part of the
responsibility of government.
If you are trying to achieve the result, it is your job to
make certain you do not get the short end. In our case, you
could argue it the other way. We knew what the valuation of our
road was, and when we got a big three times the status quo--or
even if you assumed the impossible, namely, the escalation of
tolls, which had not happened in 25 years, for all time with
inflation, we still got two times the value, so, who lost their
shirt in our deal? The investors. Sorry about their luck.
But I just think that it is a legitimate concern. If the
shackles are taken off, as I hope they will be, there probably
will be some mistakes, but the Federal system is all about
learning from mistakes and being accountable, politically, if
you make them. So I really hope that this concern will not
interfere with the possibilities of moving aggressively
forward.
If I could just have 30 seconds, since it is you asking
this question--one of my most vivid memories of back then was,
after Pennsylvania saw what we had done in Indiana, I had a lot
of exchanges with then-Governor Rendell. He told me, if I
remember correctly, he had 10,000 substandard bridges. This was
shortly after Minnesota had experienced its tragedy.
And I tried to help him with Republicans in his State to
see the opportunity that was in front of them. They tore up a
lottery ticket for $13-point-something billion that could have
done wonders for the economy and the safety of that State, and
it is just an enduring tragedy that things like that get in the
way of progress.
Senator Casey. Well, we are at about 5,000 structurally
deficient bridges now, a little more than 5,000. So we have
made some progress, but we have a ways to go.
Thanks very much. I appreciate your testimony.
Senator Coats. Well, hearing that last statement about your
bridges, I may alter my route on the way back to Indiana.
[Laughter.] I usually go up to the toll road and pay the fee.
Senator Casey. I might have the Indiana number here; let me
check. [Laughter.]
Senator Coats. I am told Senator Thune may be on his way. I
do not want to hold anybody longer than we need to. I think it
has been a very substantive hearing, and we have had a panel of
experts that has given us a range of alternatives, and that is
what we are looking for.
I think that, if there is a consensus, it is that the
current system does not work anymore, for whatever reason and a
variety of reasons, one of which is that no one wants to add a
penny of taxes. Here, there just simply is not the political
consensus for that.
I was struck by the fact that--I think it was Mr. Narefsky
who said, you have to have a champion. That champion usually
has to be the Governor, and it is not without significant
political risk for those Governors to step out and essentially
market and sell to their constituents that the State needs to
take action because the Federal Government no longer is able to
provide everything that they need.
Governor Daniels experienced that, I think, balancing the
choice between asking Hoosiers to pay an increase in taxes to
fix the bridges and roads as opposed to looking at
alternatives. And in this case, a P3 that turned out to be very
successful for the State was not without very considerable
political risk for the Governor, and it took a major selling
job.
So, when Mr. Narefsky mentioned that it takes a champion,
whether it is a champion like in Tennessee where the Governor
had sold the ability to fix the roads and bridges on the basis
of a tax increase, whether it is engaging in the potential risk
of a P3, or adding additional tolls and so forth, all of this
is part of the process that we have to go through.
But I think what has been laid out here for us today is a
very significant range of options, and maybe a combination of
those options--depending on what the situation is in the State
and how the State applies that and how it sells its
constituency that this is the best way to go--is clearly
something that needs to be addressed.
We bear responsibility here too, as was mentioned, because
we have failed, I think, in trying to reach and test some
alternative ways in which we can help the States and help our
country have better infrastructure. If there is a consensus
here, it is that we are behind the curve and that
responsibility falls on us also.
With that, let me just ask one last question, and it would
be to each of you. If you had one thing that you wanted us to
take away, this committee, one thing you would want us to take
away, and I know this has been somewhat asked, but what would
that one thing be?
We are walking out of here, and if we want to look back on
the record and say, what is the most important thing that each
of the four witnesses thought we ought to be focused on or
think about as we go forward here, what would that be?
I will start with you, Governor Daniels, and then we will
just go down the line.
Mr. Daniels. Say ``yes'' to each other's ideas this time
instead of vetoing each other's ideas. I think that, as we said
earlier, this is a matter of enormous national urgency. I think
history teaches that a pretty reliable sign of a declining
society is when it stops investing in its future, and in its
infrastructure specifically. And this is so ripe, I think, for
the bipartisan cooperation that has been scarce lately. And
since it will take multiple pieces to make a sufficient dent in
the problem, I hope that you will all find a way to each accept
the other's ideas and aim big and, for goodness's sake, take
the wraps off.
Pouring more money, wherever you get it, through the same
filter of all of the processes that we are made to live with
now would be really shortsighted.
Senator Coats. Thank you, and thank you for your testimony.
Mr. Bhatt?
Mr. Bhatt. I would just say two things. I know that the gas
tax or whatever the funding is--we are competing in a global
economy, and other economies are investing in infrastructure,
and, as the Governor said, it is incredibly important that we
do that. So, if we do not want to raise the gas tax, we should
at least index it.
And the second thing would be, financing is incredibly
important. It is an incredible tool that is being used, but
financing is not funding, and we just need more in the system.
Senator Coats. Thank you.
Mr. Narefsky?
Mr. Narefsky. I would say, recognize that there are
multiple solutions required. Do not believe that there is one
answer. This is a problem that has grown and increased, and I
think everyone recognizes it needs to be addressed. It is going
to need to be addressed by a series of complementary solutions,
whether it is funding, financing, or other regulatory
flexibility. Do not get convinced that there is one answer.
This is a problem that has multiple solutions required.
Senator Coats. And, Mr. Feigenbaum?
Mr. Feigenbaum. I would want to echo what Governor Daniels
said about thinking creatively and really looking at other's
ideas. And I think sometimes, when something new is introduced,
it is kind of scary and, oh, we do not really want to go with
it.
But if you look at something like mileage-based user fees
in terms of funding for the long term, I think there is a lot
of potential, and it is really an issue of just having the
courage to look at it.
I would also say, in this committee's jurisdiction, I think
the most important thing is an increase in the private activity
bonds, which are really critical for P3 projects. If we want to
move forward, that really needs to happen.
Senator Coats. Well, thanks to each and every one of you. I
thought it was a very, very constructive panel--the questions
that were asked and the discussion that was held.
I hope that somebody is taking a picture of me gaveling out
the Finance Committee. [Laughter.]
Let me say this. Any written questions for the record that
will be submitted need to be submitted by Monday, July 6th.
With that, the hearing is adjourned.
[Whereupon, at 11:56 a.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Hon. Shailen P. Bhatt, Executive Director,
Colorado Department of Transportation
First of all, I would like to thank Chairman Hatch for the
invitation to testify, and acknowledge our Colorado Senator on the
committee, Michael Bennet and thank him for his many years of service
to the state, including his time as Chief of Staff to then Denver Mayor
John Hickenlooper, and as Colorado's Senior Senator. For those of you
who do not know, before coming to Colorado I served as the Cabinet
Secretary for the Delaware Department of Transportation, served in the
Administration at the Federal Highways Administration (FHWA) and also
served as a Deputy Director of the Kentucky DOT. My testimony today
will be Colorado focused.
I want to begin with a story that illustrates the transportation
situation in Colorado. During my first 3 days as CDOT's Executive
Director, I took an 1,100 mile tour around the state. As those of you
who are familiar with Colorado know, Interstate 25 (I-25) is the major
North/South artery, tying urban communities together along the Front
Range. It also is an important freight corridor for the United States,
running all the way from Canada to Mexico. The first leg of the journey
was on
I-25 heading north out of metro Denver. Outside Denver we drove through
a pretty rural area on the 4-lane interstate (2 lanes in each
direction). It was a Thursday morning, after rush hour, and we were
stuck in traffic. I assumed there was an incident ahead but my Region
Engineer informed me that was how the corridor travelled. It reminded
me of Washington D.C.'s beltway traffic, and was a striking
demonstration of the need to add capacity. When I asked what the plan
was for widening, the response I received was based on current funding
availability, we expect to be able to add one managed lane (a toll
lane) in each direction, from Denver to Fort Collins (45 miles) by
2070. Think about that--18 year olds getting their driver's license
this year will be 73 years old before they will benefit from a capacity
increase--most of them will never get to enjoy the benefit.
Like the rest of the nation, funding for transportation in Colorado
is at a crossroads. Our primary source of funding, the gas tax, hasn't
increased in over 20 years (neither the federal gas tax nor Colorado's
gas tax), and the recession eliminated General Fund investment by our
Colorado Legislature in transportation in 2009. To update our
infrastructure, keep pace with population growth, and improve safety
and promote multimodal options, Colorado currently has an almost $1
billion annual shortfall and a budget that is inadequate to avoid a
steady decline in the condition of our assets.
It is no surprise that this year during the 2015 Colorado
legislative session there was a bill introduced that was promoted by
the business community and primarily Republican elected officials along
the North I-25 Corridor I mentioned earlier to ask voters to bond
against future federal revenues for $3.5 billion in transportation
improvements, including over $1 billion to fix the North I-25 Corridor
between Denver and Fort Collins. As much as CDOT would love to improve
the I-25 Corridor, we had to oppose the bill because expanding capacity
by simply bonding against our federal revenue without any additional
revenue to pay for bonds would have decimated our ability to maintain
existing infrastructure assets. It would have been akin to the example
of building an addition on the house while ignoring our leaking roof.
Our priority here in Colorado has been to build a strong asset
management program to make the very best use of our limited funds in an
effort to keep that roof from leaking even more. The North I-25 example
illustrates how important the federal revenues are to Colorado, and
shows that if Congress were to expand revenue, Colorado could enter
into a Public Private Partnership (P3) and quickly seek a bonding
solution to accelerate the improvements on this and other critical
transportation corridors across Colorado.
About 65% of CDOT's capital budget (dollars CDOT uses for
maintenance and capacity improvements) comes from the federal
government. We rely on those funds. Other states that have more clearly
recognized the critical link between economic health and transportation
tend to be less reliant. In our neighbor state to the west, the
Chairman's home state of Utah, for example, you can almost flip the
Colorado situation around. Utah relies much less on funds from the
federal government and therefore is better equipped to handle any ebbs
in federal transportation funding.
As Senator Bennet has expressed to the committee, Colorado is a
rapidly growing state. Currently, our population is 5.3 million people
and is expected to increase by almost 50% by 2040. As mandated by
federal regulations, CDOT just adopted our 2040 Statewide
Transportation Plan and the results are stunning--CDOT expects to have
over that time $21 billion in revenue and a need of $46 billion. That
leaves an unfunded gap of $25 billion over the next 25 years. These are
numbers that reflect real, quantified need. If we can't fill the gap,
CDOT will not have the money to maintain the system in its current
condition, and will have increasing travel times and decreasing
traveler convenience with ripple effects on the economic vitality of
the state. Mr. Chairman and members of this committee, in Colorado we
have a funding problem and we need your help--not to solve our problem
for us, but to partner with Colorado to address these critical needs.
The bottom line and most important thing I want to leave you with
today is that similar to Colorado's proposed bonding bill I talked
about earlier, Congress can't fix a funding problem through financing.
I cannot emphasize enough that critical point: financing mechanisms
cannot correct what is essentially a funding problem due to revenue
shortfalls. We in Colorado would love to bond and accelerate our most
important projects, but we need a revenue stream to pay for it--our
nation's highways need a stable funding source first and foremost if we
want to move ahead in transportation. I believe it is critical we
address these infrastructure improvements not only in Colorado but
nationally. As Senator Bennet has repeatedly said back in Colorado
while touring CDOT infrastructure projects--we should have the courtesy
to maintain the infrastructure our parents and grandparents provided
for us so that our children and grandchildren can enjoy the same
quality of life that was given to us. In that spirit, I implore you to
find a way to secure a stable, long-term revenue base for a robust, 6-
year surface transportation bill this year.
Mr. Chairman, these times have also led CDOT (by necessity) to
enter into an innovative era of how we meet the transportation needs of
our state. In the past, we built more general purpose lanes to meet
capacity needs. Now, we increase choice in travel, promote walking and
biking, work to increase mobility through the use of operational
improvements, and use pricing on new express lanes to manage travel
reliability and growth. We have no ``planned for'' funds for capacity
improvements and please remember that in Colorado any taxes must be
approved by a vote of the people in accordance with our Taxpayer Bill
of Rights (TABOR). That difficulty has made us very focused on
squeezing the most out of the dollars we do have. The department has
many successful ``LEAN'' process improvements that have allowed us to
stretch our dollars and become a better, more efficient, customer-
focused agency.
By necessity and as this hearing is focused on, our use of
partnerships has changed as well. In the past we delivered a project
through the federal and state gas tax and we would design, bid and then
build the project. Today our toolbox includes working with the private
sector on a wider variety of project delivery options, such as Design
Build or Construction Manager General Contractor (CMGC). Of course,
these and other project delivery options are only available if you have
the funds to deliver the project.
Colorado has turned to a variety of options, including creative
financing methods, in an effort to fill the investment gap and move
critical projects forward. In 2009 Colorado created the High
Performance Transportation Enterprise (HPTE), a Division within CDOT
whose mission is to pursue innovative financing partnerships to move
forward badly needed projects.
I'm sure the committee has already heard about the Denver area's
transit agency--Regional Transportation District (RTD)--and its
successful use of partnerships with the private sector with the Eagle
P3 light rail line and the rehabilitation of Denver Union Station. The
state has joined RTD with our first P3 by entering into a 50 year
agreement with a concessionaire to design, build, operate, finance and
maintain the second phase of our U.S. 36 improvement project. Just this
Monday, we had the ribbon cutting on the first phase of U.S. 36, which
connects the urban centers of Denver and Boulder. It is amazing to
think this project started with a $10 million TIGER ``Challenge Grant''
from the first round of the U.S. Department of Transportation's TIGER
grants in 2009 which we leveraged into two TIFIA loans totaling $114
million for the project. But even with state funds, and funds from RTD
and the Denver area Metropolitan Planning Organization (DRCOG), the
full $450 million multimodal project wouldn't have been possible
without the state entering into a P3.
I believe Colorado has an interesting perspective to offer on this
subject, because we are utilizing so many options to deliver
transportation improvements in this new environment. U.S. 36 is one
example of a P3, and it is one where our private partner is taking on
the toll risk for the project, but that is not the only option for
delivering managed lane projects in our state.
Another example is Colorado's major East/West corridor, Interstate
70. In Denver I-70 includes a viaduct that is over one mile long and is
in critical need of replacement. It was constructed in 1964 as a four-
lane bridge, and today carries more than 115,000 vehicles per day. The
viaduct made news this month as repairs made to the bridge in 1997 are
beginning to fail. Several tension rods that were installed to stop
additional cracking in have broken. The bridge remains safe for travel,
but we are increasing our inspection frequency and developing repair
plans should further components deteriorate before we reach a Record of
Decision (ROD) and move forward with the permanent improvements for
this project.
The improvements needed to replace the existing viaduct and improve
mobility on the corridor are estimated to cost $1.2 billion, and CDOT
anticipates the replacement will include managed lanes in each
direction (again, we have not completed a ROD and therefore these
elements are not final at this time). If all goes well, we hope to have
a P3 for that project as well. We don't expect the private partner to
take on the toll risk. In fact, the tolls expected to be collected will
not help pay for the cost of construction but instead will help defray
a portion of the costs for maintenance and operations. Colorado would
make what is known as availability payments to the private partner in
exchange for arranging the financing for the project up front and
covering all capital and annual maintenance of this critical Interstate
section for the next 35 years.
As we assess our project delivery and financing options, we are
considering many variables, but the one that seems to rise above the
others is risk. What risks does the state want to transfer or optimize
between the public and private sectors? What is the value of
transferring the risk of the toll collection? What is the value of
transferring the risk of long-term capital costs? What is the value of
transferring ongoing maintenance operations versus maintaining those
operations ourselves? When we assess those risks, sometimes we
determine a P3 is not the way to go and other times a P3 provides the
taxpayers with the best option in going forward.
Colorado's highway 470 (C-470) is another managed lane example,
where we will be building an express toll lane in each direction. We
have determined that a P3 would not be the best option for the state on
that $200 million project, but we hope to secure a federal TIFIA loan
and utilize toll revenue to cover about half the construction costs of
that project.
On a different section of I-70 west of Denver we are converting the
shoulder for 13 miles eastbound which carries traffic into Denver into
a weekend travel lane during the peak periods. While we can't afford
new lanes, travelers will have the option to travel in the shoulder
lane for a toll. CDOT is financing the project in part with the
expected toll revenue from the corridor, but without any private sector
or federal financing assistance. To put in perspective the benefit
states could see from creative ideas from Congress, Colorado's own
Senator Michael Bennet introduced bi-partisan legislation last year to
create a National Infrastructure Bank that proposed to provide loans at
a 1% interest rate. The I-70 mountain corridor project I just
referenced is a $72 million project. The financing included a 10 year,
$25 million commercial loan at what we consider to be very favorable
rates and terms given the infancy of the project and the speculative
nature of the pledged revenues. Had Senator Bennet's proposal been
enacted and if Colorado could have made use of that financing for this
relatively small but important project, the taxpayers of Colorado would
have saved the state over $6 million during the 10-year life of the
loan.
Mr. Chairman and members of the committee, in conclusion it is
important that states have different financing tools in the toolbox--
driven by a constrained funding reality--to meet transportation
investment needs of the state and the nation. From a project delivery
perspective, since January 2008, CDOT has advertised 29 Design Build
Projects worth about $953 million in total project budget. Since
January 2010, we have advertised 11 CMGC projects worth about $418
million in total project budget. From a financing perspective we now
have one public private partnership on a $450 million project and one
on the way for an additional $1.2 billion.
Not to be forgotten is what we have learned about the importance of
public engagement in the discussion of project delivery and project
financing. A financing partnership with the private sector is not only
new to us but new to the taxpayers and not only can a P3 change how we
finance and deliver a project, but it has changed how we discuss a
project publically. In the past, project financing and project delivery
was a much more internal discussion. Now, we recognize the need to
engage the public and stakeholders at different milestones, from
project visioning during the environmental review process, to how we
plan to build it, how it will operate once complete, and who will
maintain the new facility.
Our funding crisis only increases the importance of engaging the
public, stakeholders, local governments and more into a broader
conversation regarding the needs of the transportation system. Colorado
certainly needs to step up and do our part, and we are, but our
transportation system has federal interests, including interstate
commerce and quality of life of all citizens, and we need to continue
to have a strong federal partner in transportation.
I appreciate the committee's time and attention to the important
topic of transportation funding and financing, and I am happy to answer
any questions you may have.
______
Questions Submitted for the Record to Hon. Shailen P. Bhatt
Questions Submitted by Hon. Robert P. Casey, Jr.
Question. Public-private partnership agreements can often be
complex and need to be carefully negotiated. Do you believe that local
and State governments are equipped with the resources and expertise
necessary to negotiate public private partnership deals? Could the
Federal Government provide more resources to assist them in these
complex negotiations?
Answer. Thank you, Senator Casey, for this question. In Colorado,
we have created two specific resources for the Department to address
Public Private Partnerships and their formation. CDOT identified a
shortfall in expertise several years ago when working to create
innovative project delivery methods. First we have created the High
Performance Transportation Enterprise (HPTE) that is a government
sponsored enterprise that has some independent authority outside of the
traditional CDOT structure to identify, create, and negotiate P3
projects that are more private sector facing. Also, CDOT created the
Office of Major Projects (OMP) to help identify, create, and negotiate
P3 projects that are more traditional facing but have innovative
project delivery methods.
Specifically, the USDOT should create an office of excellence
within the Department that would help States and local governments with
the best practices clearing house for P3 negotiations. This small but
efficient office could be a tremendous help for those entities without
resources to create programs as CDOT did, but also could help those of
us who have created these offices for those staff members to associate
with their peers to exchange ideas among themselves for new innovative
delivery methods.
Question. I have been interested in exploring tax credit bonds for
transportation infrastructure projects. Similar bond programs already
exist for forestry conservation, renewable energy, energy conservation,
and new school construction. This initiative could augment the Highway
Trust Fund and provide another tool to fund our aging infrastructure,
thereby creating jobs and spurring our Nation's economy. Do you think
this type of tax credit proposal could be a useful tool to help finance
our Nation's transportation infrastructure?
Answer. Thank you, Senator Casey, for this question. Tax Credit
Bonds are a good example of how CDOT could use a financing tool to help
deliver a project faster. Here in Colorado, we are always looking for
ways to speed project delivery. However, we need additional revenue to
re-pay the bonds or other financing tools used to speed project
delivery. As I stated in my testimony, financing is not a sustainable
solution to our funding problems. At the end of the day, without
increased funding for projects, CDOT's ability to use financing tools
to deliver more projects is limited.
______
Question Submitted by Hon. John Thune
Question. I understand that this hearing is meant to focus on
financing, but given your intimate knowledge of the planning process
that goes on at the State level, I thought it might be useful to hear
about how, from your perspective, not having a long-term bill in place
has impacted States--particularly those with a short construction
season. Can you talk about the transportation planning process and how
the timing of congressional action when it comes to funding impacts
States--including the impact felt by State DOT's this construction
season?
Answer. Thank you, Senator Thune, for this question. Short-term
extensions of the authorization program have coincided with short-term
extensions in the appropriations process. These together do have a
direct impact on project delivery as well as project selection in cold
weather States.
Another important factor is the flat funding amounts. As you know,
CDOT is federally mandated to produce two significant planning
documents that affect project selection and funding (the 20 year
fiscally constrained plan and a 5 year financing document called a
STIP)
When delays in either authorization or appropriations by Congress
happen, they directly impact the STIP and how CDOT is able to move
projects into construction in any given year. Here in Colorado we are
somewhat sheltered from this problem because we have maintained a cash
balance. However, we are rapidly spending down that cash balance and
this will become a more significant issue moving forward.
Finally, I would be remiss if I did not highlight how the lack of
additional Federal revenue is having a significant impact on project
planning here in Colorado. Specifically, CDOT has completed several
large scale environmental documents to address large financial
corridors within the State. Unfortunately, we do not have funding
available to construct these critical projects nor the ability to use
P3s in large ways to accelerate these projects because CDOT does not
have the ability to repay large new bonding projects outside of the
projects already identified.
The impact of this is tremendous. In my testimony before the
committee I reported that the Interstate 25 North of Denver Corridor
that links Colorado and Wyoming has a build-out schedule through the
year 2075 with current funding levels. Think about that. We have
identified improvements that need to be addressed today, but will not
have the revenue to build these projects until the year 2075. That
means a 16 year old getting their driver's license today will be 76
years old before they see all of the project completed.
______
Prepared Statement of Hon. Mitchell E. Daniels, Jr.,
President, Purdue University
Chairman Hatch, Ranking Member Wyden, and members of the Committee
on Finance, thank you for the opportunity to testify before you about
the critical issues facing our nation's transportation system.
No country can have first-rate infrastructure without first-rate
engineers. I am proud to represent Purdue University, a land-grant
school with a long history of infrastructure research and the second
largest engineering program in the country. We are home to the Center
for Aging Infrastructure, the Center for Road Safety, and the annual
Road School, a conference that for the last 100 years has attracted
thousands of infrastructure professionals who gather to share best
practices.
We graduate quality engineers who are prepared to maintain the
structures of our past and to invent the infrastructure we will need in
the future. Through research and our growing engineering programs,
Purdue supports infrastructure that is cheaper, safer, more resilient
and more environmentally friendly.
My interactions with the next generation of American engineers make
me confident in the nation's technical ability to build infrastructure
that is state of the art. I am less optimistic about how we go about
approving and financing the projects these engineers will oversee.
Nine years ago, as a first-term governor, I was on the Hill,
testifying hopefully with then Governor Tim Kaine about these same
issues, which were highly topical already. Federal progress since then
has been disappointing, and we now have an even bigger problem today
than we did back then. The size of our infrastructure gap presents a
growing challenge. We cannot continue to be timid and traditional in
our actions. We need new thinking and strong partnerships that harness
the potential of private dollars. Public-private partnerships (P3s) are
not a complete answer for all our challenges, but Congress will not
find a complete answer without them.
I wish I could come here highlighting progress, but instead the
facts require that I give a very similar message today as I gave 9
years ago: We may be a very innovative country in other areas, but the
way we approve and finance infrastructure projects is antique compared
to the rest of the world. We will never bring our economic endoskeleton
up to date with the regulatory morass we have created; we will never
assemble the resources to rebuild without involving private capital as
a significant part of the solution.
regulatory efficiency
While the financing of infrastructure is of vital national interest
and the jurisdiction of this committee, upgrading our nation's roads,
ports and bridges will depend at least equally on a national agreement
to reexamine the system that makes ``shovel ready projects'' a myth. No
conversation about infrastructure would be complete without
acknowledging that the permitting process is costly and broken.
At the center of the need for reform is the National Environmental
Policy Act of 1969, which requires all federal agencies to generate
detailed assessments of the environmental impact of ``major federal
actions.'' The implementation of NEPA has evolved over time, becoming
more burdensome with every decade. According to one observer, in the
1970s a final EIS was typically 22 pages long. Today, an EIS commonly
exceeds a thousand pages, despite regulations directing that statements
should normally be less than 150 or 300 pages, depending on the
complexity of the assessment.\1\
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\1\ Todorovich, P., and Schned, D. (2012). Getting Infrastructure
Going. RPA. Also, 40 CFR 1502.7.
Similarly, 40 years ago it took the Federal Highway Administration
2 years on average to complete an EIS.\2\ Today, it typically takes 7
years.\3\ Wasting time and money has become the standard operating
procedure.
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\2\ FHWA, and Louis Berger Group, Inc. (2001). Evaluating the
Performance of Environmental Streamlining: Phase II.
\3\ FHWA. (2011). Estimated Time Required to Complete the NEPA
Process. http://www.environment.fhwa.dot.gov/strmlng/nepatime.asp.
This contrasts with much of the developed, environmentally
conscious world. In Canada, regulations stipulate that after a 20-day
public comment period, that nation's environmental assessment agency
has 25 days to determine whether an environmental assessment is needed.
If one is necessary, the agency has 1-2 years to complete the
assessment.\4\ Likewise, European Union regulations allow for a maximum
of three and a half years for cross-national energy infrastructure
projects.\5\
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\4\ Canadian Environmental Assessment Act, 2012 (S.C. 2012, c. 19,
s. 52).
\5\ Regulation (EU) No. 347/2013 of the European Parliament and of
the Council of 17. (2013).
Our inability to meet such standards in this country stymies growth
and is costly to the environment. How many gallons of gasoline are
wasted as Americans sit idly on congested roads? How many pollutants
are emitted while projects that improve energy efficiency are mired in
red tape? In my state, we reduced collective emissions by thousands of
tons per year by clearing out a backlog of some 450 expired air and
water permits. In some cases, these had been pending for more than 20
years, even though new permits invariably require lower limits and
tighter restrictions than the expired version. Moving fast in
government is one of the most pro-environment things you can do. As
much as anyone, the most devout of environmentalists need efficient
permitting and economic growth if they are to realize their goals and
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the purpose of NEPA.
The overarching problem is a culture where the burden of proof is
always on the pro-growth side, which has to prove that creating a new
job won't hurt the environment, in even some infinitesimal way,
interfere with some previously unheard of species, or disrupt some
ground of alleged, often highly debatable historical value. Our
national interests would be better served if we switched the
presumption so that requests for more study beyond a reasonable review
would need to prove that the additional delays wouldn't unnecessarily
cost jobs and hinder growth. Today's regulatory regime can fairly be
described as cruel in the damage it inflicts on unemployed and
underemployed Americans.
As the chair of Common Good, Philip K. Howard has stated, ``Red
tape is not the same as good government. . . . Congress must create
clear lines of authority to make decisions. . . . [A]n environmental
official should have responsibility to draw lines on how much review is
sufficient. Similarly, one agency should have overriding permitting
authority, balancing the concerns of other agencies and departments.''
Sen. Portman and Sen. McCaskill's ``Federal Permitting Improvement
Act,'' which was recently reported out of the Committee on Homeland
Security and Governmental Affairs with strong bipartisan support, is a
good first step. Quantifying the costs and benefits of federal
regulations is a goal of Indiana's Sen. Dan Coats through the ``Sound
Regulation Act'' which he will soon reintroduce and which will
hopefully lead to more reasonable policies.
the role of public-private partnerships
A notable exception to our national capital deficit is in Indiana,
now in year 9 of a 10-year, multi-billion dollar infrastructure plan
with no new debt, no new taxes and no significant permitting delays.
When I became Governor of Indiana, my administration inherited a
transportation infrastructure gap of at least $3 billion, equal then to
10 years of new road construction.
We looked at every option to address this funding shortfall,
including raising the state gas tax, indexing the gas tax, transferring
state sales tax on gasoline revenue to transportation, issuing more
debt, increasing heavy truck fees, and increasing vehicle registration
fees, to name just a few. After assessing the traditional options it
became clear that we would never break ground on our backlog of 200-
plus priority projects with a business-as-usual approach.
Instead of allowing long-sought, long-delayed projects to languish
on the drawing board, we launched a search for partners who could
augment state resources through a series of P3s. These partnerships
varied significantly in size, location and circumstance, but each had
at least one thing in common--they allowed the state to build vastly
more than Indiana could have by traditional means alone. While the
complete highlight list is long, three partnerships in particular
illustrate the problem-solving way we approach every infrastructure
challenge.
Ohio River Bridges Project
Southeastern Indiana and Louisville, Kentucky comprise one
metropolitan community separated by the Ohio River. For decades, both
states struggled to implement plans to improve transportation between
the cities, and to better connect the regions economically. The
question of how to finance and efficiently construct two necessary new
bridges, various interchanges and miles of roadway was a subject of
much debate.
Initially, both states planned to pay for the project with state
and federal tax revenue, but that proved cumbersome, dilatory and
unrealistic. A breakthrough came when the Indiana and Kentucky
legislatures gave a bi-state authority the power to explore innovative
project delivery options, including a P3. That resulted in Indiana
taking the lead on what's known as an ``availability payment'' P3 on
the new East End Crossing, in which a private partner will bear the
risk of building and financing the bridge, while the state, in
partnership with Kentucky, will maintain authority over tolls. Using
revenue from the tolls and other state funds, Indiana will now
compensate its private sector partner as milestones are met during
construction and operation of the East End Crossing.
The partnership streamlined the project and saved the state
millions. For example, after the market had spoken, the actual cost to
build the East End Crossing Bridge was $225 million lower (or 23
percent less) than the original estimate. The agreement also committed
our partner to decades of operations and maintenance services, saving
the state tens of millions of dollars in future expenses, and
guaranteeing that Indiana will receive a bridge that is in excellent
condition at the end of the 35-year concession. Most importantly, over
the next 50 years the project is expected to generate an average of
15,000 jobs a year and a total of $30 billion in personal income and
$87 billion in economic output for the region.\6\ Construction will not
be complete until late 2016, but the region has already reported the
addition of 5,000 new jobs and millions of dollars in business
expansion along the river.\7\
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\6\ Economic Impact Study of the Ohio River Bridges Project, 2014
Update.
\7\ Inside Indiana Business (2015). Regional Approach Boosts
Jeffersonville.
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Cline Avenue Bridge
The Indiana Harbor Canal extends from Lake Michigan into the
Indiana community of East Chicago, near the Illinois border. For most
of the last 35 years, the Cline Avenue Bridge has passed over the
canal, connecting several commercial sites in the area. The lengthy
bridge, which was financed using traditional methods, opened in 1983
and should have lasted for at least another 25 years without serious
issues.
But in 2009, the state discovered significant weaknesses in the
bridge's structural integrity and was compelled to condemn it a short
time later.
Although the bridge was an important asset in the community, the
expected usage levels could not justify the enormous expense it would
take to rebuild the structure in its original form. Our cost-benefit
analyses concluded that unless we could find a way to make taxpayer
funds go farther, the wisest action would be to help the community
adapt to life without a bridge by strengthening the surrounding roads.
For months, that outcome seemed the most likely. But in an
arrangement becoming more and more common throughout the world, we were
eventually able to craft an agreement with a private partner to
construct a replacement bridge. Under the agreement, the partner is
building the structure using entirely private funds, with no risk or
cost to government at any level. The contract also obligated the
partner to invest $3 million in improvements on the state road that
leads to the new bridge, and to return a share of all toll revenue back
to the local community for economic development.
Indiana Toll Road/Major Moves
By far the most successful of our efforts to find new revenue for
infrastructure came through a P3 agreement that leased the 50-year-old
Indiana Toll Road. The agreement was unique in the United States, but
fairly common globally.
Nations such as Australia and the United Kingdom have long
understood that, just as many business units are more valuable if
separated from their conglomerate parent, an asset like a highway can
be worth vastly more under different management. If it were merely a
matter of bringing forward money that would otherwise come in over the
years, such a tactic would make little sense. The goal is to capture
far more value than an asset would be worth operated in public hands.
Under these partnerships, many existing roads, bridges, and other
public facilities are operated by private companies who are more
efficient in running them and have private funds to upgrade and
maintain them better than the governments that contracted with them for
the operations. There is nothing remotely radical about this idea;
these are simply a new form of regulated public utility, like our
electric companies, few of which are owned by government.
The Indiana Toll Road, which runs 156 miles from Illinois to Ohio,
was an obvious candidate to become such an asset. At the time, instead
of making money for the state, the road had operated at a loss for 5 of
the previous 7 years. It was badly in need of an expansion, repairs and
the installation of electronic technology that makes tolling
convenient. In political hands, it was a chronically underperforming
asset. Political timidity had kept tolls locked at the same price since
1985. In one section, motorists waited in a long line to pay a
political patronage worker 15 cents in cash.
Even if we raised the tolls, there was little reason to believe
that the governors who would come after me would have the inclination
or the political ability to do the same. I once asked how much it cost
to collect that 15-cent toll on the road and the answer came back at 34
cents. I joked that we would have been better off with the honor system
and a fishbowl for occasional donations.
The estimated net present value of the road in state hands was no
more than $1.92 billion. Even that valuation assumed the state would
begin raising tolls with inflation, a total change in the state's
historic behavior. It made for an easy decision when we received a high
bid of $3.85 billion, three times the road's realistic status quo
value, to enter into a long-term agreement that, under intensive state
oversight, would give a private concessionaire the responsibility to
upgrade, operate, and maintain the road in exchange for the right to
collect tolls. To acquire revenues of that magnitude, we would have had
to roughly triple our gas tax, an economically ruinous and politically
impossible idea.
As thrilled as we were with the bid, we knew the details of the
contract would determine whether the deal was good for Indiana in the
long run. We negotiated a highly detailed legal document that keeps
rigorous oversight of the road in state hands. Performance expectations
were clearly identified for a long list of metrics including litter
removal, pavement quality, pothole repair, sign maintenance and safe
lighting, with penalties and fines for shortfalls. The agreement also
obligated the private operator to upgrade the road, add electronic
tolling, expand lanes, and make other improvements valued at about $450
million--in addition to the original $3.85 billion.
The agreement locked in the 1985 toll rates for passenger car
drivers for an additional 10 years, and it limited increases in rates
to inflation, GDP growth or 2 percent. If the concessionaire makes a
profit on the tolls, it will pay income taxes, and unlike with
government procurement, it pays sales taxes on all its purchases.
An often overlooked benefit of P3s is that when agreements are
properly constructed, as ours was, the P3 shields taxpayers from some
of the risks that are unavoidable with the construction and operation
of any infrastructure. For instance, our transaction shifted the risk
that revenues might not meet expectations away from Hoosier taxpayers
and back on our private partner. The timing of the agreement, made
months before the economy imploded, could not have been more fortuitous
for the state. Absent our transaction, the state would have endured
disappointing toll revenues as the economy collapsed and more drivers
stayed home.
Instead, that burden fell on the lessee. Indiana taxpayers had
already received the nearly $4 billion lease payment in upfront cash,
and the agreement was locked in place. Even when traffic levels were
still not meeting expectations years later and the concessionaire
succumbed to bankruptcy, all of the taxpayer protections and benefits
were preserved. The lease simply shifted to another lessee and the
agreement continued unchanged.
Of crucial importance, every penny of the $4 billion went to long-
term purposes. Whether in business or government, no asset should be
monetized for current operational spending. The only defensible
transactions are those that redeploy the proceeds to a different long-
term capital purpose that yields a higher ROA. That was a non-
negotiable tenet of our 2006 proposal, and we stuck to it.
After paying off the 50-year-old toll debt, we created a $500
million dollar permanent trust fund that earns interest for future
projects. We invested the rest in a 10-year transportation plan. Known
as ``Major Moves,'' it's paying for 104 new roadways by 2015, the
rehabilitation or replacement of 1,000 bridges, and more than 6,000
miles of highway to be resurfaced. We became the only state in the
union to have a fully-funded, 10-year infrastructure plan that required
no new taxes and no new debt.
congressional support for innovation and new revenues
P3s are more the rule than the exception in Asia, Europe and the
developing world. The United States, in so many ways the world's
leading innovator, lags behind in the area. While that is starting to
change, most U.S. P3s are designed to directly finance new
construction, or so called greenfield projects. These partnerships, as
in the case of the Ohio River Bridges project, diversify risks across
sectors and allow public investments to go farther. But in contrast to
P3s on existing assets, they still create new debt.
In addition to P3s on greenfield projects, Congress should also
encourage states to create new revenue by making P3s on existing assets
common. As my state proved through the Indiana Toll Road, these so
called recycled assets can be very effective at creating new and
unprecedented means to finance new infrastructure. And again, I cannot
stress enough that all new revenue generated by these agreements should
go towards long-term infrastructure funding, as we did in Indiana. It
would be irresponsible to use the funds for current government
operations.
The most basic way to promote P3s on existing assets is to make
sure our tax code doesn't discourage them. One issue Congress should
address is how the law treats tax-exempt government bonds when a
government enters into a P3. For example, as we were negotiating the
Indiana Toll Road partnership, Indiana still owed $200 million on 50-
year old tax-exempt bonds, a common scenario for large infrastructure.
Current law does not allow such debt to continue into public-private
partnerships. Before the program could go forward, we either had to pay
off the debt or refinance it as taxable bonds at a higher interest
rate.
Because we achieved such a spectacular lease payment, 19 times the
outstanding debt, it was no problem to pay it off and we did so
immediately and eagerly. But for other potential agreements, the tax
code has been an impediment both practically and politically. For
instance, some commentators blame the P3 tax penalty as one factor in
the collapse of a deal explored by Mayor Rahm Emmanuel to lease the
Midway Airport.
The P3 tax penalty contrasts starkly with the practice in
Australia, the global leader in this area. Not only does Australia
refrain from penalizing P3s on existing assets, its federal government
has set aside $4 billion USD to reward states and territories that make
such agreements. As long as the new revenues from the private partner
``are allocated to new infrastructure investment,'' states receive a 15
percent bonus from the national government.\8\
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\8\ Commonwealth of Australia. (2014). Budget 2014-15.
http://budget.gov.au/2014-15/content/glossy/infrastructure/
download/Infrastructure.pdf.
According to former U.S. Associate Attorney General John Schmidt,
Australia expects to earn $200 billion from P3s on existing
infrastructure. Here in the United States, untapped potential revenues
appear to exceed half a trillion dollars.\9\ The valuation Indiana
received for the Toll Road lease was so high, no state is likely to
repeat our success to the same degree. But significant revenue
potential remains and it would be senseless to leave the option out of
the toolbox as we look to expand the resources available for U.S.
infrastructure investment.
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\9\ Schmidt, J. (2015). A Sane Way to Upgrade Bridges, Ports and
Transit. Wall Street Journal.
With the persistent and growing shortfall in the Highway Trust
Fund, Congress must consider alternative funding sources for our
surface transportation infrastructure. One such alternative would be to
reform and expand the existing programs that permit state tolling of
new, expanded or reconstructed interstate facilities. Tolls, after all,
are simply a direct ``user fee'' and are thus consistent with the
principle of user-pays/user-benefits on which the Highway Trust Fund
was founded. If the federal tolling programs were expanded or
liberalized, more states would have the opportunity to explore and
pursue P3 projects, with these user fees serving as the funding source.
conclusion
Throughout this testimony I have focused on the ``how'' of
infrastructure approval and funding instead of the ``why.'' I have
assumed it unnecessary to describe the near unanimous consensus among
economists and policy experts that smart investments in infrastructure
are essential for our economy and our future. I felt certain that each
of you understands the problems we face and the economic potential we
can reap through large-scale infrastructure investments. If any issue
is ripe for bipartisan cooperation in a Congress that needs more
bipartisanship, this is that issue.
The future engineers and infrastructure scholars at Purdue
University are ready to get to work building the next generation of
American infrastructure. But real progress must start with Congress
through an agreement that fixes our broken permitting system and
maximizes funding dollars by incentivizing effective public-
private partnerships.
______
Prepared Statement of Baruch Feigenbaum, Assistant Director for
Transportation Policy, Reason Foundation
Chairman Hatch, Ranking Member Wyden, and fellow Members:
My name is Baruch Feigenbaum. I am the Assistant Director for
Transportation Policy at Reason Foundation, a non-profit think tank
with offices in Los Angeles and Washington DC. For almost four decades
Reason's transportation experts have been advising federal, state and
local policymakers on market-based approaches to transportation.
my credentials on today's topic
I am a graduate of the Georgia Institute of Technology with degrees
in Public Policy and Transportation Planning with a concentration in
Engineering. My Master's Thesis studied Induced Demand in growing areas
and potential solutions. With Reason, I have authored studies on
mobility, highway quality, highway congestion, transit options, funding
alternatives and innovative financing. I have worked with the states of
Georgia and North Carolina as well as numerous counties to implement
transportation policy and funding reform. I currently serve on two
National Academy of Sciences Transportation Research Board Committees,
Bus Transit Systems and Intelligent Transportation Systems. Further, I
assist the committees on Transportation Revenue and Financing and
Metropolitan Planning. My testimony today draws on these experiences.
overview of testimony
While the federal government continues to delay action on
meaningful transportation reform, states are leading the way.
Understandably, raising taxes is unpopular; while several states have
increased their gas tax, moved to a gas tax/sales tax combo or have
begun testing Reason's preferred option of mileage based user fees, the
majority have chosen to stretch their resources further with innovative
financing. Given scant political support for funding increases at the
federal level, Congress should examine what states are doing to stretch
their resources.
At the same time, innovative financing is not a panacea for our
transportation problems. Financing is the act of obtaining full project
funding up-front from investors, while funding is the actual revenue
itself. While financing can stretch resources, states must have some
underlying funding such as gas taxes, tolls, or mileage based user
fees. States need to avoid a situation such as New Jersey's where the
state became so overly leveraged through borrowing that 100% of its
annual gas tax revenue must go to repay its debt, and still be
insufficient, so the state would have to tap still other funding to
repay the debt.
There are numerous financing tools that states use. These can be
divided into several categories:
Federal credit assistance which includes TIFIA, Section 129 Loans
and State Infrastructure Banks;
Bonding which includes Revenue Bonds, General Obligation Bonds,
Limited and Special Tax Bonds, Hybrid Bonds, Grant Anticipation
Notes, Private Activity Bonds, Tax Credit Bonds;
Non-profit Financing; and
Methods to Leverage Federal Aid including Matching Flexibility and
Advance Construction.
However, most of the innovative financial activity has taken place
through public-private partnerships (P3s) using TIFIA and Private
Activity Bonds. A smaller source of innovative financing has been state
infrastructure banks. The rest of my testimony focuses on these tools.
recommendation no. 1: increase use of public-private partnerships
A powerful tool that fewer than a dozen states are actively using
so far is the long-term public private partnership in which the private
sector designs, builds,
finances, operates, and maintains a major highway or bridge--typically
on the scale of $500 million to several billion dollars in cost. Over
the past 12 years, the largest 16 P3 projects of this kind have
involved a total investment of nearly $28 billion. Most of these
projects involve some degree of state investment, on the order of 20-
25%, analogous to a down payment. The rest is privately financed by the
winning concession team, using a mix of debt and equity.
Infrastructure investment is growing in popularity in the private
sector. Many entities such as insurance companies, investment banks,
and pension funds invest through an infrastructure investment firm.
Since it is not possible to invest equity into infrastructure owned and
operated by governments, these companies seek to invest in
infrastructure that has been privatized (or was always private such as
utilities) or in P3s. Private infrastructure raised from investors set
a record in 2014 of $48.3 billion, the latest year for which numbers
are available.
There are many advantages to this type of procurement. Because the
same entity will be constructing and then operating the project over
many decades, its incentive is to build it more durably so as to
minimize its life-cycle cost, rather than minimizing only the initial
construction cost. The P3 company also accepts many of the mega-project
risks that are usually borne by taxpayers--construction cost overruns,
late completion, inadequate maintenance, and in many cases traffic and
revenue. Because these are examples of project finance, the total cost
is raised up-front, and the bonds are paid off over many years as
highway users benefit from the improved infrastructure. And proper
maintenance is contractually guaranteed for these high-profile
projects.
A toll-concession P3 is the best deal for taxpayers as the toll can
provide most of the revenue to repay the financing for the project.
Availability payments, the other type of P3, also need a source of
revenue (typically existing fuel tax revenue). However, both types of
P3 projects transfer risk to the private sector, which is the biggest
advantage of all P3s. In design-build projects, the private sector
takes on the risks of late completion and construction cost overruns.
But in a toll concession P3, the private sector not only takes on
delivery and cost overrun risks, but also takes on traffic and revenue
risk. In the Great Recession, when people were driving less, certain
toll roads did not meet their traffic projections. For those procured
as P3s, the private company--not taxpayers--shouldered the financial
responsibility. However, for those procured through conventional
methods, taxpayers were on the hook for the difference.
P3 contractors also deliver projects more cost-effectively. The I-
70 Value for Money Report prepared for Colorado DOT's HPTE unit, looked
at six projects comparing the actual project cost with the cost
estimated by the procuring agency if the project were delivered
internally. All five U.S. projects, I-595 in Florida, FasTracks in
Denver, the Port of Miami Tunnel, the Goethals Bridge in New York and
Presidio Parkway in San Francisco were delivered at lower cost, ranging
from 12.5% to 20% savings. The report also examined the life-cycle
costs of the LBJ Express Lanes which were 15% lower than for the public
sector comparator.
There are two financial tools which help make these projects
possible. So that the private investors can compete on a level
financial playing field, Congress authorized states to issue tax-exempt
revenue bonds, whose interest rates are similar to revenue bonds for
state-led projects. These are called Private Activity Bonds (PABs),
having a statutory cap of $15 billion.
The PABs program in recent years has been well-used. As of the end
of 2014, about $5 billion of these bonds had been issued, and another
$5 billion had been approved for issuance by DOT. That leaves only $5
billion of the original $15 billion available for a growing pipeline of
P3 projects. Congress is encouraged to double the cap to $30 billion,
for a 6-year bill, increase the cap to $25 billion for a 4-year bill,
and increase the cap to $20 billion for a 2-year bill.
Congress also created the popular Transportation Infrastructure
Finance and Innovation Act (TIFIA) credit support program, under which
P3 projects can obtain subordinated loans to complete a financing
package. Each dollar of Federal funds can provide up to $10 in TIFIA
credit assistance.
I recommend Congress make several reforms to the TIFIA program as
well. First, in order to stretch resources further I recommend
decreasing the maximum percentage of project costs that a TIFIA loan
can cover from 49% to 33%. While the USDOT's TIFIA office has never
approved a loan for more than 33%, there is no guarantee that this will
continue in the future. Second, I suggest reforming the TIFIA process,
so that all projects that meet the criteria receive funds. When
Congress reformed TIFIA in 2012's MAP-21, it intended for the program
to become a check-the-box process. Instead USDOT has been applying
discretionary criteria to the TIFIA program. Congress should direct
USDOT to approve all projects that meet TIFIA criteria, subject to the
availability of TIFIA funds.
recommendation no. 2: increase use of state infrastructure banks
State infrastructure banks are revolving infrastructure investment
funds for transportation that are established and administered by
states. Similar to a private bank, an SIB can offer a range of loans
and credit assistance to public and private sponsors of highway and
transit programs. SIBs allow states to make more efficient use of
transportation investments and leverage federal and state funds by
attracting other public and private investment. SIBs can be used as
collateral for the bond market or as reserve funding. However, under
current legislation, states may not use any federal funding to
capitalize SIBs.
There are three different kinds of SIBs, using appropriated funds
from TEA-21 and SAFETEA-LU: federally capitalized, state-capitalized
and federally and state-capitalized. Thirty-two states plus Puerto Rico
have federally capitalized SIBs. While SIB usage is widespread, similar
to P3s, most of the loan activity, 87%, is concentrated in a few
states. South Carolina is the leader with $3.3 billion in activity to
13 large projects. Two states, Georgia and Kansas have state-only
capitalized SIBs; while two, Florida and Ohio have combined federal/
state capitalized SIBs. However, the vast majority of state activity,
$762 million, has taken place in Florida.
Future legislation should allow states to capitalize up to 10% of
certain parts of their highway and transit funding. This provision
existed in both TEA-21 and SAFETEA-LU.
Thank you for the opportunity to testify today on transportation
finance. I would be happy to answer any and all questions, either
orally or in writing.
______
Questions Submitted for the Record to Baruch Feigenbaum
Question Submitted by Hon. Orrin G. Hatch
Question. It seems that all the witnesses at this hearing are
supporters of public-private partnerships and certainly have shared
compelling examples in their testimonies of their success around the
Nation. However, not every partnership ends in success, and in a
decision as important as this, it is necessary to consider both sides
of the equation before making any decisions.
Mr. Feigenbaum, in your testimony you cite New Jersey as one
example that did not end as hoped. Could you tell us what New Jersey
didn't do that a successful project should do in order to avoid similar
consequences?
Answer. New Jersey's problem was that it could not find a way to
legally authorize a P3 project.
First, the State does not have enabling legislation otherwise known
as a bill that passes a State's General Assembly and is signed into law
by the Governor. The most important component of enabling legislation
is authorizing P3s, since State departments of transportation need
specific language to enter into P3s. Well-written P3 legislation may
also create a State office dedicated to P3s, standardize and promote
best practices, and protect the public interest. Each of these steps
makes taxpayers more comfortable with P3s and leads to wider use.
Some States such as North Carolina and Texas have authorized a P3
for a specific project. New Jersey explored this option, but since some
lawmakers wanted P3s for a multitude of projects and other lawmakers
did not want P3s for any project, that effort failed.
New Jersey has very strong unions, and they, along with many
legislators, are under the impression that P3s and unions do not work
well together. This is not accurate. There are many States with strong
unions that have robust P3 laws including California, Illinois, Ohio,
and Pennsylvania. Pennsylvania is particularly noteworthy for its
bridge replacement project. New Jersey legislators need to work across
the aisle to create a P3 project that is acceptable to all.
______
Question Submitted by Hon. John Thune
Question. In your testimony you touched on risks associated with
the utilization of infrastructure financing, including the possibility
of a public entity being overleveraged. I think financing can be an
important tool when it comes to infrastructure investment, but I think
it is important we also understand the risks. How do States ensure the
long-term public interest is protected in public-private partnership
arrangements?
Answer. Becoming overleveraged can be a major problem but it is
avoidable using a few common-sense practices. First, senior department
of transportation/metropolitan planning organization staff need to
explain to political leaders the difference between funding and
financing. Funding is the actual revenue to complete the project.
Financing is the means to secure that revenue. Financing is not a
substitute for funding. All projects need funding either from the
State, the private party, or most likely a combination.
Since funding is critical and many States lack monetary resources,
I prefer toll concession P3s compared to availability payment P3s. In
toll concessions, the toll is the source of revenue. With the equity
the private sector brings to the table, little or no additional State
revenue is needed. An availability payment typically requires
additional taxpayer revenue for the deal to work. While both transfer
risk and lead to cost efficiencies, the toll concession typically
requires less public money.
State DOTs should have at least one high-ranking official whose job
it is to protect taxpayers. This person could be the director of P3s or
a specific consumer watchdog. Regardless, the person ensures that
taxpayers are protected by examining all aspects of the deal such as
the use of public funds, inclusion of specific conditions such as non-
compete clauses, type of P3 structure, length of contract, and
operating conditions. States that have specific consumer watchdogs such
as Virginia have more P3 projects and a higher public satisfaction with
the P3 process.
______
Questions Submitted by Hon. Robert Menendez
Question. While this hearing is focused on alternative financing
for highways such as through private activity bonds, I would like to
highlight a related issue for water infrastructure. The EPA and GAO
estimate the current water infrastructure funding gap to be as high as
$1 trillion. According to a report by the American Society of Civil
Engineers, not addressing this need could cost businesses $147 billion,
households $59 billion, and result in the loss of nearly 700,000 jobs
by 2020. Clearly, we have an infrastructure crisis with water in
proportion to what we face with our Nation's highways, but people take
it for granted because the pipes are underground and when they turn on
the tap, water comes out--out of sight, out of mind. Thousands of
residents in New Jersey are serviced by at least three private,
investor-owned water companies. Because these companies operate over
multiple jurisdictions, and often multiple States, they, private
companies, offer economies of scale that bring efficiencies such as
mass purchasing power and technology and expertise. During the last
highway funding bill, I joined Senator Crapo in successfully including
a proposal to lift the volume cap on private activity bonds for water
infrastructure. Unfortunately, the provision was not retained during
conference negotiations with the House.
Mr. Feigenbaum, I have two questions for you.
Does it make sense for the residents in one locality in New Jersey
serviced by an investor-owned utility to not benefit from low-cost
financing provided by tax-
exempt bonds while residents of neighboring towns and cities serviced
by municipal systems do?
Do you support removing barriers to tax-exempt financing, like
lifting the volume cap--as is already done for other types of
infrastructures such as airports, high-speed rail, wharves, and solid
waste disposal industries--for truly public purpose projects like water
infrastructure?
Answer. Much of our water infrastructure is deficient; improving
our water system is a major problem that receives little publicity
because pipes are hidden underground. Our sewer infrastructure may be
in worse shape than our roadway infrastructure. Due to this pressing
need, I am a big supporter of providing the same tax benefits to
private activity loans as municipal bonds. Therefore, it makes no sense
for residents of one New Jersey locality but not another locality to
benefit from low-cost financing.
I am also a big supporter of removing the volume cap for tax-exempt
financing. Before 2005, tax-exempt private activity bonds for surface
transportation infrastructure were not available, even though tax-
exempt bonds were permitted for maritime and aviation purposes. As a
compromise between those who wanted to allow unlimited private activity
bond use and those who wanted to prevent all usage, The Safe,
Accountable, Flexible, Efficient Transportation Equity Act: A Legacy
for Users (SAFETEA-LU), set a cap at $15 billion. U.S. projects are
expected to hit that cap by 2018.
While some questioned whether private activity bonds were sound
investment tools, 10 years of usage have shown that private activity
bonds are a cost-effective, safe-for-taxpayers method of financing
infrastructure. Since infrastructure needs to be added and modernized,
there is no logical reason why any project that is a sound investment
should not receive the benefits of tax-exempt financing. I will
continue to push for an increase in the private activity bond cap, and
I am hopeful that the cap will be significantly increased, if not
eliminated altogether.
______
Prepared Statement of Hon. Orrin G. Hatch,
a U.S. Senator From Utah
WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah)
today delivered the following opening statement at a committee hearing
examining financing options for the Highway Trust Fund:
I'd like to welcome everyone to today's hearing on alternatives and
additions to federal and local infrastructure financing.
Last week, we held a hearing on infrastructure funding,
specifically focusing on the status of the highway trust fund and the
looming deadline for renewal at the end of July. Today, we'll discuss a
separate, but important, topic, which is how states are using
innovative financing to facilitate construction of infrastructure
projects.
At the outset, I want to make sure it is clear that, while they are
important, these financing alternatives and ideas are not meant to
address the immediate shortfall in the Highway Trust Fund. As long as
our federal highway program is based upon reimbursements to states made
on a formula basis, there is no workable substitute for federal
funding.
Instead, today's discussion will be about additional tools that
states can use to better determine and respond to their own
infrastructure needs.
I think we also need be clear on what financing is and what it is
not.
Because of the large capital costs associated with infrastructure,
financing alternatives can give states more flexibility in producing
the capital they need to build projects faster. However, we should also
remember that financing carries with it the expectation of repayment
and future return.
During last week's hearing, Dr. Kile from the Congressional Budget
Office noted that ``[r]egardless of its source, financing is only a
mechanism for making future tax or user fee revenues available to pay
for projects sooner. It is not a new source of revenues.''
That is important to remember: pulling taxes and other revenues
from the future into the present does not create new resources. It is
also important to remember that there are various ways to use
alternative financing mechanisms to shift risk, but financing tools
alone do not get rid of risks.
Having said that, as Mr. Narefsky, who is on our panel today, notes
in his written testimony: ``There is bi-partisan support for public-
private partnerships at both Federal and State levels.'' This is
certainly true, and I think the distinguished panel of witnesses we
have here today demonstrates that interest.
However, while there is bipartisan consensus on examining
alternative ways of financing for infrastructure projects, many
obstacles facing infrastructure projects remain, including significant
obstacles imposed by the federal government.
For example, as Governor Daniels notes in his written testimony
today, it takes an average of seven years for the Federal Highway
Administration to complete an Environmental Impact Statement on a
single proposed highway project. By comparison, the Hoover Dam, often
cited as an exemplar of robust infrastructure policy, was built and
completed in only 4 years.
We need to do better. I hope today we can have a robust discussion
on what we can do at the federal level to make these processes more
efficient.
Working with states on innovative infrastructure financing allows
for decisions to be made closer to the people whom the projects are
intended to benefit. I have an example from my own state of Utah.
In 2008, the Utah Department of Transportation, or UDOT, was in the
process of designing and constructing the first phases of the Southern
Corridor near St. George.
The Southern Corridor is a brand new highway that provides regional
transportation among multiple communities, plus a new access point for
those communities to Interstate 15, and improved access to a new,
larger airport constructed in St. George to accommodate the growing
community.
During the design of the Southern Corridor, a private developer
expressed a desire for an interchange to access his property. This
interchange was not in the original plans. However, the developer was
willing to pay for the construction of the additional interchange
himself.
Using a State Infrastructure Bank, UDOT partnered with both the
city of St. George and the private developer in order to finance the
interchange. Under the arrangement required by the State Infrastructure
Bank, UDOT entered into a loan agreement with the city of St. George in
the amount of $3.7 million to construct a bridge for the interchange.
Afterward, the developer repaid the cost of the loan to St. George and
chipped in another nearly $2 million of his own capital to build the
ramps and street network required for the new interchange.
I'm recounting these transactions, not because they represent high
political drama or intrigue, but because they demonstrate how
innovative financing arrangements with the private sector can be useful
in improving our infrastructure by making new opportunities possible
and relieving the burden on taxpayers.
For me, the larger questions for today's hearing are not whether we
should encourage public-private partnerships and innovative financing,
but how we can ensure that the taxpayers are the ultimate beneficiaries
of these deals, and not just the bearers of risk. It's clear that, done
right, these types of financing mechanisms can help us cut through red
tape and promote local control of infrastructure development.
I hope that we can have a good discussion of these issues and work
toward improving a system that clearly could benefit from increased
efficiency.
With that, I yield to Senator Wyden for his opening remarks.
______
Prepared Statement of David Narefsky, Partner and Co-Leader,
Infrastructure Practice Group, Mayer Brown LLP
Dear Chairman Hatch and Members of the Senate Finance Committee:
It is an honor for me to be here today to discuss the increased use
of innovative public-private partnerships to finance, construct and
operate major transportation infrastructure projects. My name is David
Narefsky. I am an attorney and partner at Mayer Brown, an international
law firm headquartered in Chicago. I am co-
leader in the Firm's Global Infrastructure Practice Group and regularly
advise both state and local governments and private clients in the
development and financing of major transportation infrastructure
projects.
State and local governments across the country are responding
proactively to what is widely recognized as a crisis in the state of
our nation's infrastructure by partnering with the private sector to
finance, develop and operate major transportation projects. In the last
decade or so, we have seen an increasing use of the public-private
partnership model, building on approaches developed and refined in
Canada, Europe, Asia and Australia and utilizing the innovative
financing and regulatory incentives authorized by the Federal
Government. As a result, public-private partnerships have played a
major role in the successful development most large-scale
transportation infrastructure projects completed or under construction
in the past decade. Many of these projects are highlighted on the map
which is attached to these remarks.
lessons learned
Reflecting on the experience of state and local government efforts
over the last decade to partner with the private sector in the
development of our transportation infrastructure, I would highlight the
following as key ``lessons learned'':
There is bi-partisan support for public-private partnerships at
both Federal and State levels. Federal financing incentives and
regulatory flexibility has been encouraged by each of the
Clinton, Bush and Obama Administrations. Both Republican and
Democratic Governors and Mayors have been strong advocates for
public-public partnerships supporting transportation
infrastructure.
Protecting the public interest is paramount: Successful public-
private partnerships require the private partner to comply with
detailed and comprehensive operating standards, with non-
compliance resulting in significant monetary penalties and/or
default and loss of the right to continue to operate the
project.
A reliable legal framework is a necessary precondition to getting
things done: Private parties investing in a jurisdiction and
its infrastructure need to know that the identified sources of
revenue will be available throughout the term of the
agreement--and that when project procurement is initiated it
will get to the finish line.
Federal financing incentives, in particular tax-exempt private
activity bond and low-cost TIFIA financing, have been critical
to successful implementation of transportation public-private
partnerships.
The successful models developed for transportation public-private
partnerships are increasingly being applied to other
infrastructure assets, including water supply and public
buildings such as courthouses and university facilities.
While there are many types of public-private partnerships, it is
critical to know when a public-private partnership is the right
structure for the project and to know what type of public-
private partnership should be implemented on a project. Not all
projects are well-suited for public-private partnership
contracting. Certain types of projects are more suited than
others for public-private partnerships because of the ability
to reduce cost, introduce innovation, and accelerate delivery
through a public-private partnership. Knowing which projects
those are and then implementing the right public-private
partnership model for those projects is critical.
Important government policy objectives can be incorporated in
public-private partnership transactions: These objectives can
include labor protections, including requirements for project
labor agreements, labor neutrality and card check procedures,
wage and benefit requirements and required offers of employment
to existing employees; disadvantaged, minority, female,
disabled and veterans' contracting requirements. In addition,
they can include limitations on toll increases and other fees
imposed by private sector partners.
Having a public champion is critical: Jurisdictions that have been
successful in developing public-private partnerships have had a
public champion who clearly articulated policy rationale for
the project, moved forward with bold initiatives to develop new
projects, and developed a vision in the face of uncertainty and
at times opposition.
Successful public-private partnerships result in significantly
reduced construction cost as well as lower and more predictable
``life cycle'' operation and maintenance costs over the useful
life of the asset.
Credibility is important: Successful jurisdictions have
credibility with their constituents that they are making the
best decisions on projects to implement and the availability of
revenue sources; credibility with private sector partners that
they will accomplish what they set out to do; and credibility
with investors and financing parties that will meet their
obligations.
ground-breaking public-private transactions
In the United States, the market for long-term leases of existing
infrastructure assets--sometimes referred to as ``brown field
transactions''--was catalyzed by two transactions that closed in 2005
and 2006--the Chicago Skyway and the Indiana Toll Road. In the Skyway
transaction, the City of Chicago received an upfront payment of $1.8
billion, which it used to retire high interest rate debt, establish
reserve accounts that significantly strengthened the City's financial
position and funded quality of life ``safety net'' programs for
residents most in need. In addition, the winning bidder was obligated
to implement significant capital improvements, including long overdue
electronic tolling and to comply with comprehensive operating
standards.
In the Indiana Toll Road transaction, the State received an upfront
payment of $3.8 billion, which it used, after paying down debt, to
fully fund its ``Major Moves'' multi-year transportation program, as
well to provide $150 million to each of Indiana's 92 counties for local
road improvements. In addition, the winning bidder committed to deliver
and additional $500 million in improvements to the Toll Road--including
electronic tolling technology, upgraded toll plazas and new lanes to
reduce congestion--and to comply with comprehensive operating
standards.
You may have heard recently about the private investors in the
Indiana Toll Road going through a bankruptcy proceeding. The public-
private partnership transaction documents worked as intended through
this bankruptcy, protecting the interests of the State and the
traveling public by ensuring the continued smooth operation of the
road.
The success of transactions like the Chicago Skyway and Indiana
Toll Road led the Commonwealth of Puerto Rico to establish a Public-
Private Partnerships Authority. The Authority's mission is to partner
with the private sector to make infrastructure projects viable when the
funds needed for development were not available in the Commonwealth's
Treasury and thereby increase the reliability of services, reduce
congestion, provide routine maintenance, improve safety and
environmental performance and generally enhance the value of Puerto
Rico's infrastructure assets.
In 2013, the Public-Private Partnerships Authority and Aerostar
Airport Holdings successfully reached financial closing of a long-term
lease for the Luis Munoz Marin International Airport in San Juan. The
San Juan Airport became the first major airport in the U.S. run by a
private operator under the Privatization Pilot Program established by
Congress in 1996 and administered by the Federal Aviation
Administration. Highlights of this transaction include a 35-year
contract with over $2.6 billion in value to Puerto Rico through a $615
million up-front payment, fixed annual payments and long-term revenue
sharing expected to total at least $500 million, and with the
operational risk and responsibility for $1.4 billion in airport capital
expenditures shifted to a private entity held to strict operating
requirements. The transaction enabled Puerto Rico to pay off
significant infrastructure-related debt and also included protections
for existing employees of the airport.
The San Juan Airport transaction closed approximately 2\1/2\ years
ago and is widely viewed as a major success: by the traveling public
that is benefiting from improved passenger amenities, by the airlines
who are benefiting from lower and more predicable rates as well as from
implementation of deferred and overdue airport capital improvements,
and by the Commonwealth which is realizing increased passenger traffic
notwithstanding the island's current economic downturn.
As noted above, San Juan is now the first U.S. airport operated by
a private party under the Federal Aviation Administration's
Privatization Pilot Program. This program requires the private party to
operate an entire airport--both airside and landside facilities--and to
obtain operating certifications from the FAA and the Transportation
Security Administration. Two major U.S. airports are currently
exploring use of public-private partnerships to achieve major capital
improvements without transfer of full operating responsibility to a
private consortium and proceeding outside of the Privatization Pilot
Program.
In New York City, the Port Authority of New York and New Jersey has
just selected LaGuardia Gateway Partners to finance and implement the
badly needed and long overdue construction of a new Central Terminal,
expected to cost between $3.5 billion and $4 billion. This consortium
will also operate and maintain the new Central Terminal under a long
term agreement with the Port Authority. Highlighting the long overdue
nature of the Central Terminal Project, Vice President Biden recently
referred LaGuardia to as ``an airport from a third world country.''
Denver recently launched the procurement for its Great Hall
Project, with the intention of benefiting from private sector
imagination and financial expertise to relocate TSA checkpoints and
related security facilities from the Airport's main passenger terminal
and repurpose this space to provide ``best in class'' passenger
amenities, including public meeting spaces and enhanced food and retail
concessions.
public-private partnerships to develop new transportation
infrastructure
The public-private partnership model described above is no means
limited to long-term leases of existing transportation infrastructure.
In fact, public-private partnerships are increasingly and more commonly
used by state and local governments to access private sector expertise
in the construction, financing and operation/maintenance of major new
or upgraded infrastructure assets (sometimes referred to as
``greenfield transactions''). To illustrate this trend, I have
highlighted below several of the most innovative public-private
partnerships recently implemented in the U.S. In each of these
transactions, the objectives of the government sponsor have been
similar: accelerated project delivery for critically needed new
infrastructure assets, reduced construction and life-cycle costs and
significant risk-shifting to the private sector.
Texas has been a market leader in the use of public-private
partnerships (referred to in that State as comprehensive development
agreements) in the construction, financing and operation of new highway
and bridge infrastructure. Projects in Texas have ranged from design-
build projects, with the State providing all necessary financing and
retaining all revenues to full toll concessions, with the private
sector retaining all toll revenues and, in some instances, making an
up-front payment to the State for the right to collect such revenues.
Among the innovative projects currently being implemented by the Texas
Department of Transportation (TxDOT) are:
SH 288 Toll Lanes Transaction: Development of new toll express
lanes in the Houston area where a private developer is paying TxDOT for
the right to develop toll lanes and receive revenues from those toll
lanes. TxDOT is receiving the benefit of an expansion of an existing
state highway, along with several connecting roads and a new Interstate
interchange with the cost and risk shifted to the private sector.
SH 183 Managed Lanes Transaction: Development of new toll express
lane facilities in the Dallas-Fort Worth area. In this case, the
private developer is constructing the road, financing a portion of the
construction costs, and operating and maintaining the facility for 25
years after construction. The Texas Department of Transportation is
retaining the tolls from the project. The project procurement was
structured so that the bidding parties competed to develop the largest-
sized project for a total of $850 million that TxDOT had available for
the project. The winning bidder agreed to construct not only the base
scope of the project but all four additional optional components
offered by TxDOT.
Denver FasTracks Eagle P3 Project. On June 2010, the Denver
Regional Transportation District awarded the $2 billion Eagle Project
P3 concession to the Denver Transit Partners consortium, which achieved
financial close on August 2010. The private sector partner will design,
build, finance, operate and maintain two commuter rail corridors, and
an associated maintenance facility under a 34-year availability
payment. One of the new rail corridors will connect Denver
International Airport with Denver Union Station. The Eagle Project is a
core component of RTD's $6.75 billion voter approved FasTracks transit
expansion program, and the only successful project under the Federal
Transportation Administration Penta-P Program. This is the first
design-build-finance-operate-maintain project for mass transit in the
United States, and it is providing significant benefits to RTD:
Unprecedented risk transfer to the private sector;
Accelerated project delivery from participation in FTA's Penta-P
program;
Significantly reduced total project cost versus internal
estimates;
Attractive funding through the use of Private Activity Bonds, tax-
exempt bonds, and Federal New Starts Funding;
The Eagle P3 Project was the first US public-private partnership
structured with government sponsor retaining all project revenues and
making annual payments to its private partner, with these payments
subject to annual appropriation by the transit agency. These payments
are subject to reduction if the project is not constructed by certain
time periods or is not constructed or operated and maintained in
accordance with the detailed and comprehensive certain standards in the
public-private agreement. Eagle P3 also represents the first use tax-
exempt Private Activity Bonds for a mass transit project.
Seagirt Maritime Port Terminal. In 2009, the Maryland Port
Administration and Ports America Chesapeake, LLC entered into a 50-
year, $1.3 billion agreement to expand and operate the Seagirt Marine
Terminal in Baltimore. Ports America agreed to make at least $500
million in capital investments to enlarge the Seagirt Terminal,
positioning Baltimore as one of only twoU.S. East Coast ports with a 50
foot draft to handle the new Super-Post-Panamax cargo ships and help
maintain its global competitive position when the Panama Canal
expansion is completed. In addition, the State of Maryland received an
upfront payment of $140 million that was reinvested in the State's
transportation infrastructure, including along the Interstate 95
Corridor and the Chesapeake Bay Bridge. Maryland will also receive both
fixed annual payments and variable revenue share payments that will be
used to support on-going transportation infrastructure improvements.
The project is projected to generate significant economic growth, over
5,000 new and high-paying jobs, and incremental tax revenues of $16
million per year.
East End Crossing. In a transaction that closed in 2013, the
private developer, WVB East End Partners, will be responsible for the
financing, construction and operation of a new toll bridge over the
Ohio River connecting Southern Indiana and metropolitan Louisville,
Kentucky. The transaction, which was undertaken by the Indiana Finance
Authority, is structured as an availability payment transaction. Under
this approach, the state receives revenues from the toll bridge and
utilizes those and other revenues to make payments to the private
developer during construction and during a 35-year operations-and-
maintenance period. The private developer does not take toll revenue
risk and instead offers a fixed price for these annual payments from
Indiana during the term and finances the transaction based on the
promise of the government to make the payments during the term of the
agreement. However, Indiana has the ability to reduce its payments if
the project is not made ``available'' either because it was not
constructed by certain time periods or was not constructed or operated
and maintained up to certain standards in the contract. As a result of
this structure and the competitive procurement between four different
contracting teams, the price received by Indiana for this project was
approximately 20% less than construction estimates.
Rapid Bridge Replacement Project. Taking advantage of public-
private partnership legislation signed into law in 2012, the
Pennsylvania Department of Transportation undertook a new initiative to
address the State's significant and growing inventory of structurally
deficient bridges. This initiative resulted in the recently awarded 28-
year agreement to Plenary Walsh Keystone Partners to replace 558 of
these bridges in just three years, with construction to be completed by
the end of 2017. In addition to significant acceleration of
construction schedule, it is expected that the average cost for design,
construction and maintenance per bridge will be approximately 20% lower
than Pennsylvania's estimate of the cost if the work had been performed
under standard contracting processes for bridge design, construction
and maintenance. As with East End Crossing and Denver FasTracks, the
private developer will not take revenue risk and instead will receive
fixed annual payments during the term of the agreement and finances the
transaction based on the promise of the government to make the payments
during the term of the agreement.
Again, I thank the committee for the opportunity to discuss the
increased use of innovative public-private partnerships to finance,
construct and operate major transportation infrastructure projects.
David Narefsky
Partner
[email protected]
71 S. Wacker Dr.
Chicago, IL 60606
T: 1-312-701-7303
F: 1-312-706-9136
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
Questions Submitted for the Record to David Narefsky
Questions Submitted by Hon. Orrin G. Hatch
Question. Mr. Narefsky, I noticed in President Obama's fiscal year
2016 budget that the President's proposal for America Fast Forward
Bonds resulted in an outlay of over $58 billion. Outlays are defined as
spending under the Congressional Budget Act. Therefore, the President's
America Fast Forward Bonds' proposal would increase spending by more
than $58 billion. And it would increase revenues by over $53 billion.
Aren't these bonds mainly the same thing as Build America Bonds with a
new name?
Answer. The President's proposal for America Fast Forward Bonds is
similar in many ways to previously authorized Build America Bonds, with
eligible projects being surface transportation facilities eligible
under title 23 or chapter 53 of title 49: highways, bridges, and
tunnels; transit and intercity passenger bus or rail; and intermodal
freight transfer facilities and private freight facilities conferring a
public benefit. America Fast Forward Bonds would be taxable bonds and
would provide a 28-percent subsidy to State and local issuers from the
Treasury Department on the interest rate of the bonds. These taxable
bonds are intended to appeal to a wider variety of investors beyond
traditional tax-exempt investors, including public pension funds,
corporate pensions, sovereign wealth funds, insurance companies, and
taxpayers in lower income brackets. I would also note that a competing
America Fast Forward bond proposal has also been proposed that uses a
different subsidy structure. Instead of receiving an interest payment
or a direct subsidy, bond holders would get an annual tax credit that
can be applied to all forms of their taxable income, including Federal
benefit and wage withholdings. Much like the Obama administration's
proposal, this tax credit proposal is designed to open up the market
for infrastructure debt to a much larger group of investors.
Question. Mr. Narefsky, in April of 2015, the Treasury Department
Office of Economic Policy issued a report titled ``Expanding the Market
for Infrastructure Public-Private Partnerships.'' This report notes
that one reason that public-private partnerships are more prominent in
Canada and other parts of the world is that the U.S. municipal debt
market is already an attractive option for investment. The report
states, ``The challenge is for PPPs to demonstrate overall cost savings
and efficiencies that outweigh the lower-cost financing advantage of
traditional procurement.''
Is there a way to take advantage of the existing municipal bond
market to lower the rate of return that a public-private partnership
needs to generate in order to be successful, for example by having
governments and non-profits, which are able to issue tax-exempt debt,
enter into contracts with private-sector partners? Is this an
arrangement that could work for large-scale infrastructure projects?
Answer. The answer to this question is ``absolutely.'' And in fact
there is currently in place a Federal financing initiative that has
been quite successful in lowering the required rate of return for
public-private partnerships: The Surface Transportation Private
Activity Bond (PABs) Program authorized in 2005. This program provides
for $15 billion in nationwide authorization for the issuance of tax-
exempt bonds to lower the cost of capital for large-scale
transportation infrastructure projects. These projects include the
Eagle P3 FasTracks commuter rail project in Denver, the East End
Crossing Bridge Project in metropolitan Louisville and the Goethals
Replacement Bridge Project in metropolitan New York. Congress should
consider increasing the amount of this bond authorization as well as
expanding authorized purposes beyond surface transportation to include
``social infrastructure'' projects such as courthouse and higher
education facilities. Furthermore, the Move America Bonds proposal
introduced by Senators Wyden and Hoeven would build off of the Surface
Transportation PABs Program and expand opportunities to use tax-exempt
financing to support infrastructure public-private partnerships.
______
Question Submitted by Hon. Robert P. Casey, Jr.
Question. Over the past decade, Amtrak funding levels have averaged
approximately $1.3 billion per year. While funding in real terms is
still slightly higher than the FY 2005 levels, it has not kept pace
with inflation. The reality is that Amtrak and intercity passenger
rail, like every other national rail network in the world, needs so
much more than this baseline amount from Congress. Do you think
initiatives like Move America Bonds could help Amtrak in the short-
term?
Answer. Yes. The Move America Bonds proposal introduced by Senators
Wyden and Hoeven would build off of the 2005 Surface Transportation
PABs Program and expand opportunities to use tax-exempt financing to
support infrastructure public-private partnerships, and these
partnerships could specifically include improvements to our national
rail network. Moreover, initiatives like Move America Bonds could be
combined with existing rail infrastructure financing incentives such as
the existing Railroad Rehabilitation and Improvement Financing (RRIF)
program to accelerate improvements to our national rail network.
______
Questions Submitted by Hon. Robert Menendez
Question. While this hearing is focused on alternative financing
for highways such as through private activity bonds, I would like to
highlight a related issue for water infrastructure. The EPA and GAO
estimate the current water infrastructure funding gap to be as high as
$1 trillion. According to a report by the American Society of Civil
Engineers, not addressing this need could cost businesses $147 billion,
households $59 billion, and result in the loss of nearly 700,000 jobs
by 2020. Clearly, we have an infrastructure crisis with water in
proportion to what we face with our Nation's highways, but people take
it for granted because the pipes are underground and when they turn on
the tap, water comes out--out of sight, out of mind. Thousands of
residents in New Jersey are serviced by at least three private,
investor-owned water companies. Because these companies operate over
multiple jurisdictions, and often multiple States, they, private
companies, offer economies of scale that bring efficiencies such as
mass purchasing power and technology and expertise. During the last
highway funding bill, I joined Senator Crapo in successfully including
a proposal to lift the volume cap on private activity bonds for water
infrastructure. Unfortunately, the provision was not retained during
conference negotiations with the House.
Mr. Narefsky, I have two questions for you.
Does it make sense for the residents in one locality in New Jersey
serviced by an investor-owned utility to not benefit from low-cost
financing provided by tax-
exempt bonds while residents of neighboring towns and cities serviced
by municipal systems do?
Answer. As a general matter, this would not seem to make good
public policy sense. And there should be ways to allow for the
residents in the locality serviced by the investor-owned utility to
benefit from low-cost financing while still making sure that these
benefits flow to the residents and not only to the shareholders of the
investor-owned utility.
Question. Do you support removing barriers to tax-exempt financing,
like lifting the volume cap--as is already done for other types of
infrastructures such as airports, high-speed rail, wharves, and solid
waste disposal industries--for truly public purpose projects like water
infrastructure?
Answer. Yes. As noted, America's water infrastructure needs are
increasing significantly and receiving increased attention. As such,
removing the currently applicable volume cap for water infrastructure
projects is justified, especially when considering that private
activity bonds for water infrastructure bonds separately require some
form of rate-setting regulatory oversight. Consistent with this
recognition of the importance of supporting investment in water
infrastructure, another barrier to the most effective use of tax-exempt
financing for water infrastructure was recently removed: specifically,
the prohibition on combining tax-exempt bonds with loans or other
financial support under the Water Infrastructure and Investment Act or
WIFIA Program.
______
Question Submitted by Hon. John Thune
Question. In your testimony you mentioned a number of P3 projects.
In your opinion, what is the single biggest obstacle that inhibits the
use of P3s? Conversely, what is the single most important aspect of
making a P3 successful?
Answer. The most important aspect of making a P3 successful is
effective executive leadership from the State or local government that
is implementing the project. As examples, I would point to the
leadership provided by former Indiana Governor Mitch Daniels (projects
such as the Indiana Toll Road and East End Crossing Bridge Project) and
Colorado Governor and former Denver Mayor John Hickenlooper (projects
such as Denver Union Station, Eagle P3 FasTracks Commuter Rail, and
U.S. 36 Managed Lanes Highway Improvements).
The single biggest obstacle that inhibits the use of P3s is failure
to clearly articulate and advance public-sector objectives and obtain
buy-in and support from affected stakeholders--legislative,
neighborhood, and civic organizations, as well as the design,
engineering, and contractor industries, etc.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
A lot of Americans wonder if Congress can organize a two-car
parade. When you look at 33 consecutive short-term patches for
infrastructure funding, it sure seems like Congress can't pave the
parade route either.
This is the second time in 8 days the Finance Committee has come
together to take a hard look at the nation's infrastructure crisis. By
now, there's a good consensus with respect to the dire condition of our
roads, highways, bridges, railways and ports. You cannot have a big-
league economy with little-league infrastructure. Yet our
transportation networks are crumbling, the price-tag of maintenance
down the road is growing, and America's infrastructure is falling far
behind our competitors'.
Last week our hearing focused on the drastic shortfall in
transportation infrastructure funding, which leaves the highway trust
fund running on fumes every few months. Finding a pathway to a long-
term source of revenue for the trust fund is absolutely essential so
that projects can get underway and construction workers stay on the
job. To solve this crisis, the Highway Trust Fund has got to be solvent
and healthy. But that's only one part of the solution.
The U.S. needs more than a trillion dollars of new investment just
to get our infrastructure up to a level of good repair. Even with a
steady stream of revenue, there's still a big gap between the work that
needs to be done and the resources to make it happen. That's why it's
so critical that Congress find some fresh ideas to get projects off the
ground, including financing tools with proven records of success.
That's what today's hearing will focus on--getting private dollars off
the sidelines and into the game on infrastructure.
Six years ago, when the Senate was looking for a way to spark
investment in infrastructure, it turned to a proposal I and a
bipartisan group of colleagues had been supporting for a long time
called Build America Bonds. At the time, people thought it was a nice
little idea that would generate $4 or $5 billion in private investment.
That turned out to be a big underestimation. In less than 2 years,
Build America Bonds sparked more than $180 billion worth of investment.
Oregon took advantage of the program to build a new interchange in
Eugene, improve the highways around Clackamas County and Bend, and a
whole host of other projects across the state. States across the
country saw their own projects get off the ground. So there shouldn't
be any question as to whether there's an appetite for effective
financing tools for infrastructure.
Last month, Senator Hoeven of North Dakota and I introduced a bill
called the Move America Act to provide an effective new approach to
financing. Picking up on several of the best features of Build America
Bonds, our new proposal, according to the Joint Tax Committee, will
turn an $8 billion taxpayer investment into $226 billion worth of
infrastructure projects.
Our proposal will cut red tape that's been a bureaucratic nightmare
for states, localities, and the private sector in the past. And unlike
Build America Bonds, this proposal is permanent. Let's not put an
expiration date on a good idea.
I believe the Move America Act, and the smart approach to financing
that it represents, are going to be a key part of the long-term plan
that solves our transportation infrastructure crisis. There is a lot of
work to be done, and it can't begin as long as Congress is falling back
on short-term funding patches. On this issue, Congress has punted more
times than the Oakland Raiders. So in my view, it's time to do better.
I hope this hearing will help bring the committee closer to a
comprehensive solution to this crisis and drive home the message that
Congress has to adopt some fresh ideas like Move America.
______
Communications
----------
AMERICAN SOCIETY OF CIVIL ENGINEERS (ASCE)
_______________________________________________________________________
Washington Office
101 Constitution Ave., N.W.
Suite 375 East
Washington, D.C. 20001
Phone: (202) 789-7850
Fax: (202) 789-7859
www.asce.org
Statement for the Record
On
``Unlocking the Private Sector: State Innovations
in Financing Transportation Infrastructure''
United States Senate
Committee on Finance
June 25, 2015
Introduction
The American Society of Civil Engineers (ASCE) \1\ appreciates the
opportunity to submit our views on private investment in transportation
infrastructure to the U.S. Senate Finance Committee. There is an urgent
and timely discussion taking place about the future of federal
transportation funding and the need to secure long-term, sustainable
funding to support the federal Highway Trust Fund (HTF). Given
yesterday's positive action by the U.S. Senate Environment and Public
Works (EPW) Committee, there exists now heightened urgency on the
Finance Committee to accommodate funding levels that can provide 6
years of growth for the federal highway and transit program.
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\1\ ASCE was founded in 1852 and is the country's oldest national
civil engineering organization. It represents more than 146,000 civil
engineers individually in private practice, government, industry, and
academia who are dedicated to the advancement of the science and
profession of civil engineering. ASCE is a non-profit educational and
professional society organized under Part 1.501(c)(3) of the Internal
Revenue Code. www.asce.org.
Private sector financing of transportation projects does not help
address the current HTF funding challenge. However, coupled with a
strong federal, state and local funding program, innovative financing
mechanisms can help fill transportation infrastructure gaps by
leveraging tax revenues and user fees. Funding cannot be separated from
the financing discussion because the availability of private sector
capital, or ability of governments to repay transportation-related
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debts, is tied to public acceptance to pay more in tolls fees or taxes.
Bridging the Gap: A Public and Private Sector Challenge
ASCE's 2013 Report Card for America's Infrastructure \2\ graded the
nation's infrastructure a ``D+'' based on 16 categories and found that
the nation needs to invest approximately $3.6 trillion by 2020 to
maintain the national infrastructure in good condition. The $3.6
trillion figure is the total needs funding amount across all
infrastructure sectors, with federal, state and local transportation
shortfall being $1.7 trillion. The following are the grades and the
investment needs by 2020 for the surface transportation area:
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\2\ www.infrastructurereportcard.org.
Bridges received a grade of C+;
Transit received a D; and
Roads received a grade of D.
The current spending of $91 billion per year, from all levels of
government, for highway capital improvements is well below the
estimated $170 billion needed annually to improve conditions. The
Federal Transit Administration (FTA) estimates a maintenance backlog of
nearly $78 billion needed to bring all transit systems up to a state of
good repair.
To meet these transportation needs, it will take:
Increased leadership in infrastructure renewal;
Strategic plans to guide investment towards increased system
performance; and
A robust program of both public and private sector investment.
The Nexus Between Funding and Financing
ASCE encourages the full utilization and expansion of innovative
financing methods like revenue bonds, tax exempt financing, federal
credit assistance programs, public-private partnerships (P3s), and
state infrastructure banks, among other tools. Innovative financing
tools can greatly accelerate infrastructure development and can have a
powerful economic stimulus effect compared to conventional methods.
However, innovative financing tools should not be viewed as an
alternative to funding, but rather financing is often dependent upon
securing public support for increased revenues.
A full menu of financing options should be available to federal, state
and local policymakers and asset owners as they seek to identify the
best way forward to build and modernize America's surface
transportation infrastructure. However, it should be noted that while
infrastructure investors such as private-equity firms, sovereign wealth
funds, and public pensions have indicated a renewed interest in
investing more in U.S. infrastructure, the investment that they make
should not be mistaken as a charity donation: Investors are looking for
a rate of return on that capital which will require some sort of
general public or transportation user payment.
There exists a clear yet underappreciated connection between our
nation's ability to generate significant funding for transportation
improvements and an investors' interest in financing transportation
projects. Repayment options on debt for surface transportation projects
often include general taxes, gasoline taxes, sales taxes,
transportation fees, toll receipts, and federal grant funding to name a
few. The following chart \3\ from a 2009 Transportation Research Board
(TRB) National Cooperative Highway Research Program (NCHRP) report on
debt financing provides a ranking of the most utilized sources of state
revenue for debt repayment when it comes to surface transportation:
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\3\ http://onlinepubs.trb.org/onlinepubs/nchrp/nchrp_syn_395.pdf.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
In addition to repayment on debt, P3s often utilize transportation user
fees as their primary payment mechanism to provide investors a
guaranteed rate-of-return. There are differing payment models that have
been developed for P3s as it relates to collecting toll revenue, and
some are more risky to the private investor than others. But regardless
of the method of collection, absent a strong appetite by both
policymakers to secure these revenues and the public to pay any tolls,
taxes or fees, the P3 model in the U.S. will remain severely
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constrained.
The attractiveness, availability and experience of state and local
governments when it comes to utilizing low-interest, tax-exempt
municipal bonds certainly has some effect on depressing the domestic P3
market, but as Fitch \4\ noted in 2014, ``Identifying and allocating
revenue for repayment of project debt is the biggest obstacle to the
renewal of aging infrastructure in many developed economies.'' Fitch
studied developed economies outside of the U.S. and consistent
throughout was not the lack of attractive financing options available,
but rather the lack of political will to raise revenues to build and
maintain existing infrastructure. ``The problem requires an often-
difficult political decision on who should pay for facilities that only
a fraction of the population will use and that will also be used by
future generations,'' stated Fitch in their report summary.
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\4\ https://www.fitchratings.com/gws/en/fitchwire/fitchwirearticle/
Revenue,-not-Financing,?pr_id=939115.
In order to help increase private investment, the federal government
should make every effort to assist public asset owners to engage in P3s
and also facilitate engagement with private investors who are
oftentimes in search of clear, accurate asset and project data to help
inform their infrastructure investment strategies. Programs like
Transportation Infrastructure Finance and Innovation Act (TIFIA),
bonds, and other innovative solutions like President Obama's proposed
Qualified Public Infrastructure Bonds (QPIBS) are attractive
instruments to both the public and private sector that can help fill
---------------------------------------------------------------------------
the nation's infrastructure investment gap.
Need for Robust, Long-Term Funding
A key challenge before the Committee is to ensure future HTF solvency.
Since the creation of the Interstate Highway System in 1956, the HTF
has been supported by revenue collected from road users. This ``pay-as-
you-go'' system has served the nation well over the past half a
century, allowing states to plan, construct, and improve the surface
transportation network. Additionally, the reliable stream of user-
supplied revenue has been critical to the legislative process, because
it has enabled Congress to guarantee the availability of multi-year
funding to states.
The federal gas tax was last changed over 20 years ago in 1993, and
since that time a revenue shortfall has developed in the HTF that
increases each year. Currently, the HTF is allocating more than the
revenues it receives, with the trust fund allocating $15 billion more
than raised in 2014 alone. The Congressional Budget Office recently
projected that the 6-year cumulative gap in the HTF will grow to
approximately $90 billion by 2020.
Despite this freeze in use fee revenue rates, every year demands on the
system grow and the purchasing power of those 1993-dollars degrades
further. As a result, current levels of highway and transit investment
cannot be maintained solely with HTF resources. Over the last 6 years,
Congress has had to dedicate approximately $60 billion from general
fund revenues to shore-up the HTF. When the choices are either to cut
funding, raid the general fund, or raise additional revenue, there
exist no more easy options. It's time for Congress to lead the way on a
solution to fix the HTF.
ASCE supports a reliable, long-term, sustained user fee approach to
building, maintaining and improving the nation's highways and transit
systems and believes that all funding options should be considered by
Congress. We recently endorsed House legislation that would raise the
federal fuels tax by 15 cents per gallon over the course of a 3 year
period. In recent years the Simpson-Bowles Commission \5\ and the
National Surface Transportation Infrastructure Financing Commission,\6\
among others, have come to the conclusion that additional user-based
revenue is needed, with each suggesting an increase in the federal
motor fuels tax rate. While the motor fuels tax remains the best long-
term solution to solving the HTF shortfall in a fiscally responsible,
deficit neutral way, a full range of options must be considered within
the context of reauthorization, either within or outside of any broader
tax reform package.
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\5\ http://momentoftruthproject.org/report/recommendations.
\6\ http://financecommission.dot.gov/.
Of utmost importance is the need to maintain the current fuels tax
rate's purchasing strength as it is not currently indexed to economic
indicators such as the Consumer Price Index (CPI). An indexing of this
sort is applied to many other government revenues and would allow the
gas tax to remain strong despite the rising costs of steel, other
building materials and labor rates. If adjusted to the projected CPI
over the next 10 years, the current fuels tax would raise \7\ an
additional $27.5 billion, which is enough to plug the HTF shortfall for
about 2 years. ASCE recommends raising the motor fuels tax by 25 cents
per gallon and indexing for inflation to help meet our nation's near-
term surface transportation needs.
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\7\ http://renacci.house.gov/index.cfm/2015/4/bipartisan-group-of-
lawmakers-introduce-long-term-solution-to-address-highway-trust-fund.
---------------------------------------------------------------------------
Conclusion
Innovative financing does not produce revenue and should not be viewed
as an alternative to increasing user fees, taxes or other revenue.
While recognizing that innovative financing is not a replacement for
new funding, ASCE fully supports innovative financing programs and
urges incentives and federal policies to make these programs available
and utilized in all states. Additionally, the federal government should
make every effort to develop new programs. These types of programs
could include QPIBS, lifting the cap on Private Activity Bonds (PABs),
reintroducing Build America Bonds, creating Transportation and Regional
Infrastructure Project bonds, establishing a National Infrastructure
Bank, expanding Transportation Infrastructure Finance and Innovation
Act, (TIFIA), and further supporting State Infrastructure Banks, among
other instruments.
Surface transportation infrastructure is the critical engine supporting
the nation's economy, national security, and public safety. To compete
in the global economy, improve our quality of life and raise our
standard of living, we must successfully rebuild America's surface
transportation infrastructure for the 21st century utilizing both
public and private sector resources. To achieve that goal, Congress
must approve a long-term, sustainable HTF revenue solution before the
law expires on July 31, 2015, and federal, state and local governments
must continue do more to attract and properly leverage private sector
infrastructure investment.
______
Public Citizen
215 Pennsylvania Avenue, SE Washington, D.C. 20003 (202) 546-4996
www.citizen.org
June 23, 2015
United States Senate
Committee on Finance
Attn. Editorial and Document Section
Rm. SD-219
Dirksen Senate Office Building
Washington, DC 20510-6200
Re: Funding for infrastructure investments
Dear Chairman Hatch and Honorable Committee Members,
On behalf of Public Citizen's more than 400,000 members and supporters,
we appreciate the opportunity to submit this statement for the record
outlining our recommendations for securing long-term funding for
transportation and infrastructure funding.
Public Citizen strongly urges the committee to consider funding options
that both maximize the benefit for taxpayers and that are sustainable
over the long term. For these reasons, we recommend that you avoid
short-term fixes such a repatriation tax holiday for multinational
corporations' profits stashed overseas and concentrate instead on long-
term funding sources that would also create an incentive to reduce
harmful emissions from vehicles such as increasing the gas tax or
implementing a tax on carbon.
It's clear that America has an infrastructure crisis: bridges are
crumbling, roads are in desperate need of repair and mass transit
options are too few and far between. The American Society of Civil
Engineers 2014 ``Report Card for America's Infrastructure'' estimates
that $3.6 trillion in investments are needed to modernize and repair
U.S. infrastructure.
The short-term funding for the Highway Trust Fund will run out again
this summer, and it is encouraging that this committee is searching for
long-term funding solutions instead of continuing to move from patch to
patch as has been done in the recent past. However, as you weigh your
options, it is important to not choose solutions that would be a losing
proposition for American taxpayers.
One such losing proposition is a repatriation ``holiday'' for taxes
owed on profits listed as being earned by foreign subsidiaries of
American corporations. Because of the current system of deferral, where
taxes may be indefinitely put off until profits are repatriated or
``brought back'' to the U.S. in the form of dividends or other
shareholder payments, multinational corporations are able to play games
with their accounting books and transfer profits between entities,
usually to companies located in low or no tax jurisdictions (or ``tax
havens.'')
This type of corporate tax haven abuse costs the federal government $90
billion in lost revenue every year. In total, more than $2 trillion in
profits are booked offshore. It's true that without changes to our tax
code, those monies will continue to be stashed in offshore accounts.
But, it is not a good solution to allow corporations to voluntarily
repatriate those profits at much lower tax rates than would have
otherwise been due, using a tactic that is known as a ``repatriation
holiday.'' This experiment was tried and failed in 2004, and as a
country we must learn our lesson and not repeat the same mistake.
A 2011 Senate report analyzing the tax repatriation holiday in 2004
found that much of the profits that multinational corporations were
supposedly holding offshore were actually sitting in U.S. bank accounts
and other assets, undercutting the concept of ``bringing the money
back.'' And, the repatriated taxes came from a small number of
corporations that used the money to pay dividends instead of
reinvesting in the economy and at the same time ended up cutting
workforces.
Proposals like the one offered by U.S. Senators Barbara Boxer (D-
CA) and Rand Paul (R-KY) would allow companies to choose to repatriate
offshore taxes at the bargain-basement rate of only 6.5 percent,
slightly more than 1 percent higher than the rate used in the 2004 tax
holiday. The Joint Committee on Taxation scored the Boxer-Paul bill as
costing $118 billion over 10 years. In addition to losing money in the
long run, as a funding option, a repatriation holiday would only be a
one-time-source of money that would do nothing to fix the long-term
funding shortfall for infrastructure investments. Additionally,
allowing another repatriation holiday would reward corporations that
have for years avoided paying taxes by using accounting gimmicks to
shift profits to the books of related foreign corporations.
Mandatory ``deemed repatriation'' proposals, such as the 14 percent
rate put forward by President Barack Obama in his FY 2016 budget
proposal, are still not a good deal for taxpayers. This is because
corporations are given a break on the tax rate, forcing the U.S. to
give up the other 21 percent of taxes that could have been assessed if
loopholes like deferral were ended and companies were forced to pay the
full 35 percent statutory rate on offshore profits (after receiving a
credit for foreign taxes paid.) Research by the Institute for Policy
Studies and the Center for Effective Government in their April 2015
``Burning our Bridges'' report examines the myriad of infrastructure
investments that could be made if loopholes were closed and offshore
profits were taxed at the full statutory rate.
Though the President's budget proposal was encouraging in that it
proposed to require a minimum tax on offshore profits of 19 percent
moving forward, meaning it could be used for a long-term funding
source, given the difference between that rate and the normal statutory
rate, it would continue the incentive for companies to play accounting
games and shift profits to overseas subsidiaries.
A better alternative would be to instead fund transportation and other
infrastructure investments with long-term funding pots that are not
only sustainable, but that are tied to the use of highways and would
incentivize positive behavioral shifts to reduce emissions that
contribute to climate change. Examples include increasing the gas-tax
and instituting a carbon tax.
The gas tax has not been raised for more than two decades and because
of inflation, the value of the 18.4 cent tax continues to fall. The gas
tax provides a disincentive for fuel use, and it makes sense to raise
the tax since it has not been changed since 1993. It should also be
tied to inflation in order to ensure its value holds steady.
Another great option for long-term funding for infrastructure
investments (among other things) would be to implement a tax on carbon
dioxide pollution, with a refund given to U.S. consumers on a per
capita basis as a way to balance out the regressive nature of the tax.
Since transportation produces around a third of our nation's C02
pollution, which causes climate change, it makes sense to tie a portion
of the proceeds from a carbon tax to fund improvements to highways and
mass transit.
Either way, both the gas tax and a carbon tax would be directly tied to
the use of our highways and provide long-term solution to funding
infrastructure investments, as opposed to a one-time option like a
corporate tax repatriation holiday.
The American people should not have to settle for a repatriation
holiday's discounted tax revenue at the expense of further
incentivizing activities by multinational corporations that
disadvantage responsible small business owners and ordinary taxpayers.
Instead, the incentive we should be creating is to reduce carbon
pollution and limit the harmful impacts of climate change.
Thank you again for the opportunity to submit our thoughts on this
important topic.
Sincerely,
Lisa Gilbert Susan Harley
Director Deputy Director
Public Citizen's Congress Watch
division Public Citizen's Congress Watch
division
Tyson Slocum
Director
Public Citizen's Energy program
[all]