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The Price Is "Right" Perspectives on Finding It Genevieve Giuliano, University of Southern California Ed Regan, Wilbur Smith and Associates Jim Bourgart, Parsons Brinckerhoff Mark Burris, Texas A&M University INNOVATIVE FINANCING'S ROLE IN construction and of maintaining an aging system, devo- PRICING PROJECTS lution of financial responsibilities to lower levels of gov- ernment, and general public resistance to tax increases. I Genevieve Giuliano argue that there is more to the story: a more general shift in perceptions of the role of government, changes in our Since the passage of the 1956 Interstate Highway Act, understanding of transportation industry structure, highway infrastructure in the United States has been mixed evidence of broad economic benefits of highways, funded, built, and operated almost entirely within the increased concern with environmental costs, and lack of public sector. Infrastructure was funded primarily by consensus on how transportation problems should be fuel and other user fees, and projects were built on a addressed. pay-as-you-go basis. This traditional model of highway There are many arguments for innovative finance: finance is losing its relevance. Over little more than a projects can be built sooner, public dollars are lever- decade, an entire array of new funding strategies have aged, private-sector costs are lower, publicprivate ven- emerged. Termed "innovative finance," these strategies tures spread risk, and technology now makes possible seek to leverage public funds by accelerating project user charges and complex revenue-sharing agreements. construction, facilitating issuance of bonds and other Despite these advantages, most innovative finance proj- debt instruments, tapping into new sources of revenue ects to date have been various forms of fund advance- (including user charges), or attracting private invest- ments and more flexible financing arrangements. ment. Perhaps the most extreme form of innovative Relatively few new highway projects include significant finance is partial or full private funding and ownership private-sector participation. of highway facilities. This presentation investigates the My assessment of two groups of projects--the emergence of innovative finance, offers some explana- Assembly Bill 680 toll road projects in California and tions for its rapid proliferation, and discusses the shifts four new suburban toll roads--focuses on the various in risk that innovative finance implies. By using exam- types of risk such projects face. I conclude that success- ples of toll road projects drawn mainly from California, ful projects require uniquely favorable conditions; polit- I examine various aspects of risk to understand why ical acceptance and the sustained support of public projects succeed or fail and the lessons that can be partners are critical. Fully private facilities are generally drawn for future projects. not economically viable because of very long payback The erosion of highway system funding capacity is periods and uncertain user revenue streams. Moreover, well recognized. The conventional explanation identifies the public sector retains the residual risk, even in the the declining productivity of the fuel tax, rising costs of case of fully private projects. 54