Financing Surface Transportation in the United States: Forging a Sustainable Future—Now! (2012)

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35 PLENARY SESSION 4 International Panel Brian Howells, Halcrow, Inc. (Moderator) Robert Bain, RBconsult Ian Scholey, Parsons Brinckerhoff Zongzhi Li, Illinois Institute of Technology Brian Howells of Halcrow, Inc., moderated Plenary Session 4, in which experts from Europe and Asia shared their views on the potential transferability of successful international strategies to transportation infrastructure investment in the United States. The follow- ing were among the key questions for consideration: How should delivery and funding mechanisms be determined and used, and under what circumstances? What are the critical success factors? Specific issues related to project delivery methods and risk allocation were also addressed. leSSonS learned from euroPean PuBlic– Private PartnerSHiP infraStructure ProjectS Robert Bain of RBconsult presented research prepared by the European Investment Bank (EIB), which is the largest lender to public–private partnership (P3) projects in the world. EIB was created in 1958 and is the Euro- pean Union’s (EU’s) long-term lending institution. The bank is owned by the EU’s member states and supports EU policies and priority objectives such as European integration through its financing operations. Mr. Bain interviewed senior staff at the bank, reviewed project documentation, and distilled lessons learned from recent P3 activity in Europe. EIB has sup- ported more than 200 P3 projects. Highways, schools, hospitals, and rail developments are among them. With schools, design–build procurement is often used, and risk allocation is evolving. This has been largely suc- cessful, but some issues, such as school closings, were not addressed in contract documents. These issues can be resolved when a champion helps make things come together. Experience in Europe has shown that hospital P3s are not always affordable in a fast-paced sector with large capital costs. In some cases hospital projects may be gold plated. In the end, planning is driven by procurement, but most observers believe that with health care it should be the other way around. There is even more risk with rail projects because of their size and complexity. There is significant geological risk, and there are multiple intersec- tions with their parties, who are not obliged to help. The P3 experience in these three sectors indicates that the most successful have involved stand-alone projects that are sup- ported both operationally and institutionally. The highway sector is a particularly good fit for P3 procurements. They are effective because they lock in future maintenance needs and obligations. A number of risks must be managed, including unforeseen ground conditions. Construction risks may be overemphasized, and operational risks are perhaps of greater concern to lenders. Highways are likely to remain at the forefront of P3 involvement in Europe. Mr. Bain then turned to the subject of measuring the success of P3 highway performance. This often involves revisiting policy objectives. Many objectives may have been muddled and contradictory or justified retrospec- tively, and some may have evolved over time. Three key benefits of highway P3s are fixed-price asset delivery, the locking in of high-quality maintenance, and provision of value for money. P3s have also brought new technolo- gies and commercial discipline to the highway sector. In Europe as in the United States, there are two types of highway P3 arrangements: those based on user-paid

36 FINANCING SURFACE TRANSPORTATION IN THE UNITED STATES tolls and those using availability and performance-based payment mechanisms. Availability and performance- based projects are increasingly popular. However, they may be more of a financier-led solution than a policy solution, since they provide no new money and instead only reprofile government obligations. This raises the question of whether the availability and performance- based P3 approach is sustainable. In the United King- dom, 20 percent of the Highways Agency budget pays for shadow toll projects, which represent 8 percent of the highway network. In Portugal, 125 percent of the budget is paying for 50 percent of the network. Mr. Bain believes that the M25 will be the last shadow toll project in the United Kingdom because the concept is unsustain- able. This experience demonstrates that financing solu- tions should not be confused with funding solutions. HigH-SPeed rail and m25 HigHWayS agency deSign–Build–finance–oPerate Ian Scholey of Parsons Brinckerhoff in the United King- dom discussed his experience in working on highway and rail P3 projects in Europe. They include the Portu- guese High-Speed Rail Project, which is part of a Trans- European Networks corridor that will link Portugal with Spain and France. The Portuguese have done a bench- marking assessment of how other rail projects in France, Spain, the Netherlands, and Brazil have been financed and procured. The model the Portuguese have used is to let individual P3 contracts for substructure, super- structure civil and track works, and “high-tech” control systems with values of between 1.4 billion and 2.0 bil- lion, while retaining the overall management as a pub- lic rail function. The program is funded from multiple sources including EU grants (39 percent), state support (12 percent), and private finance (49 percent, of which 36 percent is from EIB). The cost of the program is 40 percent less than public-sector comparator. The public sector retains responsibility for traffic, political, and some planning and environmental risk, while the private sector assumes responsibility for all other risk areas. The Portuguese have had good experiences with P3s. They have managed P3s well and derived significant savings from the approach compared with the cost of advancing the projects on a traditional public-sector-led basis. One of the largest P3 projects in the United Kingdom is the M25, an orbital highway around greater London with daily traffic levels exceeding 200,000 vehicles, which makes it one of the most heavily traveled highways in Europe. The Highways Agency has initiated a project to widen the remaining three-lane sections to four lanes and has let a 30-year P3 contract to operate, maintain, and widen the motorway. This is the Highways Agency’s 12th P3 contract, and at 30 years it is by far the longest. A public-sector comparator analysis has shown that this approach provides significant efficiencies derived mainly from combining large on-line capital widening works with 30 years of operations and maintenance. The scope of the P3 procurement involves operat- ing and maintaining a 400-kilometer highway, includ- ing the Dartford Crossing over the Thames and three tunnels, and widening 100 kilometers of highway. Bids were received from five consortia in March 2006, with three groups shortlisted in October 2006 and final bids received in February 2008. The preferred bidder was selected in May 2008, when a separate competition to raise more than £1 billion in funding began. The High- ways Agency worked closely with 19 banks, and the proj- ect reached financial close in May 2009 without the need for public subsidies. Credit was extended by a group of 16 private banks and EIB. The Highways Agency found that even in a time of financial turmoil, the P3 approach provided value for money. Mr. Scholey stated that the lessons learned from the M25 P3 initiative indicate that the scope should be fixed early in the process and stake- holders should be involved in the project. evolution of tranSPortation finance in cHina Zongzhi Li of the Illinois Institute of Technology began by reviewing the current status of the surface transportation sector in China, which is seeing extensive investment and expansion. In 2009, the highway network included 2.4 million miles of highway and 40,000 miles of expressway, with more than 6,000 miles of expressway under construc- tion for a total investment of $150 billion. The rail net- work includes 54,000 miles of track, of which 4,071 miles can sustain high speeds of 155 to 220 mph, with 20,000 miles of new track under construction, involving a total investment of $300 billion. There are also 9,000 miles of bus transit systems and 480 miles of fixed guideway tran- sit lines. Plans call for investing $350 billion in roads and $700 billion in rail by 2020, when the country will have a high-speed rail network of some 10,000 miles connecting most capital cities to Beijing within 4 hours. In 2008, the federal government provided 15 percent of all highway funding in China. Local governments pro- vided 35 percent of highway funding, domestic banks provided 36 percent, and the remaining 14 percent came from other sources including foreign loans, domestic enterprise investments, and carryover funds from earlier years. The profile of rail funding is markedly different, with the central government contributing at least half of all funding. Rail funding also includes medium- and long-term domestic bank loans and railway bonds. China is currently facing many highway financing and investment issues. Funding is insufficient, with the high-

37INTERNATIONAL PANEL way program facing huge gaps. Highway investment is not perceived as an appropriate activity for the central government. There are also many risks involved in high- way financing, many of which are borne by state-owned enterprises. There is also inadequate private capital investment. Mr. Li believes that reform is needed in the highway financing and investment sector in China. Fund- ing sources should be diversified, and raising funds from various sources is inevitable if the funding gaps are to be filled. Road pricing policies should also be rationalized, with revenues generated from tolls playing a pivotal role in highway financing. In western China the government wants to attract private capital, but it recognizes that it must invest public money to attract this investment. Mr. Li stated that rail financing and investment issues in China include the need to diversify the sources of fund- ing, which now comes mainly from investment compa- nies established by the central or local governments and other large state-owned companies. These sources of financing are insufficient to meet the financing needs of large-scale railway construction. Management also needs to be improved to address the lack of internal investment control and fund development mechanisms. Joint devel- opment by central and local governments and domestic and foreign investors will become an important feature of construction. China should also establish a railway indus- try investment fund by using local savings and foreign investments, especially from pension and insurance funds. queStionS and anSWerS Question: Has there been a comparison of EIB tools and programs and the Transportation Infrastructure Finance and Innovation Act credit program in the United States? Answer: EIB does not take project risk. This is left to the banks, which provide guarantees. Banks are in a position of needing to take on construction risk. Question: What is the impact of the high-speed rail pro- gram in China on the United States? Answer: China may be rushing its high-speed rail pro- gram. The Ministry of Transport has more than 20 rail construction companies, which all take on loans. This may not be sustainable. As China makes clear, massive infrastructure improvements are under way outside the United States. If the United States cannot figure out how to build comparable programs, it will fall behind. Question: Is Europe becoming overextended with shadow toll facilities? Would there be merit to a model under which governments sponsoring P3 projects main- tain control over toll proceeds and toll rates? Answer: Yes, there is a Canadian project where toll proceeds flow through the state, but that does not change the value of the revenues generated. The essential point is that availability payments and shadow tolls are tools for wealthy countries. They are not sources of free money.