Why the US needs more Skyway deals

Almost a decade ago, Chicago Mayor Richard Daley set off shockwaves in the US infrastructure industry when he executed a $1.8 billion concession with a private consortium for the operation of the Chicago Skyway toll road. Governor Mitch Daniels of Indiana immediately followed up with a similar $3.8 billion concession agreement for the Indiana Toll Road, which was enough to finance most of Indiana’s planned transportation improvements.

Since then, however, few such deals have closed. Despite noteworthy concessions for parking in Chicago, Indianapolis, and at Ohio State University, negotiations collapsed for similar deals in Los Angeles, Pittsburgh, and Hartford. As the US faces an ever-increasing backlog of infrastructure maintenance and renewal needs with little or no money to pay for them, converting a deteriorating liability into a financial asset through a concession agreement with the private sector should have wide appeal.

For the most part though, US policymakers have totally failed to take advantage of the benefits offered by asset monetisation and have instead maintained that the “public interest” is paramount. What their inaction fails to demonstrate, however, is how under-funded and poorly maintained infrastructure actually benefits the public.

The reasons for these funding shortfalls are well known. During the latter half of the 20th century, excise taxes on motor fuels (the “gas tax”) provided the bulk of funding for highways and other transportation projects: a 90 percent federal share in most cases. However, this tax is based on consumption and is not indexed to inflation. As a result, increasing vehicle fuel efficiency and the reluctance of lawmakers to increase the roughly 5 percent per gallon levy have gradually depleted the Highway Trust Fund to the point where transfers from the federal general fund have been necessary to maintain solvency.

The most recently enacted federal transportation bill does nothing to reverse this trend and is evidence of a broader national reluctance to fund infrastructure through general tax measures at the federal level. Faced with this reality, state and local officials like Daley and Daniels have sought to increase revenue for infrastructure (and other public services) by any means possible. The “brownfield” concession is one such method.

Repurposing infrastructure assets like the Skyway offers communities a way to leverage the past to build for the future, and we should be looking for more, not fewer, opportunities to do this. What is apparent is that when enterprising public officials like Richard Daley and Mitch Daniels recognise the need to increase revenue by innovative means, it can happen. Similar concessions for existing brownfield assets with predictable revenue streams have attracted private capital worldwide and institutional investors such as pension funds and insurance companies are aggressively looking for more opportunities in the US.

Opponents of these asset concessions are quick to point out that the public sector is giving up monetary benefits that governments could reap on their own. Although attractive as a headline, this is an incomplete and generally misleading assessment. Yes, the government as owner is turning over future revenue potential to the private sector in exchange for cash today, but this is not the same as Esau selling his birth right for a bowl of porridge. Revenues can be shared so that the public and private sectors benefit jointly. Concession agreements require the facility to be maintained in a specified condition, usually far better than the public operator had provided, and to be refurbished as necessary.

A fair future

Over the course of a 75- or 99-year concession period, the Skyway and the Indiana Toll Road will essentially need to be rebuilt at least once and perhaps twice. The cost of this ultimately will be paid by the future users of the facilities, but this is both fair and efficient from the standpoint of inter-generational equity. In addition, the risk that the facilities will actually be generating revenue into the 22nd century will be borne by the concessionaire, not the government. If, in the distant future, people are no longer driving private vehicles on dedicated strips of asphalt, financial viability will be more the concern of the private investors than of public institutions.

Changing the perception that infrastructure services are a market commodity rather than a public good will not be easy. However, the shift away from the tax-allocation model employed in the US at the federal level for the past 50 years to pay for infrastructure has made such public entrepreneurism a financial necessity. At the very least, the days of cheap federal money are over and US governments at all levels will need to become both more efficient in how they provide services and more innovative in how they pay for them.

In their search for a “grand bargain” that goes beyond the current short-term budget fix, this would be a great opportunity for Congress and the Administration to figure out how to encourage and facilitate the recapture of investment stranded in public infrastructure so the funds could be productively reallocated to today’s needs.

Richard Little is the retired director of the Keston Institute for Public Finance and Infrastructure Policy at the University of Southern California