February 15, 2008

Dear Innovation Briefs Reader,

As part of our continuing effort to provide faster delivery of information to our readers and the transportation community at large, we are discontinuing the printed version of the Briefs and converting to an all-electronic edition. This means that, instead of receiving a set of printed briefs by mail once every two months, you will be receiving our NewsBriefs by email as and when important news occurs. There will no longer be a subscription fee and no charge for this service.

Those of our readers who already receive the electronic version of the Briefs need to take no action. However, those of you who only receive printed copies by mail and wish to remain on our mailing list, will need to notify us of your email address (at [email protected] ). Multiple addresses are welcome. Our website (www.innobriefs.com) will continue to serve as an archive, provide abstracts of current NewsBriefs and post other occasional items of interest.

The new year promises to be of more than usual significance to the transportation community. The unfolding debates about the future of the surface transportation program , and the role of the federal government and the private sector in infrastructure development are likely to dominate public discussion as we come closer to the next legislative reauthorization cycle. Through our news analyses and commentaries we hope to help you better understand the implications of these developments and shed light on issues that are seldom covered by news services or the trade press.

We thank you for your past loyalty and hope to continue providing you with vital and timely news and commentary in the months ahead.

Sincerely,
C. Kenneth Orski
Editor and Publisher

RECENT ITEMS OF INTEREST

March 17, 2007

A National Highway/Transit Program for the 21st Century - A Vision Scenario

In recent months, the Congressionally chartered National Surface Transportation Policy and Revenue Commission and the House Transportation and Infrastructure Committee have called for "a new vision" for the federal surface transportation program. Behind these calls lies a belief that, in the absence of a more clearly defined mission, the federal program will lose its sense of purpose and become simply a vehicle for revenue sharing. Absent a compelling new mission, disputes over funding allocation will become ever more intense, and the temptation to earmark a high proportion of the Trust Fund for projects of local interest will become ever harder to resist. Moreover, lacking a program that is national in scope and challenging in its objectives, it may not be possible to galvanize public support for substantially increased funding that is needed to renew and expand the nations aging highway and transit infrastructure. A parallel often is drawn between the challenge facing the nation today and the situation fifty years ago, when a bold vision of interconnecting the nation with a network of limited access highways captured the public imagination and generated sustained congressional support and funding for over half a century.

In the months ahead, there will be attempts to develop a similarly challenging vision for the surface transportation program of the 21st century. The American Road and Transportation Builders Association (ARTBA) has led the way with its proposal for "Critical Commerce Corridors" (see News from the Transportation Front, Jan 26.) The American Association of State Highway and Transportation Officials (AASHTO) is developing a vision of its own and will present it at a joint AASHTO/Industry "Visioning Conference" in May. Taking our cue from these two initiatives, and in response to the National Transportation Policy Commission's open invitation for "bold new ideas," we present below our own vision of the future surface transportation program. We are mindful that surface transportation involves more than just highways and transit. However, issues of intercity freight and passenger railroads present some unique features (for one thing, they are privately owned and operated) and demand a vision scenario of their own.

In developing our vision we drew on several sources: the ARTBA Critical Commerce Corridors proposal; AASHTO's "Future Needs of the U.S. Surface Transportation System" report (February 2007); a draft NCHRP report by PB Consult, entitled "Future Options for the National System of Interstate and Defense Highways" [NCHRP Project 20-24(52)]; and the 2003 report on "HOT Networks" co-authored by Robert Poole and ourselves. Our thinking also has benefitted from participating in several recent transportation meetings at which the future of the transportation program was a topic of discussion. Lastly, we owe much to our colleagues in the transportation community with whom we have maintained a running dialogue about these issues for many months. Our thanks especially go to the 28 colleagues who responded to our request for comment on an earlier draft of this proposal. However, the responsibility for any errors of interpretation is ours alone.

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We start with the premise that the nation's surface transportation program faces four long-term challenges as we approach the next legislative reauthorization cycle. They are: (1) reducing congestion as an obstacle to metropolitan mobility, by offering travelers an option of congestion-free travel; (2) expanding the freight carrying capacity of the nation's highway system to ensure continued growth and international competitiveness of the nation's economy; (3) attracting new investment capital to help finance needed infrastructure and supplement the eroding purchasing power of the Highway Trust Fund revenue; (4) and, importantly, developing a vision and a long-range plan of action for a national highway/transit program that would capture the public imagination and galvanize political support for a significantly higher level of transportation funding.

THE VISION

In addition to the vital mission of preserving the existing highway and transit systems and enhancing their performance through improved management and operation, the nation should embark on a program of infrastructure development extending over 20-30 years. Its aim would be to accomplish two long-term objectives:

Metro Networks. One objective would be to create a set of express toll lane networks that would offer travelers the option of reliable, congestion-free travel in all major metropolitan areas (e.g. all areas expected to reach one million in population by 2020.) The toll lanes would be built largely adjacent to existing toll-free lanes within existing highway alignments as part of reconstructing and widening urban Interstates and upgrading selected urban arterials. Free flow of traffic (level of service C or higher) would be maintained in the toll lanes at all times by employing dynamic pricing and electronic toll collection technology. The express toll lane networks would be designed also to accommodate express bus service (Bus Rapid Transit). Operating in free-flow traffic, BRT vehicles would offer transit riders dependable high-frequency, high-speed service throughout metropolitan areas with service characteristics similar to those of rail transit systems (This scenario is discussed in detail in "HOT Networks: A New Plan for Congestion Relief and Better Transit," by Robert W. Poole and C. Kenneth Orski, Reason Policy Study 305, February 2003).

Trade Corridor Networks. A second objective would be to create multi-jurisdictional interconnected networks of dedicated toll truckways and exclusive truck-only-toll (TOT) lanes in high-volume intercity freight corridors. The networks would provide access to and from the nation's major gateways and intermodal terminals, including container seaports, airports, border crossings and major warehousing and distribution centers. By offering premium-level service to shippers and freight carriers and accommodating longer-combination vehicles (LCVs), the dedicated truckways and toll lanes would enhance trucking productivity, improve highway safety, decongest existing Interstates— and, most importantly, reinforce the crucial role of a modern freight transportation system in maintaining America's competitiveness in the global marketplace.

The Trade Corridor Network would be created largely in existing alignments of the Interstate and National Highway Systems. Truck-dedicated enhancements would include addition of truck-only toll (TOT) lanes, elimination of freight bottlenecks and upgrading of interchanges. In selected places, toll truckways would be built in new rights-of-way to allow intercity freight traffic to bypass crowded urban areas (examples would be the planned I-285W and I-75N TOT lanes in NW Atlanta and the Commerce Connector around Indianapolis.) Definition of the Trade Corridor Networks and identification of priority segments would be an ongoing process, conducted as a joint responsibility of state DOTs and metropolitan planning organizations in consultation with the private trucking and shipping industries. U.S. DOT would have the lead responsibility for coordinating the planning process and setting design and construction standards. (This scenario borrows heavily from the "Critical Commerce Corridors" proposal of the American Road and Transportation Builders Association.)

LONG-TERM OUTCOME

What would eventually emerge over the next two-to-three decades is a two-tiered system of metropolitan and intercity roadways. Supplementing existing toll-free highways would be networks of premium service toll facilities offering congestion-free travel for a fee. As toll-free highways became saturated with traffic, individual motorists, shippers and truck-fleet operators would switch to the free-flowing premium service facilities in sufficient numbers to ensure their political legitimacy and financial viability. That is not a far-fetched vision. Already today, commuters in Northern Virginia's Dulles Corridor are offered two parallel routes into Washington — one is a toll-free state route (Route 7), the other a privately-financed and operated toll road, the Dulles Greenway. Tens of thousands of commuters choose to pay a daily fee of $10.80 on the free-flowing Greenway in order to avoid the stop-and-go traffic on the state route.

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Big ideas only define where we want to go; a detailed strategy is needed to show how to get there. With this in mind, a concrete plan of action to implement this vision is presented below.

FUNDING MECHANISMS
In our scenario, private capital would play a crucial role. Just as private investment has built our superb telecommunications system and continues to fund expansion of freight rail capacity, so private capital could play a major role in financing future road capacity. There is evidence that capital markets are prepared to make significant investments in transportation assets that offer promise of stable and dependable streams of revenue. According to one source, there are already 15 private equity funds with an estimated $30-$37 billion in capital ready to invest in transportation infrastructure (Public Works Financing, 2/2007). Assuming that equity represents 30 percent of the capitalization in a typical leveraged transaction (with the remainder financed with bank loans), the available equity capital could leverage $110 to $135 billion in new transportation facilities.

While to date most of the capital has come from foreign sources, U.S. private investors are ready to join in. Wall Street investment banks and private equity funds including Goldman Sachs, the Carlyle Group, Citigroup and JP Morgan, have formed infrastructure funds and are actively pursuing opportunities for investments as equity partners in toll road concessions (the recent SR 121 toll road project in Texas, financed partly by JP Morgan Asset Management, is an example.) There are also signs that institutional investors are beginning to take interest in infrastructure. For example, the giant CalPERS pension fund (California Public Employees' Retirement System, $230 billion in assets) intends to add infrastructure as a new asset class to its future investment program. Such investments, the staff wrote in an internal memorandum to the Board, "would make CalPERS a player in solving some pressing public policy infrastructure problems." ("Proposed Inflation-Linked Investment Asset Class," 1/22/2007). Russell Read, Chief Investment Officer of CalPERS, has mentioned toll roads as one type of infrastructure that might qualify for the pension fund's support. Meanwhile, a large Canadian pension fund, the Ontario Municipal Employees' Retirement System (OMERS, $41 billion in assets), has announced that it will double its infrastructure investments in the coming years to 15 percent of its portfolio.

This leads us to conclude that priced facilities in high volume, traffic-intensive corridors, where tolls could be expected to generate a large, steady and predictable stream of revenue, could be financed with private capital and built, operated and maintained as private concessions. State governments would retain control over toll rates and require private concessionaires to maintain prescribed levels of maintenance and service. However, private concessionaires would be responsible for day-to-day management of the toll facilities.

Metro Networks

While some heavily used facilities of the Metro Networks (e.g. suburban congestion relievers) could be financed solely with private capital and operated as private concessions, most would require at least some public funds (Our "HOT Networks " report and subsequent analyses have estimated that tolls could cover on average 30-80 percent of capital cost of express toll lane networks, depending on extent of existing HOV lanes.) Hence, much of the metro toll lane mileage would be built as Design-Build-Operate (DBO) projects in partnership with the federal, state and local governments. The federal share would be funded with a combination of Title 23 and Title 49 (Section 5309, New Starts) dollars. To qualify for Title 49 funding, certain conditions would have to be met. For example, a specified percentage of the managed lanes capacity would have to be reserved for Bus Rapid Transit (BRT) service, and a level of service C (LOS C) or higher would have to be maintained at all times.

Full Funding Grant Agreements (FFGA), modeled after those used in FTA's New Starts Program, would be negotiated by U.S. DOT with each jurisdiction applying for federal assistance under the Metro Networks program. The FFGA evaluation process, pioneered by the Federal Transit Administration, has proved its effectiveness in assessing cost-effectiveness and financial feasibility of candidate projects. The grant agreements would define the projects' scope, schedule and timetable for completion, and establish terms and conditions of federal financial participation, such as minimum level of service to be maintained in the express toll lanes, toll rates, and disposition of any excess toll revenue. The FFGA mechanism would ensure that once a project has been approved, funds would be guaranteed through to completion. However, federal commitment would be subject to annual congressional appropriations.

Trade Corridor Networks

Large portions of the Trade Corridor Networks would likewise require public capital. Segments of the network that could not be financed with private capital would be funded with a dedicated source of revenue supported by a system of freight-based user fees. The fees could include tolls on the facilities of the Trade Corridor Networks, container fees and customs duties. Container fees represent a potentially large source of revenue. A $30 unit fee applied at all U.S. ports would generate $2.2 billion/year according to one estimate (NCHRP Project 20-24, 2005). A precedent for such fees exists in the Alameda Corridor where they are used to repay debt service on the construction bonds. Customs duties are another potentially attractive source of revenue. Reallocating 10 percent of the the customs revenues (which currently are deposited into the U.S. General Fund) would yield an estimated $3.6 billion/year.

The financing structure supporting the Trade Corridor Network would be separate from revenues supporting the core federal-aid highway program. Creating a clear separation and erecting a "fence" between these two revenue streams would assure the trucking and shipping industries that their contributions would stay within the program and not be diverted to other programs or modes. A commitment to maintain a guaranteed level of service "C" or higher on the dedicated truck network would serve as a further assurance to the trucking community that they would receive a tangible benefit in the form of a premium level of service on congestion-free roadways. Linking customs duties explicitly to improvements in the national freight distribution system would likely meet with support from the shipping community.

THE FUTURE ROLE OF THE HIGHWAY TRUST FUND

With freight-based user fees, toll revenue and private capital becoming a major source of financing new highway capacity, tax dollars flowing into the Highway Trust Fund would be devoted to the vital mission of preserving and reconstructing the existing federal-aid highway system. Supplemented with a politically realistic increase in the fuel tax, the Trust Fund would also finance a limited expansion of urban rail transit systems and of the Interstate Highway System, primarily to serve new population centers in high-growth regions of the nation. Interstate extensions would be created primarily by upgrading and reconstructing selected NHS (National Highway System) roads to Interstate standards.

With new revenue sources, state transportation tax funds and borrowing needs would likewise come under less pressure. States would use freight-based user fees, tolls, private capital and public-private partnerships to finance, build and operate much of the new highway capacity. The current highway investment strategies of the states of Texas, Virginia and Indiana may be harbingers of such a transition. All three states view private financing and toll facilities replacing public borrowing and tax increases as the primary means of expanding road capacity. In each case, the state retains control over toll rate increases and requires private concessionaires to maintain prescribed levels of maintenance and service.

IMPLICATIONS FOR THE FEDERAL TRANSIT PROGRAM

Major emphasis on the Metro Networks program would significantly modify the focus of the federal transit program. After three decades of sustained capital investment in rail transit, a program that has resulted in retrofitting 22 cities with rail transit infrastructure, the nation has begun to run out of truly cost-effective new rail projects. While federal funding support of extensions to existing rail transit networks should continue, the needs of smaller cities aspiring to rail transit could be satisfied more effectively with rapid bus service (BRT) on express toll lanes (according to Federal Transit Administration cost data, based on nine recent light rail projects, a mile of light rail costs an average $123.8 million. By contrast, a lane-mile of freeway in urban setting costs $12-20 million.) This would allow the federal transit program to shift some of its resources from the costly New Starts rail projects to the Metro Networks program.

A NEW PHILOSOPHY OF INFRASTRUCTURE FUNDING

Underlying the above vision scenario is the notion that the nation's surface transportation program should not – indeed cannot— continue relying exclusively on traditional sources of transportation revenue, i.e. fuel taxes and borrowing. The long-term sustainability of the fuel tax is increasingly being questioned. A modest short-term increase in the federal gas tax might offer temporary relief but would hardly suffice to cover the estimated $155 billion in annual investment needed to provide additional highway capacity, unless they were matched by significant additional contributions from state level. According to AASHTO, a $35 billion/year increase in state contributions would be needed to match a 7 cent increase in the the federal fuel tax.

Instead of continuing to rely on taxation and public borrowing, the nation should begin a gradual transition to a more market-oriented approach to infrastructure financing—an approach in which tolls, demand-based variable pricing (congestion pricing), private capital and public-private partnerships are allowed to play a major role. That is not to say that the Highway Trust Fund should be dispensed with. On the contrary, its resources, augmented by a politically realistic increase in the federal fuel tax, would continue to play a vital role in preserving and enhancing the nation's existing highway and transit systems. However, private capital, toll revenue and freight-based user fees would assume a dominant role in financing new highway infrastructure. In our judgment, this approach is not only the best way --- it's the only way to ensure the long-term health and vitality of our surface transportation system without imposing an unacceptable tax burden on the American people.

Future Prospects For Transportation Financing
Finding 21st Century Funding Solutions to 21st Century Fiscal Problems

Remarks by C. Kenneth Orski, Editor/Publisher of Innovation Briefs at the Transportation Leaders Meeting, National Conference of State Legislatures, San Antonio, December 5, 2006

Thank you for inviting me to be a part of your meeting on the transportation challenges confronting state legislators. With the federal transportation program coming up for reauthorization in 2009, it is a timely subject. As some of you may know, I have been reporting and interpreting transportation news for a good many years. And it is as a long-time observer of the transportation scene that I would like to report to you today on what I see as the current trends in transportation financing and where they are taking us in the years ahead.

I shall focus my remarks on two issues:

■ The emerging role of tolling and private capital in highway financing;

■ The implications of these trends for the state-federal relationship.

Growing Interest in Tolling and Road Pricing

That there is a high level of interest in highway tolling is no longer in dispute. A survey conducted by the U.S. General Accountability Office (GAO) shows that as many as 23 states have plans to build toll facilities. Of these, 17 already have toll facilities and 6 are planning their first toll roads or toll lanes. [The 6 states are Alabama, Mississippi, Missouri, North Carolina, Oregon and Washington. Highway Finance: States' Expanding Use of Tolling Illustrates Diverse Challenges and Strategies, June 2006, GAO-06-554.]

Back in February of this year we looked at the rising level of interest in tolling and concluded that highway tolling has reached the "tipping point." We wrote: "Virtually every week brings fresh evidence that highway tolling and private financing are gaining new converts among governors and state transportation officials, in state legislatures, and in the media. Growing transportation budget shortfalls, eroding value of highway tax revenues and a supportive federal policy have helped to nurture these ideas. Fanning their spread are visions of highway projects built entirely with private funds and prospects of multi- billion-dollar concessionary cash payments that could jump start ambitious transportation improvements years in advance of their planned execution." (Innovation Briefs, January/February 2006).

Since then, we have been able to document over 60 distinct tolling initiatives in 17 states. The new projects bear little resemblance to the toll roads of past generations. They take a variety of innovative forms such as conversion of existing HOV lanes to High Occupancy/Toll (HOT) lanes, construction of new express toll lanes, introduction of variable pricing on existing toll facilities, and plans for truck-only-toll (TOT) lanes. Few of these projects are being planned as entirely new toll roads. Most of them involve adding priced lanes in established highway corridors. Some of the new toll facilities are intended to double as transitways for express bus service. And many will be built in partnership with the private sector.

Why is interest in tolling growing?

There are, I believe, two explanations for the high level of interest in tolling: one is theoretical, the other pragmatic.

Tolls, we are told, are a true road user fee as contrasted with the per-gallon fuel tax which is only a surrogate measure of use. In a toll-based system motorists pay only for the actual use and the wear and tear of the roads they travel on. The collected money remains in the jurisdiction – often in the same corridor– that provides the service. Variable tolls allow road operators to charge for the actual marginal cost that individual users impose on the facility. Finally, market-based pricing allows for a more rational resource allocation — it helps direct scarce resources where additional road capacity is most needed.

But what is really driving the growth of interest in tolls is not their theoretical virtue but a set of very pragmatic considerations. State transportation officials tell us that tolls are the only way they can finance new road capacity because most of their budget already goes into maintenance and reconstruction of existing roads. Tolling allows states to build new roads that otherwise would remain on the drawing board for many years if they had to be funded with traditional pay-as-you-go financing. Another motive for tolling is to augment current gas tax revenues to meet shortfalls in local transportation budgets – shortfalls that many states are struggling with these days.

The often unstated assumption behind this thinking is that state legislatures and the U.S. Congress will continue to be reluctant to raise fuel taxes, no matter which party is in power. In order to close the funding gap, many states would have to increase local fuel taxes to a level that voters would find exorbitant. For example, a Washington State Transportation Commission report estimates that it would take an increase of 50 cents/gallon to close the State's road funding gap beyond 2009, assuming that the federal contribution remained unchanged. (Washington State Comprehensive Tolling Study, Final Report, September 2006).

At the federal level, fuel taxes would also need to be increased significantly— about 27 cents/gallon* according to recent estimates. So, I see little prospect for congressional action on a gas tax increase, certainly not during this session of Congress and probably not in the next session as well. (* based on "average annual gap to improve " of $119 billion during 2007-2017 or about 60 cents/gallon, as estimated in a forthcoming report, Future Financing Options to Meet Highway and Transit Needs, NCHRP 20-24(49). A one cent increase in the fuel tax is assumed to generate an annual sum of $1.95 billion in tax revenue. The federal share of the 60 cent increase is assumed to be 45%, based on the historic federal share of capital investment in highways.)

Eventually a mileage-based tax may replace the fuel tax and provide a more adequate source of revenue. But implementing a mileage-based tax system would involve difficult problems of transition. It is, at best, a solution for the distant future. A Transportation Research Board committee concluded that the fuel tax will be with us for at least the next 15 years. Until then at least, tolls appear to many state transportation authorities as the most logical and practical source of revenue with which to supplement the eroding value of the gas tax. The public seems to share this point of view. According to a recent AAA nationwide survey cited by Mr. Darbelnet this morning, 52 percent of respondents were in favor of some form of tolling to help finance transportation facilities, while increase motor vehicle fuel taxes received support from only 21 percent.

Tolls as a Tool of Demand Management

There is another reason why interest in tolling is rising : tolls are seen as a tool for reducing traffic congestion. And congestion mitigation has become an important policy objective at both state and federal level. Variable pricing — where tolls go up and down with the level of demand— allows highway operators to adjust the flow of traffic dynamically, and thus maintain the lanes relatively free of congestion even at the height of rush hour.

At the same time, priced lanes are becoming increasingly accepted by the driving public. Electronic toll collection technology has eliminated a major public objection to tolling because drivers are no longer required to stop at toll booths. Most importantly, toll lanes offer a tangible option to getting stuck in traffic. Surveys show that even drivers of modest means choose to pay tolls when they are pressed for time. The term "Lexus Lanes," once used as a pejorative shorthand for toll lanes, is disappearing from usage.

A graphic example are commuters in Northern Virginia's Loudoun County who have a choice of two parallel routes into Washington — one is a toll-free state route (Route 7), the other a privately operated toll road, the Dulles Greenway. Tens of thousands of commuters are opting to pay a daily fee of $10.80 on the free-flowing Greenway in order to avoid the stop-and-go traffic on the state route. And by the way, most of them drive Fords and Chevrolets rather than luxury cars.

Increased Role of Private Capital in Highway Development

A related new trend in highway financing is the growing role of private investment capital. This has taken two forms: long-term private concessions or leasing of existing toll roads; and construction and operation of new toll roads and toll lanes by private consortia.

Here again, budgetary constraints are the main reason for increased private sector participation. Public officials tell us they welcome private capital much for the same reason they have come to accept tolls: to supplement their inadequate transportation budgets. As Indiana's Governor Mitch Daniels likes to point out, thanks to the up-front lump sum payment received from the lease of the Indiana Toll Road, the state has a fully funded capital program of highway construction for the next ten years. Few projects in this program would be constructed had Indiana continued to rely on traditional funding mechanisms.

Involving the private sector, we are told, also has other advantages. It offers access to private equity capital. It allows state governments to build projects sooner than with traditional pay-as-you-go financing. It shifts the risk of cost overruns and over-optimistic traffic forecasts to the private concessionaire. Private toll road operators have often shown themselves to be more entrepreneurial, innovative and customer-oriented. And lastly, under private management, toll rates can be raised to control demand or fund needed improvements without the fear of political interference.

That is not to say that private toll road concessions should be left completely unregulated. Rather, like investor-owned utilities, their performance, rate making decisions and customer satisfaction can be closely scrutinized by public authorities and controlled through contractual conditions written into concession agreements.

There is another reason for the rising level of private investment in transportation infrastructure. Private capital markets have discovered that toll road concessions offer attractive long-term investment returns. While most of the money so far has come from foreign sources, our own venture capital does not intend to be left behind. Many private equity funds and major investment banks on Wall Street have created — or are in the process of creating— infrastructure funds with transportation as a major component. By the end of the decade we may see as many as a dozen such funds.

Some time ago, the New York Times observed, "Tolling is shaping up as one of the biggest philosophical changes in transportation policy since the toll-free Interstate highway system was created under President Eisenhower in 1956." (NYT, 4/28/2005). The Times editorial speculation turned out to be true. A growing acceptance of tolling and a willingness of private capital to invest in transportation infrastructure are indeed influencing our approach to highway financing. It is quite conceivable that toll facilities will constitute the bulk of all future additions to the nation's highway capacity, and that private capital rather than tax dollars will become the chief source of financing new road construction.

However, I cannot stress enough the words "future additions" and "new road construction." There is strong public opposition to converting existing free lanes to toll lanes and this opposition is likely to continue. Tolling existing highways, at best, is a policy for the more distant future.

Implications for the States

There is an aspect to these trends which should be of particular interest to you, state legislators. A widespread use of tolling, combined with greater reliance on private sector financing could fundamentally modify the traditional state-federal relationship in transportation.

If toll revenue and private capital became the primary means of financing new highway capacity, a major federal responsibility — construction of new roads— would be shifted to the states and their private concessionaires. Such a de facto devolution of the federal role would lessen the pressure on the Highway Trust Fund since its resources could henceforth be devoted mostly to helping preserve and rehabilitate the Interstate system and other existing highway assets. State transportation funds would likewise come under less pressure, much for the same reason.

This morning we heard some observations about two competing views of the world: one view envisions the need for new approaches to transportation financing and a greater role for the states; the other view emphasizes traditional tax-based financing and a strong federal role in transportation investment. Rather than seeing these two views in opposition to each other, I see them merely as a reflection of a new division of responsibility necessitated by new fiscal realities. The federal tax dollars will continue to be needed to support the vital mission of maintaining and reconstructing the existing highway system. The states, on the other hand, will assume primary responsibility for financing new infrastructure. They will do so not with borrowing or tax dollars but with the help of tolls, private capital and public-private partnerships.

A New Vision

We also talked this morning about the need to develop a new vision. Imagine, if you will, a long-term program (extending very likely over several decades) of creating networks of express toll lanes in major metropolitan areas of the nation. Imagine further multi-state systems of toll truckways in freight-intensive corridors. As existing toll-free roads became clogged with traffic, individual motorists, shippers and truck operators, I suggest, would switch to these premium-service congestion-free toll facilities in sufficient numbers to ensure their financial viability and attractiveness to private investors.

The toll networks would be financed, built, and operated as private concessions, financed largely with private capital. Just like other investor-owned public utilities, they would be subject to state regulatory oversight, but would be managed like a business and have a strong customer service orientation.

What is currently happening in the states of Texas, Virginia and Indiana may be a harbinger of this transition to a public utility model. All three states view privately financed toll facilities as a means of expanding road capacity without local borrowing or a tax increase. In Texas, long-term private toll concessions will help fund seven segments of the Trans-Texas Corridor (TTC-35)— an initiative that owes much to my fellow panelist, Mike Krusee. In Northern Virginia, express toll lanes, paid for largely by the private sector, are being added to expand the capacity of the Capital Beltway and I-95. And, in Indiana, Gov. Mitch Daniels has just announced an ambitious new project – construction of a 75-mile circumferential toll road around Indianapolis– utilizing a public-private partnership to build, operate and maintain the facility without, in his words, " a penny of borrowing or a tax increase." In all three cases the state will retain control over toll rates and require the private concessionaire to maintain prescribed levels of maintenance and service.

These three states are the trailblazers. They are pioneering, to paraphrase Transportation Secretary Mary Peters, 21st century funding solutions to 21st century fiscal problems. May I respectfully suggest that you, too, should consider these approaches as worthy of your consideration as you seek to address your own state's transportation needs.

Thank you again for the opportunity to be with you today.

INNOVATION BRIEFS
10200 Riverwood Drive, Potomac, MD 20854-1536
tel: 301.299.1996; Fax: 301.299.4425; e-mail: [email protected]