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forecasts rely exclusively on predictions of traffic.
"These revenue forecasts for toll roads, although critical to the evaluation of whether to invest in a proposed project,
have not been reliable and add to the uncertainty about the financial viability of public-private partnerships," the USDOT
report states.
These issues have led to serious financial difficulties for a number of PPP projects around the country, according to the
GAO report. For example:
Dulles Greenway is a 14-mile, privately developed toll road extending from Dulles International Airport to Leesburg, Va. It
was developed as a private, for-profit venture and opened in 1995. Just a year later, the developers went into default on
their loans due to toll revenue 80 percent below projections. They refinanced the debt in 1999, extending the payments by nine
years, lowering the interest rate and restructuring the debt to provide for lower payments until 2011. But as of the 2004
report, its income was still negative and had never made a profit for the investors.
The S.R. 91 express lanes comprise a 10-mile, four-lane toll road that was built in the median of the existing freeway. It
connects large residential communities to major employment areas in California's Orange and Los Angeles counties. A private,
for-profit entity was given a 35-year lease on the express lanes. The lease contained a non-compete clause that prohibited the
state from making improvements to any roadways within 1.5 miles of S.R. 91 until 2030. The lanes opened in 1995. In 2002, the
Orange County Transit Authority decided to purchase the lanes from the developer because of public pressure to make
improvements to S.R. 91 that were prohibited by the lease. The sale closed in 2003.
The Southern Connector is a 16-mile, four-lane toll road linking I-85 and I-385 in southern Greenville County, S.C. The
Connector was developed by a nonprofit corporation comprised of business leaders in the area. It has an operating agreement
with the state for 50 years or until the bonds are repaid, whichever comes first. The toll road opened in February 2001.
Traffic has been half of what was projected and the developer has only been able to generate enough money to cover maintenance
and operating costs. As of the date of the report, the developer had used up its debt reserve fund and Standard & Poor's had
lowered its bond rating to "negative."
The Pocahontas Parkway is a four-lane, 8.8-mile toll road built by a private, nonprofit developer on the south side of
Richmond, Va. It opened in 2002. As of the publication of the GAO report, the toll road was operating at less than half of the
projected traffic level. Under the agreement with the state, toll revenues must first go to debt service and the state must
pick up the cost of operations and maintenance until tolls can also cover this cost. In November 2002, the Fitch rating agency
placed the Pocahontas Parkway bonds on a negative watch.
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Despite the poor track record of PPPs in the United States, Mark Florian, managing director of Goldman Sachs' municipal
finance and infrastructure group, says this method of financing infrastructure is widely used around the world.
Earlier this year, Goldman Sachs oversaw the long-term leasing of two major infrastructure projects in the United States:
the Chicago Skyway, a 7.8-mile toll road built in 1958 to connect the Dan Ryan Expressway with the Indiana Toll Road, and the
Indiana Toll Road, a 157-mile toll road that carries I-90 and I-80 and opened in 1956. Florian handled both transactions.
According to Florian, there is a tremendous appetite internationally, not just for existing systems with long track records
like the Skyway and the ITR, but what he calls "greenfield" projects (new construction), too.
"The private sector is used to doing this in other parts of the world," Florian said. "As a matter of fact, there are a
lot of pension funds and other investors around the world that are very, very interested in investing in these types of assets
because they are steady cash flow producers. They want assets that produce cash flow over a long, long period of time. There
has actually been a tremendous growth in the investor dollars from around the world that want to invest in this thing that we
call infrastructure. There is a great appetite for taking risks and for being involved in this sector from an investor
standpoint."
Florian says investors understand there are risks involved, but he says they also have ways to mitigate those risks. For
example, construction risk - the risk that the project might exceed construction schedules or projected costs - can be reduced
by entering into a guaranteed contract with the builder, he says.
"The biggest risk in my mind is actually the revenue risk," said Florian. "What if you build it and nobody comes? That's
the risk. There's a lot of technology and knowledge about how to forecast where traffic patterns will be. I am not saying it
is always right, but there is a lot of money that is spent in analyzing those aspects as well. So people make their best
guess. They might say there is more risk, so instead of maybe demanding a 9 percent return on their investment, they might
want a 12 percent return to compensate them for additional risks. But they are willing very much to take those risks."
Florian says another way to mitigate the risk involved in a greenfield project is for the government to sell a long-term
lease on another piece of infrastructure that is already built and has a proven track record - and use the proceeds to build
the new structure itself.
But U.S. Rep. Jerry Costello, a Democrat representing Illinois, remains skeptical.
"While there are successful toll bridges in other parts of the country, it is generally in an area where you have no other
route to select in order to get from point A to point B," Costello said. "In those cases where you have no choice, then people
have to pay the toll or they are not able to get where they want to go."
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