Friday, June 30, 2006

Spain: Leader in Infrastructure Development

Continued from Page 4

Into North America

No Spanish companies were operating toll roads in North America in 1999 when Cintra, working in conjunction with Australia’s Macquarie Bank, won the tender in 1999 for Toronto’s Highway 407  —a 99-year contract and the largest privatization in Canada’s history. “This fundamentally relied on the reliability of Cintra’s estimate, based on their experience, that the toll road still had far to go in terms of reaching its peak travel,” said Reinhardt. “They could see how much it would cost to improve the roads. And incredibly boldly, they saw that there was a business in the United States that was going to evolve. So they bet heavily on the Toronto toll road, which included a major construction component and a number of other kinds of risks. They now turned this into a very profitable asset.”

As part of the improvements to Highway 407, Cintra installed the first system of boothless tolls, called gantries, and invested in other improvements to increase ridership. This proved successful: within the first three years, the road quadrupled in appraised value.

Continues Reinhardt, “They’ve used the success of this very risky venture as a horse to ride through the U.S.”

 While the rest of the world began to embrace privately-funded toll roads, the U.S. has been significantly slower to open its doors to this type of investment.

Despite the fact that American citizens today may assume that the local, state, or federal government always retained authority over infrastructure, in fact the history of the U.S. mirrors that of the rest of the world in private infrastructure development. “Before railroads took the freight away, we had hundreds and hundreds of privately owned, privately chartered toll road companies all around America,” says Peter Samuel, publisher of Toll Roads News. “But pavement couldn’t compete with steel rail, and turnpikes fell by the wayside.” By the Depression in the 1930s, nearly all private roads were under the ownership and operation of state authorities.

The state and federal authorities,  however, are facing a challenge today in funding necessary improvements and new construction. In the U.S., highway funding has been provided by a gasoline tax, the proceeds of which are earmarked for transportation expenditures. This tax began in Oregon in 1918 and soon spread to all other states. Today, the states impose an average tax of 20 cents per gallon, while the federal tax is a little more than 18 cents. The federal government has not raised the gasoline tax in more than 20 years.

At the same time as the gas tax has remained steady, vehicles have become more fuel efficient. “It was a popular idea to fund the highways with what is basically a user fee. But now, for every mile you drive, you’re using half as much fuel as in the past,” says Martin Wachs, director of transportation, space, and technology with the Rand Corporation. Around the country, this has led to a lack of dedicated funds for roads.

“In the past 15 years,” says Wachs, “there has been a reluctance to either impose new tolls or increase the gas tax.”

In addition, the market mechanisms in the U.S. have until recently provided a challenging environment for private investment. Bonds issued by public authorities for the development of infrastructure are not subject to federal and state tax, meaning that “the cost of public debt is less expensive than the cost of private debt,” says Reinhardt.

Reinhardt explains that the way to get around this, and to assist private investment, is by the formation of something called a nonprofit public purpose corporation, which provides the legal framework for a public private partnership (PPP). Further, Congress’s highway reauthorization bill of 2005 contained sections that extend this tax-exempt status to private companies funding toll road development. This provision allows companies to raise up to $15 billion through tax-exempt bonds for highway projects, a way of leveling the playing field.

States have also needed to change laws to allow for these PPPs in the management and operation of toll roads and other infrastructure systems; approximately 10 states have already changed their laws, and a handful of others are finding ways within the existing legal structure to allow for PPPs.

The combination of dwindling funds for roads, an awareness of the success of PPPs overseas, and the deliberate adjustment of tax and legal systems to allow for these new private initiatives has opened the doors to new, major toll roads—thus far dominated by one Spanish company, Cintra.