There are also potential costs and  trade-offs. Highway public-private partnerships can also potentially provide mobility  and other benefits to the public sector, through the use of tolling. Though concession agreements can limit the  extent to which a concessionaire can raise tolls, it is likely that tolls will  increase on a privately operated highway to a greater extent than they  would on a publicly run toll road. Unlike public toll authorities, private-sector firms pay federal income tax. According to financial  and legal experts, including those who were involved in the lease of the  Chicago Skyway in Chicago, Illinois, and the Indiana Toll Road, the useful  economic life of those facilities was lengthy. The requirement to  demonstrate effective asset ownership thus required lengthy partnership  concession periods and contributed to the 99-year and 75-year concession  terms for the Chicago Skyway and Indiana Toll Road, respectively. Determining the extent of depreciation deductions associated with  highway public-private partnerships, and the extent of foregone revenue to  the federal government, if any, from these deductions is difficult to  determine because they depend on such factors as taxable income, total  deductions, and marginal tax rates of private-sector entities involved with  highway public-private partnerships. Financial experts told us that in the  absence of the depreciation benefit, the concession payments to Chicago  and Indiana would likely have been less than the $1.8 billion and $3.8  billion paid, respectively. State and local officials in  the U.S. projects we reviewed heavily relied on concession terms. While these protections are important, governments in other countries,  including Australia and the United Kingdom, have developed systematic  approaches to identifying and evaluating public interest before agreements  are entered into, including the use of public interest criteria, as well as  assessment tools, and require their use when considering private  investments in public infrastructure. While similar tools have been used to some extent in the United States,  their use has been more limited. Using up-front public interest analysis tools can assist public agencies in  determining the expected benefits and costs of a project and an  appropriate means to undertake the project. Not using such tools may lead  to certain aspects of protecting public interest being overlooked. Direct Federal Involvement with Highway Public- Private Partnerships Has Generally Been Limited, but Identification of National Interests in Highway Public- Private Partnerships Has Been Lacking

Direct federal involvement in highway public-private partnerships has  generally been limited to projects in which federal requirements must be  followed because federal funds have or will be used. Recent highway public-private partnerships have involved sizable  investments of funds and significant facilities and could pose national  public interest implications such as interstate commerce that may  transcend whether there is direct federal investment in a project. Given the minimal federal funding in highway public-private partnerships  to date, few mechanisms exist to consider potential national public  interests in them. We have called for a fundamental  reexamination of the nations surface transportation policies, including  creating well-defined goals based on identified areas of national interest,  incorporating performance and accountability into funding decisions, and  more clearly defining the role of the federal government as well as the  roles of state and local governments, regional entities, and the private  sector. Such a reexamination provides an opportunity to identify emerging  national public interests (including tax considerations), the role of the  highway public-private partnerships in supporting and furthering those  national interests, and how best to identify and protect national public  interests in future public-private partnerships. This is no easy task, however.
Why GAO Did This Study

The private sector is increasingly involved in financing and operating highway facilities under long-term concession agreements. In some cases, this involves new facilities; in other cases, firms operate and maintain an existing facility for a period of time in exchange for an up-front payment to the public sector and the right to collect tolls over the term of the agreement. In February 2008 GAO reported on (1) the benefits, costs, and trade-offs of highway public-private partnerships; (2) how public officials have identified and acted to protect the public interest in these arrangements; and (3) the federal role in highway public-private partnerships and potential changes in this role. The Senate Finance Committee asked GAO to testify on this report and to highlight its discussion of tax issues. GAO reviewed the experience of projects in the U.S. (including the Chicago Skyway and Indiana Toll Road agreements), Australia, Canada, and Spain.

What GAO Found

Highway public-private partnerships provide potential benefits, such as sharing risks with the private sector, more efficient operations and management of facilities and, through the use of tolling, increased mobility and more cost-effective investment decisions. There are also potential costs and trade-offs--there is no "free" money in public-private partnerships and it is likely that tolls on a privately operated highway will increase to a greater extent than they would on a publicly operated toll road. There are also financial trade-offs. Unlike public toll authorities, the private sector pays federal income taxes and can deduct depreciation on assets for which they have effective ownership. The extent of these deductions and the amount of foregone revenue, if any, to the federal government is difficult to determine. Demonstrating effective ownership may require lengthy concession periods and, according to experts involved in the lease of the Chicago Skyway and Indiana Toll Road, contributed to the 99-year and 75-year concession terms on these two facilities, respectively. Experts also told us that in the absence of the depreciation benefit, the concession payments to Chicago and Indiana would likely have been less than $1.8 billion and $3.8 billion, respectively. Highway public-private partnerships in the U.S. that GAO reviewed sought to protect the public interest largely through concession agreement terms prescribing performance and other standards. While these protections are important, governments in other countries, such as Australia, have developed systematic approaches to identifying and evaluating public interest and require their use when considering private investments in public infrastructure. Similar tools have been used to some extent in the United States, but their use has been more limited. Using up-front tools can also assist public agencies in determining the expected benefits and costs of a project and an appropriate means to deliver the project. Not using such tools may lead to certain aspects of protecting the public interest being overlooked. While direct federal involvement has been limited to where federal investment exists and while the DOT has actively promoted them, highway public-private partnerships may pose national public interest implications such as interstate commerce that transcend whether there is direct federal investment in a project. However, given the minimal federal funding in highway public-private partnerships to date, little consideration has been given to potential national public interests in them. GAO has called for a fundamental reexamination of our surface transportation policies, including creating well-defined goals based on identified areas of national interest. This reexamination provides an opportunity to identify emerging national public interests (including tax considerations), the role of the highway public-private partnerships in supporting and furthering those national interests, and how best to identify and protect national public interests in future highway public-private partnerships.