Week of September 9, 2009
Snapshot from the Field
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What's Moving and What's Not
by ADAM BRUNS,
managing editor, Site Selection
Mississippi Gov. Haley Barbour, Aug. 31, 2009, at the opening session of the Southeast Association of State Highway and Transportation Officials annual conference.
SAFETEA-LU reauthorization was on a lot of DOT minds at SASHTO this year, as were ARRA, TIFIA, PPP and TIGER too.
There may be no U.S. arena more filled with acronyms than transportation their number being a direct reflection of the strong role of government in determining how the nation moves. A visit to the annual conference of the Southeast Association of State Highway and Transportation Officials (SASHTO) in Biloxi, Miss., helped decipher some of the policy mumbo-jumbo and find the inflection points between words and action. But in this era of federal stimulus and recovery funding, all eyes are turning in unison toward the nation's capital.
As Mississippi Gov. Haley Barbour and others reiterated to the delegates from 12 states and Puerto Rico, industrial development choices often can hinge on transportation infrastructure choices made years before. Right now, however, some of those choices appear to be out of state hands, as they struggle with the falling revenues that have come with the recession.
SASHTO's event itself reflected this reality: Not one delegate was present from the Virginia Dept. of Transportation, for instance, as that agency implements austerity measures amid a bloodletting that will see a reduction of up to 1,000 jobs and cutbacks in such areas as landscaping, equipment maintenance, engineering and construction. The moves come even as the Commonwealth surpasses $1 billion in American Reinvestment and Recovery Act (ARRA) funding. VDOT aims to get down to 7,500 employees from its current 8,200 by July 1, 2010, as part of its efforts to address a $2.6-billion revenue shortfall.
One way to shore up those accounts has been through public-private partnerships (PPP or P3), which not so long ago were all the rage in transportation. More recently, Chicago's big deal to monetize the value of Midway Airport fell through prior to close (though a similar deal with its parking meters has proceeded), the $13-billion sale of the Pennsylvania Turnpike ran into political roadblocks, and other deals have stalled due to the economic crisis. But the need and the opportunity are still there, said a panel of PPP experts at SASHTO.
Down but Not Out
"We still see a degree of interest, in large part because state and local governments are under a fair degree of financial stress," said Marshall Crawford, managing director, JP Morgan. "There is not enough federal funding to do these projects." State and local governments need to leverage federal stimulus money to garner matching dollars, he explained, and P3 helps.
"The general view has been that the programs we have are broken and need greater accountability," said Jack Basso, COO of the American Association of State Highway and Transportation Officials. "Earmarking has been poisonous to the public perception of what we're doing."
Yet somehow, he said, the U.S. needs to spend between $225 billion and $340 billion per year for the next 40 years or so to catch up with its infrastructure deficit. It's spending around $90 billion now.
PPPs have a relatively small role currently, compared to federal grants, which comprise half of all funding. AASHTO proposes keeping the highway trust fund solvent with such immediate measures as a hiked gas tax and a truck sales tax increase. But even with re-jiggered formulas in Washington, there is a place for innovative financing arrangements.
"We're clearly at a crossroads," said Basso. "The future of these programs will be written unlike it was written in 1956 when the Interstate system was created."
Among the alternatives available, explained Stratford Shields, managing director of Morgan Stanley Smith Barney, are traditional tax-exempt bonds, but more popular in recent months has been the Build America bond program, which expires on Dec. 31, 2010. He explained that because ratios with tax-exempt bonds are out of whack during the financial crisis, Build America bonds, which issue taxable debt, can save the issuer up to 100 basis points. More than $26 billion in Build America bonds has been issued, including to the Mississippi Dept. of Transportation, and a huge $1.75-billion deal with the New Jersey Turnpike Authority that saved 53 basis points vs. tax-exempt bonds.
Shields explained that because of the virtual disappearance of bond insurance during the financial crisis, it's a different universe of investors now, including life insurers and pension funds, as well as overseas investors, many of whom are unfamiliar with investing in municipal credits. Thus explaining your credit is imperative, up to and including a marketing road show.
Shields pointed out that GARVEEs (grant anticipated revenue vehicles) continue to offer financing benefits as well, as in the case of a successful offer in Ohio that built an order book of $240 million just one month after the 2008 collapse of Lehman Brothers. But as the name implies, they are dependent on federal grants, many of which hang in the balance as Congress examines the reauthorization of SAFETEA-LU (The Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users). Different bills are under consideration, but the general consensus is that yet another 18-month extension is in the offing, rather than a new six-year plan.
Another program in similar limbo is TIFIA (The Transportation Infrastructure Finance and Innovation Act of 1998), though Mark Sullivan, senior advisor to the Office of Innovative Program Delivery at the Federal Highway Administration, noted that the current fiscal 2010 appropriations bill quadruples TIFIA funding levels. Still another is the Transportation Investment Generating Economic Recovery (TIGER) grant program, which offers an opportunity for social programs and P3 arrangements to work together, said Marcus Lemon, former counsel for the Bush administration, who now serves as a partner at Baker & Miller, PLLC.
"We don't know which projects will play out, but livability, access to economic opportunities and helping distressed areas are things we can achieve while we advance PPPs," said Lemon.
Meanwhile, political calculations remain as meaningful as the financial figuring to P3 projects.
"We don't believe the $13-billion price tag was the issue" with the Pennsylvania Turnpike deal, said Crawford. "It was political acceptance of privatization of the operations."
The point was reinforced by Florida State Representative Audrey Gibson (D-Jacksonville), the Democratic ranking member on the Florida legislature's Economic Development & Community Affairs Policy Council, and a member of that body's Transportation & Economic Development Appropriations Committee.
"The public perception is we're giving away the store not only are you owning the tolls, but we're giving you the asset," said Gibson from the audience. "You're going to run against a wall, because they think we're giving away their money. Who is responsible for the maintenance of this road that is driven on by the public, but not owned by the public, and how do you relate that to the public?"
"Maintenance can be part of a contract," said Marshall. "In most cases it's in fact the private sector that's responsible. I've been to a lot of public forums there is a lot of misunderstanding about how a PPP works."
Such reactions indeed have led to lawmaker caution, such as in P3-happy Texas, where the legislature enacted a moratorium on new P3 projects in the state. "Today, you couldn't put that bid together for $3.8 billion for the Indiana toll road," said Crawford, pointing out that while the capital structure of P3 two years ago might have been 80 percent debt and 20 percent equity, recent prospective deals may have as much as 100 percent equity.
"That was part of the reason Midway failed," he explained. "They accepted a bid, put down $125 million, and couldn't get financing for it. So they lost a $125-million deposit."
Even so, the P3 offers are still coming.
"One thing we see is an increase in unsolicited bids, partly because the whole process of solicitation was built on the paradigm of how the market used to work," said Crawford. "Now they're saying that doesn't work for us anymore. Let the entities react politically to it."
Crawford explained that in a number of situations where there's been a procurement that does not result in an acceptable bid, "private-sector entities are reformatting, and coming at it again with an unsolicited proposal to say ‘Here's how we would get it done.'"
Barney Allison, a partner in the Nossaman law firm, noted that the only financial close of a P3 project for a U.S. highway so far this year was for the I-595 project in Florida. How did they do that?
"Florida's deal is the first availability payment contract in the U.S., which is different from a toll concession," said Allison. "In a toll concession, revenue risk is shifted to the private entity. They take the risk traffic won't be there. In an availability payment contract, an annual payment comes from the state ‘We'll pay $"X" million every year provided you perform according to the contract. If you don't, we'll ding you according to when it's not available.'"
Another Florida deal in procurement involves the $700-million Port of Miami tunnel project, but that project carries significant risks, said Allison, as the concessionaire has been told it has to stage its tunnel-boring machine out of the same island where people park their cars while on cruises, and would have to maintain traffic to that island (Dodge Island) during the entire project. Allison said the close of the deal is expected in October.
Allison said the next generation of P3 is "going to be right here in the southern states," with new procurements being considered in Georgia and Louisiana, and a new ring highway being considered around the island of Puerto Rico.
On Monday, Aug. 31, 2009, what Mississippi DOT Director, SASHTO President and incoming AASHTO President Butch Brown called "the strongest panel of freight executives that's ever been assembled in one place at the same time" took the stage to discuss the future of freight in the United States. Moderated by Allen Biehler, president of the American Association of State Highway and Transportation Officals (AASHTO) and Dr. Michael Meyer, professor of civil and environmental engineering at Georgia Tech, the conversation started with a request for predictions about freight growth over the next 25 years.
"The hopeful dream is we can expect GDP to double over the next 20 years," said Steve Williams, chairman and CEO of trucking firm Maverick Transportation, Inc. "I'm looking forward to that challenge, because since mid-2006 we've been focused on anything but growth. We will get back on track, and when we do, we'll have a daunting challenge. With 20 to 30 percent of capacity taken out over the last 18 months, it will be difficult to ramp up and get back on that track."
"We're an international company, and you have to think about what this looks like on a global basis," said Tracy Rosser, regional vice president, Wal-Mart Stores, Inc. "We're importing, but also we hope to export to other countries we serve. It's not out of the realm to think about exporting to Brazil, Mexico, Canada,
"Cuba is an interesting opportunity. Not just serving 12 million inhabitants, but we have to be looking at intermodal hubs. The Republic of Cuba has an interest in being an intermodal hub."China and so forth. We hope to see global economic growth, and with that you think about the infrastructure needed to support that type of rebound. What does this look like as a network of highways, waterways and port infrastructure? The thing that concerns us is in 2004-2005, demand outstripped supply, or at least it felt that way to us. We really need to focus on those pinch points so we can compete globally."
- Don Allee, executive director and CEO,
Mississippi State Port Authority
"I'm still okay with predictions that by 2020 we'll see a doubling of the amount of freight coming in to the Gulf of Mexico," said Don Allee, executive director and CEO of the Mississippi State Port Authority, citing the port's $570-million investment in a recovery program since being decimated by Hurricane Katrina. "We plan to compete with the major load centers on the Gulf of Mexico, and for a reason the widening of the Panama Canal."
Georgia Tech's Meyer asked what types of changes the panelists were expecting in technology, logistics patterns and markets that will affect the global transportation system.
"We think more and more containerization," said Matt Rose, chairman, president and CEO of BNSF Railway Company. "While the U.S. has been doing that, you'll see much more of a move towards that. And we'll be much more of a global trader in the future … trade has been the big game-changer. That's why you see so many new freight corridors and places. But we haven't developed a national freight vision."
"Global trade and economics is at odds with public policy," said Doug Duncan, president and CEO of FedEx Freight. "The end game is to serve the end user. But policy is about modes, and dealing with issues one at a time."
"The interesting question for us is where supply chains will change," said Tony Furst, director, freight management and operations for the Federal Highway Administration. "With cap and trade and energy issues, will we see more near-shoring back from the maquilas and China. We're running into an era where we have energy consumption issues going forward."
But current weaknesses in the national freight network were the issue of the day. BNSF's Rose just served for two years on the National Surface Transportation Policy and Revenue Study Commission.
"I went to field hearings and heard the same things over and over: There is a freight mobility crisis that is causing problems with the passenger piece," he said. Meanwhile, there are 108 federal programs (most dealing with the single mode of highways) that, in his opinion, need some serious consolidation. But he's pleased with two bills currently in play that call for moving either 10 percent or 20 percent of traffic off the highways: "That's the first time we've ever heard that." How to pay the large amount of cash it will take to bring the highway system back to a state of good repair presents some tough questions, he said, but money is not a hard concept to grasp.
"As congestion costs are driving up our supply chain costs, it will come back to jobs, and to our ability to compete" as a nation, he said.
"What I'm most concerned about is we're still having the conversation we should have had 20 years ago," said Maverick's Williams. "It's going to get a lot uglier before it gets better. We have no one to blame but ourselves, until we have a legislature that's not afraid to tax us as we need to be taxed. The trucking industry will not go down without a fight. We will support increases in federal and state taxes when we have the confidence money will be spent on freight corridors and highways that make sense. The fact is we have failed, and we're being held hostage to a lot of the historical perspectives of the industry, for instance that Matt and I should be at cross purposes. If we can't find legislators who can do that, we need different legislators. They have not been able to say they're for taxes yet."
FedEx Freight's Duncan said congestion makes his company use "more facilities than we actually need" because fewer would not allow shipments to make cut times. "A lack of infrastructure, eroding infrastructure and an increase in congestion are adding a heavy burden to transportation and logistics costs."
But there's a bigger issue, he said:
"We're so far behind we have under-invested for so may years that it doesn't leave much room for error. Quantify it, and start to make strategic investments over a 20-year time horizon. If we don't, it's going to be catastrophe. If we do not support transportation infrastructure, we'll constrain growth in this country, and we'll limit ourselves to smaller markets."
What should a vision of true freight mobility encompass? Major corridor and major player identification, a continued commitment by the U.S. Corps of Engineers to deepening port channels and rail upgrades, to name a few. But reform may head the list.
- Mississippi Speaker of the House William "Billy" McCoy
"We have 108 federal programs, and it is too much," said Rose. "We're all frustrated. It's primarily a highway trust fund. But we have to look at modal optimization. If you owned this country, and had 180 million workers and your job was to provide employment for them, you wouldn't tunnel down on just one mode. You'd look at it holistically."
Duncan said one way to do that is to bring together the tremendous amount of research already available. Williams said another way to escape the limitations of state-level thinking is to not necessarily abandon traditional funding mechanisms, but to add another level of taxation that is for the movement of freight. He also echoed comments earlier in the day from U.S. Federal Highway Administrator Victor Mendez calling for a renewed focus on leveraging technological developments.
So how does one convince elected officials to invest in the system?
Let's Make a Deal
"I'm thinking ‘Highways for Clunkers,'" joked Wal-Mart's Tracy Rosser. "Everybody benefits from this, so you have to have a level playing field where everybody pays."
"I would convince Tracy," said Rose of BNSF. "He knows he's paying for freight congestion. If I could go to him and say, ‘I want to put a box fee on, and 100 percent will go to the facility, expanding the railroad, intermodal connectors, etc., I think I could convince him. The problem is the money goes off-project, and it contaminates the entire theory of who should pay and how. Start with fact that state monies don't always go to transportation projects. Not that these aren't needed programs, but we as a society have had a pay-as-you-go system, and those monies should be protected."
"We already have a congestion tax, and it's embedded, based on the lack of productivity for a truck or train to go from point "A" to point "B," said Rosser. "If you think about the productivity I'm shooting for for the consumer, if Matt would be able to move his trains more efficiently, he could lower his prices, and same thing for a truck, covering more miles per day I can then lower the price of that coffee cup to the consumer, and the consumer then has more money to spend on other things. You improve the productivity of the consumer dollar. And you're right we'd be willing to sit down and speak openly about these things, if we knew these monies were going toward these improvements."
"I'm a businessman, and approach it as a business problem," said Duncan. "You have a forecast and a plan, and then try to find financing. If you have the plan, and can start to quantify these cost savings, you have something to go to work on. The discussions in Washington all revolve around funding. It's maddening how can you talk about funding when you don't know what you're trying to be?"
But even if the plan is developed, it then needs to be accepted.
"We had an 11-member panel, looked 20 and 50 years out," said Rose of his commission experience. "We had reform, rebuilding, revenues. We said shift 10 percent to rail, reduce the amount of pavement replacement, reform from 108 programs down to 10. Most of the members of Congress looked at us as if we had horns coming out of our heads, and they disavowed us. The reality is the collection methodology right now doesn't work with improving CAFÉ standards and alternative fuels. Gas mileage is getting better, and there will be more and more revenue issues, and every few years jacking money out of the general fund. We might as well have an adult conversation about future collection of highway funds, get it right and move forward."
Indeed, technological progress is aiding sustainability goals too, such as former Wal-Mart CEO Lee Scott's pledges a few years ago to make his company's fleet 25 percent more efficient by 2010.
"Today we're 38 percent more efficient," said Rosser. "We're moving more product with less miles and less trucks, incorporating technology, education and packaging design. We can do more with less."
But will we be ready to do more with more?
"Our challenge going forward is much more freight in a much more congested environment," said Williams of Maverick Transportation. "How we choose to do that will have implications on quality of life for every American."