Local equity & citizen dividends proposed in variant on P3s - investment fund P3s or IP3s

July 8, 2012
By Peter Samuel

2012-07-08: A variation on standard public private partnerships (P3s) is being proposed that would invest toll concession fees in a permanent investment fund in which local residents would share, paying citizens dividends. The IP3 model as it is dubbed ('I' for Investment fund)  is being proposed by Richard Geddes and Dimitar Nentchev of the department of policy analysis and management at Cornell University in work they are doing for the American Enterprise Institute.

Geddes has written extensively on transport issues including the book "The Road to Renewal, Private Investment in US Infrastructure." He has a PhD in economics from University of Chicago, was a member of the US Congress' National Surface Transportation Policy and Revenue Study Commission (reported January 2008,) and earlier was a senior staff economist on the President's Council of Economic Advisers. Nentchev is a research assistant.

Geddes and Nentchev argue that giving the public a direct and longterm stake in the proceeds of concessions via investment funds will overcome some of the political opposition to P3s, and in particular to tolls on presently untolled roads.

"The permanent fund approach allows the value created by road pricing to remain under public control while insulating it from political pressure."

They say the typical P3 model for concessioning an existing highway with a big one-off lump sum payment gets voters suspicious the money will be misused or quickly squandered when it is under the control of politicians. They don't feel any stake in the project.

And the imposition of tolls is commonly denounced as inequitable in that it disproportionately affects lower income groups.

Geddes and Nentchev:: "Under the IP3 approach, a permanent fund is capitalized through concession lease payments that allow value to be realized from newly priced roads. Dividend payments from the fund are distributed to all households in the newly priced area. Such universal dividend payments are progressive in that they represent a larger share of income for poor families, so an IP3 reduces income inequality. The IP3 thus challenges the view that private investment is a mechanism to raise financing given an existing revenue stream rather than a way of generating additional revenue.  Instead, by reducing political opposition to road pricing, an IP3 allows revenue to be raised on an existing un-priced facility and its underlying value to be realized."

Permanent funds of this type have a history and record outside tollroads. Texas had a permanent funds created in its constitution in 1876 for schools and universities, and the largest today in America is the Alaska Permanent Fund financed by concession fees on North Slope oil.

Geddes and Nentchev see the greatest potential for permanent funds in highways as taking unpriced and congested urban roads and offering them as toll concessions to be managed by congestion pricing, the concession fees to go into a priced-roads permanent fund that will invest the money and pay dividends to the citizens of the jurisdiction doing the concession. The sponsoring government will decide what proportion of concession fees goes into the permanent fund and what proportion is used for transport projects associated with the concession.

Independent of politicians

The authors see key to success of their project as ensuring that the IP3 fund is administered and governed independently of politicians: "A key benefit of the permanent fund structure over existing proposals is improved governance by placing the value inherent in priced transportation facilities into an independent, transparent fund insulated from short-term spending.... placing lease (concession) proceeds directly into a permanent fund reduces opportunities for using value realized through pricing to fund projects that may be politically appealing but not cost beneficial."

By regularly putting currently unpriced roads out to bid, the process will help signal where funds will be most productively used:

"By facilitating variable road pricing, the IP3 creates a price signal indicating where investment dollars should flow... it provides an objective measure of where investment is most valuable to motorists."

Projects for expansion or widening or green fields projects will tend to get the go-ahead depending on their return on capital - their value to the permanent fund of the citizens in the local area. In the proposed context of pricing roads and market valuations of the pricing projects pork barrel projects and proverbial 'bridges to nowhere' will more easily be recognized as wasteful.

Progressive in that helps poor more

Geddes and Nentchev argue that the IP3 model will redistribute income in a  progressive direction: "The IP3 generates a lump-sum payment for all citizens. A lump-sum dividend represents a larger fraction of annual income for low-income families. By releasing value embedded in infrastructure, the IP3 reduces income inequality without taxation. In addition to low-income families, it is also beneficial to those on fixed incomes, such as retirees."

And unlike the deficit financing/borrowing practice of the US government and many states' the IP3 approach "enhances intergenerational equity by ensuring that transportation network value is preserved for future generations and is a well-maintained asset that can generate dividends in perpetuity."

Further, the approach increases savings and can improve bond ratings.

Geddes and Nentchev argue for investor concessions as opposed to state or local government. That's because  investors can bring equity and raise more capital and assume more risk than bond-only capital raisings of government entities.

They also point out that to the extent bonds for road projects are backed by general revenue of governments taxpayers are being subjected to financial risk for which they receive no compensation.

The two researchers use detailed traffic data for Columbus OH, population 787k and values of time saved to estimate the potential of a variable pricing concession for the whole of the city. For a 15 year concession applying tolls of 15c/mile off-peak and 22c peak the concession should generate an upfront payment of $4.28b, they estimate. With the same tolls a 5 year concession would garner $1.73b.

Assuming 40% of an upfront payment was spent on immediate projects and 60% invested in a City Tolls Permanent Fund, it should be able to support an annual dividend to each of 318k households in the city of $909 under a 15 year concession and $815 on a 5 year concession.

In addition Columbus citizens would benefit by freer flowing traffic thanks to the congestion pricing.  And they'd have a framework for future improvements independent of the vicissitude of politics.

Their paper summarizes the benefits:

"First, it facilitates variable pricing of transportation facilities, which both regulates demand for the use of those facilities and generates new facility-specific revenue that can be used to renovate and expand those facilities as needed. Infrastructure use will thus become more sustainable.

"Second, it provides an equitable solution to the problem of facility pricing by recognizing that all citizens are owners of a jurisdiction's infrastructure, and should receive some of the value from lease payments.

"Third, because the IP3 provides a fixed annual payment in perpetuity, it will be substantial help to those on fixed incomes, such as retirees. It will also reduce income inequality because everyone gets the same payment fixed payment. Finally, by reducing political resistance to tolling and facilitating new, large private investment in transportation infrastructure, the use of an IP3 will create additional jobs in transportation facility construction, expansion, and operation.

The Geddes-Nentchev paper is to be published by the American Enterprise Institute after revisions.

COMMENT: Let a hundred flowers bloom. Let's think about and try different models of ownership, financing and management so long as they are all based on the key premise that all highways should be priced or tolled. Highways are too expensive, too scarce, and too important, to be a giveaway. It simply isn't right or sustainable or sensible to go on with roads financed indirectly via taxes, then subjected to the budgetary appropriations, and the whims of politicians and their campaign fundraising, and next election concerns.

We wouldn't tolerate the waste and abuses if, say food, housing, or energy were dispensed this way. The American electorate's refusal to accept any increase in fuel taxes indicates the old gas-taxes-as-user-fees model is doomed.

As soon as possible all highways should all be priced - in order to empower motorists, to allow existing capacity to be managed for optimum flow with variable prices, to get capacity added in places where the prospective revenue stream indicates motorists value it most, and to make good, modern roads a self-sustaining business.

How the highway business is owned is less important and can well be a mix of models - straight state or regional government-owned, state or regional toll authority, P3, IP3, straight private ownership?

Our thought is that a weakness of the Geddes-Nentchev IP3 model is its governance. It's not clear who manages it or how the directors are appointed, or made accountable once appointed.

The IP3 isn't run by politicians, elected officials, because their perspective is the next election - too short-term. It's natural they'll exercise opportunistic control over the enterprise, and raid the tolls fund, as they do with state turnpikes, port authorities and suchlike conglomerate agencies to cover other deficits. So the IP3 is rightly kept out of their hands.

But there are problems too with enterprises run by independent people. Who appoints them to begin with. Another word for independent is unaccountable - a power-unto-themselves - and that certainly has the potential for abuses too.

The strongest element of the IP3 seems to be the idea of granting initial ownership to the citizens of the area to be tolled - giving them a stake on the business end of tolling.

But rather than unsaleable 'shares' in the permanent fund,  local citizens could be granted initial shares in the toll concession enterprise, shares that would be tradable on the stock exchange. The toll concession would be a regular public company formed to toll an area's roads. Being able to cash out, or invest more, makes the citizens' stake much more tangible than a share in a fund that you can't realize, that locks you in.

The Initial Public Offering could raise equity investment outside the area being tolled so that stock would be a mix of paying investors and local citizens with stock they'd received as a grant. Or it could maintain ownership within the community of grantee owners - at least until decided otherwise.

Unlike permanent funds, publicly traded companies have a clearly established reporting requirements and governance - control by a board of directors accountable to owners according to the extent of their ownership, the number of shares they have.

TOLLROADSnews 2012-07-08


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