Study: Why Pa. Turnpike Plan Failed

Searching for ways to pay for transportation projects, states are considering public-private partnerships. A report by the Pew Center on the States issued Tuesday (March 24) said 24 states have approved legislation allowing such agreements between state governments and private firms. Not all of the 24 have projects completed.

The largest public-private transportation partnership proposed in U.S. history collapsed last year because of a series of missteps by Pennsylvania Gov. Ed Rendell and the General Assembly, according to a report released Tuesday (March 24).

Rendell and lawmakers did not resolve their differences over the proposal before the governor initiated bids, the report said. The governor was too optimistic about the return the state would earn on the investment, and there was no detailed plan for how the money would be invested by the state. State officials also failed to consider the long-term effects of the project, according to the report by the Pew Center on the States.

Rendell (D), looking for ways to finance transportation projects, led efforts to lease about 500 miles of the Pennsylvania Turnpike to a private partnership for 75 years in exchange for $12.8 billion up front. The private consortium dropped its offer Sept. 30 because state lawmakers had not acted on it.

"Pennsylvania policymakers did a lot right in their first exploration of such a lease, but they fell short in key areas of how the deal was proposed, structured and handled," said Susan Urahn, managing director of the Pew Center on the States (PCS), which analyzed the turnpike deal and interviewed a wide range of policymakers and transportation specialists. "If Pennsylvania and other states want to pursue successful public-private partnerships, more questions need to be asked-and answered." is part of PCS, headquartered in Washington, D.C.)

A spokesman for Rendell said the report "fails to take into consideration the real world realities that were involved in attempting a public-private partnership of this size."

States are facing a crisis in transportation funding, and revenue from the traditional source, gasoline taxes, isn't keeping up with the needs. Urahn noted that even with the federal economic stimulus package pouring $27.5 billion into transportation, the money "won't come close" to covering a $47 billion-a-year funding gap for highways alone.

Public-private partnerships offer one appealing alternative. The Chicago Skyway and the Indiana Toll Road already have been leased to private firms for large upfront payments. Massachusetts, Florida and New York are considering similar deals. The report said 24 states have approved some type of legislation allowing such partnerships.

The report stressed that such deals are complex, with no single aspect making one state's plan good and another state's bad. Nevertheless, the report concluded that Pennsylvania policymakers made several errors that doomed the $12.8 billion proposal from investors Abertis of Spain and Citi Infrastructure Investors of New York.

For one thing, the state was overly hopeful that investing its lump-sum payment would earn it more than $1 billion a year in interest to spend on transportation projects. Under the deal, Pennsylvania planned to pay off debt and invest the remaining $10.2 billion.

Rendell assumed a 12-percent-a-year return, but the state's own public employee pension fund assumes 8.5 percent interest on its earnings. Beyond that, the report said, the state lacked a clear plan for how the proceeds would have been invested and spent, as the Indiana Toll Road and Chicago Skyway had.

Barry Ciccocioppo, a spokesman for Rendell, said the lease proposal was carefully developed based on the best legal and financial advice available. The bids and other financial information were available to the public, and "we made it clear all of the revenue would be invested," he said.

"The process was more open than the Pew Center on the States' analysis indicates," Ciccocioppo said.

Rendell and state lawmakers also "hurt the process" by failing to agree on a set of basic principles to guide the proposal. The report said Pennsylvania would have benefited from approving a law similar to those in other states establishing the state's general interests and terms for a public-private partnership before the negotiations began.

"The backward process caused a plethora of related problems and contributed to a highly politicized debate that left Pennsylvania and the bidders in limbo for months-and ultimately contributed to the failed deal," the report said.

Ciccocioppo said that Rendell first proposed the lease in 2007 but that lawmakers rejected it in favor of a plan to raise transportation money from tolls on Interstate 80, another key east-west route. The federal government rejected the toll proposal, and Rendell revived the public-private partnership last year "to see what it was worth and move the process forward," he said. Lawmakers failed to vote, and the consortium pulled out.

In pointed advice for other states considering such financing, the report said the debate over the turnpike lease was narrowly focused on the state's current financial condition and did not look at assumptions about the future impact of the lease on taxpayers, the economy and the environment. Nor did state officials set up adequate oversight of the turnpike operation once it was turned over to the consortium - a crucial mechanism to ensure transparency, the report said.

"Long-term infrastructure deals are often debated with a short-term perspective," said Michele Mariani Vaughn, a PCS researcher. "These proposals typically involve billions of dollars and stretch over decades. It's critical that state policymakers and the public have all of the information and answers they need to make a thoughtful and sound decision."

Pennsylvania got some things right, the report said. State officials thoroughly identified Pennsylvania's infrastructure needs. They conducted the bidding process efficiently and produced the highest possible bid, given the lease terms set by the state and prevailing market conditions. Officials also set detailed performance standards for the life of the lease, according to the report.

"We certainly hope other states are able to learn something from Pennsylvania's experience," Ciccocioppo said.

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