Highway Helper: States Add Leverage To P3 Deals

Chicago and Indiana were the pioneers: They tapped into public-private partnerships--known as P3s--to improve their highways and infuse their coffers with billions of dollars. Owing to political opposition to privatizations, several states are adjusting their proposals to avoid two significant catches in the first generation of deals: century-long leases and non-compete clauses. Both exacerbate citizen worries and cuff government flexibility. "States are now learning from the experience of the Chicago Skyway and Indiana Toll Road," says Kenneth Orski, publisher of a transportation industry newsletter, "on how not to negotiate these deals."

Florida, for instance, is debating legislation to restrict, although not prohibit, leases running more than 50 years. Longer terms such as Chicago's 99-year lease bring more cash up front but are difficult to price. Even a 50-year deal, says the Reason Foundation's Geoffrey Segal, who worked with Governor Mitch Daniels on Indiana's 75-year contract for its highway, "generates a lot of interest."

Pennsylvania Governor Ed Rendell is shooting for an even shorter line: Pending approval from the legislature to make a deal, the state is looking for a 30-year lease for the Pennsylvania Turnpike, a time period that equals the typical lifespan of European toll-road leases as well as the usual duration of long-term bonds. Rendell also plans to place the upfront, lump-sum payment into an annuity to provide money for future transportation improvements.

As to non-compete clauses, Texas chose not to include one in its recent partnership deal. Instead, if the state builds competing roads that reduce the concessionaire's revenues, it will compensate the company. Avoiding non-compete clauses allows the state to address future congestion issues, and that could save the deal from political vulnerabilities.