North Carolina Commission Recommends P3s as a Tool to Address Transportation Infrastructure Needs

Nossaman LLP

State departments of transportation across the country currently find themselves at a cross-roads where traditional sources of infrastructure funding may not generate sufficient revenues for addressing aging transportation infrastructure. States generally rely on “user fee” revenues generated from fuel taxes, vehicle sales taxes and registration fees to support transportation infrastructure spending. The user fee funding model has come under scrutiny in light of recent trends, such as urbanization, electric vehicles, micro mobility and ride-sharing services. In addition, the COVID-19 pandemic’s impacts on travel will dramatically reduce revenues generated from user fees in the near term.

The NC FIRST Commission (the Commission) was formed in 2019 to advise the North Carolina Secretary of Transportation on sustainable transportation investment strategies for the state’s infrastructure needs. The Commission issued its report in January of this year and found that North Carolina’s transportation infrastructure requires significant investment for repairs and modernization to remain competitive with other states. The Commission also found that the state’s current transportation funding model, based largely on a traditional combination of user fees and federal funding, will not provide sufficient funds to support the necessary level of investment.

The Commission identified private-public partnerships (P3s) as an option to provide long-term modernization and address transportation infrastructure needs while decreasing reliance on user fees. North Carolina law currently restricts the North Carolina Department of Transportation and North Carolina Turnpike Authority from entering into more than three P3 agreements. One P3 has already been completed under the enabling statute, the I-77 Express Lane Project. The Commission recommended removal of the project cap to allow North Carolina to leverage private capital and pursue alternative financing arrangements for transportation projects. Specifically, the Commission noted that P3s can provide a mechanism for private investors to provide up-front capital to expedite new projects. In addition, the Commission recommended that an evaluation of state-owned infrastructure assets, such as ports and rail systems, be conducted to determine the potential for those assets to be monetized to support other transportation projects. The Commission also pointed out that infrastructure-focused private equity funds currently hold substantial amounts of unused capital that can be deployed for P3 projects.

In addition to removing the cap on transportation P3s, the Commission recommended other transportation modernization strategies, including modifying the implementation of existing user fees to increase revenues, expanding the use of tolling and innovative tolling strategies, exploring whether a mileage-based use fee can replace state fuel taxes, and developing programs to capture revenue from increased usage of electric vehicles, e-commerce deliveries and ride-sharing services.

The challenge of identifying sustainable sources of funding and financing for transportation investment is not unique to North Carolina. Over the coming years states will need to rethink infrastructure funding and financing and explore innovative ways to pay for rehabilitating and modernizing the country’s infrastructure. Similar to the Commission’s findings, more states may identify P3s as a tool to leverage private capital in the delivery of infrastructure projects in order to mitigate the impacts of decreased user fee revenues.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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