Toll Road Update

Toll Road Update

April 01, 2005

The United States would like to see more roads built in the future by public-private partnerships, but this will happen only if states allow private sector participation. Are states willing to open road development to the private sector? Increasingly, the answer is yes, and state initiatives are also beginning to venture beyond public-private development of new roads to privatization of existing highways.

Federal Actions

Congress has struggled to renew federal spending authority on road projects since the authority expired in October 2003. State governments have complained that the delay is affecting major state projects since such projects rely partly on federal funding. Congress has extended the spending authority at existing levels for short periods six times since October 2003 while it argues about what to write in the new bill.  The most recent extension expires on May 31, 2005. A new spending bill passed the House on March 10. A new bill had not yet passed the Senate as the NewsWire went to press, but was scheduled to be debated the first week in April. A conference committee made up of senior members from both houses will eventually also have to iron our differences between the House and Senate versions of the bill.

The Bush administration is urging Congress to include several provisions in the final transportation bill to encourage public-private partnerships, or “PPPs.” One provision would allow up to $15 billion in tax-exempt “private activity bonds” to be issued for construction of private road projects. Use of tax-exempt bonds is usually limited to public projects. The administration wants to make an exception.  This provision did not make it into the House bill, but was included in the bill that the Senate approved last year. (The House and Senate both passed bills last year that are the starting points for the bills being considered this year.) Private activity bonds are controversial because expansion of tax-exempt bond authority is unpopular with the tax-writing committees in Congress, and there is also controversy surrounding whether the Davis-Bacon Act, which requires payment of prevailing wages on federal transportation projects, should apply to road projects that are funded with tax-exempt debt. Another provision supported by both houses of Congress and the Bush administration would reduce the required minimum project cost necessary for a project to be eligible to participate in the federal TIFIA program from $100 million to $50 million. TIFIA — the “Transportation Infrastructure Finance and Innovation Act of 1998”— provides public and private sponsors of road projects with supplemental subordinated credit, loan guarantees or loans of up to 33% of project cost from the federal government.

The US Department of Transportation recently issued a “Report to Congress on Public-Private Partnerships.” The report, which encourages PPPs, responds to a request from Congress to explain the impediments preventing the implementation of more PPP schemes and what can be done with states to eliminate the impediments.

State PPP Initiatives

Texas is near the front of a line of states developing road projects using PPPs. The state has started implementing an ambitious plan to build a 4,000-mile transportation corridor of superhighways and pipelines called the Trans-Texas Corridor. The cost is expected to reach $180 billion.  The state took the first step toward implementation in December when it chose Cintra to develop a new $7.2 billion superhighway along the I-35 corridor connecting Dallas and San Antonio.  The highway will stretch from the Oklahoma border in the north to the Mexican border in the south.  Texas will give Cintra a 50-year concession to operate and maintain the corridor and to collect and keep tolls.  The I-35 corridor is the first project with private financing to be approved in connection the Trans-Texas Corridor. On March 11, Texas and Cintra formalized their partnership by signing an agreement authorizing Cintra to move forward with the master development and financial plan.

The arrangement with Cintra on the I-35 corridor also is expected to serve as a blueprint for development of the I-69 corridor and for other corridors that the Texas Department of Transportation has designated as “high-priority. "The Texas work on the I-69 corridor will be part of a national plan to develop more than 1,600 miles of proposed or existing connector highways from Port Huron, Michigan, on the Canadian border, to the Mexican border in Texas. The I-69 corridor will be developed as part of the Trans-Texas Corridor network with private financing. Additional corridors are planned and requests for proposals for additional routes will be assigned priorities based on the needs in Texas.

The TTC envisions each corridor having separate lanes for cars and trucks (as many as six for cars and four for trucks), high-speed commuter railways, freight railways, oil and gas pipelines, water lines, transmission lines for electricity and telecommunications and even broadband lines. The proposed corridors, which may be as wide as a quarter of a mile, will connect every corner of the state while skirting the perimeters of major urban areas. Most state road projects have been funded in the past out of revenues from fuel taxes. In contrast, the TTC website says, “We have purposely left project funding flexible to encourage creative ideas that will maximize revenues and ensure significant private participation in financing the TTC.  We want to combine the best of private sector business practices with the best in government to deliver a world-class transportation system.”

In the last couple months, several other states have also moved to encourage new road construction using PPPs.

A bill before the California state assembly (AB-850) would amend existing toll road enabling legislation in California that expired on January 1, 2003. The expired legislation has been criticized for being too restrictive and for putting too much responsibility on the private sector without guaranteeing enough state support. The expired legislation limited the number of projects that could be developed; initially only four pilot projects were authorized and this number was subsequently reduced to two pilot projects. The old legislation also required that the authorized projects be developed by the private sector without significant cooperation from the state. AB-850 would not limit the number of projects, but permitted “transportation projects” would be limited to toll lanes, mixed-flow toll lanes and free lanes, “dedicated exclusive truck lanes” and shared High-Occupancy Vehicle (HOV) lanes (although HOVs must be given free passage under the proposed legislation). AB-850 also allows for more cooperation between public and private partners. For qualifying projects, AB-850 would authorize “comprehensive development franchise agreements” among the California Department of Transportation and public and private entities.

The bill expressly permits the use of non-compete provisions in comprehensive franchise development agreements to protect authorized toll roads from competing state facilities, but California would be able to buy its way out.  This part of the bill is probably a response to an impasse that developed in connection with the SR-91 express lanes, a project developed under the old legislation. In the SR-91 case, the Orange County Transportation Authority was forced to buy out the project after a non-compete provision in the concession agreement limiting further development along the route led to public criticism of the project. Under the new bill, the department’s ability to open competing state highway facilities within the same transportation corridor as the toll facility may be limited, but this ability is qualified by a provision allowing the state to open competing facilities if the state exercises its police power to acquire by condemnation or negotiation the remaining net fair market capitalized value of the toll franchise period.

Oregon plans on issuing requests for proposals on April 8 for three separate public-private partnership transportation projects: the Sunrise limited access road facility, improvements to the south I-205 corridor and the Newburg-Dundee alternative corridor (bypass). These three projects will be the first projects implemented under the Oregon innovative partnerships program. The program was created to solicit proposals and accept unsolicited proposals from private entities to partner with the state on development of transportation projects. The initial RFPs are expected to be for “pre-development services,” which, if delivered satisfactorily for the relevant project, would qualify the private partner to enter into negotiations for delivery of the project. Oregon accepted comments on a draft RFP through March 24. The expected due date for proposals is July 7, 2005.

The Colorado House passed a bill on February 8 centralizing regulation of toll rates for private toll roads. The Colorado Senate killed the House bill on March 22, but made private toll roads the focus of a summer legislative study committee. The House bill would have given the Colorado Tolling Enterprise, a branch of the Colorado Department of Transportation, the responsibility for regulating tolls for private toll roads that are located in more than one county. (Each county can regulate tolls for private toll roads that are wholly within county lines.) The bill would have applied to private toll roads, but would not have applied to toll roads financed, constructed, operated or maintained under the Colorado public-private initiatives program or pursuant to the statewide tolling enterprise program, both of which already contemplate statewide regulation of tolls.

The driving force behind the legislation was the development of the Front Range toll road by the Front Range Tolling Co. along the eastern edge of the Front Range.  The Front Range Tolling Co., which acquired rights to develop parts of the Front Range toll road in the 1980’s under an old law that has since been changed, would have been able to start construction of the Front Range toll road within months of the new law being passed.  The company already has private financing lined up for the project.  While Colorado killed this bill, the decision to set up a summer legislative study committee emphasizes the state’s willingness to consider private investment in road projects.

Privatization

A hot topic currently in the US toll road market is privatization of existing toll roads. The Chicago-Skyway deal recently grabbed a significant amount of attention and has left a number of states thinking about their own privatizations.

In the Chicago-Skyway deal, Chicago leased the Chicago-Skyway toll road to a Cintra-Macquarie consortium for 99 years in exchange for $1.82 billion.  The consortium will be responsible for operation and maintenance (including future improvements, but excluding policing and plowing snow), and the city will get the full $1.82 billion up front. The consortium is confident that the right to collect and keep future tolls, which the consortium has been given limited rights to increase, makes this investment worthwhile. Privatization of an existing road is generally less risky than development of a new road because traffic can be forecasted more accurately.

Other states are exploring the Chicago-Skyway model, and several state proposals for privatizing major toll roads have been issued recently.

Indiana Governor Mitch Daniels recently suggested selling the state-run Indiana toll road to private interests. Critics of the proposal argue that the toll road is used primarily by residents of northern Indiana and proceeds from the sale of the toll road should not be used to support projects elsewhere in the state.

In New Jersey, acting Governor Richard Codey is considering leasing the New Jersey turnpike to private interests. Codey asked the state treasurer to look into whether leasing the New Jersey turnpike would create surplus cash. State officials are concerned about public backlash to leasing the turnpike, but the New Jersey turnpike is a huge, statewide project that could probably generate several billion dollars for the state treasury.  The state is facing a $4 billion budget shortfall this year.

New York Governor George Pataki also recently proposed privatization as a means of alleviating budgetary constraints. Pataki did not mention specific facilities, but his proposal suggested that privatization would be most appropriate for roads and bridges that currently charge tolls or for facilities that undergo substantial improvements to increase capacity.

In general, US states have been trying to involve the private sector in road development for almost two decades. However, only in the last few years have states begun to explore the PPP model seriously. The federal government might help push this along through the transportation bill, but the success of existing initiatives, like those in Texas and Chicago, will go farther in creating the necessary public and private confidence in the PPP model.