Toll Road Update

August 05, 2005 | By Jacob Falk in Washington, DC

States looking to use public private partnerships — called “PPPs” — to maintain existing roads or develop new toll roads are finding that no one model fits all needs. States have very different road infrastructure needs, and the PPP programs they implement reflect these realities.

New Jersey

New Jersey announced in July that it would like to lease portions of its major toll roads to private entities.

New Jersey has two developed toll highways running the length of the state. The New Jersey Turnpike runs northsouth along the I-95 corridor, which connects Washington, Baltimore and Philadelphia in the south with New York City and Boston in the north. The Garden State Parkway also runs north-south but follows the Atlantic coast for most of its length. New Jersey’s primary road infrastructure needs are to maintain its developed corridors and to protect the integrity of a transportation trust fund that funds all roadwork in the state.

The main problem is the transportation trust fund is expected to run out of money in just under a year. Beginning in July 2006, the entire $805 million budget of the fund will be needed just to pay debt service on existing loans, and there will be no money left over to maintain roads or build new highways. The New Jersey Turnpike and the Garden State Parkway earn the state approximately $829 million a year, but they also currently carry approximately $5 billion in debt.

New Jersey said in July that it would address the transportation revenue shortfall by raising gas taxes and leasing portions of its two major toll roads to private entities. Richard Codey, the acting governor, floated the idea of privatizing the New Jersey Turnpike last March. The latest proposal is to lease a portion of either the New Jersey Turnpike or the Garden State Parkway to a private operator and to make up the rest of the revenue by raising gas taxes from the current rate of 14.5¢ a gallon (which is low even by US standards).

New Jersey is taking inspiration from the Chicago Skyway deal in which Chicago leased a 7.8 mile “Skyway” to a Cintra-Macquarie consortium for 99 years for an upfront payment of $1.83 billion. New Jersey could probably raise $20 billion if it did a similar lease of its main roads. Other states along the I-95 corridor are considering the Chicago Skyway model for similar reasons. Delaware is working on a proposal to privatize the State Route 1 toll road that runs from Dover in the south to I-95 in the north. In New York, Governor George Pataki has floated the idea of privatizing state-owned bridges.

The Pennsylvania Senate created a committee recently to study private involvement in toll roads. The committee has been directed to study the feasibility of creating more tolls and using PPPs to raise money for highway projects. The committee must submit a report by August 15, 2006. The report is expected to focus on I-76, among other roads, but lawmakers stress that the report will most likely be broad and lead to further analysis before enabling legislation is passed.

The Chicago Skyway model appears to be most appropriate for states that have well developed corridors and existing toll roads with relatively predictable revenue streams, but that find themselves short of money.

North Carolina

A bill pending in the North Carolina legislature would revamp the PPP highway program in the state. North Carolina has two big interstate highways — I-95, which runs north-south, and I-85, which connects Atlanta, Charlotte and other cities to I95. There are no toll booths currently on these roads. The politics of adding tolls are difficult; tolls for roads that have already been paid for are often seen as double taxation by opponents.

North Carolina has experimented with two ways to encourage private investment in state roads. The first is a PPP program administered by the North Carolina Turnpike Authority that allows for construction of three turnpike projects that use private money and charge tolls. The second method was a “private pilot toll project” that was run by the state department of transportation. It was supposed to lead to construction of one pilot toll road using solely private resources, but no road was built and the authority expired in 2003.

In June, both houses of the North Carolina legislature passed a bill that would increase the number of PPP turnpike projects that the Turnpike Authority may undertake from three to nine. One of the nine projects would have to be a toll bridge to the Outer Banks recreation area in Currituck County.

The move in North Carolina from wholly-private pilot projects toward establishment of public-private partnerships is similar to the evolution of toll road programs in two other states in the southeast. Virginia was one of the first states to enact a private toll road bill in the late 1980’s, and it was also one of the first states to supplement its private toll road program with a PPP program in 1995. Georgia also passed PPP-enabling legislation in 2003, five years after enabling wholly-private toll roads.

The North Carolina Turnpike Authority is currently studying four projects that could involve partnerships with the private sector. The projects are the Garden Parkway/US 321-74 bypass in Gaston and Mecklenburg Counties, the Cape Fear Skyway in Wilmington, the Monroe connector in Union County and the Triangle Parkway in the Research Triangle area (running parallel to US 40). North Carolina does not have existing tolled corridors to privatize like New Jersey does. While New Jersey can leverage existing assets to raise funds, North Carolina can only offer the private sector a right to build new projects and collect a reasonable return on the investment through tolls.

Oklahoma

Oklahoma has no pressing need to look at PPPs, but it is doing so anyway.

Texas has embarked on an ambitious new transportation corridor that will provide a point of entry for trucks traveling from Mexico to the rest of the United States. This is expected to spill major truck traffic directly on to Oklahoma highways. Whether Oklahoma will move forward with new road development using PPPs depends on what happens to the south in Texas. Not only Oklahoma — but also Arkansas and Louisiana — may be forced to turn to the private sector to help develop the transportation infrastructure needed to handle the traffic heading north and east along the new Texas transportation corridors, which are being built to accommodate four lanes of purely truck traffic and six lanes of passenger car traffic.

Other States

Both Utah and Alaska recently expressed interest in engaging the private sector for road development. Utah appears interested in passing comprehensive legislation after consulting with experts from other states. Alaska hopes to procure the Knik Arm bridge project as a PPP.

In June, Utah announced that it will consider a full range of PPPs for future road construction. Utah needs $16.5 billion for road development over the next 25 years. State Senator Sheldon Killpack has promised that, despite voter distaste for tolls, someone on the transportation committee will sponsor a bill in the next legislative session allowing Utah to partner with private entities on toll roads.

Utah already has experience with PPP roads. Utah used a design-build procurement for reconstruction of the I-15 corridor in time for the 2002 winter Olympics. The PPPs currently under consideration would not be limited to design-build, but would include PPPs for the financing and operation of toll roads. Utah lawmakers have asked for advice from specialists in Texas and Colorado who have experience engaging the private sector.

An Alaskan road authority, the Knik Arm Bridge and Toll Authority (KABATA), is looking to build a $400-$600 million bridge from Anchorage to Mat-Su borough on a PPP basis. The authority is authorized to sell revenue bonds and to collect tolls. KABATA received preliminary funding from the legislature and expects to present the legislature with a detailed financing plan by February 2006. The project, which may be tendered in the first half of 2006, will be funded by a combination of federal, state and local grants and public and private sector loans, including TIFIA loans. 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.

Federal Highway Bill

A massive highway that Congress passed in late July encourages states to implement PPPs.

The bill would let state and local governments issue tax-exempt “private activity bonds” to finance highway projects and certain freight transfer facilities. “Private activity bonds” are bonds whose proceeds will be put to private use — for example, to finance a road that will be privately owned. The bill authorizes a total of $15 billion of such bonds to be issued. All such bonds must be issued by December 2015. All projects that benefit from the bonds must pay workers prevailing wages in accordance with the Davis-Bacon Act.

Another provision in the bill reduces the required minimum project cost for a project to qualify for TIFIA funds from the federal government. The rule had been that a project had to cost at least $100 million or, if less, half the federal funds apportioned to the state in which the project is located. These figures have now been reduced to $50 million or, if less, a third of the apportioned funds. The bill also makes clear that public-private partnerships can apply for funds under the TIFIA program.