Toll Road Update

Toll Road Update

June 01, 2005

As public and private toll road developers push for increased cooperation on new projects, the importance of a proper legal framework remains noteworthy.

New State Programs

Washington state enacted a new law — called the “Transportation Innovative Partnerships Act”— in early May to encourage development of public-private toll roads in the state. Related legislation appropriates $1.5 million for preliminary studies and suggests that the first opportunities for private investment in Washington toll roads will be for projects in and around Seattle.

The main thrust of the law is to create a mechanism for private companies to participate in the development and financing of transportation projects. Washington has actually had a program for private investment in road projects since 1993, but the old program was severely hampered by community and political resistance and only one project, the Tacoma Narrows bridge, was authorized, despite the submission of proposals for several other projects.

The new law requires state agencies to come up with guidelines for public-private projects and complete preliminary studies by 2006. The legislature directed that the studies address the feasibility of “value pricing” on transportation facilities in King, Pierce and Snohomish counties (essentially the western transportation corridor from Everett heading south through Seattle to Tacoma). It also gave orders to address the feasibility of a toll facility on State Road 704 in Pierce County.

The Washington Department of Transportation is expected to issue requests for proposals for private parties to participate in state transportation projects starting in late 2006 or 2007 once the feasibility study has been completed and guidelines have been issued. Unsolicited proposals will be accepted beginning on January 7, 2007. The law explains that the old public-private initiatives act did “not meet the needs and expectations of the public or private sectors” and that the new law “will provide a more desirable and effective approach by applying lessons learned from other states and from this state’s ten-year experience” with the old program.

The Pacific northwest is becoming a hot region for private transportation projects. In other news in the region, Oregon issued three requests for proposals in late April for public-private road projects. The three projects — Sunrise, south I-205 and the Newberg-Dundee — are the first three projects put up for bid under an “innovative partnerships program” that Oregon adopted in 2003. All three projects are located near Portland. The deadline for submission of proposals is August 29, 2005. Oregon also had earlier enabling legislation that was enacted in 1995, but no projects were developed under that program.

Georgia recently amended its existing public-private transportation initiatives law. The two-year-old law, which replaced an earlier, ineffective private toll roads law that had been on the books since 1998, has been criticized for creating a process that is too secretive and closed to competition. Georgia has received three unsolicited proposals to date for development of toll roads, but none of the proposals has been challenged by a competing developer. The lack of competition worries Georgia officials who hope that the new amendment will encourage broader participation in the process.

The amendment increases from 90 to 135 days the amount of time that interested developers have to submit competing proposals. It also allows the state transportation department to solicit proposals. Unsolicited proposals are considered less competitive than solicited proposals because they give the developer that submits the unsolicited proposal a significant head start. The amendment also creates an evaluation committee (composed of two appointees of the governor, the state transportation commissioner, the director of the State Road and Tollway Authority and the director of the Georgia Regional Transportation Authority) to comment on state transportation department recommendations before they go to the governor. There is also supposed to be faster disclosure of nonproprietary matters contained in proposals as a further spur to competition.

Public outrage over a $4.70 toll proposed for a $1 billion public-private expansion of state highway 316 has, at least for now, derailed the first unsolicited proposal reviewed under the Georgia public-private partnership law. While the developer that submitted the bid for the project is proposing to address the public’s concern, negotiations have been postponed indefinitely, and it is not clear that the proposal will go forward.

Taking Projects to the Legislature

Delaware recently announced that it intends to privatize a state road — route 1 — by the end of the year. The 51-mile highway runs from the Wilmington-Newark corridor in the north to the state capital, Dover, in the south. Privatization of the road may be packaged with an upgrade of US route 301, a 14-mile road running from the Maryland border to route 1. Like other states considering privatization after the $1.83 billion lease of the Chicago Skyway to private interests (see “Toll Road Update” in the April NewsWire), Delaware is hoping that privatization will bring in enough money to offset projected decreases in revenue from gas taxes and other sources. It was encouraged by the $1.83 billion lease of the skyway in Chicago earlier this year to private interests. The Chicago Skyway deal continues to draw accolades; in May, Standard & Poor’s upgraded the A-plus general obligation credit rating for Chicago from a stable to a positive outlook.

The Delaware transportation department will have to get approval from the state legislature for the route 1 and US route 301 project once it has a firm proposal in hand. A 2002 law authorizes state officials to look at private road projects, but permits the state only to “enter into agreements regarding a transportation project that has been specifically authorized by the General Assembly, and…such authorization [must include] all material terms of the proposed project, including without limitation any terms concerning repayment of debt or capital to or for the benefit of any private entity.”

The need to return to the legislature on each project makes the process in Delaware cumbersome. Florida is like Delaware in that it also requires state officials to get separate authority from the legislature for each project. An effort failed in 2003 to strip this requirement from the Florida statute.

The Front Range toll road project in Colorado shows what can happen when the legislature becomes too involved with the development of specific projects. The project has suffered significant setbacks in the last couple months. The developer, the Front Range Tolling Co., has been trying to persuade the legislature to adopt a new framework for setting tolls on private roads, but the proposal was defeated in the Senate after heavy lobbying by private landowners whose property is in the way of the new highway.

In May, the plot thickened. The state Senate began considering instead a bill that would strip private toll road companies of the power to exercise eminent domain and require a legislative review of the current framework for private toll roads with the aim of writing new rules for tolls, but not until 2006. The governor has said he is considering vetoing the bill if it passes.

While the Senate debates whether private developers should have eminent domain rights, the Colorado House unanimously passed a bill that would authorize the Front Range project to move forward, but with new restrictions. The developer would have to do the same level of analysis and receive the same approvals that are required for federal interstate highway projects. These requirements include getting approval for the new road from the Colorado Department of Transportation, conducting an environmental impact study and providing funding for environmental mitigations necessitated by the study.

Ironically, Colorado does not require individual road projects to be brought back to the state legislature for approval. The Front Range developer approached the legislature because it wanted the legislature to centralize regulation of toll rates, which under current law are set separately by each county through which a proposed toll road passes. This request gave an opening to opponents of the Front Range project, who wasted no time in mobilizing opposition in the state Senate.

Europe

Fitch Ratings reported in mid-May that “Europe is now poised for an explosion in new toll road projects, both in mature and emerging economies.” Western Europe already has experience with private sector involvement in toll roads; budgetary pressures are forcing Western European governments to do more. Probably the area for the greatest potential new growth is central and eastern Europe, which has less experience with private investment in public projects. Roads are inadequate in the 10 countries that joined the European Union in May 2004 to handle the increased volume of truck traffic. For example, truck traffic increased by 50% in the Czech Republic in just the last year.

Many Europeans believe that a European Union initiative is needed to clarify the rules for public-private partnerships, or “PPPs.” The European Commission is expected to issue a “communication” by the end of 2005 that will recommend how to address the issue. The commission action has the potential to make PPPs a more popular vehicle for highway projects.

Investors are wary of putting money into PPPs in certain European countries due to unfolding controversies. For example, Bulgaria recently embroiled itself in controversy by negotiating a reportedly no-bid concession for the €1.2 billion Hemus motorway with Salini Construttori SpA, an Italian company. Critics charge the concession is unlawful and cost inefficient. These negotiations followed shortly after Bulgaria awarded the Trakia motorway to a Bulgarian-Portuguese consortium in a similarly no-bid concession. Potential investors are usually wary of investing in an atmosphere charged with controversy.

The European Investment Bank has called for the Bulgarian-Portuguese consortium developing the $1 billion Trakia motorway to withdraw from the concession because of the alleged improprieties surrounding the award. This call, which was made through the Bulgarian press, came several days after the European Investment Bank allegedly withdrew from involvement in the financing of the Trakia motorway. This developing situation highlights the importance of defining uniform tender procedures to avoid controversy.

Private investment in road projects is also mired in controversy in Romania, a candidate for European Union accession in 2007. The former Romanian government awarded a road concession contract for a $3.6 billion PPP motorway without going through a tender process, which is illegal in the European Union. The European Union condemned the road, which will be Europe’s most expensive, but Romania, armed with an independent review stating that the price of the road is fair, recently approached US lenders to make up a $128 million budgetary shortfall that put the project in jeopardy. The European Union is backing construction of a competing road running almost parallel to the condemned road. Lenders may be wary of financing the remaining $128 million if Romania is forced to give the competing road priority.

Russia, another country that presents great opportunity, would also benefit from passage of a PPP law. Russian authorities are preparing to tender the construction and management of the 640-km Moscow-to-St. Petersburg highway project and Russia has appointed a group to look into the feasibility of additional project-financed roads, but the country has no law enabling concessions for toll roads.

A concessions law is expected by the end of the year. Russia spends about 1.3% of its gross domestic product on roads. This compares poorly with the 3.5% to 4.5% spent by European Union countries. The Russian transport minister called recently on the government to accelerate work on the concession law due to its huge importance in encouraging PPPs. Private investment in Russian roads is expected to increase gradually to $2 to $3 billion a year. A significant obstacle blocking this investment is investor skittishness about Russian intentions in the wake of the Yukos affair.

Public and private entities in the United States and internationally are eager to cooperate in the development of toll road projects, but without proper enabling legislation projects often end up creating controversy, falling behind schedule and exceeding their budgets.

Good enabling legislation, using past experience as its guide, defines the roles of developers, investors, government entities and even the interested public and spells out the rules of the game that must be followed. Good enabling legislation will not create opportunity where opportunity does not exist, but without proper enabling legislation, even the regions most likely to benefit from innovative financing and public-private partnerships will not realize their full investment potential.