Toll Road Update

January 05, 2006 | By Jacob Falk in Washington, DC

A number of US states that do not currently authorize significant private sector involvement in road projects are considering public-private partnerships for the development or operation of toll roads.

While some of these states are focusing on creating the necessary legislative and regulatory framework for private or public-private road projects, others are starting with an attractive project and working their way back to the necessary legislation.

Of course, whether you start with a framework or with a project, one of the key ingredients for jump starting any public-private partnership — or PPP — program is political support and, in a handful of states, recent gubernatorial elections brought in governors who support the use of PPPs to help solve their states’ transportation problems.

Individual States

Private sector involvement in road projects has traditionally been limited in the United States to low-bid procurement of construction contracts. To involve the private sector in anything more than low-bid procurement requires legislation to change the rules.

Maryland is moving to create a PPP program for highway projects. Maryland has a PPP program authorizing transportation projects generally, which dates back to 1997, but the program specifically excludes highway projects. (The program is administered by the Maryland Transportation Authority, which is responsible for managing, operating and improving the state’s toll facilities.) Maryland recently sent highway officials to Texas, Virginia and California to study the experiences those states have had with highway PPPs and, on August 11, the Maryland Transportation Authority released a report on highway PPPs titled “Current Practices in Public-Private Partnerships for Highways.”

Maryland has not yet disclosed specific projects for which it would consider PPPs. Since Maryland already has a centralized and well-managed tolling authority, there is speculation that the state is considering PPPs for the development of new capacity rather than the operation of existing toll roads.

Utah is also considering PPPs for roads, but like Maryland, Utah has not yet identified a particular PPP project (or a group of projects) on which to focus. Utah needs $16.5 billion for road development over the next 25 years. It is studying what other states have done to encourage PPPs generally. A bill for PPP toll roads is expected to be introduced in the next session of the Utah legislature.

In Tennessee, the commissioner of the Department of Transportation recently suggested that the state will look at PPPs over the next couple of years as an alternative financing solution for road projects. The commissioner identified the proposed beltway around Knoxville — the so-called “orange route” — as one project that might benefit from privatesector help, but the state is expected to focus on authorization of PPPs generally.

Tennessee is looking at PPPs because high gas prices make it difficult to raise gas taxes to pay for highway maintenance. The state gas tax is currently 21.4¢ a gallon and has not been raised in years. The buying power associated with it continues to decline. The state is projecting a 5% to 10% percent decline in gas tax revenues in the near term as high gas prices cause people to drive less and buy more fuel-efficient cars.

In Nevada, the governor has established a task force that is supposed to report by the summer of 2006 on the potential for toll road PPPs. The state is facing a $2.4 billion shortfall in highway funding over the next six years. Raising gas taxes is difficult in Nevada. The state gas tax is 23¢ a gallon and the combination of federal, state and local gas taxes bring the total tax to 53.05¢ a gallon -– the highest in the nation, outside Hawaii.

Nevada has PPP enabling legislation for certain types of transportation projects, but toll roads and toll bridges are specifically excluded from the legislation. Nevada’s enabling legislation cannot be amended until the legislature meets again, which is not scheduled to happen until 2007. Among the projects Nevada would like to complete, but cannot afford to complete out of current revenue, are the widening of I-15 and I-95 in the Las Vegas area and the construction of a bypass around Boulder City.

Indiana does not currently have statutory authority for highway PPPs, but the governor suggested in August 2005 that the state consider PPPs generally. The governor said, in particular, that the I-69 extension from Indianapolis to Evansville would benefit from a PPP structure. Unlike the other states mentioned earlier, Indiana is not initially focusing on creating a broad regulatory framework for PPPs but approaching things from the other direction by focusing on privatizing a single existing highway.

The state is soliciting proposals for a 75-year concession agreement that will require the concessionaire to maintain the 157-mile Indiana turnpike, in exchange for which it will be allowed to collect tolls. The turnpike runs across the northern part of the state, starting in the east where the Ohio turnpike dumps cars into Indiana and connecting in the west with the Chicago Skyway. The governor is hoping that the state will receive proposals for this concession that are too attractive for the legislature to turn down. If the state is offered the kind of money that Chicago was offered for the Chicago Skyway, then the governor’s gamble will have paid off. If not, the governor’s gamble could turn into an embarrassing setback for the state’s PPP program.

Another PPP project that may be in the works is the new $910 million Mississippi River bridge between Illinois and Missouri. A preliminary study by a St. Louis engineering firm, which will not be complete until sometime in 2006, found that a $1.00 toll each way could generate as much as $240 million per year, assuming an average of 66,000 vehicles crossing the bridge each day. Illinois does not currently have statutory authority for highway PPPs. (The Chicago Skyway was authorized by the City of Chicago under a home rule provision of the Illinois constitution.) Illinois transportation officials have said they would prefer not to collect toll on this new bridge. Missouri has legislation from 1990 authorizing not-for-profit state transportation corporations to implement PPPs, but Missouri does not have broader statutory authority in place authorizing the full range of PPP structures being used around the country.

The Florida Department of Transportation is moving forward on plans to begin a PPP tender process for the Miami port tunnel. The tunnel would link I-395 on Watson Island with the Port of Miami on Dodge Island. The tunnel would help accommodate port traffic, which is expected to increase, and would remove trucks and buses from Miami’s crowded downtown streets.

Miami held a heavilyattended informational meeting on December 5, 2005 to solicit feedback from the private sector and share background information. Alternative scopes and project delivery methodologies were discussed. On December 13, the Federal Highway Administration signed a re-evaluation of an earlier environmental assessment, again accepting a recommendation for a bored tunnel. A request for proposals and an information memorandum are expected to be released in early February 2006, with the selection and award of a franchise or concession targeted for the end of 2006.

New Jersey

In New Jersey, where there is currently no statutory authority for private participation in road projects, the incoming governor, Jon Corzine, may face the same dilemma as the Indiana governor if he tries to privatize the New Jersey turnpike or the Garden State Parkway, a move New Jersey appears to be considering. Going to the legislature with a proposal in hand for a valuable concession (the concession has been estimated to be worth over $20 billion dollars up front) may help smooth the way for statutory authority. On the other hand, to ask private investment consortia to conduct the necessary studies and prepare proposals only to have these efforts set aside by a skeptical legislature could foreclose future private investment in New Jersey road projects.

New Jersey needs to find a new source of revenue for transportation projects. By June 2006, New Jersey’s transportation trust fund, which funds capital improvements, will have $0.00 in revenue generating capacity for investment in new capacity and maintenance; it will be using all of its revenue for debt service on outstanding indebtedness. In addition, depletion of the transportation trust fund jeopardizes the approximately $1.2 billion that New Jersey receives from the federal government, which is only provided if the transportation trust fund provides matching contributions. Together, the transportation trust fund and the federal matching funds make up approximately 60% of New Jersey’s transportation budget, and the loss of these revenue sources will force New Jersey to limit its transportation spending to operating expenses and emergency repairs.

The idea of privatization has been discussed for almost a year in New Jersey, but real political support has been elusive. There has been speculation that privatization will move forward now that Corzine has been elected, but a November 2005 report by the Regional Plan Association, a New Jersey, New York and Connecticut think tank, suggested that it would take one to two full years to negotiate a fair concession contract, and the “day of reckoning” for the transportation trust fund is expected on June 30, 2006 –- in six months.

New Jersey needs an estimated $2.7 billion a year in new transportation revenue. The Regional Plan Association’s report suggested several alternative sources of funds that could be used in various combinations to satisfy this need. In addition to privatization, they include container taxes, corporation business taxes, motor fuel taxes, motor vehicle registration fees, personal property taxes on vehicles, petroleum gross receipt taxes, rental car fees, higher sales and use taxes, tolls and value-capture fees or mortgage recording taxes.

The report said Corzine must exhibit “rare leadership” and that a decision must be made within the next six months. A study commissioned by the New Jersey Department of Transportation speculating on how much might be raised by privatizing existing New Jersey toll roads was expected in late December.

Virginia

The new governor in Virginia, Tim Kaine, expects the transportation “crisis” to be the “most urgent issue” of his upcoming term in office. Kaine started, almost immediately after election day, hosting town hall meetings around the state to discuss Virginia’s transportation needs.

Kaine supports PPPs. The town hall meetings are an effort to rally support for transportation initiatives. The state legislature has supported PPPs in the past, but the PPP landscape has been changing dramatically over the last year and the governor’s support will be crucial, especially for the recent concession-style proposals being considered by the Virginia Department of Transportation, or VDOT.

VDOT is currently considering granting a long-term concession for the Dulles toll road similar to the one used for the Chicago Skyway and the one proposed for the Indiana turnpike. One bidder made an unsolicited proposal.The state is also reviewing four competing proposals.The initial unsolicited proposal would dedicate a significant amount of the concession price for development of a Metrorail extension from Washington, DC to Dulles airport. In late December, the state eliminated one of the competing proposals and the Metropolitan Washington Airports Authority, which operates the Dulles airport, submitted an additional competing proposal. The airports authority proposal relies on toll and bond revenues and does not contemplate any private involvement.

VDOT signed an agreement during 2005 with a private consortium for development and operation of two highoccupancy toll lanes in each direction on Virginia’s 14-mile portion of the beltway that runs around Washington, DC. The project is expected to cost approximately $900 million. VDOT is also currently negotiating with a private consortium for an approximately $913 million concession for development and operation of high-occupancy toll lanes on a 56-mile portion of I-95 and I-395 south of Washington.

Meanwhile, Virginia and Maryland have been working together on adding new toll lanes to the two Potomac River crossings on the beltway. It is not clear whether the toll lanes would be developed or operated as PPP projects, or how a PPP could be structured between two states only one of which currently has a PPP highway program, but a study commissioned by the two states analyzing the projects is expected in the next 18 months.

The last year was an exciting year for private road projects in the United States, with the Chicago Skyway and the Trans-Texas corridor grabbing major headlines, but perhaps the most exciting development, as 2006 starts, is that a number of states without active PPP programs are talking about adopting them.