March/April 2006
The Return of Private Toll Roads
by Robert Poole and Peter
Samuel
Private
concessions offer an alternative to managing American highways.
|
The city of Chicago recently leased the Chicago Skyway toll road (shown here) for 99 years, making a substantial return on the arrangement. Photo: Peter Samuel. |
In little more than 12 months, beginning in late 2004, the following events occurred: A Spanish toll road
company proposed to invest $7.2 billion to build the first leg of the
Trans-Texas Corridor (TTC), a major highway, rail, and utility corridor running
north-south from Oklahoma to Mexico. A global consortium agreed to pay $1.8
billion to lease, toll, operate, and maintain the Chicago Skyway for 99 years.
And an Australian toll road operator bought out a struggling public-private
toll road in Virginia.
These events illustrate a growing
trend in highway investment. The reality today is that increasingly the public
and private sectors are looking toward partnerships to build, operate, and
maintain highway infrastructure in the United States.
During the 1980s and 1990s,
investment in new highway capacity lagged considerably behind the growth in
automobile travel and freight movement. In the future, improvements in the fuel
efficiency of automobiles and the growing availability of alternative fuel
sources will increasingly affect highway revenues from gas taxes. At the same
time, public and political support for increasing fuel taxes, which have served
as a traditional source of highway funding, was and continues to be weak. In
this environment, as Federal, State, and local departments of transportation
(DOTs) look for solutions to improve safety and mobility on the Nation's
roadways, global capital markets are just beginning to see the U.S. highway
sector as a potential investment opportunity.
How the United States responds to
these forces will help shape the country's highway system in the 21st century. What follows is an overview of the emerging rebirth of
toll roads in the U.S. landscape and strategies for making the best use of this
model through long-term concessions to private toll operators.
The Challenge Of Highway Investment
"One key element of surface transportation, now and in the
future, will be toll roads," says Gary Hausdorfer, chief executive officer of
Cofiroute USA, a private toll road company. "Neither State nor Federal levels
of highway funding are sufficient to keep pace with demand."
The most commonly used reference
for assessing the adequacy of highway investment is the Federal Highway
Administration's (FHWA) biennial Conditions & Performance Report to
Congress. The 2002 edition reported that Federal, State, and local capital
investment in the Nation's highway system in 2000 totaled $64.6 billion. But
based on projected increases in automobile and truck vehicle miles traveled
(VMT), as estimated by the States, the annual investment needed to maintain the
asset value and expand the capacity of this tremendous resource was $75.9
billion. In a no-growth society, bridging that $11.3 billion annual gap might
be enough to solve the highway investment challenge. But with the number of VMT
increasing every year and truck VMT growing at an even faster rate, simply
maintaining the existing system is not sufficient to address the Nation's
mobility needs.
FHWA analysts estimate that the
Nation could be investing $106.9 billion per year if all potential improvements
having a benefit/cost ratio of 1.0 or greater were made. This estimate points
to a much larger gap of $42.3 billion per year—or 65 percent more than the
United States currently is investing. In The Bottom Line report,
published in 2002, the American Association of State Highway and Transportation
Officials (AASHTO) offered an even higher estimate of $125.6 billion for
improving the physical condition and performance characteristics of highways
and bridges over 20 years. Both estimates send the same message: the Nation is
not investing enough in the system upon which both personal mobility and most
freight movement are based.
The new Safe, Accountable,
Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU)
legislation has helped to increase Federal investment in highways. But because
the fuel taxes used for highway development and maintenance are not indexed for
inflation or automobile fuel economy, today's Federal-plus-State gas tax, in
real (inflation-adjusted) terms, produces between 2 and 3 cents per mile driven
(in light vehicles). That is about half of what the gas taxes of the 1960s and
1970s produced, when much of the interstate system and many core urban freeways
were built. Many of the systems built during those decades now need major
reconstruction, in addition to capacity expansion, but the resources are
inadequate to complete the task.
|
As shown in this figure, VMT has far outpaced the addition of new
lane miles of roadway in the United States since 1980. Source: FHWA. |
From 1980 to 2000, while VMT grew
by 82 percent, highway miles increased by just 4 percent. One symptom of
rapidly growing VMT is that urban freeway systems are now choked with traffic.
The 2005 edition of the annual Urban Mobility Report produced by the
Texas Transportation Institute (TTI) estimates that it costs motorists $63
billion per year in lost time and wasted fuel sitting in traffic congestion.
Although some may argue that adding capacity is not the answer, each year TTI's
data show that those few urban areas that added capacity to nearly keep pace
with VMT growth have the least increase in congestion, while those that add
little or no capacity suffer the most from congestion.
|
Motorists queue up
at the tollbooth for
the Blue Mountain
Interchange on
the Pennsylvania
Turnpike during its
opening weekend in
October 1940. The
Pennsylvania Turnpike
became the design
and financing model
for other States that
wanted to build
superhighways before
significant funding for
the interstate system
began in 1956. |
A New Model: Long-Term Concessions
The three highway projects cited earlier are based on a
model for highway finance, management, and operation known as the toll-funded,
long-term concession. Under this approach, in exchange for the right to collect
tolls for a long period (typically anywhere from 30 to 99 years), a private
firm or consortium will design, finance, build (or rebuild), operate, and
maintain a large-scale highway project.
In 18th-century Britain, the concept was used to develop hundreds of
turnpikes in the preauto era. The United States imported the model, where it
became the principal means of developing bridges and highways between towns and
cities in the eastern States, many of which still bear the name "turnpike" or
"pike" 150 years after they collected their last tolls. And when the West was
settled in the second half of the 19th century, again
this model was used to develop important mining roads and intercity roads in
California, Colorado, Nevada, and other States. The concession model also saw a
limited revival in the early days of the automobile era, with the Long Island
Motor Parkway (1908), the Ambassador Bridge in Detroit (1929), and the
Detroit-Windsor Tunnel (1930) as prime examples. Most of the toll bridges on
the upper Hudson and Delaware Rivers, on the Mississippi River, and in the San
Francisco Bay area, also were developed using this model. Some became insolvent
during the Great Depression and were taken over by State agencies. Others were
bought up by State and bi-State agencies with the expectation that they would
become toll free.
|
Eastbound traffic is shown here on the 91 Express Lanes in Orange County, CA. |
According to researchers at the
Reason Foundation, several factors prevented the full-fledged development of a
private toll road industry in the automobile era. The highly publicized
scandals surrounding the New York Bridge Company and the frauds committed
during construction of the Brooklyn Bridge in the 1870s gave toll bridge
charters a bad reputation. Second was the invention of highway trust funds
supported by dedicated motor fuel taxes. This form of highway funding proved
highly effective and inexpensive to collect. The fuel tax was quickly adopted
by every State, thanks to the Good Roads Movement in the late 1800s. Also, the
invention of the State toll road agency provided a way to fund large-scale projects
with toll revenue bonds, with the cost advantage of being able to issue the
bonds at tax-exempt rates. The Pennsylvania Turnpike became the model for a
host of other State and later urban and regional toll authorities that built
and maintained some of America's most important highways.
But Europe had neither highway
trust funds nor tax-exempt bonds. So as the need for limited-access motorway
networks became obvious after World War II, first France and then Italy, Spain,
and Portugal rediscovered the toll-funded, long-term concession model. All four
countries developed their large, national motorway networks using this model.
Many of the toll road companies started out as state owned and retained
majority state control, but in the last decade, most of them have been
privatized. Thus, Western Europe today has a thriving private toll roads
industry that has started investing in Latin America, the former Eastern
Europe, and the United Kingdom.
One of the newer adherents to this
model is Australia. Toll road companies operating under long-term concession
agreements have developed and now operate nearly all of the urban expressway
capacity added since the early 1990s in the country's two largest cities,
Melbourne and Sydney. Another major city, Brisbane, now seems to be moving in
the same direction. Australia's leading toll road firms also have gone global,
acquiring ownership stakes in overseas toll roads and even developing toll road
mutual funds aimed at long-term investors.
|
Shown here is a four-level
interchange at Toronto's highway
407 ETR. To relieve congestion,
drivers' willingness to pay directly
affects the setting of toll rates. |
Workable for Major Projects
The long-term concession model appears to work well with
large-scale highway, bridge, and tunnel projects for several reasons. First,
these are precisely the kinds of projects that are the most difficult to
develop using traditional highway funding. Amassing a large sum of money like
$2 billion for a single project in one location is both financially and
politically challenging. But if the economics of the project pencil out (that
is, there exists an unmet demand and a willingness to pay), the capital can be
raised in exchange for a suitable long-term right to toll.
Second, it is megaprojects that
pose the greatest risks of cost overruns, schedule slippage, and traffic
shortfalls under public ownership. With a properly structured long-term
concession, these risks can be shifted to the private sector. Because the flow
of toll revenues depends on the project getting finished on time (or early),
the concessionaire has a powerful incentive to ensure that its design-build
contractor delivers the project on schedule. And with a financing structure in
place, based on acceptable estimates of what drivers are willing to pay, it is
crucial to keep project costs within budget so toll revenues will cover
operating and debt-service costs.
In this model, the concessionaire also
does not have an incentive to cut corners on design or construction, because it
will have to operate and maintain the project for the life of the concession.
The minimum in construction standards might decrease short-term development
costs but would likely increase long-term operating and maintenance costs.
Innovation is a third reason for
looking to this kind of long-term, public-private partnership. Private firms
appear more willing than public agencies to take risks and "think outside the
box" to solve difficult problems. For example, it was a private company
operating under California's pilot program for long-term concessions that
invented the value-priced, congestion-relief tollway. California's 91 Express
Lanes in Orange County, which are located in the median of State Route 91 (S.R.
91), rely on an electronic toll-collection system with a variable toll based on
the time of day and day of the week to achieve a smoother traffic flow.
In France, a private toll road
company (whose U.S. subsidiary was a major shareholder in the company that
developed and now operates California's 91 Express Lanes) resolved a 30-year
impasse in completing the missing link on the A86 Paris ring road by developing
it as a congestion-priced, deep-bore tunnel beneath (rather than through)
historic Versailles.
And in Melbourne, Australia, a
private toll road company linked three existing freeways into a network, using
a combination of tunnels and elevated construction (with a "sound tube,"
similar in function to a "sound wall" in the United States except in the shape
of a cylinder, to minimize noise) through dense urban areas.
"Sooner or later, more and more
transportation officials will embrace congestion pricing," says Cofiroute USA's
Hausdorfer. "Why? To encourage fewer cars on the road. Whether it is higher
tolls at peak hours or general road charging, the commuting public will come
face to face with a very different form of public policy. [Because] no one
wants to propose additional taxes of any kind, road charging and public-private
partnerships become the alternative."
In Ontario, Canada, the concession
agreement for the 407 Express Toll Route (407 ETR) set a number of policy
objectives that needed to be met. According to Imad Nassereddine, vice
president for traffic operations and planning at 407 ETR Concession Company
Ltd., the main objectives included operating the 407 ETR as an open-access,
all-electronic toll collection system; requiring the concessionaire to adhere
to provincial safety and environmental standards in the design, construction,
and operation of the highway; and providing congestion relief to the
alternative public highways. To relieve congestion, a separate tolling
agreement was established whereby the road users' willingness to pay would
directly affect the setting of toll rates.
"Research . . . [shows] that
customers mainly value three factors in their decision to use the toll
highway," Nassereddine says. "These include the time savings achieved, the
reliability and convenience of the trip, and safety of the highway."
|
California's 91 Express Lanes facility, shown here, was the first privately financed toll road in the United States in more that 50 years, the world's first fully automated toll facility, and the first application of value pricing in America. |
Capturing Innovation
The long-term concession model can be applied to developing
new capacity as well as taking over and modernizing existing toll roads. The
arguments for enlisting investors rather than following the traditional U.S. model
of a public toll authority are twofold. Many public toll facilities are fully
borrowed (that is, they are unable to sell additional bonds), making them
unable to take on major new projects. Second, during the competitive bidding
process, private investment groups sometimes devise innovative approaches to
adding new capacity, potentially bringing to the table new ideas that the
public sector had not considered.
In southern California, for
example, inspiration from the private sector led to the notion of having
variably priced express lanes in the middle of the Riverside Freeway. It took a
law (AB 680) inviting investor proposals to produce the idea for the 91 Express
Lanes. "It is doubtful whether a public agency could have implemented such a
radical, untried scheme, in addition to carrying out the intense marketing and
customer relations needed to get it to work," says Carl B. Williams, former
director of the Office of Public-Private Partnership at the California
Department of Transportation. "It was a risky project, and public agencies do
not tend to reward risk taking, at least not to the extent that the private
sector can with stock options and bonuses for those who succeed and dismissal
for those who fail."
Similarly, the toll lanes
currently being negotiated for use on the Washington (DC) Beltway (I-495) in
northern Virginia rescued a traditional Virginia Department of Transportation
(VDOT) widening project that was collapsing under a barrage of local
opposition. Under the Virginia Public-Private Transportation Act, a private
company proposed a widening scheme that would almost eliminate the need to
acquire extra right-of-way (and thereby remove hundreds of homes), which
reduced the project cost from about $3 billion to about $1 billion. This
alternative approach transformed the political situation.
The original VDOT proposal was
more standard, featuring barriers separating the toll lanes, four sets of
breakdown shoulder lanes, and high-speed ramps at all the interchanges. The
private company proposed the same widening scheme—from 8 travel lanes to
12—but eliminated a pair of breakdown lanes. The company also proposed
deferring some interchange improvements.
VDOT and the private company are
working to incorporate some of VDOT's planned interchange improvements into the
scheme. And to ensure that enough funding will be available to cover the
additional work, an Australian toll road company agreed to commit more than
$100 million in "patient capital" (a long-term equity investment that does not
need to earn a return during the early years when toll revenues are hardest to
predict). This example shows how the private sector can bring both ideas and
capital to a project.
Virginia
Other unsolicited proposals are in various stages of
consideration in Virginia. Two groups proposed major enhancements to the
two-lane, reversible, high-occupancy vehicle (HOV) facility including the
Shirley Highway (I-395) and I-95 from the Beltway to the Fredericksburg area,
about 64 kilometers (40 miles) south of Washington, DC. In December 2005, the
VDOT commissioner selected one firm for VDOT to negotiate an agreement with to
further develop the high-occupancy toll (HOT) lane concept. The selected proposal suggests converting the
facility to HOT lanes by adding a third lane to about 45 kilometers (28 miles)
of the existing two-lane, reversible facility, extending the facility southward
about 32 kilometers (20 miles). Other enhancements would include installing new
entry and access points and ramps at the Springfield Interchange and other
locations and improving park-and-ride and bus facilities. Negotiations are
underway between VDOT and the private sector partner, but innovative aspects under
consideration are substantial private sector investments and a possible
concession arrangement.
In 2002, VDOT solicited proposals
for upgrading the 523-kilometer (325-mile) I-81 corridor, an overstressed
four-lane interstate with heavy truck traffic both ways. After an extensive
review process and touring I-81, Commissioner Philip Shucet directed VDOT to
enter negotiations with a private company selected as the potential operator of
I-81 corridors. Negotiations are still under way toward a comprehensive
agreement.
Concurrent with the review of
private proposals, VDOT has been conducting the National Environmental Policy
Act study on the entire length of the corridor. The study will serve as a basis
for making an informed decision before proceeding with any design and
construction improvements.
The private sector proposal
considers innovative financing mechanisms, such as truck tolling and
Transportation Infrastructure Finance and Innovation Act loans, along with
traditional formula funding from gasoline tax sources. The scale of the
anticipated improvements proves that innovative financing tools could represent
more than just a supplement to traditional formula funds.
California
Southern California is another area with potential for new
toll projects and private sector innovations. A major new toll road, the South
Bay Expressway (S.R. 125 South), is being constructed under a long-term
concession held by a private company based in Chula Vista, CA. The $635 million
toll road, due to open in late 2006, is 15 kilometers (9.3 miles) long and will
serve the rapidly developing communities on the eastern fringe of the area and
provide a new connection to the Otay Mesa border crossing to Mexico.
|
Shown from above, construction
begins on California's South Bay
Expressway Otay River Bridge, which
will span 1.2 kilometers (0.75 mile)
and reach 55 meters (180 feet) high. |
Currently the company is
negotiating with the California Department of Transportation and local agencies
for a 10-year extension of the concession, from 35 to 45 years. In exchange for
the extended concession, the company proposes covering the cost of adding a
single HOV lane in each direction on the I-805 freeway within the franchise
zone.
"The South Bay Expressway, or S.R.
125 South as it was formerly known, has been a line on the map since 1959,"
says Greg Hulsizer, chief executive officer of California Transportation
Ventures, Inc., the owner/operator of the South Bay Expressway. "It wasn't a
regional priority for funding, and there likely wouldn't have been funding for
a long time into the future. So the use of the private concession model is
bringing this new transportation alternative to life. It would have been literally
decades before it would ever be funded with public funds."
At least four tolled megaprojects
are being considered in the Los Angeles area. As an alternative to a
contentious 9.6-kilometer (6-mile) surface road, for example, transportation
officials are considering building an 8-kilometer (5-mile) tunnel that would
serve as the missing link in the I-710 freeway in South Pasadena.
Further north in Glendale, local
officials including the Los Angeles County Board of Supervisors, the city of
Palmdale, and the Southern California Association of Governments are
considering a proposal to tunnel under the mountains of Angeles National Forest
to improve the connection to Palmdale. The facility would cut 45 minutes off
the trip over the mountains. With tunnels measuring 17.4 kilometers (10.8
miles) and 7.6 kilometers (4.7 miles) plus about 8 kilometers (5 miles) at
grade, the project is estimated to cost less than a surface highway—a
reflection not only of the challenges inherent in building a road through such rugged
topography but also of improvements in tunneling technology.
A third tunneling project, under
consideration by the Orange County Transportation Authority and the Riverside
County Transportation Commission, would link the Foothill/Eastern Toll Road in
Orange County to I-15 in Riverside County to provide an alternative to the S.R.
91 Riverside Freeway and the winding S.R. 74 Ortega Highway through the
mountains of Cleveland National Forest. This tunnel would be about 22.5
kilometers (14 miles) long.
A nontunnel project would add
truck lane capacity in the corridor following the I-710 freeway from the ports
of Los Angeles/Long Beach to intermodal yards, then eastbound along the S.R. 60
Pomona Freeway. Truck volumes in this area are among the highest in the country
because of a heavy concentration of truck-related businesses. The project would
connect the growing array of warehousing and logistics businesses in Riverside
and San Bernardino Counties, then go north toward Nevada along I-15. With
Mountain State-style triple trailer rigs and other longer combinations
operating behind jersey barriers, such truck lanes could improve mobility and
safety in the regional transportation network. The enhanced productivity of
managed truck lanes totaling some 117 kilometers (73 miles) in urban areas and
277 kilometers (172 miles) to the Nevada State line would provide the basis for
toll financing.
California Governor Arnold
Schwarzenegger's administration is supporting a bill to facilitate concession
agreements, which are envisioned to be open for negotiation for investors,
nonprofits, and public toll agencies alike.
Indiana
Indiana also is pursuing the concession model. In September
2005, Governor Mitch Daniels announced that his administration would seek
investor proposals for a long-term concession to take over the Indiana Toll
Road. In January 2006, Daniels announced the winning bid: a joint venture by
toll road companies from Spain and Australia bid $3.85 billion for the 75-year
concession. Daniels also announced that 228 kilometers (142 miles) of the
planned I-69 southwest of Indianapolis will be built as a toll road and that
the State will seek investor proposals to build and operate the facility as a
concession.
|
These long, double trailer trucks are
at a service area on the Indiana Toll
Road, which is a major east-west
corridor for freight shipping. |
"The Indiana Toll Road is an
economic engine for northern Indiana," says Indiana Department of
Transportation Commissioner Tom Sharp. "For 50 years it has served as a vital
east-west link in facilitating the movement of commerce across the United
States."
He continues, "Grants and
no-interest loans generated from Indiana Toll Road revenues assist local
communities with transportation improvements at little or no cost. The latest
grants are being used to upgrade and integrate air and rail transportation
systems for passengers and freight. The Indiana Toll Road is a successful model
[that] Indiana plans to use for future toll highway projects."
Concessions on Existing And New Facilities
Although the concession model may be applied equally to
existing toll facilities and to new ones, the distinction is not clear-cut.
Many existing toll facilities need considerable investment. According to the
proposed concession agreement, the Indiana Toll Road (now operated by a State
toll authority), for example, could be improved by widening its western
commuter section, modernizing its toll system, and repaving.
In considering a long-term lease
for the State-operated New Jersey Turnpike, New Jersey would likely make
extension of the dual-dual (dual roadways both directions) roadways south of
Interchange (IC) 8A a condition. The State already announced that it wants to
widen the existing six lanes that extend some 32 kilometers (20 miles) from
IC-8A to IC-6 to four roadways of three lanes.
By contrast, in Texas, the primary
focus is not on privatizing the existing regional toll authorities but instead
on seeking investor involvement in concessions for new roads to address soaring
traffic growth. In addition to embarking on the TTC project noted earlier, the
Texas Department of Transportation now requires that all major new projects
forwarded from its regional offices be assessed for toll feasibility.
Further, Texas defines the term
"comprehensive development agreement" (CDA) as including both the traditional
public toll authority model and the concession model. The Central Texas
Turnpike Project, covering some 105 kilometers (65 miles) of toll roads under
construction in the Austin area—including State Highway (SH) 130, SH-45 North,
and Loop 1—is being constructed under a CDA that covers design, build, and
operations but excludes financing. The exclusion of financing and the fact that
the toll revenues will go to the State make it a public authority toll road.
The first TTC project (TTC-35) may
mark the start of using the full-fledged concession model. The winning proposal
for the first TTC-35 project involves a 50-year concession. (For more
information, see "Trans-Texas Corridor" in the July/August 2005 issue of Public Roads.)
In Colorado and Georgia, State
legislation allows private toll roads to operate along with two major State
toll facilities, E-470 and GA-400 respectively. There, the concession model
would be used almost exclusively to build new toll roads. In North Carolina,
where no toll facilities as yet exist, the North Carolina Turnpike Authority is
considering a concession for the Mid-Currituck Bridge, a proposed new multilane
facility connecting U.S. 158/NC-168 at Barco on the mainland to Corolla on the
Outer Banks.
Steps in the Concession Process
- Select qualified, third-party legal and financial consultants to advise the State on all aspects of the process.
- Appoint a qualified and respected selection and negotiating panel.
- Publish a timetable for the selection process.
- Prepare informational materials on the history and present state of the facility.
- Commission a professional traffic and revenue study.
- Release a formal request for expressions of interest to potential proposers.
- Release informational materials to potential proposers and the public.
- Release the results of the traffic and revenue study to the public, although independent assessments by bidders are encouraged.
- Issue a request for conceptual proposals and qualifications to potential proposers.
- Select the best three to five potential proposers (short list) and formally ask them for detailed proposals.
- Review proposals by selection panel.
- Negotiate with best proposer, holding others in reserve.
|
Why Sell or Lease an Existing Toll Road?
When Chicago leased the Skyway for 99 years for $1.8
billion, the city earned a substantial return on the arrangement. In fact,
according to a city press release, the mayor plans to set aside $875 million to
establish a $500 million long-term reserve fund and a $375 million mid-term
annuity the city can use to smooth the effects of economic cycles and stabilize
the need for additional revenues. Further, the city plans to use $463 million
of the proceeds to retire existing Skyway debt and $392 million to pay off
other existing city obligations.
By contrast, in 2002, the city
earned a profit of approximately $8.4 million from Skyway tolls, which is a
return of a mere 0.4 percent on the capital value of $1.8 billion as revealed
by the successful concession bid. Therefore, one way to determine if taxpayers
would be better off holding onto a toll road or selling it is to compare the
relative rates of return.
|
Traffic is shown here traveling on
the Chicago Skyway just east of the
toll plaza. |
A second consideration in deciding
whether to lease an existing toll road is how the proceeds will be used. If the
proceeds are dedicated to other needed infrastructure investments for which the
government would otherwise have to borrow, the transaction is more likely to be
viewed by the public in a positive light. For example, nearly one-third of the
proceeds from the concession of the Indiana Toll Road (or roughly $1.35
billion) are earmarked for Lake, Porter, and the five remaining counties that
surround the toll road.
All of this presumes that the
State can find a buyer experienced in owning and operating toll roads, with the
capabilities needed to manage such an asset and deliver quality service to its
customers. It also presumes that adequate protections for the public interest,
such as adherence to proper maintenance standards and avoidance of
monopolistic pricing, can be included in the terms of the concession agreement.
Why Use Concessions On a New Toll Road?
Choosing to use concessions on a new toll road offers a
number of potential benefits. As noted earlier, one benefit is the private
sector's ability to be innovative and think outside the box in coming up with
creative solutions to difficult problems. Second, funding a large project all
at once can facilitate completing the project and delivering its benefits to
the public years or even decades sooner than with traditional procurement
methods. But the latter benefit also would be available using public toll
authorities. What else does the private sector bring to the table? A more
robust financing approach is one feature.
|
A technician mans a
computer station in
the traffic operations
center for the
91 Express Lanes in
California. The
center is staffed 24
hours a day, 7 days a
week, and 365 days
a year to dispatch
emergency vehicles
in the event of a
traffic incident. |
As illustrated by the Washington
Beltway express toll lanes example, conventional all-debt financing fell short
by $200 million of what was needed. But because equity (rather than assets for
collateral) is patient capital, investors are willing to wait longer for a
larger return. The concession approach made it possible to finance a larger and
more serviceable project. A mix of equity and debt also is less vulnerable to
default in the early years of a new toll road, when traffic may be less than
was forecast. With a project 100 percent funded by debt, the debt-service
burden that must be met by toll revenues is higher than if only, say, 65
percent of the project is funded with debt that must be serviced like clockwork
in those critical early years.
Another advantage is risk
transfer. In a long-term concession, the company or consortium takes on the
risks of cost overruns and inadequate traffic, relieving the State and its
taxpayers of the burden. This is especially important on megaprojects, where
those risks are larger in magnitude.
To Toll or Not to Toll
The long-term concession represents a major new approach to
providing and managing highway infrastructure. Some in the transportation
community will welcome the opportunity to breathe new life into 20th-century institutions. Others may approach the concept reluctantly
or do so out of financial necessity. What seems clear, however, is that in a
changing world, stepping beyond highway "business as usual" can open doors to
improving the delivery and operation of the Nation's surface transportation
system.
Tips for Planning Long-Term Concessions
- Pay
for professional advice. Dealing with
global companies requires the State to have legal and financial expertise on
its side of the table, with comparable experience in long-term toll concession
agreements. If such expertise does not exist in-house, the State should be
prepared to pay for it in the marketplace.
- Ensure an open process. The more open the process, the
better, except that there will always be a need for some temporary
confidentiality. For example, bids should be sealed so the bidders offer what
they are prepared to pay, not just enough to beat the next bidder. Also
consider allowing proposers to keep some of their ideas confidential until all
proposals are submitted. At the same time, the public needs to be assured that
the selection process is fair, so confidentialities should be kept to a minimum
and be maintained only as long as essential.
- Protect road users from monopoly. To a certain extent, concessioned
toll roads represent a new form of public utility in the United States, bearing
at least some characteristics of a monopoly. Accordingly, it may be necessary
to regulate either the toll rates charged or the overall rate of return that
can be earned under the agreement to protect the public. Generally, these
provisions are best incorporated into the concession agreement, to be enforced
by the State DOT, rather than subjecting the toll road company to regulation by
a public utility commission unfamiliar with toll roads. In addition, so-called
noncompete clauses, which limit the degree to which the State can build
parallel nontolled roads, must be used judiciously, as it is extremely
difficult to predict potential needs 40 to 100 years into the future.
- Provide for future modifications. A 35-, 50-, or 99-year
concession term is a long time. No one knows what the world will be like in 20
years, let alone 50. So it makes sense to spell out in the agreement procedures
for dealing with future needs, such as major additions to the toll road or
allowances for a future administration to buy it back before the end of the
agreement. The more the risk of unknowns can be minimized through such
provisions, the better the deal that the State will be able to secure.
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Robert Poole is the director of
transportation studies at the Reason Foundation, a public policy think tank
based in Los Angeles. He received a B.S. and M.S. in engineering from the
Massachusetts Institute of Technology. He has provided advice to the United
States, California, Florida, Georgia, and Indiana DOTs, as well as the White
House Domestic Policy Council and National Economic Council during several
administrations.
Peter Samuel is a journalist who
has specialized in toll roads issues for the past 10 years. He produces
TOLLROADS news, a Web-based news service and writes for World Highways
and ITS International magazines. He also is a senior fellow with the
Reason Foundation and has authored and coauthored policy reports on toll roads
issues. He received a bachelor of commerce at the University of Melbourne,
Australia, and taught economics at Monash University.
For more information, see
the Reason Foundation's policy paper, "Should States Sell Their Toll Roads?"
available at http://www.reason.org/ps334.pdf.
Other Articles in this issue:
The Straight Scoop on SAFETEA-LU
Mileage-Based Road User Charges
Preservation Act
Helping Roadway Contractors Fulfill Public Expectations
Geospatial Technologies Improve Transportation Decisionmaking
The Return of Private Toll Roads
Essential to the National Interest
Multipedestrian Tracking