A cursory glance at the headlines today could leave the impression that the Texas Transportation Commission handed a decisive victory to the North Texas Tollway Authority yesterday when it conditionally selected them over the private Cintra/JPMorgan team to build the State Highway 121 project in Denton and Collin Counties.
But having attended the TTC meeting yesterday (which should be available to watch here soon), it was abundantly clear that the decision was exactly that--a conditional acceptance--and the NTTA has a lot of work to do over the next two months to get its ducks in a row and develop a project agreement with the Dallas-area Regional Transportation Council. A very significant point to highlight is that the TTC did not close the Cintra procurement, preferring instead to keep Cintra's ready-to-execute project agreement in their back pocket in the event that NTTA is unable to seal the deal.
Reason Senior Fellow and TollRoadsNews.com editor Peter Samuel offers the most accurate wrap-up of yesterday's events that I've seen thus far.
The SH121 saga continues. It was not resolved today in favor of either NTTA or Cintra as had been expected. The Texas Transportation Commission voted a 60 day deadline for the North Texas Tollway Authority (NTTA) and the Dallas area Regional Transportation Council to reach a firm agreement on SH121, including enforcement provisions, toll rate policy, a project schedule, payment obligations, quantification of public benefits, and other matters.
This must include demonstration of the ability to go to financial close no less than 45 days later.
Ric Williamson chairman of the Commission laid down an ultimatum at the end of about two hours of talk saying that there have already been three efforts at reaching agreement. The NTTA proposal to date was a "bunch of promises" Williamson said, as compared to a "firm executable contract" of Cintra. If the RTC and NTTA can't do a deal within the deadline, then TTC will go with Cintra, the commission chairman suggested.
The commission took its lead today from Michael Morris, transportation director at the local council of governments and director of the Regional Transportation Council. Morris said that local officials would prefer to do a deal with NTTA over Cintra, but that this is conditional on NTTA and RTC getting detailed agreements on a range of issues.
It's no easy task for NTTA moving forward. As Peter notes, they're being asked to deviate from their normal way of doing business:
TxDOT issued a statement on behalf of the Commission afterward in which it said staff were were authorized to enter into a project agreement for SH121 once:
(1) RTC negotiates the major terms with NTTA and submits those to TxDOT
(2) quantification of public benefits
(3) NTTA is able to close within 45 days of the agreement
Major terms still to be negotiated include:
- the timing and amount of annual payments
- enforcement provisions
- agreement length
NTTA has never previously agreed to concession type provisions which the RTC and TTC have now laid down.
Normally NTTA, like other toll authorities assure lenders that there are no constraints on their ability to raise toll rates in case of a financial shortfall. Here the RTC is insisting on NTTA committing itself to toll caps of the kind to which Cintra would be held under a concession contract. NTTA would have to agree to a [binding] schedule for project delivery. And NTTA would not have control of SH121 in perpetuity but only for an agreed term after which it would revert to the state.
The last point in bold is a big one. As Bob Poole and Peter wrote in their recent policy study, The Role of Tolls in Financing 21st Century Highways (pp 11-12):
In 1947, the Maine Turnpike pioneered a new form of bond financing [...] non-recourse toll revenue financing. It pledged prospective future toll revenues to service the debt, based on a traffic and revenue projection through the life of the bonds. The investors in these bonds are betting on the revenues being sufficient to service the debt because there is no recourse to any other state revenues. Most of the toll roads built in America in the past half century used such toll revenue bonds. The covenants usually oblige the toll authority to take certain actions to address the rights of bondholders if revenue comes up short. These may require toll increases, and in case of default a court can often appoint an administrator to manage the toll road in place of the normal directors appointed by the state. Governments wanting to lower toll rates or institute toll holidays or to provide toll exemptions [Editor note: you could add to this list, "sign a contract that caps toll rates"] are constrained by the terms of bond covenants. Those covenants create a legally enforceable fiduciary responsibility to protect the revenues needed to service the debt.
NTTA's obligations to debt holders and TTC/RTC's intention to place contractual caps on toll rates are in direct conflict, so it will be interesting to see how this develops. But it's not the only hurdle that needs to be cleared; other challenges include:
- Sorting out the issue of road standards--NTTA has pledged to build the road to its usual standards, which don't live up to the standards guaranteed under Cintra's agreement. It's not exactly a great deal for drivers if you trade off public authority control of the project for a lower quality road and/or lower performance expectations;
- NTTA needs to commit to a binding project delivery schedule;
- NTTA needs to line up solid lending commitments;
- NTTA and RTC will need to agree on the length of the contract, after which point the road would revert to state control;
- NTTA will need to solidify its fuzzy promise of $1.3 billion in "public benefit," a major point of contention in PriceWaterhouseCooper's critique of the NTTA proposal since that benefit would only materialize if there's money left over after debt service, operations & maintenance costs, and payments to the state;
- The agreement needs to include enforcement provisions and remedies to cover any NTTA failure to comply with the toll rate policy, project schedule, payment obligations, and other commitments. Private concessionaires are used to this sort of thing as a standard part of undertaking PPPs, but public authorities certainly aren't, so committing to these enforcement provisions could be a bitter pill for NTTA to swallow.
These are no small issues to resolve on a short time frame. And then there's the larger--but very basic--question that I've never heard a clear, direct answer to: if NTTA is somehow able to pull off the 121 project, how will they be able to pull off the other five projects they've already committed to begin construction on in the next five years (Southwest Parkway, Texas 360, Texas 170, PGB Turnpike eastern extension, and Trinity Parkway). It will take time for the 121 to ramp up in revenue collection, so it's not as if you can just turn on the money spigot on day 1 of operations and have a cash cow that you can immediately leverage.
Of course, if it all gets to that point, I do have a suggestion for NTTA: tap the private sector and use concessions! NTTA reps recently stated at an RTC meeting how much they support the private sector and that they even fought to get CDA (concession) authority under the recently passed SB 792, so why not use those new tools? Sure, it might be a little awkward to go toe-to-toe with Cintra on the 121 project and then turn around and court them and other firms for CDA projects down the road, but we're all adults here, right? As several commissioners and NCTCOG's Michael Morris noted yesterday multiple times, the silver lining of the whole 121 debacle is that it demonstrates the value of competition--"competition works" has been a consistent theme in these discussions. If NTTA is being genuine about fighting to get CDA authority and continuing its transformation into an aggressive, competitive public toll authority and then they should look seriously at concessions as an option for future projects.
There's a lot more to say about the events yesterday. I'll have a new commentary soon that delves into these and other related issues.