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A Tale of Two States, Part 2: Texas vs. California on PPP Toll Roads

Leonard Gilroy
March 27, 2009, 9:25pm

In a post on Wednesday, I contrasted Texas and California on creating a thriving environment for business, and Texas was the clear winner:

One is unabashedly pro-growth and aggressive in courting industry, while the other seems content to spin an ever denser spider web of laws, regulations and red tape that is driving business out of the state.

However, the same thing cannot be said on the specific issues of public-private partnerships (PPPs) and privately financed infrastructure. Like a policy "Freaky Friday," the two states have oddly switched roles. As California rediscovers the need to court private industry to help solve its major infrastructure problems, Texas policymakers seem intent on driving the private sector away.

First, Forbes.com on California:

Billions of dollars of private capital for infrastructure may pile into California with the state, the world's eighth-largest economy, opened to public-private partnerships. The tie-ups, known as "P3s," had been blocked by state employee unions because they allow private companies to both build and operate public works. But Gov. Arnold Schwarzenegger recently signed a bill allowing state transportation planners to approve unlimited P3 projects through 2017.

Previously, California only allowed up to four of the tie-ups until 2012, with their fate in the hands of the legislature, where political opponents could stall them. [...] "What California has done in essence is open the door and put out the welcome mat," said D.J. Gribbin, managing director at Macquarie Capital, a unit of Australian toll-road investor Macquarie Group Ltd . "California is a very attractive market because of its size and the number of people out there -- and because of its needs."

Hopes for busy construction sites meeting infrastructure needs across California have been thwarted by increasing strains on traditional financial sources for public works -- taxes, user fees and the municipal debt market.

So a state that helped launch PPP toll roads in the U.S. back in the early 1990s—then quickly retreated as opposing union forces obstructed the issue for nearly two decades—is finally resurfacing to find that it has lost significant ground to other states like Virginia, Florida, and yes...Texas...that are tapping private dollars to deliver public infrastructure and solve tricky congestion problems. One might say that California's ever-mounting infrastructure needs and dire fiscal situation finally convinced policymakers to accept the obvious folly of keeping a powerful tool like PPPs idle in the procurement toolbox.

Meanwhile, in the Lone Star State—which at one point in the recent past was widely considered the most aggressive state on PPPs under Governor Perry's leadership—policymakers are seemingly determined to take a second attempt at neutering PPPs. Per TollRoadsNews.com:

Legislation is moving through the Texas legislature to virtually preclude further private tollroad development in the state. SB17 sponsored by state senator Robert Nichols (Republican) builds on SB792 the 'moratorium' bill of 2007 and is even more hostile to private toll concessions. It abolishes SB792's "market valuation" under which public toll authorities were required to pay a negotiated equivalent to an upfront concession fee for profitable projects. And at that market value they had a first right of refusal. Nichols says the valuation process is "unduly expensive, contentious, and time-consuming" and simply abolishes it, allowing public toll authorities to develop toll projects for free.

That is called "streamlining" the process. [...] Only as "last resort" will private investors be called on. [...]

One investor rep told us: "You'd be insane in invest in Texas roads under this law. If you do well and establish a great tollroad the government can buy you out sub-market at any five year interval, confiscating a large chunk of the value you created, and leaving you no reward for risktaking and success. If the road does poorly the government has invested no capital and taken no risk and gets to buy it at the firesale price at a time of its choosing. It's heads they win, tails you lose."

Yes, that's right, legislators in a state that by almost any other metric has its doors flung open wide for business are poised to drive off the very investment Texas needs to help keep its citizens and businesses—and ultimately the state economy—moving into the future. Texas may be running ahead in the state economic race now, but these gains will be threatened by chronic underinvestment in transportation and rising congestion in the future if it doesn't start delivering more infrastructure, and fast.

Consider the recent announcement of two North Texas blockbuster PPPs (the North Tarrant Express and the New LBJ Freeway), in which the private concessionaires are bringing $5 billion to the table to facilitate roughly $6 billion worth of major, congestion busting projects to benefit the entire Metroplex economy. It puzzles me that any Texas legislator could look at the clear value and importance of these projects and then still conclude that PPPs should be the absolute very last resort in the state's set of project delivery methods.

In a state with $315 billion in transportation infrastructure needs in coming decades, and nowhere near enough traditional funding through fees and taxes to pay for it (and no political will to raise taxes and fees to the level it would take), something has to give. In the three Texas PPP toll concessions alone, the private sector is facilitating roughly $7 billion in needed mobility projects that the state could not otherwise afford for decades (if ever) under traditional financing approaches.

At the very same time that government is failing badly at delivering the infrastructure we need to meet the demands of the 21st century world, Texas legislators are trying to concentrate the eggs in government's basket. I'd counter that it's time for Texas to get its hat back on straight, wipe itself off, and get back to business, as California's doing right now on PPPs.

If it wants to share some monumental congestion and infrastructure problems with California, Texas should do exactly what it seems to be doing right now—innovate then quickly retreat on PPPs, sitting by for decades afterward fiddling while the congestion problems burn ever brighter and become ever more expensive to solve.

Speaking as a former Texan, it's extremely disheartening that as California finally wakes up and starts climbing out of the anti-PPP hole it's dug for itself, Texas seems to be asking California if it can borrow the shovel.

» Reason's Transportation Research and Commentary


Leonard Gilroy is Director of Government Reform


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