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PA Turnpike Concession: Gaining control, not losing It

Leonard Gilroy
May 19, 2008, 7:13pm

One of the prevalent myths about long-term toll road concessions is that somehow government would be "losing control" of a roadway as part of the deal. This really involves a fundamental misunderstanding of the nature of concessions--namely, that their entire legal foundation is a strong, performance-based contract that spells out all of the responsibilities and performance expectations that the government partner will require of the concessionaire. And the failure to meet any of thousands of performance standards specified in the contract exposes the concessionaire to financial penalties, and in the worst-case scenario, termination of the contract (with government keeping any upfront payment the concessionaire may have paid). Concession contracts are often several hundred pages long and may incorporate a number of other documents (e.g., detailed performance standards) by reference. The public interest is protected by incorporating enforceable, detailed provisions and requirements into the contract to cover such things as: So the short answer is, government never loses control--in fact, it can actually gain more control of outcomes--as part of a concession. It's my understanding that state officials in Indiana have testified that they were able to require higher standards of performance from the concessionaire on the Indiana Toll Road (Cintra/Macquarie) than the state itself could even provide--precisely because you can specify the standards you want in the contract and hold the concessionaire financially accountable for meeting them. There's no mystery here...if you want it, put it in the contract. A useful example is the concession agreement for the PA Turnpike (see my post yesterday for details)--all 686 pages of it are available for download here (warning: large download, 33MB). Even through a quick scan, it becomes very obvious how detailed and complex these agreements are. In addition to the roughly $5 billion in capital expenditures on the Turnpike required of the concessionaire over the deal (a staggering amount of investment in the asset that's above and beyond the $12.8 billion upfront payment), the agreement includes a variety of interesting performance requirements that readers may find surprising. The concessionaire must: And these are just a tiny subsection--remember, the concession agreement is 686 pages, so there are plenty more where this came from! Safety and security is another area in which understanding the contract should dispel fears of losing control. Even if the concessionaire wouldn't already have a strong financial interest in ensuring security and safety on the Turnpike (which they'd obviously have since it's a business operation, but speaking hypothetically), the concession agreement would require it. Under the PA Turnpike agreement, the concessionaire would have to provide (at their own expense) the same level of traffic patrol, law enforcement, and emergency services in place today on other Commonwealth highways and the Turnpike itself. Further, the lease agreement requires the concessionaire to grant access to police, fire, emergency, security or armed forces personnel for a broad range of emergency management and homeland security purposes, and in the event of a declaration of a state of emergency in the Commonwealth, the state always reserves the right to temporarily designate the Turnpike as a toll-free highway to facilitate evacuations or for any other emergency purpose. Again, a ton of control. So the main takeaway should be that government doesn't lose control in concessions whatsoever, it actually gains it and can guarantee performance through the contract. For more on how concession agreements work, see Reason's 2007 study, The Role for Tolls in Financing 21st Century Highways, or our FAQs here and here.

Leonard Gilroy is Director of Government Reform


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