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Public Works Financing

Where Now on U.S. Toll Road Concessions?

Setbacks obscure several positive developments for tolling and long-term concessions

Robert Poole
September 1, 2007

The past six months have been a sobering time for those of us supporting toll road concessions as a major step forward for U.S. transportation infrastructure. First came the populist backlash against both tolling and concessions in Texas, culminating in a two-year moratorium on new toll-road concession projects and the award of the lucrative SH 121 project to the local public-sector toll authority instead of the private-sector winner of an already-completed competition. Then came the Pennsylvania legislature's rejection of Gov. Ed Rendell's proposal to lease the Pennsylvania Turnpike. Add to that a series of House Highways & Transit Subcommittee hearings focusing on the negatives of toll road PPPs, along with a letter and white paper threatening states with federal restrictions if they don’t conform their PPP activities to those legislators' narrow view of what constitutes the public interest. Whew!

But focusing solely on those setbacks obscures the larger context in which these debates are taking place, as well as a whole series of positive developments for tolling and long-term concessions. My assessment is that the outlook is far more positive than negative.

First, consider what is happening in other states:

Another important sign of the times is the recent decision by the country's largest public-sector pension fund, CalPERS, to allocate up to $2.5 billion to investments in infrastructure, including road and bridges. This move will encourage other large U.S. pension funds to follow suit.

In Pennsylvania, increasing doubts (and legal challenges) over the legislature's plan to have the Turnpike Authority take over I-80 and convert it to a toll road have led Gov. Rendell to revive his Turnpike lease plan. Potential bidders have been invited to submit their qualifications by October 1st. If Rendell can obtain a high enough bid in response to a subsequent RFP, he would take that offer to the legislature—as did Gov. Mitch Daniels in Indiana—for their consideration.

Even in Texas there are still numerous opportunities for the private sector. First of all, the Swiss-cheese moratorium exempted nearly a dozen concession projects that were already moving forward. Second, TxDOT has figured out that while the moratorium prohibits starting any new toll-based concessions during the two-year period, it does not prohibit tolling of new roads. So the 87 toll projects on TxDOT's priority list can proceed, with TxDOT doing the tolling; the private sector could still be asked to design, finance, build, operate, and maintain them based on availability payments (which is the model FDOT will use for the I-595 project).

There is also the question of competition between public-sector toll agencies and investor-owned concession companies. Some have claimed that the selection of the North Texas Tollway Authority instead of the Cintra/J.P. Morgan consortium for SH 121 shows that public agencies as a general rule can do as much as or more than a concessionaire. That's a gross misreading of the actual situation. Both the SH 121 toll road project and the situation of NTTA in 2007 were rather special cases.

In the first place, SH 121 was a most untypical start-up ("greenfield") toll road. It’s in the middle of a very fast-growing and affluent metro area and has relatively modest construction costs given its size and traffic potential. Most greenfield toll roads could not possibly justify significant up-front payments, let alone multi-billion-dollar ones.

Second, NTTA was substantially under-leveraged, having always been run very conservatively. Why its board suddenly decided to shift gears to a far more aggressive policy—essentially leveraging its entire system so as to match or exceed the private sector’s bid—remains obscure. We are still awaiting the rating agencies' assessment of NTTA's post-SH 121 financial condition. And its board has put the users of all NTTA's toll roads at risk of unexpected toll increases, if their traffic and revenue projections for SH 121 don't fully pan out. In the private-sector alternative, that risk would have been borne solely by the investors.

The SH 121 example shows that a large public toll system can leverage its system more aggressively than is traditional, committing to CPI-based toll increases. But that process is not generalizable. Once the agency has used up its bonding capacity, it can't keep replicating that process, since it has nothing left to leverage. By contrast, a concession company funds each project separately. As long as it has a large pool of equity and debt capital to tap into, it can keep on funding toll projects.

Moreover, most states and metro areas do not have a large toll agency already in place, with lots of surplus cash flow that can be leveraged for greenfield projects. The growing number of brand new "regional mobility authorities" in Texas and elsewhere must start from scratch—and could wind up with a financial disaster on their hands, as happened with Colorado's Northwest Parkway and Virginia’s Pocahontas Parkway—both foundering startups that have now been rescued via long-term concession deals. It's highly risky to fund a stand-alone greenfield toll road 100% with debt. A private-sector 80% debt/20% equity model is far more robust during the early years when toll revenue may well fall short of projections.

An excellent case in point is segments 5 and 6 of Texas's SH 130 toll road, south of Austin. Under conventional all-debt public sector toll finance, tolling could cover only 50% of the project's cost. Yet when offered to the private sector, a concession company was able to finance the entire project, thanks to being willing to accept a more aggressive traffic forecast, take advantage of tax benefits, and operate on a longer time horizon. SH 130 is a far more typical case than SH 121, but it may take awhile before elected officials come to understand this.

Putting all of this together, I expect that over the next decade or so we will see a lot more urban/regional toll agencies created. But for a variety of reasons—expertise, risk transfer, ability to fund a larger total amount—they will increasingly partner with private firms under various kinds of concession agreements. While nearly all these projects will be tolled, in some cases the private sector will be compensated mostly or entirely via availability payments rather than directly receiving and pocketing the toll money. This is a more complex scenario than many of us imagined a few years ago. But it is far more likely than a scenario in which public-sector toll agencies take most of the business away from concessionaires.


Robert Poole is Searle Freedom Trust Transportation Fellow and Director of Transportation Policy


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