As per norm, Texas toll road opponent Terri Hall and her San Antonio Toll Party organization demonstrate their willingness to misconstrue, misrepresent and generally obfuscate issues related to privately-financed toll roads. The latest involves a decision yesterday by the Regional Transportation Council—the regional transportation policymaking body in the Metroplex area—to (finally) compensate Spanish toll-road operator Cintra $3.6 million for its costs related to the State Highway 121 (now known as the Sam Rayburn Tollway) procurement. In my mind, this move was long overdue.
The long saga of SH-121 has been told over the last few years in numerous Reason Foundation blog posts, commentaries, etc.—see here for starters. The short of it is that Cintra and partner JPMorganChase jumped all but the last hurdle in a lengthy procurement for a team to finance, build and operate this highway megaproject (including a $2+ billion upfront payment for the priviledge). Local leaders pulled an about-face and then gave the project to the North Texas Tollway Authority, utterly thwarting a competitive procurement in a move reminiscent of a banana republic.
Megaprojects are complex and tricky things, and bidders involved in these sorts of procurements spend millions of dollars just to do all of the necessary design work, legal and financial due diligence, etc. to comply with the procurement process itself. Hundreds of thousands, even millions, may be spent by a prospective bidder throughout the procurement process, and every new stage (shortlisting, final selection, negotiating commercial and financial close, etc.) brings greater costs for bidders. By the time the winning bidder gets to the finish line, it’s burned through millions.
Because of the unique nature of the market for privately-financed infrastructure like toll roads, policymakers in Texas and other states have wisely recognized that you will have tremendous difficulty soliciting competitive bids from a wide pool of bidders if you don’t offer them some form of compensation to those that make it past the qualifications stage. After all, if you’re a potential bidder, it becomes a much easier decision to commit to a costly procurement process if you know that you’ll receive at least some compensation for all of your time, energy and costs incurred. Think about it—would you be more or less likely to bid if you knew you could potentially spend millions along the way, with no way to cover any of your costs? That why stipends to unsuccessful bidders is standard operating procedure in the world of public-private infrastructure partnerships.
In this case, all of the qualified, but losing, bidders in the SH-121 procurement received a stipend, which as I understand it totalled about $750,000 each. When Cintra had the rug pulled out from underneath them, the company then became eligible for the same amount. But because it had also been selected as the winning bidder, it ended up incurring a variety of costs to advance the project to commercial and financial close. So it’s then only right that they receive partial compensation for those costs—after all, it was the fickle elected officials who flip-flopped. The message they sent was essentially, “yes, go forth and spend money to complete this procurement…(months-long pause)…oh wait, sorry, we changed our mind…thanks for your time.”
If you’re going to pull a move like policymakers did by thwarting a competitive procurement, then the only way to help clean up that mess and remove some of the ill-will felt by the market is to make some form of restitution. I very seriously doubt that $3.6 million comes anywhere close to the actual costs the Cintra-JPMorgan team actually incurred, but I think this was the right thing for local officials to do and helps put a bookend on this ugly chapter in Texas transportation history. And it sends a signal to the market that there are still people in Texas who take good business seriously.
In fact, I thought it was notable that Denton County Commissioner Andy Eads spoke against the payment to Cintra, but not for the reason you might expect. According to Gordon Dickson at the Fort Worth Star-Telegram, Eads questioned why Denton County should contribute to the $3.6 million when it had wanted Cintra to keep the project all along! There’s a not-so-subtle jab there that seems very appropriate.
Anyway, what happened in the Metroplex yesterday was smart policy, not “paying losers,” “cronyism,” “bowing to foreign interests” or whatever other demagoguery Terri Hall and other toll road opponents may espouse. Yet again, Hall demonstrates that the volatile world of emotional politics and the rational and methodical real world of infrastructure procurement don’t mix well.
“ Reason Foundation’s Annual Privatization Report 2009
“ Reason Foundation’s Transportation Research and Commentary