Commentary

Leasing Existing Toll Roads

Subsection of Annual Privatization Report 2013: Surface Transportation

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For all the political furor over the issue of long-term leasing existing toll roads, only a handful of such deals have taken place in the United States. The best-known of these, until 2011, were the Chicago Skyway in 2005 and Indiana Toll Road in 2006, both acquired by a Cintra/Macquarie joint venture. Lesser-known leases involved failing toll roads: the Pocahontas Parkway in Virginia and the Northwest Parkway in Colorado, each of which was rescued and refinanced by an investor-owned toll road firm. The largest failed attempt was then-Gov. Ed Rendell’s effort to lease the Pennsylvania Turnpike in 2008. New life was breathed into “brownfield leasing” of toll roads in 2011 when Puerto Rico leased its PR-22 and PR-5 toll roads to Abertis Infraestructuras for 40 years.

Puerto Rico’s success stimulated the interest of Ohio Gov. John Kasich in a possible long-term lease of the Ohio Turnpike. Enabling legislation was passed in 2011, permitting a lease term of up to 75 years and requiring the RFP and proposed business terms to be submitted to the legislature for approval in advance of issuing the RFP. Ohio selected KPMG as its financial advisor, and that consultant has evaluated several restructuring alternatives. In December 2012, Gov. Kasich disappointed PPP advocates by deciding not to lease the Turnpike, which KPMG estimated could have yielded $4.03 billion ($2.6 billion up-front and the balance as annual revenue-sharing). He decided instead to issue $1.5 billion worth of bonds backed by future toll revenue to pay for other highway projects, mostly in northern Ohio.

Many critics of brownfield leases claim to support long-term PPP concessions for new highway capacity (“greenfield” projects), but this distinction is not persuasive. Highways in the United States are designed to have a useful life of around 50 years with proper ongoing maintenance. After that, they generally need costly rehabilitation or reconstruction. Thus, any lease of an existing highway more than 10 years old for 40 years or longer will require some degree of reconstruction in order to be handed back at the end of the lease in acceptable condition, per the terms of the concession agreement. Well before then, if the highway is in an area with economic growth, it will require some degree of capacity expansion-added lanes, new on-ramps and off-ramps, redesign and rebuilding of obsolete interchanges. The concession company will be responsible for those investments needed during the term of the lease.

A presentation by Cintra, developer/operator of two new PPP megaprojects in the Dallas/Ft. Worth metro area, at the 23rd annual American Road & Transportation Builders Association (ARTBA) PPP conference, showed initial capital costs to build these new express toll lanes of $4.04 billion. Subsequent capital expenditures during the 50-year concession term were estimated at another $1.35 billion, and maintenance over the 50 years at $2.2 billion. Thus, total expenditure on this $4.04 billion (initial cost) project will be $7.59 billion, nearly twice the initial investment. Likewise, the private company that acquired a 99-year lease of Toronto’s Highway 407 for $3.1 billion in 1999 has invested an additional $1.2 billion since then on extensions and widening projects.

The idea that an existing toll road “has already been paid for” ignores both the need for ongoing maintenance and the full panoply of capital investments that will be needed over a typical lease term of 50 or more years. Thus, the main difference in principle between a brownfield concession and a greenfield concession is the timing (and perhaps the amounts) of the construction projects the concession company must carry out. If it is acceptable in principle for an investor-owned company to make a profit providing high-quality highway services to customers, then greenfield vs. brownfield is a distinction without a meaningful difference.

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Robert Poole is director of transportation policy and Searle Freedom Trust Transportation Fellow at Reason Foundation. Poole, an MIT-trained engineer, has advised the Ronald Reagan, the George H.W. Bush, the Clinton, and the George W. Bush administrations.

Surface Transportation

In the field of surface transportation, Poole has advised the Federal Highway Administration, the Federal Transit Administration, the White House Office of Policy Development, National Economic Council, Government Accountability Office, and state DOTs in numerous states.

Poole's 1988 policy paper proposing privately financed toll lanes to relieve congestion directly inspired California's landmark private tollway law (AB 680), which authorized four pilot toll projects including the successful 91 Express Lanes in Orange County. More than 20 other states and the federal government have since enacted similar public-private partnership legislation. In 1993, Poole oversaw a study that coined the term HOT (high-occupancy toll) Lanes, a term which has become widely accepted since.

California Gov. Pete Wilson appointed Poole to the California's Commission on Transportation Investment and he also served on the Caltrans Privatization Advisory Steering Committee, where he helped oversee the implementation of AB 680.

From 2003 to 2005, he was a member of the Transportation Research Board's special committee on the long-term viability of the fuel tax for highway finance. In 2008 he served as a member of the Texas Study Committee on Private Participation in Toll Roads, appointed by Gov. Rick Perry. In 2009, he was a member of an Expert Review Panel for Washington State DOT, advising on a $1.5 billion toll mega-project. In 2010, he was a member of the transportation transition team for Florida's Governor-elect Rick Scott. He is a member of two TRB standing committees: Congestion Pricing and Managed Lanes.

Aviation

Poole is a member of the Government Accountability Office's National Aviation Studies Advisory Panel and he has testified before the House and Senate's aviation subcommittees on numerous occasions. Following the terrorist attacks of Sept. 11, 2001, Poole consulted the White House Domestic Policy Council and the leadership of the House Transportation & Infrastructure Committee.

He has also advised the Federal Aviation Administration, Office of the Secretary of Transportation, White House Office of Policy Development, National Performance Review, National Economic Council, and the National Civil Aviation Review Commission on aviation issues. Poole is a member of the Critical Infrastructure Council of the Los Angeles Economic Development Corporation and of the Air Traffic Control Association.

Poole was among the first to propose the commercialization of the U.S. air traffic control system, and his work in this field has helped shape proposals for a U.S. air traffic control corporation. A version of his corporation concept was implemented in Canada in 1996 and was more recently endorsed by several former top FAA administrators.

Poole's studies also launched a national debate on airport privatization in the United States. He advised both the FAA and local officials during the 1989-90 controversy over the proposed privatization of Albany (NY) Airport. His policy research on this issue helped inspire Congress' 1996 enactment of the Airport Privatization Pilot Program and the privatization of Indianapolis' airport management under Mayor Steve Goldsmith.

General Background

Robert Poole co-founded the Reason Foundation with Manny Klausner and Tibor Machan in 1978, and served as its president and CEO from then until the end of 2000. He was a member of the Bush-Cheney transition team in 2000. Over the years, he has advised the Reagan, George H.W. Bush, Clinton, and George W. Bush administrations on privatization and transportation policy.

Poole is credited as the first person to use the term "privatization" to refer to the contracting-out of public services and is the author of the first-ever book on privatization, Cutting Back City Hall, published by Universe Books in 1980. He is also editor of the books Instead of Regulation: Alternatives to Federal Regulatory Agencies (Lexington Books, 1981), Defending a Free Society (Lexington Books, 1984), and Unnatural Monopolies (Lexington Books, 1985). He also co-edited the book Free Minds & Free Markets: 25 Years of Reason (Pacific Research Institute, 1993).

Poole has written hundreds of articles, papers, and policy studies on privatization and transportation issues. His popular writings have appeared in national newspapers, including The New York Times, The Wall Street Journal, USA Today, Forbes, and numerous other publications. He has also been a guest on network television programs such as Good Morning America, NBC's Nightly News, ABC's World News Tonight, and the CBS Evening News. Poole writes a monthly column on transportation issues for Public Works Financing.

Poole earned his B.S. and M.S. in mechanical engineering at Massachusetts Institute of Technology (MIT) and did graduate work in operations research at New York University.