In Defense of Leasing Toll Roads

Responding to concession critics

February witnessed a flurry of activity, pro and con, on the leasing of existing toll roads under long-term concession agreements. On Feb. 9th, Govs. Ed Rendell (D, PA) and Mitch Daniels (R, IN) made the case for leasing their respective toll roads and using the proceeds to address their transportation funding shortfalls. Both spoke at a White House conference for state transportation legislative leaders and then at a National Governors’ Association news conference. The very same day, a coalition of trucking and motorist groups held a news conference to denounce the leasing of existing toll roads.

I was invited to testify the following Tuesday at a hearing on toll road PPPs for the House Highways & Transit Subcommittee, chaired by Rep. Peter DeFazio (D, OR). In preparing my remarks, two colleagues suggested that I distinguish between the use of long-term concessions for existing toll roads versus concessions for new tolled projects. They suspected (correctly) that DeFazio was far more hostile to the former than the latter.

I considered-and then rejected-this advice. Here’s why. When you actually look at what is involved in a long-term concession agreement (and I’ve read both the Chicago Skyway and Indiana Toll Road ones), it becomes pretty obvious that such an agreement needs to address the same array of issues whether it’s for an existing toll road or a new one. To be sure, there are differences in risk and in the financing between the two types of situation. But when you realize that a 50 or 75 or 99-year agreement will involve at least one if not two substantial reconstructions of the toll road, and more than likely significant expansion (more lanes, rebuilt interchanges, etc.), it’s clear that even an agreement for an existing toll road will involve major construction and the attendant costs and risks for the private toll company. And all the provisions needed in the concession agreement to protect the public interest-on toll rates, performance standards, “non-compete” provisions, amendments, termination, etc.-will apply to either type of situation.

So if we think a long-term concession model is a good thing-a mechanism to mobilize capital investment in the highway sector while protecting the public interest-then I see no good reason to support its use in the case of greenfield projects but reject it for existing toll roads. A concession is a concession is a concession. And by siding with the critics of leasing existing toll roads (or remaining silent while such deals are attacked), those of us who see toll concessions as the best way forward for new highway capacity would undercut our position.

I understand that politics often cares nothing for consistency or principles. So I’ll add some pragmatic reasons to defend the leasing of existing toll roads as part of the process of institutionalizing the toll concession paradigm in America.

First of all, we want a robust U.S. market in highway finance. That means toll road investment funds need to develop and grow. What do investors in such funds want? A basket of toll roads, at different stages of maturity. A toll road fund consisting solely of greenfield projects would be a lot riskier investment than one with a chunk of the Pennsylvania Turnpike offsetting the risks of the Miami Port Tunnel or the Los Angeles Toll Truckway.

Second, the current flurry of opposition to leasing major toll roads is likely to be short-lived. Why? Because there aren’t that many big-ticket candidates, and some won’t be leased. At this juncture, the Pennsylvania Turnpike looks highly likely, with the Illinois Toll Highway system a clear maybe, and the New Jersey Turnpike increasingly unlikely. There seems little or no interest in privatizing the well-run toll systems in Florida, Texas, or Orange County, California. And most of the other state toll systems (except the New York Thruway, which is politically unlikely) are relatively small potatoes. So once a few more big leases go through, I expect this issue to fade away. Not so the need for new toll projects!

Third, the foreign company issue will become less significant over the next few years. Already, there’s been a huge growth of U.S. capital to invest in infrastructure, with new funds created by Goldman Sachs and other investment banks, as well as private equity firms like the Carlyle Group. And we’re also seeing joint (U.S./foreign) teams like Kiewit/Macquarie, Cintra/Zachry, and Fluor/Transurban bidding and winning concession deals. As I told Congressman DeFazio, I expect we will see purely U.S. toll road concession companies within the next five years.

It’s also important that we structure concession deals in ways that give the least cause for political backlash. My suggestions in this respect include:

  1. Move away from huge up-front payments to deals that stress revenue sharing over the life of the concession term;
  2. Dedicate 100% of the proceeds to transportation infrastructure investment;
  3. Use “non-compete” provisions as sparingly as possible, since these become huge red flags for opponents;
  4. Transparency, transparency, transparency.

The U.S. DOT has been taking heat for its well-meaning attempt to promulgate model legislation for state PPP enabling laws. While I see some value (and no harm) in that, I think FHWA could add a lot more value by holding a series of strategically targeted workshops around the country to educate state DOT people, legislators, and media people about concession agreements and 21st-century toll finance. The model for this is the huge success of FHWA’s Value Pricing program over the past decade in educating key people on the merits of HOT lanes and value pricing.

DeFazio concluded his hearing by warning that Congress may have to take action on toll road leasing. While I think that prospect is remote prior to the next scheduled reauthorization bill (in 2009), the mere threat of such intervention should motivate governors and legislators in toll road states to take timely action while they still have a highly supportive U.S. DOT leadership in place. The more “facts on the ground” by the time a new Administration takes office and Congress takes up reauthorization, the less likely we are to see roadblocks erected in Washington on this vitally important issue.

Robert Poole is director of transportation at Reason Foundation. An archive of Poole’s work is available here and Reason’s privatization research and commentary is here.