My latest Public Works Financing column looks at how we fund our highways…
I’ve been somewhat taken aback by the rapid growth of interest availability-payment mechanisms for large new highway projects. This seems to have become the project finance method of choice in Canada, Germany, the U.K., and much of the former Eastern Europe (in contrast with the long-time prevalence of toll concession financing in France, Italy, and Spain). The last few issues of Public Works Financing have reported new availability payment road concession projects in Australia, Colombia, Denmark, Finland, and Ireland.
Last year saw the financing of the first two large U.S. availability payment road projects, both in Florida: the Port of Miami Tunnel and the I-595 express lanes/reconstruction project. The first project going forward under California’s important new public-private partnership (P3) law-reconstructing Doyle Drive in San Francisco-will be financed via availability payments. And the Bond Buyer reports that even Texas is now looking seriously at availability payment financing (called “pass-through tolling in Texas), since there is still a moratorium on P3 toll projects in that state.
What I fear is being missed in this burst of enthusiasm is the difference between financing and funding. Availability payments are a method of financing the cost of a highway project, but they add not a single dollar of funding to an economy’s highway sector. All the money a state DOT will spend on 35 years of availability payments will come out of its already constrained highway revenues and will be unavailable for other highway projects.
In essence, a 35-year commitment to make availability payments for a project is a form of debt, and in many states (my Reason colleague and former Virginia Secretary of Transportation Shirley Ybarra tells me), the state treasurer, attorney general, or revenue commissioner will count such commitments against whatever limits are imposed by the state’s debt capacity model. Financially speaking, therefore, availability payment commitments are very similar to GARVEE bonds. Thus far, the 20 states that have issued GARVEES have been rather conservative, perhaps recognizing that this financing tool can only play a modest, supplemental role.
But New Jersey provides an object lesson in bonding to excess. Though it has not issued GARVEEs, the Garden State has so over-emphasized highway financing (rather than funding) that “by July 2011, its entire $895 million annual [transportation] appropriation will be needed to cover principal and interest payments on the Transportation Trust Fund’s nearly $11 billion of existing debt,” reports the Bond Buyer.
If you think that’s not a danger with availability payments, take a look at Portugal. In the late 1990s, that country embarked on a large-scale program of motorway construction, mostly using availability-payment concessions. By 2006, when many of the new motorways were in operation, projections showed that by 2009, annual availability payments would reach nearly $1 billion. That led to plans, still being implemented and litigated, to convert most of those motorways to real tolls, as part of Portugal’s debt- and deficit-reduction efforts.
The major U.S. highway problem is a huge shortfall in funding, not finance. For my money, the most careful estimates of this shortfall were produced by the Infrastructure Financing Commission in its February 2009 final report, Paying Our Way. After updating somewhat dated Federal Highway Administration figures, it also applied a more stringent benefit/cost ratio of 1.2 (versus FHWA’s 1.0) for new-capacity projects. The result was a federal/state/local annual funding gap of $55 billion to “maintain” current performance and an annual funding gap of $89 billion to “improve” performance. Only some major additional source of funding-such as tolls-can close this gap.
I find it ironic that availability payment financing is becoming all the rage in both Europe and the United States at the same time we are seeing escalating rhetoric about the need for road pricing (which tolling inherently provides). In the December Public Works Financing, for example, while one headline read “Road Pricing Gains Popularity in Europe,” just one paragraph away in an unrelated article was the statement that “Availability payment schemes . . . in the E.U. . . . are displacing conventional hard and shadow toll alternatives,” according to a knowledgeable source. Likewise in this country, the Transportation Research Board and other organizations are advocating a shift from fuel taxes to per-mile charging-at the very same time that tolling is increasingly being rejected in favor of availability payments.
One bright spot in this picture is the concession model being used for Florida’s I-595 project, which combines variable tolling and availability payments. In this case, only the three new reversible express lanes are to be tolled, but the $1.8 billion project involves rebuilding the entire freeway and its frontage roads, which could not be financed based on toll revenues alone. And since FDOT wanted to retain control of the express lanes toll-setting, it came up with the model under which it will collect the toll revenues but pay the concession company via availability payments. To the extent that HOT and Express Toll lanes are considered risky to finance, this hybrid model may have applications to other similar projects. But my caution to DOTs is a reminder that in using this model, they will forego one of the principal benefits of long-term toll concessions-transferring traffic and revenue risk to investors.