The Texas legislature’s ongoing rejection of public-private partnerships and tolling
Photo 82896887 © Bryan Roschetzky |


The Texas legislature’s ongoing rejection of public-private partnerships and tolling

Many of the state's large construction companies have lobbied effectively against expanded tolling and new design-build-finance-operate-maintain P3s.

Since 2009, the Texas legislature has rejected all proposals from the Texas Department of Transportation for new design-build-finance-operate-maintain public-private partnership projects. That happened again in the 2023 legislative session, which ended but has been called into a special session by Texas Gov. Greg Abbott.

I used to believe the driving force against these transportation projects was grass-roots populist opposition to tolling and public-private partnerships in the state. But I now think the problem goes deeper. In discussing the issue with pro-tolling and pro-public-private partnership (P3) groups in Texas, I learned that many of the state’s large construction companies have lobbied effectively against expanded tolling and new design-build-finance-operate-maintain P3s. A person at one of those groups sent me lobbying scripts provided to member companies by Associated General Contractors of Texas, the state affiliate of the Associated General Contractors (AGC) of America, which calls itself “the voice of the construction industry” and an “organization of qualified construction contractors and industry related companies.”

From my perspective, the points made in these lobbying scripts were half-truths, at best. Moreover, the points conflicted with the generally pro-public-private partnerships white paper that has been on the national AGC’s own website for about 15 years.

This information led me to look more closely into why design-bid-build (DBB) and design-build (DB) contractors in Texas may be uncomfortable with design-build-finance-operate-maintain (DBFOM) P3s. I decided to gather data on the past decade of DBFOM projects to find out which companies were the design-build contractors on each and the extent to which each project used mostly-local subcontractors. My resulting Reason Foundation policy brief, “Contractors and Transportation Public-Private Partnerships,” was published last month.

My sample included 18 highway and transit public-private partnership (P3) projects across 10 states, with an average construction cost of just over $1 billion financed between 2009 and 2019. Twelve projects were revenue-risk, and the other six were financed based on availability payments.

Despite the impression created by AGC of Texas, the projects were not all constructed by U.S. subsidiaries of “foreign” companies. Of the 18 projects, six had only U.S. contractors, and two others were each built by teams that included U.S.-based and foreign-based contractors. Several major P3 developers did use only their sister construction companies as their design-build contractors, and all 18 projects used dozens—and sometimes hundreds—of local subcontractors, averaging more than half the total project budgets.

The data refute the idea that U.S. contractors are being excluded from DBFOM public-private partnerships. What AGC of Texas ignores is that design-build-finance-operate-maintain (DBFOM) is so different from conventional low-bid construction projects that only pre-qualified teams (i.e., with some DBFOM experience) can bid on DBFOM projects. The U.S. design-build contractors that have gotten their feet wet on smaller DBFOMs are gaining qualifications to be part of larger teams in future competitions.

AGC of Texas also tries to persuade state legislators that DBFOM P3s “cost more” because they are not awarded based on the lowest construction cost. That glosses over the fact that a 50-year P3 involves both the project construction as well as 50 years of guaranteed maintenance. With this long-term responsibility, the developer/operator is motivated to minimize life-cycle costs, not initial construction costs. This will likely mean more robust, longer-lasting pavements and eliminate the chronic problem many states face with deferred maintenance. Both the bondholders and the terms of the long-term P3 agreement require proper ongoing stewardship of the asset.

In going through these and other alleged concerns over public-private partnerships, I realized that many state legislators probably aren’t aware of how different a 50-year DBFOM project is compared with a low-bid design-bid-build construction contract. They may not know that in a revenue-risk public-private partnership, the bonds are non-recourse—which means that if something goes wrong, the state’s taxpayers are not at financial risk because the P3 developer and its investors are on the hook for that bond. It’s a fact that there have been several bankruptcies in U.S. and Australian revenue-risk P3 projects, but there has never been a taxpayer bailout for those bankruptcies.

The AGC of Texas scripts I saw also objected to the long length of the agreement that AGC claims will “tie the hands of future transportation planners for half a century.” That argument ignores the 50 years of guaranteed maintenance for the project. It also ignores important provisions in the long-term P3 agreement to protect both the public and private partners: termination provisions.

There are two kinds of termination for these projects. If state and local politics or other things change 10 years into a 50-year concession, the agreement will allow “termination for convenience.” Since the project’s developer and investors signed a contract and were expecting 50 years of revenue rather than 10 from the project, compensation must be provided via a formula that is agreed upon in advance of the final contract.

The other kind is “termination for cause.” If the public-private partnership company fails to live up to the terms of the agreement, the state may terminate the contract, generally without compensation. That’s a powerful incentive to operate responsibly.

In writing this policy report, it occurred to me that the contractors who lobby against public-private partnerships may not fully be aware of the implications of DBFOMs, especially the revenue-risk version (the only kind allowed under Texas law). What they may miss is that revenue-risk P3s expand the size of the state’s construction market.

My study includes an example I discussed at a conference in Ft. Worth several months ago. In TxDOT’s current plans, major highway additions are planned in Austin, Dallas-Ft. Worth, and San Antonio. In each case, TxDOT planned these as privately financed express toll lanes, similar to those already operating in Dallas and Houston. But with public-private partnerships and tolling ruled out, the lane additions are now planned as high-occupancy vehicle lanes, paid for solely by TxDOT’s budget, totaling $8.1 billion. If the projects were done as revenue-risk P3s, with 20% paid for by TxDOT and the balance privately financed, TxDOT would get $8 billion worth of new capacity while spending only 20% of the total cost. That would free up about $6.5 billion to be spent on smaller design-build and DBB projects across the state.

Unfortunately, AGC of Texas is hurting its members and limiting transportation project options that could help the state’s workers and businesses by preventing Texas’s return to tolling and design-build-finance-operate-maintain projects. It’s not a zero-sum game. Public-private partnerships expand the size of the infrastructure pie, and hopefully, state policymakers come to see this.

A version of this column first appeared in Public Works Financing.