Recent discussions in Public Works Financing have weighed the pros and cons of revenue-risk and availability-payment public-private partnership (P3) concessions for highway projects that charge tolls. But there’s an aspect of this that has not received as much attention: toll-financed projects developed and operated by public-sector agencies.
This is a relatively new phenomenon in the evolution of “managed lanes,” otherwise known as express toll lanes (ETLs). The earliest and simplest version was high-occupancy toll (HOT) lanes, in which public agencies converted existing HOV lanes to lanes that still gave free passage to high-occupancy vehicles (mostly HOV-2) but charged tolls to single-occupancy vehicles that were not previously allowed. These projects had low capital costs, but most also had low revenue, since the majority of their users were carpools that paid nothing.
As Departments of Transportation and Metropolitan Planning Organizations began looking into networks of priced lanes, they realized that because many expressway corridors lacked HOV lanes to convert, and since converting general purpose (GP) lanes was politically off-limits, this second generation of priced lanes required expensive new construction. Financing billion-dollar-scale variable-toll projects was risky, so a second generation of projects (e.g., the I-495 ETLs on the Beltway in northern Virginia, the LBJ and NTE projects in Dallas and Fort Worth) were procured as revenue-risk P3 concessions. More such projects are under construction today, in Charlotte, Houston, northern Virginia, and Fort Worth), with others planned in Chicago and Maryland. And we also have hybrid toll/availability P3 express toll lane projects in Florida, including I-595 and I-4.
Almost ignored has been yet another model: revenue-risk ETLs financed directly by the public agency that will be the owner/operator. Thanks to the 2018 edition of Fitch Ratings’ Peer Review of U.S. Managed Lanes, we now have details on four such projects: Colorado DOT’s C-470, Riverside County Transportation Authority’s SR 91 and I-15 projects, and Texas DOT’s I-35E project. These four plus the original Orange County SR 91 project (developed as a revenue-risk P3 but now owned and operated by the Orange County Transportation Authority) are all revenue-bond financed and rated by Fitch, along with eight revenue-risk P3 concessions.
There are many similarities among these 13 revenue-risk projects, whether done by public agencies or P3 concession companies. First, all 13 of those rated by Fitch (five public-sector, eight P3) have investment-grade ratings, mostly BBB or BBB-. Second, six that have opened in recent years have already exceeded their base-case revenue projections: three by 15-17 percent, one by 71 percent (I-95 in northern Virginia), another by 129 percent (TxDOT’s I-35E), and another by 150 percent (RCTC’s SR 91). This performance underscores the emphasis Fitch gives to corridor selection as a rating factor.
Since corridors differ in many ways, designers make different decisions about many aspects of an ETL project’s configuration, and Fitch reviews the implications of these factors for projects’ economic viability. For example, multiple access points offer the potential of more traffic and revenue, but can be confusing to users. Continuous access from adjacent general-purpose lanes—allowed or contemplated in some ETL projects—is deemed by Fitch as an “extremely ineffective configuration,” along with a note that Fitch has not rated any ETL projects with this configuration. Fitch considers plastic pylon separation from GP lanes as “cost-efficient” but notes potential weaving problems (as seen on Miami’s I-95 ETLs but reduced due to stiffer pylons and closer spacing). Fitch also notes that “single-lane ML facilities are likely to prove less attractive to potential users, given the possibility of being stuck behind slow-moving traffic or a traffic incident without the ability to pass.”
Perhaps the most important factor in common among these 13 toll-financed ETL projects is how they deal with HOVs. Not a single one offers free passage for HOV-2s. Indeed, what we observe in ETLs with that policy is much lower revenue and diminished ability to manage traffic flow—both the result of only a small fraction of the vehicles being subjected to variable pricing. Most of the 13 projects allow HOV-3s either free or at a discount, but two of them offer no free HOV access (except for buses): SH 288 (Houston) and C-470 (Denver). That is also the policy of all ETLs in Florida except on I-95 (where HOV lanes pre-existed the ETLs), as well as Maryland’s I-95 ETLs and the new ones on the MoPac expressway in Austin.
Pricing flexibility is yet another factor influencing Fitch’s ratings. All 13 projects covered by the report are required to adjust toll rates to maintain specified peak-period speed. None of these projects face explicit price caps (such as those in place on public-sector projects such as I-95 in Miami and I-405 in Seattle). Several have what are described as “soft caps,” under which revenue maximizing is allowed up to a specified toll level that can only be exceeded if the operator is unable to achieve the minimum peak-period speed requirement without a higher price. Fitch points out that public-sector ETL operators may be vulnerable to public pressure when prices get high, but they may be somewhat insulated if the pricing is being carried out by a P3 operator in accordance with terms of the long-term concession agreement. (Some have termed this “outsourcing of political will.”)
Overall, the Fitch report provides a set of guidelines for viewing ETLs as business entities, regardless of whether they are developed and operated as public-sector projects or P3 concessions. DOTs and MPOs that plan to develop whole networks of ETLs will almost certainly have to toll-finance much of that network since it will involve large amounts of new construction (additional lanes plus flyover connectors at freeway interchanges, and in some cases direct-access ramps). Maximizing revenue, consistent with public-sector traffic management and throughput goals, will be essential to financing these megaprojects. And that means taking seriously Fitch’s recommendations for configuration, pricing, and other factors needed for investment-grade ratings.
This column originally appeared in Public Works Financing.