Aug. 14, 2007

When the state of Texas highway department signed a pioneering agreement with the Cintra-Zachry road construction consortium in March 2005 to build and operate a 600-mile toll road on the Trans Texas Corridor (called TTC-35), the deal was hailed as a remedy to a national problem of flagging state gas tax revenues and mounting road congestion.

When the state of Texas highway department signed a pioneering agreement with the Cintra-Zachry road construction consortium in March 2005 to build and operate a 600-mile toll road on the Trans Texas Corridor (called TTC-35), the deal was hailed as a remedy to a national problem of flagging state gas tax revenues and mounting road congestion.

The Bush administration had been a major cheerleader for the TTC project, and for highway public-private partnerships (PPPs) in general. These so-called “P3 deals” involve a private consortium paying a state billions of dollars in return for a long-term lease to either build a new road or operate an existing one, with the construction of toll roads the financial lure for the private investor.

To help bring these PPPs to fruition more quickly, the Federal Highway Administration (FHWA) opened a new regulatory avenue for them in October 2004 when it announced its SEP-15 pilot program, a new experimental process for the FHWA to identify new public-private partnership approaches to project delivery. The FHWA dropped some federal requirements on highway construction in the name of getting major projects completed more quickly. Both the TTC-35 and TTC-69, a second project, were among the first seven projects approved under SEP-15, which Amadeo Saenz, assistant executive director for engineering operations for the Texas Department of Transportation, said Texas has used to good effect.

But where Texas Gov. Rick Perry, the Bush administration and Cintra-Zachry saw the TTC projects and privately owned toll roads more generally as the opening of a new era, others in Texas saw them as a call to arms. A citizens group called CorridorWatch formed and marshaled opposition within Texas to the prospect of privately built, privately run toll roads. By the spring of 2007, the public outcry in Texas had burned the ears of the Texas legislature, which passed a bill placing significant limits on highway PPPs.

Looking both ways

If the Texas legislation served as a yellow caution light on the road to future highway PPPs, recent actions by two key House Democrats were closer to a big, bright blinking red light. Reps. James Oberstar (D-Minn.) and Peter DeFazio (D-Ore.), the chairman of the House Transportation and Infrastructure Committee and the chairman of its highway subcommittee, respectively, published an unusual nine-page paper on June 4 setting out their disagreements with the FHWA on PPPs and implying that Democrats would rein in PPPs via language in the next highway bill, which Congress has already begun work on. The policy paper followed a May 10 letter Oberstar and DeFazio sent to state governors and highway officials. It warned them that Democrats would “undo” PPPs “not in the long-term public interest.” Jim Berard, a committee spokesman, added that Chairman Oberstar may introduce some preliminary anti-PPP legislation in this 2007-2008 session of Congress just to set the framework for 2009 when the 2006 SAFETEA-LU highway bill comes up for reauthorization.

“We won’t agree on every point they raised, but we do agree with them that PPPs need to be in the public interest,” said Tyler Duvall, assistant secretary for transportation policy in the office of the secretary at the U.S. DOT. “The question is how you define the public interest; that is where we may have differing views. But there does need to be a national debate.”

That national debate would be based on a limited amount of data. There have only been four highway PPPs finished since the first one, the Dulles Greenway, was authorized in 1990. Those are all greenfield projects. In the last few years, Indiana and Chicago have leased existing highways to consortiums who will build toll roads. A very few other projects—the TTC is the main example—have gotten under way, and are in varying stages of progress. But there is significant interest from both states and the private sector for getting the PPP pipeline fully stocked.

“In many downtown urban areas, such as Seattle, there are several major multi-billion-dollar projects that may be built as a P3 tolled facility,” said Paul Yarossi, president of HNTB Holdings Ltd., which is working with a number of states to lay the groundwork, legislatively and otherwise, for highway PPPs. “The state of Georgia adopted P3 legislation and has been inundated with unsolicited proposals.”

Florida Gov. Charlie Crist signed a bill in June allowing PPPs in his state. Pennsylvania Gov. Edward Rendell sent legislation to his legislature in May which, if passed, would have cleared the way for a PPP for the Pennsylvania Turnpike.

Writing samples

The potential revenue bonanza is why governors of both parties took none too kindly to Oberstar’s and DeFazio’s threats. In a June 15, 2007, letter, Govs. Janet Napolitano (D-Ariz.), Tim Pawlenty (R-Minn.), Dave Heineman (R-Neb.) and Jennifer Granholm (D-Mich.), leaders at the National Governors Association, responded that the threat from Oberstar and DeFazio would “undermine” the federal-state partnership. They said that with regard to the PPPs undertaken and planned, the states “have been careful and prudent in their analysis, negotiation and oversight to ensure adequate protections for the public interest.” They complained that Oberstar and DeFazio failed to cite any PPPs that did not offer a net balance of benefits.

Asked to name some specific highway PPPs that did not sit well with the Democrats, Berard cited Highway 91 in California. That project, and a second one in California, Rte. 125, have been poster children for the pitfalls of highway PPPs. Democratic Sen. Alan Lowenthal, chair, California Senate Transportation and Housing Committee, admitted that “PPPs have a troubled history in California.”

California was the second state, after Virginia, to approve a law in 1990 allowing PPPs. Then the California Transportation Department (Caltrans) awarded a 35-year concession to the California Private Transportation Co. (CPTC), a limited partnership comprised of subsidiaries of Lever 3 Communications Inc., Compagnie Financiere et Industrielle des Autoroutes (Cofiroute)—the world’s largest private toll road operator—and Granite Construction Inc. CPTC would build four express toll lanes in the median of Highway 91. But a non-compete clause in the contract inhibited Caltrans from building other public roads nearby, which, along with some financial problems, led to the Orange County Transportation Authority purchasing the toll lanes from CPTC for $207.5 million.

The nation’s first greenfield highway PPP, Virginia’s Dulles Greenway, also ran afoul with problems. When the Virginia Department of Transportation (VDOT) decided to extend the state-built Dulles Toll Road (the first toll road in the state) to Leesburg, it awarded the contract to a consortium, the Toll Road Investors Partnership II (TRIP II), comprised of Shenandoah Greenway Corp. of Virginia, Italy’s toll road operator, Autostrade, and the Texas-based engineering and construction firm Brown & Root. But low ridership on the Greenway led to problems, which resulted in toll reductions and a potential TRIP II default on its loans. Eventually things straightened out somewhat and Australian firm Macquarie Infrastructure Group (MIG) purchased the concession from TRIP II in 2005 for $617.5 million.

Duvall explained that the problems encountered with Highway 91 had to do with a “fairly blunt” non-compete agreement. “Today, those agreements are more nuanced,” he said.

Duvall said that Highway 91 and the Dulles Greenway have some of the highest levels of traffic growth in the U.S.

Two games in

The more recent, high-profile PPPs have involved leasing of existing roads. The deal Chicago signed in January 2005 with the Skyway Concession Co. LLC, a consortium jointly owned by MIG and Spain’s Cintra Concesiones de Infraestructuras de Transporte S.A. (Cintra), involved a 99-year lease of a 7.8-mile stretch of 48-year-old roadway. The contract price for the concession was $1.83 billion. What troubled some people about that deal was that Chicago planned to use a significant portion of the money for non-highway purposes.

Indiana closed a 75-year lease deal with Statewide Mobility Partners, a consortium owned by the same MIG-Cintra partners as the Chicago Skyway deal, on June 29, 2006, for the operation and maintenance of the Indiana Toll Road. The contract price for the 50-year-old, 157-mile-long Toll Road was $3.8 billion. But the Indiana deal has spawned critics, especially truckers, who have complained about the near geometric increase in tolls leading up to the lease, which goes into effect in 2010, and the schedule of additional increases thereafter. Todd Spencer, executive vice president of the Owner-Operator Independent Drivers Association, added, “Imposing significant tolls on interstate highways without corresponding tax abatement will force truckers and other highway users to use alternative routes such as local roads and state highways that were not intended for the type and volume of traffic that interstate highways are designed to handle.”

Given the potential pitfalls on the road to PPPs, Pennsylvania Gov. Edward Rendell is trying to protect himself from second-guessers as he attempts to find a way to turn the Pennsylvania Turnpike into a money machine. Rather than immediately focusing on a conventional PPP à la the Chicago Skyway to obtain that revenue, Rendell is considering a few options, any of which will require Pennsylvania legislative approval. The first would be a long-term lease on the order of what Chicago signed for its Skyway. Another would be to cede control of the turnpike to a new public corporation that could refinance the roadway in much the same way a private investor would, but without any private equity investment. Rendell’s hiring of Morgan Stanley in March to help sort through those options prompted the Pennsylvania Turnpike Commission, which currently operates the roadway, to make its own proposal.

About The Author: Barlas is a freelance writer based in Washington, D.C.