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|Federal Highway Administration > Publications > Public Roads > Vol. 69 · No. 5 > The Return of Private Toll Roads|
Publication Number: FHWA-HRT-2006-003
The Return of Private Toll Roads
by Robert Poole and Peter Samuel
Private concessions offer an alternative to managing American highways.
In little more than 12 months, beginning in late 2004, the following events occurred: A Spanish toll road company proposed to invest $7.2 billion to build the first leg of the Trans-Texas Corridor (TTC), a major highway, rail, and utility corridor running north-south from Oklahoma to Mexico. A global consortium agreed to pay $1.8 billion to lease, toll, operate, and maintain the Chicago Skyway for 99 years. And an Australian toll road operator bought out a struggling public-private toll road in Virginia.
These events illustrate a growing trend in highway investment. The reality today is that increasingly the public and private sectors are looking toward partnerships to build, operate, and maintain highway infrastructure in the United States.
During the 1980s and 1990s, investment in new highway capacity lagged considerably behind the growth in automobile travel and freight movement. In the future, improvements in the fuel efficiency of automobiles and the growing availability of alternative fuel sources will increasingly affect highway revenues from gas taxes. At the same time, public and political support for increasing fuel taxes, which have served as a traditional source of highway funding, was and continues to be weak. In this environment, as Federal, State, and local departments of transportation (DOTs) look for solutions to improve safety and mobility on the Nation's roadways, global capital markets are just beginning to see the U.S. highway sector as a potential investment opportunity.
How the United States responds to these forces will help shape the country's highway system in the 21st century. What follows is an overview of the emerging rebirth of toll roads in the U.S. landscape and strategies for making the best use of this model through long-term concessions to private toll operators.
The Challenge Of Highway Investment
"One key element of surface transportation, now and in the future, will be toll roads," says Gary Hausdorfer, chief executive officer of Cofiroute USA, a private toll road company. "Neither State nor Federal levels of highway funding are sufficient to keep pace with demand."
The most commonly used reference for assessing the adequacy of highway investment is the Federal Highway Administration's (FHWA) biennial Conditions & Performance Report to Congress. The 2002 edition reported that Federal, State, and local capital investment in the Nation's highway system in 2000 totaled $64.6 billion. But based on projected increases in automobile and truck vehicle miles traveled (VMT), as estimated by the States, the annual investment needed to maintain the asset value and expand the capacity of this tremendous resource was $75.9 billion. In a no-growth society, bridging that $11.3 billion annual gap might be enough to solve the highway investment challenge. But with the number of VMT increasing every year and truck VMT growing at an even faster rate, simply maintaining the existing system is not sufficient to address the Nation's mobility needs.
FHWA analysts estimate that the Nation could be investing $106.9 billion per year if all potential improvements having a benefit/cost ratio of 1.0 or greater were made. This estimate points to a much larger gap of $42.3 billion per year—or 65 percent more than the United States currently is investing. In The Bottom Line report, published in 2002, the American Association of State Highway and Transportation Officials (AASHTO) offered an even higher estimate of $125.6 billion for improving the physical condition and performance characteristics of highways and bridges over 20 years. Both estimates send the same message: the Nation is not investing enough in the system upon which both personal mobility and most freight movement are based.
The new Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) legislation has helped to increase Federal investment in highways. But because the fuel taxes used for highway development and maintenance are not indexed for inflation or automobile fuel economy, today's Federal-plus-State gas tax, in real (inflation-adjusted) terms, produces between 2 and 3 cents per mile driven (in light vehicles). That is about half of what the gas taxes of the 1960s and 1970s produced, when much of the interstate system and many core urban freeways were built. Many of the systems built during those decades now need major reconstruction, in addition to capacity expansion, but the resources are inadequate to complete the task.
From 1980 to 2000, while VMT grew by 82 percent, highway miles increased by just 4 percent. One symptom of rapidly growing VMT is that urban freeway systems are now choked with traffic. The 2005 edition of the annual Urban Mobility Report produced by the Texas Transportation Institute (TTI) estimates that it costs motorists $63 billion per year in lost time and wasted fuel sitting in traffic congestion. Although some may argue that adding capacity is not the answer, each year TTI's data show that those few urban areas that added capacity to nearly keep pace with VMT growth have the least increase in congestion, while those that add little or no capacity suffer the most from congestion.
A New Model: Long-Term Concessions
The three highway projects cited earlier are based on a model for highway finance, management, and operation known as the toll-funded, long-term concession. Under this approach, in exchange for the right to collect tolls for a long period (typically anywhere from 30 to 99 years), a private firm or consortium will design, finance, build (or rebuild), operate, and maintain a large-scale highway project.
In 18th-century Britain, the concept was used to develop hundreds of turnpikes in the preauto era. The United States imported the model, where it became the principal means of developing bridges and highways between towns and cities in the eastern States, many of which still bear the name "turnpike" or "pike" 150 years after they collected their last tolls. And when the West was settled in the second half of the 19th century, again this model was used to develop important mining roads and intercity roads in California, Colorado, Nevada, and other States. The concession model also saw a limited revival in the early days of the automobile era, with the Long Island Motor Parkway (1908), the Ambassador Bridge in Detroit (1929), and the Detroit-Windsor Tunnel (1930) as prime examples. Most of the toll bridges on the upper Hudson and Delaware Rivers, on the Mississippi River, and in the San Francisco Bay area, also were developed using this model. Some became insolvent during the Great Depression and were taken over by State agencies. Others were bought up by State and bi-State agencies with the expectation that they would become toll free.
According to researchers at the Reason Foundation, several factors prevented the full-fledged development of a private toll road industry in the automobile era. The highly publicized scandals surrounding the New York Bridge Company and the frauds committed during construction of the Brooklyn Bridge in the 1870s gave toll bridge charters a bad reputation. Second was the invention of highway trust funds supported by dedicated motor fuel taxes. This form of highway funding proved highly effective and inexpensive to collect. The fuel tax was quickly adopted by every State, thanks to the Good Roads Movement in the late 1800s. Also, the invention of the State toll road agency provided a way to fund large-scale projects with toll revenue bonds, with the cost advantage of being able to issue the bonds at tax-exempt rates. The Pennsylvania Turnpike became the model for a host of other State and later urban and regional toll authorities that built and maintained some of America's most important highways.
But Europe had neither highway trust funds nor tax-exempt bonds. So as the need for limited-access motorway networks became obvious after World War II, first France and then Italy, Spain, and Portugal rediscovered the toll-funded, long-term concession model. All four countries developed their large, national motorway networks using this model. Many of the toll road companies started out as state owned and retained majority state control, but in the last decade, most of them have been privatized. Thus, Western Europe today has a thriving private toll roads industry that has started investing in Latin America, the former Eastern Europe, and the United Kingdom.
One of the newer adherents to this model is Australia. Toll road companies operating under long-term concession agreements have developed and now operate nearly all of the urban expressway capacity added since the early 1990s in the country's two largest cities, Melbourne and Sydney. Another major city, Brisbane, now seems to be moving in the same direction. Australia's leading toll road firms also have gone global, acquiring ownership stakes in overseas toll roads and even developing toll road mutual funds aimed at long-term investors.
Workable for Major Projects
The long-term concession model appears to work well with large-scale highway, bridge, and tunnel projects for several reasons. First, these are precisely the kinds of projects that are the most difficult to develop using traditional highway funding. Amassing a large sum of money like $2 billion for a single project in one location is both financially and politically challenging. But if the economics of the project pencil out (that is, there exists an unmet demand and a willingness to pay), the capital can be raised in exchange for a suitable long-term right to toll.
Second, it is megaprojects that pose the greatest risks of cost overruns, schedule slippage, and traffic shortfalls under public ownership. With a properly structured long-term concession, these risks can be shifted to the private sector. Because the flow of toll revenues depends on the project getting finished on time (or early), the concessionaire has a powerful incentive to ensure that its design-build contractor delivers the project on schedule. And with a financing structure in place, based on acceptable estimates of what drivers are willing to pay, it is crucial to keep project costs within budget so toll revenues will cover operating and debt-service costs.
In this model, the concessionaire also does not have an incentive to cut corners on design or construction, because it will have to operate and maintain the project for the life of the concession. The minimum in construction standards might decrease short-term development costs but would likely increase long-term operating and maintenance costs.
Innovation is a third reason for looking to this kind of long-term, public-private partnership. Private firms appear more willing than public agencies to take risks and "think outside the box" to solve difficult problems. For example, it was a private company operating under California's pilot program for long-term concessions that invented the value-priced, congestion-relief tollway. California's 91 Express Lanes in Orange County, which are located in the median of State Route 91 (S.R. 91), rely on an electronic toll-collection system with a variable toll based on the time of day and day of the week to achieve a smoother traffic flow.
In France, a private toll road company (whose U.S. subsidiary was a major shareholder in the company that developed and now operates California's 91 Express Lanes) resolved a 30-year impasse in completing the missing link on the A86 Paris ring road by developing it as a congestion-priced, deep-bore tunnel beneath (rather than through) historic Versailles.
And in Melbourne, Australia, a private toll road company linked three existing freeways into a network, using a combination of tunnels and elevated construction (with a "sound tube," similar in function to a "sound wall" in the United States except in the shape of a cylinder, to minimize noise) through dense urban areas.
"Sooner or later, more and more transportation officials will embrace congestion pricing," says Cofiroute USA's Hausdorfer. "Why? To encourage fewer cars on the road. Whether it is higher tolls at peak hours or general road charging, the commuting public will come face to face with a very different form of public policy. [Because] no one wants to propose additional taxes of any kind, road charging and public-private partnerships become the alternative."
In Ontario, Canada, the concession agreement for the 407 Express Toll Route (407 ETR) set a number of policy objectives that needed to be met. According to Imad Nassereddine, vice president for traffic operations and planning at 407 ETR Concession Company Ltd., the main objectives included operating the 407 ETR as an open-access, all-electronic toll collection system; requiring the concessionaire to adhere to provincial safety and environmental standards in the design, construction, and operation of the highway; and providing congestion relief to the alternative public highways. To relieve congestion, a separate tolling agreement was established whereby the road users' willingness to pay would directly affect the setting of toll rates.
"Research . . . [shows] that customers mainly value three factors in their decision to use the toll highway," Nassereddine says. "These include the time savings achieved, the reliability and convenience of the trip, and safety of the highway."
The long-term concession model can be applied to developing new capacity as well as taking over and modernizing existing toll roads. The arguments for enlisting investors rather than following the traditional U.S. model of a public toll authority are twofold. Many public toll facilities are fully borrowed (that is, they are unable to sell additional bonds), making them unable to take on major new projects. Second, during the competitive bidding process, private investment groups sometimes devise innovative approaches to adding new capacity, potentially bringing to the table new ideas that the public sector had not considered.
In southern California, for example, inspiration from the private sector led to the notion of having variably priced express lanes in the middle of the Riverside Freeway. It took a law (AB 680) inviting investor proposals to produce the idea for the 91 Express Lanes. "It is doubtful whether a public agency could have implemented such a radical, untried scheme, in addition to carrying out the intense marketing and customer relations needed to get it to work," says Carl B. Williams, former director of the Office of Public-Private Partnership at the California Department of Transportation. "It was a risky project, and public agencies do not tend to reward risk taking, at least not to the extent that the private sector can with stock options and bonuses for those who succeed and dismissal for those who fail."
Similarly, the toll lanes currently being negotiated for use on the Washington (DC) Beltway (I-495) in northern Virginia rescued a traditional Virginia Department of Transportation (VDOT) widening project that was collapsing under a barrage of local opposition. Under the Virginia Public-Private Transportation Act, a private company proposed a widening scheme that would almost eliminate the need to acquire extra right-of-way (and thereby remove hundreds of homes), which reduced the project cost from about $3 billion to about $1 billion. This alternative approach transformed the political situation.
The original VDOT proposal was more standard, featuring barriers separating the toll lanes, four sets of breakdown shoulder lanes, and high-speed ramps at all the interchanges. The private company proposed the same widening scheme—from 8 travel lanes to 12—but eliminated a pair of breakdown lanes. The company also proposed deferring some interchange improvements.
VDOT and the private company are working to incorporate some of VDOT's planned interchange improvements into the scheme. And to ensure that enough funding will be available to cover the additional work, an Australian toll road company agreed to commit more than $100 million in "patient capital" (a long-term equity investment that does not need to earn a return during the early years when toll revenues are hardest to predict). This example shows how the private sector can bring both ideas and capital to a project.
Other unsolicited proposals are in various stages of consideration in Virginia. Two groups proposed major enhancements to the two-lane, reversible, high-occupancy vehicle (HOV) facility including the Shirley Highway (I-395) and I-95 from the Beltway to the Fredericksburg area, about 64 kilometers (40 miles) south of Washington, DC. In December 2005, the VDOT commissioner selected one firm for VDOT to negotiate an agreement with to further develop the high-occupancy toll (HOT) lane concept. The selected proposal suggests converting the facility to HOT lanes by adding a third lane to about 45 kilometers (28 miles) of the existing two-lane, reversible facility, extending the facility southward about 32 kilometers (20 miles). Other enhancements would include installing new entry and access points and ramps at the Springfield Interchange and other locations and improving park-and-ride and bus facilities. Negotiations are underway between VDOT and the private sector partner, but innovative aspects under consideration are substantial private sector investments and a possible concession arrangement.
In 2002, VDOT solicited proposals for upgrading the 523-kilometer (325-mile) I-81 corridor, an overstressed four-lane interstate with heavy truck traffic both ways. After an extensive review process and touring I-81, Commissioner Philip Shucet directed VDOT to enter negotiations with a private company selected as the potential operator of I-81 corridors. Negotiations are still under way toward a comprehensive agreement.
Concurrent with the review of private proposals, VDOT has been conducting the National Environmental Policy Act study on the entire length of the corridor. The study will serve as a basis for making an informed decision before proceeding with any design and construction improvements.
The private sector proposal considers innovative financing mechanisms, such as truck tolling and Transportation Infrastructure Finance and Innovation Act loans, along with traditional formula funding from gasoline tax sources. The scale of the anticipated improvements proves that innovative financing tools could represent more than just a supplement to traditional formula funds.
Southern California is another area with potential for new toll projects and private sector innovations. A major new toll road, the South Bay Expressway (S.R. 125 South), is being constructed under a long-term concession held by a private company based in Chula Vista, CA. The $635 million toll road, due to open in late 2006, is 15 kilometers (9.3 miles) long and will serve the rapidly developing communities on the eastern fringe of the area and provide a new connection to the Otay Mesa border crossing to Mexico.
Currently the company is negotiating with the California Department of Transportation and local agencies for a 10-year extension of the concession, from 35 to 45 years. In exchange for the extended concession, the company proposes covering the cost of adding a single HOV lane in each direction on the I-805 freeway within the franchise zone.
"The South Bay Expressway, or S.R. 125 South as it was formerly known, has been a line on the map since 1959," says Greg Hulsizer, chief executive officer of California Transportation Ventures, Inc., the owner/operator of the South Bay Expressway. "It wasn't a regional priority for funding, and there likely wouldn't have been funding for a long time into the future. So the use of the private concession model is bringing this new transportation alternative to life. It would have been literally decades before it would ever be funded with public funds."
At least four tolled megaprojects are being considered in the Los Angeles area. As an alternative to a contentious 9.6-kilometer (6-mile) surface road, for example, transportation officials are considering building an 8-kilometer (5-mile) tunnel that would serve as the missing link in the I-710 freeway in South Pasadena.
Further north in Glendale, local officials including the Los Angeles County Board of Supervisors, the city of Palmdale, and the Southern California Association of Governments are considering a proposal to tunnel under the mountains of Angeles National Forest to improve the connection to Palmdale. The facility would cut 45 minutes off the trip over the mountains. With tunnels measuring 17.4 kilometers (10.8 miles) and 7.6 kilometers (4.7 miles) plus about 8 kilometers (5 miles) at grade, the project is estimated to cost less than a surface highway—a reflection not only of the challenges inherent in building a road through such rugged topography but also of improvements in tunneling technology.
A third tunneling project, under consideration by the Orange County Transportation Authority and the Riverside County Transportation Commission, would link the Foothill/Eastern Toll Road in Orange County to I-15 in Riverside County to provide an alternative to the S.R. 91 Riverside Freeway and the winding S.R. 74 Ortega Highway through the mountains of Cleveland National Forest. This tunnel would be about 22.5 kilometers (14 miles) long.
A nontunnel project would add truck lane capacity in the corridor following the I-710 freeway from the ports of Los Angeles/Long Beach to intermodal yards, then eastbound along the S.R. 60 Pomona Freeway. Truck volumes in this area are among the highest in the country because of a heavy concentration of truck-related businesses. The project would connect the growing array of warehousing and logistics businesses in Riverside and San Bernardino Counties, then go north toward Nevada along I-15. With Mountain State-style triple trailer rigs and other longer combinations operating behind jersey barriers, such truck lanes could improve mobility and safety in the regional transportation network. The enhanced productivity of managed truck lanes totaling some 117 kilometers (73 miles) in urban areas and 277 kilometers (172 miles) to the Nevada State line would provide the basis for toll financing.
California Governor Arnold Schwarzenegger's administration is supporting a bill to facilitate concession agreements, which are envisioned to be open for negotiation for investors, nonprofits, and public toll agencies alike.
Indiana also is pursuing the concession model. In September 2005, Governor Mitch Daniels announced that his administration would seek investor proposals for a long-term concession to take over the Indiana Toll Road. In January 2006, Daniels announced the winning bid: a joint venture by toll road companies from Spain and Australia bid $3.85 billion for the 75-year concession. Daniels also announced that 228 kilometers (142 miles) of the planned I-69 southwest of Indianapolis will be built as a toll road and that the State will seek investor proposals to build and operate the facility as a concession.
"The Indiana Toll Road is an economic engine for northern Indiana," says Indiana Department of Transportation Commissioner Tom Sharp. "For 50 years it has served as a vital east-west link in facilitating the movement of commerce across the United States."
He continues, "Grants and no-interest loans generated from Indiana Toll Road revenues assist local communities with transportation improvements at little or no cost. The latest grants are being used to upgrade and integrate air and rail transportation systems for passengers and freight. The Indiana Toll Road is a successful model [that] Indiana plans to use for future toll highway projects."
Concessions on Existing And New Facilities
Although the concession model may be applied equally to existing toll facilities and to new ones, the distinction is not clear-cut. Many existing toll facilities need considerable investment. According to the proposed concession agreement, the Indiana Toll Road (now operated by a State toll authority), for example, could be improved by widening its western commuter section, modernizing its toll system, and repaving.
In considering a long-term lease for the State-operated New Jersey Turnpike, New Jersey would likely make extension of the dual-dual (dual roadways both directions) roadways south of Interchange (IC) 8A a condition. The State already announced that it wants to widen the existing six lanes that extend some 32 kilometers (20 miles) from IC-8A to IC-6 to four roadways of three lanes.
By contrast, in Texas, the primary focus is not on privatizing the existing regional toll authorities but instead on seeking investor involvement in concessions for new roads to address soaring traffic growth. In addition to embarking on the TTC project noted earlier, the Texas Department of Transportation now requires that all major new projects forwarded from its regional offices be assessed for toll feasibility.
Further, Texas defines the term "comprehensive development agreement" (CDA) as including both the traditional public toll authority model and the concession model. The Central Texas Turnpike Project, covering some 105 kilometers (65 miles) of toll roads under construction in the Austin area—including State Highway (SH) 130, SH-45 North, and Loop 1—is being constructed under a CDA that covers design, build, and operations but excludes financing. The exclusion of financing and the fact that the toll revenues will go to the State make it a public authority toll road.
The first TTC project (TTC-35) may mark the start of using the full-fledged concession model. The winning proposal for the first TTC-35 project involves a 50-year concession. (For more information, see "Trans-Texas Corridor" in the July/August 2005 issue of Public Roads.)
In Colorado and Georgia, State legislation allows private toll roads to operate along with two major State toll facilities, E-470 and GA-400 respectively. There, the concession model would be used almost exclusively to build new toll roads. In North Carolina, where no toll facilities as yet exist, the North Carolina Turnpike Authority is considering a concession for the Mid-Currituck Bridge, a proposed new multilane facility connecting U.S. 158/NC-168 at Barco on the mainland to Corolla on the Outer Banks.
Why Sell or Lease an Existing Toll Road?
When Chicago leased the Skyway for 99 years for $1.8 billion, the city earned a substantial return on the arrangement. In fact, according to a city press release, the mayor plans to set aside $875 million to establish a $500 million long-term reserve fund and a $375 million mid-term annuity the city can use to smooth the effects of economic cycles and stabilize the need for additional revenues. Further, the city plans to use $463 million of the proceeds to retire existing Skyway debt and $392 million to pay off other existing city obligations.
By contrast, in 2002, the city earned a profit of approximately $8.4 million from Skyway tolls, which is a return of a mere 0.4 percent on the capital value of $1.8 billion as revealed by the successful concession bid. Therefore, one way to determine if taxpayers would be better off holding onto a toll road or selling it is to compare the relative rates of return.
A second consideration in deciding whether to lease an existing toll road is how the proceeds will be used. If the proceeds are dedicated to other needed infrastructure investments for which the government would otherwise have to borrow, the transaction is more likely to be viewed by the public in a positive light. For example, nearly one-third of the proceeds from the concession of the Indiana Toll Road (or roughly $1.35 billion) are earmarked for Lake, Porter, and the five remaining counties that surround the toll road.
All of this presumes that the State can find a buyer experienced in owning and operating toll roads, with the capabilities needed to manage such an asset and deliver quality service to its customers. It also presumes that adequate protections for the public interest, such as adherence to proper maintenance standards and avoidance of monopolistic pricing, can be included in the terms of the concession agreement.
Why Use Concessions On a New Toll Road?
Choosing to use concessions on a new toll road offers a number of potential benefits. As noted earlier, one benefit is the private sector's ability to be innovative and think outside the box in coming up with creative solutions to difficult problems. Second, funding a large project all at once can facilitate completing the project and delivering its benefits to the public years or even decades sooner than with traditional procurement methods. But the latter benefit also would be available using public toll authorities. What else does the private sector bring to the table? A more robust financing approach is one feature.
As illustrated by the Washington Beltway express toll lanes example, conventional all-debt financing fell short by $200 million of what was needed. But because equity (rather than assets for collateral) is patient capital, investors are willing to wait longer for a larger return. The concession approach made it possible to finance a larger and more serviceable project. A mix of equity and debt also is less vulnerable to default in the early years of a new toll road, when traffic may be less than was forecast. With a project 100 percent funded by debt, the debt-service burden that must be met by toll revenues is higher than if only, say, 65 percent of the project is funded with debt that must be serviced like clockwork in those critical early years.
Another advantage is risk transfer. In a long-term concession, the company or consortium takes on the risks of cost overruns and inadequate traffic, relieving the State and its taxpayers of the burden. This is especially important on megaprojects, where those risks are larger in magnitude.
To Toll or Not to Toll
The long-term concession represents a major new approach to providing and managing highway infrastructure. Some in the transportation community will welcome the opportunity to breathe new life into 20th-century institutions. Others may approach the concept reluctantly or do so out of financial necessity. What seems clear, however, is that in a changing world, stepping beyond highway "business as usual" can open doors to improving the delivery and operation of the Nation's surface transportation system.
Robert Poole is the director of transportation studies at the Reason Foundation, a public policy think tank based in Los Angeles. He received a B.S. and M.S. in engineering from the Massachusetts Institute of Technology. He has provided advice to the United States, California, Florida, Georgia, and Indiana DOTs, as well as the White House Domestic Policy Council and National Economic Council during several administrations.
Peter Samuel is a journalist who has specialized in toll roads issues for the past 10 years. He produces TOLLROADS news, a Web-based news service and writes for World Highways and ITS International magazines. He also is a senior fellow with the Reason Foundation and has authored and coauthored policy reports on toll roads issues. He received a bachelor of commerce at the University of Melbourne, Australia, and taught economics at Monash University.
For more information, see the Reason Foundation's policy paper, "Should States Sell Their Toll Roads?" available at http://www.reason.org/ps334.pdf.
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