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Recent experience in the utilization of private finance for American toll road development
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Content
RECENT EXPERIENCE IN THE UTILIZATION OF PRIVATE FINANCE FOR
AMERICAN TOLL ROAD DEVELOPMENT
by
Yin Wang
A Dissertation Presented to the
FACULTY OF THE USC GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(POLICY, PLANNING, AND DEVELOPMENT)
May 2010
Copyright 2010 Yin Wang
ii
Dedication
To my parents, Yunzheng Wang and Lijun Xu, who love and support me
unconditionally.
iii
Acknowledgments
This dissertation could not have been written without Professor Elizabeth Graddy
who not only served as my supervisor but also encouraged and challenged me throughout
my academic program. She and the other committee members, Professor Genevieve
Giuliano, Professor Richard Little, and Professor James Moore, guided me through the
dissertation process, never accepting less than my best efforts. I thank them all. Also I
would like to make a special reference to USC’s Keston Institute for Public Finance and
Infrastructure Policy for a research grant that provided financial support for this
dissertation. In addition, I would like to thank Mr. John Schmidt, a partner of Mayer
Brown LLP, Mr. Paul Ryan, Managing Director of Infrastructure Advisory Group of J.P.
Morgan, and Mr. Geoffrey Yarema, a partner and Chair of Infrastructure Practice Group
of Nossaman LLP, for taking the time to be interviewed and providing valuable
information for the research.
Lastly I would like to make a special thanks to Professor Gerald Caiden, who was
my mentor throughout my doctoral study. One of the things I enjoyed most at SPPD was
to drop by in his office and talk about current news in the world. I liked to sit on the floor
when the two guest seats were covered under books and newspapers. He would usually
grab a piece of newspaper or a prepared article for me to read and then start to share
thoughts with me. Our conversations covered things including politics, economics,
culture and history in both developed and developing countries. I learned how to think in
a global and historical context and realized that continuous thinking and exploration is a
iv
powerful tool human beings have to truly understand the world. He also cared for my
dissertation. Besides giving me two classic books on the topic of my dissertation, when
coming across good papers or newspapers related to my research, he always saved them
for me.
I feel truly grateful to study at SPPD and be a member of USC Trojan family
because I have met the best professors one could ever ask for.
v
Table of Contents
Dedication ii
Acknowledgments iii
List of Tables vii
List of Figures viii
Abstract x
Chapter 1: Introduction 1
1.1 Research Background 2
1.2 Research Questions and Methodology of the Dissertation 6
1.3 Significance of the Study 10
1.4 Overview of Chapters 12
1.5 Chapter 1 References 14
Chapter 2: Review of the Literature 16
2.1 American Highway System 16
2.2 Reasons behind Toll Financing 21
2.3 America’s Toll Road Activities 37
2.4 Current Findings: Understand Toll Road Development from Public
Management Perspective 42
2.5 Summary 60
2.6 Chapter 2 References 62
Chapter 3: Determinants of Utilization of Private Finance in Toll Road
Development 71
3.1 Practices and Studies 72
3.2 Model Development 78
3.3 Data and Empirical Methodology 89
3.4 Results Discussion 103
3.5 Chapter 3 Conclusion 110
3.6 Chapter 3 References 112
Chapter 4: The Formation of Private Development of Toll Roads 116
4.1 The Formation Model 117
4.2 Cases and Empirical Methodology 134
4.3 Case Reports 138
4.4 Findings 163
vi
4.5 Chapter 4 Conclusion 189
4.6 Chapter 4 References 192
Chapter 5: Conclusions 197
5.1 Major Findings 197
5.2 Theoretical and Practical Implications 199
5.3 Future Research 202
Bibliography 205
Appendix 1: Correlation Matrix 218
Appendix 2: Project Information of Dulles Greenway 219
Appendix 3: Project Information of CA 91 Express Lanes 227
Appendix 4: Project Information of South Bay Expressway 233
Appendix 5: Project Information of Pocahontas Parkway 240
Appendix 6: Project Information of Foley Beach Express 248
Appendix 7: Project Information of I-394 MnPASS 254
Appendix 8: Project Information of SH 130 Segment 5 and 6 260
Appendix 9: Project Information of the New LBJ IH-635 Managed Lanes 268
Appendix 10: Interview Protocol 276
Appendix 11: An interview with John Schmidt 278
Appendix 12: An interview with Paul Ryan 281
Appendix 13: An Interview with Geoffrey Yarema 285
vii
List of Tables
Table 1: 2005 Revenues Used for Highways by Governments (in Percent) (a) 20
Table 2: Shortage of Gasoline Taxes in 2009 to Maintain the Buying Power
as in 1956 23
Table 3: Average Annual Investment Requirements versus Current Spending
on Highways and Bridges between 1993 and 2004 (a) 26
Table 4: Ratios of Federal User Charges to Allocated Costs by Vehicle Class 34
Table 5: Summary of Toll Road Activity by State between 1992 and 2008 91
Table 6: Variable Definitions and Data Sources 93
Table 7: Descriptive Statistics of Variables (a) 101
Table 8: Binomial Logit Regression Analysis of Private Finance
Involvement Decision (a) 105
Table 9: Division of Roles between Public and Private Parties 130
Table 10: Procurement, Partners, Risk Management and Contract Terms
of PFM Projects 164
Table 11: Financing Structure of South Bay Expressway 237
Table 12: Part 1 in feasibility study: Asset Management of Alternatives 282
Table 13: Part 2 in feasibility study: Capital Structure of Alternatives 282
Table 14: Risk Arrangements in PPPs 283
viii
List of Figures
Figure 1: Ratio of Motor Fuel Taxes to National Highway Funding from
1921 to 2006 19
Figure 2: The History of America’s Highway Development 37
Figure 3: Strategies of Toll Road Development in the U.S. 47
Figure 4: Major Phases of Toll Road Development in the U.S. 47
Figure 5: Development Process of the Public Development Mechanism 50
Figure 6: Development Process of the Private Finance Mechanism 50
Figure 7: The Public Sector’s Decision Whether to Involve Private Finance 79
Figure 8: The Formation Process vis-à-vis the Entire Project
Development Process 118
Figure 9: The Formation Process of Toll Road Projects under the Private
Finance Mechanism (PFM) 119
Figure 10: Partnership Formation Flow in Two Scenarios 167
Figure 11: Map of Dulles Greenway 220
Figure 12: Map of CA 91 Express Lanes 228
Figure 13: Map of South Bay Expressway (SR 125) 234
Figure 14: Map of Pocahontas Parkway 241
Figure 15: Map of Foley Beach Express 249
Figure 16: Map of I-394 MnPass 255
Figure 17: Map of SH 130 Segment 5 and 6 261
ix
Figure 18: Maps of the New LBJ Managed Lanes 269
Figure 19: The Process from RPFs, Negotiation, Partner Selection to
Contract Signing 283
x
Abstract
The last two decades has seen increasing interest in utilizing private finance to
develop toll roads in the United States. This dissertation is designed to answer two related
questions: What factors determine the utilization of private finance for a toll road project?
How do public and private parties shape a partnership to develop a toll road with private
finance? To answer the first question, a decision-making model is designed to consider
social, political, legal, and economic influences on the decision of utilization of private
finance. The model is empirically explored using data on toll road activity in the U.S.
between 1992 and 2008. The results provide support for the model as both project
characteristics at micro-level and state fiscal, political, and economic conditions at
macro-level affect the private finance decision. For project characteristics, initiation at a
later time and localized or professionalized public sponsorship reduce the likelihood of
private finance involvement. For macro environment, states with an umbrella debt limit,
conservative political ideology, higher proportion of public employees, and higher
average personal income are more likely to utilize private finance for toll road
development.
For the second question, the dissertation develops a formation model that
considers partner selection, division of roles, joint risk management, and building of trust
and mutual understanding as four critical components of partnership formation. The
model is empirically explored through a multiple-case study that contains eight toll road
projects with private finance involvement initiated after the late 1980s in the U.S. The
xi
findings show there are two types of partnership formation: government-solicitation
partnership and private-initiation partnership. The four components of partnership have
had significant changes in the last 20 years, including a transition from self-motivated
domestic companies to foreign professional toll road giants in response to government
initiatives, increasing support from federal and state governments, greatly improved
management of project risks, and effective trust creation and mutual understanding
building. These changes in partnership have led to changes in project contracts, such as
more projects for the purpose of congestion relief, larger project scale, new contract
terms for protection of the public interest, and longer concession periods.
1
Chapter 1: Introduction
The 2010 Transportation Bill has been nine months overdue since the original
retirement date of the last transportation law (SAFETEA-LU) in June 2009 because
lawmakers couldn’t identify a politically satisfactory funding mechanism to pay for the
450-billion-dollar bill. American transportation is facing severe funding shortfalls.
Utilizing private finance to build toll roads and awarding to private investors the
operation rights for investment returns has recently gained great attention (GAO, 2004;
Hobby & Forsgen, 2007; Samuel & Poole, 2007). It is considered a promising
government instrument for providing extra road capacity without further straining
government budgets. Governments, including federal, state, and local, are showing
considerable interest in it. The Intermodal Surface Transportation Efficiency Act (ISTEA)
of 1991 is the first federal legislation allowing state and local governments to use tolling,
private funding, and other innovative financing tools to improve and expand highway
infrastructure. Between 1992 and 2008, a total of 235 new toll road projects have moved
into various stages of development, among which 27 have been confirmed to be partially
or fully funded with private funding (Perez & Lockwood, 2009). The total capital cost of
these toll roads with private finance involvement is reaching 25 billion dollars. The
current economic and financial climate has drawn more states’ attention to the possibility
of using private funding for transportation finance. Several states, including Arizona,
California, Georgia, and Virginia, are expanding their existing or initiating new programs
to utilize private finance for toll road development.
2
However, little academic attention has been paid to this topic to provide a
systematic understanding on private development of toll roads with private finance,
leaving some basic questions unanswered. What have we achieved since the passage of
ISTEA? Why did some projects involve private finance while others didn’t? Is private
development of toll roads an effective way of delivering value for money? And if
governments want to pursue this path, how do they shape a partnership with the private
sector? These questions triggered my interest in this dissertation.
1.1 Research Background
America is experiencing a highway infrastructure crisis. At present 33 percent of
America’s major roads are in poor or mediocre condition and 36 percent of America’s
major urban highways are congested. Each year Americans lose 4.2 billion hours and 2.9
billion gallons of fuel stuck in traffic, creating a 78.2-billion-dollar annual drain on the
U.S. economy (TTI, 2007). The crisis is caused by unbalanced transportation demand and
supply. Demand on transportation has grown significantly in the last few decades
associated with population and economic growth, while transportation capacity hasn’t
increased accordingly. The nation’s population grew by 20 percent from 1990 to 2006
and vehicle travel on highways increased by 41 percent during the same time period,
while new road mileage increased by only 4 percent (TRIP, 2008). Moreover, much of
the existing roadway system is beyond its designed service life and need major
improvements or replacements soon (Samuel, 2000). Unfortunately, the traditional pay-
as-you-go financing method, with motor fuel taxes as the main revenue source, could no
3
longer support the needed transportation maintenance and expansion. Over the last two
decades, the buying power of motor fuel taxes has been significantly weakened by the
combined effects of inflation, improved vehicle fuel efficiency, increased construction
costs and diversion of road funding to other transportation programs (Wachs, 2006).
These facts consequently create a big shortage of transportation finance. At the same time
there is tremendous political and economic opposition to increases in motor fuel taxes to
fill the financial gap (Utt, 2008).
Toll financing is believed to be a promising approach to mitigating the current
crisis in transportation finance. Tolling can provide a new revenue stream for highway
system and therefore provide extra road capacity and support road maintenance without
further straining government’s budgets. Meanwhile it has been proved to be an effective
tool for congestion management (Nash, 2007; Samuel, 2000). Also toll roads are
expected to provide better quality road services because of the self-financing nature of
the roads.
In fact toll roads were once adopted by Americans. Between the 1920s and 1960s
many states issued tax-exempt public bonds to fund turnpikes to provide fast, convenient
overland transportation. This time period is called the Turnpike Era in American history.
Around the mid 1980s, America entered the Interstate Era. The Interstate Highway
System, the world’s largest highway system, was built with federal grants that
contributed approximately 90 percent of the cost and 10 percent of state matching funds
under a pay-as-you-go financing policy. Tolls were expressly forbidden on the interstate
system except for 2,447 miles of toll expressways that were already in operation or
4
almost completed at the time the interstate system was authorized (Gómez- Ibáñez &
Meyer, 1993).
In the late 1980s the nation’s highway system started to rapidly decay. Since then
the U.S. government has endeavored to once again utilize toll financing as a
supplementary source for transportation finance. The particular method of using private
finance for toll road development has ignited a heated debate. Proponents argue the
method attracts private capital, offers real efficiency gains, and shifts project risks from
government. Government financial pressure is often the main driving force behind the
use of private finance. Besides, most governments perceive that there are political
benefits from keeping large capital projects like highways off government budgets
(Vining, Boardmand & Poschmann, 2005). Proponents also believe that the method can
provide real efficiency gains. When investing in a toll road project, a private entity often
becomes the project sponsor assuming multiple roles in project development, such as
design, construction, operation, and maintenance. With the integration of multiple project
phases, the project facility is expected to be provided at a lower cost with higher
efficiency, resulting from superior private sector’s economy of scale and technical
efficiency (Frantz 1992). A third argument in support of the method is it can effectively
shift the risks associated with cost overrun and revenue shortfall to the private sector
while the public sector still receives the desired infrastructure facilities as designated in
contracts. Lastly, most governments believe that having a private entity collect tolls on
infrastructure would create less political resistance compared to having a public agency
5
do so, since the public tend to believe they have already paid for public services through
taxes (Vining, Boardmand & Poschmann, 2005).
Meanwhile some scholars and practitioners are very suspicious of the
involvement of private finance in toll road development. A primary concern is that
government will lose control over key infrastructure. In this case, it might result in a
fragmented road network and even affect the integrity of transportation policies in the
region (Baxandall, Wohlschlegel & Dutzik, 2009). The second concern is private
development of toll roads might actually cost government and the public more money for
construction and operations. It is more expensive for the private sector to raise project
capital than the public sector because government can borrow through issuance of tax-
exempt bonds (de Bettignies & Ross, 2004; Enright, 2007). As a result a toll road built
with private finance is likely to charge higher tolls to repay its expensive investments and
a publicly developed toll road is likely to provide cheaper services and greater value for
money. In addition, some others are concerned about how to protect the public interest
from the profit-driven strategies and opportunistic behaviors of the private parties. They
argue a public-private partnership is likely to incur significant transaction costs which
might eat up efficiency gains resulting from superior private sector’s economy of scale
and technical efficiency.
The studies on private development of toll roads are still in the preliminary stage.
Discussion is largely theoretical with exception of only a few empirical case studies. The
purpose of the studies is mainly to provide state or local governments simplified
understandings on the potential profits and problems of this practice. Meanwhile the
6
current transportation finance shortage is not expected to be solved any time soon. This
situation calls for an immediate study to systematically examine the method of using
private finance for toll road development.
1.2 Research Questions and Methodology of the Dissertation
This dissertation is one of the first devoted to a thorough empirical investigation
on the practice of using private finance to develop toll roads in the U.S. I defined the
method of utilizing private finance for infrastructure development as a Private Finance
Mechanism (PFM). Specifically the PFM refers to a financing method under which a
private entity is authorized to fully or partially finance an infrastructure project and has
sole or shared entitlement to project-generated revenue. As the project sponsor, the
private entity usually also assumes responsibilities for project design, construction,
operation and maintenance. In this dissertation, I am mainly interested in investigating
how the PFM has been used in toll road activity in the U.S. over the last two decades,
why some projects involved private finance and others didn’t, and more importantly if
state or local governments would like to adopt this mechanism and cooperate with private
entities, how they shape a partnership. Specifically I explored the answers to the
following two sets of questions respectively.
First, what factors determine the utilization of private finance for a toll road
project?
Scarce attention has been devoted to the empirical factors determining the use of
private finance for toll road activity. The lack of scholarly attention has left many basic
7
questions unanswered. Is there an identifiable pattern of decision making of utilization of
private finance for toll road projects? What are the factors affecting the private finance
decision? Why are some states able to attract more private investments than others?
To answer these questions, a decision-making model was designed to illustrate
how the public sector chooses to use private finance or not for a toll road project under
the influences of seven channels of factors. The seven channels are: (1) state demand for
road capacity, (2) state debt situation, (3) state political environment, (4) state Public-
Private Partnerships legislation, (5) state turnpike experience, (6) state market conditions,
and (7) specific project attributes. The model contains multiple hypotheses. For Channel
1, the hypothesis is states with high demand for road network expansion, caused by fast
economic development or population growth, are more likely to utilize private funding
for toll road development. For Channel 2, it is expected that states in a serious debt
situation are more motivated to engage in utilizing private finance. For Channel 3, states
with conservative political ideology are more likely to engage in private development of
toll roads, and meanwhile states with powerful public employees are less likely to use
private funding for infrastructure development. For Channel 4, states with strong and
effective PPP legislation are expected more likely to attract private finance. For Channel
5, the hypothesis is states with affluent turnpike experience from the Turnpike Era
between the 1920s and 1960s are more capable of developing public toll roads through
issuance of municipal revenue bonds, and less likely to resort to private finance. For
Channel 6, states with wealthier residents are expected more attractive to private
investments. For Channel 7, the hypotheses argue that later initiated, small-scale, and
8
Greenfield toll road projects are more likely to involve private finance, and project
sponsorship is also expected to influence the decision of private finance involvement.
This decision model was applied to toll road activity in U.S. states between 1992
and 2008. The dataset contains 155 toll road projects with all needed information, among
which 128 are or will be developed with only public funding and 27 are or will be
developed under the Private Finance Mechanism (PFM), partially or fully funded with
private funding. What is noteworthy is this dataset only contains projects that provide
new road capacity for tolling. In other words, leasing existing public toll roads to the
private sector, such as the Indiana Toll Road and the Chicago Skyway, is not included in
this study. I used quantitative methodology for research analysis. Specifically given the
binary structure of the dependent variable, either involving private finance or not, I used
binomial logit regression model for data analysis. The goal of the binomial logit
regression is to measure the probability that a choice will be made (or not) under the
influences of a set of determinants.
The second question the dissertation answered is: how do public and private
parties shape a toll road project under the Private Finance Mechanism (PFM)?
I took a micro perspective to examine the process in which public and private
parties shape a toll road project using the PFM. The study used a multiple-case study
method to investigate the nuts and bolts of the formation processes of eight PFM projects
and answer three specific questions: “how do public and private parties communicate,
interact and negotiate to shape a toll road project under the Private Finance Mechanism
9
(PFM)?”, “what factors contribute to or obstruct the formation process?” and “how does
the formation process influence the contract terms that parties reach agreements on?”
A formation model was developed to describe and explain the processes of
partnership formation. The model indicates that partnership formation is consisted of four
crucial components: partner selection, division of roles among partners, joint risk
management, and trust creation and building of mutual understanding. Meanwhile this
formation process is believed greatly influenced by the nature of the PFM (public and
private sectors’ different interests and risks) and affected by specific characteristics of
projects.
I deliberately selected cases using three criteria in order to justify the
generalization of analysis results about the state of the art in partnership formation in the
country as a whole. Selected projects must have involved intensive interaction and
cooperation between public and private partners so as to provide adequate information
about how parties work together to shape partnerships. Also, in order to avoid
concentration in one or two states with the most partnerships, I selected up to two cases
from each of the five states that have been active in toll road partnership. The five states
are Alabama, California, Minnesota, Texas, and Virginia. Lastly, in order to capture the
full picture of private development of toll roads since the late 1980s, I selected cases with
their initiation time evenly across the time range between 1988 and 2005. As a result,
eight projects were selected: Dulles Greenway and Pocahontas Parkway in Virginia, CA
91 Express Lanes and South Bay Expressway in California, Foley Beach Expressway in
10
Alabama, I-394 MnPASS in Minnesota, and SH 130 Segment 5 and 6 and the New LBJ
IH-635 Managed Lanes in Texas.
I used qualitative methodology for research analysis. Specifically, pattern-
matching technique was used to answer the first question and explain the general process
of partnership formation based on an overall observation of all studied cases. Time-series
analysis technique was used to tackle the remaining two questions. The eight cases were
sorted into three groups by the time of their initiation. Partnership factors were then
examined in a time-series context in order to demonstrate if there is any pattern(s) of
change of these factors and what its impact is on the resulting contract terms.
1.3 Significance of the Study
This dissertation constitutes an interdisciplinary effort which uses public
management theories to investigate and explain a particular financing method in
transportation development. Its findings are contributing to both transportation and public
management literature.
First, the research findings have significant practical implications for mitigating
the current transportation financial shortage in the U.S. The searching for non-
conventional sources of funding has become inevitable with the falling of the buying
power of motor fuel taxes and the growing demand for transportation investment.
Utilizing private finance is a promising alternative to provide extra road capacity without
further straining government’s budget. For governments that are considering the PFM,
the findings on the formation processes of toll road partnership offer up-to-date specific
11
information about how to shape partnerships in toll road development. For example, an
important finding is there are two major types of partnership formation: government-
solicitation partnership and private-initiation partnership. For states that are new to the
game and lack knowledge on PPP, they are likely to pursue private-initiation partnership,
in which case the government invites private investors with affluent local knowledge to
submit proposals on projects the investors think promising. For states that are more
knowledgeable about and experienced with PPPs, they can choose to use government-
solicitation process by soliciting the best-value proposal among multiple proposals for a
designated project. A main strength about this process is government can best utilize
market competition to seek for a best offer for a project it truly desires. In a word, this
dissertation contains practical findings and can be of immediate use for government
agencies that are considering using private finance for transportation development.
Second, this dissertation also makes theoretical contribution to the study on
Public-Private Partnership (PPPs) in public management field. The notion of PPPs has
drawn a great amount of academic and government attention since the adoption of Private
Finance Initiative in the United Kingdom in the early 1990s. The U.S. government has
widely used contracting-out for public service delivery but the talk about using private
finance to develop key public infrastructure has always been limited. The research
findings shed light on this topic by answering what factors determine the use of private
finance for a particular project. The specific factors found to affect the decision are
project initiation year, project sponsorship, the existence of state umbrella debt limit,
state political ideology, the power of public employees, and state average personal
12
income. The results suggest that, at least in the case of toll road development, both
project characteristics at micro-level and state fiscal, political and market conditions at
macro-level have affected the decision to use private finance. Furthermore the results
provide a point of comparison for future work that considers different sets of
infrastructure and decision makers, which is very necessary if we are to enhance our
understanding of the circumstances under which public agencies prove willing to utilize
private finance for public infrastructure and other services.
1.4 Overview of Chapters
In the rest of the dissertation, Chapter 2 provides review of the literature. It first
reviews the history of American highway system and discusses the current transportation
finance shortfalls to justify the necessity of toll financing. It then elaborates what we have
known about private development of toll roads and identifies the research gap. Chapter 3
answers the research question: “what factors determine the utilization of private finance
for a toll road project?” It conducts a quantitative analysis on empirical data from 20
years of toll road activity in the U.S. Major findings and their implications are discussed
in detail. Chapter 4 moves on to tackle the second research question: “how do public and
private parties shape a toll road project under the Private Finance Mechanism (PFM)?” It
uses qualitative analysis techniques and conducts a multiple-case study on eight
deliberately selected cases. The findings on the partnership formation processes, changes
of crucial partnership factors and their impacts on resulting contract terms are also
thoroughly discussed. The dissertation ends with Chapter 5, in which I reiterate the major
13
findings of this dissertation, discuss limitations and delimitations of the research, and
explore future research.
14
1.5 Chapter 1 References
Baxandall, Phineas, Kari Wohlschlegel & Tony Dutzik. (2009). Private Roads, Public
Costs- The Facts About Toll Road Privatization and How to Protect the Public. U.S.
PIRG Education Fund.
de Bettignies, Jean-Etienne & Thomas W. Ross. (2004). The Economics of Public–
Private Partnerships. Canadian Public Policy, 30(2), 135–154.
Enright, Dennis J. (2007). The Public versus Private Toll Road Choice in the United
States. NW Financial Group, LLC.
Frantz, Roger. (1992). X-efficiency and Allocative Efficiency: What Have We Learned?
American Economic Review, 82 (2), 434-438.
GAO (United States General Accounting Office). (2004). Highways and Transit-Private
Sector Sponsorship of and Investment in Major Investment in Major Projects Has Been
Limited. A report to Congressional Requesters, March 2004.
Gómez- Ibáñez, José A. & John R. Meyer. (1993). Going Private: The International
Experience with Transport Privatization. By Washington, D.C.: The Brookings
Institution.
Hobby, Matthew & Kurt Forsgen. (2007). U.S. Transportation’s PPP Market Continues
Down A Long and Winding Road. In Standard and Poor’s CreditWeek: May 9
th
, 2007.
Nash, Jonathan Remy. (2007). Economic Efficiency versus Public Choice: The Case of
Property Rights in Road Traffic Management. John M. Olin Program in Law and
Economics Working Paper No.374, Public Law and Legal Theory Working Paper No.
192.
Samuel, Peter. (2000). Putting Customers in the Driver’s Seat: The Case for Tolls.
Reason Foundation, Policy Study No.274.
Samuel, Peter & Robert W. Poole, Jr. (2007). The Role of Tolls in Financing 21
st
Century
Highways. Reason Foundation, Policy Study No.359.
TRIP (The Road Information Program). (2008). Key Facts about America’s Road and
Bridge Conditions and Federal Funding. Updated August 2008.
TTI (Texas Transportation Institute). (2007). 2007 Urban Mobility Report. Available at:
http://tti.tamu.edu/infofor/media/archive.htm?news_id=4449.
15
Utt, Ronald D. (2008). The Transportation Commission’s Proposed 200 Percent Gas Tax
Increases: One of Several Bad Ideas in Its Report. Backgrounder, No. 2103, January 30,
2008, Published by the Heritage Foundation.
Vining, Aidan R., Anthony E. Boardman & Finn Poschmann. (2005). Public-Private
Partnerships in the US and Canada: “There Are No Free Lunches”. Journal of
Comparative Policy Analysis, Vol.7, No.3, 199-200, September 2005.
Wachs, Martin. (2006). A Quiet Crisis in Transportation Finance: Options for Texas.
Testimony presented before the Texas Study Commission on Transportation Finance, on
April 19, 2006.
16
Chapter 2: Review of the Literature
The return of toll road in the U.S. since the late 1980s is no coincidence and the
recent discussion on using private finance for toll projects also emerges for many reasons,
both of which ought to be understood within the context of American transportation
history. This section will first discuss the importance of motor fuel taxes to current
American highway system and elaborate the factors that have significantly weakened the
buying power of motor fuel taxes to justify the necessity of toll financing. Then two
development models for toll road will be introduced, a Private Finance Mechanism and a
Public Development Mechanism, with an emphasis on theoretical debates over their
comparative strengths and weaknesses. In the end a research gap will be identified which
leads to a research question guiding the dissertation.
2.1 American Highway System
The National Highway System of the U.S. is the longest highway system in the world,
comprising approximately 162,000 miles of roadway, 97 percent of which is free to
public traffic because government provided most funding through user fees. The system
is a product of a delicately balanced partnership of federal, state, regional and local
governments, consisting of the following subsystems of roadways (FHWA, 2006 I):
The Dwight D. Eisenhower National System of Interstate and Defense Highways,
also called the Interstate Highway System, a network of limited-access highways. The
17
system, as of 2006, has a total length of 46, 876 miles, making it the largest highway
system in the world (FHWA, 2006 II). The Interstate Highway System retains its
separate identity within the National Highway System.
Other principal arterials. These are highways in rural and urban areas which provide
access between an arterial and a major port, airport, public transportation facility, or
other intermodal transportation facility.
Strategic Highway Network. This is a network of highways which are important to
the nation’s strategic defense policy and provide defense access, continuity and
emergency capabilities for defense purposes.
Major Strategic Highway Network connectors. These are highways which provide
access between major military installations and highways which are part of the
Strategic Highway Network.
Intermodal connectors. These highways provide access between major intermodal
facilities and the other four subsystems making up the National Highway System.
2.1.1 The Interstate Highway System
The Interstate Highway System takes the foremost position in the U.S. National
Highway System. Supported by President Eisenhower, development of the Interstate
System was authorized by the Federal-Aid Highway Act of 1956, to not only provide key
ground transport routes for military supplies and troop deployments in case of an
emergency or foreign invasion but also facilitate private and commercial transportation.
The majority of the Interstate System was built between the 1950s and 1980s and the
18
construction era essentially ended in 1991 with a total mileage of 45,074 miles. Since
then small construction and improvements continue through the present. As of 2006, the
Interstate Highway System had a length of 46, 876 miles, modest growth since 1991.
Two funding breakthroughs have made the world’s largest highway system
possible. The first is the creation of the Highway Trust Fund (HTF) and the dedication of
federal fuel taxes to the fund. In 1954 President Eisenhower and some very creative and
visionary members of the Congress worked to establish the HTF and dedicate all federal
fuel taxes to the account, two cents per gallon at that time and later increased to three
cents per gallon by the Federal-Aid Highway Act of 1956, in order to ensure dependable
financing for the Interstate Highway System (PB Consult, 2006). Before that, federal fuel
taxes were deposited in General Fund of the U.S. Treasury, and used for all purposes.
Another funding innovation is the adoption of the pay-as-you-go funding policy, under
which budgetary restrictions are imposed on government that pays for expenditures of a
program with funds that are made available as the program is in progress; hence
government would compel new spending or tax changes not to add to government deficit.
Without the HTF funding mechanism the Interstate Highway System would probably
never have been possible. A financial report issued in 1991 estimated that the
construction of the Interstate Highway System cost approximately $128.9 billion (in 1991
dollars); the federal government paid about 90 percent of the total costs from the HTF
and state governments provided the remaining 10 percent with state matching funds
(FHWA, 2006 II).
19
2.1.2 Importance of Motor Fuel Taxes to American Highways
Motor fuel taxes, the major revenue source of transportation finance, were first set
up as user fees under the rationale that people should pay in proportion to their use of the
roadway system. Since first introduced, fuel taxes have played a crucial role in funding
American highways. As Figure 1 shows, motor fuel taxes, including both federal and
state fuel taxes, have provided over 50 percent of national highway funding since the
1940s.
Figure 1: Ratio of Motor Fuel Taxes to National Highway Funding from 1921 to 2006
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
1921
1925
1929
1933
1937
1941
1945
1949
1953
1957
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
Information source: Highway Statistics Series, FHWA.
In the U.S. both federal and state governments levy taxes on motor fuel. The first
state fuel tax, a 1 cent per gallon tax, was introduced in Oregon in 1919; in the following
decade all U.S. states introduced a state gasoline tax. In mid-1950s, an average fuel tax of
5.7 cents per gallon was levied by states. According to the most recent State Motor Fuel
Excise Tax Report effective since January 2009, the average state gasoline and diesel
exercise taxes are 26.6 and 26.5 cents per gallon respectively (API, 2008). The federal
20
motor fuel exercise tax was first collected at a rate of 1 cent per gallon in 1932. With the
passage of the Federal-Aid Highway Act of 1956, federal fuel taxes were increased from
2 to 3 cents per gallon and all deposited into the newly created HTF to ensure dependable
financing for the Interstate Highway System. Currently the federal fuel taxes are 18.4
cents per gallon for gasoline and 24.4 cents per gallon for diesel, which have stood since
1993. Combining state and federal fuel taxes, as of January 2009, America has an
average tax of 45 cents per gallon for gasoline and 50.7 cents per gallon for diesel (API,
2008).
Besides motor fuel taxes, different levels of governments have a variety of
additional sources for highway funding. Table 1 lists 2005 national highway funding by
governments. In addition to motor fuel and vehicle taxes, state governments received a
significant portion of their highway funding from public bonds, tolls and other taxes and
fees. Local governments’ main highway funding sources consist of general fund
appropriation, property taxes and assessments and public bonds.
Table 1: 2005 Revenues Used for Highways by Governments (in Percent) (a)
Sources Federal State Local Total
Motor-Fuel& Vehicle Taxes 20
(b)
32 1 53
Tolls 4 1 5
Property Taxes/Assessments 5 5
General Fund Appropriation 1 2 11 14
Other Taxes& Fees 3 3 6
Investment Income& Other Receipts 2 3 5
Bond Issue Proceeds 8 4 12
Total Percent 21 51 28 100
(a)
Information Source: 2005 Highway Statistics.
(b)
Federal motor-fuel and vehicle taxes are collected in the Highway Trust Fund, and the 20% was in fact
from the Highway Account of the Highway Trust Fund.
21
2.2 Reasons behind Toll Financing
Americans rely almost exclusively on roads for transportation: travel in private
vehicles accounts for 88 percent of all person miles of travel, air travel accounts for 8
percent, and transit, including buses and trains, accounts for only 1 percent (TRIP, 2008).
However, the nation’s highway system has been seriously decaying. At present 33
percent of America’s major roads are in poor or mediocre condition and 36 percent of
America’s major urban highways are congested. Each year Americans lose 4.2 billion
hours and 2.9 billion gallons of fuel stuck in traffic, creating a $78.2 billion annual drain
on the U.S. economy. In 2005 average peak hour traveler suffered a total delay of 38
hours, a significant increase from 12 hours in 1982, consumed an additional 26 gallons of
fuel and incurred $710 of delay cost (TTI, 2007). America is experiencing a highway
infrastructure crisis.
The crisis is caused by unbalanced transportation demand and supply. Demand on
transportation has grown significantly in the last few decades associated with population
and economic growth, while transportation capacity hasn’t increased accordingly. The
nation’s population grew by 20 percent from 1990 to 2006 and vehicle travel on
highways increased by 41 percent during the same time period, while new road mileage
increased by only 4 percent (TRIP, 2008). Moreover, much of the existing roadway
system is beyond its designed service life. Most segments of the Interstate Highway
System are about 30 to 50 years old; with either concrete or asphalt pavements, they are
getting close to the end of their service lifetime and will need major improvements or
replacements soon (Samuel, 2000). Unfortunately, traditional pay-as-you-go financing
22
method, with motor fuel taxes as the main revenue source, could no longer support the
needed transportation maintenance and expansion since the late 1980s. In the last few
decades, the buying power of motor fuel taxes has been significantly weakened by the
combined effects of inflation, improved vehicle fuel efficiency, increased construction
costs and diversion of road funding to other transportation programs, which consequently
creates a big shortage of transportation finance. At the same time there is tremendous
political and economic opposition to increases in motor fuel taxes to fill the
transportation financial gap.
2.2.1 Motor Fuel Taxes Are Falling Short
Several factors collectively have significantly weakened the buying power of
motor fuel taxes. Firstly, the growth of state and federal fuel taxes didn’t keep up with the
pace of inflation rate. The average rate of inflation since 1957 when the nation started in
earnest to build the Interstate Highway System is 4.098% (InflationData, 2008). As
outlined in Table 2, the average state motor fuel tax stood at 5.7 cents per gallon at that
time; taking inflation into account, it should have been raised to 44.2 cents per gallon by
2009 to simply match the per-gallon buying power of state fuel tax in 1957. But the
actual average state gasoline tax today stands at only 26.6 cents per gallon. The federal
gasoline tax in 1957 was 3 cents per gallon; in order to maintain the equivalent buying
power, it would have to be raised to 23.3 cents per gallon by 2009. But the current federal
fuel tax has stood still at 18.4 cents per gallon for more than a decade. Combining state
and federal taxes, the total fuel taxes would have to be raised by 22.5 cents per gallon, a
23
50 percent increase of current fuel taxes, to simply maintain the equivalent buying power
of fuel taxes in 1957. This is beyond the realm of political possibility and public
acceptance, which will be discussed in detail later in this section.
Table 2: Shortage of Gasoline Taxes in 2009 to Maintain the Buying Power as in 1956
Unit: cents/gallon 1957
rate
Required 2009 rates for the same
buying power with 4.098% of annual
inflation rate
The actual
2009 rates
Shortage
State gasoline taxes 5.7 44.2 26.6 66.2%
Federal gasoline taxes 3 23.3 18.4 26.6%
Total gasoline taxes 8.7 67.5 45 50%
Information source: Highway Statistics, FHWA.
Besides the effect of inflation, the buying power of per-gallon-based motor fuel
taxes has also been eroded by increased vehicle fuel efficiency. The average fuel
efficiency of U.S. passenger car was 13.5 miles per gallon (mpg) in 1970 (Wachs, 2006),
which had been increased to 22.4 mpg by 2006 (RITA, 2007), a 66 percent improvement.
On one hand, the fuel efficiency improvement is highly desirable in response to the
public awareness of energy saving and environmental protection, but on the other hand
this means that gas taxes now bring in far less revenue per mile driven than four decades
ago. Moreover, there is an associated push for “alternative fuels”, including compressed
natural gas, ethanol and electricity. Vehicles powered partially or fully by these energy
sources use the road just as much as regular vehicles, but they are usually levied at a
lower tax rate because of lower fuel demand or sometimes no tax due to government
preferential policy to promote the adoption of energy-saving vehicles. Improving fuel
economy is expected to continue to be a major theme in automobile industry and at
present American cars are looking up to the lead of European cars, striving for 40 mpg.
24
The momentum will no doubt continuously depress the revenues from per-gallon-based
fuel taxes.
Meanwhile the costs of maintaining existing roads and building new roads have
risen dramatically, which is further straining the faltering revenue stream. Majority of the
Interstate Highway System was built between the 1950s and 1980s and many segments
are coming close to the end of their service lifetime. Concrete pavement lasts 30 to 50
years, asphalt pavement has a shorter life, about 30 years, and at the end of that time
pavements crumble and lose their load-bearing capacity (Samuel, 2000). In recent years,
many interstate highways have been reported with severely deteriorated pavements: 33
percent of America’s major roads are in poor or mediocre conditions, many of which will
soon need large-scale improvements or replacements. Besides the increasing financial
needs for maintenance of existing roads, construction of new roads has become much
more expensive than in the Interstate Era. Project planning and design costs have risen
significantly because of the extensive study of alternatives and desire to cope with
environmental and local concerns. It is quite common that 15 to 20 percent of project
costs go to planning, design and relevant project quality supervision (Samuel, 2000).
Moreover, the costs of construction ingredients have been multiple folded since the 1950s.
The Engineering Newsrecord Construction Cost Index, which tracks over time the
average costs in 20 cities of major ingredients in transportation construction, including
labor, steel, lumber and concrete, rose by nearly 850 percent between 1957 and 2005
(Wachs, 2006). Even if improved construction productivity gained during the same time
period is taken into account, highway revenues still have fallen far short in relation to
25
costs. In addition, the increasingly expensive right-of-way acquisition has further
suffocated the possibilities of many new road projects.
Last but not least, other transport programs, such as mass transit, bicycle paths
and ferries, have diverted away a significant portion, around 40%, of highway funding
and further constrained financially troubled highway programs. In response to public
awareness of energy saving, environmental protection and a new lifestyle based on Smart
Growth philosophy, a significant part of transportation funds is being devoted to mass
transit and relevant transport programs to promote mass transit usage and reduce
individual driving. In fact, only 60 percent of motor fuel taxes are being used for
highways and bridges and the remaining 40 percent goes to unrelated uses (Peters,
August 15
th
, 2007). Seeking for energy-saving and environmentally friendly transport
alternatives is desirable for the nation’s sustainable development in the long run, but
diversion of highway funds to other programs at present is pushing road programs into a
tougher situation.
In conclusion, the buying power of motor fuel taxes has been greatly weakened by
the combined effects of inflation, improved vehicle fuel efficiency, increased
construction costs and diversion of road funds to other transportation programs. The per-
gallon-based fuel taxes would have to increase regularly to simply keep up with the
necessary buying power. However they have been rising far more slowly than
transportation financial needs, consequently creating a serious funding shortage. As Table
3 shows, the actual spending on highways and bridges between 1993 and 2004 was 8 to
58 percent short to simply maintain existing transportation system with equivalent user
26
costs of driving, and 65 to 113 percent short to improve highways and bridges to reach
the Maximum Economic Investment Level.
Table 3: Average Annual Investment Requirements versus Current Spending on Highways and
Bridges between 1993 and 2004 (a)
Percent Above Current Spending Spending
Year
Capital Outlay
(billions of
that year
dollars)
Relevant Comparison
Cost to Maintain
Highways and
Bridges
(b)
Cost to Improve
Highways and
Bridges
(c)
1993
39.5
Average Annual Investment
requirements for 1994-2013
compared to 1993 spending
57.5%
112.6%
1995
43.1
Average Annual Investment
requirements for 1996-2015
compared to 1995 spending
21.0%
108.9%
1997
48.9
Average Annual Investment
requirements for 1998-2017
compared to 1997 spending
16.3%
92.9%
2000
64.6
Average Annual Investment
requirements for 2001-2020
compared to 2000 spending
17.5%
65.3%
2002
68.2
Average Annual Investment
requirements for 2003-2022
compared to 2002 spending
8.3%
74.3%
2004
70.3
Average Annual Investment
requirements for 2005-2024
compared to 2004 spending
12.2%
87.4%
(a)
Information Sources: Status of the Nation’s Highways, Bridges and Transit: Conditions and
Performance Report. A biennial report, 1999, 2002, 2004, 2006 reports.
(b)
“Cost to Maintain Highways and Bridges” refers to maintaining equivalent user costs of driving rather
than maintaining pavement conditions.
(c)
“Cost to Improve Highways and Bridges”, also called “Maximum Economic Investment Level for
Highways and Bridges”, indicates a maximum level of investment above which it would not be cost-
beneficial to invest, even if available funding were unlimited.
2.2.2 Difficulty in Increasing Motor Fuel Taxes
Since the new millennium, many have proposed to increase motor fuel taxes to
help fill the transportation financial gap. In early 2004, a bill was proposed by then
Secretary of the Treasury and Secretary of Transportation to increase the federal tax on
gasoline by 5.45 cents per gallon in 2005 and then index it to inflation, with an aim to
27
create a total of $131 billion increase in federal revenue from 2005 to 2014. But the bill
was vetoed by President Bush (Utt, 2004). The most recent attempt to increase gas tax
was made by the congressionally created National Surface Transportation Policy and
Revenue Commission (NSTPRC). In a 2008 report, the commission (NSTPRC, 2008)
recommended raising the federal fuel tax by 25 cents to 40 cents per gallon over the next
five years and thereafter indexing it to the rate of inflation. The increase of motor fuel
taxes is proposed to be included in the 2009 reauthorization of the federal transportation
policy after the current policy, the 2005 Safe, Accountable, Flexible, Efficient
Transportation Equity Act: A Legacy for Users (SAFETY-LU), expires on September
30
th
, 2009. With the current federal fuel taxes at 18.4 cents per gallon of gasoline and
22.4 cents per gallon of diesel fuel, the commission is proposing a staggering 136 percent
to 218 percent increase in motor fuel taxes (Utt, 2008).
Besides the transportation community’s desire for increased infrastructure
investment, an increase in motor fuel taxes is also supported for environmental and
political reasons. Environmental groups and others concerned about global warming
advocate higher fuel taxes to motivate people to drive less, buy fuel-efficient vehicles or
switch to mass transit, which would lead to reduction in oil consumption and greenhouse
emission (Taylor & Doren, 2007). In addition, higher motor fuel taxes are considered as a
strategic step toward America’s “energy independence”. Some economists have called
for a big increase in fuel taxes, as high as 50 cents or 1 dollar per gallon, in order to
reduce oil consumption and lessen America’s dependence on foreign oil. Another version
of the argument is higher U.S. gas prices with a big tax will reduce oil consumption and
28
therefore the oil price, which would help deprive political regimes, such as Venezuela,
Saudi Arabia and Iran, of some of their windfall profits from high oil prices (Poole, 2008).
While many advocate a motor fuel tax increase, others oppose it for a variety of
reasons. First, the public generally oppose tax increases arguing that taxes are too high
already and should be reduced at a time of a global financial crisis, and a higher tax on
gasoline would hurt the poor and lower middle class most (Haines, June 8
th
, 2004).
Secondly Critics and skeptics who suspect the efficiency and equity of today’s
transportation funding system argue that the proposed tax increase would just be a
massive transfer of income and wealth from motorists to a much bigger version of
today’s ill-conceived federal transportation program (Utt, 2008). Currently 37 percent of
motorist-paid fuel tax revenues is diverted from the HTF to projects of no value to the
typical motorists who pay the taxes. For example, at present public transit programs
consume about 20 percent of federal surface transportation spending, however public
transit’s share of passenger transportation is less than 2 percent of the total passenger
transportation and 70 percent of America’s transit riders live in just seven metropolitan
areas (Utt, 2008). Such a small number of riders concentrated in a handful of cities does
not justify spending such a large amount of funding on a service that few would use. An
increase in motor fuel taxes would only exacerbate the already large diversions from the
HTF to the low-priority spending and non-transportation projects.
Furthermore economists argue that while raising motor fuel tax would increase
government revenue, it would only do so at the expense of economic growth, jobs, and
family income. The Center for Data Analysis at the Heritage Foundation conducted a
29
macroeconomic analysis (Hederman & Goyburu, 2004) on the vetoed 2004 transportation
bill which proposed to increase the federal tax on gasoline by 5.45 cents per gallon in
2005 and then index it to inflation with a goal of creating $131 billion increase in federal
revenue from 2005 to 2014. The analysis showed that a motor fuel tax increase would
depress economic activity and the incomes of millions of Americans: 1) Americans’
personal savings would average $8 billion less per year from 2005 to 2014, which means
that the average American family would save $100 less each year because of higher gas
prices, and $82 billion of the $131 billion increase in federal revenue over 10 years would
be financed out of foregone personal savings; 2) Gross Domestic Product would decline
by $6.5 billion per year in real terms from 2005 to 2014, which means the $131 billion
increase in government revenue would shrink the economy by $65.5 billion; 3) there
would be an average of 37,000 jobs lost each year, which works out to one lost job for
every $351,000 in new taxes, equal to 11 years of work at average yearly wages.
Last but not least, in the real world of practical politics, many of those who
actively campaign for office are talking about reducing gas taxes, not increasing them,
which could be seen in the 2008 Presidential Campaign and some statehouses’ proposals
for a summer suspension of gas taxes.
In short, government is unlikely to make a big increase in motor fuel taxes as
proposed by the 2008 NSTPRC report for political and economic reasons, and so
government must look for alternative financial resources for the incoming 2009
reauthorization of federal transportation policy. Tolling and public-private partnerships
30
have been proposed as one of the promising tools to assist states and urban regions to
close the infrastructure funding gap.
2.2.3 Benefits of Toll Financing
Toll financing is believed to be a promising approach to mitigating the current
transportation financial crisis by providing a new revenue stream for highway system.
After a toll road is built, drivers will pay for their direct use of the road and toll revenue
goes to retire the debt used to finance the construction and set aside funds for operation
and maintenance of the road, to subsidize other relevant transport programs, or to be
collected as project investor’s investment return. Hence toll financing could support road
maintenance and provide extra road capacity without further straining government’s
budget.
Besides providing extra road funding, tolling has been proved to be an effective
tool for congestion management (Samuel, 2000; Nash, 2007). Congestion is expensive.
Drivers incur internal congestion costs when spending extra time and consuming more
fuel stuck in traffic. They also impose external congestion costs on other drivers and the
environment by worsening congestion and adding air pollution (Nash, 2007). Tolling
gives people an incentive to internalize their external congestion costs by paying tolls,
reducing travel, or using alternative models. People value time and money differently.
Those who value their time greatly might choose to pay tolls to save driving time and
those who value money greatly might choose to reduce unimportant trips, for example
running errands in a nearby supermarket instead of driving somewhere far away. In this
31
way, the drivers are internalizing the congestion costs they used to impose on other
drivers and the environment by paying tolls or reducing unnecessary trips which
consequently would ease traffic congestion and reduce overall transportation demand.
In contrast, simply building more free roads won’t have the same effect of
congestion management as tolling does, due to the phenomenon of “induced travel”
associated with road expansion. Additional road construction can’t effectively solve
traffic congestion, because it spurs new demand for travel and in the end congestion on
the newly expanded road system might be no better and indeed probably even worse than
before (Nash, 2007). In a widely cited empirical study on the induced travel effects in the
U.S. Mid-Atlantic region, after controlling for other important determinants of travel,
such as population and income, a 10 percent increase in lane miles can result in anywhere
from a 2 to 6 percent increase in total vehicle-miles of travel (Fulton, Noland, Meszler &
Thomas, 2000). It means a significant portion of the travel-time reduction benefit derived
from highway expansion may be lost to increased traffic volume. Of course, the increased
traffic volume might come from “pent up” demand that is now set free by the extra road
capacity, but there is also a possibility the added road capacity “spoils” people to more
heavily rely on roads and make more unimportant trips. Free roads couldn’t differentiate
between necessary traffic volume increase and “spoiled” driving increase, and are
entirely subject to induced travel. But tolling could effectively prevent the added road
capacity from being eaten up by “spoiled” driving increase since drivers would value
trips against tolls to determine the necessity of the trips.
32
Third, besides revenue provision and congestion management, toll roads are also
expected to provide better quality road services because of the self-financing nature of
the roads. Unlike general transportation agencies that rely on legislators for funding and
tend to be responsive to key politicians, toll agencies are inclined to be more customer-
oriented because they live on toll revenues from hundreds of thousands of motorists and
hence are under more pressure to provide good value for money, including quicker debris
removing, faster salting and snow plowing, more efficient motorist assistance patrols,
better maintained signage, lighting, guardrail and the like (Samuel, 2000). A good
example of toll roads’ superior value for money is the fact toll roads are 36 percent safer
than general expressways and 65 percent safer than general roadway. Based on 2005 and
2006 statistics, the fatality rate of toll roads is 5.2 per billion vehicle miles traveled
(pbvmt), comparing to general expressways’ fatality rate of 8.1 pbvmt
(TOLLROADSnews, March 18
th,
, 2008) and the nation’s overall road fatality rate of 14.7
pbvmt (Campbell, 2008). Several factors could explain the greater safety associated with
toll roads. Firstly, toll roads are generally better maintained than free roads. A toll agency
is more focused on maintaining signage and other equipments, salting and plowing snow,
removing debris and other hazardous objects, repairing pot holes and relevant damages,
and doing a host of small things that help reduce the accident rate. Also when there is an
accident, toll roads tend to have faster accident response and clearance times than free
highways, which could contribute to toll roads’ lower fatality rate. In addition, toll roads
have their own revenue incomes and don’t have to rely on appropriations from the
legislature, which gives toll agencies the financial ability to provide better road
33
maintenance and relevant services (Samuel, 2000). In a word, the self-financing nature of
toll roads gives toll agencies better incentives and also financial ability to provide better
quality road services than free roads.
Last but not least, fairness is another strong argument in support of tolling which
should be understood from two perspectives. Firstly toll roads are fair because through
(non-local) traffic, which make no local purchases and therefore pay no gas taxes, would
pay their fair share of road costs. This makes particular sense for toll roads in
geographically small jurisdictions or located near a state border or national border, which
have a large volume of through traffic. A typical example is the twelve-mile toll road of
I-95 in Delaware linking Maryland to New Jersey, where 80 percent of the traffic is out-
of-state through traffic, paying no gas taxes to the state (Samuel, 2000). Without tolls, the
people of Delaware would have to pay for the road’s upkeep largely on behalf of
outsiders.
Another sense of fairness lies in the fact toll roads usually charge variable tolls
based on the number of vehicle axles, meaning heavier vehicles like trucks pay higher
tolls than regular passenger automobiles. Rationale behind the policy is that heavy
vehicles tend to impose more costs on roads than lighter vehicles and that it is fair for
those impose more road costs to pay proportionately (Samuel, 2000). In fact, current
highway charge system centering on motor fuel taxes is doing a poor job reflecting road
costs imposed by heavy vehicles. A major road cost is pavement wear, which is greatly
affected by vehicle weight per axle besides the variables of pavement design, adequacy of
maintenance and free-thaw effect. The most recent Highway Cost Allocation Studies by
34
FHWA (1997, 2000) find that vehicles with large weight per axle are paying much less
than the cost they impose on roads, as outlined in Table 4. Buses pay only 20 percent of
their costs, Single-Unit Trucks over 50,000 pounds pay only 40 percent of their costs, and
Combination Trucks over 80,000 pounds pay less than 50 percent of their costs. In
contrast, relatively lighter vehicles in each vehicle class tend to pay more than their costs,
such as Pickups and Vans, Single-Unit Trucks under 25,000 pounds, and Combination
Trucks under 50,000 pounds. Experts believe the fairest way is to make weight-distance
or axle-weight-distance charges which is already adopted by the Pennsylvania and Ohio
turnpikes. Most toll roads generally charge variable tolls based on the number of vehicle
axles, a way corresponding more closely than motor fuel taxes with the degree of
pavement wear imposed by vehicles. Hence toll roads have greater potential than regular
highways to better reflect roads costs imposed by vehicles, for example through adopting
average-axle-weight tolling policy.
Table 4: Ratios of Federal User Charges to Allocated Costs by Vehicle Class
Vehicle Class/Registered Weight 1997 HCAS Ratios 2000 Updated Ratios
Autos 1.0 1.0
Pickups/Vans 1.4 1.5
Buses 0.1 0.2
Passenger Vehicles 1.1 1.1
Single Unit Trucks
<25,000 pounds 1.5 1.5
25,001 - 50,000 pounds 0.7 0.7
> 50,001 pounds 0.5 0.4
Total Single Unit 0.9 0.9
Combination Trucks
<50,000 pounds 1.6 1.4
50,001 - 70,000 pounds 1.1 1.0
70,001 - 75,000 pounds 1.0 0.9
75,001 - 80,000 pounds 0.9 0.8
35
Table 4 Continued
80,001 - 100,000 pounds 0.6 0.5
>100,001 pounds 0.5 0.4
Total Combinations 0.9 0.8
Total All Vehicles 1.0 1.0
Information Source: Addendum to the 1997 Federal Highway Cost Allocation Study Final Report, May
2000. This table shows estimated Federal equity ratios in 2000 under the current highway user charge
structure and the TEA-21 program structure. Equity ratios estimated in the 1997 High Cost Allocation
Study are shown for comparison.
2.2.4 Concerns Regarding Toll Financing
Double taxation is the greatest concern many people have against tolling.
Motorists argue they already pay for roads through user fees, mostly in the form of motor
fuel taxes, and charging tolls on facilities, especially the ones built and operated with
taxes, constitutes double taxation (Samuel, 2000). This is hardly a valid argument which
can be rebutted from two perspectives. The buying power of motor fuel taxes has been
significantly weakened, user fees paid in this manner are simply not enough to pay for
current road services and hence charging extra fees is necessary. Also heavy vehicles are
paying much less than the costs they impose on roads in the current user charge system
and tolling is an effective way to correct the unfairness by charging user fees in
proportion to the costs vehicles impose on roads.
Another way to explain why tolling doesn’t constitute double taxation is to define
transportation costs as consisting of direct costs of building and maintaining a roadway
and indirect costs of traffic emission, noise and delays imposed by users on the road
system. Motor fuel taxes only pay for direct costs of roadway system and don’t cover the
indirect costs. However when drivers squeeze their vehicles onto already crowded
36
freeways, they could impose surprisingly large levels of additional delay on the vehicles
backed-up behind them. Hence the indirect costs associated with traffic delay, noise and
emission are in fact very significant and shouldn’t be ignored (Wachs, 2006). By
imposing tolls on roadway, drivers are motivated to pay for the indirect costs by either
paying tolls or reducing unimportant trips. Not driving as much as people want and
reducing relatively unimportant trips are considered as costs born by drivers.
A second major concern against tolling is the traffic diversion effect of tolling.
When a free road is converted into a toll road, it might cause traffic diversion, especially
truck traffic, from the toll road to parallel free roads, which may result in more operations
and maintenance costs and increased crash rates associated with use of the free roads
(Penn State Live, 2008). This is a valid concern and has been confirmed by a 2007 study
(Swan & Belzer, 2008) on the truck traffic diversion caused by toll hikes on the Ohio
Turnpike. The Ohio Turnpike substantially increased its tolls by 60 percent during the
1990s to help finance its road improvements and later lowered its rates. This provides
sufficient information to examine the traffic diversion effect of toll hikes. The study
results not only confirm that truck traffic diverts from toll roads to parallel free roads due
to toll hikes but also predict that when toll rates are raised to three times as high as they
are, a 40 percent of truck traffic diversion ought to be expected. Consequently parallel
free roads would become more burdened, their operations and maintenance would be
more expensive and the public sector would have to pay for the extra costs. In addition
the traffic diversion would make parallel free roads more dangerous, causing increases of
crash rates, crash severity and fatalities.
37
2.3 America’s Toll Road Activities
2.3.1 History
Toll roads have had a long history in the U.S., as illustrated in Figure 2:
Figure 2: The History of America’s Highway Development
1792 -1847 was the first Turnpike Era of the eastern states. Before that Americans
had no direct experience with private turnpikes, and roads were financed, built
and managed by town governments. Due to lack of public funding and
inefficiency of three-day mandatory road service, a dozen of eastern states
resorted to private turnpikes, including Connecticut, Maryland, Massachusetts,
New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island,
Vermont and Virginia, and a total of 1562 private turnpikes were built (Klein &
Majewski, 2003). The turnpike incorporations were mainly stock-financed but
weren’t profitable. Major stockholders were farmers and other local residents with
a strong sense of community, and their main reason of buying stock was to
support local development.
In the years 1847 to 1853 the eastern states experienced a boom of plank roads,
which were toll roads surfaced with wooden planks. A total of 1388 private plank
roads were built in over a dozen states to provide well-maintained, short-distance
38
fast transportation. As in the early eastern turnpike movement, investment in
plank road companies came from local landowners, farmers, merchants and
professionals, and these stockholders were motivated less by potential investment
returns than by the convenience and increased trade and development the roads
would bring (Klein & Majewski, 2003).
Between 1850 and 1902, the Far West area experienced its first toll road
movement. Due to a rapidly growing population and booming economy, several
western states faced a strong demand for fast and convenient transportation; but as
administrative government was almost nonexistent at the time, it was left to the
private sector to tackle the problem. California, Colorado, Nevada, Oregon and
Texas together built over 900 private toll roads (Klein & Majewski, 2003). Even
though these private toll roads were clearly profit oriented, there wasn’t enough
evidence to show whether the toll roads of the Far West as a whole was profitable
or not.
With the ideology of “Progressivism” igniting policy reform throughout the
nation, private toll roads began to decline nationwide from the 1890s onwards.
Progressivism, a collectivist ideology, holds that important social affairs should
rely on centralized government planning, be financed by growing taxes, and be
administered by professional experts free of special economic or political interests
(Klein & Yin, June 6th, 1994). By 1910, almost all private toll roads in the nation
had been taken over by government, either state or local, due to the ideological
and policy shift in government.
39
The 1920s marks the beginning of another Turnpike Era in American history.
Different from previous toll road development, this time state governments had
become more financially capable of sponsoring large road projects. A state
government would issue tax-exempt bonds to provide capital for toll projects and
pay back the debt with future toll revenues. State sponsorship made it possible to
raise enough capital to build large projects. Large turnpikes built during that time
period include the New York State Thruway (639 miles), Oklahoma Turnpikes
(567 miles), Florida Turnpike (376 miles), Illinois Tollways (273 miles), Ohio
Turnpike (241 miles), Kansas Turnpike (236 miles), Garden State Parkway, New
Jersey (173 miles), Pennsylvania Turnpike (160 miles) and Indiana Toll Road
(157 miles). Based on incomplete data, at least 26 major toll roads were built as
well as numerous small toll roads and bridges (Samuel, 2000). By now, some of
them have been de-tolled, such as Connecticut Turnpike and Richmond-
Petersburg Turnpike, Virginia, but most still collect tolls.
1956 is the watershed of America’s transportation development, indicating a shift
from tolls to taxes, mainly for the development of the Interstate Highway. The
Federal-Aid Highway Act of 1956 was authorized to build the Interstate Highway
System with newly increased federal motor fuel taxes. The 1950s to 1980s was
the Interstate Era and all toll road activities were virtually stopped except the ones
from the previous Turnpike Era.
40
Since the late 1980s, motor fuel taxes started to fall short of the financial needs of
transportation maintenance and expansion. The passage of ISTEA in 1992 opened
a new chapter for toll financing in American transportation history.
2.3.2 Recent Toll Road Activity
The 1992 Intermodal Surface Transportation Efficiency Act (ISTEA) was the first
federal legislation allowing state and local governments to use tolling and other
innovative financing tools to improve and expand highway infrastructure, and its passage
indicates a comeback of toll road in the U.S. A 2009 FHWA study, Current Toll Road
Activity in the U.S., reports between 1992 and 2008 a total of 235 new toll road projects
have moved into various stages of development, among which 131 are or will be financed
with only public funding, 25 are or will be partially or fully funded with private finance,
another 24 will possibly involve private finance, and the rest 55 are undetermined (Perez
& Lockwood, 2009).
What is noteworthy is in the U.S. there are two types of toll road projects
involving private finance. The first is privately owned toll roads, where a private entity
owns the land a toll road is built on and assumes full ownership-like responsibilities for
road projects including design, finance, construction, operation and maintenance, while
the public sector plays a minimized role in the process. This is often seen in a land
development case, where a land investor/developer builds a toll road in order to provide
convenient access to its land, enhance the land values as well as generate toll revenue to
repay road investment; this type of road is also called a Developer Toll Road. The
41
development strategy has been used in several cases, including four small toll roads in
Alabama (Emerald Mountain Parkway, Alabama River Parkway, Black Warrior Parkway
Bridge and Foley Beach Express) and Poinciana Parkway in Florida.
Another type of project also involving private finance is private toll concession,
where a private entity reaches a contractual agreement with a public authority to design,
finance, construct and operate a toll road for a specified period of time, often as long as
30 to 50 years in the U.S., collect project-generated revenue to repay private investment,
and transfer the facility back to the public sector after the period ends. Two notions need
to be clarified regarding private toll concessions in the U.S. Not only does government
usually retain ownership of a toll facility right after it’s built and during private operation
period, but it also plays a significant role in the private toll concession’s planning,
financing and other project phases. For example in most cases government still makes
significant financial contribution to private concessions with government grants, TIFIA
loans
1
, SIBs
2
, or right-of-way contribution. Secondly even though most of the time a
private sponsor of a toll concession has sole entitlement to project-generated revenue,
1
The Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) is a program to provide
federal credit assistance in the form of direct loans, loan guarantees, and standby lines of credit to finance
surface transportation projects of national and regional significance. TIFIA credit assistance provides
improved access to capital markets, flexible repayment terms, and potentially more favorable interest rates
than can be found in private capital markets for similar instruments. Most surface transportation projects -
highway, transit, railroad, intermodal freight, and port access - are eligible for assistance.
2
State Infrastructure Banks (SIBs) is a credit program that authorizes states to use a portion of their federal
transportation funds to establish infrastructure revolving funds and provide credit assistance to support
certain projects with dedicated repayment streams that can be financed in whole or in part with loans, or
that can benefit from the provision of credit enhancements. As loans are repaid, or the financial exposure
implied by a credit enhancement expires, the SIBs initial capital is replenished and can be used to support a
new cycle of projects. SIBs was first authorized by the National Highway System Designation Act of 1995
(NHS) for ten states and later expended by the Safe, Accountable, Flexible, Efficient Transportation Equity
Act: A Legacy for Users of 2005 (SAFETEA-LU) to all states. SIBs program aims to provide states with
more financing flexibility to meet transportation needs and build projects that may otherwise have to be
delayed or not funded due to budgetary constraints.
42
occasionally a concession would require revenue sharing between the private sponsor and
government depending on each party’s investment in the project and specifics of the
concession contract. In practice, private toll concession has been a more popular way for
government to utilize private finance for toll roads, used in several well known cases
such as Dulles Greenway in Virginia, California 91 Express Lanes and South Bay
Expressway in California.
2.4 Current Findings: Understand Toll Road Development from Public
Management Perspective
Transportation problems could be studied in multiple disciplines, such as finance,
engineering, urban planning and public management. The dissertation takes an interest
from public management perspective in the practice of utilization of private finance in
toll road development, and study what difference the practice makes to transportation
infrastructure. Utilization of private finance for toll roads is an application and reflection
of New Public Management (NPM) principles in transportation. NPM provides a
theoretical foundation to understand and explain the strengths and weaknesses of private
finance involvement in transportation.
NPM “refers to a cluster of ideas and practices that seek, at their core, to use
private-sector and business approaches in the public sector” (Denhardt & Denhardt,
2000). NPM emerged around the mid-1980s in response to the falling of old public
administration, which had been criticized as a broken system of government that was
primarily seen as unresponsive, inefficient, undemocratic and failing in most aspects of
43
being an effective government (Miller & Dunn, 2006). With the goal of remedying the
broken system, several countries have implemented radical and comprehensive public-
sector reforms and started a worldwide NPM movement since the mid-1980s (Behn, 1999;
Box, Marshall & Reed, 2001). NPM has been selectively implemented in each country
based on the place’s particular situation and special needs, and major reforms include
opening government agencies to competition, empowerment, greater privatization,
greater transparency, and a comprehensive accountability mechanism, which all intend to
reform the government into a leaner, increasingly privatized, and highly efficient
government (Behn 2003; Koppell, 2005; Rainey, 1990; Romzek & Dubnick, 1994).
Utilization of private finance in toll road development is a reflection of NPM
principles in transportation in that it not only introduces competition into a public field,
but also privatizes a public service to some extent. First, NPM sees the principle of
“opening government to competition” as a way to approximate an efficient government
because competition helps find the best ideas and the most efficient way of public service
delivery. The principle of competition can at least lead to two types of competitive
behaviors: 1) public agencies and private firms would compete to procure the rights to
deliver public services, and citizens, as customers, would have the opportunity to shop
between competing service providers; 2) agencies within government would compete for
limited public resources (Miller and Dunn, 2006; Rainey, 1990). In toll road development,
with the injection of private finance, the privately-developed roads become competitors
to publicly-developed roads. Even though each road has certain monopoly power due to
44
the uniqueness of its route, but in the long run, utilization of private finance provides an
alternative way to develop toll roads which poses a threat to some public agencies.
Secondly, as one of the most important principles of NPM, privatization is
promoted based on the belief that there should be a “roll-back of the state” with the
private sector providing services where this is more efficient. Under certain
circumstances, privatization could lead to a better service and lower cost for the citizens,
as well as less waste of economic resources, especially if services are being supplied free
or below cost by the public sector (Yescombe, 2007). In toll road development, when
investing in a project, the private investor takes ownership-like responsibility, not only
financing and constructing a facility, but also operating and making profits out of it. The
arrangements to some extent resemble privatization. However, it must be noticed that
there are important differences between privatization and private finance involvement,
which deserves special attention because it might be difficult for the arrangement of
private finance involvement to achieve the same results as privatization. Major
differences include: 1) the public authority remains directly politically accountable for a
project with private finance involvement, but not for a privatized service; 2) for a project
with private finance involvement, ownership of the facility usually remains with the
public sector, whereas a facility becomes permanently privately owned after privatization
(Yescombe, 2007).
In short, the practice of utilization of private finance in toll road development is
an application and reflection of NPM principles in transportation. Hence a study on the
45
practice will add valuable empirical evidence to the broad discussion on the effectiveness
of NPM in a variety of public fields.
2.4.1 Two Development Models of Toll Road
There are two major development models of toll road by project financing: Public
Development Mechanism and Private Finance Mechanism. The Public Development
Mechanism refers to a financing method under which a public transportation agency
funds a project with public funding and has sole entitlement to project-generated revenue.
The defining feature is the toll project receives only public financing, usually tax-exempt
public bonds, and tolls and other project-generated revenue go to retire public debt.
Meanwhile the public agency could choose to either use public in-house work or contract
out work to the private sector for facility design, construction, operation and other phases
of project development. The Private Finance Mechanism refers to a financing method
under which a private entity is authorized to fully or partially finance a toll road and has
sole or shared entitlement to project-generated revenue. As the project sponsor, the
private entity usually also assumes responsibilities for project design, construction,
operation and maintenance; hence the Private Finance Mechanism involves the utmost
private participation.
The concept of Public-Private Partnerships (PPPs) must be embraced into the
discussion of the two toll road development models. PPPs refers to a wide range of
contractual arrangements by which public authorities and private entities collaborate in
the development, operations, ownership and/or financing of a transportation
46
infrastructure project or program. So PPPs could mean different things in different
situations depending on the legal, political and financial features of the relevant project
sponsor (Grote, 2006). The Private Finance Mechanism falls under the concept of PPPs,
and in fact it is the form of PPPs in which the private sector assumes most responsibilities
and makes most contributions. The Public Development Mechanism overlaps with the
notion of PPPs; for example a public authority finances a toll road with public bonds but
chooses to outsource design and construction to a private entity through a Design-Build
(DB) contract is a typical example of using PPPs under the Public Development
Mechanism.
The relationship between PPPs and the two toll road development models is
illustrated in Figure 3. Part A refers to toll roads built under the Private Finance
Mechanism with full or partial private financing. Part B (the in-between tube) consists of
toll road projects that don’t involve private finance but utilize contracting out in design,
construction, operation, maintenance or any other phases of project development. Hence
Part (A+B) (the median circle) contains all projects that use any form of PPPs. Part C (the
outermost tube) refers to toll roads built under the strategy of Direct Public Provision,
where the public sector takes full responsibility for every aspect of project development,
from planning, finance, construction, to operation and maintenance. Direct Public
Provision is a traditional way of infrastructure delivery and a typical example of public
entities conducting direct government provision is the Army Corps of Engineers (Vining
& Boardman, 2008). However this strategy is rarely used in toll road development and in
fact almost all road construction in the U.S. is outsourced to the private sector. Part (B+C)
47
contains all toll projects built without private finance involvement under the Public
Development Mechanism. In conclusion, the Private Finance Mechanism is represented
by Part A, PPPs is the combination of Part A and Part B and the Public Development
Mechanism is the combination of Part B and Part C; hence the Private Finance
Mechanism falls under the concept of PPPs, and the Public Development Mechanism
overlaps with PPPs.
Figure 3: Strategies of Toll Road Development in the U.S.
2.4.2 Comparison of Project Development Frame of the Two Models
The process of toll road development in the U.S. is generally comprised of six
major phases and one optional step (bid), as illustrated in Figure 4:
Figure 4: Major Phases of Toll Road Development in the U.S.
Pre-Planning
&Acquisition
Finance Design Construction Operation &
Maintenance
Bid
Revenue
A: toll roads built under the Private Finance Mechanism
B: toll roads using contracting out
A+B: toll roads with any form of PPPs
C: toll roads built under the Direct Public Provision
B+C: toll roads built under the Public Development
Mechanism
48
1. Pre-Planning and Acquisition. The phase consists of project planning, feasibility
study, environmental review, right-of-way and other permits acquisition.
2. Finance. Who funds a project is a defining feature of the project. In this phase the
relevant project sponsor looks for funding to build and operate a project. Finance
could come from a variety of sources, including government grants, public bonds,
public loans, private equity, private loans and private activity bonds.
3. Design. Specific design of a project could be done by either government in-house
experts or private professionals through outsourcing.
4. Bid. This is an optional step, taking place when a project sponsor seeks a
contractor to construct a project based on ready-to-go design. The sponsor selects
the contractor based on certain criteria, for example “the lowest bidder wins”.
5. Construction. Theoretically this phase could also be done by either government
in-house work or private work through outsourcing. But in practice, actual
construction of road projects has almost all been contracted out to the private
sector.
6. Operation and Maintenance. The phase covers daily operations and periodical
maintenance of a toll facility after it’s put into service.
7. Revenue. Who gets project-generated revenue is another defining feature of a
project. Usually the project sponsor receives revenue to cover operations costs
and retire project debt.
Under the Public Development Mechanism the public sector finances a project
with sources including government grants, public bonds and public loans, and collects
49
tolls and other project-generated revenue to retire project debt. The private sector is not
involved in either Finance or Revenue phases; however private entities could participate
in any one or more of the phases of Design, Construction, and Operation and
Maintenance. As Figure 5 illustrates, Design, Construction, and Operation and
Maintenance, the three aspects could by done by either government in-house work or
outsourced private work. This strategy creates several public-private arrangements: (1)
direct public provision, where the public sector does everything from planning, design,
construction, to operation and revenue collection, without any private involvement; (2)
Design-Bid-Build (DBB) model, a widely used method for project delivery, where the
public sector contracts with separate private entities for each the design and construction
of a project, and holds a bidding process in between; (3) Design-Build (DB) model, a
more advanced project delivery method than DBB model, where the design and
construction aspects are contracted for with a single entity known as the design-builder,
in order to minimize the project risk for the public sector and reduce the delivery
schedule by overlapping the design and construction phases of a project; (4) Asset
Operation and Management model, where the public sector contracts out project
operation and management to a private contractor and pays for the private services based
on public-private agreements.
In contrast, the defining feature of the Private Finance Mechanism is a private
entity provides full or partial project finance and meanwhile is entitled to full or partial
project-generated revenue. Besides Finance and Revenue phases, the private entity could
also participate in any other project aspects, as illustrated in Figure 6. Three facts ought
50
Figure 5: Development Process of the Public Development Mechanism
Figure 6: Development Process of the Private Finance Mechanism
to be noticed. Firstly in the U.S. the public sector still plays a crucial role in the Private
Finance Mechanism, especially in the planning and finance aspects. The private sector is
not capable of doing everything on its own, so the phases of Pre-Planning and
Acquisition and Finance usually involve both private and public sectors. For example
private toll concessions in the U.S. are by far mostly funded with both private investment
and government contribution. Sources of government contribution include right-of-way
Pre-Planning
&Acquisition
Finance Design Construction Operation &
Maintenance
Public Public Public or
Private
Public or
Private
Public or
Private
Bid
Revenue
Public
Pre-Planning
& Acquisition
Finance Design Construction Operation &
Maintenance
Private
&Public
Private
& Public
Private Private Private
Transfer to public sector
after concession ends
Revenue
Private&
Public
Bid
51
contribution, public loans (TIFIA and SIBs), and government grants. Secondly the public
sector is usually not involved in Design, Construction, and Operation and Maintenance of
a private concession, leaving it to the private sector to take full responsibility for the three
aspects. Last but not least, when both public and private sectors invest in a toll project,
usually both parties are entitled to project-generated revenue. A typical example is a toll
concession designates a portion of its toll revenue to support public transit services in the
region besides paying operations costs and project debt services.
2.4.3 Theoretical Debates over the Two Models
Recent academic conversations on toll financing have been largely dominated by
debates over relative effectiveness and efficiency of the two development models of toll
road. Proponents of the Private Finance Mechanism argue the model attracts private
capital and other resources, offers real efficiency gains and shares project risks with
government; however critics cast strong doubt on private finance involvement in toll road
for political, economic and efficiency concerns. Meanwhile scholars have been prompted
to reconsider and reevaluate the conventional Public Development Mechanism in a
comparative manner.
Strengths of the Private Finance Mechanism
Financial pressure in the public sector is the main force driving government to
pursue toll financing as an alternative source of transportation finance; proponents of the
Private Finance Mechanism argue that utilizing private finance for toll road development
52
would keep project financing off government budgets to the utmost extent. Under the
conventional Public Development Mechanism, government would issue tax-exempt
public bonds to raise project capital which would show up in government budget.
However all U.S. states except Vermont have a legal requirement of a balanced budget;
some are constitutional, some are statutory, and some have been derived by judicial
decisions from constitutional provisions about state indebtedness (Briffault, 1996; Snell,
1996).
Besides, most governments perceive that there are political benefits from keeping
large capital projects like highways off government budget (Vining, Boardmand &
Poschmann, 2005). Hence the Private Finance Mechanism is considered desirable by
many governments and the 1991 ISTEA for the first time legally tapped the private sector
as a source for funding transportation improvements and allowed private entities to own
toll roads.
Secondly proponents argue that the Private Finance Mechanism could provide
real efficiency gains. When investing in a toll road project, a private entity often becomes
the project sponsor assuming multiple roles in project development, such as design,
construction, operation or maintenance. With the integration of multiple project phases,
arguably the Private Finance Mechanism could provide infrastructure facility at a lower
cost with higher efficiency, in other words, greater value for money, which primarily
results from superior private sector’s economy of scale and technical efficiency (Frantz
1992).
53
A third argument in support of the Private Finance Mechanism is the risk
reduction on the public sector side which pertains to both project costs and project-
generated revenues. Studies on foreign countries with successful experience in private
concession in infrastructure, for example Britain, find a primary benefit of private
concession is the risk transfer from government to the private sector (UKNAO, 1999;
HM Treasury, 2000). Firstly private concession transfers the risk of project cost overrun
to the private sector. Large public infrastructure projects have often incurred large cost
overruns (Flyvbjerg, Bruzelius & Rothengatter, 2003; Boardman, Mallery & Vining,
1994; USGAO, 2003) and governments end up paying far more than anticipated or
budgeted. Moreover project-generated revenues from these projects have often turned out
to be much lower or more volatile than expectations, which pose more unpredictable
financial burdens on government. Private concession could effectively shift the risks
associated with cost overrun and revenue shortfall to the private sector while the public
sector still receives the desired infrastructure facilities as designated in concession
contracts.
Last but not least, many governments believe that having a private entity collect
user fees would result in less political resistance than having a public agency do so. The
public are more willing to accept that a private investor needs to raise revenue to repay its
debt and make a profit (Vining, Boardmand & Poschmann, 2005), and less willing to pay
user fees to a public agency since they believe they have already paid for public services
through taxes.
54
Oppositions against the Private Finance Mechanism
Even though American government, especially federal government, is generally
supportive of utilization of private finance for toll road development, many scholars and
practitioners are highly suspicious of the Private Finance Mechanism for three major
reasons. The first is a political concern arguing that private finance involvement would
inevitably lead to private control over a key public highway which would result in a
fragmented road network and even affect government control over relevant transportation
policies (Baxandall, Wohlschlegel & Dutzik, 2009).
The second is an economic concern arguing that this model is in fact going to cost
government and the public more money for project construction and operations. A crucial
fact causing this concern is it is more expensive for the private sector to raise project
capital than the public sector because government could raise capital through issuance of
tax-exempt bonds (de Bettignies & Ross, 2004; Enright, 2007). Under the Public
Development Mechanism, state or local governments could issue tax-exempt toll revenue
bonds to fund toll projects and repay the debt with future toll revenues; the privilege of
tax exemption determines that public bonds are relatively cheaper to borrow. In contrast
private investment in toll projects, consisting of private equity, bank loans and private
activity bonds, is subject to dividend requirements and taxation, and hence these toll
projects would have to generate higher rates of return to pay back the extra debt. As a
result a toll road built under the Private Finance Mechanism is likely to charge higher
tolls to repay its expensive investments and a publicly developed toll road is likely to
provide cheaper services and greater value for money.
55
Another fact causing the economic concern for the Private Finance Mechanism is
the inclusion of non-compete and compensation clauses in some private toll concessions
puts the public sector in a very disadvantaged position and might incur huge costs for
government in the future (Baxandall, Wohlschlegel & Dutzik, 2009). With a goal to
protect private investors, a non-compete clause in a concession contract would explicitly
limit the public sector’s ability to improve or expand nearby competing free highways in
order to attract traffic to the privately operated toll road. When transportation demand
grows, this might lead to severe congestion on both the toll road and competing free
roads, as what happened to CA 91 Express Lanes in Orange County, California. When
congestion eventually got out of control, a local transportation authority, Orange County
Transportation Authority (OCTA), had to buy back the toll road from the private investor
for a big price in order to eliminate the non-compete clause and make improvements to
nearby freeways. Since the event of CA 91 Express Lanes, all governments have become
more cautious about non-compete clause; however in place of non-compete clause, many
agreements now include a compensation clause which allows government to improve
competing freeways but requires government to compensate the private investor for
reduced toll revenue. As a result the compensation clause could add significantly to the
cost of project construction and government could potentially not afford to do the
improvement work it would otherwise perform.
The last and probably most controversial concern regarding the Private Finance
Mechanism is an efficiency concern, arguing this model would incur significant
transaction costs which might eat up efficiency gains resulting from superior private
56
sector’s economy of scale and technical efficiency. Transaction costs incurred during the
interaction between public and private entities have always been a great issue concerning
the Private Finance Mechanism. A traditional normative theory argues that for public
projects government ought to seek the mechanism offering the most efficiency and
incurring minimal social costs. The notion of “social costs” refers to the sum of
production costs, transaction costs and negative externalities (Williamson 1975). For
projects using the Public Development Mechanism, production costs will largely
determine the social costs; there could be some transaction costs if the public sector
chooses to contract out project delivery or operation to the private sector, but transaction
costs are expected to be low with internalized decision making (Vining, Boardmand &
Poschmann, 2005). In contrast, in a private toll concession where cross-sectoral activity
dominates the entire project development process, there is expected to be significant
transaction costs in partner searching, negotiation, contracting and almost every other
aspect of project development.
The fundamental cause of transaction costs in the Private Finance Mechanism is
public and private partners have different and sometimes even conflicting organizational
goals and cultures (Teisman & Klijn 2002; Reeves 2003; Trailer, Rechner & Hill, 2004).
Costs associated with partner searching, negotiation, contracting and monitoring all occur
with an aim to seek for the right private partner to serve government’s goals and prevent
opportunistic behaviors at the expense of the public interest. However complexity and
unpredictability of large long-term capital projects like highways make it almost
impossible to write a complete contract to avoid all types of transaction costs. Generally
57
speaking, besides searching, negotiation and contracting costs, transaction costs have
another two major manifestations: risks caused by uncertainty and opportunistic
behaviors.Risks caused by uncertainty is a common form of transaction costs in that
complexity and unpredictability of large capital projects determine contracts are hardly
possible to be complete and the consequent uncertainties generate corresponding risks.
For projects with high asset specificity, high complexity and uncertainty, and low ex ante
competitiveness, like most road projects, transaction costs are likely to be high because
most design work for the projects are not useable for other projects, which incurs high
sunk costs (Williamson 1975; Globerman & Vining 1996; Broadbent, Gill & Laughlin,
2003). The difficulty in managing these uncertainties is greater if the government
initiating the concession has poor contract management skills (Boardman & Hewitt, 2004;
Leiblein & Miller, 2003). Furthermore in practice the private sector would try to transfer
uncertainty-related risks to the public sector or a third party through using a variety of
tools; for example, the private partner could form a stand-alone corporation that is
isolated from its other corporate activities (Vining, Boardmand & Poschmann, 2005), or
limit its equity participation through borrowing government loans such as TIFIA and
SIBs or utilizing third-party debt financing (Roll & Verbeke, 1998).
Opportunism is another form of transaction costs often seen in private
concessions. The relationship between the partners is longer term and more complex than
in conventional contracting-out situations. Given the nature of road infrastructure projects,
there is a significant possibility for opportunism to emerge, especially from the private
sector side, and government might find itself held up in a disadvantaged position. For
58
example, most of the time government wouldn’t replace an inefficient or irresponsible
private partner because it is generally much cheaper for the initial private partner to finish
the project than to bring in a new one. The situation could get worse if the project
happens to be well publicized or under a political and media microscope, and government
wouldn’t be able to stop it even if the project is falling (Ross & Staw, 1993). Also there
could be an escalation of commitment, where the private sector understands government
is committed to continuing the project regardless of escalating costs, and then takes
advantages of it to force government throw good money after bad (Vining, Boardmand &
Poschmann, 2005). Furthermore after a toll road opens to traffic, the private investor
might conduct opportunistic behaviors to maximize its profits at the expense of the public
interest because it perceives government wouldn’t close down a road under any
circumstance.
Reevaluation on the Public Development Mechanism
Due to the concerns with the Private Finance Mechanism, many scholars and
practitioners cast strong doubts on continuing privatization of toll roads and start to
reevaluate desirability of the conventional Public Development Mechanism. A main
argument in support of the conventional model is in the U.S. low-cost, tax-exempt
financing is available to the public sector. Comparing to a project under the Private
Finance Mechanism, a toll project developed under the Public Development Mechanism
is likely to provide cheaper services and greater value for money due to cheaper capital
raised through issuance of tax-exempt bonds. Also ideologically publicly developed and
managed toll roads are more inclined to serve the public interest instead of purely
59
focusing on profit maximization as a private investor does. In addition, public toll roads
are less likely to fragment the roadway system and instead they tend to closely follow
government guidance and meet government requirements to maintain the integration of
transportation system.
Nevertheless there are several persuasive criticisms against toll road development
by the public sector, all of which challenge the institutional setting of public
transportation agencies. The first one questions institutional capability of state or local
toll authorities, arguing that a particular toll agency is only able to operate within a single
jurisdiction which precludes the efficiency gains from diversity and economy of scale.
For example a state turnpike is unable to operate across state lines and only allowed to
develop turnpikes within the state; in other words, all its eggs are in one basket. In
contrast, private companies might have a portfolio of projects in many locations and
could achieve significant efficiencies through operating nationally and internationally. A
downturn in one project’s revenue would likely be offset by stronger financial
performance from projects in other locations, allowing the company to carry the
financially troubled project through bad years without the large reserves or coverage
ratios required by the public bonds’ rating agencies. Another criticism questions
institutional management of public toll agencies. Private companies are able to hire and
retain experienced management professionals, whereas in a public authority the chief
executive is likely to be changed with every change in political administration (Samuel &
Segal, 2007). Also many chief executives of public toll authorities come to the job with
no toll road experience and are forced to make decisions in ignorance of the industry.
60
With the top position guaranteed to a politician, it is difficult to retain experienced
professionals because they are discouraged from making a career of toll road
management. A third criticism concerns institutional integrity of public toll agencies. The
belief that a public toll agency is solely concerned with the public interest and with its
customers is quite idealized and naïve in that it is also concerned with the careers,
incomes, and power of its managers and staff. In fact some public turnpikes have long
been accused of using power to reward friends and allies with jobs and contracts at the
expense of merit-based selection (Samuel & Segal, 2007).
2.5 Summary
Throughout the literature review it is clear that since the comeback of toll roads in
the U.S. starting the late 1980s, scholars and practitioners have generated a large and
diverse literature on toll financing, among which two groups of studies are of particular
importance to this dissertation. The first group is focused on the necessity of toll
financing in current transportation development. Practitioner-researchers who work at the
frontier of transportation truly understand the urgency of the on-going transportation
financial shortage, and hence their studies stress on understanding the falling
transportation finance and searching for new financial resources. Tolling is considered
one of the most promising innovative finance tools with a great potential to provide new
transportation capacity and ease government budget constraints, as well as manage
congestion problems. The second group of studies examines the utilization of Public-
Private Partnerships (PPPs) in toll road development. Theory-oriented scholars apply
61
public management knowledge to transportation field, examining how public and private
entities could collaborate in the development, operation, ownership or financing of toll
road projects, and more importantly how PPPs could affect the projects’ efficiency.
Recently a new emphasis of the management studies has been put on using
private finance for toll road development. This approach arguably can keep project
capital off government budgets, gain real private efficiency and reduce political risks
associated with tolling public facilities. The studies are still in the preliminary stage,
mainly providing simplified managerial and legal guidance to state or local governments
on the formation and execution of toll projects with private finance involvement.
Discussion in these studies is largely theoretical with exception of a few empirical case
studies. Meanwhile the current transportation finance shortage is not expected to be
solved any time soon and private finance offers a great potential to overcome government
budget constraints. Hence there is a great need for an immediate study to systematically
examine the Private Finance Mechanism in toll road development.
62
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Chapter 3: Determinants of Utilization of Private Finance in
Toll Road Development
Scarce attention has been devoted to the empirical factors determining the use of
private finance for toll road activity. The existing literature has often focused on the
trade-offs between public and private financing and the economic and managerial
implications of utilization of private finance (Frantz 1992; UKNAO, 1999; HM Treasury,
2000; Vining, Boardmand & Poschmann, 2005). The lack of scholarly attention has left
many basic questions unanswered. Is there an identifiable pattern of decision making of
utilization of private finance for toll road projects? What are the factors affecting the
private finance decision? Why are some states able to attract more private investments
than others? Do other public infrastructure arenas utilize private finance in the same way
as toll roads?
To author’s best knowledge, this project constitutes the first empirical attempt to
analyze the determinants of private finance involvement in America’s recent toll road
development, using a data set on toll road activity in the U.S. between 1992 and 2008.
Based on the existing Public-Private Partnerships (PPPs) and toll road literature, the
study develops a decision-making model of utilization of private finance in toll road
activity, which considers influences of seven channels of factors, taking into account
different incentives and constraints in both the public and private sectors. These channels
are state demand for road capacity, state debt situation, state political ideology, state PPP
72
legislation, state turnpike experience, state market conditions and project specific
attributes. This chapter is organized into four sections. After introducing the current
practices and previous studies on private development of toll roads, the chapter presents
the decision-making model. Then the author empirically explores the model using data on
toll road activity in the U.S. between 1992 and 2008. The chapter concludes with a
discussion of the implications of the results for the determinants of private finance
involvement in toll road projects in the U.S. in particular and our understanding of private
investment in public infrastructure in general.
3.1 Practices and Studies
3.1.1 Current Practices
A toll road, also known as a tollway, turnpike, pike, or toll highway, especially if
it is constructed to freeway standards, is a road paid for partly or wholly by fees collected
from travelers for using the road. Toll roads once were a major form of overland
transportation in the U.S. until the passage of the Federal-Aid Highway Act of 1956
which launched the Interstate Highway System, primarily financed with federal motor
fuel taxes. Tolls were explicitly forbidden on the interstate system except for toll
expressways already in operation or almost completed at the time the 1956 legislation
was enacted (Gómez-Ibáñez & Meyer, 1993). By the end of the Interstate Era (around the
late 1980s), the buying power of motor fuel taxes began to erode and the pay-as-you-go
financing policy could no longer support necessary maintenance and expansion of the
73
transportation system. The passage of the Intermodal Surface Transportation Efficiency
Act of 1991 (ISTEA), which allowed the combination of federal, state, local, private and
toll funding into public-private funding partnerships to improve and expand highway
infrastructure, opened a new chapter for toll financing in the country (FHWA, 2002). It
was the first federal legislation in recent American history that identified the private
sector as a source for funding transportation improvements and entitled the private sector
to own toll roads.
Since the passage of ISTEA, a total of 230 new toll road projects have moved into
various stages of development between 1992 and 2008, according to a 2009 study
commissioned by FHWA (Perez & Lockwood, 2009) and author’s further research of the
official website of each state’s department of transportation. What is noteworthy is these
230 projects are projects that have provided or will provide new toll capacity and
therefore don’t include the lease of existing public toll roads to private operators, such as
the Chicago Skyway and the Indiana Toll Road. These projects can be sorted into two
groups by financing method: projects developed under a Public Development Mechanism
(PDM) and projects developed under a Private Finance Mechanism (PFM). The key
feature that differentiates between the PDM and the PFM is “where the money comes
from and goes.” Under the PDM, a public transportation agency finances a project with
only public funding such as government grants, public bonds, SIB loans and TIFIA loans,
and enjoys sole entitlement to project-generated revenues and uses them to repay the
project debt after covering operation and maintenance costs. The private sector which
normally wouldn’t be involved in either direct project financing or revenue sharing, could
74
participate in project design, construction, operation or other aspects of project
development according to contracts between the public sponsor and private contractors.
In contrast, the PFM refers to a financing mechanism under which a private entity
is authorized to fully or partially finance a toll road, and meanwhile has sole or shared
entitlement to project-generated revenues. As the project sponsor, the private entity
usually also assumes responsibilities for project design, construction, operation and
maintenance; hence the PFM involves the utmost private participation. What is
noteworthy is in practice the PFM could lead to two types of toll roads: privately owned
toll roads and private toll concessions. For the former, a private entity owns the land a toll
road is built on and assumes full ownership-like responsibilities for the road project
including design, finance, construction, operation and maintenance, while the public
sector plays a minimized role in the process (TOLLROADSnews, February 12
th
, 1998).
This is often seen in a land development case, where a land investor/developer builds a
toll road in order to provide convenient access to its land, enhance the land values as well
as generate toll revenues to repay road investment. Therefore this type of road is also
called a developer toll road. The strategy has been used in several projects, including four
small toll roads in Alabama (Emerald Mountain Parkway, Alabama River Parkway,
Black Warrior Parkway Bridge and Foley Beach Express) and the Poinciana Parkway in
Florida.
A toll concession is another type of PFM which can use different models, such as
Build-Transfer-Operate (BTO) and Design-Build-Finance-Operate (DBFO), depending
on the specific partnership arrangements. In a toll concession, a private entity receives a
75
concession from the public sector to finance, design, construct, and operate a toll facility
for a specified period, often as long as 30 to 50 years in the U.S., collect project-
generated revenues to repay private investment, and transfer the facility back to the
public sector after the period ends (ACT, 2007 I). Two important notions need
clarification. First, not only does government usually retain ownership of a toll
concession right after the facility is built, but it also plays a significant role in planning,
financing and other aspects of the development of a concession. For example in most
private toll concessions built thus far, the public sector has made significant financial
contribution to projects through grants, TIFIA loans, SIB loans, or right-of-way donation.
Secondly, even though the private sponsor of a toll concession often enjoys sole
entitlement to project-generated revenues, some concessions include revenue sharing
agreement between the private sponsor and the public sector depending on each party’s
contribution and the contract specifics. A typical example is I-394 MnPASS in Minnesota,
a High Occupancy Toll (HOT) concession, which is required to, after paying private
sponsor’s operations costs, spend 50 percent of its toll surplus for capital improvements
in the corridor where the tolls apply and give the other 50 percent to the metropolitan area
council for bus transit improvements (TOLLROADSnews, November 7
th
, 2003). By and
large, private toll concession has been more popular than the developer toll road strategy,
used in several well known cases such as Dulles Greenway in Virginia, CA 91 Express
Lanes and South Bay Expressway in California, and I-394 MnPASS in Minnesota
mentioned above.
76
Overall, among the 230 toll road projects between 1992 and 2008, 134 are or will
be developed under the PDM with only public funding; 27 are or will be developed under
the PFM, funded partially or fully with private funding; another 21 will possibly involve
private finance; and the remaining 48 are undetermined.
3.1.2 Previous Studies
Most of the attention of the literature on the private development of toll roads has
focused on the trade-offs between public and private financing and the economic and
managerial implications of utilizing private finance. Only a few studies have paid
attention to the determination of private investment in the general field of transportation,
which provide valuable insights and lay a foundation for this research. To summarize,
previous studies suggest that three aspects are of particular importance to the decision of
utilizing private investment in transportation: government constraints, social environment,
and project characteristics.
By government constraints, Gómez-Ibáñez and Meyer (1993) explain that
infrastructure development with private funding, which they call infrastructure
privatization, is often motivated by a desire to tap new funding sources to supplement the
constrained resources of the public sector. “Usually the primary concern is that the public
sector simply does not have the financial resources to build the infrastructure needed
(Gómez-Ibáñez & Meyer, 1993)”. Since infrastructure can often be supported by user
fees, privatization offers the potential for providing infrastructure without overt increases
77
in taxes, which is particularly appealing to the public sector when it faces considerable
taxpayer resistance or is unable to timely finance badly needed facilities.
Secondly, Hammami et al. (2006) argue that the social environment, including
market, legal and political conditions, is the key determinant of private investment in
transportation, based on the evidence from developing countries. Transportation
infrastructure PPPs are determined by both market size and market demand, and
countries with large markets and high demand for transportation infrastructure tend to
have more private investments. Also, they stress the role of a well developed legal system
as particularly important for the prevalence of transportation PPPs, because strong rule of
law and low level of corruption provide the stable institutional and legal frameworks
required by the investors in PPP arrangements. This finding is consistent with Gómez-
Ibáñez and Meyer’s (1993) observation that it is more difficult for developing countries
to attract private investments because their political and regulatory traditions are not as
well developed or understood as those of developed countries, and political and
regulatory risk is substantially higher for projects in the developing world. In addition,
Hammami et al. (2006) find political dynamics also plays a substantial role: ethnically
fractionalized societies with center-left governments tend to have more private
investments in transportation. It is believed that ethnically divided countries require a
larger number of public infrastructure and services due to various needs of different
ethnical groups and center-left governments are more likely to respond to these various
needs and pressures (Alesina, Baqir & Easterly, 1999).
78
Lastly, de Bettignies and Ross (2009) argue that two project characteristics,
project scale and profitability, are crucial determinants of private investment in
transportation, based on their theoretical financing model. Private developers are more
likely to engage in projects requiring smaller capital outlays with higher expected returns,
because the possibility of strategic default by the developer determines it can only
commit to smaller debt repayments and therefore can only find lenders for projects
requiring smaller capital outlays with higher expected returns.
However, it is unlikely that any of these forces is the sole determinant of private
finance involvement in toll road activity. Some integration of political and economic
factors is likely at work in almost all cases (Graddy & Ye, 2008), and therefore a new
model is needed to comprehensively consider and integrate these factors and explore their
relative importance in the context of toll road development. Hammami et al. (2006) take
an important step in their development of a descriptive model for the determination of
PPPs in infrastructure across developing countries, considering government constraints
and legal and economic conditions. The paper continues this effort to build a model for
the determination of private finance involvement in toll road development.
3.2 Model Development
With a goal of answering the question “what factors determine the utilization of
private finance for a toll road project”, a decision-making model is developed to illustrate
how the public sector chooses between a PDM and a PFM for a toll road project under
79
the influences of seven channels of factors. As illustrated in Figure 7, the seven channels
consist of: (1) State Demand for Road Capacity, (2) State Debt Situation, (3) State
Political Environment, (4) State PPP Legislation, (5) State Turnpike Experience, (6) State
Market Conditions, and (7) specific Project Attributes.
This effort is guided by two assumptions. First, toll road activity is examined in a
state-level context based on the belief that state government is the main body making
transportation planning decisions and a state is the macro environment within which a
decision of a road project is often made. Hence the first six channels of factors are all
state-level factors, while Channel 7 contains specific project factors. Second, the model is
titled “the Public Sector’s Decision Whether to Involve Private Finance” without
Figure 7: The Public Sector’s Decision Whether to Involve Private Finance
7. Project
Attributes:
Time/Scale/
Type/
Sponsor
6. State
Market
Conditions
5. State
Turnpike
Experience
4. State PPP
Legislation
3. State
Political
Environment
2. State Debt
Situation
1. State
Demand for
Road
Capacity
Decision
whether to
Involve
Private
Finance
80
specifying a public agency; the reason is, even though a state Department of
Transportation (DOT) is usually the common decision maker of toll road projects in most
states, some states also authorize regional transportation agencies (for example California)
or specially established turnpike authorities (for example Florida) to develop toll roads.
In fact the author believes that “who” acts as the lead sponsor of a toll road project is a
crucial factor influencing the decision whether or not to involve private finance.
Therefore project sponsorship will be examined as one of the project attributes in
Channel 7.
3.2.1 Channel 1: State Demand for Road Capacity
Main driving force behind transportation development is the need to boost
economic development and serve the associated population growth. According to the
neoclassical growth theory, land, capital, and labor are the three basic inputs that produce
outputs (Eberts, 1990 &1994; Boarnet, 1997; Dalenberg & Partridge, 1997). As a type of
capital, highway’s impact on economic and population growth could be understood from
three perspectives. First, highway infrastructure could be considered as an input into the
production process via a production function, and as the level of highway infrastructure
increases, both productivities and outputs also increase. Second, highway and other
public infrastructure can influence regional growth by improving the productivity of
other inputs, for example labor. Third, public infrastructure can also be understood as a
household amenity factor to attract workers. In a word, highways, as well as other public
81
infrastructure, boost economic growth by increasing productivities and promote
population growth by attracting firm owners and labor migrants.
The theory suggests that states that have experienced fast economic development
or population growth since the late 1980s are more likely to have had high demand for
highway network expansion. Given the reality that all state governments are facing some
level of financial constraints and can’t provide unlimited public funding for
transportation infrastructure expansion, it suggests that these states are more likely to
resort to private finance for transportation. The following hypothesis could be derived
from this argument:
H1: States with high demand for road network expansion, caused by fast
economic development or population growth, are more likely to utilize private funding
for toll road development.
3.2.2 Channel 2: State Debt Situation
Under the demand for road expansion, the first thing government needs to
consider is how to finance it. Over the past several decades the buying power of motor
fuel taxes has significantly decreased and can no longer fund necessary highway
maintenance and expansion, while states’ debt situation might constrain the issuance of
government bonds to fund transportation. Private development of transportation with
private funding allows the public sector to consider otherwise unaffordable projects, and
helps fill the infrastructure gap between what government can afford and what people
need (Hammami, Ruhashyankiko & Yehoue, 2006; Kopp, 1997). Moreover utilization of
82
private finance would enable the public sector to allocate limited public financial
resources to other worthy but less commercially viable projects (Williams, 1992).
The theory suggests states in a serious debt situation are less likely to issue public
bonds for transportation and tend to be more open to private investment so that they
could afford otherwise unaffordable projects and allocate limited public funding to other
important programs. The following hypothesis is derived from this argument:
H2: States in a serious debt situation are more motivated to engage in utilizing
private finance in toll road development.
3.2.3 Channel 3: State Political Environment
Political ideology has always had a significant influence on government policy
making. In the U.S., two prevailing political ideologies are Conservatism and Liberalism.
The former influences government’s policies with a core belief that the self interest of the
private sector leads to superior production efficiency and therefore free market is the best
way to prosperity. A key notion promoted by American Conservatism is “big market,
small government” (Crane, 2004; Ehrman, 2005), which supports expanding market
scope, utilizing private resources for the public sector and even privatizing public
services and facilities, and at the same time opposes extensive government intervention in
and regulation of the market. In contrast, American Liberalism influences policies with a
belief that the private sector is self-interested and ought to be strictly regulated by
government in order to serve and protect the public interest (Fried, 2008; Rorty, 1997).
Hence liberal political theory supports extensive government intervention and strong
83
regulation in market and is very cautious about privatization of public services and
facilities.
The theory suggests that, in states with conservative political ideology,
governments tend to be more open to market force and more willing to utilize private
resources for provision of public services and infrastructure, and people tend to support
competition in free market and therefore be more willing to pay for high quality public
services. In contrast, in states with liberal political ideology, both governments and
people are more likely to hold the belief that public services, especially crucial public
infrastructure services, should be provided by government through taxation, and
privatization of public infrastructure is a suspicious way for the private sector to expand
profit margin at the expense of the public interest. The following hypothesis could be
derived from the arguments:
H3: States with conservative political ideology are more likely to engage in
private development of toll roads using private funding than states with liberal political
ideology.
Another important factor building political environment is the power of public
employees because public employees and their unions could affect state and local
governments’ policies through their strong interest and involvement in politics (Ferris &
Graddy, 1994; Zax & Ichniowski, 1998). As an influential group directly affected by
private development of public infrastructure, public employees are expected to oppose
private finance involvement due to the introduced competition of the private sector in
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jobs, productivity and pay rates. The following hypothesis could be derived from the
argument:
H 4: States with powerful public employees (in terms of size) are less likely to use
private funding for toll road development.
3.2.4 Channel 4: State PPP Legislation
Well developed PPP legislation is of critical importance to successful utilization
of private finance in toll road activity. Private development of toll roads is a form of PPPs
which involves utmost private participation, and its formation, operation and
sustainability depend critically on the regulatory environment which is shaped by
relevant PPP legislation (Hammami, Ruhashyankiko & Yehoue, 2006). PPP legislation
could decrease uncertainties of government regulation and increase the chances of
success for PPP projects. Hence strong and effective legislation is important to attracting
external private finance and securing PPP arrangements (Pistor, Raiser & Gelfer, 2000).
A 1992 Reason Foundation survey on major engineering and construction firms and
investment banking firms found that the developers and the financiers seem to believe
“having private tollway legislation” is the third, out of ten, most important factor in the
success of PFM toll road projects, right after the factors “having strong local political
support” and “having minimal environmental problems” (Poole & Guardiano, 1992). The
following hypothesis could be derived from the argument:
H 5: States with strong and effective PPP legislation are more likely to attract
private finance for toll road development.
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3.2.5 Channel 5: State Turnpike Experience
Experience is the best teacher. States’ toll road experience from the Turnpike Era
between the 1920s and the 1960s could be an indicator of states’ capability to develop
public toll roads. By 1910 all private toll roads built during the 19
th
century were taken
over by the public sector due to the political campaign of Progressivism. Starting the
1920s, many state governments began to build public turnpikes to provide fast, high
quality roads financed through issuance of tax-free municipal revenue bonds. The
Turnpike Era expanded from the 1920s to the 1960s until the launch of the Interstate
Highway System. Today many turnpikes built back then are still in operation (Samuel,
2000). The experience from the Turnpike Era provides valuable lessons and knowledge
on how to develop public toll roads through issuance of municipal revenue bonds, which
would likely benefit state governments in recent toll road development. The hypothesis
could be phrased as:
H 6: States with affluent turnpike experience from the Turnpike Era between the
1920s and the 1960s are more capable of developing public toll roads through issuance
of municipal revenue bonds, and less likely to resort to private finance.
3.2.6 Channel 6: State Market Conditions
The factors discussed above are mainly from a government perspective, focusing
on the public sector’s willingness and capability to utilize private funding for toll road
development. Another critical channel of factor indispensable to the formation of PPPs is
the private sector’s willingness to engage in transportation infrastructure development.
86
Infrastructure projects generally have high upfront costs and often need time to generate
revenues, which means the commercial risk of such projects is quite high (Hammami,
Ruhashyankiko & Yehoue, 2006). Moreover the U.S. already has the world’s most
advanced and extensive free highway system and toll roads are usually considered luxury
services for wealthy people. Hence certain market conditions indicating good profitability
is of critical importance to attracting private investors. These market conditions include
great demand for the infrastructure to be provided and strong purchasing power of
potential consumers. Demand for infrastructure has been discussed in Channel 1, and
here the focus is on the purchasing power of potential consumers, which refers to
people’s ability to pay market prices for service. Arguably infrastructure services
provided to wealthier consumers would be more profitable and allow a faster investment
recovery, and hence appear to be more attractive to private investors. The argument could
lead to a hypothesis that:
H 7: States with wealthier residents are more likely to attract private investment
in toll road development.
3.2.7 Channel 7: Project Attributes
Last but not least, the feasibility of private development of a particular toll road
project also depends on the given project’s characteristics. Firstly, the timing when a
project is initiated is expected to be a crucial determinant because a specific period of
time is always associated with certain social, political and economic conditions under
which project decisions are made. As time goes by, social, political and economic
87
conditions change which would be reflected in project financing decision. ISTEA in 1991
was the first federal-level legislation to promote private development of toll roads and
about the same time several states passed PPP legislation authorizing pilot projects to
experiment with private toll roads. In the past two decades, attention towards private
development of transportation has substantially increased and relevant political and
academic discussions have clearly intensified. This leads to the following hypothesis:
H 8: As time passes by, later initiated toll road projects are more likely to involve
private finance than early developed projects.
Also, specific attributes of toll road projects, such as project scale and project type,
are expected to have significant influence on the decision of private finance involvement
based on the belief that private investors/developers are only interested in certain projects
due to their profit motives and financial constraints. For example de Bettignies and Ross
(2009) argue that private developers tend to engage in projects requiring smaller capital
because their lenders are only willing to provide limited capital outlays with high
expected returns. The following hypothesis is inspired by the argument:
H 9: Small-scale toll road projects are more likely to attract private investment
than large-scale projects.
Project type is expected to be another important determinant because it is
associated with project complexity and cost, easiness of acquisition of land and
environmental permit, and time length of facility construction. Toll road projects could be
sorted into three categories: Greenfield projects, Brownfield projects, and HOT related
88
projects
3
. Greenfield projects require project sponsors to start from scratch, covering
original project design, land acquisition, environmental study and facility construction,
while Brownfield and HOT related projects are usually built on existing roads, expected
to less complicated in design, land, environmental issues and other aspects of project
development. Hence theoretically the public sector would prefer using private
development for Greenfield projects since they are more expensive, difficult and time-
consuming, and develop cheaper, easier Brownfield and HOT projects in-house. The
following hypothesis could be derived from this argument:
H 10: Greenfield projects are more open to private finance than Brownfield or
HOT related projects.
In addition, who is the lead sponsor of a project is also expected to be an
important determinant. Besides state DOTs as the common decision maker of toll road
projects in most states, in some states, private entities, regional transportation agencies, or
specially established turnpike authorities also sponsor toll road projects with or without
state DOTs’ involvement. Due to their own missions, responsibilities and capability,
different sponsors are expected to have very different understandings about utilization of
private finance which would be reflected in project financing decision. The following
hypothesis is derived from this argument:
3
This classification is a reorganization and simplification of Perez and Lockwood’s (2009) classification.
For maximum clarity, Perez and Lockwood sorted toll-road-related improvements into twelve categories:
New Greenfield Centerline Mile Toll Roads; New Greenfield Centerline Mile Extensions; New Greenfield
Centerline Mile Express Toll Lane (ETL) Projects; Replacement Centerline Mile Improvements; Toll Road
Widenings to Accommodate Rail; Toll Conversions; Widenings; ETL Widenings; High Occupancy Toll
(HOT) Lane Conversions; HOT Conversion and Widenings; HOT Widening, Conversion and New
Centerline Mile Improvements; and HOT Widenings.
89
H 11: Project sponsorship is expected to influence the decision of private finance
involvement.
To summarize, the study develops a decision-making model of utilization of
private finance for toll road activity. The decision whether or not to utilize private finance
is made within a structure which considers societal needs, government’s financial
pressure and political environment, the private sector’s willingness, and specific project
characteristics.
3.3 Data and Empirical Methodology
3.3.1 Dependent Variable
The model of private finance involvement is applied to toll road activity in U.S.
states
4
between 1992 and 2008. The dependent variable is the public sector’s decision to
use private finance for a given toll road project, denoted as “Private Finance
Involvement”. The main data source is a 2009 study, Current Toll Road Activity in the
U.S. – A Survey and Analysis, commissioned by FHWA (Perez & Lockwood, 2009). This
dataset contains considerable information of toll road projects that have moved into
various stages of development since the 1991 ISTEA, including project name, location,
current status, cost, size, type and lead sponsor. Meanwhile author did comprehensive
internet research to check information consistency, update changes, add missing projects
and eliminate recently cancelled projects. Main internet sources include websites of each
4
Puerto Rico and other U.S. possessions are excluded from the study.
90
state’s department of transportation, TOLLROADSnews.com, and major law firms that
have been actively involved in toll road PPPs such as Mayor Brown LLP and Nossaman
LLP. The resulting dataset contains 155 toll road projects with all needed information
5
,
among which 128 are or will be developed under the Public Development Mechanism
(PDM) funded with only public funding; 27 are or will be developed under the Private
Finance Mechanism (PFM), partially or fully funded with private funding. What is
noteworthy is, among the 27 PFM projects, only nine have been confirmed to be fully
privately financed and they are all small-to-medium scale projects: seven of them have a
capital size of less than 100 million dollars and the other two are between 100 and 350
million dollars. It means most PFM projects receive a portion of their capital from the
public sector. Even though this study won’t subcategorize these PFM projects due to the
small sample size, this interesting phenomenon deserves more attention in the future and
will help us better understand the financing structure of PFM projects. In data analysis,
the dependent variable “Private Finance Involvement” is a binary variable, assuming a
value of 1 when a toll road project involves private finance and 0 otherwise.
State toll road activity is summarized in Table 5. Not all U.S. states have built toll
roads in the past two decades; in fact only 23 states have built at least one toll road, nine
of which have utilized private finance. What is noteworthy is that toll road projects
appear to concentrate in a few states. Texas, Florida and California together developed
102 toll roads, 63 percent of all projects in the country. Meanwhile projects using private
finance concentrate in Virginia, Texas, Alabama, and Florida; these four states developed
5
The final dataset excluded projects with possible private finance involvement or undetermined financing
decision, or missing crucial information. In fact six confirmed PDM projects were excluded due to the lack
of cost information.
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20 out of 27 PFM projects. A high concentration of toll road projects in a handful of
states might cause difficulty in examining the impact of state factors on the decision of
private finance involvement since many projects are done in the same context. The fact
needs special attention in data analysis.
Table 5: Summary of Toll Road Activity by State between 1992 and 2008
State
Projects Involving
Private Finance
Projects with Only
Public Funding
Total Project
No.
Percentage
of U.S. Total
Alabama 4 0 4 3%
Arkansas 0 1 1 1%
California 3 14 17 11%
Colorado 1 4 5 3%
Delaware 0 2 2 1%
Florida 4 26 30 19%
Georgia 0 1 1 1%
Illinois 0 6 6 4%
Kansas 0 1 1 1%
Louisiana 0 2 2 1%
Maine 0 2 2 1%
Maryland 0 1 1 1%
Minnesota 1 1 2 1%
Mississippi 1 0 1 1%
New Jersey 0 2 2 1%
North Carolina 0 2 2 1%
Oklahoma 0 3 3 2%
Pennsylvania 0 6 6 4%
South Carolina 0 2 2 1%
Texas 5 44 49 32%
Utah 1 3 4 3%
Virginia 7 2 9 6%
Washington 0 3 3 2%
(23 states) 27 (9 states) 128 (21 states) 155 (23 states) ----
17% 83% ---- 100%
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3.3.2 Independent Variables
In general, the model contains two types of independent variables: state variables and
project variables. The former measures state road demand (Channel 1), state debt
situation (Channel 2), state political environment (Channel 3), state PPP legislation
(Channel 4), state turnpike experience (Channel 5), and state market conditions (Channel
6). Project variables in Channel 7 measure specific characteristics of each project,
including project initiation time, scale, type, and sponsorship. Table 6 summarizes all
variable definitions and data sources. Please note that the data collection process starts
with Channel 7, because initiation time of a project is a crucial determinant of many other
factors. Variables measuring state road demand, debt situation and market conditions are
expected to be highly time-sensitive. As time goes by, social, political, economic
conditions change substantially even in the same state, which could result in very
different financing decisions. Hence the data collection begins with the variable of
project initiation year in Channel 7.
Project Attributes
The variable of project initiation year (denoted InitiationYear) is defined as the
time when a project’s feasibility study gets endorsed or approved, or the final
Environmental Impact Study approved and Record of Decision received. What is
noteworthy is the author uses a five-year index for the variable, for example a project
initiated in 1987 would assume a value of 1 (ranging from 1985 to 1990) and a project
initiated in 1992 would assume a value of 2 (ranging from 1991 to 1995). A main reason
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Table 6: Variable Definitions and Data Sources
Channel Variables Definitions Data Sources
InitiationYear Indexed as 1=1985~1990; 2=1991~1995; 3=1996~2000; 4=2001~2005; 5=since
2006.
Cost Billions of 2005 dollars.
Size Lane-miles.
Type Categorical variable: 1= Greenfield project; 2=Brownfield project; 3= HOT
related project.
7. Project
Attributes
Sponsor Categorical variable: 1= only state DOT sponsorship; 2= no public sponsorship;
3=localization (regional transportation agency as sponsor); 4=professionalism
(state/regional turnpike authority/enterprise as sponsor).
Perez & Lockwood
(2009) and author’s
research
EconomicGrowth 5-year average of percentage change in annual real GDP of state. U.S. BEA 1. State Demand
for Road Capacity PopulationGrowth 5-year percentage change in state population. U.S. Census Bureau
StateDebt 5-year average of state debt as percent of GDP. U.S. Census Bureau 2. State Debt
Situation UmbrellaLimit
Dummy variable: 1=existence of an umbrella debt limit on the total of G.O. and
Revenue Bonds, 0=otherwise.
Kiewiet & Szakaly
(1996)
StateIdeology Indexed as 1=extremely conservative; 2=highly conservative; 3=moderately
conservative; 4=moderately liberal; 5=highly liberal; 6=extremely liberal.
Medoff (1997) 3. State Political
Environment
PublicEmployees 5-year average of state and local public employees as percent of state
population.
U.S. Census Bureau
4. State PPP
Legislation
PPPlegislation Dummy variable: 1=state has passed at least one PPP law since the late 1980s
when a given project is being initiated, 0=otherwise.
FHWA (2009) and
author’s research
5. State Turnpike
Experience
TurnpikeExperience Dummy variable: 1=state has turnpike experience from the Turnpike Era
between the 1920s and the 1960s, 0=otherwise.
Samuel (2000)
6. State Market
Conditions
PersonalIncome 5-year average of state per capita personal income, in thousands of 2005 dollars. U.S. BEA
94
to do so is that it usually takes a long time to plan and initiate a project, and therefore it is
hard to identify a specific year as the starting point of a project. For example it is quite
normal for a state transportation agency to spend a decade in studying a toll road project
before it moves into actual development. This is also why the dataset contains toll road
projects since 1992 but the variable InitiationYear starts from 1985. Another reason to
use the five-year index is it helps to better capture other time-sensitive factors. State road
demand, debt situation and market conditions are likely to influence government’s
planning in the early years of project development. Five-year index tactic will capture the
influences of these state variables over a corresponding five-year period, expected to be
more accurate than data from a particular year which is subject to random sudden
changes. With a higher score meaning a project initiated at a later time, InitiationYear is
expected to have a positive sign, indicating projects become more open to private funding
as an alternative financial option as time goes by.
The model also identifies project cost, size, type and sponsorship as the project
characteristics most likely to impact the decision of private finance involvement. Both
project cost and size will be used to capture the scale of a project. Project cost is
expressed in billions of 2005 dollars (denoted Cost) and project size is measured by the
number of lane-miles of a project (denoted Size). Both signs are expected to be negative
because private investors likely prefer small-scale projects due to their profit motives and
financial constraints. Project type is a categorical variable (denoted Type) containing
three categories: Greenfield, Brownfield and HOT related projects. Greenfield projects
are expected most likely to involve private finance because government would prefer
95
private development for expensive, difficult and time consuming Greenfield projects, and
develop relatively easier, cheaper Brownfield and HOT related projects in-house.
Project sponsorship is another categorical variable (denoted Sponsor). Decoding
of project sponsorship is more complex than project type and requires some explanation.
Besides state DOTs as the main project sponsors, some states authorize private entities,
regional transportation agencies, or specially established turnpike authorities to sponsor
toll road projects, with or without state DOTs’ involvement. Specifically, project
sponsorship could be decoded into four categories:
Only state DOT sponsorship. In most states, state DOT is authorized to make
decisions of toll road projects; in practice state DOT is the sole sponsor of many
projects.
No public sponsorship. Some privately owned toll roads have no public sponsors but
only private sponsors (investors); a typical example is a developer toll road where
government plays a minimized role.
Localized sponsorship. In Alabama, California, Texas and Virginia, regional
transportation agencies are also authorized to sponsor toll road projects; in practice
some projects in these states have localized sponsorship, with or without state DOTs’
involvement.
Professionalized sponsorship. Some states created a state or regional turnpike
authority, either within or independent from state DOTs, to specialize in toll road
development; these states include Illinois, Kansas, Louisiana, Maine, Maryland, New
Carolina, New Jersey, Oklahoma, Pennsylvania, and Texas. Meanwhile, Colorado
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and Florida created a state tolling/turnpike enterprise, a special purpose business-like
entity, to specialize in toll road development. In practice many projects in these states
have sponsorship from professionalized turnpike authority, with or without state
DOTs’ involvement.
The model expects that projects with localized or professionalized sponsorship are
less like to use private finance than other projects. Localized sponsorship from regional
transportation agencies would usually bring in local political and financial support
resulting from these agencies’ local connection and resources, and reduce the likelihood
to resort to private finance. Similarly, the sponsorship from a professionalized turnpike
authority brings in experience and knowledge in building and operating public toll roads,
and therefore reduces the likelihood of private finance involvement.
State Demand for Road Capacity
Both economic and population growth will be used to provide indicators of state
road demand. Economic growth will be measured by the five-year average of percentage
change in annual real GDP of a state (denoted EconomicGrowth); and the five-year
period will correspond to the indexed initiation year of a given project. Population growth
will be measured by the percentage change in state population in a five-year period
(denoted PopulationGrowth); and the five-year period also corresponds to the indexed
initiation year of a project. Both signs are expected to be positive. Faster economic and
population growth imposes more demand on transportation and increases the likelihood
of the public sector to consider external private financial resources. It is worth noting that
the two factors are expected to be highly correlated because economic growth imposes
97
demand on transportation through labor migration and the associated increase in driving
needs. The two factors will be considered separately if the correlation between them is
confirmed.
State Debt Situation
Finding suitable measures of state debt’s impact on private finance decision is
difficult because the impact is indirect. Issuance of tax-exempt municipal revenue bonds
is the most common method to fund public toll roads. Different from General Obligation
(G.O.) Bonds which are guaranteed by government tax revenues, Revenue Bonds issued
for transportation purposes are backed with tolls, fees and other transportation collections.
Presence of large state debt and strict regulation on bond issuance are expected to
constrain the development of public toll roads and thus increase the likelihood of utilizing
private finance. Therefore both state debt burden and revenue bond regulation will be
used as indicators of the impact of state debt situation on the private finance decision.
First, state debt burden is measured by the five-year average of state debt as
percent of state Gross Domestic Product (GDP) (denoted StateDebt). Here state debt
includes G.O. Bonds, Revenue Bonds and all other credit obligations issued by
government; and the five-year period also corresponds to the indexed initiation year of a
given project. A second variable is state regulation on revenue bond issuance. States
usually impose constitutional debt limits on G.O. Bonds since they are backed by
government tax revenues, but not on Revenue Bonds that are backed by project- or
program-generated revenues. Only a few states have set an umbrella debt limit, a ceiling
for the total of G.O. and Revenue Bonds, to control revenue bond issuance. The model
98
measures the existence of an umbrella debt limit with a dummy variable (denoted
UmbrellaLimit). Both signs are expected to be positive, because heavy debt burden or an
umbrella debt limit would constrain the development of public toll roads through
issuance of municipal revenue bonds and therefore increase the likelihood to use private
finance.
State Political Environment
All economic problems are to some extent political problems. Politics plays a
significant role in the discussion of private development of public infrastructure. The
model identifies political ideology of a state and the influence of public employees as the
two political factors most likely to influence the private finance decision. The first factor,
state political ideology (denoted StateIdeology), will use the ideology ranking created by
Medoff (1997). This ranking was estimated based on a comparison and improvement of
four typical measures of state political ideology, expected to be highly accurate. The
ranking will be used as a time-insensitive variable based on the evidence that state-level
ideology is mostly stable and there has been vastly more ideological stability than change
within American states in the last quarter century (Erikson, Wright & Mclver, 1993;
Brace, et al, 2004). The expected sign is negative, with a higher score meaning more
liberal ideology and thus less likelihood to use private finance. The second factor, the
influence of public employees (denoted PublicEmployees), will be measured by the five-
year average of state and local public employees as percent of state population; and the
five-year period also corresponds to the indexed initiation year of a given project. A
negative relationship is expected. Generally speaking, public employees and their unions
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would be negatively affected by private development of public infrastructure, and
therefore more public employees are likely to create stronger opposition against
utilization of private finance.
State PPP Legislation
PPP legislation provides a framework to guide the development of partnership
projects, specifying things like what types of PPPs are allowed and in what fields, which
public agency (or agencies) is authorized to sponsor PPP projects, and what innovative
finance tools are available. A state would increase the chances of success of a PFM
project by developing a good PPP law. Since Virginia passed the first state PPP
legislation in 1988, 28 U.S. states and one U.S. territory have enacted statutes that enable
the use of various PPP approaches for transportation infrastructure (FHWA, 2009; White
& Case, 2009). A dummy variable (denoted PPPlegislation) will be used to indicate if a
state has passed at least one PPP law since the late 1980s when a given project is being
initiated. The expected sign is positive, indicating PPP legislation provides a better
regulatory environment to increase the chances of success of private development of toll
roads and thus attracts more private investments.
State Turnpike Experience
In the Turnpike Era between the 1920s and the 1960s, some states accumulated
affluent knowledge and experience in building public turnpikes through issuance of
municipal revenue bonds, which provides valuable lessons for these states’ recent toll
road activity. A dummy variable (denoted TurnpikeExperience) will be used to indicate if
100
a state has relevant turnpike experience from the Turnpike Era. A negative sign is
expected based on the belief that states with turnpike experience are more comfortable
developing public toll roads and therefore less likely to use private development.
State Market Conditions
Good market conditions increase the attractiveness of a project to private
investors. The model identifies people’s purchasing power as a key indicator of market
conditions, measured by the five-year average of state per capita personal income
(denoted PersonalIncome); and here the five-year period is also corresponding to the
indexed initiation year of a given project. The expected effect is positive, indicating that a
state with wealthier residents would appear to be more attractive to private investors.
To summarize, the model to be estimated with the expected signs of the
coefficients noted in parentheses is:
Private Finance Involvement = f [InitiationYear(+), Cost(-), Size(-), Type,
Sponsor, EconomicGrowth(+), PopulationGrowth(+), StateDebt(+),
UmbrellaLimit(+), StateIdeology(-), PublicEmployees(-), PPPLegislation(+),
TurnpikeExperience(-), PersonalIncome(+)]
Table 7 reports the descriptive statistics of the dependent and independent
variables. Type and Sponsor are both categorical variables and their descriptive statistics
are separate from the others.
101
Table 7: Descriptive Statistics of Variables (a)
Variable Mean Std. Dev Min Max
Y: private finance
involvement
Dummy: 1=yes, 0=no
.17 .38 0 1
InitiationYear A 5-point-scale index 3.54 1.26 1 5
Cost Billions of 2005 dollars .63 .87 .0026 5.20
Size Lane-miles 60.52 79.25 1.5 840.0
EconomicGrowth Percentage change in annual real GDP 3.15 1.55 .34 8.22
PopulationGrowth Percentage change in state population 7.32 3.60 .60 15.07
StateDebt State debt as percent of GDP 4.25 2.15 1.93 16.27
UmbrellaLimit Dummy: 1=yes, 0=no .45 .50 0 1
StateIdeology A 6-point-scale index 2.15 1.15 1 6
PublicEmployees State and local public employees as
percent of state population
5.32 .48 4.01 6.58
PPPlegislation Dummy: 1=yes, 0=no .80 .40 0 1
TurnpikeExperience Dummy: 1=yes, 0=no .75 .44 0 1
PersonalIncome State per capita personal income, in
thousands of 2005 dollars
32.40 3.95 22.64 42.92
Categorical Variable
(b)
1: Frequency (percent) 2 3 4
Type (3 categories) 89(57.4) 33(21.3) 33(21.3)
Sponsor (4 categories) 36(23.2) 7(4.5) 20(12.9) 92(59.4)
(a). Number of observations is 155.
(b). Type and Sponsor are categorical variables and therefore their descriptive statistics are separate from
the others.
3.3.3 Estimation Methodology
Given the binary structure of the dependent variable, the author uses binomial
logit regression model for data analysis. The goal of binomial logit regression is to
measure the probability that a choice will be made (or not) under the influences of a set
of determinants (explanatory variables). The logistic regression model could be expressed
in a linear form:
k k 3...... 3 2 2 1 1 0 X B X B X B X B B
prob(1) 1
prob(1)
ln ODDS ln (1)] logit[prob
102
In the equation, Prob(1) is the probability that a choice will be made, in this case,
private finance involvement, Xs are the explanatory variables identified as key
determinants of a choice to be made, Bs are intercept and coefficients of explanatory
variables, and ODDS refers to the ratio of the probability a choice will be made (private
finance involvement) divided by the probability it will not.
Three notions deserve special attention. First, binomial logit regression equations
are in fact nonlinear in the coefficients. Here, a coefficient represents the impact of a one-
unit increase in the independent variable in equation, holding the other explanatory
variables constant, on the log of the odds of a given choice, not on the probability itself
(Agresti, 1996). Hence the coefficient can not be used directly to explain the change in
the probability with a one-unit increase in an independent variable. However, the signs of
the coefficients are the same as in an equation linear in coefficients and can accurately
predict the relationship between the probability and an independent variable. Secondly,
logits use Maximum Likelihood Estimation (MLE) to estimate coefficients. MLE is an
interactive estimation technique that is especially useful for equations that are nonlinear
in the coefficients, and it chooses coefficient estimates that maximize the likelihood of
the sample data set being observed (Studenmund, 2006). For this study, the author uses
SPSS’s multinomial logit regression function to run data analysis. Thirdly, given the
small sample size of the study, a total of 155 projects, Likelihood-Ratio Test is used for
significance test in model checking, because Likelihood-Ratio Test has been proved to be
a more reliable significance test for small sample size than the Wald test, an alternative
proved to be more reliable for large sample size (Agresti, 1996; Menard, 1995).
103
3.3.4 Multivariate Analysis
The final results are presented in Table 8. In a preliminary test which checked for
significant multicollinearity and correlation among independent variables, two sets of
significant correlation were found (please refer to Appendix 1). StateDebt and
StateIdeology are highly correlated (Pearson correlation= 0.787, significant at the 0.01
level). State political ideology is a main factor the model intends to test and therefore
must be kept. Meanwhile besides StateDebt, there is another factor UmbrellaLimit to
measure state debt situation; hence StateDebt can be safely removed from the model
without affecting the theoretical completeness of the model. In addition, as expected,
EconomicGrowth and PopulationGrowth are highly correlated (Pearson
correlation=0.719, significant at the 0.01 level). Since they are virtually measuring the
same phenomenon (more road demand), it is redundant to use them both. Therefore the
two factors are considered separately to produce two sets of results, as presented in Table
8.
The model provides a good overall fit for the data as the Chi-Square value is
significant at the 0.005 level in both estimations. Although the Economic Growth model
provides a slightly better fit, there are no important differences between the results.
Hence results discussion in the next section will not differentiate between them.
3.4 Results Discussion
The data analysis provides some exciting results, as project attributes and macro
fiscal, political, and market conditions both affect the decision to utilize private finance
104
for a given toll road project. Table 8 highlights the variables that are found to be
statistically significant to the private finance decision. Before discussing the nuts and
bolts of the results, recall that coefficients in logit regression equations can’t be used
directly to explain the impact of explanatory variables on the probability that a choice
will be made, but the signs of the coefficients can accurately predict the relationship
between the probability and independent variables. In addition, Exp(B) explains the
impact of independent variables on the odds (the ratio of the probability a choice will be
made divided by the probability it will not), not on the probability itself. Hence the
following discussion will focus on the signs of the coefficients, explaining the general
relationship between explanatory variables and the probability of private finance
involvement.
3.4.1 Different Effects of Project Attributes
The results provide strong support for the effects of project initiation time and
project sponsorship on the decision of private finance involvement, and surprisingly
project scale, both cost and size, is found irrelevant to the private finance decision. First,
project initiation time is significantly associated with the private finance decision, but in
an unexpected way. The model expected a positive sign based on the hypothesis that later
initiated projects are more open to the option of private finance due to an increasing
interest in private development of transportation in the past two decades. However, a
negative relationship is found. A possible explanation is that, as time goes by, states have
become more cautious about utilizing private finance due to the wide publicity of several
105
Table 8: Binomial Logit Regression Analysis of Private Finance Involvement Decision (a)
Population Growth Economic Growth
Y: Private Finance
Yes (b)
B
Std Error(p) Exp(B) B
Std Error(p) Exp(B)
Intercept -21.787 9.840(.027) -23.725 10.123(.019)
Project attributes
InitiationYear -1.586 .576(.006) .205 -1.654 .607(.006) .191
Cost .006 .351(.988) 1.006 .015 .354(.967) 1.015
Size .007 .005(.197) 1.007 .007 .006(.229) 1.007
Type(Greenfield) 0(c) . . 0(c) . .
Type(Brownfield) -.047 1.265(.970) .954 -.058 1.250(.963) .944
Type(HOT related) .877 1.012(.386) 2.403 .783 1.013(.439) 2.189
Sponsor(only state DOT) 0(c) . . 0(c) . .
Sponsor(no public
sponsor)
3.932 1.806(.029) 51.030
3.828 1.800(.033) 45.965
Sponsor(localization) -3.319 1.177(.005) .036 -3.290 1.171(.005) .037
Sponsor(professionalism) -2.724 .887(.002) .066 -2.922 .900(.001) .054
State road demand
PopulationGrowth -.084 .126(.506) .920
EconomicGrowth -.191 .249(.442) .826
State debt situation (d)
UmbrellaLimit 1.874 .984(.057) 6.515 1.829 .998(.067) 6.227
State political
environment
StateIdeology -1.326 .533(.013) .265 -1.298 .532(.015) .273
PublicEmployees 2.655 1.334(.047) 14.224 2.906 1.395(.037) 18.280
State PPP legislation
PPPLegislation 1.959 1.313(.136) 7.094 1.795 1.321(.174) 6.019
State turnpike
experience
TurnpikeExperience -1.649 1.031(.110) .192 -1.587 1.061(.135) .205
State market conditions
PersonalIncome .433 .214(.043) 1.542 .464 .227(.041) 1.590
Number of observations 155 155
Likelihood ratio tests
Chi-Square (p)
72.017(.000) 72.187(.000)
Pseudo R-Square Cox&Snell=.372
Nagelkerke=.616
McFadden=.502
Cox&Snell=.372
Nagelkerke=.617
McFadden=.504
Classification
Predicted Private
Observed
No Yes
Percent
Correct
No
124 4 96.9%
Yes
11 16 59.3%
Overall
percentage
87.1
%
12.9
%
90.3%
Predicted Private
Observed
No Yes
Percent
Correct
No
124 4 96.9%
Yes
13 14 51.9%
Overall
percentage
88.4
%
11.6
%
89%
(a) Please refer to Table 6 for variable specifications and the highlighted lines are the six variables found
significant in data analysis.
(b) The reference category is No Private Finance.
(c) This parameter is set to zero because it is redundant.
(d) StateDebt is excluded from the channel of state debt situation due to its high correlation with
StateIdeology (Pearson correlation=0.787, significant at the 0.01 level).
106
problematic pilot projects. In the late 1980s and early 1990s, several states authorized
pilot projects to utilize private finance as experiment; however some of them encountered
serious problems, such as the severe revenue shortfalls of Dulles Greenway in Virginia,
the non-compete clause issue with CA 91 Express Lanes and the environmental clearance
problem with South Bay Expressway, both in California (ACT, 2007 II; GAO, 2004;
Vining, Boardman & Poschmann, 2005). Pilot projects have always been in the spotlight
and their problems were widely publicized as well. This has triggered more discussions
and reconsideration on private development of transportation and states are thus
becoming more cautious about utilizing private finance.
Project sponsorship also has a statistically significant impact. For the categorical
variable, “only state DOT sponsorship” is set as the reference category and the
coefficients of the other three categories represent their relative likeliness to use private
finance in comparison to the reference category. When a project has “no public
sponsorship” and only private sponsorship, private finance involvement is certain
because it is the only financial source of the project; a typical example is a developer toll
road. In contrast, localized sponsorship reduces the likelihood of private finance
involvement because regional transportation agencies bring in local political and financial
support which reduces the need of using private finance. Similarly, sponsorship from a
professionalized turnpike authority comes with valuable knowledge and affluent
experience in developing and operating public toll roads, and thus reduces the likelihood
of utilization of private finance.
107
Surprisingly, project scale, both cost and size, is not found to be a significant
influence. This is contradictory to Bettignies and Ross’s (2009) PPP financing model
which argues that private developers tend to engage in projects requiring smaller capital
because their lenders are only willing to provide limited capital outlays with high
expected returns. What is noteworthy is their model is based on a hypothetic project, for
example “the construction and operation of a bridge” without referring to empirical
projects. Given the fact that this study has a fairly small sample size, a total of 155 and
only 27 of them involving private finance, a larger sample of private finance involvement
may be necessary to adequately explore the role of project scale.
3.4.2 Politics Matters
Both political factors, StateIdeology and PublicEmployees, are significantly
associated with the private finance decision. As expected, state political ideology has a
negative sign, indicating that conservative states are friendlier to private development of
transportation while liberal states are more cautious about it. This is consistent with core
principles of American Conservatism and Liberalism.
The effect of public employees is, however, not as predicted. The model expected
a negative relationship, believing that states with higher percentage of public employees
would be less likely to use private finance due to stronger opposition from public
employees and their unions. Instead the results find a positive association, meaning the
more public employees the more likelihood of private finance involvement. It may be that
a state with a large percentage of public employees is already having a big government
108
and therefore faces strong pressure to downsize the government and resort to the private
sector. Another explanation considering both sectors’ efficiency is that public employees
face little or no outside competition in states with a large percentage of public employees
and thus lack incentives to improve their efficiency or productivity, which eventually
leads to privatization for the private sector’s superior efficiency.
3.4.3 Effects of Debt Limit and Market Conditions
The existence of an umbrella debt limit on the total of G.O. and Revenue Bonds
has a significant, positive impact on the private finance decision. It is believed that a debt
ceiling would constrain the issuance of revenue bonds for the development of public toll
roads and therefore increase the likelihood to use private finance.
In terms of market conditions, the results show that state per capita personal
income is a significant determinant and states with wealthier residents are more likely to
attract private investment in transportation.
3.4.4 Three Additional Findings
Three “byproducts” of the data analysis are also worth noting. First neither
economic growth nor population growth makes a difference in toll road financing. For a
very long time, people tend to believe that states with faster economic development and
population growth experience more road demand and therefore are more likely to use
private finance. However this study finds neither has a significant impact after
109
considering them separately as an indicator of state road demand. It may be that both
indicators do not fully capture the effect of state road demand and a more relevant
indicator is needed. Another possibility is that state road demand is less important in
affecting financing decision of a project. It is not that economic or population growth
wouldn’t create extra road demand, but the growth would not affect states’ preference
between public and private funding.
Secondly, PPP legislation is surprisingly found to be an insignificant factor in the
private finance decision, which is contradictory to the prevailing belief. Both the public
and private sectors state that strong and effective PPP legislation is of critical importance
to successful private development of toll roads because it would decrease uncertainties of
government regulation and provide a better regulatory environment to secure PPP
projects. The results, however, don’t show the significance. A possible explanation is
some, if not many, of the existing state PPP legislation is neither “strong” nor “effective”
and has failed to fulfill its goal of promoting and securing PPPs projects. For example,
FHWA has publicly pointed out that the PPP legislation of Alabama and Arizona is not
appropriate to use as a model for PPPs enabling legislation (FHWA, 2009). This leaves
policy makers an urgent mission about how to improve existing or create new legislation
to effectively support PPPs projects and best serve its purpose.
Another interesting finding which is not shown in the final results is that state
debt is highly related to state political ideology. Recall that in the preliminary test of the
logit regression model, state debt ratio was found significantly correlated with state
political ideology at a level of 0.787 (Pearson correlation) (Appendix 1), indicating that
110
conservative states are significantly less likely to have large-scale government borrowing
than liberal states. This is consistent with the core principles of American Conservatism
and Liberalism. The former prefers downsizing government, reducing public debt and
utilizing market force for public service provision, while the latter believes in a big and
powerful government providing crucial public infrastructure and services through
taxation and government borrowing.
3.5 Chapter 3 Conclusion
This paper developed a decision-making model of private finance involvement in
toll road activity, which integrates a variety of societal, political and economic influences
on the decision-making process. The model was used to empirically explore the factors
that explain the financing decision in toll road activity in the U.S. between 1992 and 2008.
The specific factors found to affect the decision were project initiation year, project
sponsorship, the existence of state umbrella debt limit, state political ideology, the
proportion of public employees, and state average personal income. The results suggest
that, at least in the case of toll road development, both project characteristics at micro-
level and state fiscal, political and market conditions at macro-level have affected the
decision to use private finance for toll road projects.
However, people must be cautious about the generalization of the study’s results
as they are limited by the focus on a single function of public infrastructure. Toll roads
may not be broadly representative of transportation, let alone public infrastructure. Most
toll roads primarily benefit the rich. This creates political dynamics that may differ
111
substantially from public infrastructures that serve broader and less wealthy sectors of the
community. The behavior of transportation agencies may also be unique. State and local
transportation agencies have been severely constrained by financial shortfall due to the
falling of motor fuel taxes. Therefore they may be more responsive than public agencies
managing other public infrastructures to the possibility of utilization of private finance.
Nevertheless this paper substantially advances our understanding of private
investment in toll road development in the U.S. It offers a theoretical framework that
allows the empirical exploration of a broad range of influences on the decision of
utilization of private finance in toll road activity and their relative importance.
Additionally the results provide a point of comparison for future work that considers
different sets of infrastructure and decision makers, which is very necessary if we are to
enhance our understanding of the circumstances under which public decision makers
prove willing to utilize private finance for public infrastructure and other services.
112
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Chapter 4: The Formation of Private Development of Toll
Roads
This chapter takes a micro perspective to examine the process in which public and
private parties shape a toll road project using the Private Finance Mechanism (PFM). The
study uses a multiple-case study method to investigate the nuts and bolts of the formation
process of eight PFM projects and answer three research questions: “how do public and
private parties communicate, interact and negotiate to shape a toll road project under the
Private Finance Mechanism (PFM)?”, “what factors contribute to or obstruct the
formation process?” and “how does the formation process influence the contract terms
that parties reach agreements on?”
The PPPs literature is inclined to make general analysis on PPPs’ features in order
to suit the wide application of PPPs across a variety of fields (Allan, 1999; Seader, 2002;
Skelcher, 2005). This study, however, pays special attention to the particular context
under which the PFM is being used, in this case American toll road development, and
argues that the characteristics of the sector have special impacts on the formation of
partnerships in the sector. Each sector has its own story of PPPs: why use partnerships,
what are the expectations, who are the typical partners, what are the partnership norms,
and what are the major problems. These characteristics would create a set of special risks
for partnerships in the sector. For example, toll roads in the U.S. are likely to face high
revenue uncertainty due to the fact the U.S. already has a well-developed, extensive
highway system and toll roads are usually a complement to existing freeways to provide a
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better alternative. Without much monopolistic market power, toll revenues are highly
subject to events such as changes to competing freeways, bad economic times and slow
local development. Internal characteristics like this will become the center of partnership
negotiation and affect parties’ decision in role division and risk management. Therefore
the study develops a formation model which closely looks at the characteristics of private
toll road projects and their impacts on partnership formation.
The chapter is organized as follows. The second section presents the formation
model of PFM projects in toll road development. The author would discuss the nature of
the PFM and characteristics of private development of toll road and then explain how the
two notions together influence the formation of PFM projects in the sector. The third
section introduces the eight cases selected for the multiple-case study and specific
techniques used in analysis. Then the rest of the chapter will discuss major findings from
the multiple-case study and their implications for future partnership practice and study.
4.1 The Formation Model
The study takes a micro perspective to investigate the formation process of PFM
projects and answers three questions: “how do public and private parties communicate,
interact and negotiate to shape a toll road project under the Private Finance Mechanism
(PFM)?”, “what factors contribute to or obstruct the formation process?” and “how does
the formation process influence the contract terms that parties reach agreements on?” The
formation process of a PFM project is defined by Koppenjan (2005) as “an interactive
negotiation and assessment process in which parties, prior to engaging in formal
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cooperation agreements, define the content of the project, investigate possibilities and
risks, arrive at agreements on the distribution of costs, benefits, risks and responsibilities,
and decide upon the arrangements that will govern their cooperation”. Parties at this stage
work on immaterial partnership building and take care of technical issues such as project
planning and feasibility study, government permission acquisition and project financing
(ACT, 2007 I). Figure 8 positions the formation process vis-à-vis the entire project
development. The agreed-upon arrangements as a result of the formation process may
guide the rest of the project development including project design, construction,
operation and maintenance, and revenue collection.
Figure 8: The Formation Process vis-à-vis the Entire Project Development Process
A formation model (Figure 9) is developed to describe and explain the formation
process of PFM projects. The model indicates that two occasions can serve as the starting
point of the formation process: the passage of state PPP legislation to authorize private
development of toll roads, and in a very few cases, unsolicited project proposals from the
private sector. Then government works on partner selection, division of roles among
partners, and joint risk management. This is a complex process driven by the nature of
the PFM (public and private sectors’ different interests and risks) and affected by specific
characteristics of projects (in this case, private toll road projects). Therefore before
discussing the partnership formation process, the author would first explain the nature of
FORMATION PROCESS
Finance Construction Operation &
Maintenance
Bid
Revenue Pre-Planning
&Acquisition
Design
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the PFM and discuss important characteristics of private toll road development with an
emphasis on risks crucial to partnership formation. The last phase is the agreement on
contract terms as the results of the formation process. The following will elaborate the
PFM formation process starting with the nature of the PFM.
Figure 9: The Formation Process of Toll Road Projects under the Private Finance Mechanism (PFM)
4.1.1 Nature of the PFM
A Private Finance Mechanism (PFM) refers to a financing method under which a
private entity is authorized to fully or partially finance an infrastructure project and has
sole or shared entitlement to project-generated revenues. The PFM falls under the
concept of PPPs but grants the private sector with more responsibilities than average
partnerships. The private developers often assume ownership-like responsibilities for
functions including financing, design, construction, operation and maintenance.
Nature of the PFM
-Different interests of parties
-Different risks of parties
-Barriers to risk management:
cultural& institutional differences
State PPP
Legislation
or Private
Initiation
Partnership Formation
-Partner selection
-Division of roles
-Joint risk analysis & management
-Solutions to the barriers of risk
management
Contract Terms
-Contract type
-Project type
-Capital structure
-Term of contract
-Revenue sharing
-Termination for convenience
Characteristics of Private Toll
Road Development
-Project scope /capital requirements
-Traffic and revenue uncertainty
-Environmental review process
-Right-of-way land acquisition
-Facility design & complexity
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With the in-depth involvement of the private sector, the PFM by nature is a
bilateral cooperation instead of a unilateral public procurement like contracting-out. The
public sector is no longer the public financier or procurer, but an equal partner who
provides investment opportunities to and looks for resources from the private sector. The
private sector is no longer the service provider or seller, but an investor looking for a
good avenue for investment while bearing the relevant business risks. Therefore PFM
projects should not be unilaterally defined but rather bilaterally shaped, and it is not only
the public sector’s decision but also the private sector’s.
Different Interests of Parties
The public parties adopt the PFM for several reasons. Limiting government’s
financial expenditures is often the fundamental driving force of using the PFM. Besides
the concern of government fiscal conditions, most governments also perceive that there
are political benefits from keeping large capital projects off government budgets (Vining,
Boardmand & Poschmann, 2005). Also, real efficiency gains is another benefit
governments expect to receive from using the PFM. In PFM projects, the private
investors often take ownership-like responsibilities covering financing, design,
construction, operation and maintenance. The integration of multiple functions is
expected to generate higher efficiency such as cost and time savings resulting from
project consistency, economy of scale and advanced technologies from the private sector
(Frantz, 1992). A third reason to use the PFM is to transfer risks to the private sector,
especially the risks associated with cost overrun and revenue shortfall. Large public
infrastructure projects have often incurred large cost overruns and project-generated
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revenues from these projects have often turned out to be much lower or more volatile
than expectations (Boardman, Mallery & Vining, 1994; Flyvbjerg, Bruzelius &
Rothengatter, 2003). By using the PFM, government could transfer some of the risks to
the private sector and still receive the desired infrastructure facility. Lastly, most
governments believe that having a private entity collect tolls on infrastructure would
create less political resistance compared to having a public agency do so, since the public
tend to believe they have already paid for public services through taxes (Vining,
Boardmand & Poschmann, 2005).
For private parties, the reason to take part in a PFM project is that it opens up new
markets and offers investment opportunities (Van Ham & Koppenjan, 2002). The private
parties on their own are often not able to get infrastructure projects off the ground since
infrastructure development, for example transportation, is often dominated by the public
sector. Also this type of project often involves political risks and long-term uncertainties.
Therefore cooperation with public authorities becomes indispensable. In addition, the
possibility of borrowing low-cost public loans and receiving public contribution towards
the unprofitable part of a project provides another motive for private participation in a
PFM project.
Different Risks of Parties
The PFM involves considerable risks for both public and private parties. These
risks could deter parties from entering into a partnership. Therefore it is crucial to get a
clear view of them in order to shape a smooth partnership.
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For the public sector, a primary risk is that it will lose control over key
infrastructure. In the case of highway development, this might result in a fragmented road
network and even affect the integrity of transportation policies in the region (Baxandall,
Wohlschlegel & Dutzik, 2009). Also the public parties are concerned about how to
protect the public interest from the profit-driven strategies and opportunistic behaviors of
the private parties. For example, some argue that PFM projects would charge higher user
fees and eventually cost the public more than public projects because private investors
want to make a good return on their equity investment and other private debt like bank
loans is more expensive to borrow than tax-exempt public bonds (de Bettignies & Ross,
2004; Enright, 2007).
Moreover the public sector faces the risk of discontinuity. While private parties
often complain about the capricious and indecisive nature of politics, they themselves
sometimes withdraw due to a change in company strategy, or no longer exist as a result
of bankruptcy or takeover (Van Ham & Koppenjan, 2002). This is a big risk for the
public sector because government takes the ultimate responsibility for public
infrastructure provision and it will almost never let an infrastructure shut down, public or
private. In addition, public authorities also face political risks when the political
endorsement that has backed a PFM project in the first place changes or disappears, due
to, for example, an electoral shift.
For the private sector, the PFM presents real financial risks compared to
traditional arrangements like contracting-out. Private developers would put in private
money to fund projects rather than simply provide services and get paid by government.
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Also without government’s guarantee for payments they would have to depend on
project-generated revenues, for example tolls, collected from people using the facility for
investment returns.
A second risk concerns the transaction costs involved in PFM projects. Besides
the costs caused by information asymmetry in partner searching, negotiation, contracting
and execution, a set of uncertainties are also sources of transaction costs. First there is
political uncertainty. Politics could be capricious and indecisive, especially when it
comes to things like private development of key public infrastructure. Moreover in
complex projects a number of local, regional and national authorities are usually involved,
which might all have different visions, policies and preferences. The private sector often
considers the public sector to be a multi-headed monster with contradicting strategies
(Koppenjan, 2005). The uncertainty is reinforced by political discontinuity, the electoral
cycle. When new politicians or parties come to power, public policy preferences towards
the PFM might change and government might simply renege on the earlier agreements
(Van Ham & Koppenjan, 2002). Then there is administrative uncertainty. This is a
question about whether government is able to do its part, completing the necessary
administrative procedures in time to keep the project on schedule. The procedures, for
example an environmental clearance process required for transportation projects, often
involve other public authorities whose agenda cannot be controlled by the public partner
(Van Ham & Koppenjan, 2002). Lastly social uncertainty needs to be considered too.
These projects often have great visibility and become easy targets of social protests. The
public hearing process of these projects gives civil societies and citizens the public
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consultation and advisory rights (Van Ham & Koppenjan, 2002). People can petition and
appeal to challenge the projects and stop them from happening. The social pressures
could also affect government to reconsider its earlier agreements. All these uncertainties
could significantly delay projects, if not take them down.
Barriers to Risk Management
The risks on both sides would hamper project development and must be managed
and controlled in order to shape successful partnerships. There is a common
understanding that risks should be allocated to the party that is best suited to manage
them (Allan, 1999; Seader, 2002). However there isn’t a good-for-all solution for risk
allocation. Arrangements for risks have to be made case by case, heavily relying on
mutual understanding between parties.
But the divergent cultural orientations of and institutional differences between
public and private parties are the major barriers to mutual understanding and therefore
hinder effective risk management. Public and private parties are different creatures that
value different things, aim at different goals, adopt their own strategies while face their
own risks. Just to give a few examples: (1) the public sector’s goal is to serve and protect
the public interest while the private sector aims at maximizing profits; (2) the public
sector adopts rigid approaches to project design and other project aspects under standard
procedures while the private sector uses more flexible approaches since it is result-driven;
(3) the public sector must obey transparency law while the private sector concerns about
confidentiality; (4) the public sector adopts risk-averse strategies to prevent bad
expectations while the private sector adopts managed-risk strategies to take market
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opportunities (ACT, 2007 I; Coghill & Woodward, 2005; Klijn & Teisman, 2003). These
differences and lack of understanding of them would impede risk management in
partnerships and even affect parties’ willingness to enter into partnership relations.
4.1.2 Characteristics of Private Toll Road Development
Besides consideration of the nature of the PFM, partnership formation needs to be
understood contextually. Some projects are not well suited to build under the PFM while
others have a better chance to succeed. Each project comes with its own set of
characteristics that determines the degree of project complexity and the financial viability
if built as a toll facility. Consequently it generates particular risks that parties must deal
with in partnership formation. Recall that government favors the PFM for the reasons of
extra resources, efficiency gains and risk transfer. These features are believed to make
expensive infrastructure projects affordable and save government budgets as well
(Akintoye, Beck & Hardcastle, 2003; Hall, 1998; Moore, 1994; Van Ham & Koppenjan,
2002; Yescombe, 2007). But the central question is whether these expectations will come
true in a particular project which is largely determined by the project’s characteristics.
For private toll road projects, major characteristics include project scope, capital
requirements for construction and operation, future traffic and revenue expectations,
environmental clearance requirements, land acquisition needs, facility design and
technical complexity. At least three of them deserve special attention.
First, toll roads in the U.S. are expected to face high risk of traffic and revenue
uncertainty. This is because they tend to be a complement to existing freeways mainly for
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the purpose of congestion relief and without much monopolistic market power. Before
the recent toll road development starting the late 1980s, America already had a well-
developed, extensive freeway system, the Interstate Highway System. Hence the
opportunity to build a new road as the only high-speed road in a region with monopolistic
market power is very limited. Furthermore, with a goal of ensuring high traffic flow and
maximizing profits, private developers tend to select projects in a region which is
suffering severe traffic congestion on existing freeways at present or expected in the near
future. As a result most toll roads are to provide a better-conditioned alternative to
existing freeways. The characteristic determines these projects are likely to have traffic
and revenue uncertainty since events such as improvements to competing freeways, bad
economic times and slow local development would keep drivers on free roads. A typical
example is Dulles Greenway in Virginia. The private toll road opened to traffic in
September 1995 and went into default in eleven months because Virginia Department of
Transportation (VDOT) made significant improvements to a competing road, State Route
7, ahead of schedule (GAO, 2004), in addition to the local real estate meltdown due to the
Savings and Loan Crisis of the 1980s and 1990s.
Second, the environmental clearance process required for all transportation
projects has been an extremely important, complicated and difficult part of project
development and brought a special risk into PFM projects. Private developers are
concerned that they put large sums and extensive time into the detailed environmental
studies, only to have the project turned down on environmental grounds at the end. A
1992 Reason Foundation survey on major engineering and construction firms and
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investment banking firms found that the developers and the financiers seem to believe
“having minimal environmental problems” is the second most important factor in the
success of PFM toll road projects, right after the factor “having strong local political
support” (Poole, 1993). The best known example is South Bay Expressway (SR 125) in
San Diego, California, which has been cited in almost every relevant occasion. The
private firm spent 50 million dollars and nine years on the environmental review process
and the costly process led to a change of the firm ownership which caused another three-
year delay. It took a total of sixteen years to complete this 12.5-mile toll road (ACT, 2007
II; GAO, 2004). Recent PFM projects have paid increased attention to the issue, and how
to manage the risk has become a center of public-private negotiation in partnership
formation.
Last but not least, the acquisition of right-of-way involved in most transportation
projects brings up two questions: should the private firm be responsible for all costs of
land purchase, and should it be granted the eminent domain power? Eminent domain
refers to the state’s power to condemn land for public use. Generally people agree that it
would be unwise to delegate the power of eminent domain to a private toll road firm. But
whether or not and under what circumstances state governments could use the authority
for a private project is still politically controversial. Some states, for example Virginia,
specify in the state PPP legislation that private toll road firms would not have access to
the state’s land-condemnation power. While others, for example California, specify that
the power may be exercised by state Department of Transportation on behalf of an
approved private project, but only as a last resort after all reasonable alternatives have
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been exhausted (Poole & Guardiano, 1992). The land acquisition issue must be well
managed for a PFM project to proceed safely.
In sum, private toll road development in the U.S. has a special set of
characteristics, such as traffic and revenue uncertainty, a complicated environmental
review process and controversial right-of-way land acquisition. These characteristics
bring special concerns and risks into partnerships. Public and private parties should
weigh up both gains and risks associated with a particular project and then decide their
focuses and strategies in partnership formation.
4.1.3 Partnership Formation
The nature of the PFM and the characteristics of private toll road development
together determine the formation process of PFM toll road projects. Public and private
parties start with informal communication and consultation and move forward step by
step in a joint exploratory process towards a gradual commitment to partnership. During
the process they select partners, negotiate on project specifications, divide responsibilities
among parties, and analyze and manage risks involved. This course is often lengthy and
involves many rounds of negotiation. The following pays special attention to four factors
crucial to the formation process.
Partner Selection
Partnerships are inherently risky endeavors and selecting the right partner is a
crucial step towards building successful partnerships. After receiving an unsolicited
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proposal from a private consortium or multiple private proposals in response to a
government call, the lead public agency would need to approve or select a consortium to
be the private partner. A consortium is a development team typically consisting of an
engineering firm, an investment banking firm(s), specialist firms in such areas as toll
revenue studies, a construction contractor, a toll system operating company, a law firm,
and sometimes even a public relations firm. Of course, several of the capabilities may
exist within a single firm (Poole, 1993). The agency will select the consortium that best
meets its selection criteria. It should seek a partner with resources that are beneficial to
but not possessed by itself (Dyer & Singh, 1998). Also, the agency might experience
vulnerability to the behavior of the private partner due to the mutual interdependence in
partnership. It could mitigate the vulnerability by selecting the partner it sees as
trustworthy. Here trust means positive expectations of both partner intentions and its
competence (Das & Tend, 2001). By selecting such a partner, the agency can lower
monitoring costs and other transaction costs and significantly enhance the chance of
successful partnership (Graddy & Chen, 2009).
Also there is a need to establish exit rules. Private consortia that submit proposals
should realize that they don’t automatically gain a place in the project. There should be
agreements made in advance about, besides the procurement procedure for partner
selection, after the procedure whether parties that are eliminated will receive
compensation for their incurred costs (Van Ham & Koppenjan, 2001). The question here
is thus: how does partner selection influence the formation of a PFM project?
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Division of Roles
The involvement of both public and private actors requires the division of roles
between parties. Empirical studies show a clear delineation of roles and responsibilities
could reduce transaction costs and uncertainty and therefore is critical for effective
partnerships (Graddy, 2009). Generally speaking, in a PFM project the public sector
plays a directing role, organizing project activities and setting game rules. Agencies of
different government levels might assume different functions depending on their specific
involvement. The private sector would play a role of doer, taking care of technical
specifications, physical construction and daily management. Of course, firms contained
in the private consortium would assume different functions depending on their
capabilities. Table 9 provides a general division of roles between public and private
parties. The purpose of the exhibit is to create clarity regarding the nature of parties’
involvement and to illustrate how they could handle their multiple roles smoothly, but by
no means to limit the involvement of partners to a single role. Here the question is: how
do parties divide roles among themselves in partnership?
Table 9: Division of Roles between Public and Private Parties
Public Parties Private Parties
Determine the social utility of a project;
Coordinate with politicians, civil societies and
the public;
Select and cooperate with trustworthy private
partners;
Make financially unprofitable investment;
Oversee project development and safeguard the
public interest.
Form a development team (consortium) with all
necessary capabilities;
Cooperate with public parties in project
development;
Make financially profitable investment;
Take care of technical specifications and daily
operation and management.
Source: Adapted from Van Ham & Koppenjan. (2002). Building Public-Private Partnerships: Assessing
and Managing Risks in Port Development. Public Management Review, Vol. 4, Issue 1, 2002, 593–616.
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Joint Risk Analysis and Management
Conducting a joint risk analysis usually is not part of the standard procedure but
highly desirable, because it makes it possible to find an effective way to manage project
risks. Besides general risks involved in most infrastructure projects (such as design,
construction and implementation risk, financial risk, market risk, and government
regulation and legislative risk), private toll road projects face a particular set of risks
associated with the special characteristics of these projects. As previously discussed, the
risks associated with traffic and revenue uncertainty, environmental review process and
land acquisition, are of particular importance to private toll road projects and have caught
most attention in public-private negotiation.
Generally there are two ways to manage these risks. One is, through appropriate
role division, to assign risks to the parties best able to manage them. This is based on the
belief that each party to partnership has a level of tolerance for risks and a capacity to
manage certain types of risks, and therefore transferring risks to the partner best able to
mange them could be an effective way to reduce project costs and improve the potential
for success (ACT, 2007 I). This has long been an argument supporting PPPs (Allan,
1999). However there isn’t a good-for-all solution for optimal risk allocation and it must
be determined case by case. For example, private toll road firms in Virginia might bear
higher risk associated with land acquisition since they don’t have access to the state’s
land condemnation power while firms in California might be in a better situation as they
could request California Department of Transportation (Caltrans) to intervene with
eminent domain power as a last resort.
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Another alternative to manage risks is to modify project design. This does not
come easily and is often very expensive. For example, the South Bay Expressway was
challenged in the environmental review process over issues such as concern over the loss
of wildlife habitat and protection of endangered species found in the corridor. As a result,
the project changed the original design and adopted a set of mitigation measures,
including wetlands restoration, protected wildlife habitats, and recreational improvements
in adjacent communities (ACT, 2007 II). These design changes were extremely costly.
The developer spent 50 million dollars and nine years in order to receive the final
environmental permit. In sum, parties in a PFM toll road project ought to fully understand
the risks involved and then look for the most effective way to manage them. This leaves
us two questions: how do parties make risk arrangements in the formation process, and is
there optimal risk allocation for toll road development under the PFM?
Solutions to Risk Management Barriers
In the discussion on the nature of the PFM, the divergent cultural orientations of
and institutional differences between public and private parties are believed to be the
major barriers to risk management. Parties have different values, interests, goals,
strategies and risks, and often don’t understand each other. Moreover these differences
are extremely difficult to change. Jacobs (1992), for example, considers them
unbridgeable, while others believe certain management strategies can help to bridge the
gap. For example, Klijn and Teisman (2000) and Koppenjan (2005) all suggest that trust
creation and joint image building could help mitigate the cultural and institutional
differences. The essence of these suggestions is to promote interaction among parties to
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generate more mutual understanding to cooperate and compromise in risk management.
Thus the question is: how do trust creation and building of mutual understanding affect
risk management in the formation of a PFM project?
4.1.4 Contract Terms
This phase will investigate the contract terms that parties reach agreement on as
the results of the lengthy and complex partnership formation process. For a PFM toll road
project, important terms include: (1) contract type, referring to the private involvement in
project development, such as Build-Transfer-Operate (BTO) and Design-Build-Finance-
Operate (DBFO); (2) project type, either a new development road or a congestion relief
road; (3) capital size and structure; (4) term of contract, the period of time during which
the private developer can operate the toll facility and collect toll revenues after it is put
into operation; (5) revenue sharing arrangements; (6) termination for convenience, a
clause giving government a right to terminate the contract without the government being
liable for breach-of-contract damages. These terms should be made in such a way that
parties involved are confident that the arrangements are best suited to the project and
each partner’s concomitant risks (Koppenjan, 2005). The question here is: how does the
formation process affect the contract terms of a toll road project under the PFM?
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4.2 Cases and Empirical Methodology
4.2.1 Case Selection
The research population consists of toll road projects with private finance
involvement that were initiated after the late 1980s and have successfully executed
public-private contracts as of December 2009. In the U.S. this population is limited in
scope, twenty three, to be exact. In order to justify the generalization of analysis results
about the state of the art in partnership formation in the country as a whole, the author
deliberately selected cases using three criteria. First, selected projects must have involved
intensive interaction and cooperation between public and private partners so as to provide
adequate information about how parties work together to shape partnerships. Therefore
most privately owned toll roads, including developer toll roads, will not be included in
the study since the public sector usually plays a minimized role in these projects. But
there are two exceptions: Dulles Greenway in Virginia and Foley Beach Expressway in
Alabama. The former is the first privately developed toll road in the U.S. since the 1980s
and involved extensive interaction and cooperation between the private developer,
Virginia Department of Transportation and some other Virginia government agencies.
The latter is a developer toll road contained in a real estate project which also involved
extensive public-private cooperation. Not only the then governor strongly endorsed the
project and signed a PPP bill into law, but local government also made significant
financial contribution to the project and even managed to waive environmental review
requirements for a part of the project. An investigation of these two projects will provide
some interesting information regarding partnership building.
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Second, in order to avoid concentration in one or two states with the most
partnerships, the author selected up to two cases from each of the five states that have
been active in toll road partnership. The five states are Alabama, California, Minnesota,
Texas and Virginia. Florida has proposed several partnerships since 2005 but these
projects are still in planning stage and haven’t reached formal public-private agreements.
Third, in order to capture the full picture of the practice of private development of toll
roads since the late 1980s and observe any changes along the time, the author selected
cases with their initiation time evenly across the time range between 1988 and 2005. No
projects initiated after 2005 have reached a formal public-private contract. As a result,
eight projects were selected, accounting for a substantial part of the research population:
Dulles Greenway and Pocahontas Parkway (Virginia Route 895) in Virginia, CA 91
Express Lanes and South Bay Expressway (SR 125) in California, Foley Beach
Expressway in Alabama, I-394 MnPASS in Minnesota, and SH 130 Segment 5 and 6 and
the New LBJ IH-635 Managed Lanes in Texas.
Data collection for case studies is complicated and requires a well pre-designed
guideline to collect only useful data without being overwhelmed by large amounts of
irrelevant information. The author designed a protocol to build a database for each project
and the following data was collected: (1) project background concerning politics, finance,
and legislation; (2) project basics, such as length, the number of lanes, facility type,
project goals, and the expected project complexity; (3) partnership information, including
authorization legislation, partner selection process, public partners and their roles, and the
firms in the consortium and their roles; (4) contract terms, such as contract type,
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financing arrangements, concession term, toll and revenue regulation, arrangements for
the environmental review process and land acquisition, and the clause of termination for
convenience; and (5) follow-ups, consisting of evaluation of risk management
arrangements and discussion of major events since operations such as severe revenue
shortfalls and changes of contract terms. Appendix 2 to Appendix 9 provide a database
for each project.
Data sources included interviews, published papers and reports, government
documentations, archival records, and newspapers. The author interviewed two lawyers
and one financial advisor with rich experience and strong expertise in private
development of toll roads: John Schmidt, a partner of Mayer Brown LLP, Geoffrey
Yarema, a partner and Chair of Infrastructure Practice Group of Nossaman LLP, and Paul
Ryan, Managing Director of Infrastructure Advisory Group of J.P. Morgan. All of them
have represented various state and local transportation agencies to sponsor PFM projects
and some have also advised private consortia in various projects. An interview protocol
(Appendix 10) was designed to obtain the following information: (1) their personal
experience in toll road partnerships; (2) how government selects a private partner and its
specific selection criteria; (3) when and what parties negotiate in partnership formation;
and (4) in general how partnerships have changed in the past two decades. Interview
notes can be found in Appendix 11 to Appendix 13. Besides interviews, the author
conducted internet research and examined: (1) published academic papers and
government reports on the selected cases; (2) FHWA and state DOTs’ program
documentations, including the original Request for Qualification (RFQ), Request for
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Proposals (RFP) and received private proposals; (3) each project’s official website; (4)
the original authorization PPP legislation; (5) news reports from TOLLROADSnews.com
and other news websites.
4.2.2 Qualitative Analysis Techniques
The eight cases are to form a multiple-case study to address the three research
questions:
(1) How do public and private parties communicate, interact and negotiate to shape a toll
road project under the Private Finance Mechanism (PFM)?
(2) What factors contribute to or obstruct the partnership formation process?
(3) How does the formation process influence the contract terms that the parties reach
agreements on?
Pattern-matching technique will be used to answer the first question and explain
the general process of partnership formation based on an overall observation of all
studied cases. The author spent more time in considering how to conduct qualitative
analysis to answer the second and third questions. When conducting case studies on each
selected project, the author made a general observation that as time goes by new
partnerships seem to have more comprehensive specifications in their agreements on
almost every aspect of project development, and many of these changes seem to be made
as improvements to ineffectiveness or mistakes of earlier projects, such as non-compete
clause and environmental review issues. Meanwhile the two lawyers and one financial
advisor the author interviewed all emphasized that learning from previous mistakes is of
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critical importance to toll road partnerships and recent partnerships have achieved better
value for money for the public sector because of learning (See interview notes in
Appendix 11 to Appendix 13). Therefore the author decided to use time-series analysis
technique to tackle the remaining two questions. In the analysis, partnership factors will
be examined in a time-series context in order to demonstrate if there is any pattern(s) of
change of these factors and what its impact is on the resulting contract terms. To assist
the use of the time-series technique, the eight cases are sorted into three groups by the
time of their initiation. Early Group contains projects initiated around the late 1980s and
early 1990s, including Dulles Greenway, CA 91 Express Lanes, and South Bay
Expressway. Middle Group contains projects initiated between 1995 and 2000, including
Pocahontas Parkway and Foley Beach Expressway. Projects in Late Group were initiated
between 2000 and 2005, including I-394 MnPASS, SH 130 Segment 5 and 6, and the
New LBJ IH-635 Managed Lanes.
4.3 Case Reports
In this section the author will briefly review the eight selected cases with an
emphasis on the following information: (1) a project’s historical background; (2) partner
selection process; (3) specific arrangements for the partnership, including project
financing, toll and revenue regulation, management of land acquisition and environment
review process; and (4) any major problems since operations. These projects are
reviewed in order of their initiation time.
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4.3.1 Dulles Greenway
In 1986 a group of private entrepreneurs, later organized as the Toll Road
Investors Partnership II (TRIP II), proposed building a fourteen-mile toll road connecting
with the existing state-owned Dulles Toll Road at Dulles Airport and extending into the
rapidly developing western outskirts of the Washington, D.C. metropolitan area. By 1988
the road’s backers had convinced the Virginia Assembly to pass the Virginia Highway
Corporation Act of 1988 to authorize private toll roads in the state after state studies
revealed a large backlog of needed projects (Gómez- Ibáñez & Meyer, 1993). TRIP II
was formally formed in 1993 and awarded a Design-Build-Finance-Operate (DBFO)
contract to develop the fourteen-mile four-lane Dulles Greenway. This is a new
development road with a goal of accommodating the anticipated traffic growth associated
with Dulles Airport and real estate development in Loudoun County. The highway
opened in September 1995, six months ahead of schedule.
In the partnership, Virginia Department of Transportation (VDOT) assumed
responsibilities of oversight and inspection as the road was being built and the Virginia
State Corporation Commission (VSCC) had a delegated power to regulate toll rates like a
public utility. The private partner TRIP II, formed by a Virginia family, the AIE Limited
Liability Corporation, and Brown and Root of Houston, Texas, assumed responsibilities
of ownership, design, build, finance, operation, and maintenance. After construction was
completed, TRIP II would own and operate the facility for 42.5 years. For project
financing, the 350-million-dollar project was fully funded by TRIP II, which put up 40
million dollars in equity and secured 310 million dollars in privately placed taxable debt.
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For toll and revenue regulation, the VSCC regulated toll rates like a public utility and
limited the rate of return to 18 percent. For environmental work and land acquisition, the
developer took full responsibility to go through necessary processes and acquire needed
government permissions and properties. It is noteworthy that local government played a
significant role in land acquisition. The developer at first appeared to have obtained the
cooperation of all of the small number of land owners along its desired fourteen-mile
route through land purchase and donations. But ultimately the developer encountered a
problem with holdouts at one end of the route. Since by law the project had no access to
state’s eminent domain power, the local county government, which wanted the project
built, used its own condemnation powers to acquire the final parcels (Poole, 1993).
The project had struggled financially since its opening. It went into default in July
1996, within a year of its opening, due to lower-than-expectation ridership. Besides the
local real estate meltdown caused by the Savings and Loan Crisis of the 1980s and 1990s,
the developer claimed that VDOT’s significant improvements to a competing road, State
Route 7, had significantly affected toll revenues. Even though Dulles Greenway did not
have a non-compete agreement with the state, the developer understood that the state
would not make improvements to competing roads ahead of schedule. According to a
bond rating agency, these improvements adversely affected the traffic projected to use the
toll road (GAO, 2004). To tackle the severe revenue shortfalls, TRIP II restructured its
debt in 1999 which involved 332 million dollars in AAA Bonds that replaced all other
outstanding agreements. In 2001 the VSCC agreed to extend TRIP II concession period
for an additional 20 years to 2056. However these remedial measures failed to bring the
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Dulles Greenway out of financial trouble. In August 2005 Macquarie Infrastructure
Group (MIG) agreed to purchase TRIP II along with the Dulles Greenway for 617.5
million dollars. TRIP II became a fully owned subsidiary of MIG.
4.3.2 CA 91 Express Lanes
As one of the first states allowing PPPs in transportation, California passed
Assembly Bill 680 (AB 680) in 1989, which authorized California Department of
Transportation (Caltrans) to enter into agreements with private entities for the
development, construction, and operation of four pilot projects at private sector expenses
without the use of public funds. Upon completion, these facilities will be leased to the
private entities for up to 35 years and private investments will be recovered with toll
revenues. Under this law, Caltrans organized a competition for private proposals that
drew 8 entries in 1990. Teams of Caltrans experts ranked the proposals on criteria that
included the importance of the transportation need served, the ease of implementation
(including environmental or right-of-way acquisition obstacles), the experience of the
consortium, the extent to which the project would promote economic development, and
the degree to which the project incorporated innovative ideas (Gómez- Ibáñez & Meyer,
1993). Four projects were selected and only two were eventually built: CA 91 Express
Lanes in Orange County and South Bay Expressway (SR 125) in San Diego County.
The CA 91 Express Lanes is a ten-mile toll highway with two lanes and an
additional three-plus carpool lane in each direction within the median of pre-existing
eight-lane SR 91 between SR 55 in Orange County and the Riverside County line. This is
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a congestion-relief road and its main goals are to reduce congestion on the existing SR 91
Riverside Freeway and to connect growing residential areas in the Inland Empire with
employment centers in Orange County. The project was developed by the California
Private Transportation Company (CPTC) under a Build-Transfer-Operate (BTO)
agreement with the Caltrans and the Orange County Transportation Authority (OCTA).
The agreement was reached in December 1990 and the project was accomplished and
opened to traffic in December 1995.
In the partnership, Caltrans was the project sponsor and attained project
ownership after it was completed, while the OCTA conducted environmental studies for
the project and sold them to the developer. The private developer CPTC, formed by
subsidiaries of Level 3 Communications, Inc., Cofiroute Corporation, and Granite
Construction, Inc., took full responsibility for design, finance, construction, operation,
and maintenance of the toll facility. After construction was completed, ownership of CA
91 was transferred to Caltrans, while CPTC retained the franchise for the toll road for 35
years. For project financing, the 130-million-dollar project was fully funded by CPTC,
which put up 20 million dollars in equity, borrowed 100 million dollars in bank loans,
and assumed 9 million dollars in subordinated debt to OCTA to purchase environmental
documents. For toll and revenue regulations, toll rates of CA 91 were unregulated but the
Caltrans put a 17-percent ceiling on rates of return with any excess revenues to be paid
into the state highway fund. In addition, AB 68 also allowed the consortium to profit by
leasing out its rights to providers of various auxiliary services, such as gas stations,
restaurants, and hotels by the toll road; but the incomes were not expected to be
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significant. To mitigate revenue risk for the developer, CA 91 included a non-compete
clause in the original language in the concession agreement, which created a 1.5-mile
protection zone along each side of CA 91 and precluded any public improvements along
the corridor until the year 2030. For land and environmental issues, it was relatively
easier for the project than average transportation projects to acquire right-of-way and
environmental clearance. This toll road was built within the median of the existing SR 91
and the state donated the road. There was no need for a separate right-of-way acquisition.
Also, the OCTA had already prepared an environmental review prior to the project
because the state had planned to build HOV lanes on SR 91. The OCTA subsequently
conducted a supplemental review on the express lanes to alter the original review and the
CPTC purchased both environmental reviews from OCTA when it built the toll road
(GAO, 2004).
The project is innovative in several aspects. It is the first privately financed toll
road in the United States in the last 50 years by the time of its financial closure, the first
variably priced toll road in the nation, and the first fully automated toll road in the world
which collects tolls through electronic transponders. However the biggest problem with
this partnership was the non-compete clause. It prohibited several attempts of Caltrans to
make improvements to the SR 91 corridor in the late 1990s, which Caltrans claimed was
necessary to improve driving safety in the corridor. After several failed legislative
attempts to void the noncompete clause, the OCTA paid the CPTC 210 million dollars to
buy back the toll facility and has been operating it as a public toll road since January
2003 (Vining, Boardman & Poschmann, 2005). This incident has drawn great attention as
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an example of the private sector taking advantage of information asymmetry and
government’s inexperience to purse profits at the cost of the public interest. It ignited
heated debates over how to better protect the public interest in future PPPs.
4.3.3 South Bay Expressway
Also authorized by AB 680 and selected by Caltrans experts from the 1990
proposal competition, SR 125 in San Diego, later named South Bay Expressway, is a
12.5-mile six-to-eight-lane toll highway alignment from SR 905 near the international
border to SR 54 near Sweetwater Reservoir. This is a new development road and main
objectives are to connect the only commercial port of entry on the United States-Mexico
border in San Diego to the regional freeway network and also to reduce traffic congestion
on I-5 and I-805. The original project development agreement between Caltrans, San
Diego Association of Governments (SANDAG) and California Transportation Ventures
(CTV) was reached in January 1991. But due to serious environmental challenges, the
developer experienced a nine-year delay and incurred huge loss which resulted in an
ownership change. Caltrans renegotiated the contract terms with the new owner of CTV,
MIG, in the early 2000s. The construction work didn’t begin until September 2003. The
road opened to traffic in November 2007.
In the original partnership, the Caltrans was the project sponsor issuing and
managing the franchise and also assumed project ownership. The developer CTV, which
was owned by Washington Group International, assumed responsibilities of design,
construction, finance, and operation. After construction was completed, ownership of SR
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125 would be transferred to the Caltrans, while CTV would retain the franchise for the
toll road for 35 years. For land acquisition, the developer acquired all necessary lands
from land owners through purchase and donations while the City of Chula Vista
facilitated a land dedication program required for right-of-way. What is noteworthy is the
Caltrans was delegated the formal powers to shepherd the project through the
environmental review process (GAO, 2004). However the environmental process turned
out to be very problematic and the project was severely challenged over issues such as
concern over protection of endangered species, Quino Checkerspot butterflies, found in
the corridor and the loss of wildlife habitat. Despite the delegation of power, the Caltrans
left the developer to tackle with the environmental problems. The developer worked with
local governments (SANDAG) to relocate and preserve the endangered butterflies by
adopting a set of mitigation measures, including wetlands restoration, building protected
wildlife habitats, and recreational improvements in adjacent communities (ACT, 2007 II).
It took the developer 50 million dollars and nine years to receive the final environmental
clearance in 2000. The expensive process led to a change of the firm’s ownership and
Macquarie Infrastructure Group (MIG) acquired the rights to develop the project in 2003.
Given the frustrating project development, the Caltrans allowed a re-negotiation on the
contract with MIG and restructured the partnership.
In the new partnership, the expressway was divided into two segments. The
southern 9.5-mile segment, later operated as a toll road, was funded and developed by
CTV under a BTO agreement with the Caltrans and SANDAG. The northern 3.2-mile
segment, including the interchange with SR 54, was publicly financed with a mix of
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federal and local funds, and built and operated also by CTV as a freeway. The total
capital requirement for the project was 722 million dollars. The 621-million-dollar
southern segment was privately funded with a mix of 160 million dollars in private equity,
140 million dollars in TIFIA loans, and 321 million dollars in bank loans. The 101-
million-dollar northern free segment was funded with a mix of 81 million dollars in
federal funds for the connector and 20 million dollars in SANDAG local sale taxes. For
toll and revenue regulations, toll rates were unregulated but the Caltrans put an 18.5-
percent ceiling on rates of return. Also AB 680 allowed the developer to profit by leasing
out its rights to providers of various auxiliary services, such as gas stations, restaurants,
and hotels by the toll road; but the incomes were not expected to be significant. For
revenue risk management, even though the original concession agreement included a
non-compete clause, after the non-compete clause problem with the CA 91 Express
Lanes, the Caltrans took steps on the new agreement to ensure the clause would allow the
state sufficient flexibility to make needed improvements to other roads while also
protecting the private developer (GAO, 2004). Under this revised non-compete clause,
the state agrees not to make any improvements to, or build new competing highways that
were not already contained in the state’s twenty-year plan. Moreover, when the state
builds a competing road, it is required to reimburse CTV for the lost revenues caused by
the new road.
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4.3.4 Pocahontas Parkway
Pocahontas Parkway (Virginia Route 895) is an 8.8-mile, four-to-six-lane toll
facility with a high-level bridge over James River, linking I-95 in Chesterfield County
with I-295 south of the Richmond International Airport in Henrico County, Virginia. It is
a new development road with a main goal of accommodating the anticipated development
along the James River and the Richmond International Airport. In fact the Pocahontas
Parkway was a long planned project in Virginia. The state approved the route for the
Parkway in 1983 and VDOT completed the environmental work in 1984. However, the
project was put on hold because funds were not available. In 1995 Fluor Daniel and
Morrison Knudsen, two American engineering and construction firms, submitted an
unsolicited proposal for this project to VDOT and the Commonwealth Transportation
Board. Since privatization and private sector investment when possible has been a major
strategy in Virginia state government since the Governor George Allen administration
1993 to 1997, they were well advised to utilize this opportunity. In 1997, a 63-20
nonprofit corporation Pocahontas Parkway Association (PPA) was incorporated by
FD/MK LLC, a joint venture of Fluor Daniel and Morrison Knudsen, with oversight from
VDOT, for the limited purpose of financing, constructing and operating the Pocahontas
Parkway (RoadstotheFuture, 2009). In June 1998, PPA entered into a DBFO contract
with FD/MK and the state. This is the first project under the Virginia Public Private
Transportation Act of 1995 (PPTA). It opened to traffic in May and September 2002 in
two segments.
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Under the partnership agreement, PPA was created to finance, construct, and
operate the project while FD/MK was the design-build contractor. The state owns the
right of way as well as the road and VDOT paid for pre-planning, study, and land
acquisition, and assumed full responsibility for operation and maintenance, to be paid
from PPA’s toll revenues, after payment of project debt service and operating expenses.
After construction was completed, PPA would retain the franchise for the toll road for 30
years (GAO, 2004). For project financing, the 381-million-dollar project received most of
its funding from 63-20 corporation private tax-exempt toll revenue bonds, 354 million
dollars, which was issued by PPA and the state had no liability for. The remaining capital
came from a mix of 18 million dollars in SIB loans, 9 million dollars in federal funds for
project design, and 5 million dollars in FD/MK debt service reserve funds. For toll
regulation, the first two years of toll rates were set forth in the contract. After that PPA
sets toll rates and VDOT has the right to adjust them, subject to a requirement to meet the
covenants in the indenture. Meanwhile the Parkway had a preliminary revenue sharing
system. The PPA has the obligation to reimburse VDOT for costs of operations and
maintenance that are subordinated to the lien of the bonds on project revenues. Since the
PPA is a non-profit corporation, funds in the Surplus Account are to be applied at the
direction of VDOT for any purpose related to the project, including retirement of debt
and reimbursement of expenses paid by VDOT. Regarding revenue risk management, the
project included a limited non-compete clause which contains only limited protection
from competitive transportation activities, such as a publicly funded road. Land and
environmental work was relatively easy for the Parkway since VDOT completed the
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initial land and environmental studies in the early 1980s and the preliminary design for
the new project was 60 percent complete when the project was awarded. The state paid
FD/MK to acquire right-of-way in the name of the state and FD/MK spent 10 million
dollars on Environmental Impact Statement (EIS) reevaluation. In addition, the project
included a clause of termination for convenience which gives government a right to
terminate the contract without the government being liable for breach-of-contract
damages. It provides that in case of termination for convenience, VDOT must pay the
PPA all amounts necessary to retire and defease all outstanding bonds and to pay all
amounts owed to the design-build contractor.
The Pocahontas Parkway is only the second transportation project nationwide to
be financed through a 63-20 corporation. This creative financing approach is why the
Parkway could be built without further delay. The vast majority of the funding was raised
through the sale of private non-profit tax-exempt bonds, which minimized the risk to both
the localities and the taxpayers. However since the project’s opening in 2002, both
revenue and traffic were significantly lower than projected. A traffic study indicated slow
regional and national economic growth due to the impact of September 11, 2001, had a
particularly negative effect on activity at the Richmond airport (GAO, 2004). In June
2006, VDOT and Transurban (USA), a private Australian toll road operator with
subsidiaries in the U.S., executed an Asset Purchase Agreement with the PPA and entered
into the Amended and Restated Comprehensive Agreement. Under the terms of these
agreements, Transurban has acquired the sole rights to enhance, manage, operate,
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maintain, and collect tolls on the Parkway for a period of 99 years. Transurban has also
defeased all of PPA’s underlying debt.
4.3.5 Foley Beach Expressway
Foley Beach Expressway was proposed by the Baldwin County Bridge Company
(BCBC) in the mid-1990s through an unsolicited proposal as part of a BCBC’s real estate
project in Alabama. In May 1996 then Governor Fob James signed into law a bill that
said counties and the Alabama Department of Transportation (ALDOT) could license a
private legal company to build toll roads and toll bridges. Before long the Expressway
proposal was publicly announced. This is 13.5-mile, four-lane limited access route
including public road and privately owned toll bridge, from the City of Foley to Orange
Beach, Gulf Shores and Perdido Key in Alabama. The purpose of the highway is to
alleviate growing Alabama 59 traffic concerns and to offer an alternate route during
hurricane evacuation situations. BCBC reached a Build-Own-Operate (BOO) agreement
with the City of Foley around mid 1996. Even though it was branded as one project,
Foley Beach Expressway consisted of three distinct parts proceeding southward: (1) the
Foley Bypass, a 7.5-mile freeway funded with 7.5 million dollars of FHWA grants and
local funds, connecting to Highway 59 south of Summerdale and north or Foley; (2) a
five-mile, 6.5-million-dollar BCBC road, designed, funded and built by BCBC, but upon
completion deeded to Baldwin County which would maintain and operate it free of tolls;
and (3) a one-mile, five-lane and eleven-million-dollar worth Intra-Coastal Waterway
bridge, developed and owned by BCBC and operated for a toll. Development of the
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project took three years and construction was completed in 55 weeks, several months
ahead of schedule. The entire Expressway was opened to the public in June 2000.
In the partnership, the City of Foley was the public sponsor which owned the
Foley Bypass and provided part of funding for the Bypass. The developer BCBC was a
private company owned by three sons of the former governor Fob James and owners of
the long-established bridge contractor McInnis Corp of Mobile AL, and assumed
responsibility of ownership (of the bridge), design, construction, finance, and operation.
The total capital of the project was 44 million dollars. BCBC raised 36 million dollars in
private bonds and the remaining 7.5 million dollars was a mix of FHWA grants and City
of Foley funds. The project is a developer toll road as it was contained in a real estate
development project. Therefore the agreement did not include a concession term or any
form of formal revenue regulation. Neither does it contain a non-compete clause. For
land issues, some of the land was donated by landowners keen on the expressway’s
development potential but some other stretches were purchased by the developer. For the
environmental process, the project had relatively easier experience. “Someone used some
political clout in Washington DC” (TOLLROADSnews, August 3
rd
, 2000) and the city-
owned Foley Bypass was waived from environmental review requirements. The Bypass
was funded with a no-strings-attached FHWA grant of 7 million dollars to the City of
Foley in which the normal NEPA (National Environmental Policy Act) environmental
permitting, Davis-Bacon Prevailing Wage Rates and Racial/Women Disadvantaged
Business Enterprise Quotas were waived. In addition the investors who were not
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accepting federal money were not subject to some of these requirements, a source of
savings as compared to normal state projects.
This project is believed to be a win-win partnership. The financial contribution of
FHWA and the City of Foley towards the unprofitable Foley Bypass increased the
profitability of the toll bridge. On the other hand it is also a good deal for the city. Tim
Russell, the mayor of Foley said the city got a “terrific deal” out of the whole project
because the city’s Foley Bypass was built for much less by folding it in with the
investor’s design and construction contract (TOLLROADSnews, August 3
rd
, 2000). In
2005, Macquarie acquired BCBC along with the Foley Beach Expressways for 95 million
dollars. In 2007, Macquarie packaged the expressway with three other toll facilities it
acquired in Alabama, consisting of the Emerald Mountain Expressway, the Alabama
River Parkway, and the Black Warrior Parkway, and sold them together to Detroit-based
Alinda Roads, LLC.
The Foley Beach Expressway was apparently pushed forwarded by the
collaboration between a powerful governor, Fob James, and his three sons who owned
BCBC. Recently Tim James, one of Fob James’s sons, is running for Alabama’s governor
in 2010. His work with the Foley Beach Expressway is being remarked as one of his
major accomplishments.
4.3.6 I-394 MnPASS
I-394 MnPASS is an eleven-mile, two-lane interstate level toll road converting
previous High Occupancy Vehicle (HOV) lanes on I-394 to Highway Occupancy Toll
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(HOT) lanes, located in Minneapolis, Minnesota. The lanes, which are dynamically
priced, remain free to HOVs and motorcyclists during peak hours and are free to all users
in off-peak periods. The project’s objective is to reduce congestion on I-394 by making
better use of the road capacity in previously underutilized HOV lanes. The project was
authorized in 2003 by the 2003 High Occupancy Toll Lane Legislation in Minnesota and
included in the FHWA Value Pricing Pilot program. The authorization law specifies that
after paying costs of operation any toll surplus should be spent 50 percent for capital
improvements in the corridor where the tolls apply and 50 percent goes to the
metropolitan area council for bus transit improvements.
The I-394 MnPASS is a good demonstration of the importance of political and
public support to the success of a toll road. In fact this project was a second trial of
Minnesota Department of Transportation (MNDOT) in doing HOT lanes in I-394
corridor. The first time was in 1996 and failed a year later because of political sensitivity
of tolling and lack of strong political backup. The 1996 plan of a similar HOT lanes
project gained the approval of the metropolitan council and the legislature, and was
supported by then Governor Arne Carlson. But due to the facts that it was being
implemented in an election year and an opposition candidate, retailer Mark Dayton,
attacked the tolling project making it his major campaign issue, Governor Carlson
withdrew his support for the HOT lanes project and ordered his transportation secretary
James Denn to cancel it. In the early 2000s when MNDOT made its second effort to do
HOT lanes in I-394 corridor, it started with asking for public support and political backup.
An opinion survey was conducted in January 2002 which found 57 percent of the public
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supported the toll project. Then in 2004 the state formed a Community Task Force of
local notables to hold hearings and advise on the project. Also state political leaders were
fully involved this time and the official announcement of the project was made by
Governor Tim Pawlenty and Lieutenant Governor Carol Molnau who was also state
transport commissioner.
The I-394 MnPASS was developed through a PPP and MNDOT utilized a
Request-For-Proposal (RFP) process to seek the private partner. After MNDOT sent out
the RFPs in July 2003 two teams submitted proposals. The one led by Wilbur Smith
Associates (WSA) was chosen over the other bidder Transcore and a BTO contract was
signed in early 2004. The first phase of the project opened in May 2005. In the
partnership, MNDOT assumed project ownership and provided most funding. The private
partner, a team consisting of WSA, SRF Consulting Group, Cofiroute, and Raytheon,
assumed the responsibilities of design, construction, finance, and operation. For project
financing, WSA funded approximately 20 percent of 12.5 million dollars cost of setting
up the tolling system on HOT lanes to which it has legal title, and the remaining capital
came from the state government. For toll regulation, tolls are set dynamically based on
monitoring the density of traffic and lookup tables which set toll rates at levels directly
related to traffic density. For revenue regulation, the project has a preliminary revenue
sharing system. MNDOT gets toll revenues, WSA receives a share to cover its
investment and operations costs, and 50 percent of toll revenue surplus is required by law
to be used to fund public transit. For land and environmental issues, I-394 MnPASS did
not incur any problems since the project was built on existing highway lanes and its
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environmental study was approved in 1996. The partnership does not have a term period
since it is a public project instead of a concession. For the same reason, the contract does
not have a clause of termination for convenience.
Since its opening in May 2005, the I-394 MnPASS has been a big success in
terms of traffic management over both HOV/HOT lanes and other free lanes, but its
financial performance has been a big disappointment. This could be partly due to the
skyrocketing gasoline prices and a slight increase in bus travel in the corridor, but in part
the project also seems to be a victim of its own success in traffic management. The HOT
lanes have significantly improved traffic flows on the unrestricted free lanes so that
drivers lack strong incentive to use the tolled lanes. According to a recent study
(TOLLROADSnews, December 9
th
, 2007), during peak hours, HOT lanes’ traffic speeds
slightly increased from 64.7 to 65.6 miles/hour while free lanes’ speeds had a 6 percent
increase from 58.9 to 62.2 miles/hour. Hence eleven-mile HOT lanes are only 3.4
miles/hour, or a half minute, faster than free lanes. With measured average speeds of over
60 miles/hour over six peak hours (6am to 9am outbound and 3pm to 6pm inbound)
congestion is just not bad enough in the free lanes to generate major revenues in the toll
lanes alongside. MNDOT officials said what is wanted is some California style real
congestion.
4.3.7 SH 130 Segment 5 and 6
Texas Department of Transportation (TxDOT) planners have identified 188
billion dollars in needed projects to achieve an acceptable level of mobility in Texas by
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2030. They estimate that only 102 billion dollars will be available to meet those needs,
leaving a significant funding gap of 86 billion dollars (Gonzales & Courier-Gazette,
2006). In 2003 Texas legislature passed PPP legislation to permit expanded use of tolling
and public-private partnerships (PPPs), and later strengthened the law with amendments
in 2005. Under this law, TxDOT built a partnership with a consortium formed by Cintra
and Zachry in 2005 to develop Segments 5 and 6 of State Highway 130. This road will be
a 40-mile toll highway with minimum of two lanes in each direction, linking through
Travis, Caldwell and Guadalupe counties southeast of Austin to I-10 near Seguin, Texas.
By March 2009, the design phase was 90 percent complete and the project was in the
process of acquiring right-of-way. Construction began in April 2009 on the northern most
portion of the route. The facility is expected to open in 2012. The project will complete
SH 130 to be a new 91-mile toll road to provide needed traffic relief to the highly
congested I-35 through Central Texas.
TxDOT used a Pre-Development Agreement process (see Appendix 13, an
interview with Geoffrey Yarema) to seek the partner. This is a special and rarely seen
form of solicited proposal process and results in a two-phase agreement. The contract that
is normalized through bidder consultations covers only the first, pre-feasibility phase and
leaves the implementation phase portion of the contractual relationship to be negotiated
with the selected developer in the second phase. In this case, Cintra-Zachry (CZ)
competed for the right to sign the Trans-Texas Corridor-35 (TTC-35) Master
Development Comprehensive Development Agreement (CDA) in 2005 and was selected
by TxDOT as the bidder providing the best value. As a result, TxDOT and CZ signed a
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CDA in March 2005 providing for collaboration in conceptual, preliminary and final
planning along with some development, design, construction, financing, operation and
maintenance. The CDA contemplated further agreements or development of facilities like
SH 130, and such projects must be within the TTC-35 corridor or projects that connect to
or support TTC-35. After five months of negotiation, in July 2005 TxDOT and CZ agreed
on a Facility Implementation Plan Preparation Agreement (FIPPA) for SH 130 Segment 5
and 6. In June 2006, TxDOT announced approval of the project, the state’s first
concession agreement. On March 22, 2008, the SH 130 Concession Company, formed by
CZ, entered into a Facility Concession Agreement (FCA) with the TxDOT to design,
build, finance, operate, and maintain Segments 5 and 6 of SH 130. The FCA grants a 50-
year concession to the company from the date the project opens to traffic.
For the partnership, TxDOT owns the facility, holding title to any property
purchased for the road, and will provide back office services for transponder (TxTag) toll
collection including a call center, issue of transponders, violation processing, revenue
handling, accounting, and clearinghouse operations with other toll agencies. The private
developer SH 130 Concession Company is a special purpose company owned by Cintra
(65 percent) and Zachry (35 percent). It assumes responsibilities of design, construction,
finance, operation, maintenance, and toll collection. For project financing, this 1309-
million-dollar worth project is funded with both public and private funds. Besides 196
million dollars in private equity and 682 million dollars in senior bank loans, the project
also receives 430 million dollars in TIFIA loans. For toll regulation, toll rates are
regulated indirectly based on state per capita income. The CDA establishes conditions
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and imposes caps on the rate of toll increases for each year. The increase/adjustment is by
the greater of the increase in the nominal state per capita income as measured in indices
of gross state product and population published by the US Bureau of Economic Analysis.
The maximum base rate for tolls is established at 12.5 cents per mile for most vehicles,
more for large trucks (TOLLROADSnews, June 28
th
, 2006).
For revenue regulation, the concession company has paid TxDOT 25.8 million
dollars upfront concession fee. Also the terms of the agreement give the state a share of
the toll revenue over the next 50 years. The state’s cut of the toll revenue begins with the
first dollar earned on the toll road, and increases proportionately with toll revenues across
revenue bands; eventually the state will reach a 50-50 split with the SH 130 Concession
Company. It is estimated that the state could receive approximately 1.6 billion dollars in
toll revenue over the next 50 years (TOLLROADSnews, July 6
th
, 2006). In addition, in
order to attract traffic and enhance revenue, an innovative strategy adopted by the CDA is
the arrangement for higher concession payments and revenue sharing percentage if higher
posted speeds are approved by the legislature. This is because posted speed limits are a
key to attracting large volumes of traffic from free competitor I-35. Lastly, the contract
has limited non-compete protection which is not expected to cause any substantial
restriction on improvements to or building of new competing roads.
Regarding environmental issues, there was no need for the private developer to
conduct environmental studies for the project. In fact the Final Environmental Impact
Statement (FEIS) for the entire 91-mile SH 130 was approved in 2001 and the FHWA
Record of Decision (ROD) was issued in the same year. The FEIS Reevaluation was
159
approved in December 2006. The Federal approvals for SH 130 Segments 5 and 6 specify
nine measures that the developer and TxDOT must take to meet environmental
regulations and standards. Regarding the land issue, the project requires acquisition of
property and property rights for the new roadway. The study was covered in previously
approved FEIS. The developer paid the costs for all 3,500 acres of right-of-way and
acquired it in the name of the state. In addition, the agreement contains a very detailed
clause of termination for convenience.
4.3.8 The New LBJ IH-635 Managed Lanes
The New LBJ IH-635 Managed Lanes is a thirteen-mile, six-lane project to
expand I-635 to fourteen travel lanes from eight, located in northern part of Dallas, Texas.
Managed lanes use a value pricing system based on real-time traffic to ensure traffic is
kept moving at a fast and reliable speed. This project is to relieve the severe congestion
on the existing I-635 and improve driving safety and air quality in the corridor. In 1969,
I-635 was built to accommodate 180,000 vehicles per day. Today, in the project area,
average daily traffic counts exceed 270,000 vehicles. Future corridor traffic demand is
estimated to exceed 450,000 vehicles by the year 2020. Also, the existing pavement has
exceeded its life span and is in critical need of repair. If TxDOT were to finance and
build this project, TxDOT estimates that it could borrow up to 300 million dollars in
bonds and loans, which would be secured and paid back by toll revenue. 300 million
dollars in borrowed funds combined with 700 million dollars in available gas tax revenue
is only half of the 2 billion dollars required to build the project (TxDOT, 2009 I). Under
160
the 2003 Texas PPP legislation, TxDOT executed a Comprehensive Development
Agreements (CDA) contract with LBJ Infrastructure Group in September 2009 to enter a
52-year toll concession to finance, build, operate, and toll the project. The developer is
currently working on project design and financial closure as of December 2009.
Construction is expected to begin between mid 2010 and mid 2011 and to be completed
between 2013 and 2015.
TxDOT used a RFP process to seek the private partner. Before TxDOT sent out a
RFQ in May 2005, the project was actually highly developed already with over ten years
of alternatives analyses, public outreach, engineering reviews, geotechnical drillings,
utilities mapping, costings, and a traffic and revenue study by Wilbur Smith in early 2005.
The time taken has not been the result of any great contention, just working through the
complexity of the scheme. All of this makes it one of TxDOT’s most solid projects
(TOLLROADSnews, November 25
th
, 2005). In November 2005, TxDOT received
qualification proposals from four developer teams. In September 2007 TxDOT issued a
RFPs and received two proposals in January 2009. A proposal from LBJ Infrastructure
Group, a consortium led by Cintra, was selected as the best-value proposal and a CDA
was conditionally awarded in February 2009. The winning bid has significantly lower
total cost (2678 million dollars), proposes to use both TIFIA (800 million dollars) and
private activity bonds (400 million dollars), and only asks for 445 million dollars public
funds. The losing bid has significantly higher total cost (3882 million dollars), proposes
to use TIFIA (800 million dollars) but not private activity bonds, and asks for 1800
161
million dollars public funds. On September 4, 2009, TxDOT officials executed the CDA
with the LBJ Infrastructure Group.
In the partnership, TxDOT will retain project ownership and conduct oversight of
the project to include review and periodically audit managed toll lane operations for
compliance. Throughout the project development, the North Central Texas Council of
Governments (NCTCOG) and Regional Transportation Council (RTC), City of Dallas
and Dallas County have guided planning for the project and contributed significantly.
After the project opens to traffic, the NCTCOG/RTC managed lane policy will govern
toll rates and collections. The North Texas Tollway Authority (NTTA) will handle toll
collections and manage the toll tag accounts (PegNews Wire, February 26
th
, 2009). The
private developer LBJ Infrastructure Group is formed by Cintra, Meridiam Infrastructure
Finance, Dallas police and fireman’s pension system, Ferrovial Agroman,S.A., and
W.W.Webber, Inc. Macquarie was part of the winning Cintra-led group but pulled out as
part of its scaling back of its investments worldwide. The consortium assumes the
responsibilities of design, construction, finance, operation, and maintenance. The CDA
awards the developer with a lease of the facility for a term of 52 years, including the
construction and operations periods.
For project financing, the developer proposes to finance the 2678-million-dollar
project with a mix of 598 million dollars in equity contribution, 400 million dollars in
senior term facility, 400 million dollars in Private Activity Bonds, 800 million dollars in
TIFIA loans, 445 million dollars of public funds, and 35 million dollars of toll revenue.
The developer is currently working on financial closure as of December 2009. For toll
162
regulation, Regional Transportation Council sets tolling policy and the developer
implements the policy and sets the tolls. Toll rates are set based on a formula to maintain
a minimum traffic speed of 50 miles/hour otherwise the developer makes a sliding scale
of damages payments to TxDOT. For revenue regulation, the terms of the agreement give
the state a share of the toll revenue over the concession period. The CDA contains a
profit sharing schedule with five bands based on a blended nominal after-tax internal rate
of return for equity which starts at 12.5 percent and eventually steps up being 75 percent
(TxDOT, 2009 II). In addition, the CDA does not contain any restrictions on expansion
of competitive capacity and TxDOT has the right to build any facilities at any time.
For the environmental issue, TxDOT had finished all necessary environmental
studies and received FHWA approvals before the award of the concession. The original
environmental approvals for the project were received between 1992 and 2003. In early
2006, TxDOT initiated modifications to the designs in the originally approved documents
and received FHWA approval of the Environmental Re-Evaluation in 2008. For land
issues, TxDOT worked with the developer to adopt new design in order to avoid the need
for extra right-of-way acquisition. An earlier plan in 2005 was to put several miles of the
toll lanes in a pair of mined tunnels. In this case right-of-way was already partially
acquired by government but the concessionaire would have to acquire the remainder. In
the finalized concession contract, the earlier plan was abandoned and the project adopts
an entrenched/cantilever design to avoid the need for extra right of way acquisition and
also be less expensive to build and operate. A lot of the length of the project will be
elevated (on I-35E and at each end on I-635) or subsurface (on five miles of I-635)
163
cantilevered over (See the demonstration picture in Appendix 9) (TOLLROADSnews,
March 2
nd
, 2009). In addition, the CDA contains a clause of termination for convenience
that provides TxDOT has the right to terminate the CDA at any time without cause. If
TxDOT uses this right, it must compensate the developer the greater of fair market value
and the senior debt termination amount plus reimbursement for demobilizing and
terminating subcontracts.
4.4 Findings
Table 10 gives a bird’s eye view of the main facts of formation processes and
contract terms of the eight studied projects. They are organized in order of initiation time.
This section will answer three research questions based on findings from the multiple-
case study.
4.4.1 Two Types of Partnership Formation
How do public and private parties shape a partnership in toll road development?
The author examined original project documents such as RFQs, RFPs, proposals, and
CDAs and talked at length with interviewees in order to understand the partnership
formation process. The three interviews provided extremely helpful inside information
about how government prepares a project, when and what parties negotiate, and what the
criteria for partner selection are. Most of these details are unavailable in published
164
Table 10: Procurement, Partners, Risk Management and Contract Terms of PFM Projects
Projects
(initiation)
Dulles Greenway, VA (1988) CA 91Express Lanes, CA (1989) South Bay Expressway,CA (1989;
2000-2003)
Pocahontas Parkway, VA (1995)
Procurement An unsolicited proposal;
developer took initiative, pushed
PPP law, acquired all needed
permits, asked for land donations.
Caltrans held a competition & drew
8 entries, developer did feasibility
study, and local govt.s had a
dispute over HOVs tolls.
Caltrans held a competition & drew
8 entries; developer asked for land
donation; local disputes over
tolling.
An unsolicited proposal; govt did
full study previously; developer
took the initiative; a non-profit org.
PPA finances the project
Partners
Public/role -VDOT/oversight;
-VSCC/regulates tolls like a public
utility;
-county/helped land acquisition
with local condemnation.
-Caltrans/ownership;
-OCTA/did environ. studies & sold
them to developer, acquired the
facility in 2003.
-Caltrans/ownership;
-USDOT/TIFIA (2003);
-SANDAG,the City of Chula
Vista/helped land acquisition &
environ. review process.
-VDOT/ownership, planning study,
oversight, O,M;
-FHWA/funded engineering
&environ. study and design.
Private/role -A team led by a Virginia
family/ownership ,D,B,F,O,M;
-in 2005 purchased by MIG.
3 American companies/ D,B,
F,O,M; sold the facility to OCTA
in 2003.
-A team led by Washington Group
International/D,B,F,
O,M;
- in 2003 MIG acquired the project.
-FD/MK /D,B;
-PPA /F, toll revenues;
-in 2006, acquired by Transurban
for a 99-year lease.
Risk Management
-Tolls;
-Revenue.
-strict toll regulation like a public
utility;
- return caps of 30%-14%;
-no revenue sharing;
-no non-compete clause, govt. did
improvements to competing roads.
-no toll regulation;
-a 17% cap on return;
-no revenue sharing;
-with non-compete clause to
guarantee revenues, caused big
problems, led to public takeover.
-no toll regulation;
-a 18.5% cap on return;
-no revenue sharing;
-limited non-compete clause.
-tolls set by PPA& VDOT;
-no return cap;
-PPA pays VDOT for O&M,
revenue surplus is used by VDOT;
-limited non-compete clause.
-Environme
ntal work;
-Land work.
-developer did environ. work with
extensive effort;
-developer acquired land by
purchase& donations, county
helped land condemnation.
-OCTA did environ. work, sold it
to the developer;
-state donated the land.
-developer did environ. work with
local govt. support, spent
$50million and 9 years;
-50%land was donated, the rest was
purchased.
-VDOT did environ. study, FD/MK
spent $10M on re-
evaluation;
-VDOT did land study, paid
FD/MK to acquire the land.
Contract
-Project type;
-Capital
structure.
-new development road;
-$350m,100%private:
11%equity, private loans.
-congestion relief road;
-$130m,100%private:
15% equity, private loans and
subordinated debt.
-new development road;
-$722m,67%private:
22%equity, private loans, TIFIA,
federal&local grants.
-new development road;
-$381m, 94%private:
63-20 bonds, SIB loans, federal
fund for study.
-Term;
-Terminat-
ion.
-42.5yrs, later extended 20 yrs due
to financial shortfall, in 2005
acquired by MIG;
-no termination clause.
-35yrs, terminated by OCTA
takeover after 7yrs of operat- ions
in 2003;
-no termination clause.
-35yrs;
-limited right to seek for
compensation in case of
termination (2003).
-30yrs; in 2006 acquired by
Transurban for a 99-year lease;
-detailed termination clause:VDOT
will pay PPA to retire,defease debt.
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Table 10 Continued
Project
(initiation)
Foley Beach Expressway,
AL (1996)
I-394 MnPASS, MN
(2003)
SH 130 Segment 5&6, TX
(2005)
The New LBJ Managed Lanes,
TX (2005)
Procurement An unsolicited proposal; developer
took the initiative, pushed the law,
closely work with the city for
environmental waiver.
A RFP process; a task force made
effort to gain extensive public &
political support; MNDOT did
study& design, sent out a RFP,
selected a bid from 2, built
understanding of risks and rewards.
The project is a small part of a
large PPP contract, TTC-35 Master
Development Plan CDA, won by
Cintra/Zachry through a RFP
process; Govt has done study for
entire SH130 previously.
A RFP process; project was
highly developed over 10 yrs of
govt. effort, then the RFP
process selected a bid from 2
bids; parties had extensive talks
on risk management.
Partners
Public/role -the City of Foley/grant, owner of
the Foley Bypass, O,M of free
segments;
-FHWA/federal fund.
MNDOT/ownership,
financier, revenue receiver.
-TxDOT/ownership, office service
for toll collection;
-USDOT/TIFIA.
-TxDOT/owner, oversight;
-USDOT/TIFIA;
-city, regional agencies/ facilitate
development, set and collect tolls.
Private/role -local real estate developer/
ownership, D,B,F,O,M.
-in 2005 bought by MIG.
A team led by WSA/
D,B,F,O.
Cintra/Zachry/ D,B,F,O,M, and toll
collection.
A team led by Cintra&Meri-
diam/D,B,F,O,M.
Risk Management
-Tolls;
-Revenue.
-no toll regulation;
-no return cap;
-no revenue sharing, all private
revenues;
-no non-compete clause.
-tolls are set based on traffic
density, formalized in tables;
-no return cap;
-MNDOT gets revenues, WSA gets
a share to cover investment and O.
costs.
-no non-compete clause.
-indirect toll reg. based on state per
capita income;
-no return cap;
--complex revenue sharing:
higher speed &revenue lead to
more state share.
-limited non-compete clause.
-toll regulation to maintain traffic
speed over 50mph;
-no return cap;
-TxDOT gets increased share in
revenue cross 6 revenue bands.
-limited non-compete term.
-Environmen-
tal work;
-Land work.
-the project was waived from
environmental process.
-developer acquired land via
purchases & donations.
-no need for environ. work,
designed in 1996, built on existing
lanes;
-no need for land, on existing lanes.
-no need for environ. work,
previously done by govt.
-land study previously done by
govt., developer acquired the land.
-no need for environ. work,
previously done by govt.
-no land need, designed to avoid
need for extra ROW.
Contract
-Project type;
-Capital
structure.
-road for congestion relief &
hurricane evacuation;
-$44m, 82% private:
private bonds, federal&local grants.
-congestion relief road;
-$12.5m, 20%private:
20%WSA equity, state fund.
-congestion relief road;
-$1309m, 67% private:
15%equity, TIFIA, bank loans.
-road for congestion relief,
safety&air quality improvement
-$2678m,54%private: 22%equity
bank loans, private activity bonds,
TIFIA, public funds.
-Term;
-Termination.
-forever privately owned; in 2005
acquired by MIG then sold to
Alinda Roads 2007;
-no termination clause.
-no term, a public project;
-no termination clause, a public
project.
-50yrs after opening;
-detailed termination clause:
TxDOT will compensate developer
based on detailed policies.
-52yrs, including B. and O.;
-detailed termination clause:
TxDOT will compensate
developer based on policy details.
166
materials. Hence the following discussion heavily relies on information from the
interviews.
An overall observation on the eight cases is there are two major types of
partnership formation: government-solicitation partnership and private-initiation
partnership. For the former, government takes the initiative to study the possibility of
building a toll road under the PFM and looks for the best-value proposal for the
designated project through a regular RFPs process (the I-394 MnPASS and the New LBJ
Managed Lanes) or a Pre-Development Agreement process (PDA) (the SH 130 Segment
5 and 6). In a RFPs process, government agencies send out a RFQ and a RFPs for a
designated project, negotiate with several bidders, normalize the contract terms and then
select the proposal that offers the most benefit for government. A PDA process is a
special and rarely seen form of solicited proposal process and results in a two-phase
agreement. The contract that is normalized through bidder consultations covers only the
first, pre-feasibility phase and leaves the implementation phase portion of the contractual
relationship to be negotiated with the selected developer in the second phase (See
Appendix 13 an interview with Geoffrey Yarema). For private-initiation partnership, a
private entity takes the initiative to study a project and submit a proposal, unsolicitedly
(the Dulles Greenway, the Pocahontas Parkway, and the Foley Beach Expressway) or in
response to a general call of government (the CA 91 Express Lanes and the South Bay
Expressway). Figure 10 demonstrates the flow of the two types of partnership formation.
Government- solicitation partnership (Scenario 1) can be done in either a RFPs process
(Scenario 1.1) or a PDA process (Scenario 1.2). Scenario 2 represents the private-
167
Figure 10: Partnership Formation Flow in Two Scenarios
Scenario 1.1:
Govt. receives final
proposals, selects a
partner, signs the con-
tract, finalizes terms.
Govt. Legislation &
pre-design:
-Role division
-Risk management
-Procurement process
Scenario 1:
Government study of
project feasibility
Govt. issues a
RFP, receives
pre-proposals
Scenario 2:
A private proposal with
feasibility study
Govt. approvals the
project, signs contract,
finalizes contract terms.
Separate
meetings to
negotiate
roles& risks
STEP 1 STEP 2 STEP 3 STEP 4
Parties
negotiate
on roles &
risks
Scenario 1.2:
Govt. gets proposals,
selects a partner,signs
Pre-Development
Agreement.
Feasibility
study,design,
negotiate on
roles&risks
Parties reach
agreements,
sign an
implementati-
on contract
Govt. approves
the private
partner
STEP 5 STEP 6
168
initiation partnership. The following discussion will emphasize on the RFPs process since
it requires most research work and project preparation in the public sector and then
briefly introduce the PDA process and the private-initiation partnership formation.
Scenario 1.1 Government Solicitation through a RFPs Process
Using a RFPs process to shape partnership has gained strong momentum since the
new millennium. As seen in both the I-394 MnPASS and the New LBJ Managed Lanes,
government begins a PFM project by conducting feasibility study, usually with assistance
of financial and legal advisors. The study compares two alternatives for project
development, public development versus private development, in aspects of asset
management and capital structure. The asset management analysis estimates the costs of
construction, operation and maintenance, toll rates, and revenue expectations under each
alternative, and compares them apples to apples. The capital structure analysis shows
how each alternative might work: where to raise the needed capital if government wants
to do the project by itself; if using private finance, what is the required rate of return for
equity investment, what are the interest rates of other private debt, and how much upfront
payment from the private developer is possible; and then overall what is the net present
value of each alternative. By thoroughly and strictly comparing the two development
alternatives, feasibility study will show which alternative makes the most economic sense
and assist government in determining whether or not to pursue a partnership (See
Appendix 12 an interview with Paul Ryan).
Besides feasibility study, government also pre-designs a partnership plan to
specify responsibility of each party and arrangements for risks and issues crucial to
169
partnership, and also clarify the procurement process. These arrangements are largely
determined by existing PPP legislation in a state. However they are not unalterable, and
in fact some arrangements, for example revenue-related risk management, are often
heavily negotiated in later public-private negotiations. Among these arrangements, risk
management always catches most attention. The fundamental questions need to be
answered here are what are the major risks to financial performance of a project and
which party should be responsible for controlling a particular risk in order to stay on
budget? Also, the procurement process is another important issue in the partnership plan.
This is about how the procurement will be conducted, what the process is like, and what
the exit rules are. The procurement must be organized in a fair, transparent way. What is
noteworthy is how transparent the government procurement process will be is largely
determined by the state’s sunshine law (See Appendix 12 an interview with Paul Ryan).
To sum up Step 1, government is responsible for not only the feasibility study but
also a clear plan about how to organize a partnership. The information must be fully
provided to the private sector beforehand because when private entities review a project,
they look at both feasibility study and the partnership plan, and weakness in one might
deter private interest.
Then in Step 2, government first sends out a RFQ to invite qualification proposals
and usually up to four qualified bidders will make it to the shortlist. A RFPs will then be
sent out to the shortlisted bidders for project proposals. On one hand, government would
like to keep its options open by inviting more proposals. On the other hand, for bidders,
preparing a proposal is time-consuming and very expensive, usually of the same order of
170
magnitude as ten million dollars and hardly reimbursable by government; therefore a
shortlist with more than four bidders is considered wasteful and even unfriendly to the
private sector. By the RFP deadline, government usually receives two to three pre-
proposals (See Appendix 12 an interview with Paul Ryan).
Step 3 is where negotiation takes place. Government agencies hold separate
meetings with each bidder to negotiate on project details and the whole process usually
takes three to six months. Top items on the negotiation list include: (1) cost and oversight
issues in project construction, operation, and maintenance; (2) risk management for
revenue uncertainty, environmental work and land acquisition, for example revenue
sharing and refinancing clauses are often heavily negotiated; (3) in case of termination
for convenience, how to split responsibility between the public and private sectors and
solve the relations between government, banks and the developer; (4) other project details,
for example, which party is responsible for the debt interests generated during the time
period between contract signing and financial closure. A crucial principle here is to treat
all bidders absolutely equally and keep the negotiation process transparent. Assuming a
bidder successfully adds a new term in the contract draft through negotiation, the term
will be made available to every other bidder. So a bidder is negotiating for not only itself
but also all its competitors. In the end government will produce a normalized contract
which provides all bidders exactly the same offer. The rule is to ensure the fairness of the
procurement process (See Appendix 12 an interview with Paul Ryan).
During Step 4, after bidders submit their final proposals, government evaluation
committee compares these proposals apples to apples and selects the best-value proposal.
171
Although each agency might have its own selection preference in each case, a common
set of selection criteria might apply, including: (1) in the financial part of a proposal,
what is the net present value, how much public grants and public loans are required, and
what is the upfront payment to government; (2) in the technical part, what are the quality
management, management approach and technical solutions in phases of design-build,
operation and maintenance. What is noteworthy is government generally prefers
proposals that stick to its pre-design and require minimal changes in both financial and
technical aspects, because changes are often complicated and expensive, for example
changes requiring additional environmental study or right-of-way acquisition. The
evaluation committee will design a formula to take into account both financial and
technical factors and give a score for each proposal. The committee will then select the
proposal that offers the best value to government and sign the contract with the developer.
Very limited private negotiation will be allowed afterwards, if any. This is the official
end of partnership formation process and project development now goes on to financial
closure, construction and so on (See Appendix 12 an interview with Paul Ryan).
To sum up, in a RFPs process, partnership formation is completed when a partner
is selected, and other components of partnership formation such as cross-party
negotiation, division of roles and risk analysis and management all take place before the
partner selection. After rounds of cross-party negotiation, when the private partner with
the best-value proposal is selected, the partnership is formed and contract terms are
finalized. In other words, government is not committed during feasibility study or cross-
party negotiation. It only commits itself after project details are thoroughly negotiated
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and determined, risks are clearly allocated and government itself feels comfortable about
its position in the partnership.
Scenario 1.2 Government Initiation through a Pre-Development Agreement process
Another way of government initiation of partnership is through a Pre-
Development Agreement (PDA) process, as seen in the SH 130 Segment 5 and 6. This is
rarely seen in comparison to the RFPs process. The PDA process solicits the best ideas
for a project competitively through a two-phase agreement. It starts with government
conducting preliminary project study and partnership plan (Step 1). The contract that is
normalized through bidder consultations (Step 2 and 3) covers only the first and pre-
feasibility phase, and government signs a Pre-Development Agreement with the bidder
whose proposal promises the best value for money (Step 4). Then during the one-on-one
negotiations (Step 5), parties conduct detailed feasibility study and facility design, and
negotiate on partnership specifications such as role division and risk management
arrangements. If the negotiations are unsuccessful, government could terminate the
agreement and pursue the project through alternative means. In case of successful
negotiations, parties would enter into an implementation agreement to design, build,
finance, and operate the project. In sum, in the PDA process government selects a partner
first with a general contract and then parties work on project details and negotiate on the
implementation contract. Negotiation happens after a preferred bidder is selected, which
requires government to understand the market very well and know the ongoing projects
and competent bidders in the market (See Appendix 13 an interview with Geoffrey
Yarema).
173
Please note in some occasions the SH 130 Segment 5 and 6 was categorized as a
partnership shaped through a regular RFPs process. But I believe the project used a PDA
process. By looking into the history I found, before the award of the project concession,
the developer CZ, as the winner of a RFPs process, signed the TTC-35 Master
Development CDA with TxDOT, which provides for collaboration in conceptual,
preliminary and final planning along with some development, design, construction,
financing, operation and maintenance. The CDA contemplated future development of
facilities within the TTC-35 corridor or projects that connect to or support TTC-35, like
the SH 130 Segment 5 and 6. More importantly, as the winner of the TTC-35 Master
Development CDA, CZ automatically became the developer of the SH 130 Segment 5
and 6 and wasn’t required to compete through another round of RFPs process. The
contract signed later was a facility implementation agreement for the SH 130 Segment 5
and 6 based on detailed project studies and further public-private negotiations.
Scenario 2: Private Initiation
Private initiation of partnership dominated in the 1990s. A private developer takes
the initiative to conduct feasibility study on a project and submit a proposal to
government, unsolicitedly (the Dulles Greenway, the Pocahontas Parkway, and the Foley
Beach Expressway) or in response to a general government call (the CA 91 Express
Lanes and the South Bay Expressway). Existing PPP legislation or relevant laws in the
state would provide some general rules for partnership, accounting for division of roles,
arrangements for major risks and procurement procedures. Then government agencies
decide whether or not to approve the developer based upon the idea of the proposal. In
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most cases agencies have opted to defer negotiations completely until after a developer is
approved (See Appendix 13 an interview with Geoffrey Yarema). After the partner is
selected, parties will negotiate thoroughly on project design and partnership
specifications. In fact the entire contract is mostly built through pure one-on-one
negotiation. At the end when agencies approve the crafted project design and contract, it
signs the contract and finalizes the terms. In a word in the private initiation process, a
private entity proposes a project, after approving the developer government would
negotiate with it on project specifications, and the contract will be crafted purely through
cross-party negotiation.
4.4.2 Crucial Factors in Partnership Formation Have Changed Greatly Over
Time
What factors contribute to or obstruct the partnership formation process and how
have they changed over time? The four factors in the formation model – partner selection,
division of roles, risk management, and interaction among parties – are found to have a
significant impact on partnership formation and the resulting contract agreements as well.
Time-series analysis will be conducted to demonstrate how these factors have changed
over time and affected partnership formation accordingly.
Please note the South Bay Expressway will be treated with extra care in the time-
series analysis. The project’s development took a very long time because of the
environmental challenges encountered. It was initiated by California AB 680 in 1989 but
the contract was renegotiated when the original owner of the company quitted and sold it
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to MIG in the early 2000s. Therefore although the project was initiated early and belongs
to the Early Group, it might have similar characteristics to projects in the Late Group. For
example, AB 680 didn’t allow any state or federal fund to be used for the project; after
the renegotiation, the project received not only local sales taxes but also TIFIA loans and
another federal grant, covering 33 percent of the capital. Also the new contract revised
the non-compete clause in the earlier one to limit its constraint effects on expansion of
competitive capacity (GAO, 2004). Special attention will be paid to this project.
Different Partners Suit Different Situations
How does partner selection influence partnership formation? The study finds
different situations call for different partners which in turn lead to different processes of
partnership formation and public-private arrangements as well.
When states first considered private development of toll roads in the late 1980s
and early 1990s, governments lacked knowledge on PPPs and might not even have an
idea about what projects would be attractive to private investors. Hence they invited
domestic investors with local knowledge to submit proposals on projects the investors
think promising. These investors were from all walks of life, such as real estate
development, communication industry and infrastructure construction and didn’t
necessarily have expertise in toll road development. This situation has been widely
observed in both Early and Middle groups. Virginia allows private entities to propose
projects through unsolicited proposals, rather than only in response to the RFPs. Dulles
Greenway was developed by a team led by a Virginia family and Pocahontas Parkway
was built by a joint venture of two American engineering and construction companies,
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Fluor Daniel and Morrison Knudsen, both through unsolicited proposals. In California,
Caltrans organized a competition for private proposals and drew eight entries in 1990
(Gómez- Ibáñez & Meyer, 1993); among them, CA 91 Express Lanes was built by a team
led by a communication company, a subsidiary of Level 3 Communications, Inc., and
South Bay Expressway was developed by a domestic engineering and construction
company, Washington Group International. The Foley Beach Expressway in Alabama
was built by a local real estate company formed by three sons of the then state governor
Fob James.
A main strength of these domestic developers is they have not only the local
knowledge to initiatively and quickly kick off a project but also political influences to
push necessary legislation and government processes to keep a project moving forward.
Some of them took the initiative to submit unsolicited proposals (the Dulles Greenway,
the Pocahontas Parkway and the Foley Beach Expressway), and some closely worked
with government agencies to convince state legislature to pass PPPs laws (the Dulles
Greenway and the Foley Beach Expressway). However the domestic developers have a
big weakness: since they are from a variety of industries and might not have expertise in
toll road development, they often lack experience and sometimes financial capability to
handle tough situations such as severe toll revenue shortfalls or major engineering
obstacles. In that case, these domestic developers often choose to quit the projects and
end concession ahead of schedule; this could generate huge costs to the public sector.
What is noteworthy is these projects are often taken over by foreign professional toll road
giants such as MIG and Transurban. It is probably because only these world-class toll
177
road developers have the experience and financial and technical capability to take over
these projects. In 2003 MIG acquired the rights to develop the South Bay Expressway
after the project came out of a nine-year-long environmental process. Before long, in
August 2005 MIG purchased the Dulles Greenway after the project went into default and
failed to emerge from it with a series of remedies such as refinancing and an extension of
the concession period. In the case of also financially troubled Pocahontas Parkway,
Transurban acquired it with a 99-year lease through a RFP process in 2006.
As we entered the new millennium, after ten years of practice of toll road
partnership, some state governments now become more knowledgeable about PPPs: what
projects are good candidates, what government can do to smooth and expedite project
development, and how to pick a suitable private partner to work with. Meanwhile some
governments start to have a second thought about unsolicited proposals for two reasons.
First, the National Environmental Policy Act (NEPA) regulates the definition of
transportation projects; sometimes when an unsolicited proposer comes up with a really
creative idea, it might offer value for money but set back the environmental process by
years to take advantage of it. South Bay Expressway is a good example of that. Second,
in more than a few instances public officials after the fact perceived, rightly or wrongly,
that unsolicited private proposals tended to serve the interest of the private company
more than the public interest (Appendix 13 an interview with Geoffrey Yarema). CA 91
Express Lanes serves as an example of this point.
This is why we see an overwhelming use of the RFPs process in the Late Group,
in which case the public sector designates a project, calls for multiple proposals, and
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chooses the one with the best value. In this situation, world-class professional toll road
giants have a much better chance to win the project with their outstanding experience,
reputation, and capacity, and the public sector sees them as more trustworthy partners. On
the other hand, with governments becoming more knowledgeable and supportive of PPPs
and establishing better legal environment for partnerships, these foreign companies feel
more secure to make big investments in the country. The SH 130 Segment 5 and 6 and
the New LBJ Managed Lanes in the Late Group have capital size of 1309 and 2678
million dollars respectively, a much larger scale than previous projects done by domestic
developers.
In sum, there has been a clear shift in selection of private partners over the last
two decades. Early partners are characterized by self-motivated domestic companies from
all walks of life. They take the initiative to look for promising projects with their local
knowledge and work with government agencies to push legislation and government
procedures to make projects happen. Recently, more world-class professional toll road
developers have entered American market through taking over existing toll roads or
responding to government RFPs. Their rich experience and strong capability have made
them preferred partners.
Evolution of Roles
How do parties divide roles among themselves, and how has it changed over time?
The study finds that private partners have been generally playing the same roles over time:
they design, build, finance, operate, and maintain project facilities, depending on the
specific terms in state PPP legislation. Except in the Pocahontas Parkway, a non-profit
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project, the developer (FD/MK) was a design-builder without taking real financial risks.
What is interesting is the division of roles within the public sector has experienced major
changes, evolved into something very different from what it was like in the beginning,
and consequently influenced partnership formation.
Local governments played a silent but crucial role in early PPPs. In the late 1980s
and early 1990s, state governments were still unfamiliar with PPPs and even cautious
about involving themselves too much while federal government hadn’t decided where it
would stand on this issue before the passage of the Intermodal Surface Transportation
Efficiency Act of 1991 (ISTEA). Support from local governments was crucial to keep
some of the earliest partnerships alive. Virginia PPP legislation denied the Dulles
Greenway access to state eminent domain power in land acquisition. When the project
encountered an impasse with holdouts at one end of the route, the local county
government, which wanted the project built, used its own condemnation power to acquire
the final parcels (Poole, 1993). When the South Bay Expressway was severely challenged
by environmental problems, it was local officials at the area association of governments
and cities along the route who kept the project alive (TOLLROADSnews, November 28
th
2007). According to the developer, local governments worked closely with the developer
to relocate and preserve the endangered Quino Checkerspot butterflies spotted on the
right of way of the route.
Local governments continued to play an important role in later projects. When
state and federal governments became gradually more supportive of partnership by
improving existing PPP legislation and providing more incentives, local governments
180
helped partnerships with specific project designing and facility management. For
example, in the New LBJ Managed Lanes, throughout the project development, the North
Central Texas Council of Governments (NCTCOG) and Regional Transportation Council
(RTC), City of Dallas and Dallas County guided planning for the project and contributed
significantly. When the project opens to traffic in the future, the NCTCOG/RTC managed
lane policy will govern toll rates and collections. The North Texas Tollway Authority
(NTTA) will handle toll collections and manage the toll tag accounts. In some other cases,
local governments have made significant financial contribution to partnerships, especially
the unprofitable part, to enhance the viability of the entire project. In the Foley Beach
Expressway, the City of Foley financed and owns the free part, the Foley Bypass, and
also managed to get no-strings-attached federal funds for it to waive the Bypass from the
environmental review process. When the South Bay Expressway renegotiated its contract
in the early 2000s, San Diego Association of Governments agreed to provide 20 million
dollars in local sale taxes to support the northern freeway part.
State governments have gone through a learning-by-doing process and come out
with a better understanding of what a project owner or sponsor needs to do to facilitate a
partnership. Over time, they have become more supportive of PPPs by taking a greater
role in project planning, design, and permitting processes. Comparing to earlier projects,
the ones in the Middle and Late groups didn’t have to face big environmental
uncertainties because most environmental work had been completed by government
before the award of partnership contracts (the Pocahontas Parkway, the I-394 MnPASS,
the SH 130 Segment 5 and 6, and the New LBJ Managed Lanes). Also in land acquisition,
181
governments had either completed land studies beforehand (the Pocahontas Parkway and
the SH 130 Segment 5 and 6) or worked closely with developers on project design to
minimize the need for land (the New LBJ Managed Lanes). Another way states
contributed is that, for later projects, states were inclined to develop those that had been
long planned and studied, which explains why these projects didn’t encounter big
problems with regional planning requirements and rules. Studies and planning for the
Pocahontas Parkway, including project route and environmental work, were completed
and approved in the early 1980s. The New LBJ Managed Lanes, before the award of
partnership, was already highly developed with over ten years of alternatives analyses,
public outreach, engineering reviews, geotechnical drillings, utilities mapping, costings,
and traffic and revenue studies. All of these make it a very solid project. In a word, the
greater involvement of states have substantially increased project viability and expedited
project development for later partnerships.
Lastly federal government’s role has shifted from being an outsider in early
projects to being an important financier and policy supporter in later projects with the
passage of ISTEA and authorization of innovative financial tools such as SIBs, TIFIA,
and Private Activity Bonds
6
. It has increasingly provided more grants for project study
and design (the Pocahontas Parkway) or covering the unprofitable part of a project (the
South Bay Expressway and the Foley Beach Expressway), issued TIFIA loans (the South
6
The Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy For Users of 2005
(SAFETEA-LU) adds highway and freight transfer facilities to the types of privately developed and
operated projects for which private activity bonds may be issued. This change allows private activity on
these types of projects, while maintaining the tax-exempt status of the bonds. The law directs the Secretary
of Transportation to allocate private activity bonds among qualified facilities. Providing private developers
and operators with access to tax-exempt interest rates lowers the cost of capital significantly, enhancing
investment prospects.
182
Bay Expressway, the SH 130 Segment 5 and 6, and the New LBJ Managed Lanes), and
supported the use of SIBs loans (the Pocahontas Parkway) and Private Activity Bonds
(the New LBJ Managed Lanes).
In sum, local governments played a crucial role to keep early projects alive in
troubled situations, while state governments, through learning by doing, have gradually
become a more supportive project sponsor by playing a greater role in project planning,
study and design, and federal government has used innovative financial tools to provide
important financial support for later partnerships.
Improvements in Risk Management through Learning
How do parties manage risks, and is there optimal risk allocation for toll road
partnerships? Risk analysis and management has been the most complicated and difficult
part of partnership building. Generally speaking, the private sector is responsible for risks
associated with costs of construction, operation and maintenance while the public sector
is responsible for administrative, regulatory and legislative problems. However some
risks, such as toll-and-revenue-related risk, environmental risk and land acquisition risk,
are much more complicated to manage and need to be carefully negotiated and
thoroughly accounted for in partnership formation. Through 20 years of practice,
governments have learned great, sometimes painful, lessons from their experience. They
might not have found the optimal risk allocation, but through the learning process, they
are certainly getting closer one step at a time.
Management of toll-and-revenue-related risks has evolved from direct and rigid
regulation in the earlier projects to more sophisticatedly designed methods in later
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projects with a goal of maximizing social welfare. In the Early Group, tolls of the Dulles
Greenway were strictly regulated by the Virginia State Corporation Commission (VSCC)
like a public utility in addition to pre-determined caps on rates of return; and both
California projects put a ceiling on rates of their revenue return. However, direct
regulation of toll rates cannot flexibly accommodate traffic flow: it deters traffic and
underutilizes facility when tolls are set too high, and generates congestion when tolls are
too low. Also, the method of putting a ceiling on rates of return is hardly of any use: in
case of strong revenue, developers could increase their operations and maintenance costs
or use other accounting techniques, for example a higher-than-standard accounting
depreciation, to internalize the extra revenue (Yescombe, 2002; Finnerty, 2007). Later
projects became more sophisticated on this issue by adopting innovative toll and revenue
management strategies. They set tolls to maintain certain traffic density (the I-394
MnPASS) or traffic speed (the New LBJ Managed Lanes) so as to maximize the use of
toll capacity while maintaining free flow. Also, they adopted revenue sharing between the
developer and government. Government’s cut of revenue increases proportionately across
revenue bands (the SH 130 Segment 5 and 6 and the New LBJ Managed Lanes). One
project has even used higher revenue sharing percentage to convince legislature for
higher speed limits for the toll road (the SH 130 Segment 5 and 6) (TOLLROADSnews,
July 6
th
, 2006; TOLLROADSnews, March 2
nd
, 2009). The revenue sharing is a well
designed strategy to provide both sectors incentives to achieve social welfare goals. By
increasing government’s share proportionately across revenue bands, it prevents
developers from charging overly high tolls and getting windfall benefits. On the other
184
hand, private developers also gain since revenue sharing gives government agencies more
incentives to be actively involved to speed up project development and to be protective of
the project in troubled times.
What is noteworthy is the adoption of non-compete clause in the CA 91 Express
Lanes as a way to guarantee toll traffic and control revenue risk has been proved
problematic and abandoned since then. The clause created a 1.5-mile protection zone
along each side of CA 91 and precluded any improvements along the corridor until the
year 2030. It turned out to be very problematic: the clause prohibited several attempts of
Caltrans to make improvements to the SR 91 corridor, and according to Caltrans the work
was necessary to improve driving safety. To solve the deadlock, OCTA had to pay a big
price to buy the facility back from the developer (GAO, 2004). The public sector learned
the lesson. Since then partnerships either have no restriction on expansion of competitive
capacity or adopt very limited non-compete protection. Another lesson from the CA 91 is
government realizes the importance to include a term to ensure the public sector’s rights
to take over partnership projects when it becomes necessary. This is probably why
projects in the Middle and Late groups began to include a term of termination for
convenience.
Secondly, environmental risk management became quite straightforward after the
incident of environmental review “marathon” of the South Bay Expressway. For the later
projects, private investors required Environmental Impact Report completion before they
would be willing to take on a project. Governments either ensured environmental
approvals before the award of partnership contracts (the I-394 MnPASS, the SH 130
185
Segment 5 and 6, and the New LBJ Managed Lanes), or at least completed preliminary
study that only requires minimal re-evaluation (the Pocahontas Parkway), or even
managed to waive the environmental review requirement for a part of a project (the Foley
Beach Expressway).
Lastly, there have been clear arrangements for land-related risk. Generally
speaking, land acquisition has always been the responsibility of the private sector except
for the CA 91 Express Lanes and the I-394 MnPASS. The two were built on the existing
public corridors and state governments donated the land. But as mentioned previously,
over time state governments are becoming more involved in this issue by preparing land
study beforehand (the Pocahontas Parkway and SH 130 Segment 5 and 6) or working
with developers on project design to minimize the need for land (the New LBJ Managed
Lanes).
Building of Trust and Mutual Understanding
How do trust creation and building of mutual understanding reconcile cultural and
institutional differences among parties and affect risk management? The study finds what
is really missing is not understanding of cross-sectoral differences in culture and
institution, but parties’ willingness to compromise themselves to overcome these
differences. Public and private parties are in partnership with different interests and they
have little incentive to care about others’, especially since overcoming the cultural and
institutional differences and controlling relevant risks are often time-consuming and
expensive. In fact it has taken a long learning process with continuous trials for public
and private sectors to better reconcile their differences and manage project risks. During
186
the last 20 years, both sectors have spent a great amount of time in understanding how
each sector works, what parties want from each other, what items are negotiable and what
are not, and how to work together and make a project happen. Now parties are more
comfortable and willing to make compromise on small things to ensure the realization of
big common interest. As seen in later projects, state governments have helped the
investors to utilize low-interest innovative finance tools such as TIFIA, SIBs and Private
Activity Bonds (the South Bay Expressway, the Pocahontas Parkway, the SH 130
Segment 5 and 6, and the New LBJ Managed Lanes) while the private sector started to
share revenues with states to motivate the public sector’s cooperation (the SH 130
Segment 5 and 6, and the New LBJ Managed Lanes), both to enhance project viability.
Also the public sector has taken full responsibility for environmental clearance and
prepared land study (the Pocahontas Parkway, the I-394 MnPass, the SH 130 Segment 5
and 6, and the New LBJ Managed Lanes) while the private sector continued to take the
responsibility for land acquisition, both to expedite project development. The trust and
mutual understanding built along the years of cross-party communication and cooperation
have made effective risk management more possible.
4.4.3 Contract Terms Are Greatly Affected by Partnership Formation
How does partnership formation process influence contract terms? The impact of
partnership formation on contract terms is most visible in four aspects. First, over time
parties have had a better idea about what projects are good candidates for a toll project.
Some projects in the Early and Middle groups were built as new development roads to
187
serve anticipated traffic growth in a region (the Dulles Greenway, the South Bay
Expressway, and the Pocahontas Parkway) and some were for the purpose of congestion
relief. However all Late Group projects are to relieve congestion on existing corridors.
This is because parties have learned from the earlier projects with financial shortfalls that
the key to ensure a toll project’s viability is having real traffic congestion.
Secondly, capital structure and size have changed over time. More innovative
financial tools are now available to privately funded and operated facilities under new
federal legislations, including SIBs, TIFIA, and Private Activity Bonds. These financial
tools have provided a significant portion of capital for partnership projects financed after
2000. For example, TIFIA loans provided 33 percent of the capital for the SH 130
Segment 5 and 6, and TIFIA and Private Activity Bonds together will fund 45 percent of
the New LBJ Managed Lanes. In addition, federal and local governments have gradually
increased their grant contribution to partnership projects to either cover project
preliminary study or build the unprofitable part of a toll facility, as seen in both Middle
and Late groups. As a result, the percentage of private funds in total project capital has
decreased from 100 percent in early projects, 80 to 90 percent in Middle Group projects,
to 20 to 60 percent in later projects (including the South Bay Expressway). Moreover,
availability of these innovative financial tools and investments from world-class toll road
developers together have not only improved project prospects but also made large-scale
projects with a mileage over 150 lane-miles and a capital size of over 1000 million
dollars possible, as seen in the Late Group (the SH 130 Segment 5 and 6, and the New
LBJ Managed Lanes).
188
In addition, partnership contracts have gradually added new terms to protect the
public interest. Revenue sharing and termination for convenience are two terms created
for this purpose. The former allows the public sector to enjoy part of project profits. The
latter is probably a lesson from the incident of public takeover of the CA 91 Express
Lanes in order to assure government the rights to acquire a privately funded and operated
facility when it becomes necessary. The two terms have been increasingly used in the
Middle and Late groups.
Late but not least later projects have had longer concession periods than previous
projects. As Geoffrey Yarema said in the interview, in the 1990s there were not many
investors really interested in long-term equity in toll road development and they all
wanted out within a short term. After two decades of practice, the investors are now
much more confident in making long-term investment in toll roads. In the public sector,
governments are more comfortable with and have more trust in private developers
building and operating public infrastructure, especially in partnership with world-class
professional toll road developers. Also, the development of larger scale of projects will
inevitably require longer concession periods for investment returns. The revenue sharing
term included in these projects’ contracts gives state governments more incentives to
consider longer concessions while the termination for convenience clause provides them
a safety net. The SH 130 Segment 5 and 6 and the New LBJ Managed Lanes in the Late
Group both have a concession period of over 50 years, significantly longer than
concession periods of 30 to 40 years in the Early and Middle groups. Interestingly the
189
New LBJ Managed Lanes has a concession period of 52 years covering both construction
and operations. This is an effective technique to encourage timely project delivery.
4.5 Chapter 4 Conclusion
The search for understanding of how parties shape a partnership and determine
contract agreements has led to the following findings:
(1) There are two major types of partnership formation: government-solicitation
partnership and private-initiation partnership. The former can be done through a
regular RFPs process or a Pre-Development Agreement (PDA) process. In a RFPs
process, government agencies send out a RFPs for a designated project, negotiate
with several bidders, normalize the contract terms and then select the best-value. A
PDA process is a special and rarely seen form of solicited proposal process and
results in a two-phase agreement. The contract that is normalized through bidder
consultations covers only the first, pre-feasibility phase and leaves the
implementation phase portion of the contractual relationship to be negotiated with the
selected developer in the second phase. For private-initiation partnership, a private
entity takes the initiative to study a project and submit a proposal, unsolicitedly or in
response to a general call of government.
(2) The four crucial factors in partnership formation– partner selection, division of roles,
risk management and interaction among parties – have significantly changed in the
last 20 years. Specifically, private partners have shifted from self-motivated domestic
companies to foreign professional toll road giants in response to government
190
initiatives; division of roles has evolved with federal and state governments becoming
increasingly involved in and supportive of PPPs; arrangements for project risks have
significantly improved by learning from previous mistakes; and through trust creation
and building of mutual understanding parties now are more willing to compromise on
small things for the realization of big common interest.
(3) Changes in partnership formation have led to changes in partnership contracts: more
projects are now being built for the purpose of relieving congestion on existing
corridors instead of accommodating anticipated future traffic; the availability of a
variety of innovative financial tools and investment of world-class toll road
developers together have made large-scale projects possible; new contract terms such
as revenue sharing and termination for convenience have been created to better
protect and serve the public interest; and recent partnership contracts are having
longer concession periods.
However author would like to point out the limitation of the study. The study
deliberately selected cases from several states that have been active in private
development of toll road in order to justify the generalization of analysis results to the
entire country. But the study didn’t pay much attention to the differences across states.
Incidentally, both California projects are in the Early Group, Virginia projects are in the
Early and Middle groups, while both Texas projects belong to the Late Group. This is
determined by the fact these states started doing PPPs at different time periods which
cannot be evened out by case selection. However it leaves a possibility that the changes
in partnership formation observed across three groups in the time-series analysis might
191
not be reflections of learning from experience but simply be caused by states’ different
ways of handling PPPs. This possibility should not be ruled out but is beyond the scope
of the study. It leads to questions for the next level study: do states conduct PPPs
differently and why, and can their experience be shared?
Nevertheless the research constitutes one of the first academic efforts in exploring
PPPs formation in toll road development. It serves an important purpose. Recently many
states have been considering adopting or expanding their use of PPPs in transportation
development, such as Arizona, California, Georgia and Virginia, to cope with severe
financial shortage in the sector. On the other hand, there still are many questions and
doubts. Just in May 2007, the Texas state senate passed a two-year moratorium on toll
concession because Texans were angry about foreign companies taking over their public
infrastructure. The study is timely to answer some important questions, telling people
how we have been doing PPPs in highway development, what are the mistakes and
problems observed, and what we have learned and how we have improved. Two
important conclusions can be drawn from the study. In actuality, every project is different
in some way, and what parties need to do is to work on every project detail and find a
way to manage every risk. More importantly, we must realize PPPs is a learning process,
experience is the best teacher, and there is no easy way to expedite the process.
192
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Chapter 5: Conclusions
This dissertation studies a Private Finance Mechanism (PFM) that utilizes private
finance for infrastructure development and awards to private investors the operation
rights for investment returns, and its application in American toll road development in the
last two decades. It answered two questions: what factors determine the use of private
finance for a toll road project, and how do public and private parties shape a partnership
to build a toll road under the PFM? This chapter reviews the major findings of the
research, discusses their theoretical and practical implications, and explores an important
topic for future research on the PFM.
5.1 Major Findings
First, this dissertation designed a decision-making model to illustrate how the
public sector chooses to use private finance or not for a toll road project under the
influences of seven channels of societal, fiscal, political, and legislative factors. The
model was empirically explored using data of toll road activity in U.S. states between
1992 and 2008. The specific factors found to affect the decision were project initiation
year, project sponsorship, the existence of state umbrella debt limit, state political
ideology, the proportion of public employees, and state average personal income. The
results suggest that, at least in the case of toll road development, both project
198
characteristics at micro-level and state fiscal, political and market conditions at macro-
level have affected the decision to use private finance for toll road projects.
Second, to understand how public and private parties shape a toll road partnership
under the PFM, a formation model was developed to describe and explain the process of
partnership formation. The model indicates that partnership formation is consisted of four
crucial components: partner selection, division of roles among partners, joint risk
management, and trust creation and building of mutual understanding, and meanwhile the
formation process is driven by the nature of the PFM and affected by specific
characteristics of a project. Eight projects were deliberately selected to form a multiple-
case study, and both pattern-matching and time-series analysis techniques were used for
qualitative analysis. Findings include (1) there are two major types of partnership
formation: government-solicitation partnership and private-initiation partnership; (2) the
four components of partnership have had significant changes in the last 20 years,
including a transition from self-motivated domestic companies to foreign professional toll
road giants in response to government initiatives, increasing support from federal and
state governments, greatly improved management of project risks, and effective trust
creation and mutual understanding building; and (3) these changes in partnership have led
to changes in project contracts, such as more projects for the purpose of congestion relief,
larger project scale, new contract terms for protection of the public interest, and longer
concession periods.
199
5.2 Theoretical and Practical Implications
In the search for determinants of private finance involvement in toll road
development, the results of Chapter 3 offer several theoretical implications for the study
on Public-Private Partnerships (PPPs). First of all, only having high demand on public
facilities or services is not going to trigger PPPs. For a very long time, people tend to
believe that states with faster economic development and population growth experience
more road demand and therefore are more likely to use private finance. The results show
that neither economic development nor population growth makes a difference in toll road
financing, which tells us only having high demand is not a good enough reason to use
PPPs.
Second, politics is of critical importance to the PPPs decision. Political factors,
both state political ideology and the power of public employees, have significant
influences on the use of private finance in infrastructure development. Conservative
states are found friendlier to the PFM than liberal states. States with a higher proportion
of public employees are found more likely to use private finance, probably because they
are facing more pressure to downsize their big governments. Third, economics is playing
a great role in the use of the PFM. Governments are more likely to use the PFM when
they face restrict fiscal regulations and debt limits. Private investors are following the
money: they tend to invest in states with wealthy residents.
In addition, an important policy implication is current state PPP legislation is not
living up to its mission statement. Both the public and private sectors state that strong and
effective PPP legislation is crucial to successful toll road partnerships because it
200
decreases uncertainties of government regulation and provides a better regulatory
environment to secure PPP projects. The results, however, don’t show the significance.
Instead of explaining the results as PPP legislation is indeed insignificant to the PPPs
decision, a more likely explanation is, based on current PPP legislation practices in states,
the existing legislation is neither “strong” nor “effective” to fulfill its goal of promoting
and securing PPPs projects. This leaves policy makers an urgent mission about how to
improve PPPs legislation to effectively support partnership projects.
Furthermore, the results provide some preliminary insights into the relationship
between government decentralization and the use of PPPs. Decentralization and PPPs
both are main New Public Management principles, but the interactions between them
have not been thoroughly empirically explored. This dissertation finds localized and
professionalized project sponsorship are to reduce the likelihood of using private finance,
probably because of the availability of local political and financial support and expertise
and experience in the particular field. This finding sheds light on the relationship between
decentralization and PPPs and provides a point of comparison for future work.
In the investigation into how the public and private parties shape a toll road
partnership under the PFM, the results of Chapter 4 provide some practical implications
for government in transportation development. First, state and local governments ought to
choose the way of doing toll road partnerships based on their own experience and
administrative and legislative readiness. For states that are new to the game and lack
knowledge on PPPs, private-initiation partnership can offer some advantages. Here the
government invites private investors with affluent local knowledge to submit proposals
201
on projects the investors think promising. These investors can quickly kick off a project
with their local knowledge and in some cases also help government with necessary
legislative and administrative work to push the project moving forward. In contrast, for
states that are more knowledgeable about and experienced with PPPs, government-
solicitation process might offer more advantages by soliciting the best-value proposal for
a designated project. A main strength about this process is government can best utilize
market competition to seek for a best offer among multiple proposals for a project it truly
desires. Also, a related point is, to ensure project viability, governments should choose to
build roads to solve real traffic congestion. This is an implication from a finding that
many of the early projects built in anticipation of future traffic demand have encountered
severe revenue shortfalls while projects built to relieve congestion on existing roads have
performed much better financially.
Secondly, various innovative finance tools are now available and ought to be
better used. Recently, especially since the new millennium, partnerships have
increasingly used innovative financing tools to provide a significant portion of their
project capital. This is probably part of the reason recent projects are in a much larger
scale than earlier partnership projects. However it must be pointed out that some of these
innovative financing tools have been used much less than expectations. TIFIA, the most
widely used one among all innovative finance tools, had always had sufficient budget
authority to support all qualified projects until a boom in demand in the last two years
due to the current financial crisis. A recommendation for future partnerships is to well
plan project financing and effectively utilize all innovative finance tools available to them.
202
However, people must be cautious about the generalization of the study’s results.
First, toll road activity has taken place in fewer than half U.S. states and private
development of toll roads have only been witnessed in a handful of states. Each state is
different when it comes to infrastructure development. Therefore these findings might not
be applicable to other states that are currently not involved in toll road development.
Second, this dissertation focuses on a single function of public infrastructure and its
findings may not be broadly representative of transportation, let alone public
infrastructure. For example, most toll roads primarily benefit the rich. This creates
political dynamics that may differ substantially from public infrastructures that serve
broader and less wealthy sectors of the community. The behavior of transportation
agencies may also be unique. State and local transportation agencies have been severely
constrained by financial shortfall due to the falling of motor fuel taxes. Therefore they
may be more responsive than public agencies managing other public infrastructures to the
possibility of using private finance.
5.3 Future Research
This dissertation substantially advances our understanding of private investment
in toll road development in the U.S. and also leads us to a new question crucial to the
study on the PFM. After examining what determines the PFM and how parties form it, it
is time to ask “is it a really effective instrument for the public sector”. Previous studies
have merely provided theoretical discussions on the effectiveness of the PFM. An
empirical study is greatly needed to answer this question. Two critical issues need to be
203
addressed to help design the empirical study: what does effectiveness mean here? And
what should be in the control group to serve as the comparative counterpart of the PFM in
effectiveness measurement?
A preliminary design is to compare toll roads built under the PFM with toll roads
built with only public funds. This is because the options the governments are facing are
whether to attract private finance to build toll roads or issue tax-free public bonds to do
so. Here effectiveness is a comprehensive notion that should be measured in at least three
aspects: project planning and development, real development costs, and project delivery
and performance. The two groups of toll roads ought to be compared in each aspect. In
project planning and development, the PFM toll roads and public toll roads ought to be
compared in their ability to finance, government’s permitting process, process
transparency, and their impact on public employees. In real development costs, they
ought to be compared in their surety of budget, life-cycle costs, and transaction costs.
And lastly in project delivery and performance, they ought to be compared in timeliness
of project delivery, quality of service, quality of maintenance, use of advanced
technology and innovations, and toll rates and the increases.
A main difficulty to conduct this study is it requires full project information
covering from planning in the beginning to the end of a project’s operation in order to
measure some long-term variables such as life-cycle costs and quality of service and
maintenance. However, most PFM toll roads are still in the early stage of their project life.
None has completed its contract term, except for a few projects that were terminated or
taken over ahead of schedule. However, effectiveness of the PFM is the core issue to
204
justify the continuation of private finance involvement in toll road development and
future expansion of private development of public infrastructure, and therefore must be
well studied and answered.
205
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Appendix 1: Correlation Matrix
Initiation
Year cost Size Type
Sponso
r
Economic
Growth
Population
Growth
State
Debt
Umbrella
Limit
State
Ideology
Public
Emplo
yees
PPP
Legisl
ation
Turnpik
e
Personal
Income
Initiation
Year
1
cost
.131 1
Size
-.071
.459
(**)
1
Type
-.391
(**)
-.071
.177
(*)
1
Sponsor
.126
.214
(**)
.130 -.148 1
Economic
Growth
-.409
(**)
-.055 .006
.245
(**)
-.002 1
Population
Growth
-.313
(**)
-.143 -.035
.246
(**)
-.081
.719
(**)
1
StateDebt
.009
.158
(*)
.151
-.291
(**)
.093
-.172
(*)
-.458
(**)
1
Umbrella
Limit
-.108 .086 -.038
-.207
(**)
.055 -.065 -.016
.420
(**)
1
State
Ideology
-.092
.169
(*)
.126
-.294
(**)
.135 -.099
-.375
(**)
.787
(**)
.348
(**)
1
Public
Employees
.252
(**)
-.038 -.002 .100 -.027 .026 .048
-.177
(*)
-.544
(**)
-.303
(**)
1
PPP
Legislation
.281
(**)
.000 -.058 .064 .031 .090
.383
(**)
-.539
(**)
.026
-.400
(**)
.108 1
Turnpike
Experience
.025 -.043 .059 -.053 .152 .084 .116
-.231
(**)
-.049
-.314
(**)
.020 .045 1
Personal
Income
.626
(**)
.336
(**)
.095
-.444
(**)
.152
-.257
(**)
-.289
(**)
.204
(*)
.271
(**)
.332
(**)
-.192
(*)
.170
(*)
.088 1
The number of observations is 155.
** Correlation is significant at the 0.01 level (2-tailed); * Correlation is significant at the 0.05 level (2-tailed).
219
Appendix 2: Project Information of Dulles Greenway
OVERVIEW
Dulles Greenway is a 14-mile, limited-access highway extending from the State-owned
Dulles Toll Road, which carries traffic between Washington's Capital Beltway and Dulles
Airport, to Leesburg. It is the first private toll road built in Virginia since 1816. Virginia's
Highway Corporation Act was passed in 1988 to authorize PPPs. Construction of the
project was originally scheduled to start in 1989 and to be completed by 1992, but
financing and environmental concerns postponed the start of construction until September
1993. In 1993, the Toll Road Investors Partnership II, L.P. (TRIP II) was formed to build
the Dulles Greenway. A construction contract was awarded in 1993. The highway opened
in September 1995, six months ahead of schedule. However, early ridership was lower
than projected, and the project went into default in July 1996 – within a year of its
opening. Although privately owned, the highway is also part of SR 267. The speed limit
is 65 mph (105 km/h).
http://www.dullesgreenway.com/
BACKGROUND (LEGISLATION, POLITICS, AND FINANCE)
In 1986 a group of private entrepreneurs, later organized as the Toll Road Corporation of
Virginia (TRCV), proposed building a fifteen-mile toll road connecting Dulles
International Airport with Leesburg, Virginia. The private road would connect with an
existing state-owned toll road at Dulles Airport and extend into the rapidly developing
western outskirts of the Washington, D.C., metropolitan area. By 1988 the road’s backers
had convinced the Virginia Assembly to pass the legislation needed to authorize private
toll roads in the state. By late 1991 TRCV had received all the state and local government
permissions needed to begin construction and was waiting only on final arrangements for
construction and long-term financing (Gómez- Ibáñez & Meyer, 1993).
Regarding the PPP legislation, Virginia's Highway Corporation Act was passed in 1988.
Virginia adopted the highway privatization programs only after state studies revealed a
large backlog of needed projects. It permits private developers incorporated as public
service corporations to develop, own, and operate tollways on a B-O-T basis. Projects
must be approved by the Virginia Department of Transportation (VDOT), and the toll
rates and rate of return are regulated by the Virginia State Corporations Commission
(VSCC). Title to the project must return to the state 10 years after the project debt has
been repaid. The law makes no provision for use of eminent domain powers on behalf of
a private tollway, but under existing state law counties may exercise such powers for
firms pursuing public-service projects regulated by the VSCC (Poole & Guardiano, 1992).
220
Figure 11: Map of Dulles Greenway
221
SECTION 1 PROJECT BASICS
State and location: In Loudon County, Virginia, connecting Dulles Airport and
Leesburg.
How long: 14 miles, comprising 66 lane-miles with an additional 40 lane-miles of
ramps and service roads and 11 toll plazas.
How many lanes: 2x2 (before 1999; after 1999, added a third lane in each direction).
Facilities type: Greenfield.
Purpose/goals: new development road, in anticipation of Dulles Airport growth and
local real estate development in Loudoun County, extending northwesterly from the
airport to Leesburg, Virginia, as an extension of the existing state-owned Dulles Toll
Road.
Toll type: no congestion pricing, no electronic tolling in the beginning and available 1
year later.
Capital needs/ Financial estimate: $300 M in 1988 (final cost was $338 M).
Expected revenue sources: toll revenues.
Revenue uncertainty: (1) competing free road Route 7; (2) expectations on local real
estate boom.
Environmental review needs and study: yes, the project would need to acquire
environmental permits and local support.
Land acquisition needs and study: yes, the project needs to acquire land from tens of
private land owners.
SECTION 2 PARTNERSHIP INFORMATION
PPP legislation: Virginia's Highway Corporation Act was passed in 1988.
Initiation time of project: 1988.
Feasibility study: a new development road is expected to have lower construction
costs; however the developer argued that tolls alone are insufficient and that local
government or landowner contributions will be necessary to cover to 20 to 30 percent
of costs.
Partner selection/procurement: no procurement, it was an unsolicited proposal.
Main negotiations and other interactions: land issue with state and local government
eminent domain power.
Public sector/roles
o State: VDOT has oversight responsibility during construction and inspected
the road as it was being built; the Virginia State Corporation Commission
(VSCC) regulates toll rates like a public utility.
o Federal: no.
o Local: local county government helped to acquire lands from a few private
landowners with county government’s eminent domain power.
Private sector/roles
o Consortium: Toll Road Investors Partnership II (TRIP II), developed for the
sole purpose of building and operating the toll road with a 42-year franchise
from the state.
222
o Roles: D,B,F,O,M and ownership.
1. The partnership handled and paid for all aspects of developing, operating
and maintaining the project, including acquiring the right of way and
conducting the environmental work, and the road falls under regulatory
control of the State Corporation Commission.
2. TRIP II acquired all of the land for the project and owns the right of way
and the road. Consequently, TRIP II also pays real estates taxes on the
property and has insurance to cover any liability that may occur (i.e., as
the result of an accident).
3. TRIP II uses Virginia state troopers specifically assigned to the toll road to
police the road and reimburses the state for this service.
o Firms in the consortium: In 1988, TRIP II consists of three partners: a
Virginia family, the AIE Limited Liability Corporation, and Brown and Root
of Houston, Texas.
o Other PPPs contracts: Brown and Root, Inc., was the prime contractor for the
construction of the toll road. Autostrade, an Italian private toll road developer
and operator, is responsible for operations and maintenance.
SECTION 3 CONTRACT TERMS
Project nature: for-profit.
Contract type: DBFO, with private ownership.
Contract signed date: In 1993 TRIP II was formed and a construction contract was
awarded.
Financial closure: in 1993, the project cleared financing and environmental concerns.
Financing arrangements: $350 million in total, 100% private money.
o TRIP II put up $40 million in equity.
o Ten institutional investors provided $258 million in long-term, fixed-rate
notes (due in 2022 and 2026).
o Three banks agreed to provide part of the construction funding and $40
million in revolving credit.
(Details: TRIP II put up $40 million in equity, and secured $310 million in privately
placed taxable debt. Ten institutional investors led by CIGNA Investments, Prudential
Power Funding Associates, and John Hancock Mutual Life Insurance Company
provided $258 million in long-term, fixed-rate notes (due in 2022 and 2026). Three
banks (Barclays, NationsBank, and Deutsche Bank AG) agreed to provide part of the
construction funding and $40 million in revolving credit. Loans are to be repaid with
toll revenues, and the financing is secured by a first mortgage and security interest in
the developer's right, title, and interest in the facility.)
Term/reversion contract: Initially 42.5 years, the project was a real toll DBFO project,
with operational responsibilities reverting to the Commonwealth of Virginia after
42.5 years. (In 2001, it was extended another 20 years to 2056.)
Revenue regulations
223
o Rate of return: Virginia's State Corporation Commission limits the rate of
return on the project to 18 percent initially. The caps on return descend from
30 to 14 percent during the life of the 40 year franchise.
o Toll rates: directly regulated by VSCC like a public utility. The company
submits proposed toll rates to the Virginia State Corporation Commission for
approval.
o Other revenues: no.
o Revenue sharing: no
Management of revenue uncertainty risk: Dulles Greenway does not have a
noncompete agreement with the state. But the private sector’s understanding was no
public improvements to competing free roads would be made ahead of schedule.
Management of environmental risk: it is the private developer’s responsibility to go
through all necessary processes and acquire all necessary environmental permissions.
Management of land acquisition risk: (1) the developer is responsible for land
acquisition and (2) state government will not interfere with eminent domain power; (3)
but under existing state law, counties may exercise such powers for firms pursuing
public-service projects regulated by the VSCC (Poole & Guardiano, 1992).
Termination for Convenience. No.
SECTION 4 FOLLOW-UPS
Open date/Physical status: opened in September 1995.
Evaluation on revenue-related risk management: (1) The Dulles Greenway does not
have a noncompete agreement with the state. However According to a TRIP II person,
it was the company’s understanding that the state would not make improvements to
competing roads ahead of schedule. However, he said, VDOT made significant
improvements to a competing road, State Route 7, ahead of schedule. According to a
bond rating agency, these improvements adversely affected the traffic projected to use
the toll road. The improvements to State Route 7 were in the state’s plans in 1989 and,
according to a VDOT official, the state did not have a timetable in place for making
those improvements. Rather, once projects were in the state’s plans, they made the
improvements when funding was available. (2) Local real estate meltdown due to the
Savings and Loan Crisis during the early 1990s made the financial situation worse.
Evaluation on environmental review process: The project has met with little
resistance, perhaps because of the community outreach that Ralph Stanley, the
Executive Officer, has achieved. Stanley says that "all projects are local. ... You must
stay close to your customer." Stanley's operation stays in close contact with all local
groups, such as the newspaper, the chamber of commerce, environmental groups, and
the Northern Virginia Builders Industry Association. The operation is very attentive
to the concerns of all parties. Stanley himself has spoken at more than 70 local events
in the last three years. In some respects, then, toll roads are still community projects
(Klein & Fielding, 1992).
Evaluation on land acquisition: Local county government used its eminent domain
power to solve an impasse. The developer at first appeared to have obtained the
cooperation of all of the small number of land owners along its desired 15-mile route
224
through land purchase and donations. But ultimately the company faced a problem
with holdouts at one end of the route. Since by law the project has no access to state’s
eminent domain power, the local county government, which wanted the project built,
used its own condemnation powers to acquire the final parcels (Poole, 1993).
Term change: In 2001, it was extended another 20 years to 2056, due to financial
trouble (please see the following “important issues”).
Other important issues:
What constitutes an unsolicited proposal? An “unsolicited proposal,” as defined in
FAR 2.101, is a written proposal for a new or innovative idea that is submitted to an
agency on the initiative of the offering company (i.e. your company) for the purpose
of obtaining a contract with the government, and that is not in response to an RFP,
broad agency announcement, or any other government-initiated solicitation or
program. For an unsolicited proposal to comply with FAR 15.603(c), it must be: (1)
Innovative and unique; (2) Independently originated and developed by the offering
company; (3) Prepared without government supervision, endorsement, direction or
direct government involvement; (4) Detailed enough to show that government support
could be worthwhile, and the proposed work could benefit the agency’s research and
development (or other mission responsibilities). (5) Not an advance government
proposal for a contract you know the agency will need, that could be acquired by
competitive methods. (6) For a complete list of the FAR 15.6 regulations regarding
unsolicited proposals, see
http://www.acqnet.gov/far/current/html/Subpart%2015_6.html.
Unsolicited Proposal regulation in Virginia. Virginia's situation is more cumbersome
than most. Projects may be proposed by the private sector, rather than being
developed only in response to RFPs. But several different agencies play key roles in
the approval process. The Virginia DOT initially viewed private projects (or at least
the first private project) as rivals. VDOT argued before the Commonwealth
Transportation Board (CTB) that it should build the Dulles Toll Road Extension,
rather than the private firm. Only after the governor made it clear that he supported
the privatization did VDOT back off. After receiving CTB approval, a private toll
project must then receive approval of its financial plans and toll rate structure from
the State Corporations Commission, which will be its ongoing regulatory agency. The
SCC is Virginia's public utility regulator, so most of its expertise is in traditional
utilities, rather than transportation infrastructure.
Toll rates regulated like a public utility. The project is governed more like a public
utility. The company submits proposed toll rates to the Virginia State Corporation
Commission for approval. Before it opened to traffic the Commission had already
approved the rates through 1997. The rate for passenger vehicles would be 12 cents
per mile as of January 1, 1994 when the road was scheduled to open and could
increase to 13.5 cents as of Januay1, 1996. The caps on return descend from 30 to 14
percent during the life of the 40 year franchise.
Financing History
o Part 1 TRIP II put up $40 million in equity, and secured $310 million in
privately placed taxable debt. Ten institutional investors led by CIGNA
225
Investments, Prudential Power Funding Associates, and John Hancock Mutual
Life Insurance Company provided $258 million in long-term, fixed-rate notes
(due in 2022 and 2026). Three banks (Barclays, NationsBank, and Deutsche
Bank AG) agreed to provide part of the construction funding and $40 million
in revolving credit. Loans are to be repaid with toll revenues, and the
financing is secured by a first mortgage and security interest in the developer's
right, title, and interest in the facility.
o Part 2, refinancing. TRIP II went into default on its loans in 1996 and
restructured its debt in 1999 and agreed to an extension of the project. In 1999,
TRIP II did a refinancing which involved bonds that replaced all other
outstanding agreements. The bond issue was $332 million in AAA Bonds
insured by MBIA. In 2001 the Virginia State Corporation Commission
extended TRIP II concession period for an additional 20 years to 2056.
o Part 3, acquisition by Macquarie. In August 2005 Macquarie Infrastructure
Group (MIG) agreed to purchase TRIP II for $617.5 million. This included a
payment of $84.5 million to Kellogg Brown & Root for its 13.3% share of the
company, and $535 million to the Shenandoah Group, the family held
company that had bought out Autostrade’s former 30% share to hold 86.5% of
TRIPP II’s stock.
Financial trouble led to refinancing in 1999 and a sale to Macquarie in 2005.
1. The project had struggled financially since its beginning. Revenues had been
less than projected because traffic had been lower than projected. Before the
road opened, traffic was projected to be about 33,000 vehicles per day in the
first year and needed to reach 68,000 vehicles per day to meet its expenses,
based on a $2.00 toll. However in the toll road’s first year of operation, it
generated 20 percent of the projected revenue; in its fifth year, the road
generated 35 percent of the revenue forecast. Residential and economic
growth had continued in the area and traffic had increased, averaging 46,000
vehicles per day in 2000. According to a TRIP II official, although the toll
road’s cash flow was positive, it still had a negative income and had never
made a profit for its investors by 2004.
2. In 1999, the partnership refinanced its debt, which helped to enhance the
project’s survivability and protection provided to bondholders by allowing
debt service requirements to better match expected growth in toll revenues.
The refinancing paid off the outstanding debt, created project reserve funds,
and covered costs associated with the refinancing. As a result of the
refinancing, TRIP II issued approximately $370 million in senior bonds and
$76 million in subordinate bonds. The senior bonds are privately insured, and
the partnership must maintain a reserve equal to one year of debt service
payments. Subordinate bonds are not insured, and debt service payments can
only be made on subordinate bonds after operating expenses, debt service on
senior bonds, and required payments to project reserves. The state has no
liability for any of the debt. The repayment of the debt was also extended 9
years and was configured to keep debt service payments much lower than the
226
original plan until 2011. According to a TRIP II official, the restructuring also
resulted in significantly lower interest rates. After refinancing, it still has a
negative income and has never made a profit for its investors.
3. In 2005 Macquarie agreed to purchase TRIP II for $617.5 million. Toll Road
Investors Partnership II (TRIP II) became a fully owned subsidiary of
Macquarie Infrastructure Group, consisting of Brown and Rot, Inc.
(Constructor) and Autostrade International of Virginia O&M, Inc.
(Developers and operator), a subsidiary of Italian-based Autostrade S.p.A, the
largest toll road operator in the world.
227
Appendix 3: Project Information of CA 91 Express Lanes
OVERVIEW
The California 91 Express Lanes is a ten-mile long toll highway, with two lanes and an
additional three-plus carpool lane in each direction, within the median of pre-existing
eight-lane SR 91 between SR 55 in Orange County and the Riverside County line. The
major goals of CA 91 are to reduce congestion on the existing SR 91 Riverside Freeway
and also to connect growing residential areas in the Inland Empire with employment
centers in Orange County. The project was developed by the California Private
Transportation Company (CPTC) under a PPP agreement with Caltrans and the Orange
County Transportation Authority (OCTA). The development agreement was reached in
December 1990, and the project was accomplished and opened to traffic in December
1995. The CA 91 Express Lanes is innovative in several aspects: it is the first privately
financed toll road in the United States in the last 50 years (the time of financial closure),
the first variably priced toll road in the nation (not dynamic pricing, but fixed toll rates
during different blocks of hours), and the first fully automated toll road in the world
which collects tolls through electronic transponders. In 2003, OCTA acquired the toll
road from CPTC for $210 million and operates it as a public toll road since then.
BACKGROUND (LEGISLATION, POLITICS, AND FINANCE)
As one of the first states allowing private concession in transportation in recent history,
California passed Assembly Bill 680 (AB 680) in 1989, which authorized Caltrans to
enter into agreements with private entities for the development, construction and
operation of four pilot projects at private sector expenses without the use of public funds.
Upon completion, these facilities will be leased to the private entities for up to 35 years
and private investments will be recovered with toll revenues. In fact, Caltrans organized a
competition for private proposals that drew 8 entries in 1990. Teams of Caltrans experts
ranked the proposals on criteria that included the importance of the transportation need
served, the ease of implementation (including environmental or right-of-way acquisition
obstacles), the experience of the consortium, the extent to which the project would
promote economic development, and the degree to which the project incorporated
innovative ideas. The four projects finally selected include 3 from southern California
and one from northern California.
(Gómez- Ibáñez & Meyer, 1993). The four projects
include:
CA 91 Express Lanes (Orange County)
SR 125 (the future South Bay Expressway, San Diego County)
SR 57 (Orange County)
Mid-State Tollway (Alameda and Contra Costa Counties)
Development franchise agreements of the four projects were executed in December 1990
and January 1991. The agreements set the maximum rates of return that the developers
could earn and established zones around the projects in which Caltrans promised not to
build competing transportation facilities (Gómez- Ibáñez & Meyer, 1993) However, only
228
two projects were eventually completed, the CA 91 Express Lanes and the South Bay
Expressway (SR 125). The other two projects, SR 57 and the Mid-State Tollway, were
never able to take off due to lack of finance and community support. Over time, AB 680
earned a reputation as a PPP legislative model to avoid and the bill was repealed by the
legislature in 2002.
Figure 12: Map of CA 91 Express Lanes
229
SECTION 1 PROJECT BASICS
State and location: Orange County, California.
How long: 10 miles.
How many lanes: 2 lanes and an additional three-plus carpool lane in each direction,
within the median of pre-existing eight-lane SR 91 between SR 55 in Orange County
and the Riverside County line.
Facilities type: HOT related.
Purpose/goals: congestion relief.
Toll type: congestion pricing (not dynamic pricing, but fixed toll rates during
different blocks of hours), electronic tolling.
Capital needs/ Financial estimate: $88.3 million (1990); financial cost $130M (1995).
Expected revenue sources: toll revenues.
Revenue uncertainty: competitive free lanes on SR 91.
Environmental review needs and study: Environmental clearance for the project
would be relatively easier to obtain than other new capital projects since OCTA had
already prepared an environmental review prior to the project, because the state had
planned to build HOV lanes on SR 91.
Land acquisition needs and study: no need for a separate right-of-way acquisition,
since it is within the median of pre-existing SR 91, so the state donated the land. This
is significant non-toll support provided without charge by state authorities.
SECTION 2 PARTNERSHIP INFORMATION
PPP legislation: California AB 680 passed in 1989.
Initiation time of project: 1989.
Feasibility study: (1) the developers of CA 91 states that tolls will cover all
construction and operating costs. (2) A brief dispute over tolling did threaten to stop
CA 91. Orange and Riverside Counties originally had planned to build free HOV
lanes in the media of SR 91. Riverside County actually had begun construction of its
portion at the time that the private consortium proposed building the Orange County
segment as a toll facility. As a consequence, Riverside County argued that HOVs
should be allowed free access to the tolled Orange County median lanes, in keeping
with the plan the two counties had originally accepted. A guarantee of free access for
HOVs threatened the viability of the private proposal in Orange County, however,
because HOVs eventually might so seriously congest the toll facility as to make it
unattractive to toll-paying Single Occupancy Vehicles (SOVs). Eventually Riverside
officials compromised and accepted that HOVs with only two persons be tolled
because public opinion polls revealed that Riverside residents were more concerned
that the lanes be built quickly than whether they were tolled (Gómez- Ibáñez &
Meyer, 1993).
Partner selection/procurement: In 1990 Caltrans organized a competition for private
proposals that drew 8 entries. Teams of Caltrans experts ranked the proposals on
criteria that included the importance of the transportation need served, the ease of
implementation (including environmental or right-of-way acquisition obstacles), the
experience of the consortium, the extent to which the project would promote
230
economic development, and the degree to which the project incorporated innovative
ideas. CA 91 was ranked third, and the first two were SR -57 and SR 125.
Main negotiation and interactions: (1) a return cap of 17%; (2) non-compete clause;
(3) environmental work to be finished by OCTA (no much information, the private
developer was very secretive).
Public sector/roles
o State: Caltrans is the sponsor and state has the ownership.
o Federal: no, this is before 1991 ISTEA.
o Local: the Orange County Transportation Authority (OCTA) completed the
environmental work and sold it to CPTC.
Private sector/roles
o Consortium: the California Private Transportation Company (CPTC).
o Roles: D,B,F,O,M. CPTC takes responsibility for design, finance and
construction of the toll facility. In addition, maintenance and operational costs
for the road are also CPTC’s responsibility.
o Firms in the consortium: The consortium is formed by subsidiaries of Level 3
Communications, Inc., Cofiroute Corporation, and Granite Construction, Inc.
o Other PPPs contracts involved: Italy's Autostrade is the toll operator.
SECTION 3 CONTRACT TERMS
Project nature: for-profit.
Contract type: BTO.
Contract signed date: December 1990.
Financial closure: information unavailable, the private developer was very secretive.
Financing arrangements: $130M in total, 100% private money. CPTC financed the
project with $20 million private equity, $100 million bank loans and $9 million
subordinated debt to OCTA.
Term/reversion contract: 35 years. After construction was completed, ownership of
CA 91 was transferred to Caltrans, while CPTC retained the franchise for the toll road
for 35 years and would transfer the facility back to the state at the end.
Revenue regulations
o Revenue sources: tolls
o Rate of return: a 17% ceiling on rates of return with any excess revenues to be
paid into the state highway fund.
o Toll rates: unregulated.
o Other revenues: All 4 California projects by law allow the consortia to profit
by leasing out their rights to providers of various auxiliary services, such as
gas stations, restaurants, and hotels by the toll road; but the incomes are not
expected to be significant.
o Revenue sharing: no.
Management of revenue uncertainty risk: (1) non-compete clause (established zones
around the projects in which Caltrans promised not to build competing transportation
facilities). (2) No state or federal funds may be used, but the legislation is silent on
231
local financial assistance; that omission has led to controversial proposed legislation
in 1991 to forbid any financial or right-of-way assistance to AB 680 projects.
Management of environmental risk: to allow the private developer to buy
environmental documents prepared by OCTA for the project. OCTA had already
prepared an environmental review prior to the project, because the state had planned
to build HOV lanes on SR 91. OCTA subsequently conducted a supplemental review
on the express lanes to alter the original review and CPTC purchased both
environmental reviews from OCTA when it built the toll road (GAO, 2004).
Management of land acquisition risk: (1) This toll road was built within the median of
the existing SR 91, which meant there was no need for a separate right-of-way
acquisition. (2) By AB 680, The California Department of Transportation (Caltrans)
may exercise its power of eminent domain on behalf of a tollway project, but only as
the last resort after the private developer has exhausted all reasonable alternatives.
Termination for Convenience: no.
SECTION 4 FOLLOW-UPS
Open date/Physical status: Opened in December 1995.
Final costs: $130M.
Evaluation on revenue-related risk management: the non-compete clause was very
problematic. The biggest problem with this PPP is the noncompete clause included in
the original language in the private concession agreement, which created a 1.5-mile
protection zone along each side of CA 91 and precluded any improvements along the
corridor until the year 2030. The noncompete clause prohibited several attempts of
OCTA to make improvements to the SR 91 corridor to improve driving safety during
the late 1990s. After several failed legislative attempts to void the noncompete clause,
OCTA paid a big price, $210 million, $80 million more than the original construction
costs after seven years of private operation, to buy back the toll facility and has
operated it as a public toll road since January 2003 (Vining, Boardman & Poschmann,
2005).
Evaluation on environmental review process: easy, the private developer bought
environmental documents prepared by OCTA.
Evaluation on land acquisition: very easy, state government donated the land.
Term change: after 7 years of private operation (1995-2002), in order to eliminate the
restriction of the non-compete clause on other competitive roads, OCTA bought the
toll road back for $210M and operates it as a public toll road since 2003.
Other major issues.
Innovations: The CA 91 Express Lanes is innovative in several aspects: it is the first
privately financed toll road in the United States in the last 50 years, the first variably
priced toll road in the nation (not dynamic pricing, but fixed toll rates during different
blocks of hours), and the first fully automated toll road in the world which collects
tolls through electronic transponders.
Why financial success? The developer of CA 91 identified an underexploited low-
cost alternative by building additional highway lanes at grade in an existing freeway
median. They project the lowest construction costs per route-mile of any of the 4
232
California projects (about $8 million for two lanes in each direction) and tolls that are
more typical of the other projects even in the peak hours (about 20 cents per mile).
CA91 project was so obvious that it previously had been planned as a free public
project and thus, the developers became embroiled in a controversy over whether
HOVs will be tolled. CA 91 is probably an unusual opportunity; most low-cost new
roads in built-up areas have already been built or are already planned as free roads
and thus difficult to toll. Therefore CA 91 is a rare case: low-cost construction, high
traffic volume, easy environmental clearance.
233
Appendix 4: Project Information of South Bay Expressway
OVERVIEW
The South Bay Expressway in San Diego, California is a 12.5-mile, six-to-eight-lane, toll
highway alignment from SR 905 near the international border to SR 54 near Sweetwater
Reservoir. Besides reducing traffic congestion on I-5 and I-805, a major objective of the
expressway is to connect the only commercial port of entry on the United States-Mexico
border in San Diego to the regional freeway network. The southern 9.5-mile segment of
the expressway, later operated as a toll road, was developed by a private entity, California
Transportation Ventures (CTV), under a PPP agreement with Caltrans and San Diego
Association of Governments (SANDAG). The northern 3.2-mile segment, including the
interchange with SR 54, was publicly financed with a mix of federal (FHWA) and local
sales tax funds (SANDAG), but also built and operated by CTV as a freeway. The total
capital requirement for the project was $722 million. The project development agreement
was reached in January 1991. 1989 AB 680 specified that no state or federal funds may
be used for the project, but the project was severely challenged by the environmental
review process and didn’t receive clearance until 2000. In the early 2000s, Caltrans re-
negotiated the project with the new owner of the company, MIG. The new financing
arrangements included TIFIA loans, federal fund and local sales taxes, and financial
closure was reached on May 22, 2003. The expressway opened to traffic in November
2007. Upon completion, the ownership of the expressway was transferred to the state,
while CTV retained the franchise for the toll road for 35 years.
BACKGROUND (LEGISLATION, POLITICS, AND FINANCE)
As one of the first states allowing private concession in transportation in recent history,
California passed Assembly Bill 680 (AB 680) in 1989, which authorized Caltrans to
enter into agreements with private entities for the development, construction and
operation of four pilot projects at private sector expenses without the use of public funds.
Upon completion, these facilities will be leased to the private entities for up to 35 years
and private investments will be recovered with toll revenues. In fact, Caltrans organized a
competition for private proposals that drew 8 entries in 1990. Teams of Caltrans experts
ranked the proposals on criteria that included the importance of the transportation need
served, the ease of implementation (including environmental or right-of-way acquisition
obstacles), the experience of the consortium, the extent to which the project would
promote economic development, and the degree to which the project incorporated
innovative ideas. The four projects finally selected include 3 from southern California
and one from northern California
(Gómez- Ibáñez & Meyer, 1993). The four projects
include:
CA 91 Express Lanes (Orange County)
SR 125 (the future South Bay Expressway, San Diego County)
SR 57 (Orange County)
Mid-State Tollway (Alameda and Contra Costa Counties)
234
Development franchise agreements of the four projects were executed in December 1990
and January 1991. The agreements set the maximum rates of return that the developers
could earn and established zones around the projects in which Caltrans promised not to
build competing transportation facilities (Gómez- Ibáñez & Meyer, 1993). However,
only two projects were eventually completed, the CA 91 Express Lanes and the South
Bay Expressway (SR 125). The other two projects, SR 57 and the Mid-State Tollway,
were never able to take off due to lack of finance and community support. Over time, AB
680 earned a reputation as a PPP legislative model to avoid and the bill was repealed by
the legislature in 2002.
Figure 13: Map of South Bay Expressway (SR 125)
235
SECTION 1 PROJECT BASICS
State and location: San Diego County, California, alignment from SR 905 near the
International Border to SR 54 near Sweetwater Reservoir.
How long: 12.5 miles.
How many lanes:
o Northern 3.2-mile freeway segment: 4 mixed-flow travel lanes and one HOV
lane in each direction.
o Southern 9.5-mile toll segment: 3 mixed-flow travel lanes in each direction.
Facilities type: Greenfield.
Purpose/goals: new development road, connecting the only commercial port of entry
on the US-Mexico border in San Diego to the regional freeway network, also
reducing traffic congestion on I-5 and I-805.
Toll type: no congestion pricing (tolls are based on the distance traveled and the
number of axles on the vehicle); electronic tolling is available as well as cash
payment.
Capital needs/ Financial estimate: $400 million (1990); (final cost was $722 million
in 2007).
Expected revenue sources: toll revenues.
Revenue uncertainty: competing freeway I-5 and I-805.
Environmental review needs and study: yes, need extensive environmental study
since the road goes through large undeveloped natural lands with wildlife and
wetlands.
Land acquisition needs and study: yes, need to acquire lands since the road goes
through large undeveloped natural lands.
SECTION 2 PARTNERSHIP INFORMATION
PPP legislation: California AB 680 passed in 1989.
Initiation time of project: 1989.
Feasibility study:
o A development road typically may find it slightly easier to recoup costs from
tolls than a congestion-reliever, while construction costs are projected at
around 15 to 20 million dollars per route-mile (generally for a first stage with
two lanes in each direction). Despite lower construction costs, the developer
argued that tolls alone are insufficient and that local government or landowner
contributions will be necessary to cover to 20 to 30 percent of costs. The
project would cost $400 million and would be financed by a combination of
toll revenues, contributions of land by local real estate developers, and
possible contributions from local communities along the route (Gómez-
Ibáñez & Meyer, 1993).
o Local government support: While not objecting to tolls in principle, some
local officials in San Diego have argued that tolling SR 125 is inequitable.
SANDAG had programmed segments of SR 125 north San Miguel Road for
construction as untolled freeways in the 1990s, but construction of the section
to the south, which the private consortium now proposes to build as a toll road,
236
was deferred for almost twenty years. SANDAG and Caltrans began
environmental planning for the entire length of SR 125, however, which may
have given some residents the impression that a freeway south of San Miguel
Road was a possibility. Certainly, those residents in the south knew that their
compatriots to the north were to receive a free road while their road, if it was
to be undertaken soon, would be tolled. A state assembly man from the area
therefore argued that his South County constituents were cheated in the
complex countrywide negotiations in which SANDAG’s priorities were
established and had filed a bill that would essentially prohibit construction of
the free sections of SR 125 until his objections about the inequality of tolling
the southern sections are addressed. (Gómez- Ibáñez & Meyer, 1993).
Partner selection/procurement: In 1990 Caltrans organized a competition for private
proposals that drew 8 entries. Teams of Caltrans experts ranked the proposals on
criteria that included the importance of the transportation need served, the ease of
implementation (including environmental or right-of-way acquisition obstacles), the
experience of the consortium, the extent to which the project would promote
economic development, and the degree to which the project incorporated innovative
ideas. SR 125 was ranked second, after SR -57.
Main negotiations and interactions: (1) environmental challenges, (2) federal grants
and local sale taxes to support northern free road and TIFIA loans to support southern
toll road (in 2003) (No much information available).
Public sector/roles
o State: Caltrans is the sponsor issuing and managing the franchise, state has the
ownership.
o Federal: USDOT, provider of TIFIA loans.
o Local: the City of Chula Vista facilitated a land dedication program required
for right-of-way; San Diego Association of Governments (SANDAG) kept the
project alive during the tough environmental review process.
Private sector/roles
o Consortium: California Transportation Ventures, Inc. (now a wholly owned
subsidiary of Macquarie Infrastructure Group after 2003 CTV ownership
transfer).
o Roles: D, B, F, O.
o Firms in the consortium: Washington Group International. Project Advisors
include Nossaman, Guthner, Knox & Elliott, LLP; Salomon Smith Barney;
PBConsult; Orrick Herrington & Sutcliffe; Wilbur Smith Associates.
o Other PPPs contracts: CTV subcontracted with Otay River Construction with
a fixed-price, fixed-delivery schedule contract. Washington Group
International was the Design-Builder, with a joint venture of Parsons
Brinckerhoff Quade and Douglas, Inc and J. Muller International as the design
subcontractor.
237
SECTION 3 CONTRACT TERMS
Project nature: for-profit.
Contract type: BTO.
Contract signed date: January 1991.
Financial closure: on May 22, 2003 (note: FEIS/ROD was approved 6/2000 and
construction began in September 2003).
Financing arrangements: $722 million, 67% is private money. The South Bay
Expressway consists of two segments, the southern toll segment and the northern free
segment. The financing of both segments is outlined in the following Exhibit. The
$621 million southern segment was privately funded with a mix of $160 million of
private equity, $140 million of TIFIA loans, and $321 million of bank loans from two
global infrastructure financiers, Spanish-based Banco Bilbao Vizcaya Argentaria,
S.A., and Irish-based DEPFA Bank plc. The northern free segment was funded with
$101 million of a mix of federal and local funding.
Table 11: Financing Structure of South Bay Expressway
Financing Sources of Segments Amount (dollars in millions)
1. the southern toll road 621
Bank loans 321
Macquarie Infrastructure Group 160
TIFIA loans 140 signed on May 22,2003
2. the northern free segment 101
Federal funding for connector 81
SANDAG funding for connector
(local sale taxes)
20
3. Total project cost 722
Term/reversion contract: a 35-year BTO franchise; at the end of the franchise, control
goes back to the State at no cost.
Revenue regulations
o Revenue sources: tolls
o Rate of return: franchise allows a maximum 18.5% return on total investment.
o Toll rates: unregulated.
o Other revenues: All 4 California projects by law allow the consortia to profit
by leasing out their rights to providers of various auxiliary services, such as
gas stations, restaurants, and hotels by the toll road; but the incomes are not
expected to be significant.
o Revenue sharing: no
Management of revenue uncertainty risk: (1) limited non-compete clause. Due to the
non-compete problem with CA 91, California subsequently took steps on the SR 125
project to ensure that the language in the non-compete clause allowed the state
sufficient flexibility to make needed improvements to other roads while also
protecting the private sector developer (GAO, 2004). Under this noncompete clause,
the state agrees not to make any improvements to, or build new competing highways
238
that were not already contained in the state’s twenty-year plan. Moreover, when the
state builds a competing road, it is required to reimburse CTV for the lost revenues
caused by the new road. (2) Original AB 680 language: no state or federal funds may
be used. But when it received ROD in June 2000, TIFIA program was already
available. SR 125 received TIFIA loans, federal grants and local sales taxes.
Management of environmental risk: Caltrans was delegated the formal powers to
shepherd the project through the environmental review process, acquire the right of
way for the project and provide police service on a reimbursable basis once the
expressway was opened to commercial traffic (GAO, 2004).
Management of land acquisition risk: (1) the developer should acquire all necessary
lands from land owners through purchase or donations; (2) by AB 680, the California
Department of Transportation (Caltrans) may exercise its power of eminent domain
on behalf of a tollway project if private efforts to acquire right of way are not
sufficient.
SECTION 4 FOLLOW-UPS
Open date/Physical status: Opened on November 19
th
, 2007.
Evaluation on revenue-related risk management: just opened, so no much information,
but (1) the noncompete clause was limited; (2) federal grants and local sales taxes for
the northern free segment and TIFIA loans for the southern toll segment are believed
to be very important to the project’s viability.
Evaluation on environmental review process: The greatest threat to the project was
the environmental review process, which cost about $50 million in total. The
development agreement delegated to Caltrans the formal powers needed for the
acquisition of environmental clearance and right of way for the project. The
delegation was made with the hope that the clout of the state agency would help the
permitting process. However, the private sector later regretted this decision, claiming
that “State officials were indifferent”, and “it was local officials at the area
association of governments and cities along the route who kept the project alive,
despite Caltrans” (TOLLROADSnews, November 28
th
2007). These statements may
not be completely objective, but it’s a fact that the private partner assumed all of the
risks associated with obtaining environmental clearance for the expressway. From
1991 to 2000, the private partner went through many government procedures and
intense public review processes, and coordinated with several public agencies and
land use authorities. Severe setbacks were encountered, including legal challenges,
identification of an endangered species habitat in the corridor, and resistance to the
project from several federal agencies, including the Army Corps of Engineers and the
Environmental Protection Agency. As a result, the project changed the original design
and adopted a set of mitigation measures, including wetlands restoration, protected
wildlife habitats, and recreational improvements in adjacent communities (ACT, 2007
II). Of course, the environmental review is necessary considering the project’s
complex impacts on surrounding areas, but the question is if Caltrans had led the
permitting process as designated in the concession contract, would the project have
been able to proceed more quickly? When the project finally received its FEIS/ROD
239
(Final Environmental Impact Statement/ Record of Decision) in June 2000, nine years
had passed.
Evaluation on land acquisition: several developers in the Chula Vista area donated
land for about 50 percent of the required right of way.
Term change: just opened in November 2007, no term change yet as of December
2009.
Other major issues:
The sale of CTV to Macquarie due to the costly environmental review process.
Because of the long delay of the environmental review process, the private partner
incurred significant costs which the original owner of CTV did not anticipate. In 2000,
when the project finally received environmental clearance, the parent company of
CTV decided to sell it. The Macquarie Infrastructure Group (MIG) acquired a stake in
CTV in 2002 and 2003, and the transfer of ownership caused another three-year delay.
Construction of the project started shortly after MIG became CTV’s new owner and
the construction itself only took four years. The South Bay Expressway opened to
traffic in November 2007 and CTV retained the franchise for the toll road for 35
years.
The first use of TIFIA for a private toll road: A significant innovation on the deal is
that it is the first use on a wholly private deal of money mandated under the
Transportation Infrastructure Finance and Innovation Act (TIFIA) of 1998. $140
million TIFIA loan is the first-ever provided to a private toll road development. The
38-year loan has a fixed rate borrowing cost equal to 30- year treasuries. TIFIA
money comes with strings attached, most notably the requirement that a project's
senior debt is investment grade. This is important, since the TIFIA loan is subordinate
to the project under most circumstances and does not require repayment of interest for
the first five years.
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Appendix 5: Project Information of Pocahontas Parkway
OVERVIEW
Pocahontas Parkway is an 8.8-mile, four-lane toll facility connecting Chippenham
Parkway at I-95 in Chesterfield County with Interstate 295 south of the Richmond
International Airport in Henrico County, Virginia. The project includes a high-level
bridge over the James River and an interchange at Laburnum Avenue. The Pocahontas
Parkway Association, a private nonprofit group, was incorporated in 1997 to issue the
bonds, under the agreements between VDOT and Fluor Daniel and Morrison Knudsen
(FD/MK). Construction began in the fall of 1998 and the Parkway was opened to traffic
in 2 stages in May and September 2002. Toll collection system uses Smart Tags.
Since Nov 2002, the rating of the project’s bonds has been below investment grade
because the traffic and revenue performance were significantly lower than anticipated.
On June 29, 2006, the Virginia Department of Transportation (VDOT) and Transurban
(USA), a private Australian toll road operator with subsidiaries in the U.S., executed an
Asset Purchase Agreement with the Pocahontas Parkway Association (PPA) and entered
into the Amended and Restated Comprehensive Agreement ("ARCA"). Under the terms
of those agreements, Transurban has acquired the sole rights to enhance, manage, operate,
maintain and collect tolls on the Parkway for a period of 99 years. Transurban has also
defeased all of PPA’s underlying debt.
BACKGROUND (LEGISLATION, POLITICS, AND FINANCE)
In 1995, the General Assembly of Virginia enacts the Public Private Transportation Act
(PPTA) to encourage private companies to build and operate roads and other
transportation services. In 1997, the first construction contract under the PPTA allows
FD/MK to build the Pocahontas Parkway. Under the PPTA, the Parkway adopted DBFO
model with 63-20 (nonprofit corporations) public benefit corporation financing.
241
Figure 14: Map of Pocahontas Parkway
242
SECTION 1 PROJECT BASICS
State and location: in Greater Richmond, Virgnia, connecting Chippenham Parkway
at I-95 in Chesterfield County with Interstate 295 south of the Richmond International
Airport in Henrico County, Virginia.
How long: 8.8 miles including high-level bridge and highway.
How many lanes: mostly 4 lanes (2x2), some 6 lanes (2x3).
Facilities type: Greenfield.
Purpose/goals: new development road, in anticipation of development along the
James River and airport needs, as well as to relieve congestion.
Toll type: no congestion pricing, electronic tolling available as well as cash payment.
Capital needs/ financial estimate: $324 million (in 1997).
Expected revenue sources: toll revenues.
Revenue uncertainty: competitive local freeway network, especially SR 5 and SR 60.
Environmental review needs and study: little need of study, since VDOT completed
the initial environmental work in 1984, and preliminary design for the recent project
was about 60% complete when the project was awarded, so only re-evaluation was
needed.
Land acquisition needs and study: easy, since the state initially approved the route for
the Pocahontas Parkway in 1983 and preliminary design for the recent project was
about 60% complete when the project was awarded.
SECTION 2 PARTNERSHIP INFORMATION
PPP legislation: 1995 PPTA and the law allowed private consortia to submit
unsolicited proposals to develop projects.
Initiation time of project: 1995 FD/MK proposal.
Feasibility study:
o The state approved the route for the Pocahontas Parkway in 1983, and VDOT
completed the environmental work in 1984. However, the project was put on
hold because funds were not available.
o Extensive traffic studies demonstrated the financial feasibility of this highway
being built as a toll road based on prediction of local economic development
and a nearby airport impact.
Partner selection/procurement: This was an unsolicited proposal followed by
negotiations:
o Fluor Daniel and Morrison Knudsen, global engineering and construction
firms, gave their first proposal for this project to the VDOT and the
Commonwealth Transportation Board (CTB) in 1995. Since privatization and
private sector investment when possible has been a major strategy in Virginia
state government since the Governor George Allen administration 1993-1997,
they were well-advised to utilize this opportunity. They formed a joint venture
FD/MK LLC. In June 1998, FD/MK entered into an agreement with the state
that included a design-build contract to construct the toll road. In July 2002,
when construction was nearly complete, VDOT and PPA reaffirmed the
franchise agreement and PPA took over operations.
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o Meanwhile the Pocahontas Parkway Association was incorporated in 1997 for
the limited purpose of financing through bond issuance, constructing and
operating the Route 895 project. The Association was a private, non-stock,
not-for-profit corporation without members, organized under provisions of
Chapter 10 of the 1950 Virginia Code.
Main negotiations and other interactions: PPA was established as a non-profit project
to issue tax-exempt bonds, while FD/MK was the design-builder, getting paid for its
work.
Public sector/roles
o State: state owns the right of way as well as the road. VDOT paid for pre-
planning, study and land acquisition, also assumed full responsibility for
operation and maintenance, to be paid from PPA’s toll revenues, after
payment of project debt service and operating expenses.
o Federal: provider of $9.28 million for the preliminary engineering (the
environmental document and 60% of design). For this reason, after the project
completed in Jan 2002, VDOT was denied by FHWA to grant the road the
Interstate designation, as federal statute 23 USC 129(a)(1)(A) provides that
federal funds may not be used for a tolled Interstate. Thus, toll roads using no
federal funds and free roads of any funding source are eligible for Interstate
designation, but toll roads that use federal funds are not.
o Local: no.
Private sector/roles
o Consortium: a 63-20 nonprofit corporation Pocahontas Parkway Association
(PPA), established to finance the Pocahontas Parkway project. It is built by a
joint venture of Fluor Daniel and Morrison Knudsen (now Washington Group)
(FD/MK) as project developer and design-build contractor, with oversight
from VDOT.
o Roles: D, B, Finance (by PPA 63-20 bonds, not by the developer) and toll
collection.
i. FD/MK LLC took VDOT's preliminary design which was about 60%
complete, and developed the highway under the Design/Build concept.
That means that they completed the final design for the James River
Bridge and the rest of the highway and bridges, then FD/MK LLC and
the state acquired the right-of-way (state paid the developer to do so),
and then FD/MK LLC constructed the highway and bridges. The
parkway was administered and maintained by VDOT, but most of the
toll revenue went to the Pocahontas Parkway Association to pay the
debt service on the bond issues that was used to fund the highway's
construction. Under the terms of its contract with the state, FD/MK
LLC built the road but VDOT owns it.
ii. PPA has been receiving an operating budget from VDOT and will
continue to do so until revenues are sufficient to cover these expenses.
VDOT expects to be reimbursed by PPA for these expenses. Similarly,
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the Virginia State Police provide law enforcement services under
contract with VDOT; VDOT will pay this cost until the PPA can do so.
o Firms in the consortium: Fluor Daniel and Morrison Knudsen// Underwriter
was Bear Stearns/Lehman Bros. First Union Capital Markets, a subsidiary of
Wheat First Securities, participated as a co-underwriter.// Project advisors
include Nossaman, Guthner, Knox & Elliott, LLP; Christian Barton; Public
Resources Advisory Group
o Other PPPs contracts: FD/MK LLC is the design-builder. Also it
subcontracted with the joint venture Recchi America, Inc./McLean
Contracting to construct Segment 2 (James River Bridge and bridge ramps),
and W. C. English, Inc. to construct Segments 1, 3 and 4 (Route 895 highway
and bridges).
SECTION 3 CONTRACT TERMS
Project nature: non-for-profit.
Contract type: DBFO.
Contract signed date: entered into as of June 3, 1998, with 63-20 (nonprofit
corporations) public benefit corporation financing.
Financial closure: took place July 9, 1998.
Financing arrangements: $381 million in total, 94% is private money, but mainly
from 63-20 bond issues; little developer risks (1%).
o $0 private equity. Unlike other PFM projects, no private equity contribution
was made by the private developer.
o $5 million FD/MK debt service reserve funds.
o $354 million 63-20 corporation, private tax exempt toll revenue bonds (the
state has no liability for bonds).
o $18 million in SIB loans (will be paid back with toll revenues).
o $9 million in federal funds for design costs (for design work and supervision,
as a donation).
o Concession upfront payment: no
Term/reversion contract: PPA has the right to impose and collect tolls for 30 years,
under the franchise agreement reconfirmed in July 2002 when construction was
nearly complete (GAO, 2004).
Revenue regulations
o Revenue sources: tolls
o Rate of return: inapplicable, since this is a non-profit project.
o Toll rates: First two years of toll rates are set forth in the contract. Usually the
PPA sets toll rates, and any increases must be made in conjunction with a toll
consultant’s recommendation. VDOT has the right to adjust the tolls thereafter,
subject to a requirement to meet the covenants in the Indenture.
o Other revenues: no.
o Revenue sharing: (1) because the PPA is a 63-20 corporation, it cannot make a
profit from the toll revenues and developer has no right to toll revenues. (2)
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PPA has the obligation to reimburse VDOT for costs of operation and
maintenance are subordinated to the lien of the bonds on project revenues. (3)
Funds in the Surplus Account are to be applied at the direction of VDOT for
any purpose related to the project, including retirement of debt and
reimbursement of expenses paid by VDOT.
Management of revenue uncertainty risk: a limited non-compete clause (2 slightly
different answers).
o (FHWA, 2005) A limited non-compete clause. "Competitive Transportation
Facilities" are defined as any State highway crossing the James River within 3
miles of the project's bridge crossing. The Department agrees that it shall not,
subject to certain exceptions, (i) initiate, authorize, franchise or finance
private Competitive Transportation Facilities; (ii) open any Department
owned or operated Competitive Transportation Facilities; and (iii) fail to
exercise all discretionary authority available to it under Laws, Regulations and
Ordinances to prevent any other governmental or private entity from
developing Competitive Transportation Facilities, including but not limited to
connections to State Highways. (Section 12.1). Association's and the Trustee's
sole and exclusive remedy for a violation of this covenant shall be to recoup
an amount equal to the loss of Toll Revenues proximately caused by the
Department's action as determined by the Toll Consultant (Section 17.9(b)).
o (GAO, 2004) The Pocahontas Parkway does not have a comprehensive
noncompete clause. The franchise agreement contains only limited protection
from competitive transportation activities, such as a publicly funded road. The
language is open-ended but indicates that VDOT will refrain from certain
activities that would be competitive in nature. However, the agreement does
not provide for any remedies in the event that VDOT opens a competing road.
Management of environmental risk: Since VDOT completed the initial
environmental work in 1984, and preliminary design for the recent project was about
60% complete when the project was awarded, FD/MK is responsible for EIS
reevaluation (which cost $10M).
Management of land acquisition risk: (1) The state approved the route for the
Pocahontas Parkway in 1983 and preliminary design for the updated project was
about 60% complete when the project was awarded. So FD/MK and the state acquired
the right-of-way, and in fact state paid the developer to do so. (2) By law, VDOT is to
acquire title to and, as necessary and appropriate, condemn, all rights of way for the
project, as detailed in the Design-Build Contract. Be careful, this is different from
Dulles Greenway; under 1988 law, VDOT could not use eminent domain power for
privately developed toll roads.
Termination for Convenience. VDOT must pay the Association all amounts necessary
to retire and defease all outstanding bonds and to pay all amounts due under the
Design-Build Contract. (Section 16.2)
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SECTION 4 FOLLOW-UPS
Open date/Physical status: opened in 2 stages in May and September 2002.
Evaluation on revenue-related risk management: No relevant information, since PPA
had financial shortfalls right after its opening due to slower than expected local
development. But the risk management is expected to favor government since the
non-compete clause is very limited.
Evaluation on environmental review process: easy, since FD/MK only spent $10M
for reevaluation of EIS study which was previously prepared by VDOT.
Evaluation on land acquisition: smooth; FD/MK hired O.R.Colan Associates, a right-
of-way consulting service company, to handle land acquisition.
Term change: in 2006, PPA was acquired by Transurban for a 99-year private lease.
Other major issues:
Innovation: according to 1995 news, the Pocahontas Parkway was the first
construction project implemented under Virginia's Public-Private Transportation Act
of 1995 (PPTA) (Kaine, 2006). It was only the second transportation project
nationwide to be financed through a 63-20 corporation. This creative financing
approach is why the Pocahontas Parkway could be built without a 15 year delay to
assemble financing. Only $27 million of the Parkway’s total $324 million price tag
came from public funds ($18 m SIBs loans, and $9 m federal government donation
for design work). The vast majority of the funding has been raised through the sale of
private non-profit tax-exempt bonds, which minimized the risk to both the localities
and the taxpayers.
FD/MK didn’t take real financial risks even though it proposed the project, instead it
was getting paid for every bit of its work. (1) For pre-financing tasks, such as project
definition, preparation of environmental documents, permitting, traffic and revenue
studies, surveys, geotechnical investigations, right-of-way acquisition and preliminary
engineering, public involvement, an agreement was executed about a month prior to
the financing of this project: VDOT agreed to pay the developer $1.5 million for
certain early design tasks. The remaining pre-development work was done by the
developer at its own risk prior to signing. (2) For other pre-financing costs, e.g.,
current reimbursement, reimbursement from financing proceeds, development fee,
return-on-equity contribution, $6 million was paid to developer at closing as a
development fee. (3) For post-financing design, acquisition, permitting, construction,
and related services, the developer is compensated for design and construction from
bond proceeds under the Design-Build Contract.
Financial struggle lead to a 99-year private lease to Transurban in 2006:
o Since the project opened in 2002, revenues have been significantly less than
projected because traffic has been lower than prediction. A traffic study
indicated that traffic volumes were less than expected over the first full two
years of the parkway's operation, mainly for economic reasons. The study
cited slow regional and national economic growth due to the impact of
September 11, 2001, which had a particularly negative effect on activity at the
Richmond airport. The study also said commercial vehicle use was lower than
originally anticipated and business and residential development in the project
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corridor has been limited. In December 2002, Standard and Poor’s lowered its
rating of the bonds to below investment grade. In retrospect Fluor believed it
made a mistake in being pressed into making the project larger and more
expensive than it originally planned. VDOT pressed for the project to
incorporate a bridge deck wide enough for three travel lanes each direction on
the river crossing based on their 90k veh/day projections, plus a natural desire
to get as much built on someone else's check as possible.
o On June 29, 2006, the Virginia Department of Transportation (VDOT) and
Transurban (USA), a private Australian toll road operator with subsidiaries in
the U.S., executed an Asset Purchase Agreement with the Pocahontas
Parkway Association (PPA) and entered into the Amended and Restated
Comprehensive Agreement ("ARCA"). Under the terms of those agreements,
Transurban has acquired the sole rights to enhance, manage, operate, maintain
and collect tolls on the Parkway for a period of 99 years. Transurban has also
defeased all of PPA’s underlying debt. Transurban’s long term lease includes
the construction of a 1.58-mile, four-lane extension to Richmond International
Airport. Financing of the $548 million lease is comprised of:
i. $140.9M equity
ii. $ 55M subordinated debt proved by Transurban;
iii. $420 in senior debt provided by DEPFA Bank of Ireland, Banco
Espirito Santo de Investimento of Spain, and Bayerische Hypo-
Vereins Bank of Germany.
iv. A $150 million TIFIA loan, closed on July 18
th
2007. The TIFIA funds
would be used to refinance approximately $95 million of the long-term
senior bank debt, and pay for $7 million needed to upgrade the
electronic tolling systems and approximately $48 million towards the
construction of the airport connector.
63-20 model looks shabby: Not-for-profit toll projects have a poor track record so far.
The only two completed - the Greenville Southern Connector SC and the Pocahontas
Parkway VA - are in serious financial trouble. This is likely to raise their cost of
capital (higher rates of bank loans/debt) in the future. The not-for-profit model loads
all the incentives onto development with the developer getting fees on completion of
construction while there is little incentive to make the franchise term operations
viable. The for-profit model spreads the incentives for careful investment and
management over the whole life of the franchise and for that reason has gained more
international recognition. The so-called 63-20 developer toll financing model is
named after the relevant IRS tax code number, including the following details:
o demands a not-for-profit charter and thereby precludes any equity issue,
o leaves the launch of the not-for-profit owner association until after the project
is developed (meaning contract development with financial closing, but before
construction starts), and,
o keeps the state DOT at arm’s length while requiring a state DOT concession.
These three requirements of the IRS are serious obstacles to rational project
management.
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Appendix 6: Project Information of Foley Beach Express
OVERVIEW
Foley Beach Express is 13.5-mile, four-lane limited access route including public road
and privately owned toll bridge, from the City of Foley to Orange Beach, Gulf Shores
and Perdido Key in Alabama. The purpose of the highway was to alleviate growing
Alabama 59 traffic concerns and to offer an alternate route during hurricane evacuation
situations. This project took advantage of different forms of public-private partnerships
and Baldwin County Bridge Company (BCBC) was the private investor and developer.
Even though it is branded as one project, Foley Beach Express consists for three distinct
parts proceeding southward: (1) The Foley Bypass, a 7.5-mile freeway funded with 7.5
million dollars of Federal Administration Highway grant, connecting to Highway 59
south of Summerdale and north or Foley; (2) A five-mile, 6.5-million-dollar BCBC road,
designed, funded and built by the private firm, Baldwin County Bridge Company
(BCBC), but upon completion deeded to Baldwin County which maintains and operates it
free of tolls; (3) A one-mile, five-lane and eleven-million-dollar worth Intra-Coastal
Waterway bridge, developed and owned by BCBC and operated by it for a toll.
The total capital is $44 million. Besides 7.5 million dollars of FHWA grant covering the
freeway section, majority of the expressway finance came from private investment,
specifically including 31 million dollars of 10.25% 28-year toll revenue bonds and 5
million dollars of secondary debt at a rate varying according to the project’s profitability.
Additionally, some of the land was donated by landowners keen on the expressway’s
development potential but some other stretches had to be purchased. Development of the
project took three years and construction was completed in 55 weeks, several months
ahead of schedule. The entire Expressway was opened to the public in June 2000.
Official website (no much info): http://www.foleybeachexpress.com/
BACKGROUND (LEGISLATION, POLITICS, AND FINANCE)
The purpose of the highway was to alleviate growing Alabama 59 traffic concerns and to
offer an alternate route during Hurricane evacuation situations. ISTEA was the federal
legislation that drove the State of Alabama legislation to be created in what is known in
the Section 23-1-81 of The Code of Alabama 1975. Enabling legislation was passed that
basically said that counties and the Alabama Department of Transportation (ALDOT)
could license a private legal company to build toll roads and toll bridges. Then-Gov. Fob
James signed into law a bill allowing counties to license such bridges in May 1996,
shortly before the Foley Beach Express proposal was publicly announced.
(ALA.CODE§§ 23-1-80 to 23-1-95: Authorizes the Alabama DOT and county
commissions to establish toll roads, toll bridges, ferries or causeways or allow for their
operation by private parties. No express provision regarding the solicitation or acceptance
of unsolicited proposals. Not appropriate to use as a model for PPP enabling legislation).
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Figure 15: Map of Foley Beach Express
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SECTION 1 PROJECT BASICS
State and location: Baldwin County, Alabama.
How long: 13.5 miles, privately owned toll bridge and public road.
How many lanes: the road is 2x2, and the bridge has 5 lanes.
Facilities type: Greenfield, toll road and bridge.
Purpose/goals: congestion relief.
o As an alternative to the choked main street of Foley, AL-59, until now (2000)
the only north-south route leading directly off I-10 to Gulf Shores, Orange
Beach and Gasque on the Gulf Coast. Foley is the major old town center in the
area but it has been successful in attracting huge new ‘outlet’ shopping and
entertainment centers geared to the tourist trade in its immediate vicinity. AL-
59 being a 4 and 5-lane multi-purpose road with uncontrolled access has
become heavily overloaded with the combination of traffic going through to
the beaches and traffic wanting to do business in Foley.
o A valuable addition to capacity for hurricane evacuation.
Toll type: no congestion pricing, a fixed-rate toll for the bridge; no electronic tolling,
but cash payment or using magstripe change cards yourself or by a toll attendant.
Capital needs/ Financial estimate: around $40M.
Expected revenue sources: tolls.
Revenue uncertainty: Competing freeway Alabama 59.
Environmental review needs and study: no much. The city-owned Foley bypass was
waived from environmental review process. Someone used some political clout in
Washington DC. The bypass was funded with a no-strings-attached FHWA grant of
$7m to the city in which the normal NEPA enviro-permitting, Davis-Bacon US Labor
Dept pay rates and racial/women (DBE) quotas were waived. The investors, not
accepting fed-$s are not subject to some of these requirements anyway, a source of
savings as compared to normal state projects.
Land acquisition needs and study: need to purchase private lands.
SECTION 2 PARTNERSHIP INFORMATION
PPP legislation: in May 1996, then-governor signed a bill into law.
Initiation time of project: 1996 (shortly after the bill signed by then governor).
Feasibility study: (1) will provide significantly time saving for many beach trips; (2) a
valuable addition to capacity for hurricane evacuation.
Partner selection/procurement: an unsolicited proposal, since this is part of a real
estate development project.
Main negotiations and interactions: FHWA and the City of Foley will provide $7.5M
to fund the free Foley Bypass and BCBC will also fund a free road with its private
money in order to connect the toll bridge to highway network and increase the value
of the adjacent BCBC real estate development.
Public sector/roles
o State: not involved because county commission has the legal authority.
o Federal: FHWA, provided about $7M for the Foley Bypass.
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o Local: the City of Foley, provided some money, and owns the Foley Bypass
and waived the project from environmental review process.
Private sector/roles
o developer: Baldwin County Bridge Company (BCBC).
o Roles: owner, sponsor and D,B,F,O.
o Components of the consortium: BCBC is a private LLC owned by a small
group that includes 3 sons of the former state governor Fob James and owners
of the long-established bridge contractor McInnis Corp of Mobile AL.
Principals are Tim James and John McInnis. (Project advisor: Helmsing,
Leach, Herlong, Newman and Rouse; Lender: HSH NORBANK –
GERMANY)
o Other PPP Contracts: this project took advantage of different forms of public-
private partnerships. The Intra-Coastal Waterway Bridge was built by using a
design-build procurement awarded to McInnis. In addition, the highway
construction contract was awarded to a joint venture of J.S. Walton
Construction and Mobile Asphalt, Co, both of Mobile, Alabama. Furthermore
the toll system was designed and installed by United Toll Systems (UTS), the
developer of three toll facilities in the state which also sells complete toll
systems to smaller toll operators.
SECTION 3 CONTRACT TERMS
Project nature: for-profit.
Contract Method: BOO (Build-Own-Operate).
Contract signed date: around mid 1996.
Financial closure: around mid 1999.
Financing arrangements: $44 M in total, 82% private money.
o $7.5M from Federal Highway Administration grants for Foley Bypass and
City of Foley money.
o BCBC raised $36m in private bonds underwritten by the John Hancock
Insurance Company of Boston, including $31m of 10.25% 28-year toll
revenue bonds plus $5m secondary debt at a rate varying according to the
project’s profitability (the $5M is an equity kicker that could pay as much as
21% but bears most of the risk)
Term/reversion contract: privately owned bridge, so forever.
Revenue regulations
o Revenue sources: Tolls.
o Rate of return: inapplicable, since it’s a privately owned bridge, government
couldn’t control.
o Toll rates: inapplicable, since it’s a privately owned bridge.
o Other revenues: no.
o Revenue sharing: inapplicable, since it’s a privately owned bridge, so the
developer has it all.
Management of revenue uncertainty risk: No non-compete clause.
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Management of environmental risk: the Foley Bypass was waived from the
environmental review process, private investors don’t receive federal money are not
subject to many federal regulations.
Management of land acquisition risk: some of the land was donated by landowners
keen on the road’s development potential but other stretches had to be bought.
Termination for Convenience: inapplicable, since it’s a privately owned bridge.
SECTION 4 FOLLOW-UPS AND EVALUATIONS
Open date/Physical status: Opened in June 2000. Development of the project took
three years and construction was completed in 55 weeks, a couple of months ahead of
schedule.
Evaluation on revenue-related risk management: inapplicable, since the project
doesn’t have a non-compete clause.
Evaluation on environmental review process: easy because of special waiver policy
for Foley Bypass, and private investors receiving no federal money are not subject to
many federal regulations.
Evaluation on land acquisition: not a big problem with some donations and some
purchases.
Term change:
o Ownership has changed. In 2003 the Orange Beach City became a partner in
ownership. The City Council approved a deal with the bridge company in
which the city agreed to give the firm $1.2 million annually for 10 years in
exchange for a fee for each car that crosses the bridge. Orange Beach collects
royalties for 30 years -- at a rate that increases as traffic rates eclipse million-
car increments during the first 10 years and at a fixed rate of 30 cents for each
car that uses the bridge for the remaining 20 years. After 30 years, the city
could choose to buy the span for 10 times its annual revenue or continue to
collect 30 cents per car for another 30 years.
o In February 2004, BCBC refinanced its 36.3 million dollars in debt with HRH
Nordbank with the help of Macquarie Securities Inc., and the completed
transaction came to 67 million dollars with other associated fees added to the
debt amount.
o In 2005, Macquarie acquired the Baldwin County Bridge Co. along with the
Foley Beach Expressways for $95 million. Both Tim James and John McInnis
Jr. were to remain with the company as consultants or directors for up to five
years. In 2007, Macquarie packaged the expressway with three other toll
facilities it acquired from UTS, including the Emerald Mountain Expressway,
the Alabama River Parkway and the Black Warrior Parkway, and sold them
together to Detroit-based Alinda Roads, LLC. Since 2008, there have been
talks and actions about an extension of the Foley Beach Express.
Other major issues.
Innovation. FHWA & the City of Foley paid for the unprofitable Foley Bypass to
increase the profitability of the toll bridge; this is also a good deal for the city since
folding a public bypass into a private project saved a lot of government funding. Tim
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Russell, the mayor of Foley says the city got a “terrific deal” out of the whole project.
He says the city’s Foley Bypass was built for much less by folding it in with the
investor’s design and construction contract.
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Appendix 7: Project Information of I-394 MnPASS
OVERVIEW
I-394 MnPASS is an eleven-mile, two-lane interstate level toll road in Minneapolis,
Minnesota. This project is innovative in several aspects. It is the first HOT project in the
state which converted previous High Occupancy Vehicle (HOV) lanes on I-394 to High
Occupancy Toll (HOT) lanes and allows single occupant drivers to pay a user fee to
access HOT lanes while buses and multiple occupant vehicles can still use these lanes for
free. Secondly, arguably I-394 MnPASS has the world’s most complex value pricing
electronic tolling system. Tolls of I-394 MnPASS vary as frequently as every three
minutes, based on real traffic density on the HOT lanes, to maintain free traffic flow.
Also, I-394 MnPASS is a first for dynamic tolling with multiple entries and exists. I-394
MnPASS, counting both directions of travel, has seventeen entry and access points along
the roadway. Hence the electronic tolling system takes into account both traffic density
and travel distance to determine tolls. The I-394 MnPASS was developed through a
public-private partnership involving the State of Minnesota and a team of private entities
led by service vendor Wilbur Smith Associates (WSA). WSA was the private sponsor of
the project which funded approximately 20 percent of 12.5 million dollars cost of setting
up the tolling system on HOT lanes to which it has legal title. The project was completed
and opened to the public on May 16, 2005, with the goal of making better use of the road
capacity in previous HOV lanes and maximizing capacity in the I-394 corridor. Another
major characteristic of the I-394 MnPASS is the toll revenues are required by law to be
used to fund public transit. Since 2006, there have been talks and work on phase II of the
project. Official website: http://www.mnpass.org/index%20394.html
BACKGROUND (LEGISLATION, POLITICS, AND FINANCE)
The 2003 High Occupancy Toll Lane Legislation (160.93,Sec.7) was passed into law in
early 2003 to permit tolls in HOV lanes. Specifically the law provides that after paying
costs of operation any toll surplus should be spent 50% for capital improvements in the
corridor where the tolls apply and 50% goes to the metropolitan area council for bus
transit improvements.
In fact the I-394 MnPASS project is a good demonstration of the importance of political
and public support to the success of a toll road. In fact this project is a second trial of
Minnesota Department of Transportation in doing HOT lanes on I-394 corridor. The first
time was in 1996 which failed in 1997 because of political sensitivity of tolling and lack
of strong political backup. The 1996 plan of a similar HOT lanes project gained the
approval of the metropolitan council and the legislature, and was supported by then
Governor Arne Carlson. But due to the facts that it was being implemented in an election
year and an opposition candidate, retailer Mark Dayton, attacked the tolling project
making it his major campaign issue, Governor Carlson withdrew his support for the HOT
lanes project and ordered his transportation secretary James Denn to cancel it. In the early
2000s when MnDOT made its second effort to do HOT lanes in I-394 corridor, it started
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with asking for public support and political backup. An opinion survey was conducted in
January 2002 which found 57 percent of the public supported the toll project. Then in
2004 the state formed a Community Task Force of local notables to hold hearings and
advise on the project. Also state political leaders were fully involved this time and the
official announcement of the project was made by Governor Tim Pawlenty and
Lieutenant Governor Carol Molnau who is also state transport commissioner.
Figure 16: Map of I-394 MnPass
Maps
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SECTION 1 PROJECT BASICS
State and location: in Minneapolis, Minnesota.
How long: 11 miles.
How many lanes: 1x2.
Facilities type: HOT related, converting previous HOV lanes on I-394 to HOT lanes.
Purpose/goals: congestion relief, making better use of the road capacity in previous
significantly underutilized HOV lanes and maximizing capacity in the I-394 corridor.
Toll type: congestion pricing, electronic, the world’s most complex value pricing
electronic tolling system.
Capital needs/ Financial estimate: around $10M.
Expected revenue sources: tolls.
Revenue uncertainty: free lanes on I-394 corridor.
Environmental review needs and study: little, already studied, approved and designed
in 1996, and also the project is built on existing highway lanes.
Land acquisition needs and study: no, on existing highway.
SECTION 2 PARTNERSHIP INFORMATION
PPP legislation: The 2003 High Occupancy Toll Lane Legislation of Minnesota.
Initiation time of project: 1996 first trial but failed due to political sensitivity, and
early 2000 the second trial started.
Feasibility study: the project was already studied, approved and designed in 1996, and
scheduled to start in December 1997, but cancelled due to political reasons.
Partner selection/procurement: the RFPs for a private partner were posted in July
2003 and there were two team bids submitted. The one led by Wilbur Smith
Associates (WSA) was chosen over the other bidder Transcore, and a contract was
signed in 2004.
Main negotiations and other interactions: (1) the creative use of Raytheon’s
application of read-write transponder enforcement technology; (2) parties’ mutual
understanding of the risks and rewards for successful deployment. (3) Revenue
sharing.
Public sector/roles
o State: Minnesota Department of Transportation, ownership, funding provider.
Metro Transit, receiver of 50% of toll revenues.
o Federal: no
o Local: no
Private sector/roles
o Private partner: a team of private entities, which was led by service vendor
Wilbur Smith Associates (WSA) and included SRF Consulting Group,
Cofiroute, and Raytheon.
o Roles: private sponsor, D,B,F,O.
o Firms in the team:
1. WSA was the private sponsor of the project which funded approximately
20 percent of 12.5 million dollars cost of setting up the tolling system on
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HOT lanes to which it has legal title. Based on the public-private
agreements, WSA receives a share of the toll revenues to cover its
investment and operations costs.
2. SRF Consulting Group was responsible for all the civil design, traffic
simulation and forecasting.
3. Another private company, Raytheon, was in charge of building the toll
system, making transponders and solving other relevant technical issues.
4. Upon the project’s completion, Cofiroute started to operate I-394
MnPASS.
SECTION 3 CONTRACT TERMS
Project nature: a public project.
Contract type: BTO.
Contract signed date: Early 2004.
Financial closure: 2004.
Financing arrangements: $12.5 M ($10M tolling system, $2.5M road work), 20%
private money. WSA funded $2.5 million and the rest was from the state government.
o Concession upfront payment: no, because it is not a toll concession.
Term/reversion contract: inapplicable, since this is a public project.
Revenue regulations
o Revenue sources: tolls.
o Rate of return: no.
o Toll rates: Tolls are set dynamically based on monitoring the density of traffic
and lookup tables which set toll rates at levels directly related to traffic
density. The initial algorithm caused excessive fluctuations in toll rates and
traffic. At times there was an unwanted cycling between too much traffic at
low tolls and too little at high tolls. A new algorithm smoothing the occupancy
data and a new toll schedule has successfully damped the cycling. That was
introduced at the end of 2005.
o Other revenues: no.
o Revenue sharing: (1) MNDOT gets toll revenues because it is a public project;
(2) WSA gets a share to cover its investment and operations cost; (3) 50% of
toll revenue surplus is required by law to be used to fund public transit.
Management of revenue uncertainty risk: inapplicable, since this is a public project.
Management of environmental risk: no need.
Management of land acquisition risk: no need.
Termination for convenience: inapplicable, since this is a public project.
SECTION 4 FOLLOW-UP
Open date/Physical status: Opened May 16
th
, 2005.
Evaluation on revenue-related risk management: inapplicable, since this is a public
project. However since its opening in May 2005, the I-394 MnPASS has been
experiencing severe revenue shortfall because traffic flow on the HOT lanes is much
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less than expected, which is caused by the good performance in terms of traffic
management over both HOV/HOT lanes and other free lanes.
Evaluation on environmental review process: easy, no need.
Evaluation on land acquisition: easy, no need.
Term change: inapplicable, since this is a public project.
Other important issues: (1) value pricing electronic tolling, 3 min/change, HOT lanes;
(2) good traffic performance; (3) low toll revenues because of success of traffic
management and there are alternatives between free and tolled lanes; (4) political
support and local public support matter:
Innovation: Arguably I-394 MnPASS has the world’s most complex value pricing
electronic tolling system. Tolls of I-394 MnPASS vary as frequently as every three
minutes, based on real traffic density on the HOT lanes, to maintain free traffic flow.
In contrast, San Diego I-15 HOT lanes have the second most frequent price
adjustments, every six minutes. Also, I-394 MnPASS is a first for dynamic tolling
with multiple entries and exists. Previous dynamic tolling projects, for example San
Diego I-15 HOT lanes, have only access and egress points at each end of the toll
roads, often described as a simple “pipe”, in one end and out the other. I-394
MnPASS, counting both directions of travel, has seventeen entry and access points
along the roadway. Hence the electronic tolling system takes into account both traffic
density and travel distance to determine tolls.
Traffic Performance. Since its opening in May 2005, the I-394 MnPASS has been a
big success in terms of traffic management over both HOV/HOT lanes and other free
lanes, but its financial performance has been a big disappointment. A recent study on
peak hour traffic on the I-394 MnPASS shows that larger volumes of traffic are being
carried, faster, more reliably, and more safely with variable toll rates used to manage
the volumes of single occupant vehicles. Specifically, peak hour traffic volumes have
increased by 17 percent in the HOT lanes, and by 3 percent in other unrestricted lanes,
which leads to 5 percent increase in total peak hour traffic volumes in the corridor.
Secondly, both HOT and unrestricted lanes are well managed to improve traffic speed
and maintain free flow. The HOT lanes are generally free flow and average speeds
have improved slightly by 0.9 miles/hour, from 64.7 to 65.6 miles/hour. Buses and
carpool drivers, the only users of previous HOV lanes, have no complaints about the
tolled single occupant vehicles clogging the lanes, because the tolling system
effectively manages the traffic through value pricing. The unrestricted lanes have
benefited significantly in speed improvement because of traffic diversion to the tolled
lanes. Average speeds in free lanes have increased by 3.3 miles/hour, from 58.9 to
62.2 miles/hour, a 6 percent jump. Additionally, the first year operation also shows a
significant decrease in accident rate, a 14% drop from 410 before to 355 after the
HOT conversion. Even though the sample of one year is too small to be conclusive,
people have optimistic expectations for safer traffic in the corridor for two reasons.
First, I-394 MnPASS clearly defined crossover zones between the HOT and other
lanes which should provide a safer driving environment, in contrast to before when
crossovers were allowed anywhere along the roadway. Secondly, the reduction in
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speed differential between the traffic on HOT lanes and other free lanes could also
help reduce accidents because mergers become easier with smaller speed differentials.
Revenue Performance. Despite its success in traffic management, the project is
experiencing severe revenue shortfall because traffic flow on the HOT lanes is much
less than expected. In project modeling, it was estimated that revenue would start
from 2 million dollars and reach 3 to 3.5 million dollars when the project matures. In
the first two years, annual revenue is in fact just a little bit over 1 million dollars,
approximately half of the forecast. This could be partly due to the skyrocketing
gasoline prices and a slight increase in bus travel in the corridor, but in part the
project also seems to be a victim of its own success in traffic management. The HOT
lanes have significantly improved traffic flows on the unrestricted free lanes so that
drivers lack strong incentive to use the tolled lanes. As discussed above, during peak
hours, HOT lanes’ traffic speeds slightly increased to 65.6 miles/hour but free lanes’
speeds had a 6% increase to 62.2 miles/hour. Hence eleven-mile HOT lanes are only
3.4 miles/hour, or a half minute, faster than free lanes. With measured average speeds
of over 60mph over six peak hours (6am to 9am outbound and 3pm to 6pm inbound)
congestion is just not bad enough in the free lanes to generate major revenues in the
toll lanes alongside. What is WANTED is some California style real congestion.
Importance of political and public support. The I-394 MnPASS project is a good
demonstration of the importance of political and public support to the success of a toll
road. In fact this project is a second trial of Minnesota Department of Transportation
in doing HOT lanes on I-394 corridor. The first time was in 1996 which failed
because of political sensitivity of tolling and lack of strong political backup. The 1996
plan of a similar HOT lanes project gained the approval of the metropolitan council
and the legislature, and was supported by then Governor Arne Carlson. But due to the
facts that it was being implemented in an election year and an opposition candidate,
retailer Mark Dayton, attacked the tolling project making it his major campaign issue,
Governor Carlson withdrew his support for the HOT lanes project and ordered his
transportation secretary James Denn to cancel it. In the early 2000s when MnDOT
made its second effort to do HOT lanes in I-394 corridor, it started with asking for
public support and political backup. An opinion survey was conducted in January
2002 which found 57 percent of the public supported the toll project. Then the state
formed a Community Task Force of local notables to hold hearings and advise on the
project. Also state political leaders were fully involved this time and the official
announcement of the project was made by Governor Tim Pawlenty and Lieutenant
Governor Carol Molnau who is also state transport commissioner.
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Appendix 8: Project Information of SH 130 Segment 5 and 6
OVERVIEW
Segments 5 and 6 of State Highway 130 will form a 40-mile link through Travis,
Caldwell and Guadalupe counties southeast of Austin to I-10 near Seguin, Texas. The
Project is a continuation of the northern four segments of SH 130 – from Georgetown in
Williamson County to Mustang Ridge in southeast Travis County, which were developed
by the Texas Department of Transportation. When Segments 5 and 6 are complete, SH
130 will be a new 91-mile tollway intended to provide needed relief to the highly
congested I-35 through Central Texas.
On March 22, 2008, the SH 130 Concession Company entered into a Facility Concession
Agreement (FCA) with the Texas Department of Transportation (TxDOT) to design,
build, finance, operate and maintain Segments 5 and 6 of SH 130, the first of its kind in
Texas. The FCA grants a 50-year concession to the Company from the date the Project
opens to traffic. The developer’s financial responsibility also includes right of way costs,
thereby lifting the financial burden from Caldwell, Guadalupe and Travis counties. By
March 2009, the design phase is 90 percent complete and the project is in the process of
acquiring right-of-way. Segments 5 and 6’s construction began in April 2009 on the
northern most portion of the project, located at the current intersection of SH 45 SE, US
183, and SH 130. The road is scheduled to be open for traffic in 2012. The $1.3 billion
private investment in the state transportation system gives the state a share of the toll
revenue, which will be used for other regional mobility improvements.
Official website: http://mysh130.com/default.asp
BACKGROUND (LEGISLATION, POLITICS, AND FINANCE)
Planners have identified $188 billion in needed projects to achieve an acceptable level of
mobility by 2030. The Texas Department of Transportation estimates that only $102
billion will be available to meet those needs, leaving a significant funding gap of $86
billion. The traditional tax-based method of financing roads is no longer sufficient to
handle the state's mobility needs in a timely fashion. Texas has one of the lowest state gas
taxes in the nation but that revenue only pay for 32% of the current state transportation
budget. In addition, as many as 30,000 people move to Texas every month and the
number of registered vehicles continues to rise. This has resulted in the need for more
roads to keep pace with the demand on our strained highway system. Developing roads as
tollways will stretch limited taxpayer dollars and accelerate construction of highway
projects, resulting in congestion relief for motorists, sooner rather than later.
Texas passes PPPs legislation in 2003 to permit expanded use of tolling and public-
private partnerships (PPPs). That law, as strengthened by amendments in 2005, has led to
Texas attracting enormous potential private capital investment to expand its highway
capacity beyond what would have been considered possible several years ago. The Texas
policy has also been cited repeatedly as a model by other states enacting similar enabling
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legislation since 2003. However, in May 2007, Texas senate passed a concession freeze
bill providing for a moratorium on toll concessions by Texas DOT and except in the
Dallas metro area through Sept 2009.
Figure 17: Map of SH 130 Segment 5 and 6
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SECTION 1 PROJECT BASICS
State and location: Central Texas (Austin, Texas).
How long: 40 miles.
o Segment 5: From north of Mustang Ridge to FM1185 north of Lockhart
(approx. 11 miles), following the current US 183 alignment.
o Segment 6: From FM 1185 to I-10 northeast of Seguin (approx. 29 miles),
along (approx. 3 miles) existing and (approx. 26 miles) new right-of-way.
How many lanes: Minimum of 2 tolled main lanes in each direction.
Facilities type: Greenfield.
Purpose/goals: congestion relief, SH 130 will be a new 91-mile tollway intended to
provide needed relief to the highly congested I-35 through Central Texas.
Toll type: no information regarding congestion pricing; electronic (entirely cashless).
TX130 South will be Texas second cashless tollroad after the Westpark in Houston. It
will use frontal as well as rear cameras to handle vehicles without transponders.
Transponders will be the TxDOT issued eGo sticker tags. Toll rates for SH 130 will
be set when the road is ready to open for traffic by 2012, but can be expected to be
comparable to the rates on other Central Texas toll roads.
Capital needs/financial estimate: total investment is approximately $1.35 billion,
including right of way acquisition, utility relocation, improvements to connecting
streets/roads and construction cost of the highway itself.
Expected revenue sources: toll revenues.
Revenue uncertainty: (1) competing freeway I-35; (2) No local or state funds will be
utilized to build the roadway.
Environmental review needs and study: No need for sepate environmental study for
Segment 5 and 6 by the private developer. In fact the Final Environmental Impact
Statement (FEIS) for the entire SH 130 project (91miles) was approved on April 4,
2001 and the FHWA Record of Decision (ROD) was issued on June 5, 2001. The
FEIS Reevaluation dated October 2006 was approved on November 20, 2006.
However, Federal approvals for SH 130 Segments 5 and 6 specify 9 measures that the
SH 130 Concession Company and TxDOT must take to meet environmental
regulations and standards.
Land acquisition needs and study: all of Segments 5 & 6 of SH 130 will require the
acquisition of property and property rights for the new roadway. The study is covered
in previously approved EIS but the land acquisition will be conducted by the project
developer.
SECTION 2 PARTNERSHIP INFORMATION
PPP legislation: 2003Texas PPPs legislation, strengthened by amendments in 2005.
Initiation time of project: 2005. On 2005-07-27 TxDOT and CZ agreed on a Facility
Implementation Plan Preparation Agreement (FIPPA) for TX130S. On June 30, 2006
the Texas Department of Transportation announced approval of the state's first
concession agreement - a $1.3 billion private investment by the SH 130 Concession
Company to build the remaining 40 miles of State Highway 130.
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Feasibility study:
o No previous public traffic and revenue studies, so the developer did it after the
contract. Most inter-urban roads like this attract relatively light traffic and this
tollroad is designed to cater almost exclusively to inter-urban or long distance
trips. Cintra's Lopez agrees: "We don't expect much local traffic. Any local
traffic will tend to use the (free) frontage roads. Most of our traffic will be
long distance traffic." We've heard skeptical comments about the viability of
this TR, so we asked Lopez about the forecasts. He declines to release any of
their traffic and revenue projections - at least before the financial close which
he says should be early 2007. But he insists the project has been proven
financially viable. Lopez told us the studies they have had commissioned
suggest higher traffic than the state's older estimate. Higher than 22k
apparently. Banks and shareholders are convinced of its viability and fully
committed he says: "We could go (to financial close) tomorrow if necessary."
o But skeptics say the new tollroad will not even attract 5-digit - let alone viable
25k+ - daily traffic volumes for many years and that it is too dependent on
congestion on I-35 and on development occurring close-by it. The road does
seem to make most sense as part of a longer route from the Dallas area to San
Antonio and beyond - to the Trans Texas Corridor 35 (TTC35). In any case
the investors are putting their money, as the saying goes, where their mouth is.
Central Texas gets a valuable new highway without expense to taxpayers.
Partner selection/procurement: This is a special case: SH 130 is a small project
contained in a large procurement relation.
o Cintra-Zachry competed for the right to sign the TTC-35 Master Development
CDA. The commission determined that Cintra-Zachry offered Texans the best
value, and as a result, TxDOT and Cintra-Zachry (CZ) signed a
Comprehensive Development Agreement (CDA) 2005-03-11 providing for
collaboration in conceptual, preliminary and final planning along with some
development, design, construction, financing, operation and maintenance. It
contemplated further agreements or development of facilities like TX130S.
Such projects must be within the TTC-35 corridor or projects that connect to
or support TTC-35. Just 5 months later on 2005-07-27 TxDOT and CZ agreed
on a Facility Implementation Plan Preparation Agreement (FIPPA) for
TX130S. 2006-06-29 the FIPPA for carrying out Facility Development Work
(the work to be done under the concession) was agreed by TxDOT prior to
closing. The Facility Concession Agreement (FCA or concession) together
with agreements on right of way, intellectual property, the lease escrow and
trust and security documents constitute a Facility Agreement.
Main negotiations and interactions:
o Central to the public-private negotiations has been TxDOT's desire for
effective and substantial risk transfer to the developer. Key risks transferred to
the developer include: construction cost overruns, construction delays, traffic
and revenue risks, and financing risk. The final product will be a state-owned
toll road with title to any property purchased to be held by the state.
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o In crafting the agreement on SH 130, TxDOT conducted rigorous negotiations
to ensure that Texans receive the best possible value for the taxpayers. It also
encourages the public to scrutinize this agreement and get a first-hand look at
the ways in which the Texas Department of Transportation is meeting the
goals to reduce congestion, enhance safety, expand economic opportunity,
improve air quality, and increase the value of our transportation assets.
TxDOT made the agreement (CDA) available upon its signing on Thursday,
June 29th, 2006.
Public sector/roles
o State: TxDOT (1) ownership, holding title to any property purchased for the
road; (2) also to provide back office services for transponder (TxTag) toll
collection including a call center, issue of transponders, violation processing,
revenue handling, accounting, and clearinghouse operations with other toll
agencies.
o Federal: USDOT provides TIFIA loan ($430M).
o Local: no.
Private sector/roles
o Consortium: SH 130 Concession Company, LLC. The special purpose
company is owned 65% Cintra, 35% Zachry.
o Roles: D,B,F,O,M, and toll collection.
o Firms in the consortium: Cintra, Zachry American Infrastructure, Ferrovial
Agroman, Zachry Construction Corporation.
o Other PPPs contracts involved: The consortium has a contract with associated
companies Ferrovial Agroman and Zachry Construction for construction of
the 40 mile (64km) 2x2 lane expressway.
SECTION 3 CONTRACT TERMS
Project nature: for-profit.
Contract type: BTO.
Contract signed date: The concession contract was signed in June 2006. However it
could not be brought to financial close until permitting was complete.
Financial closure: March 7, 2008 (segment 5 and 6). SH 130 Concession Company
LLC finalized the legal details of a financial close: both the Term Sheet obligating
funds for the Project and the TIFIA Loan Agreement were executed on March 7,
2008. The first disbursement was made on March 21, 2008. The TIFIA interest rate
on the loan is 4.46 percent. The first interest payment is scheduled for June 2017.
Principal repayments are scheduled to begin in 2018. The final maturity of the TIFIA
loan is June 2047. A bank liquidity facility and contingent equity will be available to
meet senior and TIFIA debt service obligations in the first five years of operation. In
addition a 12 month debt service reserve account will be established beginning in
year six of operations and will be in place through the final maturity of the TIFIA
loan.
Financing arrangements: $ 1,309 million in total, 67% is from private funding.
o Private equity $196.4M.
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o Senior bank loans $682.6M.
o TIFIA loan $430M (The TIFIA loan will be secured by a lien on Project
Revenues subordinate to the lien securing Senior Lien Obligations, which will
be bank loans, and will be senior to the equity to be provided by investors.)
o Upfront payment: The concession company has paid TxDOT the $25.8m
upfront concession fee for the right to collect tolls on the new road for 50
years.
Term/ contract reversion: a 50-year concession from the date of opening, expected in
mid-2012. At end of concession, TxDOT takes over and is expected to continue tolls.
Revenue regulations
o Revenue sources: tolls
o Rate of return: no.
o Toll rates: Toll rate regulation annually by state per capita income. The CDA
establishes conditions and imposes caps on the rate of toll increases for each
year. The increase/adjustment is by the greater of the increase in the nominal
state per capita income as measured in indices of gross state product and
population published by the US Bureau of Economic Analysis. The maximum
base rate for tolls is established at 12.5 cents per mile for most vehicles (more
for large trucks). This is in line with the toll rates on the Central Texas
Turnpike Project.
o Other revenues: no.
o Revenue sharing:
i. Revenue sharing. The terms of the agreement give the state a share of
the toll revenue over the next 50 years. The state's cut of the toll
revenue begins with the first dollar earned on the toll road, and
increases proportionately with toll revenues across revenue bands;
eventually the state will reach a 50-50 split with the SH 130
Concession Company. It is estimated that the state could receive
approximately $1.6 billion in toll revenue over the next 50 years.
ii. Another innovative aspect of the TX130/5&6 concession is the
arrangement for higher concession payments/ revenue sharing
percentage if higher posted speeds are approved by the legislature, in
order to promote higher speed limits and attract more traffic.
(Mentioned in the following management of revenue uncertainty risk).
Management of revenue uncertainty risk: (1) little non-compete protection (2006. 7
CDA) and (2) Using higher revenue sharing to push higher speed limit.
o Little non-compete protection. Concessionaire has right to compensation to
the extent that toll revenue is reduced through development of a competing
facility (11.3.2) but TxDOT has unfettered rights to develop competing
facilities (11.3.1). "Developer acknowledges that TxDOT has a paramount
public interest and duty to develop and operate whatever TxDOT Projects it
deems to be in the best interests of the State, and that the compensation to
which Developer is entitled on account of Competing Facilities is a fair and
adequate remedy...." (11.3.3.1). If TxDOT provides notice of developing a
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competing facility the concessionaire must respond within 120 days with a
traffic and revenue study showing likely detriment to toll revenue and make a
claim for compensation. (11.3.2.1-4). Competing facilities are defined to
exclude improvements provided for in the 2006-2008 state implementation
plan, other 2006 plans and the Austin and San Antonio area 2030 mobility
plans, frontage roads to TX130, and the whole of I-35 - seeming to gut non-
compete clauses of any meaning. (Ex17p3).
o Posted speed limits are a major financial issue in the terms of the toll
concession for Texas State Highway 130 Segments 5 and 6 (TX130-S for
South). TX130-S TR route runs parallel with I-35 south of Austin toward San
Antonio. It is 15mi to the east but serves much the same long distance traffic.
If higher speed limits are posted on TX130-S then the improved travel times
will attract more tollpayers. The fine print of the concession agreement now
available on the TxDOT website shows that posted speed limits are seen as a
key to attracting large volumes of traffic from free-competitor I-35. CDA
Exhibit 7 (Ex7) titled Compensation Terms provides that the concessionaire
will pay TxDOT three radically different amounts of money through different
revenue sharing percentage, depending on the legally enacted speed limits for
the new tollroad.
Management of environmental risk: no need to go through environmental review
process but just follow previously received federal approvals. Federal approvals for
SH 130 Segments 5 and 6, which was first received in 2001 and later reevaluated in
2006, specify 9 measures that the SH 130 Concession Company and TxDOT must
take to meet environmental regulations and standards.
Management of land acquisition risk:
o All of Segments 5 & 6 of SH 130 will require the acquisition of property and
property rights for the new roadway. The private developer is going to pay the
costs for all 3,500 acres of rights-of-way and acquire it in the name of the state.
This would be enough land to construct the currently proposed tollway. The
total SH 130 right-of-way maximum width is approximately 560 feet.
o The SH 130 Concession Company has partnered with O.R. Colan Associates
to work directly with affected property owners on right of way acquisition.
Out of 309 property owners who were notified by mail about the acquisition
phase, 47 parcels are in the Luling area, and 29 parcels have been identified in
the Guadalupe County/Seguin area. Landowners and tenants then will be
contacted by surveyors, appraisers, relocation agents and environmental
experts. Property owner rights will be protected. The acquisition of right of
way will be conducted in accordance with the Federal Uniform Relocation
Assistance and Real Property Acquisition Policies Act and the Texas
Landowner’s Bill of Rights, as prescribed by the Texas Legislature. If an
agreement on the purchase of property cannot be reached, only the state can
initiate eminent domain proceedings. It should be made perfectly clear that
land can not be acquired by the state for private sector developments such as
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hotels, golf courses, industrial parks, etc. Also, the State also may not remove
water from land and redistribute it to other areas.
o TxDOT will oversee all right of way acquisition procedures and relocation
procedures, and the State of Texas will be the record titleholder to all of the
right of way and roadway acquired for this project. Land acquisition activities
began in June 2007 and are expected to be complete by 2009.
Termination for convenience: developer will be entitled to compensation determined
in accordance with Exhibit 22 to the concession agreement dated March 22, 2007
(page 142), which provides very detailed information.
SECTION 4 FOLLOW-UPS
Open date/Physical status: construction began in May 2009, and expected to open in
2012. .
Evaluation on revenue-related risk management: NA yet.
Evaluation on environmental review process: easy. No need for separate
environmental review by the private developer since TxDOT has received federal
approvals in 2006.
Evaluation on land acquisition: smooth, no major problems with private acquisition.
Term change: no as of December 2009.
Other major issues.
Innovation: Speed/concession fee tradeoff. An innovative aspect of the TX130/5&6
concession is the arrangement for higher concession payments if higher posted speeds
are approved by the legislature.
The project follows from TTC master contract. Cintra was selected in December 2004
to work toward concessions on 509km (316mi) of TTC35 tollway that was said to
involve a possible $6 billion worth of work. This was called a Master Development
comprehensive development agreement (CDA). CDA is the unique TxDOT umbrella
term for a variety of contracts that range from small consulting jobs through design-
build, project development work and large multistage concessions.SH130 is not
formally part of TTC35 yet, but it is logically part of it, and none has suggested any
separate road would be viable.
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Appendix 9: Project Information of the New LBJ IH-635
Managed Lanes
OVERVIEW
TxDOT announced in March 2009 that LBJ Infrastructure Group, a
Cintra/Meridiam/Dallas police and fireman’s pension system team, is the preferred
developer in a 52 year toll concession to finance, build, operate and toll “The New LBJ”
or I-635 Managed Lanes Project, an expansion to 14 travel lanes from 8 of the major
east-west expressway across the northern part of Dallas. The 635 project involves
complete rebuilding of 15.5km (9.7 miles) of I-635 and 5.8km (3.6 miles) of intersecting
I-35E to provide 2 frontage road lanes, 4 tax supported general purpose lanes and 3 toll
managed lanes in each direction along with ramps and interchanges - a total of 21km
(13.2 miles) of centerline roadway. Tolling operation will be provided for the 13 mile
managed lanes project along the I-635 and I-35E corridors. Toll collection will be
conducted by North Texas Tollway Authority (NTTA). The purpose of the project is to
relieve the congestion on the current I-635 and improve safety and air quality in the
region. The proposed financial cost of the project is $ 2678 million. Currently this project
is under design and finance, and construction is estimated to start between mid 2010 and
mid 2011 and to be completed by 2013 ~2015.
What are managed toll lanes? Managed toll lanes are lanes where traffic is kept moving
at a faster, more reliable speed (50 mph) by adjusting the toll rate up and down as the
number of vehicles increases or decreases respectively. If drivers want or need a faster,
more reliable trip time (catch a flight at DFW) they can choose to enter and exit the
managed toll lanes at numerous points along the roadway and pay a toll.
Websites:http://www.newlbj.com/;
http://www.txdot.gov/business/partnerships/i_635.htm
BACKGROUND (LEGISLATION, POLITICS, AND FINANCE)
The enormous challenge of reducing traffic congestion over the next 35 years, while
Texas adds 13 million people, led to enactment of sweeping legislation in 2003 to permit
expanded use of tolling and public-private partnerships (PPPs). That law, as strengthened
by amendments in 2005, has led to Texas attracting enormous potential private capital
investment to expand its highway capacity beyond what would have been considered
possible several years ago. The Texas policy has also been cited repeatedly as a model by
other states enacting similar enabling legislation since 2003. However, in May 2007,
Texas senate passed a concession freeze bill providing for a moratorium on toll
concessions by Texas DOT and except in the Dallas metro area through Sept 2009.
In 1969 I-635 was built to accommodate 180,000 vehicles per day. Today, in the project
area, average daily traffic counts exceed 270,000 vehicles. Future corridor traffic demand
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is estimated to exceed 450,000 vehicles by the year 2020. Also, the existing pavement
has exceeded its life span and is in critical need of repair. If TxDOT were to finance and
build this project, TxDOT estimates that it could borrow up to $300 million in bonds and
loans. This debt would be secured and paid back by toll revenue. $300 million in
borrowed funds combined with $700 million in available gas tax revenue is only half of
the $2 billion required to build the project. As a result, a significant portion of the I-635
Managed Lanes project would be deferred indefinitely. Also LBJ Infrastructure Group
estimates that they will employ 1,500 Americans to design, construct, operate and
maintain the new highway corridor. In addition, FHWA estimates that for every $1
billion in highway investment, 35,000 local jobs are supported.
Figure 18: Maps of the New LBJ Managed Lanes
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SECTION 1 PROJECT BASICS
State and location: Dallas, Texas.
How long: managed lanes are 13 miles.
How many lanes: 2x3 managed lanes.
Facilities type: HOT related (Brownfield). Interestingly, TxDOT is going to pay HOV
tolls. TxDOT has had studies done in which all vehicles in the managed or tolled
lanes are tolled and in which high occupancy vehicles (HOV3+) go free. The
concession is written as if a toll is collected from all vehicles regardless of occupancy.
If HOVs get a discount TxDOT pays the concessionaire the difference between the
prevailing toll and the amounts charged to HOVs - called an HOV Discount.
Purpose/goals:
o Congestion Relief: In 1969 I-635 was built to accommodate 180,000 vehicles
per day. Today, in the project area, average daily traffic counts exceed
270,000 vehicles. Future corridor traffic demand is estimated to exceed
450,000 vehicles by the year 2020.
o Safety Improvement – Wider lanes, additional shoulders, separated traffic
lanes and continuous frontage roads will help reduce vehicle collisions in the
project corridor. The existing pavement has exceeded its life span and is in
critical need of repair.
o Air Quality Improvement – Dallas’ air quality is below national requirements
in part due to vehicle emissions created by heavy congestion. Vehicle
emissions within the corridor will be reduced by maintaining traffic flow on
the managed lanes.
Toll type: congestion pricing, electronic; vehicles with 2+ passengers are considered
HOV and pay half price during peak travel periods.
Capital needs/ Financial estimate:
o Government estimate: $4billion (inflated)= $2b design and construction
+$1.5b long term operations and maintenance.
o Developer financial plan: $2678 million. $700 million in public funds were
allocated; however, the developer requires only $445 million.
Expected revenue sources: tolls.
Revenue uncertainty: the competing freeway I-635, which is however very congested.
Environmental review needs and study: all taken care of before the award of the
concession contract in early 2008.
o Original environmental approvals were received between 1992 and 2003. And
4 public hearings were held in the 10 years.
o Environmental Re-Evaluation was approved in 2008. In early 2006, TxDOT
initiated modifications to the originally approved designs in the originally
approved documents. The revised managed HOV lanes configuration does not
alter the amount of required right-of-way, displacements, or relocations stated
in the original 2002 and 2004 EAs. TxDOT has received notice from the
Federal Highway Administration (FHWA) that they have reviewed the
Environmental Assessments (EA) Re-evaluations for the design and
operational modifications that have occurred since the original issuance of the
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FONSI for the I-635 West Section and the Loop 12/I-35E Section and that the
original findings remain valid. In addition, a Categorical Exclusion was
obtained for operational improvements that have occurred since Federal
Highway Administration issued a FONSI for the I-635/US 75 interchange in
October 1993. The notices from FHWA were received by TxDOT on June 19,
2008, June 20, 2008 and June 24, 2008 for the I-635/US 75 Interchange, I-635
West Section and the Loop 12/I-35E Section, respectively.
Land acquisition needs and study: no need with an entrenched/cantilever design.
o An earlier plan in 2005 (when 4 bidders were shortlisted) was to put several
miles of the toll lanes in a pair of mined tunnels. In this case right of way was
already partially acquired by government but the concessionaire would have
to acquire the remainder (In 2005 news).
o But in Feb 2009 when the contract was finally signed, the earlier plan was
abandoned and the project adopts an entrenched/cantilever design to avoid the
need for extra right of way acquisition and also be less expensive to build and
operate. Specifically a lot of the length of the project will be elevated (on 35E
and at each end on 635) or subsurface (on 5 miles of 635 where it will be in
trench with the new tax supported lanes) cantilevered over to avoid the need
for extra right of way acquisition.
SECTION 2 PARTNERSHIP INFORMATION
PPP legislation: 2003 legislation to permit expanded use of tolling and public-private
partnerships (PPPs), and the law was strengthened by amendments in 2005.
Initiation time of project: May 2005, the RFQ was sent out. Actually the project has
been under study since 1992.
Feasibility study: Before sending out the RFQ in May 2005, the project is actually
highly developed already with over ten years of alternatives analyses, public outreach,
engineering reviews, geotechnical drillings, utilities mapping, costings, and a traffic
and revenue study (by Wilbur Smith in early 2005). The time taken has not been the
result of any great contention, just working through the complexity of the scheme - all
of which makes it one of TxDOT's most solid projects.
Partner selection:
o In May, 2005, TxDOT issued a RFQ to “to develop, design, construct, finance,
operate, and maintain the I-635 Managed Lane Project through a
Comprehensive Development Agreement.” In November, 2005, TxDOT
received qualification proposals from 4 significant developer teams:
Dragados-Zachry, Macquarie, Cintra, Dallas Mobility Link.
o In September 2007, TxDOT issued request for proposals and January 2009
received 2 proposals. The best-value proposal was selected in February 2009.
The winning bid from LBJ Infrastructure Group has significantly lower total
cost ($2678), proposes to use both TIFIA ($800M) and private activity bonds
($400M), and only ask for $445M public funds. In contrast, the losing bid has
significantly higher total cost ($3882M), proposes to use TIFIA ($800M) but
no private activity bonds, and asks for $1800M public funds. On May 7, 2009
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TxDOT held a public hearing concerning the disclosure of financial
information for the LBJ-635 CDA.
o On September 4, 2009, TxDOT officials executed a CDA with the LBJ
Infrastructure Group to design, construct, finance, operate and maintain the
13-mile LBJ-635 corridor in Dallas County.
Main negotiation and interactions during partner selection:
o Toll rates are to be set for each segment and direction “to encourage and
stimulate demand while maintaining average speeds at or above 50mph”.
o The concessionaire is liable for damages where average speeds in the
managed lanes fall below 50mph (CDA p137) and there would a sliding scale
of damages payments to TxDOT. The concessionaire is excused in case of
incidents beyond his control.
o HOVs get lower toll rates, and TxDOT pays the concessionaire the difference
between the prevailing toll and the amounts charged to HOVs - called an
HOV Discount.
o The concession has a profit sharing schedule with six bands based on a
blended nominal after-tax internal rate of return for equity which starts at 12%
and steps up being 50% at 23%, though the available exhibit says the table
will be replaced with another in the executed concession contract.
o Termination of the concession for "convenience" or through TxDOT default
requires the concessionaire be paid the greater of fair market value and the
senior debt termination amount plus reimbursement for demobilizing and
terminating subcontracts.
Public sector/roles
o State: TxDOT- will retain ownership and conduct oversight of the project to
include review and periodically audit managed toll lane operations for
compliance.
o Federal: In September 2008, the USDOT Secretary approved an award of up
to $800 million in TIFIA credit assistance to the developer of the project.
o Local: Throughout the development of the comprehensive development
agreement, the North Central Texas Council of Governments (NCTCOG) and
Regional Transportation Council (RTC), City of Dallas and Dallas County
contributed significantly. Additionally, the NCTCOG/RTC managed lane
policy will govern toll rates and collections. The North Texas Tollway
Authority (NTTA) will handle toll collections on the managed lanes and
manage the toll tag accounts.
Private sector/roles
o Consortium: LBJ Infrastructure Group (formerly LBJ Development Partners).
o Roles: D, B, F,O, M.
o Firms in the consortium: Cintra, Meridiam Infrastructure Finance, Dallas
police and fireman's pension system, Ferrovial Agroman,S.A., W.W.Webber,
Inc. Macquarie was part of the winning Cintra-led group but pulled out as part
of its scaling back of its investments worldwide.
o Other PPPs contracts: N/A yet.
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SECTION 3 CONTRACT TERMS
Project nature: for-profit.
Contract type: BTO, Comprehensive Development Agreements (CDA).
Contract signed date: CDA was conditionally awarded on February 26
th
2009, and
TxDOT executed the CDA with the developer on September 4
th
, 2009.
Financial closure: Cintra is currently working on financial closure, as of Dec 17
th
2009.
Financing arrangements: developer’s financial plan is $2678M in total, 54% private
money ($1433M).
o Equity Contribution $598M,
o Senior Term Facility $400M,
o Private Activity Bonds (PABs) $400M,
o Toll Revenue $35M,
o TIFIA loan $800M (In September 2008, the USDOT Secretary approved an
award of up to $800 million in TIFIA credit assistance to the developer of the
Project),
o Public Funds $445M ($700 million in public funds were allocated; however,
the developer requires only $445 million).
Term/reversion contract: The CDA will be for a term of 52 years, including the
construction and operations periods, and will provide the developer with a lease of the
facilities. TxDOT owns and will continue to own the Project.
Revenue regulations
o Revenue sources: toll revenues.
o Rate of return: no.
o Toll rates: a formula based on maintaining traffic flow.
i. Regional Transportation Council sets tolling policy and the developer
implements the tolling policy and sets the tolls themselves. Toll rates
are to be set for each segment and direction “to encourage and
stimulate demand while maintaining average speeds at or above
50mph,” the concession says. The developer is liable for damages
where average speeds in the managed lanes fall below 50mph (CDA
p137). It is excused in case of incidents beyond its control. There is a
sliding scale of damages payments to TxDOT if Average Speeds in the
toll lanes are less than 50mph: (1) In the 45mph to 50mph band the
concessionaire pays TxDOT 25% of the tolls collected during that time;
(2) in the 40mph to 45mph band the damages payment is 50% of the
tolls to TxDOT; (3) 35mph to 40mph TxDOT gets 75% of tolls; (4)
when average speeds are <35mph the concessionaire has to turn over
100% of tolls collected in damages payment.
ii. Additional info: TxDOT is going to pay HOV tolls. TxDOT has had
studies done in which all vehicles in the managed or tolled lanes are
tolled and in which high occupancy vehicles (HOV3+) go free. The
concession is written as if a toll is collected from all vehicles
regardless of occupancy. If HOVs get a discount TxDOT pays the
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concessionaire the difference between the prevailing toll and the
amounts charged to HOVs - called an HOV Discount.
o Other revenues: no.
o Revenue sharing: The concession has a profit sharing schedule with six bands
based on a blended nominal after-tax internal rate of return for equity which
starts at 12% and steps up being 50% at 23%, though the available exhibit
says the table will be replaced with another in the executed concession
contract. There is an elaborate disputes resolution procedure laid out.
Management of revenue uncertainty risk: No any restrictions in the CDA on
expansion of competitive capacity. TxDOT has the right to build any facilities at any
time. TxDOT will not be required to compensate the developer if TxDOT builds any
facilities outside the right of way of the Project or if it builds any other mode of
transportation (such as rail) within the right of way of the Project. If TxDOT builds
additional limited access main lanes within the right of way of the Project (such as on
an elevated structure above or in a tunnel below the Project) that increase the
developer’s revenues, the developer will be required to compensate TxDOT for the
increase in revenues, net of increases in operating and maintenance costs; if such
additional main lanes decrease the developer’s revenues, TxDOT will be required to
compensate the developer for loss of revenues due to the additional main lanes, net of
savings in operating and maintenance costs. Currently, no such additional main lanes
are planned.
Management of environmental risk: no need for any more environmental study.
Management of land acquisition risk: no need for extra right-of-way acquisition.
Termination for Convenience: TxDOT has the right to terminate the CDA at any time
without cause. If TxDOT elects to use this right, TxDOT must compensate the
developer. The compensation will equal the lesser of (a) a formula amount or (b) the
amount of reasonable, documented demobilization costs plus the greater of (i) the fair
market value of the developer’s interest at the time or (ii) the amount of outstanding
bona fide debt plus the amount of lender charges and premiums for prepayment of
such debt. The formula amount is (1) the amount necessary to prepay the outstanding
bona fide debt, including lender charges and premiums for prepayment of such debt,
plus (2) an amount that provides the equity investors with a pre-established base rate
of return over the remaining term of the CDA (had it not been terminated), plus (3) an
amount that provides the equity investors with a pre-established additional rate of
return over the term of the CDA (had it not been terminated) but subject to a cap
equal to three times the toll revenues projected to be collected over the remaining
term, plus (4) the amount of reasonable, documented demobilization costs. The fair
market value of the developer’s interest will be determined by an independent
appraiser, subject to appeal if TxDOT or the developer disagree.
SECTION 4 FOLLOW-UPS
Open date/Physical status: construction is estimated to begin between mid 2010 and
mid 2011, and will be completed between 2013 and 2015.
Final Cost: NA yet.
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Evaluation on revenue-related risk management: NA yet.
Evaluation on environmental review process: easy. TxDOT’s previous thorough
studies and analyses have made it easy for the CDA.
Evaluation on land acquisition: easy, no need for extra right-of-way acquisition.
Term change: not as of December 2009.
Other major issues:
Elevated and cantilevered highway. A lot of the length of the project the tolled
roadways will be elevated (on 35E and at each end on 635) or subsurface (on 8km or
5 miles of 635 where it will be in trench with the new tax supported lanes
cantilevered over to avoid the need for extra right of way acquisition. An earlier plan
(in 2005) to put several miles of the new I-635 toll lanes in a pair of mined tunnels
was abandoned in favor of the present entrenched/cantilever design - less costly to
build and operate.
TxDOT is going to pay HOV tolls. TxDOT has had studies done in which all vehicles
in the managed or tolled lanes are tolled and in which high occupancy vehicles
(HOV3+) go free. The concession is written as if a toll is collected from all vehicles
regardless of occupancy. If HOVs get a discount TxDOT pays the concessionaire the
difference between the prevailing toll and the amounts charged to HOVs - called an
HOV Discount.
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Appendix 10: Interview Protocol
Research Introduction
Despite private finance for public infrastructure development gaining great attention
worldwide, little attention has been devoted to formation of the actual partnerships
between the public and private sectors (PPPs). Some basic questions the author would
like to address in the research include: How do public and private parties interact and
negotiate to form partnerships? How and why have different partnering arrangements
emerged between the public and private sectors as the results of the formation process?
Author develops a formation model for PPPs and explores it contextually in the sector of
toll road development in the United States. The study would use a multiple-case study
method and examine six to eight toll road partnerships established since the late 1980s in
the U.S. to empirically explore the formation model. The results will help us understand
whether there is a pattern(s) of public and private interactions in shaping partnerships,
and what factors contribute to or obstruct the formation process.
Interview Questions
Please note the following is a comprehensive list of open-ended questions prepared for
multiple situations. In each interview, only questions applicable to that particular
interviewee were asked.
1. Please briefly introduce your company and your personal experience with privately
financed toll road projects.
2. What is the most interesting case(s) you have been involved with which could
provide significant information about how the public and private sectors negotiate to
shape partnerships and reach agreements.
3. As a consultant working for a private consortium, when you review a Request for
Proposal (RFP) from a government agency or consult on an unsolicited proposal to
government, what factors or characteristics of the project would lead you to
recommend submitting a proposal or not? In other words, what makes you think a
project is worth doing?
a. What about projects that look somewhat promising but also contain a high
degree of risk? What types of risk are particularly troubling? How will this
affect the proposal of the private consortium, if they still submit one?
b. At what point will the bidding consortia have a general idea about the capital
structure? What do you look for in the RFP to guide your recommendation
about submitting a bid?
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4. When preparing a proposal or consulting with government agencies, what would a
private developer do in order to stand out among other developers and increase its
chance of winning?
5. When a public agency reviews a proposal, what are they looking for and what factors
would help them select a private partner?
a. Besides access to private resources, what do you think really drives
government to do partnerships? What are the critical factors, please give an
example?
b. Almost all states are facing transportation funding shortfalls, but not many of
them are considering or doing PPPs. Why do you think this is?
6. If you are part of the project development team, when you begin negotiations on
project details, what items are on your negotiation list and in what order? What would
be the typical debate(s) over each item? Especially for risks associated with the
environmental review process, land acquisition, and revenue uncertainty, what would
be the negotiating points for each one of them? How would a private developer
propose in order to mitigate these risks?
7. I am looking for recommendations for interesting and informative cases which would
illustrate significant characteristics of partnership formation and how agreement was
reached on the nature of the partnership.
8. Overall, do you think PPPs agreements have gotten better in terms of mutual benefit
and reciprocity? How much better for the public sector, and how much better for the
private sector? How did this occur and what are major things the parties have learned
from the past experience?
9. There is some question about whether the capital structure determines the nature of
partnership or the nature of partnership determines capital structure arrangements.
What is your opinion?
10. Permission for tape recorder.
278
Appendix 11: An interview with John Schmidt
Interview Notes from a Phone Conversation with Mr. John Schmidt, a partner of
Mayer Brown LLP, on December 14
th
, 2009.
1. Personal experience.
Mr. Schmidt was a lawyer for government in the cases of Chicago Skyway and Indiana
Toll road. In several other projects, such as Northwest Parkway in Colorado (also an
existing road) and another toll bridge in north Colorado (didn’t happen eventually), he
was a lawyer of unsuccessful bidders. Therefore our conversation focused on his
experience with Chicago Skyway and Indiana Toll road from government perspective.
The core of the two projects is to sell government assets and realize the value of existing
toll roads upfront, and then government uses the money for other transportation projects
in the state. This type of project has its own characteristics different from using private
money to build new toll roads.
2. When government puts together a Request for Proposal (RFP) for a toll road project,
what factors or characteristics of the project would make government believe this project
could attract private investors?
(1) Technical requirements: what are the specific requirements for the particular project?
Have any companies in the world done this before? We don’t want the project to be the
first of its kind in the world and we could learn from previous experiences. Are the
private operators capable of doing the project? Can they come to Chicago, Indiana to
operate the road?
(2) Financial expectation is another element: is this project going to make profit?
3. At what point will government have a general idea about the capital structure/financial
plan?
The financial decisions in both Chicago Skyway and Indiana Toll road were determined
by both public and private sectors. Government had a minimum estimate which was not
listed in the RFP, and the estimate was made with the help of investment banks and
financial institutions. And when they received bids, the decision was made based on the
simple rule: the highest bidder wins. In the case of Chicago Skyway, the winning bid was
significantly higher than the other 2 bids. In this project, there wasn’t any government
estimate because this was the first of its kind in the country.
In the case of Indiana Toll road, Governor publicly said government wants to get $2
billion or more from the project. But lawyers and other professionals were unhappy about
this because this action might potentially lower bidders’ offer. Mr. Schmidt argues that
public discussion on these deals could be very dangerous. A low estimate would lower
bidders’ offer, and a high estimate would put people’s expectation unrealistically high. In
the case of the failed Pennsylvania Turnpike privatization project, Morgan Stanley did an
estimation projecting a final price between $11 and $18 billion, based on toll level
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significantly higher than what would be allowed. The final proposal was around $12.8
billion. Professionals thought this was a terrific bid, but the public argued this was not a
good deal since it’s at the low end of the range.
4. when a government agency reviews proposals, what are they looking for and what
factors would help them select a private partner?
In the cases of Chicago Skyway and Indiana Toll road, it was solely based on the
financial plan. Chicago Skyway had 5 qualified developers and only received 3 bids: the
winning bid was $1.8 billion, and the other two were significantly lower: $500M, and
$700M. Indiana Toll road had 4 bids: $3.8b, $2.8b, $2.5b and $1.9b.
What is interesting about the two cases is they both used a fixed contract included in the
RFP, which contained every single detail about the project, including project description
and specific toll regulations. So basically the developers only need to fill in one blank
with the amount of money they are going to pay. The decision was easy to make. All
issues regarding qualification or technical capability were already taken care of upfront.
A main reason to use this form of RFP is government is very fearful of making
controversial decisions so it tries to make transparent and easy-to-understand decisions.
Decentralized politics puts state government under a lot of pressure, so they want to
simplify the process, pre-determine every detail in the RFP, and the decision would be
made purely based on the amount. In this way, there will be less criticism of unfair
practices or nepotism. There is no any other separate regulation in addition to the fixed
contract.
But the fixed contract didn’t happen easily. After receiving qualification proposals,
government narrows it down to a few bidders, talks with they, tries to understand what
bidders are thinking and how they understand things, and includes the information in the
fixed contract. Also, government puts all information on website and welcomes people to
add more information or to ask questions. This also helps government to fully understand
the project. “Government provides as much as you can to the public and the private
proposers, and also tries to understand as much as you can about what they are thinking.
You will come to a point where you come up with a contract that can work for them and
work for the public entity.”
5. Almost all states are facing transportation funding shortfalls, but not many of them are
considering or doing PPPs. What factors besides private resources drive government to
do partnerships?
In fact more states have considered PPPs than we might think. But the problems are (1)
the lack of comfort of government with private operators taking over something
historically done by government. Chicago Skyway and Indiana Toll road are the
beginning of the learning process; and (2) natural resistance emerges in American
political and government system. There is political resistance. In the case of Pennsylvania
Turnpike privatization, Governor was absolutely in favor of the project, but the
Pennsylvania Turnpike Authority, a public agency having managed the turnpike for about
280
80 years, bitterly opposed the project due to their self-interest. Also, since a lot of traffic
is truck traffic, trucking industry was strongly against the project because they believe
they would pay much higher tolls. Governor tried but failed to make a deal with trucking
industry by promising to lower tolls for trucks in the near term. Mr. Schmidt argues this
is determined by the nature of the decentralized politics in the U.S. The decisions of
federal and state governments are subject to many agencies and civil societies, which
might care more about their own interest.
6. Overall, do you think, after 20-year practice, PPPs agreements have gotten better in
terms of mutual benefit? What are major things the parties have learned from the past
experience?
Government has learned a lot from previous experience:
(1)CA 91 non-compete clause is lesson one. So Chicago Skyway didn’t have any
restriction on competing freeway. Indiana toll road has only limited restriction on
competing freeways, which is not going to have significant impact.
(2) SR 125 environmental problem is lesson two. He argues the problem was caused by
incomplete responsibility shift to the private sector. So the two cases made a total shift of
costs and responsibility to the private sector.
(3) 407 ETR in Toronto didn’t have specific regulation on toll rates which caused
significant increases in tolls. In the proposal, the private developer designed a formula no
one really understood and the formula aims at maintaining the traffic volume. The result
was the private developer significantly increased the toll rates as long as they maintained
the traffic volume. Government couldn’t do anything about it. The two projects learned
the lesson. Before sending out the RFP, government consulted with private entities and
professionals then designed a specific toll formula as part of the fixed contract in the RFP.
The regulation is very strict and no space for private negotiation.
(4) However we must realize that there is no sudden change. Every state is different when
it comes to infrastructure development, and they have their own learning process. But the
momentum of PPPs is going to continue, because it makes economic sense. People need
time to understand, and once they realize it is good, they will continue it. A good
example is Indiana Governor Mitch Daniels was reelected last November. Recently,
Georgia, Arizona, California, and Virginia are all talking about new PPP projects.
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Appendix 12: An interview with Paul Ryan
Interview Notes from a Meeting with Mr. Paul Ryan, Managing Director of
Infrastructure Advisory Group of J.P. Morgan, on December 21st, 2009.
1. Personal experience with PPP projects in transportation.
Recently Mr. Ryan has been involved in: (1) Brownfield projects including Indiana Toll
Road, Pennsylvania Turnpike, and Puerto Rico 22; (2) Greenfield projects including the
North Tarrant Express, the New LBJ Managed Lanes in Dallas, Mississippi Toll Road.
2. What role do you and JP Morgan play in the partnership formation process?
Overall, Mr. Ryan and JP Morgan advise US state and local governments to plan a PPP
project, covering from drafting state bills, conducting feasibility studies, and then helping
the Request for Qualification (RFQ), the Request for Proposal (RFP) and bidding process.
Specifically:
(1) Legislation. They help state and local governments draft bills for PPP projects and
they have done this in Mississippi, Indiana, Ohio, and Puerto Rico;
(2) Feasibility Study. They compare all alternatives (PPPs or public projects),
considering the costs of construction, operation and maintenance, toll rates with
inflation and revenue expectations. Then, they draft financial plans to show how each
alternative might work: where to raise the needed capital if government wants to do
the project by itself, and what is the required rates of return if using a PPP. Then their
study will show which alternative makes the most economic sense. In a word, the
feasibility study must strictly compare all alternative apples to apples, easy to
understand. The recommendation made based on the feasibility study must be very
transparent.
(3) Risk Arrangements. Mr. Ryan and JM Morgan also help government specify
arrangements for risks and issues crucial to private investors. If using a PPP, what are
the major risks to financial performance? Who should be responsible for controlling a
particular risk in order to stay on budget? These arrangements are in fact largely
determined by state law. The information must be clearly provided to the private
sector beforehand in order to attract private developers.
(4) PPP Procurement Process Regulation. This is about how the procurement will be
conducted and what the process is like. This is also largely determined by state PPP
law. The PPP procurement process must be fair, transparent and clearly elaborated
beforehand in order to attract private developers to submit their proposals. Note:
states have very different legislations on the procurement process. For example,
Florida has “Sunshine Law” and every piece of information must be available to the
public; in contrast, New York is handling the problem very differently.
The above four points are JP Morgan’s main job in partnership formation. When private
developers review a project, they look at Feasibility Study, Risk Arrangements, and PPP
Procurement Process Regulation. All three are important and weakness in one might
deter private developers from participating in PPPs.
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Table 12: Part 1 in feasibility study: Asset Management of Alternatives
Comparison Status Quo (government projects) PPPs (private development)
*construction
cost
Expected to be higher Expected to be lower
*revenue
expectation
(1)Theoretically should be the same to be comparable;
(2)But in the case of managed lanes using real-time congestion pricing,
only private projects would use the technology and so it is hard to
compare. This technology has been used in projects such as the North
Tarrant Expressway and the New LBJ, both in Texas;
(3) Even if private projects charge higher tolls, it is justifiable.
Greenfield projects are always very risky, often containing a high
degree of uncertainty. Also sometimes private developers pay
government upfront payment which is extra money for government to
use in other transportation projects.
*Operation
cost
Expected to be higher Expected to be lower
*Maintenance
cost
Expected to be higher Expected to be lower
Table 13: Part 2 in feasibility study: Capital Structure of Alternatives
Comparison Status Quo (government projects) PPPs (private development)
Equity, from government grants;
Bonds, which are tax-exempt.
Equity, requiring rates of return,
about 15%;
Private bonds, which are taxable;
Private loans, which are also
taxable;
Upfront payment to government is
also considered.
Overall
present
value
To compare the net present value of the alternatives.
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Table 14: Risk Arrangements in PPPs
Risks/issues Whose responsibility to control
Construction-related risks Usually the private sector
Operation&maintenance-
related risks
Usually the private sector
Revenue risks Usually the private sector
Termination for
convenience
This is an important and complicated issue: (1) how to
separate public and private sectors’ responsibility; (2)
what is the “penalty” payment when one party terminates
the project unilaterally? For example, if the state doesn’t
use eminent domain power to acquire the right-of-way for
a project, or simply takes back land from the developer,
what would be the government payment to the developer?
3. When government compares a few proposals, what factors help it pick the private
partner?
Government compares proposals apples to apples, using the same criteria. Government
provides the preliminary design, and private developers should stick to government’s
design and require minimal changes. For example environmental design is really
complicated and difficult to change, so government would prefer a private developer
who requires minimal design changes. But some Greenfield projects could be a little
different. For example in the Trans Texas Corridor (TTC) master plan, TxDOT picked
Cintra to be the developer. Government wants to build roads between multiple places,
and Cintra is required to work with TxDOT from scratch, including preliminary design,
environmental study and many other things. The contract is called TTC-35
Comprehensive Development Agreements.
4. When does public-private negotiation take place and what items are at the top of the
negotiation list?
Figure 19: The Process from RPFs, Negotiation, Partner Selection to Contract Signing
(1) After developers submit proposals in response to the RFP, each bidder will have
separate meetings with government agencies and negotiations take place in these
meetings:
Govt. receives proposals in
response to the RFP
Govt. selects a partner &
signs the contract. No
negotiation afterwards.
3-6 months, separate
meetings &negotiations
284
a. Be very careful: assuming a bidder, through negotiation, successfully adds a
new term in the contract draft, the term will be available to every other bidder.
So a consortium is negotiating for itself and also for all its competitors. The
finalized contract draft bidders receive will be exactly the same. The rule is to
ensure the fairness of the procurement process.
b. Top items on the negotiation list include:
i. Regarding construction and operation, maintenance cost and
oversight issues;
ii. Regarding termination largely determined by state law; issues about
how to solve the relations between banks, government and private
developer;
iii. Regarding revenue sharing and refinancing the related issues are
heavily negotiated;
iv. There is usually a 2-to-3-month gap between contract signing and
financial closure, which party is going to pay for the debt interest
generated during the time period? Recently market has been weak so
governments are willing to be responsible for some of the debt interest.
(2) The entire meeting and negotiation process usually takes three to six months, and then
government chooses the best-value proposal and signs the contract with the developer.
After that, no more negotiations.
5. Overall do you think, PPPs agreements have gotten any better in terms of mutual
benefit after 20 years of practice? What are major things the parties have learned?
Mr. Ryan believes PPP agreements have been much better:
(1) Standards for working with banks. Now government doesn’t have to go through
the same process again and again, because there are formalized processes and
standards for government to work with banks;
(2) Better and clearer risk transfer. Private developers are no longer taking
environmental risks, but they are willing to take right-of-way land acquisition
risks;
(3) More financial tools and better financial system to help fund PPP projects, such as
tax-exempt private activity bonds and TIFIA;
(4) Revenue sharing between developers and government. In recent projects such as
the North Tarrant Expressway and the New LBJ Managed Lanes, the developers
are using very sophisticated methods to share revenues with government.
(5) Another critical issue is refinancing. Mr. Ryan points out: when a project has
good toll revenues, the private developer might refinance it so that they can get
their equity investment out quickly, since bank loans’ term to maturity is about 10
years, bonds’ term to maturity is about 30 years, and TIFIA 35 years. But
government doesn’t like this, so there have been talks on refinancing policies.
285
Appendix 13: An Interview with Geoffrey Yarema
Interview Notes from a Phone Conversation with Mr. Geoffrey Yarema, a partner
and Chair of Infrastructure Practice Group of Nossaman LLP, on January 15th,
2010.
1. As special advisor, what role do you (and Nossaman LLP) play in the partnership
formation process?
Mr. Yarema and Nossaman’s involvement is “from soup to nuts”, from the very
beginning to the end of partnership process:
1. Clientele Education. Mr. Yarema is hired to advise the clients about different
development alternatives, different financing strategies, and how they would work.
2. Legislative and administrative preparation. (1) He works with legislature to enable the
legislation authorizing PPPs and establish guidelines to implement the PPPs
legislation; (2) works with stakeholders to help them understand their interest in PPPs;
and (3) helps transportation agencies build their institutional capability to implement
the PPPs program. In the process, he would work with financial and technical
advisors to help the agencies go through their long-range plans and offer unbiased
opinions on what projects would be suitable for PPPs and what are the expected
benefits of PPPs in these projects.
3. PPPs project preparation. Once a project is selected to be built as PPPs, Mr. Yarema
would help the transportation agency develop a master project plan with specific
schedule, answering the following questions: (1) what are the agency’s goals and
desired outcomes for the project; (2) when is the right time to procure the project
based on the project’s characteristics; (3) what are the optimal procurement and
contracting strategies to achieve the goals; (4) what is the environmental timeline; (5)
what are the needed engineering work products and process; and (6) what are the
right legal and financial assumptions for the value for money and shadow bid
analyses?
4. Marketing. Then he would help the agency to market the project to the private sector
and treat the private sector as stakeholder. The public sector would hold separate
meetings with bidders, educate them about the project and procurement process, and
work with the bidders to optimize the allocation of risk and responsibilities between
the parties in the procurement documents.
5. Working with federal government. Federal government plays 3 roles in a toll road
program: (1) to regulate the use of tolling; (2) to regulate the procurement process; (3)
to provide federal grants and credit. Mr. Yarema and the agency will closely work
with federal government on the three aspects. By meeting federal standards, he would
help to apply for federal funding and credit on behalf of the client.
6. Partner Selection. Throughout the previous steps, Mr. Yarema and the agency
hopefully create a commercially feasible opportunity; then he would help the agency
evaluate the proposals, negotiate with bidders, select the preferred bidder as the
286
private partner, and help the partner go through the commercial process and reach
financial closure.
7. Oversee. Finally, he would educate the clients and help them oversee the contracts
they now have to make sure they receive the benefit of the bargain they have
contracted for.
2 What difference does it make by selecting a proposal through the RFP process instead
of using an unsolicited proposal.
While there are a few other countries in the world that have used unsolicited proposals,
for example Philippines, the U.S. has more than a decade of history with the tool.
1. Unsolicited proposals dominated in the 1990s for kicking off PPP projects because
state officials, rightly or wrongly, didn’t feel they had enough knowledge to identify
optimal PPP projects. For example, Virginia used unsolicited proposals and they
perceive they have received real value by using the method; other states followed the
Virginia model.
2. In the last 3 to 4 years there has been a strong transition away from unsolicited
proposals to the solicited proposals. Mr. Yarema thinks this is a positive change
which has happened for 3 reasons: (1) recently states have become more comfortable
with PPPs since transportation agencies believe they have built the ability to figure
out what projects would benefit from PPPs and no longer need the private sector to
define the projects for them; (2) the National Environmental Policy Act regulates the
definition of transportation projects, and even if an unsolicited proposer comes up
with a really creative idea, it might offer value for money but set back the
environmental process by years to take advantage of it; (3) meanwhile in more than a
few instances public officials after the fact perceived, rightly or wrongly, that
unsolicited private proposals tended to serve the interest of the private company more
than the public interest.
3. But ideally, both methods should result in a true competitive procurement. Some
companies believe they should have some privilege by bringing up unsolicited
proposals. In his view the privilege bestowed should be limited to the public sector
opting to accelerate procurement of the project. In fact, solicited and unsolicited
proposals should be considered in the same conditions and meet the same standards to
determine whether or not the company secures the contract.
3. In the partnership formation process, when will public-private negotiation take place?
And what are the top items on the negotiation list?
Different procurement processes handle this differently:
1. In the case of unsolicited proposals, agencies in most cases have opted to defer
negotiations completely until after a developer is selected, thereby developing the
entire contract through pure one on one negotiation. For example, Virginia doesn’t
use procurement, and instead the state selects proposals based upon the best ideas and
then works with the single proposer on the contract. This is pure negotiation.
2. In the growing trend toward solicitation of proposals, negotiation happens before a
preferred bidder is selected. In the RFP process, the public sector would select several
287
good teams, negotiate contract terms with all of them, normalize the contract terms
(meaning providing the exactly same terms to all bidders with very limited variables),
and then select the proposal offering the most financial benefit for government. The
method makes good use of competition among private companies.
3. Another type of solicited proposal is the pre-development agreement, which solicits
the best ideas for a project competitively and results in a 2 phase agreement. The
contract that is normalized through bidder consultations covers only the first, pre-
feasibility phase and leaves the implementation phase portion of the contractual
relationship to be negotiated with the selected developer after completion of phase 1.
The agency uses a shadow bid as a proxy for competition. If the negotiations are
unsuccessful, the agency terminates the agreement and pursues implementation
through alternative means. (Yin’s words: This is not often seen. Government selects a
partner first with a government pre-determined contract and then parties negotiate on
the implementation contract. In this case, negotiation happens after a preferred bidder
is selected. Here government needs to know the market very well and understand the
companies and ongoing projects in the market.)
4. Now more and more states are doing or considering PPPs; however there still are some
doubts. In your understanding, what are the major barriers to the expansion of PPPs in
transportation?
4 major barriers:
1. The strong political backlash against Brownfield projects (Indiana Toll Road and
Chicago Skyway) has unfortunately negatively affected Greenfield projects.
Brownfield and Greenfield projects are in fact very different (for example in purpose)
but political leaders seem to confuse two of them. PPPs is a broad concept, containing
many different partnership forms; unfortunately when one causes problems, it poisons
all. Mr. Yarema hopes we will see fewer Brownfield projects because they are
causing much bigger political concerns than Greenfield projects, which most
transportation agencies consider to be more valuable.
2. In the U.S., transportation development is mainly states’ responsibility and
transportation decisions are made at state level. While standardization and
normalization of the tools is much to be desired and should be a high priority, each
state is very different in transportation policies, culture and legal authority, and needs
to be separately educated about the value of PPPs. In addition, for 70 years, state
transportation legislation has used almost exclusively the Design-Bid-Build model,
while states are always responsible for pay as you go or bond financing. Changing the
long-term practice is not easy. Besides new legislation, it requires engineers and chief
financial officers to get out their own comfort zone and do something that is
dramatically new and different.
3. Political windows of opportunities are short. The political opportunity of PPPs might
not be long because politicians and legislature change. For example, after a consensus
is reached on PPPs, a transportation agency starts to work on project selection and the
RFP process. It can take 1- 2 years to ready a project for procurement and follow
through to close of financing; by that time the political consensus in favor of PPPs
288
could have changed. Mr. Yarema points out that the ideal situation is a state has 4-6
projects all ready to go with all environmental and engineering work ready and
financial study done before the reach of consensus. Then once executives and
legislature reach the consensus, the state can start these PPP projects immediately and
run the procurement within 6-9 months before the consensus falls apart. In this
situation, most of the work needs to be done beforehand and the state needs to prepare
the projects correctly. Unfortunately, this is seldom the case.
4. Many Opponents, including: (1) highway construction and maintenance contractors,
because their business model relies on the traditional model and they don’t want to
take the new risks associated with PPPs even if there is an opportunity for higher
profits; (2) engineering consultants, because they have worked with the state
transportation agency for a long time, and transitionally they get to do 100% of the
engineering work and now only 10%-40% of the work with PPPs contracts; (3) public
employees, engineers and maintenance people, who might lose their jobs with the
work outsourced to the private sector; and (4) people in municipal bonds industry
such as investment bankers and financial advisors, who are used to working for the
government, and now all of a sudden, financing is no longer being done by the
government but the private consortium. All these people would push back PPPs
projects and criticize them on legitimate or illegitimate ground; they will even try to
fear government officials that PPPs is a not good thing.
5. In May 2007, the Texas state senate passed a 2-year freeze on toll concession.
Meanwhile there were a couple of PPP projects going on in the state. I wonder where
Texas really stands on this issue.
Mr. Yarema argues that in fact there is no moratorium in Texas because between 2007
and 2009 Texas closed more PPPs projects than any state in any given year in American
history. They reached financial close on 3.5 billion and commercial close on over $10
billion worth deals because the moratorium grandfathered a whole group of transactions,
including: (1) SH 130 segment 5 and 6, the first to be closed; (2) North Tarrant Express,
closed in December 2009, over 2 billion financing; (3) the New LBJ Managed Lanes,
expected to close in the next 3 month; (4) then it will be the second phase of the North
Tarrant Express. The other 49 states have not been able to do what Texas has done. There
are a lot of misunderstandings about what is going in Texas and in fact the state has the
most successful PPPs program any state has ever done.
6. 2 recent projects, the New LBJ managed lanes and State Hwy 130 segment 5 and 6,
both have a special revenue sharing term, in which the government gets to share toll
revenues in increased proportion across revenue bands. How did parties come up with
that plan? What are the reasons to use it?
Revenue banding is a very successful tool which they learned from other international
transactions. What happened was Texas government hired financial advisors and
investment bankers to work together, and when they saw there would be a profit for the
private sector in the projects they developed the revenue model, in order to achieve two
goals: (1) to attract private investment and minimize the tax money required to put in the
289
project upfront; (2) to allow government share toll revenues if the project produces a
reason return on its investment. The government built the model then negotiated with
multiple bidders to figure out the specific revenue banding plans that bidders think they
can live with while providing sufficient private capital. Mr. Yarema thinks the strategy
has worked since they are able to close the financing for the projects; in fact State Hwy
130 segment 5 and 6 has been closed and the New LBJ managed lanes will be in 3
months.
7. Besides private resources what else drive government to do partnerships?
Firstly, we now have more PPP programs in the U.S. than we ever had in history and
more states are doing PPP than ever. This is an unmistakable trend. But we must
understand that it takes years to overcome political barriers, pass necessary legislation,
and build up consensus. We must also realize there is huge political cost. In fact almost
every political leader that has taken on this battle has suffered severe negative political
impact. Therefore sometimes politicians simply choose to delay projects because there is
no or little political cost to delay projects; and they could just tell the voters that we don’t
have money for these projects.
8. The U.S. has been doing PPPs in transportation for about 20 years. Overall do you
think PPPs agreements have gotten better? What are major things we have learned?
PPPs arrangements have been much better and much more sophisticated than they were
20 years ago:
(1) Recent projects use more sophisticated procurement processes, the RFP process,
instead of just negotiating with one team. This results in better value for money;
(2) States have been able to define projects better;
(3) There has been much larger investment in PPPs. Mr. Yarema said that in 1999 when
he started the business, no one was really interested in long-term equity in toll road
and they all wanted out within 5-7 years. There was not long-term project financing
in toll road in the U.S. of any kind. E-470, CA 91 and Dulles Greenway, all financed
between 1993 and 1995, were the first start-up toll road financings in the United
States in 30 years. Now the credit market has changed a lot and we have much better
system for toll revenue financing.
Abstract (if available)
Abstract
The last two decades have seen increasing interest in utilizing private finance to develop toll roads in the United States. This dissertation is designed to answer two related questions: What factors determine the utilization of private finance for a toll road project? How do public and private parties shape a partnership to develop a toll road with private finance? To answer the first question, a decision-making model is designed to consider social, political, legal, and economic influences on the decision of utilization of private finance. The model is empirically explored using data on toll road activity in the U.S. between 1992 and 2008. The results provide support for the model as both project characteristics at micro-level and state fiscal, political, and economic conditions at macro-level affect the private finance decision. For project characteristics, initiation at a later time and localized or professionalized public sponsorship reduce the likelihood of private finance involvement. For macro environment, states with an umbrella debt limit, conservative political ideology, higher proportion of public employees, and higher average personal income are more likely to utilize private finance for toll road development.
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Asset Metadata
Creator
Wang, Yin
(author)
Core Title
Recent experience in the utilization of private finance for American toll road development
School
School of Policy, Planning, and Development
Degree
Doctor of Philosophy
Degree Program
Policy, Planning, and Development
Publication Date
05/10/2011
Defense Date
03/16/2010
Publisher
University of Southern California
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Tag
innovative financial tools,OAI-PMH Harvest,private finance,public-private partnerships,toll roads
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), Little, Richard G. (
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Tags
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