Private sector ready to bet billions on Georgia toll roads

Public-private partnerships worry truckers, who fear mandatory tolls, and raise concerns about who should control the public’s transport infrastructure

March 6, 2007

By PHILIPPA MAISTER, Staff Reporter, Daily Report

AN AMBITIOUS STATEWIDE transportation plan announced Thursday by Georgia Board of Transportation member David Doss highlights one fact: As Georgia struggles with a shortfall of $74 billion during the next 30 years for road construction, it has joined a growing number of other states that are turning to the private sector for relief from financial woes.

This trend is raising questions about how much control—if any—private enterprise should have over the public’s transport infrastructure.

Doss’ plan, the Bold Initiative for Georgia, calls for a 10-year, statewide 1 percent sales tax slated to raise $22 billion to go into a Transportation Trust Fund that would pay for infrastructure projects around the state.

But it relies on private money for two of its most ambitious projects: a new East-West Connector north of Atlanta and an eight-mile underground tunnel to relieve congestion on the downtown connector. Other elements of the plan tie into existing private-sector proposals backed by Bear Stearns, Citigroup and Ireland’s DEPFA Bank, among others.

If implemented, the plan would create a virtual ring of privately built toll roads and lanes around the metro area. At this point, it is unclear how much the tolls would be.

Georgia’s only major toll road, Georgia 400, which was publicly funded, charges a flat 50 cents each way. Plans for privately funded toll roads in other parts of the country, however, call for significantly higher tariffs. For example, the Spanish company Cintra has proposed a13.9-cents-a-mile toll starting in 2008 for a $3.46 billion toll road to be constructed in Dallas. The toll would rise to 14.5 cents a mile in 2010, increasing every two years in line with the retail price index—with higher tolls at rush hours.

In the Washington area, drivers on express toll lanes on sections of Interstate 95 and I-395 could pay tolls ranging from $1 to $1.60 a mile during rush hour, according to a report in the Washington Post.

Richard Norment, executive director of the National Council for Public-Private Partnerships in Washington, estimates there are about $50 billion to $60 billion worth of private sector-backed road projects under way or on the table in the United States.

It’s a trend encouraged by U.S. Secretary of Transportation Mary Peters. Peters calls public-private partnerships—or P3s—“an idea whose time has come” and “one of the most promising options emerging for funding, building and managing transportation.”

But the growing reliance on the private sector—whose services are paid for by tolls on the roads they help build—also is stirring concerns among public officials and Georgia’s trucking industry, which would be most affected by some of the proposed projects. Furthermore, there is uniform agreement that P3 arrangements are not appropriate for projects where traffic is unlikely to produce an adequate revenue stream.

Mike Kenn, president of Georgians for Better Transportation, said he was concerned that the private sector will cherry-pick the most lucrative projects, leaving the state to fund the balance.

Frank J. Busalacchi, the secretary of Wisconsin’s DOT and a member of the National Surface Transportation Policy and Revenue Study Commission, said the U.S. DOT has been moving too fast on these types of public-private partnerships. He believes P3s will only fix a small piece of the nation’s transportation problem and that a national debate on their use is needed.

On the state level, Busalacchi was particularly critical of a 2005 deal in which Indiana Gov. Mitch Daniels leased the Indiana Toll Road to a private consortium for 75 years in return for an upfront payment of $3.8 billion. “The private group will make a lot of money and the citizens of Indiana, at the end of the day, will have nothing,” Busalacchi argued.

Public-private partnerships are widely used in Europe and Asia. They are relatively new in the United States because both the federal government and the states have relied mainly on fuel tax revenues to pay for road construction. But those revenues have failed to keep up with inflation and economic growth.

Incentives for P3 arrangements were included in a 2005 federal law, the Safe, Accountable, Flexible, Efficient Transportation Equity Act—A Legacy for Users, usually referred to as SAFETEA-LU. The law gives states more flexibility to use tolls to manage congestion, encourages the use of innovative financing mechanisms and improves access to bond financing to attract private investment.

The private sector is responding. Investment banks are flush with money, much of it from pension funds, according to the National Council for Public-Private Partnerships’ Norment. “They are looking for long-term equity positions with a reasonable return and very low risk,” he said.

The arrangement also can make more sense for investors than buying state or local bonds issued to fund a project, Norment said, even though they lose the tax-free advantages of a public bond issue.

According to the Australian firm Macquarie Infrastructure Group, one of the largest developers and operators of toll roads in the world, investments in toll roads make sense. Macquarie’s assets in North America include the Chicago Skyway, the Indiana Toll Road and the Dulles Greenway in Virginia.

A Macquarie fact sheet notes that toll road concessions allow operators to amortize the cost of the road over many years, and offer predictable cash flows and high operating margins. In addition, because of the cost of road construction, there are high barriers to entry by competitors. Furthermore, the combination of traffic growth and contractual toll increases creates strong revenue-growth potential.

Proposals on the table

Macquarie is not among the bidders for P3 projects already under review in Georgia. But its Australian rival, Transurban Group, is a partner in one of four groups bidding to construct truck-only toll lanes on a section of I-285 West. The Spanish company Cintra is a member of a rival group. Other P3 proposals under evaluation affect an area along I-75 and I-575 and a stretch of Ga. 400. All are unsolicited.

A 2003 Georgia law allows the state’s Department of Transportation to consider unsolicited bids from private companies to build transportation improvement projects. The law was amended in 2005 to allow DOT to actively solicit such bids. All environmental and other approvals will still be required, and construction must meet DOT standards.

The P3 process, unlike the traditional competitive-bidding process, does not award contracts to the low bidder. Instead, the state negotiates with the private entity based on the risk it is willing to assume or “value for money.”

Georgia Board of Transportation member Doss said he identified the East-West Connector and tunnel projects as P3 programs in part because they would be new and involve the greatest risk—which he said the private sector was best suited to assume.

All plans have to survive a rigorous five-phase screening process established by the Georgia Department of Transportation that could take several years. Along the way, a report would be submitted to the governor and to the House and Senate transportation committees. The rules also provide for a public comment process before the DOT Board takes a final vote to approve a contract.

Of the proposals DOT is evaluating, the I-75 and I-575 plan is furthest along. In May 2006, the Georgia DOT signed a $38.5 million Developer Services Agreement with Georgia Transportation Partners, a joint venture formed by Bechtel Infrastructure Corp. and Kiewit Southern Co. Other partners include Citigroup Global Markets, Inc.; Atlanta-based C.W. Mathews Contracting, Inc.; Post, Buckley, Schuh & Jernigan; and SYSTRA Consulting.

Under the agreement, the partnership will study the feasibility of constructing high-occupancy vehicle, high-occupancy toll, express toll and truck-only toll lanes, and a bus rapid transit system alongside I-75 and I-575, from I-285 to Hickory Grove and Sixes Roads.

According to a Georgia DOT press release, construction using a design-build process may take only six years, compared with 15 to 20 years using traditional procedures.

A $2.8 billion proposal by another bidder, Crossroads 400 Group, would address congestion north and south of the Ga. 400/I-85 Interchange, adding high-occupancy toll lanes, including four elevated lanes on I-285, two in each direction. The group has financial backing from Bear Stearns and is led by Washington Group International Inc., a Boise, Idaho-based engineering firm, which would also operate the toll system. Other partners include Atlanta-based APAC-Southeast Inc. and C.W. Mathews.

Four different consortia are competing to build truck-only toll lanes along I-285. They are NW Express Team, TOTal Mobility Atlanta, Horizon Mobility Group and Georgia Mobility Partners. An initial proposal backed by Goldman Sachs has been withdrawn.

Georgia DOT Commissioner Harold Linnenkohl said the state will contribute any funds already identified in DOT’s programs to approved projects. The private sector must supply the rest. DOT also will acquire rights-of-way, though it could allow the private entity to act as its agent.

Truck-only tolls worry industry

P3 proposals can be structured in many ways. In Virginia, which has authorized them since 1995, they are generally structured as concession agreements, said Thomas W. Pelnik III, director of the state DOT’s Innovative Project Delivery Division. In these, the private partner bears the revenue risk and is responsible for long-term maintenance and tax collection. The parties agree on an appropriate return on investment, and specify how excess revenues are to be shared with the state.

The proposals the Georgia DOT is considering are design-build. DOT will retain ownership of the assets but the contractor will provide design and construction services, to be paid for from tolls collected. Linnenkohl said future contracts also could be structured as concessions.

All the proposals DOT is considering include managed lanes that would run alongside general-purpose lanes. Managed lanes restrict use based on occupancy, tolls, or type of vehicle. They may also apply “congestion pricing,” charging drivers more if they travel at peak hours than at less busy times, and enabling transportation officials to control traffic flow and reduce highway congestion.

If Georgia approves any of the truck-only toll lane proposals, it could be the first state in the nation to do so, according to the National Council for Public-Private Partnerships’ Norment. The question is whether trucks will use them.

Speaking to the National Surface Transportation Policy and Revenue Study Commission, which met recently in Atlanta, Edward B. Crowell, president of the Georgia Motor Trucking Association expressed caution. Crowell said he believes a fuel tax is the most efficient way to collect highway revenues.

“We have some trepidation about privatization, because it is not really a free market system. It’s more like a monopoly,” Crowell said. “Truckers are highly toll-sensitive and will move to an alternative road at the drop of a hat. But some public-private partnerships base their funding on the mandated use of the toll road by freight traffic. There are places where tolling makes sense, but it should be voluntary.”

Home Depot’s senior vice president, supply chain, Mark Holifield, told the commission that Home Depot favors private financing of highways as one of many approaches. He said the company supports an increase in debt financing and “appropriately structured” tolls—provided the revenues raised go back to supporting the national freight infrastructure. “It is also imperative that we develop a true national freight policy,” Holifield said.

The agency responsible for operating public toll facilities in Georgia is the State Road and Tollway Authority (SRTA). It also is the financing authority for state transportation projects, with the ability to issue bonds.

Executive Director Rosa Clausell Rountree said SRTA’s mandate would not prevent a private entity from operating tolls on privately financed stretches of highway, though this is unlikely. SRTA could also issue bonds to finance a P3 arrangement. The toll structure would be based on results of an investment-grade traffic and revenue study.

Rountree said SRTA is evaluating each project independently. “There’s no ‘one size fits all.’ We are learning as we go through the process, and going slowly because we are new to it,” she said.

In 2005, SRTA surveyed 71 Georgia trucking firms to get their views on truck-only toll lanes. Rountree said she believes truckers will use such lanes if they add value. She said value could be added by reducing delivery times, lowering weight restrictions or the size of trucks allowed in truck-only lanes, or providing amenities such as roadside parking or comfortable rest areas with showers and other facilities.

Experts agree that P3 contracts have to be negotiated with great care and precision. “It’s a business deal more than an engineering or construction project,” Pelnik of Virginia DOT said. “It’s a much more complex and urgent task than a traditional highway project.”