Public-Private Partnerships in Texas Transportation

Reason interview with Texas State Representative Mike Krusee

January 28, 2008

By Leonard C. Gilroy, AICP, The Reason Foundation

As Chairman of the House Transportation Committee, Texas State Representative Mike Krusee has been the legislative architect of the state's shift towards tolling and public-private partnerships as a primary means of delivering new transportation capacity and addressing its growing urban congestion. Rep. Krusee co-authored Texas' 2003 omnibus transportation statute House Bill 3588 and the follow-up House Bill 2502 in 2005, creating a new national model for state transportation funding that provided state and local governments with new tools for addressing their infrastructure needs. It placed a much larger emphasis on tolling, private infrastructure financing, and facilitating locally-driven solutions through the formation of regional mobility authorities.

Responding to public concerns over the new approach, the Texas legislature modified the program in 2007 through Senate Bill 792, which included a two-year moratorium on toll concessions (though several projects and regions were exempted) and established a committee to study the role for private financing in meeting Texas' transportation infrastructure needs.

Last fall, I had the opportunity to interview Rep. Krusee and discuss the "Texas model," the 2007 backlash, and several other topics.

Leonard Gilroy, Reason Foundation: You've drawn parallels between traffic congestion and Soviet breadlines, with both a symptom of an institutional system shielded from market forces. Can you explain that analogy?

Texas State Rep. Mike Krusee: When people see congestion, they recognize that there's a need to build more road capacity. This sort of thing happens in the market everyday-it's commonplace-both in the private and public sector. If there's a shortage of some good or service-whether it's if there's not enough iPhones to go around, or if a city has a water shortage, or not enough slots at a university, or if a certain brand of tennis shoe becomes very popular and is in short supply-whenever that happens, either in the public or private sector, we have market mechanisms that are able to efficiently respond to that.

That's why we have no permanent shortages in the United States. The market mechanism that is used to cure shortages is that the market projects how many of a good or service the public will buy, at what price, and for what term. Then it does the math, borrows against that revenue stream, and builds the infrastructure-whether it's a water treatment plant, or a new academic building at a university, or a new chip plant for computers. You use that revenue to build your infrastructure for that present value and then you pay off your debt plus the return on investment. That works for almost everything and that's why we don't have permanent shortages.

But it doesn't work for transportation because there's no market mechanism. You cannot project the gas tax and use that as a method of financing infrastructure. There's no direct connection between what's needed and the amount of revenue you'd get from a gas tax.

So the answer for congestion is a market mechanism and it comes in the form of tolls. How much will people pay to get out of line and the shortage? Tolls provide the answer for that.

Gilroy: Your work in the legislature in 2003 and 2005 steered Texas on a new course, a paradigm shift in transportation funding in which public-private partnerships and tolling emerged as major components of the state's strategy to fill the funding gap. Can you describe what prompted that shift?

Rep. Krusee: Sure. There was one seminal incident. My district covers north Austin, Williamson County, the city of Round Rock, the home of Dell Computer. Dell Computer has over 20,000 employees here in central Texas. In the late 1990s it came time for them to expand again, but instead of building a new plant with thousands of new employees in central Texas as they wanted to do, they chose to build in Nashville, Tennessee. And when we asked them why, one of the chief reasons why was because of the lack of adequate transportation infrastructure. They depend on just-in-time delivery and there's nothing "just-in-time" about getting anywhere in Austin, Texas.

Austin has been a university town for a long time and there's a certain charm to that, and a lot of people want to retain that charm, and not grow, and felt that one way to discourage growth was to not build any roads. The thought was: "If you don't build, they won't come." The failure of that strategy was not apparent to everybody. And especially when we lost thousands of jobs in one day.

And so we looked at the project that was on the books-and had been on the books for decades-to relieve congestion on I-35; it was State Highway 130. We saw that realistically there was no way to ever finance and get that road built for decades. So we turned to tolls, and we turned to creative financing-TIFIA (Transportation Infrastructure Finance and Innovation Act) loans, a combination of taxes, loans from the federal government, and bond financing based on tolls. With all that put together, we barely scraped the project together.

However, once it was financed, it became the largest and fastest construction project in Texas history. Far ahead of schedule, far under budget by hundreds of millions of dollars, and was more popular than anyone ever imagined. It exceeded projections, and the economic impact was phenomenal on the local economy.

So once we saw that, we looked at the needs of the rest of the state. And we did an analysis that showed that the needs far outstripped the resources that we were able to provide. And that's when we created the tools that were, not mandated, but made available both to the state and local entities to solve their congestion problems.

Gilroy: How did you arrive at what became the "Texas PPP model"? How much did you draw from what other states or countries were doing, and to what extent were you working with an empty canvas?

Rep. Krusee: It was a little of both. Even before I became transportation chairman, I started seeking input from people across the country. Geoffrey Yarema at Nossaman was invaluable in explaining the concepts to me. USDOT helped out, and D. J. Gribbin was an enormous help. The banking institutions, while they obviously had their own self-interest in selling the bonds, were enormously helpful in educating me. And, frankly, so were the construction companies that wanted the bids-especially the foreign construction companies-informing us about what was possible.

We took every idea that we thought was feasible, ran it through TxDOT, ran it through the committee process in the House and the Senate. We just tried to give our local officials every single, practical tool that we could think of.

Gilroy: Some states have vested the authority to establish public-private partnerships in state DOTs, but Texas went further by granting the same authority to new entities-regional mobility authorities-that one or more counties could create to address regional mobility needs. Can you discuss the thinking behind this approach?

Rep. Krusee: Regional mobility authorities (RMAs) probably have their roots in the aftermath of the Civil War. Ever since the northerners imposed a government on Texas after the Civil War, Texas citizens have been distrustful of their state government. It's almost innate. So we didn't want to vest all of the power in the state. Texans have always jealously guarded local control, local control of their own fate. And so we wanted to let them know that this was not a power grab from the state, and that if local entities wanted to, the state would actually support the local entity making their own decisions.

Gilroy: Over a handful of RMAs in Texas have been created over the last six years. How difficult is it for them to get off the ground, and have there been any RMA successes that you can point to in this short timeframe?

Rep. Krusee: The handicap that RMAs have is that they're not taxpayer-funded; they have no mechanism for raising taxes themselves. So they need to be funded by local entities. Since their appointing agencies are the counties, they depend on county support for startup personnel. And for larger dollar items-which are the feasibility studies for toll roads-they depend on TxDOT. TxDOT's been very generous in supporting those studies and engineering work. And cities have been very supportive in providing right-of-way.

The biggest success story is probably the Central Texas RMA and State Highway 183-A. It was originally slated to take literally decades to build as a "tax" road. 183-A is an extension of the main lanes on State Highway 183. The previous five to seven miles had taken 20 years to build, and we had another 12 miles to go. We could see where that was going take another 30 years to build as a tax road.

The [Central Texas] RMA came in and offered a construction time of less than two years. They delivered it ahead of schedule and under budget. Not only did it spur economic development, but it provided a relief route for 183, and it also relieved congestion on 183 itself. So not only could you go faster on 183-A whenever you want without stoplights, but also the old 183 is now markedly less congested.

Gilroy: How would you respond to critics that suggest that actions by RMAs could fragment the existing transportation-planning system, under which metropolitan planning organizations (MPOs) drive planning and programming decisions? Are RMAs and MPOs at odds in practice, or are they working together in Texas?

Rep. Krusee: There are a lot of players when it comes to building a road, and a lot of people confuse the roles of the players. An MPO is a planning organization, not an implementing agency. The RMA is an implementing agency that can build roads, but it cannot build any roads that the MPO has not approved. The MPO approves roads but does not build them. So they're entirely separate roles, and they're entirely compatible. They must work together and they do.

Gilroy: Opponents of public-private partnerships and tolling have made a variety of claims that I'd like your perspective on. For one, some have claimed that blending gas tax funds with toll revenues-and allowing tolling for everything from new highways to existing roads to previously planned improvements-amounts to double taxation.

Rep. Krusee: The only reason that tax revenues are added to the financing of some toll roads is that the market will not fully fund the road by itself. The reason that the markets don't fully fund public roads very often is because they distrust public agencies. They don't trust them to raise their rates on an agreed schedule, and they don't trust them to maintain the road in a manner that will attract customers. So often, the market basically requires equity for the project. It's not unlike when you go to buy a home, and the market says: "Well, we like you, we like your income, and we like your job, but we sure don't want to be upside-down on this loan, so you've got to put down some equity." For the public sector, the market may require some equity in the form of tax revenues going into the road.

It's commonplace for public agencies to fund infrastructure with a blend of user fees and taxes. One example would be parking on city streets, where you pay for city streets and parking with your sales tax and property tax, and yet you still have to plug the meter. You pay for public pools and libraries with taxes, but you still may have to buy a library card or you still often have to pay a fee to get into a public pool. Transit is another service that's supported by a blend of taxes and user fees.

Gilroy: How do you respond to claims that the public-private partnerships negotiated in Texas to date have not been in the public interest? For example, critics often cite the examples of non-compete clauses and overly lengthy concession terms (50+ years).

Rep. Krusee: If you're asking someone to invest their money, then they're going to ask for some reasonable protection of their investment. That's what a non-compete clause is. It's similar to a mortgage loan. Because you're borrowing money from someone, you're required to protect the integrity of their investment when you get a mortgage loan. So for example, you're required to go out and buy insurance.

For toll roads, you don't have to get a non-compete, but then you have to understand that you're asking the investor to take on additional risk, and risk costs money. For every project, it's up to the public entities to decide what level of non-compete they're comfortable with. To the extent that they don't provide any protection of the investment, the cost to ratepayers is going to be higher.

As far as the term goes, it's a matter of routine that people sign 30-year mortgages for their homes. And obviously over 30 years of your life, things change quite dramatically. In fact, mortgages are now going to 40-years long. For a multi-billion dollar investment, 50 years is not long-term. And again, it's just a matter of what you're asking your investor to give. If you want the terms to be shorter, it's up to the local entity, but you don't get as much upfront cash.

There's a causeway that goes to South Padre Island. The residents are worried that if that bridge was incapacitated during a hurricane, they would have no route off the island. And in a bad hurricane, the island could be totally wiped out with all its inhabitants. So they want a second evacuation route. A scenario they think about is what happens if a hurricane comes during spring break when all the students are there. That bridge doesn't have the capacity for evacuating everyone on short notice, and so they want a second bridge.

We don't have the tax revenues to build another bridge; it would cost hundreds of millions of dollars. Because one free bridge already exists, it's not going to be easy to finance a second bridge using tolls. People are always going to use the free alternative. So if they want that bridge built, they're going to have to extend the term possibly longer than 50 years.

State legislators decided [in 2007 Senate Bill 792] that they wanted to artificially determine what length of terms are necessary, thereby foreclosing the option to the residents of South Padre for literally determining their own fate. State lawmakers really need to look at the fact that they've prevented someone from building an evacuation route for arbitrary reasons.

Gilroy: That leads to my next question. There was a legislative backlash against public- private partnerships and tolling this past session, culminating in the passage of Senate Bill 792, which imposed some roadblocks. At several points it seemed that you were almost a lone voice against the actions of what one senator described as a "lynch mob." What do you think caused this groundswell among your colleagues?

Rep. Krusee: I think that there were several factors that unfortunately came together all at once during session. One was the traditional opposition of rural communities to any major road-building project. The agrarian communities fought the interstate system, they fought the farm-to-market system, so as we proposed a new system for the next 50 years worth of growth in Texas, they followed tradition and came out against it.

At the same time, Texas has two public agencies that build toll roads-one for Dallas and one for Houston. Unfortunately, both of them became engaged in turf battles-not over whether toll roads should be built, but rather who could build them. Both of them sought to have the exclusive right to finance toll roads in their regions.

They effectively joined forces with the agrarian community to deny the state the right to finance toll roads. The local public tolling agencies in Dallas and Houston had long-term and close relationships with their legislators. So their legislators are more apt to believe the people from their local agency that they live with every day than they are the state. They always are going to be more responsive to those entities.

So I think what you saw was legislators representing agrarian communities being responsive to their constituents. And you saw legislators from Dallas and Houston being responsive to their local officials who were essentially engaged in a turf battle with the state and wished to make it illegal for anyone to compete with them.

When you combine the rural areas with the two largest metropolitan areas, Dallas and Houston, it was too steep of a hill to climb. I think that's what happened. The rural community was against building any roads, whether they were tolled or not. And Dallas and Houston were against the state having any control over building new toll roads in their areas.

Gilroy: So then would you say that the rural backlash to the Trans-Texas Corridor is analogous to the interstate system? That this is the latest in a chain of rural opposition to major infrastructure projects.

Rep. Krusee: Absolutely the latest on that.

Gilroy: Was the rural backlash to the Trans-Texas Corridor unexpected?

Rep. Krusee: No, that was expected. Their opposition was no different than it was in 2005, and yet we moved forward because we had the support of the major metropolitan areas of the state. The difference in 2007 was the turf battle with the Harris County Toll Road Authority (Houston) and North Texas Tollway Authority (Dallas Metroplex)-that was the tipping point.

Gilroy: Many in the private sector watched this past legislative session closely and saw not only a moratorium on certain kinds of public-private partnerships, but also legislative intervention that allowed a public toll authority take over a toll road project for which a private concessionaire had already been selected in a competitive procurement process. What would you say to those in the private sector that are wondering if Texas is still a good place to do business?

Rep. Krusee: I think that there are two fundamental factors that make Texas a good place to do business. One is the stable growth rate. The private sector can count on increasing demand. The private sector can also count on the fact that the public sector will not be able to provide the supply; the shortage under traditional financing methods with taxes is permanent. Also, it's a market-driven economy, and over the long term you can count on property rights to be respected. In the most fundamental respects, Texas remains a good place to do business for P3s. I think that political resistance to P3s is something that the private sector is accustomed to.

In the meantime, Texas carved out many exemptions to the moratorium to allow the private sector to finance roads. During the moratorium, business will continue to be done. With the long-term prospects for Texas, I think most companies will find that it's worth it to wait.

Gilroy: Assuming no special sessions are called in the meantime, the 2009 session is going to see a sunset review of TxDOT, a debate on reauthorizing a broad range of public private-partnerships, and discussion of the findings of the study commission established under SB792. There's certainly no crystal ball in the world of politics, but what do you see looming on the horizon in the next session? What can the legislature do in the next session to help address the state's mobility needs?

Rep. Krusee: I think it's going to be difficult for the state to move forward on transportation policy until our major metropolitan areas are on the same page with TxDOT, especially with the Metroplex and Houston. Until their interests are aligned with TxDOT, I think it's going to be difficult to do much positive. When those interests are aligned, it will be difficult to stop positive things from happening. That's the biggest challenge-getting the leadership in the Metroplex and Houston to understand the really delicate intricacies of P3s and how they work.

Gilroy: In the wake of the Minnesota bridge collapse, legislators at both the federal and state level are starting to seriously discuss the possibility of raising gas taxes as a way to close the infrastructure-funding gap. Others counter that that would effectively be placing a band-aid on a broken funding system in dire need of reform. What's your perspective on the efficacy of gas tax increases?

Rep. Krusee: No matter how much you increase the gas tax, it will still lack a direct relationship between the cost and the needs. Obviously we can build more roads with more money, but it won't be done in an efficient way or an adequate way. In every sphere of American life, people recognize that the market is the most sufficient method of delivering goods and services to people. As long as we exclusively rely on the gas tax, our transportation infrastructure will be inadequate. Over the long term, the gas tax is not like the income tax, or the property tax, or the sales tax; its efficacy will end-without a doubt.

Gilroy: What advice do you have for legislators in other states faced with major transportation funding shortfalls that are considering opening the door to tolling and PPPs?

Rep. Krusee: It's important to do as much as you can to educate and prepare both the public and the leadership for what needs to be done and why it needs to be done, and what the consequences of doing nothing are. What's going to happen if we don't use P3s. My advice to other legislators would be to get as much buy-in from your local public officials as you can, particularly from mayors and county leaders. And ask local leaders and the public what it is they do want and present them the options for getting there.

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Leonard Gilroy is director of government reform at Reason Foundation, a Los-Angeles-based free market think tank.