Texas commission adopts hostile policy on toll concessions

Texas Transportation Commission (TTC) adopted a hostile policy to toll concessions at their monthly meeting today. The state's policymaking body unanimously passed a Minute Order (111358 May 29 2008) of Guiding Principles for Toll Projects and the Trans-Texas Corridor which contains a complete prohibition on non-compete clauses in toll concession projects, generally termed Comprehensive Development Agreements or CDAs in Texas. Officials say compensation for unanticipated competing free capacity will also be barred.

Further TxDOT will have the right to buy out concessions "at any time" on terms left unspecified.

see copy of the Minute Order and Guiding Principles (2 pages pdf):

http://www.tollroadsnews.com/sites/default/files/TTCtollpolicy.pdf

No concession contract "will include any limitations or prohibitions on improvements needed to existing or future highways," the Guiding Principles document says. Affirmatively it states that TxDOT and other government entities may construct, reconstruct or improve any highway regardless of any nearby or adjacent toll project.

However TxDOT officials left some confusion about whether the Guiding Principles rule out compensation for concessionaires if extra free capacity detracts from toll revenues.

In this morning's major newspapers in Austin and Fort Worth TXDOT's two top senior officers are both quoted as saying the new policy provides for the right of TxDOT or regional governments to build extra capacity unfettered and also without having to pay compensation. The Fort Worth Star Telegram quotes TxDOT executive-director Amadeo Sainz: " The state will also no longer include language in contracts to compensate developers for revenue lost because of construction of new roads, said Amadeo Saenz, executive director of the Transportation Department."

Steven E Simmons TxDOT deputy executive director is reported in the Austin American-Statesman: "At a briefing with transportation reporters today, TxDOT deputy executive director Steve Simmons said the intent of the language is that 'we have the right to build any facility.' With no compensation? 'No compensation,' Simmons said."

Yet the Guiding Principles adopted by the TTC contain no mention of whether or not it is policy to allow provision for compensation in new toll concession contracts (CDAs).

Clarification on compensation

We asked TxDOT to clarify this. A public affairs officer contacted Simmons and called back later quoting him: "It is the staff (TxDOT) interpretation of the Guiding Principles barring non-compete restrictions on extra capacity that these also bar any financial compensation for extra (free) capacity. TxDOT will not negotiate any CDAs (concessions) that include any provisions for compensation."

TxDOT in its announcement of the new Guiding Principles pitches them as a response to public and legislative opinion. It quotes Commission Chair Deirdre Delisi: "The Commission's action today reflects the comments we have received from Texas drivers, legislators and members of our citizen advisory committees."

TxDOT has published no study on the financial implications of the new policy. It has no estimate of toll projects which will no longer be financeable. It hasn't even acknowledged there are trade-offs, or a price to pay for responding to popular sentiment.

BACKGROUND: Non-compete clauses have been portrayed wrongly as an aspect only of private concessions. But non-compete provisions were developed by public toll authorities from 1947 onward as an integral part of financing with toll revenues bonds - bonds supported only by the prospective toll revenues and providing no recourse against the state that owned them. They have been an essential part of selling bonds for the majority of new public toll project in the country over the past sixty years. They were naturally adopted also for private sector financings.

Starting in 1947 with the Maine Turnpike, through the Garden State Parkway, New Jersey Turnpike, Massachusetts Turnpike, New York State Thruway, the Kennedy Highway (Maryland), Ohio Turnpike, Indiana Toll Road, Illinois Tollways, Florida Turnpike, Kansas Turnpike, Oklahoma's Turnpikes, turnpikes in Connecticut and New Hampshire, tollroads in Virginia and Texas, all depended for their financing on non-compete clauses in contracts with the sponsoring states not to build competitive free capacity.

The E470 tollroad in the Denver area even included an agreement with a nearby city to retime signals on a parallel surface arterial to reduce mainline throughput and turn it into a local distributor to encourage traffic to use the tollroad. In Southern California non-compete contracts are being traded between the financially healthy Foothill Toll Road and the lagging San Joaquin Hills Toll Road. And further south there is a proposal to negotiate modification of non-compete contracts with the South Bay Expressway to enable extra lanes to be built on I-805 in return for which the concession term will be lengthened. The Orange County tollroads are public business operations, but the San Diego expressway is a private concession.

In most recent private sector concessions in the US a right to apply for financial compensation has been the preferred substitute for strict non-compete clauses when new free capacity reduces traffic and revenue on the tollroad.

IMPLICATIONS: TXDOT's new guidelines have to seriously diminish interest in toll concessions in the state. Tollroads, regardless of their ownership cannot compete with a tax-supported road running alongside and also providing the same level of service. Just as Boeing cannot compete with Airbus if the European airline manufacturer is subsidized - a principle recognized in international trade treaties.

To raise capital for the tollroad, investors must have some sense that the tollroad will provide advantages worth more than the toll over the free alternative road for a substantial number of motorists to generate the toll revenues to service the capital. Unfettered, uncompensated tax-funded competition will make tollroads unfundable.

Concessions can be terminated "at any time"

Another aspects of the new Guidelines is that TxDOT may buy out the concessionaire "at any time." There is no mention of the terms of such a buy-outs.

What interest would investors have in studying the tollroad, assembling longterm financing, making bids, and setting up operations if their tenure can be terminated "at any time"?

COMMENT: The new policy looks like the end of most new toll concessions in Texas. For now anyway. Until policy changes again.

And it is bad news for public toll financing too.

Famous early 20th century columnist Herbert Swope had wise words for TxDOT in 2008: "I can't give you a sure-fire formula for success, but I can give you a formula for failure: try to please everybody all the time."

TOLLROADSnews 2008-05-29