Monday, January 23, 2006

“Cash positive” doesn 't necessarily mean “profitable.”

Privately built roads often fail to keep promises

Jan. 23, 2006

By Sylvia A. Smith

Washington editor
Copyright 2006

WASHINGTON – The calculus for David Thomasson is a no-brainer. For about $3.50, he can shave a half-hour off his commute and be almost guaranteed not to run into a traffic jam that halts all lanes.

Thomasson usually takes a train to his office in downtown Washington from his home 60 miles away in Virginia, but when he drives, it’s on the privately owned Dulles Greenway – not on the roads his tax dollars helped build. The public roads between Leesburg, Va., and Thomasson’s office are full of traffic lights, low speed limits through small towns and congestion.

That’s exactly the kind of reaction a group of investors hoped for in the early 1990s when they proposed building and operating a $340 million, 14-mile private toll road to link the Dulles airport and the rapidly growing Leesburg area. It opened in 1995.

But in the first 10 years of its 40-year franchise, the Greenway never turned a profit, in part because traffic was much lower than projected. The toll road defaulted on its loans in 1996, refinanced, and last year sold a majority interest in it for $533 million to an Australian investment firm that was part of the conglomerate that leased the Chicago Skyway.

Traffic – and the toll rate – increased in the past year as nearby development grew, and the operation now is “cash positive,” a Greenway spokeswoman said. She said she wasn’t permitted to say more or to indicate whether “cash positive” is the same as “profitable.”

Although privately owned and operated toll roads are commonplace around the world, they’re a rarity in the United States. Only a handful exist, and many have rocky histories. But the idea has excited transportation officials in almost every state in the past few years.

“Every conference I went to in 2005, this was the topic,” said Robert Poole, director of transportation for the Reason Foundation, which supports public-private partnerships in road building.

Despite his enthusiasm, Poole said there are pitfalls, and state officials who are thinking about leasing an existing toll road – such as Indiana – or proposing the construction of a new highway with private money should go to school on the mistakes other states have made.

For instance, a decade ago California authorized 10 miles of private express toll lanes along a highway in Orange County. The project was built by a private conglomerate for $125.6 million in exchange for a 35-year lease. The lease prevented the state from building or improving roads within 1 1/2 miles of the toll road, including the public highway adjacent to the toll lanes.

Within a few years of the toll lanes’ opening, the non-compete clause became a political nightmare because it blocked upgrades to the adjacent public highway. In 2003, the state purchased the toll lanes for $207.5 million in bonds, which it expects to pay off with toll revenue.

Elsewhere, overly rosy projections for how much traffic private toll roads would attract have limited their financial success. For instance, toll roads in Virginia and South Carolina have not lived up to their expected usage, so the income from tolls is below projections.

The 8.8-mile Pocahontas Parkway near Richmond, Va., cost $377 million to build, most of which was financed through tax-exempt bonds. The deal calls for the state to operate and maintain the road until the tolls generate enough money.

But according to a report by the Government Accountability Office, the auditing arm of Congress, tolls are about half the projected amounts for the 3 1/2 -year-old highway.

Tamara Neale, spokeswoman for the Virginia Department of Transportation, said the Pocahontas Parkway was a regional priority for years – as an untolled highway – but couldn’t be built because the state didn’t have enough money.

Now the state pays for repairs and maintenance. Last year, for instance, the state paid for $389,000 in upkeep; so far the parkway has not repaid the state transportation department.

The Southern Connector toll road that rings Greenville, S.C., for 16 miles opened in 2001. Last year, it lost ridership but increased revenue because of a 50-cent toll increase. The rate increase allowed the Southern Connector to make a debt payment in January without dipping into its reserve fund for the first time, spokesman Tim Brett said.

The debt payment is scheduled to increase by $10 million next year. Brett said the Connector’s management “is in preliminary review of possible restructuring of the debt.”

Pete Poore, communications director for the South Carolina transportation department, said the Southern Connector was part of the state’s master plan for years but wasn’t a priority. Brett said when private investors stepped in, South Carolina reaped the benefits.

“The state was able to get a $200 million federal interstate built without using precious state resources or using the state bond limit,” Brett said. When the bonds are paid off in three decades, he said, the South Carolina Department of Transportation “will own and operate it with no debt.”

The spectacular failure in the world of public-private partnerships is in Texas, where the 22-mile Camino Colombia highway from the Mexico border went bankrupt after three years. The state bought the private toll road in 2004 for $20 million, a fraction of its $90 million cost.

Poole said the toll road was doomed for several reasons, including legal fights over a provision in the North American Free Trade Agreement that allows Mexican trucks to make long-haul trips into the United States. Until the court battles are settled, Mexican goods have to be dropped at a truck yard where American trucks hook up the trailers and continue the haul. The upshot for the Camino Colombia is that heavy truck traffic paying a $16 toll never materialized.

The model of a toll road from the U.S.-Mexico border didn’t work, Poole said, but the silver lining is that “Texas got a brand-new road” for 22 cents on the dollar.

The Chicago Skyway appears to be the first example of an existing U.S. toll road being turned over to private operators, so there is no history of how well leasing arrangements work.

“The main advantage from the standpoint of a state like Indiana is the large amounts of cash upfront to finance badly needed transportation improvements,” said Kenneth Orski, a transportation consultant and Department of Transportation official in the Nixon and Ford administrations.

“Over time – years – the returns from the turnpike to the state might be the same as to a private operator,” he said. “But what the private operator is willing to do is assume the risk of the toll road continuing to produce revenue in exchange for an upfront payment.”

Even skeptics of projects that allow a private company to build a new toll road say lease deals are less risky for taxpayers.

“The risk is you put profits ahead of sound transportation planning,” said Oliver “Trip” Pollard III, an attorney with the Southern Environmental Law Center.

But with public commitments on how the lease income will be used, and with the lease arrangement spelling out toll rates and increases, and adequate oversight, he said, taxpayers are at little risk of losing a valuable asset.

© 2006 Knight Ridder