Monday, January 23, 2006

"Texas Transportation Commission doesn't expect to set caps on proposed toll rates."

Private firms eye toll plans

Jan. 22, 2006

By Dave Moore
Dallas Business Journal
Copyright 2006

Someday soon, North Texas drivers who use toll roads here may be paying Australian retirees for the privilege.

As far-fetched as that idea might sound, it could be just a little more than a year away.

To officials at the state of Texas, it's a simple case of supply and demand: Billions of dollars await investment internationally, while the number of cars jamming Texas highways continues to climb. And money from the federal gas tax that normally pays for roads hasn't nearly kept pace with demand.

The officials' solution: Plow all that investment money into toll roads that serve tolltag-carrying drivers who need to get from point A to point B. Then, the state might get extra money for more road construction.

"I think people might think this is just a way for private companies to make money," said Robert Poole of the Reason Foundation, a Libertarian think tank. "But I think this is the most exciting way to fund highways to come along in the past 10 years. The gas tax simply wasn't enough to do the job."

It's been about 50 years since the federal government initiated a gas tax to pay for roads, said Bob Brown, deputy district engineer for the Dallas district of the Texas Department of Transportation's Dallas office.

"Now there's not enough to build new roads," he said. "Many states are turning to tolling."

Poole said about 17 states, including Texas, are considering privatizing highways to some extent. And passage by the Texas Legislature of laws giving TxDOT more flexibility in funding road construction in the past three years has put Texas at the forefront of privatizing toll roads, Poole said.

Under the law, the state transportation department retains the land and the road itself, while developers sign a lease that allows them to build, operate and toll the roads.

Five projects costing nearly $9 billion are under consideration for such leases in North Texas, according to TxDOT.

Among them are the $3.5 billion expansion of Interstate 635 and a $1.5 billion toll road proposed to pass through Collin and Denton counties. One of the biggest of the statewide toll projects would be the Trans-Texas Corridor, which has captured the interest of toll investors worldwide.

Statewide, private companies have expressed interest in building more than $27 billion worth of projects across the state, said Mark Ball, a TxDOT spokesman. That number approaches the $35 billion in federal highway gas tax funds that Congress issued nationwide in 2004.

"This is going to become a new thing in U.S. markets," said Philip Armstrong of the New York office of Skanska, a predominately Swedish-based building consultant. "They want to get involved in the U.S. market."

Risk and return

Australia-based Macquarie Infrastructure Group has also bid on several Texas toll projects.

While Macquarie handles investments from and staffs offices in the United States and worldwide, it got much of its initial infusion of investment capital back in the early 1990s, when the Australian government passed a law requiring employers to invest 9% of employees' pay in retirement vehicles, according to a Macquarie spokesman.

The fund now has market capital of about $6 billion to $7 billion, the spokesman said. Macquarie and other firms sell bonds that are used for toll-road projects.

U.S. investment groups have yet to completely jump aboard the notion of leasing tollways for profit. Of the five firms entering preliminary bids to lease the State Highway 121 tollway, which will span from McKinney west to the Dallas County line, only one was based in the United States.

Jack Matthews of Dallas-based Matthews Southwest Inc. was the first to enter an unsolicited bid to lease and operate the Denton County portion of S.H. 121, but the state didn't accept his proposal. Later, the Texas Transportation Commission accepted an unsolicited bid from Skanska. The Skanska proposal called for a lease agreement for S.H. 121 in both Denton and Collin counties.

Matthews, whose firm is primarily a real estate development company, said he was involved early in the development of the 407 Express Toll Road in Toronto. Generally speaking, he said, investors can expect an 8.5% annual return on their investments with a toll road, versus a return of about 7% to 7.5% if they invested in an office building.

However, Matthews and other investment experts say, exact rates of return are hard to generalize because they're affected by the amount of control the state exerts in negotiating a lease agreement, whether a road has already been built, and other considerations.

He said toll roads carry higher rates of return because they carry higher risk -- especially because they face competition from other roads.

Matthews said he intends to re-enter a bid to lease the Denton portion of S.H. 121 when the highway commission requests detailed proposals.

Some residents have voiced opposition to foreign money paying for Texas roads. (See accompanying story, "Counties split over foreign investment.")

'Competition is good'

Collin County officials are hoping that a North Central Texas Council of Governments political advisory committee, the Regional Transportation Council, will endorse the North Texas Tollway Authority for the lease of the Collin portion of S.H. 121. The council is expected to vote on the matter in a month or two.

While the council's recommendations have weight with the state transportation commission, geographic considerations won't be a factor in picking the winning bid, said transportation Commissioner Ted Houghton.

"Who do you think would be buying those (North Texas Tollway Authority) bonds?" Houghton said. "There are investors from all over the world. We're getting real parochial in our thinking. We want investors in on this. Competition is good. I get to bring someone else's money into the state of Texas? That's wonderful."

On Jan. 17, more than 300 people took part in a standing-room-only informational session in Austin, where TxDOT spelled out its expectations and ground rules for bidding on tollway leases.

Many say the state will have to strike a balance between seeking extra money to pay for other road projects and allowing firms a fair profit and drivers reasonable toll rates. While the commission doesn't expect to set caps on proposed toll rates, it will be able to control them by determining which proposal it selects for projects.

The decision is expected to be made in March 2007 for the S.H. 121 project. "We'll have to do what's right for the state of Texas," Houghton said. "We'll see which one shines."

© 2006 Dallas Business Journal