'Stipends' for losing bidders: Another piece of TxDOT's corporate welfare program

The Highwaymen (in Texas)

Even the losers win as Texas rushes to privatize its roads

December 15 2006

by Eileen Welsome
The Texas Observer
Copyright 2006

Ric Williamson, a former state legislator and longtime pal of Gov. Rick Perry, runs the monthly meetings of the Texas Transportation Commission like a traffic cop.
Staff members give brisk status reports before Williamson dismisses them so the next bureaucrat can take the podium. If members of the public embark on a diatribe, Williamson will let them prattle on with an air of friendly indulgence. Then, rounding his shoulders and leaningforward—using body language no doubt perfected when he and Perry were freshmen state representatives harrying their elders—he’ll pleasantly announce that their time is up.

As commission chairman, Williamson sits atop the organizational chart of the Texas Department of Transportation, a huge branch of state government that receives about $6 billion in tax revenue each year, and parcels out road construction jobs worth many billions more.

Appointed by Perry in 2001 and elevated to chairman in 2004, Williamson is now the governor’s man on one of the most ambitious and expensive public works programs in the world: building a network of privately financed and operated toll roads and super-corridors that will literally and figuratively change the state of Texas for generations to come.

Yet even the chairman is perplexed by some details of the new public-private partnerships being forged to build thousands of miles of roads quickly. During a break in a recent commission meeting, Williamson shook his head in befuddlement when asked why the state has begun paying millions of dollars in "stipends" to companies because they weren’t picked to build some of the toll roads.

The notion of paying the losers, Williamson agreed, is “nutty as a fruitcake.” But the department is bound by law to do it, he said, a law Williamson suggested might be a holdover from the era of big government.

Actually, million-dollar parting gifts for the losers is a more recent Texas custom, courtesy of the huge 2003 transportation bill sponsored by Mike Krusee, a Republican state representative from Round Rock and chairman of the House Transportation Committee.

Already, TXDOT has paid roughly $4.3 million to companies whose proposals to spearhead two different road projects were rejected, according to documents obtained by The Texas Observer under the state’s Public Records Act. As much as $10 million more will be doled out in the coming months.

The payments, sometimes called “work-product stipends,” or “consolation stipends,” are needed to encourage competition and innovation, TXDOT officials say. But agency records give no indication that the stipends are actually encouraging more companies to compete for the jobs.

Instead, records show the same small pool of companies, sometimes in different configurations and under different partnership names, vying for the contracts. Sometimes they’re winners. Sometimes they’re losers. Either way, they walk away with a hefty bundle of cash.

The millions in stipend payments are small change compared with the billions that will be spent on toll roads, multimodal corridors, rail lines, bridges, and port expansions in the coming years. Perry’s signature project, the Trans-Texas Corridor —really a series of superhighways crisscrossing the state—could cost more than $36 billion, by one company’s estimate. That’s greater than the entire annual budgets of some countries.

“Texas is on the leading edge in the use of tolling and public-private partnerships to improve the highway system,” says Bob Poole, director of transportation studies for the Los Angeles-based Reason Institute, a public policy think tank with a free- market philosophy.

It’s all part of a global effort by investment banking firms and multinational companies to convert public infrastructure—roads, bridges, tunnels, airports—into private, moneymaking ventures. “Hundreds of billions of dollars are moving around world markets looking for long-term investments,” D.J. Gribbin, a division director of Macquarie Holdings, recently told congressmen on Capitol Hill. Gribbin, whose company is part of the Australian-based Macquarie Bank, likened infrastructure in the United States to the “dead capital” created by Third World squatters who build homes on property they don’t own. Without clear title, the squatters can’t borrow against their homes or sell them. Thus the investment is “dead capital,” he explained. “Highway infrastructure here in the United States is analogous. Inadequate markets and legal systems in this country have locked up billions of taxpayer dollars in our transportation infrastructure,” said Gribbin, a former chief counsel of the Federal Highway Administration and former national field director for the Christian Coalition.

The effort to privatize infrastructure dovetails nicely with the agenda of public officials who want to build new roads and repair old ones without increasing taxes. “What we’re seeing,” says Pat Choate, an economist, author, and Ross Perot’s vice presidential running mate in 1996, “is an era in which governments will be selling off their infrastructure to keep their no-tax pledges.”

Multinationals from Spain, Sweden, Japan, the Netherlands, and Australia have rushed to Texas to help liberate the state’s dead capital. The problem is that once freed, much of that capital won’t be staying in Texas. For the next 50, 75, or 100 years, it’ll be flowing overseas to its liberators.

Last spring Rep. Krusee, author of the transportation bill that is making Texas’s massive road-building binge possible, spoke at a gathering of transportation officials in Santa Monica, California. Krusee had been taking a beating from bloggers and anti-toll advocates in Texas for his role in creating the private-public partnerships that will cannibalize the state’s roads and gobble up millions of acres of farmland. After receiving a warm round of applause, Krusee launched into a lengthy discussion of how it all began: “Everyone’s wake-up call is different.
For Texas, it was Dell computer locating their expansion in Nashville, Tennessee,
because Austin’s roads were inadequate. On that one day we lost 10,000 jobs.
We did not have the enormous funds it took to fix it, and the timetable stretched
for decades. We knew that in time, we would lose more business, more jobs, throughout
our state. So we discovered the magic, and the necessity, of private sector financing and tolls.”

Dell Inc.’s rather mild criticism sent local and state officials rushing about like Henny Penny. Roads, roads, roads, they concluded, would keep good corporate citizens like Dell from leaving. But they needed more money, and that would mean raising the gasoline tax. (Currently, the gas tax is 38.4 cents a gallon, with 18.4 cents going to the feds and 20 cents to the state. A fourth of the state’s share, in turn, goes for education.)

“A political calculation was made that large-scale increases in gas taxes would be politically impossible. So the choice in Texas was taxes versus tolls, and the choice was made to go with tolls,” said transportation guru Poole, who has advised four U.S. administrations on transportation and privatization issues, and currently acts as a consultant to a number of states, including Texas.

That “choice” was made by a powerful clique of state officials and business leaders, not the public. Taxpayers may well have been receptive to a big, messy debate about future transportation needs and the gasoline tax, but they were never asked.

For Republicans, though, the prospect of raising taxes was akin to heresy. So state officials snuck innocuous-sounding constitutional amendments onto the ballot in 2001. Proposition 2 allowed the state to issue bonds for road projects in border colonias. Proposition 15 created the Texas Mobility Fund, a bank of sorts that is funded by a stream of tax revenue and can make grants and loans, and issue bonds to finance the construction, reconstruction, acquisition, operation, and expansion of state highways, turnpikes, toll roads, toll bridges, and other mobility projects.

Voters approved both amendments in a low-turnout election. Effectively, just 2 percent of the state’s population voted for the ballot measures, hardly a mandate. The Trans-Texas Corridor was never mentioned in either proposition, and the word “toll” appeared only in passing. Still, Perry and others now point to them as proof that voters have approved his administration’s behemoth road-building program.

A few months after voters approved the constitutional amendments, Perry rolled out his Trans-Texas Corridor plan. The text of his press release made it clear that extensive discussion had been going on behind the scenes with investment-banking types interested in resuscitating the state’s “dead capital.”

Perry tossed around terms like “toll equity” and “exclusive development agreements,” and introduced a new political animal called a “regional mobility authority.” (Regional mobility authorities are quasi-governmental bodies that act as local toll road authorities. Made up of representatives from one or more counties, they have many of the same powers as TXDOT. They can issue bonds, borrow money, and enter into contracts with private developers. The new layer of bureaucracy, as one lobbyist put it, allows TXDOT to control the purse strings while making it appear as if the locals are in charge.)

Perry’s announcement set the stage for construction of the massive toll projects. But it was Krusee’s 2003 transportation bill, House Bill 3588, that allowed TXDOT to slough off many of the stuffy old rules governing how highway contracts were awarded, and to get down to business with its multinational friends from Spain, Australia, and Sweden.

Krusee’s bill essentially serves as a “charter” for the public-private road-building partnerships and new financing mechanisms now being used, said consultant Poole.

Perry was only too happy to sign the bill into law. Within months, though, several grassroots groups sprang up to fight the toll roads. Unusual alliances formed: urban dwellers and rural farmers; Republicans and Democrats; rich people and working people.

“There needs to be a revolution,” one farmer remarked darkly at a recent meeting of activists. “I was once a staunch Republican, but I’m not anymore.”

Dollie Cole, a wealthy landowner who lives on a ranch near Lockhart and whose late husband was president of General Motors Corp., has refused to let highway officials on her land. She’s vowed to fight the construction of the Trans-Texas Corridor and urged her neighbors to be wary of TXDOT’s promises. “Don’t be fooled,” she said. “You are paying for a road twice and will continue to pay throughout your life and throughout your childrens’ driving life.”

Judging from Krusee’s near-defeat in this year’s House District 52 race, support for toll roads is, well, taking its toll. Democratic challenger Karen Felthauser, a substitute teacher who had no political experience and only a fraction of Krusee’s financial backing, came within approximately 2,000 votes of capturing the district.

Despite the growing opposition, transportation officials haven’t detoured from their plans. “The Transportation Commission is using scare tactics and old-fashioned, mobster-type arm-twisting to further their gains,” says State Rep. Joe Pickett, an El Paso Democrat. Other state legislators and businessmen are also concerned about the toll projects, Pickett said, but they’re afraid to speak up because of the department’s enormous clout. “There isn’t anyone who will talk about it. If they’re in the business sector, they’ll get blacklisted. If it’s a state rep or senator like myself, they’ll get their projects cut.”

Although Pickett’s not against all toll roads, he believes the massive projects, which will be financed in part by bonds, loans, and toll income that has yet to be collected, will leave the state in a perilous financial condition, with a fractured, unequal transportation system.

“TXDOT is looking at the here and now. They’re not looking at the future. They’re just trying to sell everybody a bill of goods. Some people are going to get rich, become millionaires or billionaires, and 10 years from now the state will be messed up pretty bad.”

TXDOT officials have a rosier view, saying the privately financed and operated toll projects will allow roads to be built more quickly and ultimately lead to less congestion, less air pollution, and fewer accidents. They also point out that the concession fees and the revenue they’ll get from private toll operators can be used as seed money to build other badly needed infrastructure. (In reality, though, it seems this revenue will more likely be used for the construction of feeder roads, bridges, and overpasses that will funnel motorists into the for-pay lanes and super-corridors.)

House Bill 3588, like subsequent legislation, has clauses buried within it that should aise enormous public concern. An anticompetitive clause, for example, puts a two-year moratorium on TXDOT’s ability to build or improve roads that would compete with a toll road. TXDOT officials say Interstate 35 is exempt from that clause, as well as some other roads identified in its 20-year plan, but that clause ensures that customers on additional toll roads won’t be siphoned ff to a free highway during the critical period in which the toll facility is ramping up.

Another section of the legislation requires TXDOT to construct connections to and from the Trans-Texas Corridor. By doing so, TXDOT will help prop up a private developer’s operation, and quite possibly divert funds from free roads elsewhere that need improvement.

A third provision provides a limited waiver of sovereign immunity, giving greater financial protection to developers by making it easier for them to sue the state and force TXDOT or the commission to comply with its obligations. And a fourth allows the state to enter into contracts on other than a low-bid basis.

Also buried in Krusee’s bill was the legal language that explains why TXDOT is now paying million in stipends to losing bidders. It went unnoticed by the public. But the road-builders cleared their desks, sharpened their pencils, and got to work drafting proposals. They had a win-win situation–even if they lost

One of the first projects for which stipends were awarded was State Highway 130, a 49-mile toll road that will extend from I-35 north of Georgetown to U.S. 183 southeast of Austin. Although TXDOT officials are still being cagey about thealignment of the Trans-Texas Corridor superhighway that will parallel Interstate 35 and run from the Mexican border to Oklahoma, it’s highly likely that SH 130 will become the first leg of that corridor.

Three firms made the short list to build the project. They included:

*Lone Star Infrastructure, a consortium led by Fluor Corp., a multinational company and longtime government contractor.

*Four Rivers Developers, a joint venture whose largest partner was Granite Construction Inc., a publicly traded company headquartered in Watsonville, California that makes gravel and concrete, and oversees huge construction jobs.

*Texas Corridor Constructors, another joint venture whose primary partner was Zachry Construction, a well-established and privately owned firm in San Antonio that frequently partners with local, national, and multinational companies on large projects.

TXDOT’s experts ultimately decided to go with Lone Star Infrastructure, whose team includes nearly 30 members, including Edelman, the world’s largest privately owned public relations firm. (Former Ronald Reagan advisor Mike Deaver is listed as one of its leaders.) In the old days, the two losers would have gone home empty-handed. Instead, the Granite team and the Zachry-led team each received stipend payments of $1,379,219, according to records obtained from TXDOT.

The next project in which stipends were awarded was the development plan for the TTC-35 project, the mega-corridor that will parallel Interstate 35. The winner in that competition was Cintra-Zachry, a partnership consisting of Zachry Construction and Spain’s Cintra Concesiones de Infraestructuras de Transporte. The two rejected companies each received $750,000. One was Fluor (which was on the winning end of the SH 130 project). The other was an entity called the Trans Texas Express, whose members included Skanska BOT AB, a global firm based in Sweden that builds hospitals, schools, and transport facilities; Telvent, a Spanish information and technology company; and a number of U.S. firms, including several based in Texas.

Millions of dollars in additional stipends will be paid on other toll projects being developed under so-called “comprehensive development agreements.” Those projects include TTC-69, another super-corridor that will start at the Mexican border, skirt Corpus Christi and Houston, and jog northeast toward Arkansas, as well as several smaller toll road projects in San Antonio and around Dallas-Fort Worth.

Transportation officials said the stipends defray only a portion of the costs that go into preparing the proposals. “We need to be able to reward these firms for submitting,” says Hope Andrade, a San Antonio businesswoman appointed by Perry to the Transportation Commission in December 2003. “These proposals are very expensive. A million is nothing for what they submitted. If they don’t get reimbursed, then we discourage innovation, and we’re trying to encourage innovation.”

But records obtained from the state Comptroller’s Office under the Public Records Act show that some stipend payments are going to companies that are already are doing a landslide business with the state. Since 2002, for example, San Antonio’s Zachry Construction has been paid roughly $1.1 billion by TXDOT for various projects. California-based Granite Construction received payments totaling $335 million. (Roughly $52.5 million of that went to both Granite and its local partner, J.D. Abrams, an Austin-based company that also does hundreds of millions of dollars of business with TXDOT.) And Lone Star Infrastructure has received approximately $825 million.

Andrade and other TXDOT officials emphasize that the department gets to keep the intellectual ideas contained in the losing proposals and use them on other projects. But when pressed, they could cite no new ideas that sprung from the losing SH 130 proposals.

Commissioner John W. Johnson, appointed to the commission in 1999 by then-Gov. George W. Bush, says TXDOT did glean some innovative ideas from the toll lane project on Interstate 635 in Dallas. Originally a tunnel was envisioned, he says, but shifting some of the lanes below ground level will save money.

This summer, as rallies and demonstrations against the Trans-Texas Corridor erupted around the state, Secretary of State Roger Williams, Texas Transportation Commissioner Ted Houghton (another Perry appointee), and numerous TXDOT employees went to Wall Street to pitch their “Texas style” public-private partnerships, or PPPs as they’re known in the alphabet-soup world of road-building.

Phillip Russell, engineer, lawyer, and director of the Texas Turnpike Authority Division, sounded more like a hotdog vendor than a public official involved in overseeing multimillion and even billion-dollar deals as he spoke frequently of revenue opportunities available to private-sector developers. In a forum held for potential developers in New York City, he described a tolled interstate project in Dallas as “a package you all can sink your teeth into.” Of State Highway 121, another Dallas project, he said, “This is your opportunity to sharpen your pencils.” Addressing the TTC-69 corridor, he remarked, “If you haven’t dug into this one, you’ve got 52 hours to submit.”

TXDOT’s pitch for private partners is drawing interest from around the globe. One of the most active firms is Cintra Concesiones de Infraestructuras de Transporte. Its parent is Grupo Ferrovial. Both are publicly traded companies based in Madrid, Spain. Cintra has investments in 17 toll roads in six countries. In a proposal for a Virginia project, Cintra boasted that it had become “a strategic partner of the State of Texas, obtaining a 50-year contract worth up to $36.7 billion to develop the Trans-Texas Corridor.”

Cintra, along with home-grown Zachry Construction, has been given the green light to develop the master plan for the TTC-35. The partnership also has been awarded—without any competitive process—the go-ahead to develop the remaining 40 miles of SH 130, which will run from Austin to Seguin. The partnership is also competing for toll road projects in San Antonio and Dallas, and wants to build a 600-mile freight line that will run from Dallas-Fort Worth to the Mexican border. On the TTC-69 project, Cintra and Zachry have divided into two separate teams and are competing against each other.

Another big player in the global transportation market is Australia’s Macquarie Infrastructure Group, which is part of Macquarie Bank, an investment bank named after a former governor who helped transform Australia from a penal colony to a viable, dynamic country. Macquarie, which manages more than 30 toll roads in nine countries, has made proposals on several projects here in Texas, including one in San Antonio and three in Dallas.

Several years ago, Cintra and Macquarie made headlines when they formed a partnership and paid $3.85 billion for a 75-year lease to operate the 157-mile Indiana Toll Road, and roughly $1.83 billion for a 99-year lease on the Chicago Skyway, an eight-mile stretch of elevated highway on Chicago’s south side.

Bob Poole, the privatization guru, said U.S. infrastructure is more attractive to investors than the infrastructure in other countries because the political climate is more stable, another way of saying that contracts are more likely to be enforced and there’s no risk a project will be nationalized. “It’s like they’re buying a piece of ownership in a 50-year business,” Poole said.

Other global players are lining up for a piece of the action, including Skanska, a Swedish-based company that has projects throughout the world; AECOM, another multinational with 28,000 employees working in five continents; and Spain’s Dragados, which is active in more than 60 countries and bills itself as a world leader in “infrastructure and transport concessions.”

Choate, Ross Perot’s old running mate, points to another factor driving the construction of the super-corridors. The West Coast’s ports, roads, and rail lines have reached gridlock proportions, he contends, and corridors such as the TTC-35 could serve as alternate trade routes for moving foreign goods into U.S. markets. Using deepwater ports in Mexico, for example, container ships could offload goods, which could then be shipped by rail or truck through Mexico, into Texas, and up to other parts of the United States and Canada. “These routes will be cash cows,” said Choate.

Certain aspects of the super-corridors support Choate’s contention. At a recent meeting, for example, a TXDOT official confirmed there will be no frontage roads on the super-corridors other than an occasional access road allowing landowners to reach their severed property. “Because what we really want in building our parallels is we want Interstate 35 to remain the local and regional boulevard of choice for the taxpayers of the state, while the corridor becomes the regional and national transportation corridor of choice,” Transportation Commission Chairman Williamson said.

Some toll roads, as well as the super-corridors, will overlay portions of existing highways or rural farm-to-market roads. Since they’ve already been paid for through the taxes at the pump, critics maintain that Texans are paying twice for the roads, a concern that was echoed by legislative analysts. “Toll roads represent double taxation,” they wrote. “Motorists already pay for highways at the gasoline pump, vehicle registration counter, and at auto supply retailers. They should not have to pay for highways again when they exercise their right to travel on them.”

Far less attention has been paid to other ways the public is underwriting the privately operated toll roads: the large, multinational companies and global investment firms are often using taxpayer-supported bonds, loans, and grants from sources such as Texas’ State Infrastructure Bank, the Federal Highway Administration, and the Federal Department of Transportation. These private firms will be able to deduct millions from their income taxes for interest payments on the huge debts and won’t be paying property taxes because the state will still own the roads. (With large swaths of property removed from the tax rolls, property owners may find themselves making up the difference.) The state will also be helping to subsidize the profits these firms earn by performing a lot of the advance environmental work and providing emergency services and law enforcement personnel once the roads are up and running.

Among the greatest ironies is that the super-highways won’t really do much to reduce congestion, a fact that Chairman Williamson confirmed during a recent commission meeting while trying to allay the fears of businessmen and communities who worry they’ll become ghost towns once the new roads go through. In a question-and-answer session with Amadeo Saenz, TXDOT’s assistant director of engineering operations, he asked, “Is it also my understanding that we have a congestion relief study ongoing to determine what percentage of traffic moves off of Interstate 35 and onto the parallel?”

“Yes sir,” responded Saenz.

“Is it safe to say that no less than 2.5 percent and no more than 10 percent of the traffic is going to fall somewhere in that range?” asked Williamson

“Yes, sir.”

“So for those who live in, for example, Hillsboro who believe that Interstate 35 is their economic lifeblood and the parallel might have the same impact on their city as Route 66 had on some cities in Oklahoma, we can represent to them that it appears, least-case your traffic shrinks 2.5 percent, worst case it shrinks 10 percent, and in no circumstance should that be enough to markedly impact your local economy?”

“That’s correct,” Saenz responded.

Miles of new toll roads have already opened in North Austin, including the Loop 1 extension, State Highway 45 North, and a portion of SH 130. Not surprisingly, portions of these roads, collectively called the Central Texas Turnpike Project, were built by Zachry, often in partnership with other Texas firms. With their smooth pavement, sturdy overpasses, and large, easy-to-read signs, they lookno different their untolled counterparts.

For now, motorists can cruise these roads free. Come Jan. 5, though, the toll booths will be manned, the electronic surveillance will be up and running, and cameras will be recording the license plates of scofflaws still intent on getting a free ride.

For a department that loves numbers and PowerPoint presentations, TXDOT’s being unusually fuzzy when it comes to saying how much, exactly, the tolls will be. “The tolls will be set at whatever price the market can bear,” says Gabriela Garcia, a TXDOT public information officer.

The tolls roads in North Austin were, for the most part, financed and built the old-fashioned way. There were no stipends. No noncompete clauses. No 50-year leases. No legal waivers. No guy from Sweden or Spain breathing down the highway department’s neck, telling the State of Texas where it can and can’t build a competing road. The tab to taxpayers will be hefty, though, roughly $3.6 billion. The good news is, unlike many of toll projects now on the drawing boards, the state will get to keep the revenue the roads will be generating.

Fast-food restaurants, big-box stores, and discount shoe outlets already are appearing along the access roads, part of the “induced development” planners say invariably follows the construction of new roads. More development means more cars. More cars mean more roads. And so the cycle goes.

Near the intersection of Loop 1 and State Highway 45, there are still a few large pieces of wide-open land. Birds dive in and out of the brown fields. A ribbon of reddish cloud is unraveling in the sky, and small crescent moon has appeared. Scattered through the fields are small signs announcing that the property’s available for development. Soon the fields will be gone.

Karol Griffiths, a business and tax consultant, contributed to the research on this story.

© 2006 The Texas Observer: www.texasobserver.org

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