Wednesday, March 21, 2007

"It’s not toll roads that Nichols is targeting. It’s the concession deals."

Nichols heads to Transportation to ask for concession moratorium

Concerns are more about contract terms than toll roads.


Harvey Kronberg
Quorum Report
Copyright 2007

Sen. Robert Nichols (R-Jacksonville) – transportation commissioner turned toll road skeptic – will finally get a hearing this afternoon on his proposed two-year moratorium on concession agreements for toll roads.

Of all the cases that have been made against toll roads in the last two years, Nichols’ is probably the most compelling. He was, of course, instrumental in the proposed creation of the “new age of toll roads” in Texas and at the table for much of the negotiations for State Highway 130. Nichols, an engineer by training, is smart and detail oriented and has a talent for running the numbers in his head. And he knows his way around a contract.

All of that should be clear this afternoon. One thing Nichols does want you to know – and what has often been lost in the heat of debate – is that he’s not opposed to toll roads. Nor was he particularly opposed to the Trans-Texas Corridor. Instead, he’s concerned about the specifics contract protections for the state on buy-backs and non-competes, among other things.

“I’m concerned, very concerned, that what everybody has seen in the contract is that we get to build something with some front-end money, and that front-end money is going to go to build something else,” Nichols said. “And so there are some very good things in that. You really get to get some things done quickly. But very few people are focused on the contract itself and what’s in that contract.”

The message Nichols will take to the committee this afternoon is that private equity firms are in it for a profit, and they can carry a whole lot more debt than the state of Texas. They’re often termed “patient capital” because, unlike the state, they can wait 20 years to turn a profit. That profit, however, comes on the back of toll payers, something that the state needs to carefully consider in its contracts, Nichols said.

“You jack up the price of a toll road when you let the private vendor come in and raise the equity, because that private vendor has to go pay back their investors,” Nichols said. “They have the ability to bond things, but it’s the toll that’s going to pay off that debt.”

Arguing over contract terms is a lot more complicated than just getting rid of toll roads. As Chair Rep. Mike Krusee (R-Taylor) freely admits, most lawmakers have received so many calls and gotten so much flak over the issue that they would do “just about anything to make the toll road issue go away.”

But it’s not toll roads that Nichols is targeting. It’s the concession deals. Many toll roads being proposed by regional mobility authorities will be built with comprehensive development agreements – the private developer agrees to design, engineer and construct the road – but only the Texas Department of Transportation has aggressively pursued concessions deals where the developer shares in the profits of the road’s operation.

For instance, none of the roads being proposed by the Central Texas Regional Mobility Authority are based on concession agreements, nor were the first five segments of State Highway 130. On the other hand, the final two segments of State Highway 130, State Highway 121 in North Texas and Loop 1604/SH 281in San Antonio. TxDOT has at least another dozen possible concession deals in the pipeline for consideration.

This is what concerns Rep. Lois Kolkhorst (R-Brenham), who says a private equity partner willing to front so much money -- $2.1 billion to the state on State Highway 121 alone with no talk about Cintra’s eventual profit – raises red flags with her. It’s simply too good to be true. No equity partner would be willing to put that much up front unless they intended to reap serious rewards, Kolkhorst said.

Nichols said the whole path to toll roads started out simply. TxDOT wanted to move road construction along more quickly, so it proposed legislation adding comprehensive development agreements to design-build options. Instead if piecemeal contracting, one contractor could handle a project from beginning to end. Then the Texas Mobility Fund was added. Then it morphed into concession deals, and that brought real money to town.

Suddenly, TxDOT was seeing the potential for a whole lot of upfront money, quick money it could use to build long-delayed projects in Texas’ road system.

But at what price? Some regular transportation observers say the agency has taken a good idea too far. Once restricted in numbers, the concession deals are now a free-for-all. Nichols says TxDOT promised, back in 2001, that it would never step in front of a regional transportation authority to complete a project. Then along came the lucrative State Highway 121. They promised contracts would never have a “non-compete” clauses – reimbursing a toll road vendor if the state built new competing roads– but then added such terms to the SH 130 contract. They talked about protecting the state under buy-back terms and then offered to buy back a toll road at “fair market value.”

These are issues that need to be discussed now, say Nichols and Kolkhorst. This contract will be the template for all future deals in the state, Kolkhorst said. Nichols says a two-year cooling off period will give lawmakers the time to review contract terms and come up with a standard for future concession agreements.

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